6% Excise Duty Applicable on Railway Diesel Locomotive Parts: CESTAT [Read Order]

The Chennai Bench of Customs,Excise and Service Tax Appellate Tribunal(CESTAT)  ruled that electrical machinery parts specifically designed for railway diesel locomotives are classifiable under Chapter 86 of the Central Excise Tariff Act, 1985 (CETA), attracting a 6% excise duty under Notification No. 12/2016-CE dated March 1, 2016.

Shakthi Tech Manufacturing India Pvt. Ltd.,appellant-assessee,supplied goods to Indian Railways and other major customers. It classified certain electrical machinery parts under Chapter 86 of the Central Excise Tariff Act, 1985 (CETA), attracting 5% duty. However, the Department claimed these parts should be classified under Chapters 84 or 85, which carried a 12.5% duty, citing Section Note 2(f) of Section XVII of CETA.

The excise duty on railway parts under HSN 8607 was reduced from 12.5% to 6%, effective March 1, 2016, through Notification No. 12/2016-CE. Meanwhile, parts classifiable under Chapters 84 or 85 continued to attract 12.5% duty.

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Following an investigation, a Show Cause Notice dated February 25, 2021, was issued, demanding a differential duty of ₹2,18,29,679 for the period from April 1, 2016, to June 30, 2017, along with interest and a penalty. The impugned order dated January 31, 2022, upheld the Department’s claims.

The assessee aggrieved by the tribunal appealed before the tribunal.

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The two member bench comprising P.Dinesha(Judicial Member) and Vasa Seshagiri Rao(Technical Member) reviewed the submissions, evidence, and relevant provisions of the CETA and HSN Explanatory Notes. It examined whether the electrical machinery parts were correctly classifiable under Chapter 86 or Chapter 84 and whether the extended period could be invoked.

The assessee had classified the products under CETH 86079100, paying 6% duty as per Notification No. 12/2016-CE dated March 1, 2016. However, the Department reclassified them under Chapter 84, attracting 12.5% duty, and demanded a differential duty of ₹2,18,29,679 for the period from April 1, 2016, to June 30, 2017. The Principal Commissioner of GST and Central Excise, Coimbatore, confirmed the demand through an order dated January 31, 2022.

The assessee argued that the classification should be based on the 'sole or principal use' test rather than the product's description or function. It relied on the Supreme Court's ruling in Westinghouse Saxby Farmer Ltd. v. CCE, where railway parts were classified under CETH 8607 based on the HSN Explanatory Notes.

The appellate tribunal referred to the Westinghouse ruling, where the Supreme Court applied the 'sole or principal use' test from Note 3 of Section XVII over Note 2(f), which excluded electrical equipment from Chapter 86. It noted that the Supreme Court dismissed a review petition filed by the Department, making the Westinghouse ruling final and binding. It also highlighted that the commissioner had incorrectly relied on earlier judgments from 2008 and 2020, which did not consider Note 3, making them irrelevant.

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The bench observed that the classification based on the 'sole or principal use' test had been upheld in earlier cases, including Diesel Component Works v. Commissioner of Central Excise and Diesel Loco Modernisation Works. It also referred to recent rulings in Faiveley Transport Rail Technologies India Pvt. Ltd. and Premier Polyfilm Ltd., where goods exclusively used in railway locomotives were classified under Chapter 86.

Concluding that the parts were specifically designed for railway diesel locomotives, the appellate tribunal ruled that they were correctly classifiable under CETH 86079100. It held that the demand did not sustain, making the extended period and penalties inapplicable. Since no deliberate suppression or intent to evade duty was proven, it set aside the penalties.

In short,the appeal was allowed for the assessee.

To Read the full text of the Order CLICK HERE

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