Prelude: Instituting criticality of commodity classification
The welfare agenda of the government inter alia mandates addressing tax inequality whereby the tax incidence is designed on the ability-to-pay principle such that tax system does not brood disproportionate distribution of tax burdens across different income and wealth classes. Thus, for example, commodities meant for mass consumption and by those at the lower-end of the social strata should be exempted or taxed at concessional rates whereas luxuries largely meant to service the affluent sections should be taxed at a higher rate. In practice, attainment of this haloed objective requires precise identification, classification and calibration of the commodities into intelligible tax-rate system.
In addition to the above, the importance of tax rates slabs is accentuated further by both conceptual foundations and pragmatic utilities of the tax system. For example, how should coconut oil be taxed; as “edible oil” and hence preferentially or as “hair oil” and thus analogous to cosmetics?1 As another example, the debates on classification and taxability of different shades of popcorn — which captured public attention recently — reveal the societal perception and implications of tax rate composition.2
In brief, determination of tax incidence is an outcome of complex classification and tax rate evolution exercise which involves extensive interaction of public policy, tax policy, economic metrices, etc. At the field level, the resultant outcome is characterised as “tariff schedule” which encompasses the applicable rates qua each commodity. These schedules are extensively drawn, the intent being to exhaustively delineate each tradeable commodity and specify an unambiguous tax rate. For illustration, Schedule I appended to the Customs Tariff Act, 1975 adopts an eight-digit classification (with appropriate sub-classifications) of tradeable commodities along with the corresponding rate of duty.3 This classification matrix has been adopted even for goods and services tax (GST) purposes.4 Furthermore, in order to ensure international alignment, the classification scheme is based on the “Harmonised Commodity Description and Coding System” (commonly known as, “Harmonised System” or “Harmonised System Nomenclature” — HSN) which is an internationally accepted standard for classification of goods.5
The judicial appreciation of the tariff classification of goods in India has resulted into evolution of additional rules, which supplement the determination of the applicable tax rate. For illustration, the “common parlance” test has been in vogue for decades and is peculiar to India.6
In its recent decision in Commr. of Customs v. Welkin Foods7 the Supreme Court has examined the applicable rules governing classification of goods — both statutory stipulations and judicial principles — to contextualise their extent and inter se application. The decision pivots the hitherto prevailing understanding of the interpretative principles to determine the commodity classification and thus it is critical to appreciate the contours of the decision.
Dispute before the Supreme Court
Welkin Foods had imported an aluminium shelving along with a floor drain and an automatic watering which according to it were to be classified under customs tariff item (CTI) 84369900 as “parts” of agricultural machinery. According to the Customs Department, however, these goods were only a “type of aluminium structure and not a part of any agricultural machinery” and, consequently, according to the Customs Department the imported goods should have been classified as articles under CTI 76109010 as “aluminium structures”.
The classification dispute arising out of this difference of opinion between Welkin Foods and the Customs Department formed the subject of consideration before the Supreme Court. Welkin Foods lost in two rounds of adjudication wherein the classification was decided on the basis of the intrinsic qualities of the imported goods, i.e. as structure of aluminium. However, in the third round, Welkin Foods’ view found favour with the Appellate Tribunal which impressed upon the fact that the goods were supplied by a person “who exclusively deals in the structures specific to mushroom growing industry” and Welkin Foods “is also in the business of growing mushrooms” which aspect is to examined via the perspective that there is “no denial to the fact that the aluminium shelves imported cannot be used as any other aluminium structures for any other purpose”. The Appellate Tribunal, furthermore, emphasised that it was beyond denial “that growing mushroom is an agricultural or horticultural activity and the product imported is crucial and specific for the said activity that the product is specifically designed part of mushroom growing apparatus”. The Appellate Tribunal also noted that “the aluminium shelving in question is not known to the common trade parlance as a mere aluminium structure but is specifically known as Mushroom growing rack”.
Challenging the correctness of this conclusion of the Appellate Tribunal, the Customs Department appealed to the Supreme Court. In its decision, the Supreme Court noted the following key aspects which weighed in before the Appellate Tribunal and which required a deeper examination:8
12. Thus, while allowing the appeal, the CESTAT relied on the following aspects of the matter: (i) the respondent is involved in mushroom cultivation and got the subject goods imported from a party who exclusively deals in structures specific to the mushroom cultivation industry; (ii) the subject goods are specifically designed to integrate with other machinery used in mushroom cultivation and are not simply aluminium shelves but mechanical appliances used for agricultural purposes; (iii) the subject goods are essential for mushroom growing and are designed as part of the mushroom growing apparatus; (iv) the subject goods cannot be used as aluminium structures for any purpose other than their specific use in the mushroom growing industry; (v) in common trade parlance, the subject goods are known not as mere aluminium racks but as mushroom growing racks; and (vi) Chapter 76 covers all aluminium structures generally, whereas Chapter 84 specifically pertains to any machine or device made of metal used for agricultural purposes.
Thus, the stage was set for the determination by the Supreme Court. In brief, the issue to decided was the correct classification of the imported goods; whether these were to be classified as claimed by the Tax Department as aluminium structures in view of their intrinsic content, or as claimed by the taxpayer as parts of agricultural machinery in view of their exclusive usage for growing mushrooms.
Decision of the Supreme Court
At the outset, the Supreme Court highlighted and acknowledged that there are two key legal principles prevailing in India qua the classification of goods which were incongruent with the internationally followed “Harmonised System” of classification of goods; the two legal principles being: 1) “common parlance” test, and 2) reference to “end use” of the goods. As regards the former, the Supreme Court specifically noted that “the adoption of the common parlance or trade parlance test is often heavily contested” and therefore found it fit “to consider and determine the circumstances in which… it [is] appropriate to rely on the common parlance test and those in which it has not”. The Supreme Court, furthermore, took upon itself the task to explain “whether end use can be taken into account when dealing with classification disputes of imported goods… and if so, what principles govern such consideration”. The various aspects addressed in detail in the decision are distinctively examined under suitable headings in the subsequent paragraphs.
On the importance of classification and “General Rules of Interpretation”
The Supreme Court has reindorsed that while technically “customs classification is best described as the process of identifying the appropriate heading, subheading, or tariff item for a good”, it has extensive criticality for the following reasons:
27. … This is the most crucial step in the customs law, as it is not just an administrative task. Instead, the classification determines the legal and financial treatment of the goods in question, including the applicable duty rate and eligibility for exemptions.9
36. …The primary purpose of the GRIs is to establish mandatory boundaries for any classification inquiry, ensuring a structured, uniform, and predictable approach to classification. It is essential not to treat these GRIs as a menu of options that can be invoked randomly, but rather as a legal framework that dictates a precise and sequential methodology for classifying all goods.10
The decision further elaborately explains the “General Rules of Interpretation” (GRI)11 which are appended to the schedule as part of statutory text and outline the principles that govern the classification of goods. These GRIs must be applied sequentially from GRI 1 to GRI 4.12 The Supreme Court summarised the scope of the respective GRIs as under:13
29. GRI 1 is the fundamental rule for effectively navigating the HSN. The influence of GRI 1 is pervasive and forms the basis for customs classification of goods under the Act, 1975. GRI 1 states that: (i) headings of Sections, Chapters and Sub-chapters are for reference only and (ii) for legal purposes, the classification shall be determined by the terms of headings and the relevant Section or Chapter Notes. Thus, GRI 1 essentially establishes the primacy of the notes and terms of headings for determining the classification of a product.
30. GRI 2 (a) is expanding the terms of a heading to include (i) incomplete or unfinished goods, as long as the essential character of the complete or finished article is obvious from the goods as presented at the time of importation; or (ii) goods presented in unassembled or disassembled form.14
31. GRI 2(b) deals with mixtures consisting of different materials or substances and goods that are produced from different materials or substances. GRI 2(b) states that a reference in a heading to: (i) to a material or substance shall be taken to include a reference to mixtures or combinations of that material or substance with other materials or substances and (ii) goods of a given material or substance shall include a reference to goods consisting wholly or partly of such materials or substance. Lastly, those mixtures or goods that consist of mixtures of different materials or substances are classified according to GRI 3.
32. GRI 3 is the rule that acts as a tie breaker when, by application of GRI 2(b) or for any other reason, goods are, prima facie, classifiable under two or more headings. Such classification shall be based on the following:
(a) As per GRI 3(a), a heading with a more specific description of goods is preferred to a heading with a more general description of goods. However, GRI 3(a) cannot be applied to decide classification when two or more headings each refer to only part of the materials or substances contained in mixed or composite goods or to part only of the items in a set put up for retail sale. Each of those headings is to be regarded as equally specific in relation to those goods, even if one gives a more complete or precise description of the goods. The decision of classification will then be made based on GRI 3(b) or GRI 3(c).15
(b) GRI 3(b) concerns the decision for mixtures and goods that consist of different materials or components and for goods put up in sets for retail sale, which cannot be classified by reference to GRI 3(a). The classification shall be determined by the material, substance or component that gives them their essential character, in so far as this criterion is applicable. The criterion that gives goods their essential character differs according to the type of goods. The material or substance, its contents, its amount, its weight, its value or the value of a material for its usage can determine this.
(c) GRI 3(c) is applicable only when a classification according to GRI 3(a) and GRI 3(b) was not possible. Consequently, the goods are placed in the heading which occurs last in numerical order among those which equally merit consideration.
33. GRI 4 is invoked very rarely, as many classification disputes are resolved through the application of GRIs 1-3, thereby making it needless to invoke GRI 4. GRI 3 and GRI 4 are mutually exclusive, as once the analysis enters the arena of GRI 3, GRI 4 cannot be invoked, as the dispute would ultimately be resolved by GRI 3(c). GRI 4 is essentially a failsafe rule, an option of last resort, intended to ensure that an HSN provision can be found for even the most unusual product. Under GRI 4, goods are classified under the heading appropriate to the goods to which they are most akin. Thus, kinship is the sole evaluative criterion allowed under GRI 4.
34. GRI 5 is a special rule of interpretation that pertains only to the classification of cases and packing materials.
35. GRI 6 is a procedural rule that explains how to classify a good after the correct four-digit heading has already been found. In simple terms, it states that the exact same principles from GRI 1 to 5 must be applied again, mutatis mutandis, to determine the correct sub-heading within that heading. Classification at the sub-heading level is governed by the specific terms of the sub-headings and any sub-heading notes, with the critical condition that only sub-headings at the same level can be compared.
The Supreme Court summarised the application and scope of the GRI in the following terms:16
37. … GRI 1, which gives primacy to the headings and notes, is the non-negotiable starting point. GRI 2, which deals with incomplete, unassembled or composite goods or mixtures, often acts as an extension of GRI 1, by deeming the headings to include incomplete/unassembled goods or mixtures or combinations of a material or substance. GRI 3 is only invoked when the application of GRI 1 and/or GRI 2 results in a good being prima facie classifiable under two or more competing headings. GRI 3 exists solely to resolve this tie. GRI 4, the rule of last resort, is mutually exclusive to GRI 3 and is only invoked if GRI 1 and 2 have failed to find even one possible heading for the good.
The Supreme Court further confirmed that the official interpretation of the Harmonised System — as reflected in the Explanatory Notes published by the World Customs Organisation — forms “the foundation for interpreting the HSN”17 and held that in the situation wherein the Indian domestic tariff entry is fully aligned with the corresponding Harmonised System heading then the Explanatory Notes are to be treated as binding guidance.18
Reflections qua “common parlance” test
Explaining the Indian addition19 to the rules for interpreting the tariff classification, the Supreme Court observed that certain alternate rules have been judicially developed — such as common parlance, trade parlance, and popular parlance test — which “are all iterations” of the fundamental premise “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”.20 Explaining the rationale for the evolution and ambit of this interpretative principle, as developed and explained in some of its earlier decisions, the Supreme Court observed as under:21
42. The rationale behind this principle is that the purpose of a fiscal statute is to generate revenue, and the legislature assumes it is addressing the public and traders, not scientists or technical experts. Therefore, the terms used in the statute are based on the understanding of those dealing with the said goods. If a specific scientific meaning had been intended, the statute would have included an explicit definition to that effect.
The decision acknowledged that divergent judicial views exists, some decisions applying the common parlance test22 while some relegated it from the scope of consideration.23 Seeking to harmonise the principles emanating from these decisions, the Supreme Court has culled out the following rules which shall henceforth govern the application of common parlance principle:24
67. … (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.
Thus, broadly speaking, 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. Further, when a party asserts a meaning of a term based on common or trade parlance, it must present satisfactory evidence to support that claim.
(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. Specifically:
(i) The test cannot be applied in a way that results in the reclassification of a good that is clearly identifiable under a particular heading according to the statute, simply because that good is marketed or called by a different name in trade or common parlance.
(ii) Conversely, the test cannot be used to challenge the classification of goods under a statutory heading if those goods retain the essential characteristics defined by that heading, even if they have a unique or specialised trade name.
In other words, the character and nature of the product cannot be veiled behind a charade of terminology which is used to market the product or refer to it in common or commercial circles.
(g) 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 characterised as a mere sub-type or category of a broader class and thus falls outside the ambit of the common or commercial understanding associated with such a class of goods.
The Supreme Court has thus crystallised, rather limited, the scope of common parlance test for the purposes of interpreting the tariff schedules towards classification of goods and inter alia determination of applicable tax rates. Pithily put, for classification of a commodity, common parlance henceforth can only be applied in the absence of (and not in alternate to) clear statutory prescription qua such commodity.
Relevance of “end use” for classification of goods
The Supreme Court acknowledged that “usage” or “end use” test, which is also a judicial innovation and which relies upon “the purpose for which goods are used” for “deciding on their classification under fiscal statutes is often a highly debatable issue” evidently because:
70. … Importers, manufacturers, and traders will invoke “use” when it allows them to have the goods taxed at a lower rate. Conversely, the revenue authorities will seek to invoke use when they see the possibility of taxing the goods at a higher rate.25
Having undertaken a nuanced consideration of the earlier decisions on the subject,26 the Supreme Court in the case of Welkin Foods27 has declared the following legal position for henceforth applying the “usage” or “end use” test for classification of goods, inter alia severely limiting its application:28
97. … (a) “Use” can be considered as a relevant factor when dealing with classification, only if the concerned tariff heading allows for consideration of “use” or “adaptation”, either explicitly or implicitly.
(b) A tariff entry is said to allow consideration of “use” or “adaptation” for classification in the following scenarios:
(i) The tariff heading itself explicitly contains a reference to use or adaptation.
(ii) The notes related to a tariff item provide a legal definition or criterion that includes a reference to use or adaptation.
(iii) Use or adaptation is inherent in the wording of the tariff entry itself.
(iv) The heading is an eo–nomine term with no statutory definition, and based on the common or trade parlance test, the Court concludes that the common or commercial meaning of the good includes “use” or “adaptation” of the good as a defining aspect of its identity.
(c) Unless statutory intention to the contrary is proven, an importer cannot classify goods based on the actual use to which the goods are put.
(d) If the importer wishes to classify goods based on their “intended use”, then the following conditions must be fulfilled:
(i) First, the tariff heading under which the importer seeks to classify should allow consideration of “use” as a relevant factor;
(ii) Secondly, if such a tariff heading allows for consideration of “use”, the “use” mentioned in the tariff heading and the “intended use” claimed by the importer must be consistent.
(iii) Lastly, the intended use as claimed by the importer:
1. should be inherent in the goods in question and should be discernible from their objective characteristics and properties, which include, among other things, factors such as function, design and composition; and
2. should conform to the standard of use established for that entry.
(e) When a tariff heading contains both an eo-nomine component and a use component, both criteria must be satisfied. An importer cannot rely on the use criterion to ignore the product’s fundamental eo-nomine identity.
The Supreme Court has, therefore, ruled out the indiscriminate reliance upon the usage or “end use” of the goods by declaring that this test cannot be taken recourse to unless the tariff schedule itself accommodates “usage” as a relevant criteria for classification purpose. Furthermore, the Supreme Court contrasted the rules of interpretation prevalent in the United States and European Union to bring out the salient differences in the approaches vis-à-vis the Indian stance.29
Observations regarding the disputed classification of goods imported in this case
Having delineated the legal position as aforesaid, the Supreme Court adverted to the lis at hand. Towards determining the classification of the imported goods, the court extensively examined the tariff schedule and the Explanatory Notes to the corresponding entries in the Harmonised System qua both the rival claims. After appreciating the tariff schedule, the Supreme Court observed that the tariff schedule relating to Aluminium Structures (i.e. tariff Heading 7610) “makes no reference to use in any manner whatsoever, either explicitly or inherently” and thus its scope could not be limited by artificially reading “use” and instead the tariff schedule “would ordinarily include all forms of the name article”. The Supreme Court also examined the scope of tariff schedule relating to parts of agricultural machinery (i.e. tariff Heading 8436) but found the claim unsubstantiated, being exclusively based upon end use of the imported goods. Applying the legal tests discussed aforesaid, the Supreme Court observed that “[i]ntended use can serve as the basis for classification only if the following conditions are met: 1) Chapter Heading 8436 must permit such consideration of use, 2) the intended use is identifiable from the objective characteristics and properties of the subject goods, and 3) the intended use aligns with the standard of use specified in Chapter Heading 8436”. Refusing to accede to the claim of the taxpayer, the Supreme Court assigned the following reasons to reject the application of the usage test and conclude in favour of the Tax Department:30
128. … it is undeniable that the term “agricultural machinery” inherently refers to “use”. It pertains to items primarily utilised in agricultural processes. While the First Schedule of the Act, 1975 offers no explicit definition or criteria for classifying goods as “agricultural machinery”, support for this interpretation can be found in the HSN Explanatory Notes, which state that Chapter Heading 8436 belongs to a category of headings that group machinery by the field of industry in which it is used, regardless of its specific function in that field. Such an interpretation aligns perfectly with the common parlance meaning associated with the term “agricultural machinery”. We have no doubt that, in common parlance, the term “agricultural machinery” is understood to mean machinery whose principal use is in agricultural processes.
129. Furthermore, upon reviewing Chapter Heading 8436 and the relevant Chapter, Section, and Explanatory Notes, it is clear that to be classified under Chapter Heading 8436, the use test must be one of “principal use”, not “use” simpliciter. The rationale behind this is that a heading that simply refers to a field of industry is inherently broad. If any possible or incidental use in agriculture were sufficient, it would improperly expand the scope of this heading, potentially including general-purpose machines. Therefore, it is essential that the product’s objective characteristics and design clearly demonstrate that it is principally intended for use in agricultural purposes. This helps prevent goods with ambiguous or multiple uses from being incorrectly classified under this heading.
131. As regards the question whether the subject goods can be considered as agricultural machinery, we are in complete agreement with the appellant’s contention that they are not “machinery” in themselves. The term “machinery” is not defined in the First Schedule of the Act, 1975. While the appellate authorities and parties have referred to various dictionary definitions, this court has repeatedly cautioned against a mechanical reliance on such meanings, especially when the common understanding of a term is clear and unambiguous. We have no doubt that in common parlance, the subject goods are not understood as “machinery”. An iron or steel shelf, for example, is universally understood as a “structure” or “furniture”, not a machine. By the same logic, these aluminium assemblies are mere structures. To classify these static, non-moving assemblies as “machinery” is a classification that defies common sense and is patently absurd.
138. The “mushroom growing apparatus” seems to be a combination of various separate machines. However, on applying the relevant Section Notes and Explanatory Notes, it appears to us that mushroom growing apparatus does not qualify as: (i) a composite machine, as the 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. 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. To illustrate, according to the Explanatory Notes, an irrigation system comprising a control station with filters, injectors, metering valves, underground distribution, branch lines, and a surface network would be considered a functional unit. Conversely, closed-circuit video surveillance systems, which include a varying number of television cameras and video monitors connected by coaxial cables to a controller, switchers, audio receiver, and possibly automatic data processing machines (for data storage) and/or video recorders (for recording pictures), would not be regarded as a functional unit.
141. The subject goods simply do not meet the aforementioned standard, as each individual machine is self-contained. Furthermore, we do not believe that merely being customs-made and providing the “means” for a machine to complete a task automatically qualifies it as a “part” of such a machine. Such an interpretation would fundamentally misunderstand what it means to make something functional. All of the individual machines are already complete and fully operational on their own; their mechanical and electrical functions do not rely on aluminium shelves. 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. To illustrate, a car needs a road to operate. One could even create a customs race track for a specific race car, enabling it to be driven solely on that track. However, it is never disputed that the road is not a “part” of the car.
157. The “mushroom growing apparatus” seems to be a combination of various separate machines. However, on applying the relevant Section Notes and Explanatory Notes, it appears to us 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. 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.
The above observations reveal the depth of factual and legal inquiry which must be undertaken before the “usage” or “end use” test can be considered as 1) applicable; and 2) satisfied, in order for the classification to be based on such usage. The decision, furthermore, confirms that end use shall not form the basis for classification unless its application is sought for by the relevant tariff schedule and even in such a situation, its application shall be governed and limited by the contours of such schedule.
Conclusion
In their regular course, Judges decide the lis before them. While the issues addressed are definitely relevant for the contesting parties, in the process Judges interpret the legal standard and, more often than not, decide the fate of many others. When the outcome is path-breaking, the sphere of influence of the judicial outcome extends to engulf a larger paradigm, sometimes even the entire ecosystem. It is in similar vein that this recent decision of the Supreme Court of India needs to be appreciated. Literally re-shaping (if not rewriting) the rules governing commodity classification for taxation purposes, the decision has not just consolidated the multiple judicial doctrines but also explained the Indianisation of the prevailing global practices. Resetting the pendulum qua 1) “common parlance” test; 2) “end use” test; 3) resort to technical and scientific meaning; 4) extent of relevance of the Harmonised System and its Explanatory Notes; 5) General Rules of Interpretation appended to the tariff schedule; and 6) criticality of intrinsic components, composition and traits of the product, etc. is only one of the salient aspect of this decision. It is very likely that enthused by this new development both the trade and revenue may usher a revisit to the respective tax positions, which, if applied for the past, is likely to open a Pandora’s box with the potential to significantly ignite further disputes. Nonetheless, from a tax certainty perspective such erudite and exhaustive judicial elocution is always befitting in the quest to rule out ambiguities and disputes in the application of the law.
*Advocate, Supreme Court of India; LLM, London School of Economics; BBA LLB (Hons.) (Double Gold Medalist), National Law University, Jodhpur. Author can be reached at mailtotarunjain@gmail.com.
1. For illustration, see CCE v. Madhan Agro Industries (India) (P) Ltd., (2025) 149 GSTR 352 : 2024 SCC OnLine SC 3775.
2. For illustration, see Press Release, Press Information Bureau, Recommendations of the 55th Meeting of the GST Council, 21-12-2024, available at <https://www.pib.gov.in/PressReleasePage.aspx?PRID=2086873> which inter alia clarified that:
ready to eat popcorn which is mixed with salt and spices are classifiable under HS 2106 90 99 and attracts 5% GST if supplied as other than pre-packaged and labelled and 12% GST if supplied as pre-packaged and labelled. However, when popcorn is mixed with sugar thereby changing its character to sugar confectionary (e.g., caramel popcorn), it would be classifiable under HS 1704 90 90 and attract 18% GST.
3. “Tariff”, Central Board of Indirect Taxes and Customs, available at <https://www.cbic.gov.in/entities/customs>.
4. For illustration, see Notification No. 1/2017-Central Tax (Rate), (2017) 390 ITR (Stat) 33.
5. For details, see, Tarun Jain, “Appraising the Classification of Goods and Services under GST Laws”, 2019 SCC OnLine Blog Exp 1.
6. For details, see, Tarun Jain, “Principle of “Substitutability” versus “Common Parlance” Test : Ascertaining Classification of Goods”, (2019) 60 GSTR (Jrn) 1-7.
7. (2026) 166 GSTR 39 : 2026 SCC OnLine SC 27.
8. Commr. of Customs v. Welkin Foods, (2026) 166 GSTR 39, 63 : 2026 SCC OnLine SC 27.
9. Commr. of Customs v. Welkin Foods, (2026) 166 GSTR 39, 69 : 2026 SCC OnLine SC 27.
10. Commr. of Customs v. Welkin Foods, (2026) 166 GSTR 39, 73 : 2026 SCC OnLine SC 27.
11. The “General Rules for Interpretation” appending to the Schedule I, Customs Tariff Act, 1975 state as under:
Classification of goods in this Schedule shall be governed by the following principles:
1. The titles of Sections, Chapters and Sub-Chapters are provided for ease of reference only; for legal purposes, classification shall 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 following provisions.
2.(a) Any reference in a heading to an article shall be taken to include a reference to that article incomplete or unfinished, provided that, as presented, the incomplete or unfinished article has the essential character of the complete or finished article. It shall also be taken to include a reference to that article complete or finished (or falling to be classified as complete or, finished by virtue of this rule), presented unassembled or disassembled.
(b) Any reference in a heading to a material or substance shall be taken to include a reference to mixtures or combinations of that material or substance with other materials or substances. Any reference to goods of a given material or substance shall be taken to include a reference to goods consisting wholly or partly of such material or substance. The classification of goods consisting of more than one material or substance shall be according to the principles of Rule 3.
3. When by application of Rule 2(b) or for any other reason, goods are, prima facie, classifiable under two or more headings, classification shall be effected as follows:
(a) The heading which provides the most specific description shall be preferred to headings providing a more general description. However, when two or more headings each refer to part only of the materials or substances contained in mixed or composite goods or to part only of the items in a set put up for retail sale, those headings are to be regarded as equally specific in relation to those goods, even if one of them gives a more complete or precise description of the goods.
(b) Mixtures, composite goods consisting of different materials or made up of different components, and goods put up in sets for retail sale, which cannot be classified by reference to 3(a), shall be classified, as if they consisted of the material or component which gives them their essential character, insofar as this criterion is applicable.
(c) When goods cannot be classified by reference to 3(a) or 3(b), they shall be classified under the heading which occurs last in numerical order among those which equally merit consideration.
4. Goods which cannot be classified in accordance with the above rules shall be classified under the heading appropriate to the goods to which they are most akin.
5. In addition to the foregoing provisions, the following rules shall apply in respect of the goods referred to therein:
(a) camera cases, musical instrument cases, gun cases, drawing instrument cases, necklace cases and similar containers, specially shaped or fitted to contain a specific article or set of articles, suitable for long-term use and presented with the articles for which they are intended, shall be classified with such articles when of a kind normally sold therewith. This rule does not, however, apply to containers which give the whole its essential character;
(b) Subject to the provisions of Rule 5(a) above, packing materials and packing containers presented with the goods therein shall be classified with the goods if they are of a kind normally used for packing such goods. However, this provision does not apply when such packing materials or packing containers are clearly suitable for repetitive use.
6. For legal purposes, the classification of goods in the sub-headings of a heading shall be determined according to the terms of those sub-headings and any related sub-heading Notes and, mutatis mutandis, to the above rules, on the understanding that only sub-headings at the same level are comparable. For the purposes of this rule the relative Section and Chapter Notes also apply, unless the context otherwise requires.
12. Commr. of Customs v. Welkin Foods, (2026) 166 GSTR 39 : 2026 SCC OnLine SC 27, para 36. Relying upon; CCE v. Simplex Mills Co. Ltd., (2005) 3 SCC 51 : (2005) 140 STC 125; Secure Meters Ltd. v. Commr. of Customs, (2015) 14 SCC 239 : (2015) 32 GSTR 379.
13. Commr. of Customs v. Welkin Foods, (2026) 166 GSTR 39 : 2026 SCC OnLine SC 27. paras 29-35
14. Relying upon Collector of Customs v. Maestro Motors Ltd., (2005) 9 SCC 412, Commr. of Customs v. Sony India Ltd., (2008) 13 SCC 145; Salora International Ltd. v. CCE, (2012) 9 SCC 662 : (2013) 19 GSTR 221.
15. Relying upon CCEC & ST v. Jocil Ltd., (2011) 1 SCC 681 : (2011) 6 GSTR 403.
16. Commr. of Customs v. Welkin Foods, (2026) 166 GSTR 39 : 2026 SCC OnLine SC 27.
17. See generally, CCE v. Woodcraft Products Ltd., (2002) 10 SCC 734 for additional account of judicial reasons to endorse the reliance on Explanatory Notes.
18. Relying upon CCE v. Madhan Agro Industries (India) (P) Ltd., (2025) 149 GSTR 352 : 2024 SCC OnLine SC 3775.
19. Albeit the decision observes “that courts in both the United States and the European Union apply the common or trade parlance test in a broadly similar manner, considering comparable factors and considerations. See Skatteministeriet Departementet v. Global Gravity ApS, Case C-788/21, Kreyenhop & Kluge GmbH & Co. KG v.Hauptzollamt Hannover, Case C-471/17 and Len-Ron Mfg. Co. v. United States, 334 F 3d 1304, 1309 (Fed. Cir 2003)”.
20. Relying upon; Indo International Industries v. CST, (1981) 2 SCC 528 : 1981 SCC (Tax) 130 : (1981) 47 STC 359, Pappu Sweets and Biscuits v. Commr. of Trade Tax, U.P., (1998) 7 SCC 228 : (1998) 111 STC 425, Asian Paints India Ltd. v. Collector of Central Excise, (1988) 2 SCC 470 : 1988 SCC (Tax) 201 : (1988) 70 STC 38, United Offset Process (P) Ltd. v. Collector of Customs, 1989 Supp (1) SCC 131 : 1989 SCC (Tax) 168 : (1989) 74 STC 81.
21. Commr. of Customs v. Welkin Foods, (2026) 166 GSTR 39, 75-76 : 2026 SCC OnLine SC 27.
22. The earlier decisions which are enlisted as applying the common parlance test are: Dunlop India Ltd. v. Union of India, (1976) 2 SCC 241 (interpreting the scope of commodity “resin”); Oswal Agro Mills Ltd. v. Collector of Central Excise, 1993 Supp (3) SCC 716 (explaining the scope of “toilet soap”); Union of India v. Garware Nylons Ltd., (1996) 10 SCC 413 (interfacing “nylon twine” with “nylon yarn”); CCE v. Connaught Plaza Restaurant (P) Ltd., (2012) 13 SCC 639 : (2013) 18 GSTR 1 (classifying popular product “soft serve” as an ice-cream); CCE & Customs v. D.L. Steels, (2023) 17 SCC 358 : (2022) 21 GSTR-OL 288 (reflecting on the product “anardana”).
23. The decisions wherein application of common parlance test have been rejected, as noted in this decision, are; Akbar Badrudin Giwani v. Collector of Customs, (1990) 2 SCC 203 : 1990 SCC (Cri) 291 (addressing the issue whether imported stones qualify as “marbles”); CCE v. Madhan Agro Industries (India) (P) Ltd., (2025) 149 GSTR 352 : 2024 SCC OnLine SC 3775; Chemical and Fibres of India Ltd. v. Union of India, (1997) 2 SCC 664; Reliance Cellulose Products Ltd. v. CCE, (1997) 6 SCC 464; Indian Tool Manufacturers v. CCE, 1994 Supp (3) SCC 632; O.K. Play (India) Ltd. v. CCE, (2005) 2 SCC 460; etc.
24. Commr. of Customs v. Welkin Foods, (2026) 166 GSTR 39, 102-104 : 2026 SCC OnLine SC 27.
25. Commr. of Customs v. Welkin Foods, (2026) 166 GSTR 39, 104-105 : 2026 SCC OnLine SC 27.
26. The earlier decisions considered are; Dunlop India Ltd. v. Union of India, (1976) 2 SCC 241; Indian Aluminium Cables Ltd. v. Union of India, (1985) 3 SCC 284 : 1985 SCC (Tax) 383 : (1987) 64 STC 180; Collector of Customs v. Kumudam Publications (P) Ltd., (1998) 9 SCC 339; C.C., C.E. & S.T. v. Ashwani Homeo Pharmacy, (2023) 24 GSTR-OL 399 : 2023 SCC OnLine SC 558; Puma Ayurvedic Herbal (P) Ltd v. CCE, (2006) 3 SCC 266; CCE v. Wockhardt Life Sciences Ltd., (2012) 5 SCC 585 : (2012) 14 GSTR 1 : (2006) 145 STC 200; CCE v. Carrier Aircon Ltd., (2006) 5 SCC 596 : (2006) 147 STC 421; Atul Glass Industries (P) Ltd. v. Collector of Central Excise, (1986) 3 SCC 480 : 1986 SCC (Tax) 620 : (1986) 63 STC 322; Thermax Ltd. v. CCE, (2022) 17 SCC 68 : (2022) 22 GSTR-OL 272.
27. Commr. of Customs v. Welkin Foods, (2026) 166 GSTR 39 : 2026 SCC OnLine SC 27.
28. Commr. of Customs v. Welkin Foods, (2026) 166 GSTR 39, 117-118 : 2026 SCC OnLine SC 27.
29. Commr. of Customs v. Welkin Foods, (2026) 166 GSTR 39, 120 : 2026 SCC OnLine SC 27, on this count, the decision observes the following:
104. 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. 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.
30. Commr. of Customs v. Welkin Foods, (2026) 166 GSTR 39, 128-135 : 2026 SCC OnLine SC 27.
