Classifying Goods: the First Schedule and Its General Rules

Rule 2(a) extends a heading to an article which is incomplete or unfinished, provided it has the essential character of the complete article, and to a complete article presented unassembled or disassembled. This is the rule that prevents avoidance by importing a machine in parts.

Rule 2(b) provides that a reference to a material or substance includes mixtures or combinations of it with other materials, and a reference to goods of a given material includes goods partly of that material; classification of goods of more than one material is then governed by Rule 3.

Rule 3 applies where goods are prima facie classifiable under two or more headings, and it has three limbs applied in order:

Rule 3(a), the specific over the general. The heading which provides the most specific description is preferred to a heading giving a more general description.

Rule 3(b), essential character. Mixtures, composite goods of different materials or components, and goods put up in sets for retail sale, which cannot be classified under 3(a), are classified as if consisting of the material or component which gives them their essential character.

Rule 3(c), the last in numerical order. Where neither 3(a) nor 3(b) resolves the matter, the goods are classified under the heading which occurs last in numerical order among those which equally merit consideration.

Rule 4 provides that goods which cannot be classified under the preceding Rules are classified under the heading appropriate to the goods to which they are most akin. It is a residual rule and is rarely reached.

Rule 5 deals with containers. Rule 5(a): camera cases, instrument cases, gun cases and similar containers specially shaped for the article, suitable for long-term use and presented with it, are classified with the article, unless the container gives the whole its essential character. Rule 5(b): packing materials and containers presented with the goods are classified with them if of a kind normally used for such goods, but not where clearly suitable for repetitive use.

Rule 6 provides that classification at sub-heading level is determined according to the terms of the sub-headings and any related sub-heading Notes, and by the preceding Rules applied mutatis mutandis, on the understanding that only sub-headings at the same level are comparable. That last proviso is regularly missed: one compares a six-digit sub-heading with another six-digit sub-heading, never with a four-digit heading.

The remaining sections of the Tariff Act

Section 10 requires that every rule made under the Act be laid before each House of Parliament for a total period of thirty days, and gives effect to any modification or annulment both Houses agree upon.

Section 11 empowers the Central Government, where it is satisfied that it is necessary to do so in the public interest, to alter the duty on articles specified in the First or Second Schedule by notification, subject to the safeguard that the duty may be increased only to a specified extent and that the notification is laid before Parliament.

Section 11A empowers the Central Government to amend the First Schedule by notification, where it considers it necessary or expedient, provided the amendment does not alter or affect in any manner the rates specified in that Schedule in respect of goods, and the notification is laid before Parliament. This is the provision used to re-align the Schedule when the World Customs Organization revises the Harmonised System.

Section 12 is the repeal and saving provision: it repealed the Indian Tariff Act 1934 and saved things done under it.

Section 13 provides for a consequential amendment of Act 52 of 1962, that is of the Customs Act, made when the tariff was separated out in 1975.

Worked example

Godavari Instruments imports a consignment described as "portable multi-parameter water testing kits". Each kit contains a plastic carrying case, a digital meter, three sensor probes, a bottle of calibration solution and a printed manual. The department classifies the whole as a measuring instrument at 10 per cent; the importer says the case, the solution and the manual should be separately classified, and that the goods are a set attracting a different heading.

Rule 1 comes first, and often ends the matter. One reads the terms of the competing headings and the Section and Chapter Notes. If a Chapter Note to the Chapter covering measuring instruments provides that the Chapter covers instruments presented with their accessories, or excludes chemical preparations, the answer is given by the Note and no further Rule is applied.

If Rule 1 leaves the goods classifiable under two or more headings, Rule 3 is applied in order. Under Rule 3(a) one asks whether any heading gives the most specific description of the article as presented. If the kit as a whole answers no single heading specifically, one moves to Rule 3(b) and asks what gives the kit its essential character. The meter and the probes perform the function for which the buyer buys the kit; the case, the calibration solution and the manual are ancillary. The essential character is therefore that of the measuring instrument, and the whole kit is classified accordingly.

Rule 5 confirms the treatment of the case. A container specially shaped to hold the instrument, suitable for long-term use and presented with it, is classified with the instrument under Rule 5(a), unless the case gives the whole its essential character, which a plastic carrying case plainly does not.

Rule 3(c) is never reached, because Rule 3(b) resolved the question, and applying it would have been an error of sequence. This is the commonest fault in a classification answer.

What it does NOT mean

It does not mean the Chapter title decides anything. Rule 1 says the titles are for ease of reference only.

It does not mean the Rules may be applied in any order. They are sequential, and within Rule 3 the limbs are sequential too. Reaching Rule 3(c) without exhausting 3(a) and 3(b) is a misapplication.

It does not mean the trade meaning of a word overrides a Note. The Section and Chapter Notes are statutory; common parlance operates only where the statutory material leaves the question open.

And it does not mean section 11A allows the Government to change rates. Section 11A expressly excludes an amendment which alters or affects the rates; rate changes go through section 11 or a Finance Act.

Quick revision

• Section 1 of the Customs Tariff Act 1975: short title, extent, commencement. Section 2: the rates are in the First Schedule (import) and Second Schedule (export).
• The First Schedule follows the Harmonised System: 21 Sections, 98 Chapters (two digits), headings (four), sub-headings (six, internationally harmonised), tariff items (eight, India's own, where the rate sits). Section and Chapter Notes have statutory force and frequently work by exclusion.
• Rule 1: Section, Chapter and sub-Chapter titles are for ease of reference only; classification is by the terms of the headings and the relative Section or Chapter Notes, and only then by the other Rules.
• Rule 2(a): incomplete or unfinished articles having the essential character of the complete article, and complete articles presented unassembled or disassembled. Rule 2(b): a reference to a material includes mixtures and combinations, with Rule 3 to resolve.
• Rule 3, in order: (a) most specific description; (b) essential character for mixtures, composite goods and retail sets; (c) last in numerical order among headings equally meriting consideration.
• Rule 4: goods most akin, residual. Rule 5(a): fitted cases presented with the article go with it; Rule 5(b): packing materials go with the goods unless clearly suitable for repetitive use. Rule 6: sub-heading classification by the terms of the sub-headings and sub-heading Notes, only sub-headings at the same level being comparable.
• Section 10: rules laid before Parliament for thirty days. Section 11: alteration of duty in the public interest by notification. Section 11A: amendment of the First Schedule provided rates are not altered, used to re-align with Harmonised System revisions. Section 12: repeal of the Indian Tariff Act 1934 and savings. Section 13: consequential amendment of the Customs Act 1962.

Test yourself

1. State the General Rules for the Interpretation of the Import Tariff and explain why their sequence matters. Rule 1 provides that the titles of Sections, Chapters and sub-Chapters are for ease of reference only, and that classification is determined for legal purposes according to the terms of the headings and any relative Section or Chapter Notes, and only then, provided the headings and Notes do not otherwise require, according to the remaining Rules. Rule 2(a) extends a heading to an article which is incomplete or unfinished but has the essential character of the complete article, and to a complete article presented unassembled or disassembled. Rule 2(b) provides that a reference to a material includes mixtures and combinations of that material with others, leaving Rule 3 to resolve the resulting conflict. Rule 3 applies where goods are prima facie classifiable under two or more headings and has three limbs in order: the heading giving the most specific description prevails; failing that, mixtures, composite goods and retail sets are classified by the material or component giving them their essential character; failing that, the goods take the heading occurring last in numerical order among those equally meriting consideration. Rule 4 classifies goods with those to which they are most akin. Rule 5 deals with fitted cases and packing. Rule 6 applies the same principles at sub-heading level, on the footing that only sub-headings at the same level are comparable.

The sequence matters because each Rule is available only if the preceding one has failed. Rule 1 disposes of most goods, since a Section or Chapter Note frequently includes or excludes the article expressly, and no further Rule may then be applied. Within Rule 3, resorting to essential character when a heading in fact gives the most specific description, or to the last-in-numerical-order tie-breaker when essential character can be identified, produces a classification the Schedule does not authorise. The Rules are statutory, so applying them out of order is not a stylistic failing but an error of law.

2. What is the significance of the Section and Chapter Notes? They are part of the statute and they decide classification before any other consideration. Rule 1 makes classification turn on the terms of the headings and any relative Section or Chapter Notes, giving them the same force as the heading text itself, and expressly relegates the titles of Sections and Chapters to a mere aid to reference. The Notes perform three functions. They define expressions used in the Schedule, so that a word bears the meaning the Note gives it and not its ordinary or trade meaning. They include articles which the heading text would not obviously cover. And, most importantly in practice, they exclude articles, often directing them to a different Chapter altogether.

The practical consequence is that a classification argument must begin with the Notes. An article which appears on its description to answer a heading may be excluded from the whole Chapter by a Note, in which case no amount of trade evidence about what the article is called can bring it back. Conversely, where a Note expressly covers the article, the enquiry ends there and the General Rules beyond Rule 1 are never reached.

3. How does Rule 3 resolve a case where an article answers two headings? By three tests applied in a fixed order. First, Rule 3(a): the heading which provides the most specific description is preferred to one giving a more general description, so a description naming the article as such prevails over one covering it as a member of a class. Second, and only if the first does not resolve the matter, Rule 3(b): mixtures, composite goods consisting of different materials or made up of different components, and goods put up in sets for retail sale are classified as if they consisted of the material or component which gives them their essential character, which is a question of what the article is for and what makes it what it is, judged by such factors as the nature of the component, its bulk, quantity, weight or value, and the role it plays in the use of the goods. Third, and only if neither of the first two resolves it, Rule 3(c): the goods take the heading which occurs last in numerical order among those which equally merit consideration, a pure tie-breaker adopted because an arbitrary but certain rule is preferable to an unresolved dispute.

4. What do sections 11 and 11A of the Customs Tariff Act permit, and how do they differ? Both allow the Central Government to alter the Schedules by notification rather than by an amending Act, but they do different things and are subject to different limits. Section 11 permits the Government, where satisfied that it is necessary in the public interest, to alter the duty on articles specified in the First or Second Schedule, subject to the constraint that any increase may only be to the extent the section permits, and the notification must be laid before Parliament. It is a power over rates.

Section 11A permits the Government, where it considers it necessary or expedient, to amend the First Schedule itself, expressly provided that the amendment does not alter or affect in any manner the rates specified in that Schedule in respect of goods, and again subject to being laid before Parliament. It is a power over structure rather than over rates, and its main use is to re-align the Schedule when the World Customs Organization revises the Harmonised System nomenclature, which happens periodically and would otherwise require a fresh Act each time. The distinction is therefore that section 11 changes what is payable and section 11A changes how the Schedule is arranged, and the express carve-out in section 11A prevents the structural power being used to achieve a rate change indirectly.