The New Delhi Bench of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) has held that Rule 2(a) of the General Rules for the Interpretation of the Customs Tariff Act, 1975 can be invoked in relation to incomplete or unfinished imported goods only where the department is able to conclusively establish that such goods possess the essential character of the complete or finished article; where the evidence, including the department’s own expert reports, shows that the imported goods are incomplete, non-functional, and require additional components, software, testing and processing, the goods cannot be treated as complete mobile phones merely because they may acquire the shape of a mobile phone after assembly.
The CESTAT further held that when the department seeks to displace the classification declared by the importer and reclassify the goods under a different tariff entry, the burden of proof lies upon the department to adduce proper evidence in support of such reclassification, and that burden cannot be shifted to the importer.
The Division Bench comprising Justice Dilip Gupta (President) and P. Anjani Kumar (Technical Member) noted that the appellant had, at the investigation stage itself, consistently asserted that the imported goods were insufficient to manufacture a mobile phone and that additional items were required to be procured locally. The record included the list of locally purchased items for the imported models, which covered not only batteries but also PCBAs, lenses, LCDs and camera-related components for different models.
The Tribunal examined the Chartered Engineer’s report dated November 03, 2022 and found that the report expressly described the imported articles as “parts of Mobile Phone” received in disassembled/unassembled condition, which formed an incomplete mobile phone. The report further recorded that the consignment was received without battery and camera, required fitment of parts and basic manufacturing process, and that even after assembly, mobile-device testing on hardware and software was required. The report also stated that on visual examination the parts after assembly would form an incomplete product and not be in working condition, and though they may acquire the shape of a mobile phone and prima facie have the essential characteristics of the article, they did not form a complete article because battery, camera, software and further processing were required for marketability.
The Tribunal also relied on the subsequent report dated January 05, 2023, wherein the Chartered Engineer again described the imported goods as parts of mobile phone forming an incomplete mobile phone and stated that after assembly and addition of battery, mobile-device testing functions and software compliance were still required to make the device functional for communication, and that without approved laboratory testing it was not possible to arrive at the communication functionality of the device.
On a construction of rule 2(a), the Tribunal observed that incomplete or unfinished articles can be classified as complete or finished goods only if they have the essential character of the complete or finished article. The Tribunal found that the department had relied upon the Chartered Engineer’s reports to invoke rule 2(a), but those very reports did not conclusively establish that the imported parts possessed the essential character of a complete or finished mobile phone. At the highest, the report stated that after assembly the parts may acquire the shape of a mobile phone and so prima facie have the essential characteristics of the article, but the same reports simultaneously recorded that the goods did not form a complete article and remained incomplete mobile phones requiring battery, camera, software, testing and further processing.
Significantly, the Tribunal observed that the impugned order had wrongly shifted the burden onto the appellant to demonstrate that the imported goods were not complete mobile phones. The Tribunal reiterated that where the department challenges the classification adopted by the assessee, the burden lies on the department to establish, by proper evidence, that the goods fall under a different tariff heading.
The Tribunal therefore held that the view taken by the Principal Commissioner that the goods were complete mobile sets under rule 2(a) could not be sustained. Since the department had failed to conclusively prove that the imported goods had the essential character of complete or finished mobile phones, the reclassification under CTI 8517 14 00/CTI 8517 12 19, and the consequential demand, confiscation and penalty, were unsustainable.
Briefly, the appellant is engaged in the business of manufacturing/assembling mobile phones. For this purpose, it imported certain goods from M/s Techno Mobile Ltd., Hong Kong, and filed a Bill of Entry declaring the goods as “Parts of MFR of Mobile Phones.” The department entertained a belief that the goods were mobile phones in CKD condition and not merely parts, and accordingly initiated investigation.
During investigation, the appellant furnished complete details of the goods covered under the Bill of Entry and stated that the consignment under five different invoices consisted of parts of five different models of mobile phones. The appellant also submitted documents regarding the actual description and classification of the imported goods. Summons were issued to the appellant’s authorized representative, wherein the appellant also furnished a list of locally purchased items and clarified that the imported material was insufficient to manufacture a phone and that additional material had to be procured locally, including items beyond batteries.
The department obtained a report from a Chartered Engineer, who observed that upon assembling, the parts would form an incomplete product and not be in working condition; though they would acquire the shape of a mobile phone and prima facie have the essential characteristics of the article, they did not form a complete article because battery, camera, software, quality control processing, product testing, packaging, and warranty compliance were still required for marketability. On a further query by the department regarding communication functionality after addition of battery, the Chartered Engineer in report dated January 05, 2023 stated that without testing through an approved laboratory, it was not possible to determine communication functionality of the device.
Thereafter, a show cause notice was issued alleging that the appellant had wrongly self-assessed the Bills of Entry and that the imported goods were complete mobile sets attracting classification under tariff item 85171400 instead of different tariff items applicable to mobile parts. The notice proposed rejection of the classification declared by the appellant, reclassification under CTI 8517 14 00/CTI 8517 12 19, demand of differential duty under section 28(1), interest under section 28AA, and imposition of penalty under section 112(a)(ii).
The appellant replied that the imported items were correctly classifiable under various tariff headings specific to parts of mobile phones and that such items were insufficient for complete assembly of mobile phones, particularly since some components were procured locally. However, the Principal Commissioner upheld the proposed reclassification, holding that the appellant had imported all parts required for manufacture of mobile phones except battery and camera module, that the parts were not sold as such but were used for assembly of complete mobile phones, and that the assembly operation attracted rule 2(a) of the General Rules for the Interpretation of the Customs Tariff Act, 1975. The Principal Commissioner also held the goods liable for confiscation under section 111(m) and imposed penalty under section 112(a)(ii).
The appellant contended that the burden to displace the declared classification was on the department, that no evidence had been led to prove that the imported goods were complete mobile phones, that the expert evidence in fact supported the appellant, and that the imported parts were supplemented by locally procured parts and extensive manufacturing process including software loading. The department, on the other hand, argued that the goods were correctly classifiable as mobile phones presented in CKD/SKD condition under rule 2(a), that essential character did not require 100% completeness, and that confiscation and penalty were justified.
Appearances:
Tarun Gulati, Senior advocate assisted by Rupesh Gupta, Tarun Jain, Kritika Tuteja and Shruti Kulkarni, Advocates for the Appellant/ Taxpayer
Shiv Shankar, authorized representative of the Respondent/ Department
