Application of Principal User Test is important to classify Relays under Railways Signaling Equipment

In Westinghouse Saxby Farmer Ltd. v. Commissioner of Central Excise Calcultta [CIVIL APPEAL NO.37 OF 2009 dated March 08, 2021], the current appeal has been filed discussing the taxability of 'Relays', which is used as a part of Railway Signalling System. Westinghouse Saxby Farmer Ltd ('the Appellant') has come in the Court aggrieved by the dismissal of appeal challenging the same by the Hon'ble CESTAT, Kolkata vide order dated March 26, 2008.

Till March 1986, effective rate of Excise Duty on Relays were covered under the 'Electricity Relays' falling under Tariff Item No. 8536.90 and 'Railways and Railways signalling equipment' falling under No. 8608, wherein both the headings were taxed at 15%. However, post February 1993 the effective rate of excise duty for the goods under sub heading No.8536.90 became higher than the effective rate of duty for the goods under sub heading 8608.

The Central Board of Excise and Customs ('CBEC') vide Circular dated April 23, 1996 classified 'plug-in type relays' under Sub Heading 8536.90, consequent to which nine different Show Cause Notices ('SCN') which culminated into nine Orders-in-Original ('OIO') were sent to the Appellant who was classifying the said under Sub heading 8606 questioning as to why the same should not be taxed under Sub Heading 8536.90. In the appeal before the CESTAT, classification made by the Adjudicating Authority was concurred with, thereby dismissing the appeal.

The Hon'ble Supreme Court on the matter at hand observed that the Adjudicating and Appellate Authorities by invoking General Rule 3(a) of the First Schedule in the Central Excise Act, 1944 ('the CE Act') omitted to take note of two things which were held in the case of Central Excise Vs. Simplex Mills Co. Ltd (2005) 3 SCC 51. It mentioned that Rule 3(a) could not have been applied as the General Rules of Interpretation, rather, would have been relied on as mentioned in Rule 1 itself, only when no clear picture emerges from the terms of the Headings and the relevant section or chapter notes. Rule 3 could only have been invoked had there been classification of goods under two or more headings. But the Authorities had concluded the relays, by virtue of Note 2(f) of Section XVII of the CE Act that not to be classifiable under Chapter Heading of 8608 i.e. the Authorities thereby could not have resorted to application of Rule 3(a) of the General Rules.

Noted that by invoking Note 2(f), Note 3 which recognizes 'suitability for use test' or 'the user test' was overlooked and thus was not justified. Note 3 clarified that while the exclusion Note 2(f) may be of goods which are capable of being marketed independently as electrical machinery or equipment, for use other than in or as Railway signalling equipment. Those parts which are suitable for use solely or principally with an article in chapter 86 cannot be taken to a different chapter as the same would negate the very object of group classification.  

Further, holding in favour of the Appellant that said goods are to be classified under Sub Heading 8608, by relying on the Judgment of A. Nagaraju Bros Vs. State of A.P 1994 Supp(3) SCC 122 to hold that the Adjudicating and Appellate Authorities should not have overlooked the ‘predominant use' or ‘sole/principal use' test which were acknowledged by the General Rules for the Interpretation of the Schedule.