Aluminium shelves used for growing mushroom classifiable as ‘aluminium structures’, not ‘parts’ of agricultural machinery: SC

Supreme Court: In the present case, an appeal was filed against the judgment and order dated 19-4-2024 passed by the Customs, Excise and Service Tax Appellate Tribunal, Principal Bench, New Delhi (‘CESTAT’), wherein the appeal was allowed and it was held that the aluminium shelves (‘the subject goods’) imported by the respondent, Welkin Foods for mushroom growing, should be classified under Customs Tariff Item (‘CTI’) 84369900 as ‘parts’ of agricultural machinery, as opposed to ‘aluminium structures’ under CTI 76109010.

The Division Bench of J.B. Pardiwala* and R. Mahadevan, JJ., held that the subject goods did not qualify as a composite machine or a functional unit, thus could not be classified as an ‘agricultural machinery’. Further, they failed to qualify as ‘parts’ of the machines as they merely served as a surface for the devices to perform their functions, and a surface supports an object but does not become a part of it. Thus, the subject goods were liable to be classified as ‘aluminium structures’. Thus, the impugned judgment and order was set aside. Further, the Supreme Court summarized principles regarding the application of common or trade parlance test while dealing with classification disputes under taxation laws.

Background

Welkin Foods imported aluminium shelving along with a floor drain and an automatic watering system and the appellant, Commissioner of Customs (Import) accepted the classification of floor drain and automatic watering system as ‘parts’ of agricultural machinery. However, the Audit Scrutiny stated that the aluminium shelving was a type of aluminium structure and not a ‘part’ of any agricultural machinery. Therefore, they should have been classified as aluminium structures, which would attract basic customs duty at 10%, countervailing duty at 12.5%, customs cess at 3%, and additional customs duty at 4%.

Later, a notice was issued to Welkin Foods alleging misclassification and short levy of duty amounting to Rs 21,01,983, which was recoverable from Welkin Foods under Section 28(1), along with interest under Section 28-AA of the Customs Act, 1962. The Joint Commissioner held that the subject goods were liable to be classified under CTI 76109010. Being dissatisfied, an appeal was filed before the appellant, who affirmed the said order. Thereafter, an appeal was preferred before the CESTAT, which reversed both the findings and held that the subject goods were classifiable as ‘parts’ of agricultural machinery. Thus, the appellant filed an appeal before this Court.

Analysis, Law, and Decision

The issue for consideration was “whether the subject goods should be classified as ‘parts’ of machines or mechanical appliances under CTI 84369900 or as aluminium structures under CTI 76109010?”.

The Supreme Court stated that when undertaking the exercise of determining the most appropriate heading, the tribunals and courts are bound by the General Rules of Interpretations (‘GRIs’), which are provided for in the First Schedule to the Customs Tariff Act, 1975 and ought to be applied sequentially. The GRI 1 forms the basis for classifying goods under the First Schedule and establishes the primacy of the notes and terms of headings in determining classification. Thus, when interpreting a tariff heading involved in a classification dispute, the tribunal or court may need to invoke and rely on the common or trade parlance test to understand the meaning and scope of the terms used in that tariff heading.

Applicability of the common parlance test in classification disputes

The Supreme Court opined that when a particular term in a taxing statute is not defined, it should be understood in the sense recognised by those who deal with it. The common parlance, trade parlance, and popular parlance tests are iterations of the said fundamental rule, referred to as the ‘common parlance test’. The Supreme Court thus summarized the following principles regarding the application of the common or trade parlance test while dealing with classification disputes under taxation laws:

1. The test must be applied restrictively, and its function is limited to ascertaining common/commercial meaning of a term found within a tariff heading or its defining criterion.

2. The test can be invoked when dealing with a classification dispute only when the following conditions are satisfied:

   1. The governing statute, including the relevant tariff heading, Section Notes, Chapter Notes, or Harmonised System Nomenclature (‘HSN’) Explanatory Notes, does not provide any explicit definition or clear criteria for determining the meaning and scope of the tariff item in question.

   2. The tariff heading does not include scientific or technical terms, or the words used in the heading are not employed in a specialized, technical context.

   3. The application of the 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.

   Thus, the test could not be invoked where the statute, either explicitly or implicitly, provided definitive guidance and it was only in a state of statutory silence, where the legislative intent remained unexpressed, that the tribunals or courts might resort to the test.

3. 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.

4. When interpreting terms in a tariff item by relying on common or trade parlance, an overly simplified approach should be avoided, and the words should be understood within their legal context.

5. 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.

6. The common or trade parlance test cannot be used to override the clear mandate of the statute.

7. To establish a separate commercial identity, it is essential to demonstrate that the good has undergone such a substantial transformation that it can no longer be characterized as a mere sub-type or category of a broader class and thus falls outside the ambit of the common/commercial understanding associated with such a class of goods.

Consideration of ‘use’ when determining classification under the Customs Tariff Act, 1975

The Supreme Court stated that ‘use’ can be considered as a relevant factor when dealing with classification disputes, only if the said tariff heading allows for consideration of ‘use’ or ‘adaptation’, either explicitly or implicitly. 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. Both India and US follow a similar approach regarding the bifurcation of tariff provisions, that ‘use’ can only be considered if the tariff entry explicitly refers to use or adaptation, or such use is either inherent in the tariff entry itself or implied by the meaning of the term within a tariff entry. India and the EU, unlike the US, do not have separate governing rules for ‘use’ provisions. Instead, in India and the EU, the consideration of use is strictly limited to the intended use, determinable from the inherent characteristics and properties of the product.

The Supreme Court thus, after considering relevant section notes and Explanatory Notes, opined that the mushroom growing apparatus was a combination of various separate machines and did not qualify as a composite machine (as different machines are not meant to be fitted together permanently) or a functional unit (as all the machines did not appear to work together towards a single, clearly defined function). Instead, each machine, that is, the head filling machine, the automatic watering system, and the compost spreading equipment, seemed to perform its own independent task and the only common element was that they were all part of the broader mushroom cultivation process, which was different from fulfilling a specific, unified function. Therefore, mushroom growing apparatus could not be classified as ‘agricultural machinery’.

Further, it was stated that the subject goods failed to qualify as ‘parts’ of the machines with which they were integrated post-importation as all the individual machines were already complete and fully operational on their own. The aluminium shelves merely serve as a surface for the devices to perform their functions, and a surface supports an object but does not become a part of it.

Thus, the Supreme Court held that the subject goods were liable to be classified as ‘aluminium structures’. Thus, the appeal was allowed, and the impugned judgment and order dated 19-4-2024 passed by the CESTAT was set aside.

[Commr. of Customs v. Welkin Foods, 2026 SCC OnLine SC 27, decided on 6-1-2026]

*Judgment authored by: Justice J.B. Pardiwala

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Advocates who appeared in this case:

For the Appellant: Gurmeet Singh Makker, AOR

For the Respondent: Tahir Ashraf Siddiqui, AOR; Salil Arora and Mayur Punjabi, Advocates