Supreme Court Summarizes Principles Regarding Application Of Common Or Trade Parlance Test For Classification Disputes Under Taxation Laws
The Supreme Court emphasised that the common or trade parlance test must be applied restrictively.
Supreme Court, Tax
The Supreme Court has summarized the principles regarding the application of the common or trade parlance test while dealing with classification disputes under taxation laws.
The Court was hearing a Civil Appeal preferred against the Judgment of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), wherein it held that the aluminium shelves imported by a company should be classified under Customs Tariff Item (CTI) 84369900, as ‘parts’ of agricultural machinery, as opposed to Customs Tariff Item 76109010, as aluminium structures.
The two-Judge Bench of Justice J.B. Pardiwala and Justice R. Mahadevan culled out the following principles –
a. The common or trade parlance test must be applied restrictively. Its function is limited to ascertaining the common or commercial meaning of a term found within a tariff heading or its defining criterion.
b. The trade or common parlance test can be invoked when dealing with a classification dispute only when the following conditions are satisfied:
i. The governing statute, including the relevant tariff heading, Section Notes, Chapter Notes, or HSN Explanatory Notes, does not provide any explicit definition or clear criteria for determining the meaning and scope of the tariff item in question.
ii. The tariff heading does not include scientific or technical terms, or the words used in the heading are not employed in a specialised, technical context.
iii. The application of the common parlance test must not contradict or run counter to the overall statutory framework and the contextual manner in which the term was used by the legislature.
The common or trade parlance test cannot be invoked where the statute, either explicitly or implicitly, provides definitive guidance. Explicit statutory guidance exists where the legislature provides a specific definition or a clear criterion for a term within the Act itself. Conversely, implicit guidance is found where the terms employed are scientific or technical in nature, or where the statutory context indicates that the words must be construed in a technical sense. It is only in a state of statutory silence, where the legislative intent remains unexpressed, that the tribunals or courts may resort to the common or trade parlance test.
c. In the contemporary HSN-based classification regime, the common or trade parlance test cannot serve as a measure of first resort. It should only be employed after a thorough review of all relevant material confirms the absence of statutory guidance.
d. When interpreting terms in a tariff item by relying on the basis of common or trade parlance, an overly simplified approach should be avoided, and the words should be understood within their legal context.
e. When a tariff item is general in nature and does not indicate a particular industry or trade circle, the common parlance understanding of that term is appropriate. However, when a tariff item is specific to a particular industry, the term must be understood as it is used within that specific trade circle.
f. The common or trade parlance test cannot be used to override the clear mandate of the statute.
Advocate Siddhant Kohli appeared for the Appellant, while Advocate Salil Arora appeared for the Respondent.
Court’s Observations
The Supreme Court after hearing the contentions of the counsel, noted, “The Indian approach to use-based classification is a hybrid structure that combines elements of the methods used in the United States and the European Union.”
The Court said that in brief, the differences and similarities are as follows:
a. While the bifurcation of tariff provisions is not as explicitly distinguished in India as it is in the United States, both systems appear to follow a similar approach, namely, that use can only be considered if (i) the tariff entry explicitly refers to use or adaptation, or (ii) such use is either inherent in the tariff entry itself or implied by the meaning of the term within a tariff entry.
b. The approach of the European Union is less focused on bifurcating the provisions and more on the objective characteristics and properties of the good in question. Use could be a factor in determining classification if the use is inherent to the product and can be identified through its objective characteristics or properties.
c. Unlike the US, India and the EU do not have separate governing rules for use provisions. Instead, in both jurisdictions, the consideration of use is strictly limited to the intended use, which must be objectively determined from the product’s inherent characteristics and properties.
The Court emphasised that tariff headings, relevant section, chapter, and explanatory notes are crucial when determining a classification dispute.
“A use limitation cannot be imposed on an eo-nomine provision unless the name inherently suggests use. An eo-nomine provision would ordinarily include all forms of the name article. Consequently, Chapter Heading 7610 would cover all forms of aluminium structures, except for prefabricated buildings of heading 94.06, which have been excluded by the heading itself”, it said.
The Court observed that a classification dispute in the context of imported goods arises when the revenue and the importer disagree on the tariff heading or sub-heading under which the imported goods ought to be classified and in such scenarios, the Tribunals and Courts are tasked with determining the most appropriate heading/sub-heading for the purposes of customs law classification.
“When undertaking this exercise of determining the most appropriate heading, the tribunals and courts are bound by the GRIs, which are provided for in the First Schedule to the Act, 1975 and ought to be applied sequentially. The GRI 1 forms the basis for classifying goods under the First Schedule of the Act, 1975, and establishes the primacy of the notes and terms of headings in determining classification. Thus, any customs law classification dispute at its core would involve interpreting the tariff headings involved, along with the section and chapter notes relevant to such headings”, it emphasised.
Conclusion
The Court held that “mushroom growing apparatus” seems to be a combination of various separate machines, however, on applying the relevant section notes and Explanatory Notes, it appears that mushroom growing apparatus does not qualify as: (i) a composite machine, as different machines are not meant to be fitted together permanently, or (ii) a functional unit, because all the machines do not appear to work together towards a single, clearly defined function and rather, each machine, i.e., the head filling machine, the automatic watering system, and the compost spreading equipment, seems to perform its own independent task.
“The only common element is that they are all part of the broader mushroom cultivation process, which is different from fulfilling a specific, unified function. Thus, mushroom growing apparatus cannot be classified as ‘agricultural machinery’ under Chapter Heading 8436. … Lastly, the subject goods also fail to qualify as parts of the machines with which they are integrated post-importation. … These shelves do not contribute to their operation; they merely serve as a surface for the devices to perform their functions. A surface supports an object but does not become a part of it”, it concluded.
Accordingly, the Apex Court allowed the Appeal and set aside the impugned Judgment.
Cause Title- Commissioner of Customs (Import) v. M/s Welkin Foods (Neutral Citation: 2026 INSC 19)
