FEBRUARY 03, 2025

By Akhilesh Kangsia, Partner, Madhura Khandekar, Associate Partner, and Apoorva Parihar, Principal Associate, Lakshmikumaran & Sridharan, Attorneys

THE revision in the rate of Basic Customs Duty on "Carrier Ethernet Switches", as mentioned in the Budget Speech has a checkered history of litigation since 2014.

One of the critical international agreements that has influenced India's approach to completely eliminate customs duties on 'Information and Communication Technology (ICT)' products is the Information Technology Agreement (ITA-1) signed in 1996. The ITA-1 sought to eliminate tariffs on several ICT products, such as routers and other networking products.

The commitments to ITA-1 have been implemented through customs notifications, notably Notification Nos. 24/2005-Cus. and 25/2005-Cus., both dated 01.03.2005. These granted complete exemptions to various ICT products covered under the ITA-1 either with reference to Tariff Heading or with reference to Tariff Heading and Description of Goods.

In 2012, India opted out of ITA-2.

Seeing that India did not really benefit from ITA-1, in the sense that no technology to manufacture sophisticated telecom goods was absorbed, a first step was taken in the Union Budget 2014 to curtail the exemption and encourage manufacturing in India. The Central Government, through amending Notification No. 11/2014-Cus., dated 11.07.2014, excluded specific goods/technologies, including Carrier Ethernet Switches, from complete exemption under Notification No. 24/2005-Cus. The reason cited was that technologies developed and conceived after 1996 were not a part of the commitment under ITA-1, and accordingly, new technology products would not be eligible for the exemption.

The introduction of GST in July 2017 did not really affect our commitment to ICT products.

In the era of converged technology/products, there is always a functional overlap between many ITA-1 products. However, such products have led to many disputes on exemption eligibility by Customs officials, including Routers, Wireless Access Points, etc., especially with the lack of clear definition in the statutes, Switches could not remain untouched by this scrutiny. Customs officials started disputing the exemption enjoyed by various categories of Switches, including Layer-2, Layer-3, and IP/MPLS, on the grounds that such Switches are "Carrier Ethernet Switches". This led to a lot of confusion within the industry, and this confusion eventually led to litigation.

In 2016, the Telecommunication Engineering Centre (TEC) tried to resolve the dispute by suggesting that the distinction between a carrier and a non-carrier switch could be based on its end use. According to the TEC, if the ultimate purchase order is from a non-TSP (Telecom Service Provider) / ISP (Internet Service Provider), then such a switch will be treated as an Enterprise Ethernet Switch or Non-Carrier Grade Ethernet Switch. Conversely, if the purchase order is from a TSP/ISP, then it may be treated as a Carrier Ethernet Switch.

As usual, any customs dispute gets settled in the Appellate Tribunal. True to this saying, the Hon'ble CESTAT, Mumbai in a recent decision in the case of Cisco [2024-TIOL-1183-CESTAT-MUM], analyzed the legislative history of the exemption, India's commitment to ITA-1 and the technical aspects of data switches and held that they are not hit by the exclusion introduced in 2014 and continued thereafter.

Taking cues from the above decision in the case of CISCO, and to avoid recurrent litigation on eligibility to claim exemption on the import of Ethernet Switches (carrier as well as non-carrier), a much-awaited amendment has been introduced by the Central Government.

The effective rate of Basic Customs Duty has been reduced from 20% to 10% on the import of Carrier Ethernet Switches to make them at par with Non-Carrier Grade Ethernet Switches. This has been implemented by omitting/deleting 'Carrier Ethernet Switches' from the exclusion list under Sr. No. 20 of Notification No. 57/2017-Cus., dated 30.06.17, vide Notification No. 10/2025-Cus., dated 01.02.2025 (effective from 02.02.2025).

The FAQs issued by the Central Government in respect of the Budget 2025, also acknowledged that the distinction between Carrier Ethernet Switches and Non-Carrier Grade Ethernet Switches is more functional than technical, leading to implementation challenges and frequent disputes. Owing to this lack of clarity which resulted in constant disputes, the above amendment has been brought.

The authors feel that the above amendment is a positive step and will surely help in curbing future litigation. However, as networking equipment was always covered by ITA-1, ideally no duty (Nil rate) should have been imposed on the import of Switches. This aspect has been overlooked.

Nonetheless, since the reduction in duty was brought to curb litigation, the authors feel that the amendment should have been clarificatory in nature, or a Notification under Section 28A of the Customs Act, 1962 could have been issued to resolve the issue of past imports.

The authors also feel that the industry would have benefitted more if such an amendment or some clarification was also brought for other exclusion categories under Sr. No. 20 of Notification No. 57/2017-Cus., such as MPLS-TP, Voice over Internet Protocol (VoIP) equipment, etc. Therefore, it will be better if the industry can represent to the Government to have one rate for Tariff Item 8517 62 90 and 8517 69 90 and deletion of existing exclusions which have functional overlaps with ITA-1 items, or to have clarification specifying scope of each exclusion category.

[The views expressed are strictly personal.]