Classification Under The Customs Law: Analysing The Supreme Court's Ruling In Commissioner Of Customs (Import) V. M/s Welkin Foods (Civil Appeal No. 5531 Of 2025)

Introduction

Classification lies at the very core of customs jurisprudence, as it determines not only the applicable rate of duty but also the eligibility for exemptions, the applicability of prohibitions or restrictions, and the overall compliance framework governing the Customs law. Given the substantial fiscal and regulatory consequences associated with classification, disputes often arise in cases where imported goods are capable of being classified under competing tariff headings. To ensure certainty, uniformity, and predictability in classification, the Customs Tariff Act, 1975, adopts the internationally harmonised structure of the General Rules for Interpretation (GRIs), read in conjunction with the relevant Section Notes, Chapter Notes, and the Harmonised System of Nomenclature (HSN) Explanatory Notes. Indian courts have consistently emphasised that tariff classification is not a matter of discretion or subjective preference, but a question of law to be determined strictly in accordance with the statutory scheme and the objective characteristics of the goods as they exist at the time of import.

However, despite the apparent clarity of this framework, its practical application has often been uneven. Taxpayers have relied on commercial perception or intended use, an approach that has, at times, been accepted by adjudicating authorities and tribunals, resulting in interpretations that diverge from the literal meaning of tariff entries. This has been particularly evident in disputes concerning "parts of machinery" or goods designed for specialised industrial or agricultural purposes.

Established principles governing Classification:

Indian jurisprudence on tariff classification has consistently evolved around three closely connected principles. First, classification must be determined with reference to the physical condition, nature, and characteristics of the goods at the point of importation, rather than their subsequent application or utility. Second, the common or trade parlance test may be invoked to clarify the meaning of tariff expressions that are undefined or ambiguous, particularly where goods are commonly identified in the marketplace by a recognised name. Third, the relevance of end-use is confined to cases where the tariff entry itself incorporates a functional or purpose-based criterion.

Furthermore, with the growing technical complexities and sophistication of imported goods, courts have increasingly recognised the interpretative significance of the HSN Explanatory Notes. Where tariff entries are aligned with or derived from the corresponding HSN descriptions, these explanatory notes have been consistently treated as a persuasive and reliable aid in ascertaining the true scope and ambit of the relevant tariff entries.

Background of the Case:

The dispute in the Commissioner of Customs (Import) v. M/s Welkin Foods (Civil Appeal No. 5531 of 2025) case arose from the classification of certain imported goods under the Customs Tariff Act, 1975, which directly affected the rate of customs duty payable. M/s Welkin Foods, the respondent, is engaged in mushroom cultivation, an agricultural activity requiring specialised infrastructure and equipment. In November 2016, the respondent imported a consignment comprising aluminium shelving systems, floor drains, and an automatic watering system, all intended for use in mushroom-growing facilities. At the time of import, the respondent filed a Bill of Entry declaring the aluminium shelving as "parts of agricultural machinery" under Customs Tariff Item (CTI) 84369900. This tariff entry attracts a nil or concessional rate of duty. The floor drains and automatic watering system, also declared under the same tariff item, were accepted by the customs authorities as parts of agricultural machinery without dispute.

Subsequently, during audit scrutiny, the customs department took the view that the aluminium shelving could not be classified as part of agricultural machinery. According to the department, the shelving constituted aluminium structures classifiable under CTI 76109010, which attracted a significantly higher rate of customs duty. The adjudicating authority, namely the Joint Commissioner of Customs, accepted the department's position. It was held that the aluminium shelving did not possess the characteristics of a machine or a part of a machine and merely functioned as a supporting structure. Emphasis was placed on the condition of the goods at the time of import, the absence of moving parts, and the fact that Chapter 76 of the Customs Tariff covers aluminium structures irrespective of their end use. Consequently, the goods were reclassified under CTI 76109010, and the demand for differential duty was confirmed.

Aggrieved by this decision, the respondent filed an appeal before the Commissioner of Customs (Appeals). The appellate authority upheld the adjudication order, reiterating that the aluminium shelving could not be treated as part of agricultural machinery merely because it was used in mushroom cultivation. The appeal was accordingly dismissed.

The respondent then approached the Customs, Excise and Service Tax Appellate Tribunal (CESTAT). The Tribunal reversed the findings of the lower authorities and allowed the appeal. It held that the aluminium shelving was specifically designed for mushroom cultivation, could not be used for any other purpose, and was known in trade parlance as mushroom growing racks. The Tribunal concluded that the goods formed an integral part of a mushroom growing apparatus and were therefore correctly classifiable under CTI 84369900.

Challenging the decision of the CESTAT, the Commissioner of Customs filed an appeal before the Hon'ble Supreme Court. The appeal raised substantial questions relating to tariff classification, the applicability of the common parlance test, the relevance of end use, and the proper application of the General Rules for Interpretation under the Customs Tariff Act, 1975, thereby setting the stage for an authoritative pronouncement on classification disputes in customs law.

Issues Before the Court:

The principal issue that arose for consideration before the Supreme Court was:

• Whether the aluminium shelving imported by the respondent was correctly classifiable as "parts of agricultural machinery" under Customs Tariff Item 84369900 of the Customs Tariff Act, 1975, or whether it ought to be classified as "aluminium structures" under Customs Tariff Item 76109010, attracting a higher rate of customs duty.

In deciding the above, the Court was also required to examine the following ancillary and connected issues:

• Whether the classification of imported goods is to be determined solely on the basis of their condition and characteristics at the time of import, or whether their intended and actual end use may be considered for the purposes of classification under the Customs Tariff Act, 1975.
• Whether aluminium shelving systems, which do not possess moving parts or independent mechanical functions, can nonetheless be regarded as 'machines' or 'parts of machines' within the meaning of Chapter 84 of the Customs Tariff.
• Whether the CESTAT was justified in applying the common parlance or trade parlance test to classify the subject goods as mushroom growing racks rather than as generic aluminium structures.
• Whether the General Rules for Interpretation of the First Schedule to the Customs Tariff Act, 1975, were correctly applied by the Tribunal, particularly the preference for specific tariff entries over general ones.
• Whether the classification adopted by the Tribunal under Chapter 84 was sustainable in light of the relevant Section Notes, Chapter Notes, and the Harmonised System of Nomenclature (HSN) Explanatory Notes.

Supreme Court's Order and Reasoning:

The Hon'ble Supreme Court undertook an exhaustive examination of the principles governing classification of goods under the Customs Tariff Act, 1975, emphasising that tariff classification is not a matter of discretion but a rule-bound legal exercise governed by the General Rules for Interpretation (GRI), Section Notes, Chapter Notes, and the Harmonised System of Nomenclature (HSN). At the outset, the Court reiterated that GRI 1 forms the foundation of any classification inquiry. Classification must primarily be determined according to the terms of the headings and the relevant Section and Chapter Notes, and only if ambiguity persists can recourse be made to subsequent rules. The Court found that the lower authorities and the CESTAT had prematurely moved to considerations such as end use and trade parlance without conclusively resolving classification under GRI 1.

The Court reaffirmed the settled position that, as a general rule, classification depends on the nature and characteristics of the goods at the time of import, not on how they are ultimately used. While end use may be relevant in limited circumstances, particularly where the tariff entry itself refers to use, it cannot override clear tariff descriptions. In the present case, Chapter 7610 covers aluminium structures without reference to end use, whereas Chapter 8436 pertains to agricultural machinery and its parts.

The Court then examined whether the aluminium shelving could be regarded as a machine or a part of a machine under Chapter 84. It held that a "machine" ordinarily connotes an apparatus with mechanical or functional attributes, such as moving parts or the transmission of force or energy. The aluminium shelving, by its very nature, functioned as a static supporting structure. Merely because other machines or systems were mounted upon it did not convert the shelving itself into a machine or a part thereof. In this context, the Court relied on prior precedent to underline that supporting structures do not become parts of machinery simply because machinery is installed on them.

The Court also critically assessed the reliance placed by the CESTAT on the common parlance test. It clarified that the common or trade parlance test is not a universal tool to be applied mechanically in all classification disputes. Where the tariff headings are clear and supported by Section Notes and HSN Explanatory Notes, trade understanding cannot be used to defeat the statutory scheme. The Court observed that the Tribunal erred in treating the shelving as "mushroom growing racks" based on trade usage when, in law, the goods retained the essential character of aluminium structures.

Further, the Court placed considerable reliance on the HSN Explanatory Notes to Chapter 7610, which describe metal structures as items that generally remain fixed once installed and are used as frameworks or supports. The subject goods squarely fell within this description. The Court found no statutory deviation in the Indian tariff that would justify departing from the HSN guidance. Thus, on the application of the GRIs, Section Notes, and HSN Explanatory Notes, the Court concluded that the aluminium shelving was more appropriately classifiable as aluminium structures under CTI 76109010, and not as parts of agricultural machinery under CTI 84369900.

In light of the above, the Hon'ble Supreme Court held that the subject goods cannot be classified under Chapter Heading 8436. Consequently, the subject goods are liable to be classified under CTI 76109010 as 'Aluminium Structures'. The Court set aside the impugned Judgment and Final Order No. 55604/2024 dated 19.04.2024 passed by the CESTAT in Customs Appeal No. 50542 of 2021.

Our Analysis and Significance of the Judgment

The decision of the Supreme Court does not purport to discard the established principles governing classification. Rather, it reflects a noticeably stricter and more text-oriented application of the principles. The Supreme Court places considerable emphasis on the mandatory and sequential operation of the GRIs, particularly the foundational role of GRI 1. The Court makes it clear that adjudicatory bodies are not at liberty to bypass this stage by directly resorting to broader interpretative rules or trade understanding. In doing so, the judgment implicitly criticises approaches that prioritise perceived functional integration over the structured analysis mandated by the tariff text.

A different stance:

The court's decision reflects a departure in emphasis from earlier approaches to tariff classification. While reaffirming established principles, the Hon'ble Supreme Court has adopted a more text-centric and structured method of interpretation. The Court has placed strict reliance on the sequential application of the General Rules for Interpretation, particularly GRI 1, and has limited the scope for invoking trade parlance and end-use considerations. Unlike earlier decisions where such factors were accorded greater weight, the present judgment prioritises the express language of tariff headings, Section Notes, and HSN Explanatory Notes. This approach underscores a shift towards greater certainty and uniformity in classification, reducing reliance on subjective or industry-specific interpretations.

Consequences for future classification disputes:

The significance of the Supreme Court ruling lies not merely in the outcome, but in the manner in which the Court applied the General Rules for Interpretation (GRIs), read with the relevant Section Notes, Chapter Notes, and HSN Explanatory Notes.

A defining feature of the judgment is the Court's emphasis on GRI 1 as the primary and determinative rule of classification. The Court made it clear that classification must first be resolved on the basis of the terms of the headings and the statutory notes, and that recourse to concepts such as end use or trade parlance is permissible only where ambiguity persists within the tariff framework. In this context, the Court found that the CESTAT had erred in moving prematurely to considerations of functional integration and commercial understanding without conclusively examining the scope of the competing tariff headings under the statutory scheme.

The Supreme Court decisively clarified that end use, by itself, is not a determinative criterion for classification, unless the tariff entry expressly incorporates such a test. While the aluminium shelving was undoubtedly used in mushroom cultivation and formed part of a broader cultivation setup, the Court held that this fact could not override the clear scope of Chapter 76, which covers aluminium structures without reference to use. This reasoning reinforces the long-standing principle that the classification exercise must focus on the objective characteristics and condition of the goods at the time of import, rather than their subsequent deployment or commercial utility.

Furthermore, the judgment reiterates that, for an article to qualify as a "part" of machinery, it must satisfy a stringent legal test that it forms an integral and essential component of the machine, without which the machine would be incomplete or incapable of performing its intended mechanical function. The aluminium shelving, though customised for mushroom cultivation, was held to be a static supporting structure lacking any mechanical or functional attributes of machinery. Its role in facilitating cultivation did not translate into it being a part of agricultural machinery in the legal sense contemplated by the tariff.

The Court also corrected the Tribunal's reliance on the common or trade parlance test. It clarified that such a test cannot be invoked to displace a clear statutory classification supported by Section Notes and HSN Explanatory Notes. Where the tariff language is unambiguous, commercial nomenclature or industry practice cannot be used to defeat the legislative scheme. Moreover, the Court's reasoning preserves the structural distinction between machinery and ancillary or supporting items, thereby preventing the dilution of concessional regimes under Chapter 84 through expansive and use-based interpretations. This aspect of the ruling assumes particular importance in modern industries where imports are often presented as integrated systems or turnkey solutions.

In our view, this judgment will have enduring relevance for importers, tax administrators, and practitioners as it provides authoritative clarity on classification and reaffirms India's alignment with internationally accepted HSN principles. By insisting on a disciplined application of the GRI, the Supreme Court has reinforced much-needed clarity in tariff classification - an area that has witnessed divergent interpretations. Above all, the decision serves as a timely and important reminder that tariff classification is a legal determination rooted in statutory text and established interpretative rules, and not a factual or commercial exercise shaped by business convenience, industrial practice, or functional desirability.

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