NOVEMBER 01, 2022

By S Murugappan, Advocate

THERE were days when one can see people walking along with multiple wires hanging down from their ears and terminating into their shirt or pant packets. Those days have gone. Wireless earphones/earbuds/Bluetooth headsets and microphones are the 'in' things today. Nowadays you can see people moving around giving an impression that they are talking and laughing to themselves. The 'buds' are so unobtrusive and these seemingly small things are packed with technology to receive and transmit radio signals.

And how do you categorise them? Simply, speakers and microphones? Or radio transceivers?

Well, CBIC has an answer in the amended Customs Tariff Schedule in force with effect from 1st May 2022. From that date, 'wired' as well as 'wireless' speakers, headphones 'et al' are to be classified under the category of 'speakers and headphones' under heading 8518. But the Harmonised System of Nomenclature (HSN) and the World Customs Organisation do not think so.

According to them, these wireless earbuds and Bluetooth headsets should fall under heading 8517 as apparatus for transmission/reception of data voice etc. through wireless network. In the HSN, while equipment for wireless network is covered under heading 8517, heading 8518 is confined to microphones loudspeakers and headphones etc. Goods falling under heading 8518 are simpliciter headphones, microphones, speakers etc., functioning through a 'wired' medium.

Prior to 1st May 2022, wireless headsets or earphones were not within the scope of heading 8518 in the Indian Customs Tariff too.

After 1st May 2022 and after the amendments, this shift and twist have interesting ramifications!

Upto 31st January 2022, heading 8518 30 00 in the Indian Customs Tariff carried 15% statutory rate of basic customs duty with the following description.

8518 30 00 Headphones and earphones, whether or not combined with a microphone, and sets consisting of a microphone and one or more loudspeakers

With effect from 1st February 2022, in terms of Finance Bill, 2022, the statutory rate was hiked to 20% for the goods falling under 8518 30 00. (Now, the cumulative import duties will be approximately 44%). In the same Finance Bill, proposal was made to amend the tariff entries under 8518 30 00 as indicated below.

8518 30 - Headphones and earphones, whether or not combined with a microphone, and sets consisting of a microphone and one or more loudspeakers:

8518 30 11 ---- True Wireless Stereo [TWS] Sound channel not connected by wire]

8518 30 19 ---- Other

8518 30 20 --- Headphones and earphones, whether or not combined with a microphone, and capable of connecting only through wired medium

8518 30 90 --- Other

Now these changes have come into force with effect from 1 st May 2022 after enactment of Finance Act, 2022.

Earlier the Finance Bill, 2022, under 'notes on clauses' had the following to say with regard to the changes in the tariff entries proposed in terms of clause 97 of the bill.

"Clause 97 seeks to amend the First Schedule to the Customs Tariff Act-

(a)……………….

(b) in the manner specified in the Third Schedule with a view to harmonise certain entries with Harmonised System of Nomenclature to create new tariff lines in respect of certain entries and to revise the rates in respect of certain tariff items, with effect from the 1st May, 2022."

Ostensibly, harmonising the entries with the Harmonised System could have been the objective. But with regard to these 'wireless devices' it has achieved the opposite effect; that is, moving away from the HSN. Let us see how it is the other way around.

As early as 2011, as can be seen from its Compendium of classification opinions, the World Customs Organisation adopted the classification of wireless headsets under heading 8517 (8517 62 at six digits level) with the following observations.

"The radio transceiver utilizes an open wireless technology standard (wireless protocol for exchanging data within a Personal Area Network (PAN) using short length radio waves over short distances (up to 10 meters)) with Enhanced Data Rate (EDR) technology, which enables the headset to communicate wirelessly with fixed and mobile devices, such as a mobile telephone for cellular networks."

Also, there is a US Trade Commission ruling given in 2012 (NY N233055 dated 24th September 2012) which preferred heading 8517 for such wireless Bluetooth devices over heading 8518 with the following justification.

"It is the opinion of this office that the principal function of the Bluetooth stereo headset is to receive and transmit radio signals to and from the cell phones and Bluetooth enabled music playback devices to which they are paired. The said function is performed by the chipset, as a transceiver, enabling hands-free telephony and communication with Bluetooth music devices. Transceivers are classified in subheading 8517.62, which provides in part for transmission and reception apparatus… including apparatus for communication in a wired or wireless network. While earphones and microphones are classified in heading 8518, that heading does not fully describe the merchandise at issue because it does not account for transceivers. Since the transceiver enables the headset to perform functions that distinguish it from the headsets classified in heading 8518, those functions being voice activated dialing, answering, rejecting and ending calls, and auto reconnect, the Bluetooth stereo headset is classifiable within subheading 8517.62, as a transceiver".

Here comes the twist. Our own CBIC in terms of Circular 36/2013 dated 5th September 2013, when doubts were expressed with regard to classification of wireless headsets either under heading 8517 or under 8518, clarified the issue as follows -

"Headphones combined with a microphone of heading 8518 carry only audio signals and are not an active part of a network, whereas a Bluetooth headset with mobile telephony function is an active part of a wireless network, includes a software part for the wireless network and simultaneously receives/transmits voice and data in a wireless network. Thus, "Bluetooth Wireless headsets for mobile phones / cell phones" equipped with communication device fully comply with the sub-heading 8517.62".

But in 2022, there is a 'U Turn'. Interestingly, this Circular has neither been rescinded/superseded nor any explanation provided for discarding the 'old wisdom' contained in it.

As indicated earlier, the HSN and its explanatory notes adopt the classification of equipment working in wireless network for transmission of voice, data etc., under heading 8517 whereas simple wired headphones, speakers etc., fall under heading 8518.

Keeping the above in mind, another critical question that arises at this juncture is whether a participating member of WCO, after having adopted HSN can vary the scope of the headings in its national tariff.

Article 3(1) of 'International Convention on the Harmonised Commodity Description and Coding System' reads as follows.

"(a) Each Contracting Party undertakes, except as provided in subparagraph (c) of this paragraph, that from the date on which this Convention enters into force in respect of it, its Customs tariff and statistical nomenclatures shall be in conformity with the Harmonized System. It thus undertakes that, in respect of its Customs tariff and statistical nomenclatures:

(i) it shall use all the headings and subheadings of the Harmonized System without addition or modification, together with their related numerical codes;

(ii) it shall apply the General Rules for the interpretation of the Harmonized System and all the Section, Chapter and Subheading Notes, and shall not modify the scope of the Sections, Chapters, headings or subheadings of the Harmonized System; and

(iii) it shall follow the numerical sequence of the Harmonized System;

(b) ………………

(c) Nothing in this Article shall require a Contracting Party to use the subheadings of the Harmonized System in its Customs tariff nomenclature provided that it meets the obligations at (a) (i), (a) (ii) and (a) (iii) above in a combined tariff/statistical nomenclature."

It is to be noted that HSN code is upto 6 digits level only. As pointed out in Article 3{1[c]}, the contracting parties can adopt and use any number of sub-headings beyond the six digits level but without modifying the scope of the HSN tariff up to 6 digits level.

The Indian Customs Tariff prior to 1st May 2022 read as follows insofar as heading 851830 is concerned, as pointed out earlier.

8518 30 00 - Headphones and earphones, whether or not combined with a microphone, and sets consisting of a microphone and one or more loudspeakers

There were no further subdivisions beyond six digits level and the entry was made as an eight digits entry with a single dash by adding two zeros. This is exactly same as the present 2022 HSN entry at six digits as 851830.

Now see the tariff that is effective from 1st May 2022 where six digits entry has been further subdivided into eight digits entries as mentioned above earlier and reproduced again below for the purpose of clarity.

8518 30 - Headphones and earphones, whether or not combined with a microphone, and sets consisting of a microphone and one or more loudspeakers:

8518 30 11 ---- True Wireless Stereo [TWS] Sound channel not connected by wire]

8518 30 19 ---- Other

8518 30 20 --- Headphones and earphones, whether or not combined with a microphone, and capable of connecting only through wired medium

8518 30 90 --- Other

Thus, the creation of these subheadings to include 'wireless' headphones has gone beyond the scope of the six digits heading 8518 30 in the HSN. (It may be noted that in addition, there are more entries in heading 8518 to cover various other 'wireless' equipment at eight digits level). In other words, Article 3 of the Convention has been overrun.

Now comes the most interesting twist. Field officers may impress upon the importers that from 1st May 2022, the scope of goods, 'headphones' under heading 8518 has been clarified and as such even prior to that date it is to be assumed that such goods working 'wirelessly', are always intended to be put under 8518 and, therefore, ask them to pay the differential duties for the past imports made by them under heading 8517.

A fantastic source of revenue and…….litigation!

In all the melee, a few pertinent but uncomfortable questions -

++ What happens to the classification opinion given by WCO in 2011?

++ What happens to Article 3 of Convention on the HSN Coding System?

++ What happens to the CBIC circular issued in 2013?

I am clueless just like the mighty Board would be after reading this...

[The views expressed are strictly personal.]