By TIOL News Service

MUMBAI, DEC 29, 2017: THE issue is classification of Optical Fibre Cables (OFC in short) used in Telecommunication - whether they would fall under Tariff Item 8544 and be eligible for exemption under Notification No. 24/2005 dt. 1.3.2005 (as claimed by importer) or they would fall under Tariff Item 9001 and be leviable to Basic Customs Duty at 10% under Notification No. 21/2002-Cus. dt.1.3.2002, as alleged by Revenue.

On the basis of information that M/s. Vodafone Essar Group of Companies (M/s VEG) were misclassifying imported OFC and evading duty, 3 consignments totally valued at Rs.4.65Crore imported from M/s. Corning Cable Systems Pvt. Ltd. were placed under seizure.

Samples of the 3 consignments were drawn and sent to Telecommunication Engineering Centre (TEC), Ministry of Communication and Information Technology, Department of Communications, Government of India for expert opinion. TEC vide letter dt. 14.1.2009 opined that cables contain bundles of optical fibres which were not individually sheathed and, therefore, are covered under Customs Tariff Heading 9001.

During investigation M/s VEG paid Rs.1.83Crores towards differential duty liability.

Investigations culminated in issuance of SCN dt. 17.3.2009. The Commissioner confirmed the classification under TI 90011000 and demanded differential duty amounting to Rs.3.25crores along with interest. However, the seizure of goods was withdrawn and no penalty was imposed.

The importer is in appeal and so is the Revenue against dropping of penalty and withdrawal of seizure.

There is also another appeal by Revenue as the Commissioner (Appeals) classified the goods under Heading 8544.

The appellant justified the classification claimed and submitted that each of the strands of optical fibre is individually cladded, coated with dual acrylate coating and colour coated and, therefore, it should be treated as a fibre individually sheathed, hence classifiable under CTH 8544 & eligible for exemption.

The AR supported the stand taken by the adjudicating authority in classifying the goods under heading 9001 based on the technical opinion given by TEC, Department of Telecommunications and also took the assistance of the following decisions Reliance Communication Infrastructure Ltd. - 2015-TIOL-177-CESTAT-MUM, Alcatel India Ltd. - 2006-TIOL-13-ARA-CUS, Optel Telecommunication - 2005-TIOL-386-CESTAT-DEL as far as classification is concerned and the apex court decision in Carrier Aircon Ltd. - 2006-TIOL-69-SC-CX where it is held that "end-use" is not the criteria for determining classification of a product.

The Division Bench after considering the submissions decided to examine the samples seized by DRI which were presented on 9th October in the presence of the DRI Officer and observed thus -

The OFC cable was cut across its section. It was found to consist of six tubes and within each tube there were eight optical fibres, each fibre being coated with different colour. Each OFC therefore consists of forty-eight numbers of optical fibres.

After adverting to the decisions in Vodafone Essar - 2009-TIOL-117-HC-MUM-CUS, Bharti Airtel - 2008-TIOL-2069-CESTAT-MAD, M/s. Vodafone Essar South Ltd. - 2008-TIOL-1931-CESTAT-MAD, Optel Telecommunication Ltd. - 2005-TIOL-386-CESTAT-DEL, Alcatel India Ltd. - 2006-TIOL-13-ARA-CUS, Reliance Communications Infrastructure Ltd. Vs. CC - 2015-TIOL-177-CESTAT-MUM, the Division Bench inter alia held thus -

++ Moreover, the Ruling of AAR (in this case in Alcatel India Ltd. ) will apply only in respect of the party that applied for such Ruling in terms of Section 28J of the Customs Act.

++ We find that CESTAT in the decision in the case of Reliance - 2015-TIOL-177-CESTAT-MUM, solely and largely relied on the decision of ARA in Alcatel India Ltd. In the Alcatel case, the ARA relied on the dictionary definition of the terms "sheath" and "coating" to draw the distinction between these terms and assumed that "sheathing" means drawing of a tube over an object and held that the dual acrylate coating of different colours is coating and not sheathing. The ARA faulted with HSN and held that HSN confuses between sheathing and coating. Accordingly, the ARA held that the HSN erred in describing the dual acrylate coating of different colours (which is a coating) as sheathing.

++ In our considered view the OFC merit classification under Heading 8544. One of us was a member of the Bench in the case of Reliance Communications Infrastructure Ltd. which decided the classification of similar goods to be under Heading 9001. Our differing view is based to a significant extent on the Technical books/Literature, the benefit of which was not available to the bench in the case of Reliance Communications Infra Ltd case or in Optel Telecommunication Ltd. Therefore in our opinion, the matter needs to be referred to a Larger Bench of the CESTAT for resolving the dispute. At this stage we find that other issues such as confiscability and penalties would depend on the decision regarding classification. Therefore we do not propose to take a view on these issues till the larger question of classification is decided .

The matter was, therefore, referred to the Larger Bench to decide the following question of law:

Whether Optical Fibre Cables (OFC in short) imported by Vodafone Group of Companies and used in Telecommunication are classifiable under Customs Tariff Heading 8544 and eligible for exemption under Notification No. 20/2005 dt. 1.3.2005 or they would fall under Customs Tariff Heading 9001 leviable to basic Customs Duty at 10% under Notification No. 21/2002-Cusdt. 1.3.2002?

We reported this order as 2015-TIOL-2739-CESTAT-MUM.

The Larger Bench heard the matter on 25 July 2017 and reserved its order which has now been pronounced.

In a mammoth order, the Larger Bench has negated the stand taken by the importer and concluded that the OFC are rightly classifiable under CTH 9001 and leviable to BCD @10% under notification 21/2002-Cus.

Following observtions from the order are highlighted below –

+ We find that in the instant case no definition of the term 'Sheathed' or 'Sheath' has been provided in the statute.

+ In this regard, the HSN has the same status as a Statute, specially on the issues of classification.

+ In so many places in the Tariff (like heading 40.10, 56.04, 56.07, General Explanatory Notes to Chapter 46, Chapte note 2 to Chapter 59 etc.) the expression used to describe the products is 'impregnated, coated, covered or sheathed'. Simultaneous use of these words makes it clear that the term 'Sheathed' has been used in contrast with the term 'impregnated', 'coated' or 'covered'. It is apparent that the term coating and sheathing have different meaning in the tariff.

+ It is seen that the expression used in many places is 'encased in rigid sheath', 'encased in…sheath', 'in a sheath composed of layers of paper', 'in a sheath of lead or tin', 'machines for braiding a wire sheath on hose of rubber', 'consisting of a simple wire mesh sheath' etc. which clearly indicates that 'sheath' is by itself an object.

+ In those circumstances, it is seen that the tariff does not recognise coating as sheathing and treats the two as different.

+ It is seen from the above tariff entries (8544 and 9001) that all insulated conductors (including enamelled or anodised) are classifiable under heading 85.44. The heading is not limited to telecommunication wires. It covers all insulated wires and cables, including those used for telecommunication. The Tariff has deliberately chosen to differentiate between the optical fibre cables containing individually sheathed fibres and others.

+ The tariff/HSN classifies them separately in different headings and different chapters. The legislature, if it wished to classify all optical fibre telecommunication cables under heading 85.44 could have stated so . The HSN specifically mentions only the telecommunication wires made up of insulated wires.

+ It is seen that the tariff entries do not make any distinction on the basis of use of the product. The sole distinction is based on the basis of the manner in which the fibres as 'sheathed'.

+ Expression (in HSN Note of Chapter 85.44) covers telecommunication wires and cables (containing wires). If the intention was to cover all the telecommunication cables, then the HSN would have stated so and the heading would also have stated so.

+ The tariff makes distinction between the heading 85.44 and 90.01, not on the basis of use but on the basis of construction of the optical fibre cables. Only those OFCs which are made of individually sheathed fibres are classifiable under heading 85.44 and others would go under heading 90.01. The intended use of the said cable has no relevance in that regard.

+ It is seen that the Explanatory notes do not state that all telecommunication OFC cables would be classified in heading 85.44. All it says is that – 'Optical fibre cables are used mainly in telecommunications because their capacity for the transmission of data is greater than that of electrical conductors'.

+ It is not the case of the appellants that OFC's which are not made of 'individually sheathed fibres' and are used for telecommunication would fall under the heading 85.44. It is also not the case of the appellant that OFC consisting of 'fibres not individually sheathed' if used for purposes like endoscopy would be classifiable under heading 85.44. It is apparent that the classification is solely based on the manner the fibres are sheathed. These general observations regarding use of the optical fibre cables, in the explanatory notes are not relevant for the purpose of classification. The only relevant fact is if the fibres are individually sheathed or not.

+ Colouring is solely for the purpose of identification of fibres at both ends. If the fibre is individually sheathed then either sheath or fibre can be coloured. If the fibre is not individually sheathed then the fibre has to be coloured. No conclusion regarding the 'dual acrylic coating' being sheath can be arrived on this basis.

+ No purpose will be served by colouring the sheath if the fibre is not individually sheathed and there are more than one fibres in a sheath.

+ The literature and other evidence relied upon by the referral bench and also produced by both the parties during this hearing does not establish that the 'dual acrylic coating' results in 'individually sheathed fibre'.

The reference was, therefore, answered as follows –

“Optical Fibre Cables (OFC in short) imported by Vodafone Group of Companies and used in Telecommunication are not classifiable under Customs Tariff Heading 8544 and they would fall under Customs Tariff Heading 9001.”

(See 2017-TIOL-4586-CESTAT-MUM-LB)