2025 (6) TMI 1191 - AT - Customs

Classification of imported goods - trampoline - tag arena - classifiable under tariff item 9506 9190 or should be reclassified under tariff item 9506 9990? - recovery of differential duty with interest and penalty - appellant submitted that the impugned order was not based on any legal foundation and relied upon isolated correspondences that remained untested to affirm the allegations in the show cause notice - principles of natural justice - entitlement to benefit of preferential rate notified for imports from ASEAN countries - HELD THAT - In the present dispute condition of sale has been inferred from documents and the factum of separate payments to the same seller. That installation and commission was contracted to the Bulgarian supplier is not in dispute and that payment was made through bank remittance is not in controversy. It only needs to be ascertained if the enhancement has been prompted by finding that installation and commissioning was condition of sale or was merely an option exercised by the appellant. It is inclined to accord primacy to the submission of appellant that it was the latter for even if it were not condition of sale it would be sound for any importer especially where safety in usage is of undoubted priority to requisition the services of the seller for installation and commissioning of equipment. In such instances the seller does not even have to make rendering of such service to be condition of sale and in the absence of such condition a narrow construct of rule 10 of Customs Valuation (Determination of Value of Imported Goods) Rules 2007 precludes any circumstantial inference; there must be evidence of negotiation demonstrating that seller has refused to sell the goods save with condition of rendering service in relation to goods for additional remuneration. In the light of altered circumstances the Explanation in rule 10 of Customs Valuation (Determination of Value of Imported Goods) Rules 2007 admittedly inserted to overcome the ruling of the Hon ble Supreme Court such as in re JK Corporation Ltd 2007 (2) TMI 1 - SUPREME COURT may find itself being deployed as counter in proceedings initiated for recovery of duties for having been short-paid to the extent of charges for post-import services contracted for rendering. In effect save for this Explanation the provision for addition of cost and services rendered by supplier after import remained the same in the preceding rules as in Customs Valuation (Determination of Value of Imported Goods) Rules 2007 and thereby continuing the validity of decisions of the Hon ble Supreme Court such as in re JK Corporation Ltd in re Steel Authority of India and in Collector of Customs Ahmedabad v. Essar Steel Ltd 2015 (4) TMI 486 - SUPREME COURT owing to inconsequentiality of the deeming fiction notified around the time of taxing import of services was incorporated through section 66A of Finance Act 1994 and of doubtful use only in certain situations of import from across-the-board credit neutralization under goods and service tax (GST) with effect from 1st July 2017. For all the above reasons of having failed to demonstrate installation and commissioning being condition of sale such service being not only taxable upon being undertaken in India but also with revenue neutral impact in circumstances of entitlement to exemption in the impugned notification proposal for enhancement of value resting solely on an agreement that not only was lacking in provenance in accordance with section 138C of Customs Act 1962 but also inadequate for evidencing that such service was condition of sale and the factual matrix not excluding the inappropriateness of invoking extended period of limitation resort to rule 10(1)(e) of Customs Valuation (Determination of Value of Imported Goods) Rules 2007 is questionable. The principle of essential character and predominant use that the adjudicating authority relied upon to classify trampoline have no relevance until application of rule 3 of General Rules for Interpretation of the Tariff appended to Customs Tariff Act 1975 is necessitated or notes in chapter prescribing used principally or solely is required to be determined. In the impugned order neither are. The adjudicating authority appears also to have picked up the wrong end of the stick in taking up technical specifications of trampoline for scrutiny - The dispute here is not about trampoline but the connect of trampolining with gymnastics that has not been considered in the impugned order despite the rubric of the heading requiring foray in that direction. The contemptuous disdain for public good as afterthought to obfuscate fun and games in trampolining does nothing however to derogate the impugned goods as equipment for gymnastic sport. The reasons assigned in the impugned order for recourse to rule 10 of Customs Valuation (Determination of Value of Imported Goods) Rules 2007 do not pass muster as discussed supra. That the treaty negotiators considered certain types of sports and games to be deserving of preferential rate while not for others may have been outcome of deliberations or even deliberate national policy formulation. It may have been inadvertent slippage or from lack of domain expertise in devising template for inclusion which is not for us to remedy. That the swings for one and roundabouts for the other is fact of life and the tax collector is not empowered to suggest that fun and games is anathema to trade and therefore that to be the test of disallowance merely from the domain of customs authority having been encompassed in a trade treaty is not tenable. Conclusion - The impugned goods are under law to be assigned rate of duty for assessment. Neither did the impugned order deploy the General Rules for Interpretation of the Tariff appended to Customs Tariff Act 1975 for finding tariff item 9506 9990 of First Schedule to Customs Tariff Act 1975 to be appropriate nor did our scrutiny of evidence and proposition in support of such classification generate a definitive finding to justify disturbing the declared classification. There are no merit in the impugned order which is set aside - appeal allowed.

Summary

The core legal questions considered in this judgment revolve around the classification of imported goods for customs duty purposes, the applicability of preferential tariff rates under an international trade agreement, and the proper valuation of imported goods including the inclusion of post-importation services in assessable value. Specifically, the issues include:

1. Whether the imported goods-'trampoline' and 'tag arena'-are correctly classifiable under tariff item 9506 9190 (articles and equipment for general physical gymnastics or athletics) or should be reclassified under tariff item 9506 9990 (other articles and equipment for amusement and fun) in the First Schedule to the Customs Tariff Act, 1975.

2. Whether the imported goods qualify for preferential exemption from customs duty under notification issued pursuant to the ASEAN-India Free Trade Agreement (AIFTA), based on their country of origin and classification.

3. Whether payments made for installation and commissioning services, contracted with the seller of the goods, are required to be included in the assessable value of the imported goods under the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007, specifically under rule 10(1)(e), as a condition of sale.

4. The evidentiary standards and procedural requirements for valuation enhancement and classification revision, including the burden of proof on customs authorities and the admissibility of electronic evidence.

5. The applicability of limitation periods and penalty provisions under the Customs Act, 1962 in the context of alleged misclassification and undervaluation.

Issue-wise Detailed Analysis:

1. Classification of Imported Goods:

The legal framework governing classification is the Customs Tariff Act, 1975, read with the General Rules for Interpretation of the Tariff (GRI), which provide a hierarchical and sequential method for classifying goods based on headings, sub-headings, and notes. The Harmonized System of Nomenclature (HSN), developed by the World Customs Organization (WCO), forms the international basis for tariff classification.

Precedents from the Supreme Court emphasize that classification must be determined according to the terms of the tariff headings and notes, and that use or purpose is generally not a criterion unless specifically provided. The burden of proof lies on the revenue to establish the correctness of any reclassification proposed.

The Court noted that the adjudicating authority erred by first negating the importer's claimed classification before considering alternatives, thereby reversing the proper sequence mandated by the GRI. The authority also relied heavily on the 'essential character' and 'predominant use' principles, which are relevant only at later stages of classification and not applicable in this case where headings provide clear descriptions.

Further, the adjudicating authority's reliance on publicity materials describing the goods as amusement equipment and the comparison of 'tag arena' to football were found to be subjective and lacking legal foundation. The Court held that 'trampoline' is a recognized gymnastic sport equipment, and 'tag arena' constitutes physical exercise equipment, both falling within the ambit of tariff item 9506 9190.

The Court emphasized that the classification dispute should be resolved by strict application of the GRI, considering the hierarchical structure and the residuary nature of the sub-headings involved. The impugned reclassification to tariff item 9506 9990 was unsupported by proper application of the legal framework and was therefore set aside.

2. Eligibility for Preferential Tariff under AIFTA:

The notification granting preferential tariff rates under section 25 of the Customs Act, 1962, applies to goods originating from ASEAN member states, including the Philippines. The appellant claimed exemption under this notification based on certificates of origin and classification under tariff item 9506 9190.

The customs authorities challenged eligibility on the basis that the goods were misclassified and thus ineligible for exemption. However, the Court found no evidence that the goods were excluded from the notification's ambit, nor was there proof invalidating the certificates of origin. The Court also noted the lack of adherence to procedural safeguards such as verification under the Customs (Administration of Rules of Origin under Trade Agreements) Rules, 2020.

Accordingly, the Court held that the appellant was entitled to the preferential tariff benefit, as the classification under tariff item 9506 9190 was appropriate and the certificates of origin were valid.

3. Inclusion of Installation and Commissioning Charges in Assessable Value:

The Customs Valuation (Determination of Value of Imported Goods) Rules, 2007, particularly rule 10(1)(e), require inclusion in the transaction value of payments made as a condition of sale, including services such as installation and commissioning, if these are part of the sale price.

The customs authorities sought to enhance the assessable value by including payments made for installation and commissioning services amounting to approximately EUR74,100, contending that these were conditions of sale.

The appellant contended that installation and commissioning were optional services exercised at the importer's discretion for safety and operational reasons, not conditions of sale. The Court agreed, emphasizing that the burden is on customs to prove that such services were a condition of sale, which requires evidence of negotiation or refusal to sell without such services.

The Court further analyzed the legislative framework, including the coexistence of customs duty and Goods and Services Tax (GST) regimes, noting that the same service cannot be taxed twice under different statutes. It held that strict construction must be applied to rule 10, and that the inclusion of post-importation services in customs value should not be inferred lightly.

Consequently, the Court found no legal basis to enhance the assessable value by including installation and commissioning charges and rejected the enhancement.

4. Evidentiary and Procedural Aspects:

The Court underscored that the onus to prove misclassification or undervaluation rests on the customs authorities, who must produce reliable and admissible evidence. The impugned order relied on email correspondences and multiple sets of packing lists and certificates of origin, some of which were corrected post-shipment.

The Court observed that such documents are commercial in nature and not statutory declarations under customs law. Without authentication under section 138C of the Customs Act, 1962, electronic evidence cannot be given decisive weight. The failure to verify certificates of origin in accordance with prescribed rules further weakened the customs case.

The Court also noted that the invocation of the extended limitation period and imposition of penalties lacked adequate foundation, as there was no evidence of collusion, suppression, or fraud by the importer.

5. Limitation and Penalties:

The appellant argued that the demand was barred by limitation and that no grounds existed for invoking extended periods or imposing penalties. The Court found no justification in the record for extended limitation or confiscation, given the absence of evidence of misdeclaration or undervaluation with intent to evade duty.

Penalties imposed on the appellant and its employee were also set aside due to lack of substantive proof and procedural infirmities.

Significant Holdings:

"The control of the First Schedule by the General Rules for Interpretation of the Tariff is not only absolute but also exclusive and resolution of disputes without that bedrock, or even selectively, stultifies the outcome."

"The burden of proof is squarely upon the Revenue. If the Department intends to classify the goods under a particular heading or sub-heading different from that claimed by the assessee, the Department has to adduce proper evidence and discharge the burden of proof."

"Strict construction must be applied to rule 10 of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007, and 'condition of sale' must not be inferred but determined to exist both in the contractual arrangement and by the factual matrix peculiar to each import."

"The doctrine of implied repeal is based on the theory that the Legislature, which is presumed to know the existing law, did not intend to create any confusion by retaining conflicting provisions... There is presumption against a repeal by implication."

"The same service cannot be taxed twice under different statutes; overlap of tax liability is not perceivable as legislative intent."

"HS Code in commercial documents, absent statutory prescription or verification, cannot be accorded sanctity for classification purposes."

"Use or purpose is generally not a criterion for classification unless specifically provided by the tariff heading or notes."

"Classification must be determined according to the terms of the headings and any relative Section or Chapter Notes and, provided such headings or Notes do not otherwise require, according to the General Rules for Interpretation of the Tariff."

"The impugned order's substitution of classification prior to negating claimed classification is perversion of rules of engagement for classificatory adjudication."

"The appellant is entitled to the benefit of preferential tariff under the ASEAN-India Free Trade Agreement notification as the goods are correctly classified and certificates of origin are valid."

"Enhancement of assessable value by inclusion of installation and commissioning charges is not justified as these services were not conditions of sale but optional services exercised by the importer."

"The imposition of penalties and confiscation lacks foundation in absence of evidence of misdeclaration or suppression with intent to evade duty."

"Electronic evidence must be authenticated in accordance with statutory provisions before being admitted as proof."

"The principles of statutory interpretation and precedents require strict adherence to the hierarchical and sequential application of the General Rules for Interpretation of the Tariff."