It is no doubt that Chapter 98 of the First Schedule of the Customs Tariff Act, 1975, (“Tariff Schedule”) is a peculiar creation of India and has no backing of the harmonised system of nomenclature (HSN) explanatory notes. Therefore, the only source for interpreting the entries of the said chapter are its chapter notes. Because of such narrow scope, the chapter comes with its own set of interpretational challenges which are often a reason for causing unprecedented disputes for importers/taxpayers. A fallout of such interpretational issues in the form of CTI 9802 0000 (“laboratory chemicals”) shall be touched upon by the authors in this article.
CTH 9802 introduced in the Tariff Schedule in Financial Year 1985-1986 is governed by Note 1 to Chapter 98, which states that “this chapter is to be taken to apply to all goods which satisfy the conditions prescribed therein, even though they may be covered by a more specific heading elsewhere in this Schedule”. Further, as per Note 3 to Chapter 98, CTH 9802 covers “all chemicals, organic or inorganic, whether or not chemically defined, imported in packings not exceeding 500 gm or 500 ml and which can be identified with reference to the purity, markings or other features to show them to be meant for use solely as laboratory chemicals”. In terms of Paras 2.01(a)1 and 2.02(c)2 of the Foreign Trade Policy (FTP) 2023, the import policy for goods imported under CTH 9802 is “free”.
Certain chemicals falling under Section VI “Products of the Chemical or Allied Industries” (ranging from Chapters 28 to 38 of the Tariff Schedule) have huge import demand in multiple sectors/industries such has pharmaceutical, chemical, manufacture, research and development (R&D), etc. (hereinafter collectively referred as “industries”). Quite often these chemicals are imported in miniscule quantities by such industries for the purpose of research, testing, analysis, assaying, etc. and are classified in the respective headings in terms of General Rules for Interpretation (“GI Rules”) which are provided as part of the Tariff Schedule. Further, in terms of Para 2.023 of FTP 2023, these chemicals are inter alia “freely” importable, but subject to conditions stipulated in other Acts or laws for the time being in force.
The Customs Authorities (“Department”) recently in a number of cases while erroneously interpreting the notes to Chapter 98 are issuing show-cause notices to the industries and demanding differential duty along with interest and penalty for such imports on the grounds that, although they may be covered in any other specific heading but are classifiable under CTH 9802 (BCD Tariff Rate 10%), as they fulfil the criteria laid down in Note 3 to Chapter 98.
Prima facie, it may appear that the Department is only operating within the four corners of GI Rules. However, a question arises that, whether the goods imported and classifiable under a specific heading of Chapters 28 to 38 and having policy condition attached, can be forced to be classified under CTH 9802?
To analyse this question, following illustrative scenarios may be considered, wherein goods imported are chemicals, imported in a quantity less than 500mg/ml and solely for the purpose of laboratory testing/analysis or assaying.
Import of psychotropic substance as per Appendix I4 to Indian Trade Classification (HS), 2017 and the Narcotic Drugs and Psychotropic Substances Act, 1985 (“NDPS Act”), such as Triazolam (INN) (CTI 2933 9100), Ethchlorvynol (INN) (CTI 29055100), Ketazolam (INN) (CTI 29349100) Vinylbital (INN) (29335300), etc.5 all having BCD Tariff Rate 7.5%, require a no-objection certificate (NOC) from the Narcotics Commissioner, Gwalior, before import in terms of ITC (HS) Policy Condition No. 3 of Chapter 29.
If the Department’s case were to be considered, then it would mean that any and every narcotic drug and psychotropic substance shall pass through customs frontier by defeating the entire purpose of checks under the NDPS Act/Rules as well as import policy under ITC (HS) by paying BCD Tariff Rate 10% under CTH 9802.
Import of Calcium Cyanide (CTI 38089112) and similar other chemical products falling under CTH 3808 (BCD Tariff Rate 10%) are “freely” importable but with an import policy condition i.e., “if registered and not prohibited for import under Insecticides Act, 1968 and formulations thereof”.
If the Department’s case were to be considered, then the above products may be imported under CTH 9802 and the registration requirements under the Insecticides Act, 1968 (“Insecticides Act”) is likely to be circumvented, thus defeating the purpose of checks under import policy under ITC (HS) and Insecticides Act.
On one hand the Revenue Department may push the importers to classify the goods under CTH 9802 and issue notices requiring them to pay differential customs duty, interest and face the music under Customs Act/Rules. On the other hand, if the importers act in accordance with notes to Chapter 98 and classify goods under CTH 9802, then they would unintentionally end up violating NDPS Act/Rules, Insecticides Act/Rules as well as Foreign Trade (Development and Regulation) Act, 1992 (FTDR Act) and suffer the consequences under the said Acts/Rules.
In authors view, such absurdity could not have been the intent of legislature while introducing Notes 1 and 3 to Chapter 98.
Though Notes 1 and 3 to Chapter 98 have remained unchanged since the time of their introduction in 1985-1986, but the trade circumstances around them have evolved multifold. In other words, the said notes cannot be strictly interpreted and mechanically applied in every case by ignoring the nature of goods imported/related import policies.
In view of the above compelling circumstances, the industries may file appropriate representation before the Central Board of Indirect Taxes and Customs (CBIC) requesting to carve out exceptions under Note 3 to Chapter 98 by excluding products falling under Section VI which are “restricted” or “freely” importable but are subject to import policy condition. From the Government’s perspective, the situation is equally alarming, as CTH 9802 poses as a free pass for import of chemicals, which otherwise in terms of import policy require authorisations, NOCs, permits, etc. Hence, there is an urgent need for corrective actions by the legislature for taking care of this anomaly by suitably amending the import policy of CTH 9802.
† Associate Partner, Lakshmikumaran and Sridharan Attorneys.
††Senior Associate, Lakshmikumaran and Sridharan Attorneys.
1. Exports and imports shall be “free” except when regulated by way of “prohibition”, “restriction” or “exclusive trading through State trading enterprises (STEs)” as laid down in Indian Trade Classification (Harmonised System) [ITC (HS)] of Exports and Imports.
2. The import/export policies for all goods are indicated against each item as per its ITC (HS). Schedule 1 of ITC (HS) lays down the import policy regime while Schedule II of ITC (HS) lays down the export policy regime.
3. Further, there are some items which are “free” for import/export, but subject to conditions stipulated in other Acts or in law for the time being in force.
5. List not exhaustive. NDPS Act covers more than 100 psychotropic substances.