OTN Cards and Modules Incapable of Independent Operation Classifiable as Parts, Not Apparatus: CESTAT Upholds Classification under ‘Parts’ Heading [Read Order]

The New Delhi Principal Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) ruled that Optical Transport Network (OTN) cards and modules incapable of independent operation are classifiable as parts and not as complete apparatus. The tribunal upheld the classification under the ‘Parts’ heading and set aside the department’s reclassification.

Fiberhome India Private Limited, the appellant, is engaged in manufacturing Optical Transport Network (OTN) equipment for supply to Indian telecom operators, including BSNL.

The appellant imported populated printed circuit boards (PCBs), modules, and routers used in the assembly of OTN equipment. These items were classified by the appellant under the heading for parts.

The department reclassified the imported cards and modules as complete apparatus under the heading for machines for the reception, conversion, and transmission or regeneration of data and denied the benefit of exemption. A show cause notice was issued proposing demand of differential duty with interest and imposition of penalties under the Customs Act.

The Principal Commissioner confirmed the demand, interest, and penalties holding that the cards and modules were complete apparatus and not parts. Aggrieved by this order, the appellant approached the CESTAT.

The appellant's counsel argued that the imported cards and modules were integral components of OTN systems and could not function independently. They submitted that they derived power, software control, and operational capability only when installed into specific slots of the OTN chassis.

The appellant’s counsel explained that the components satisfied the twin tests for classification as parts: they had no separate identifiable function and were incapable of independent operation.

The revenue counsel argued that the goods were capable of performing data transmission or conversion functions and hence were classifiable as apparatus. It further argued that all network interface cards, including optical ones, fell within the heading for apparatus for data transmission and that the extended period of limitation and penalties were correctly invoked.

The two-member bench comprising Justice Dilip Gupta (President) and P.V. Subba Rao (Technical Member) agreed with the appellant’s arguments. The tribunal observed that the cards and modules did not have any independent function and were designed to operate only when slotted into the OTN system.

The tribunal further observed that each card drew power and software control from the main equipment and could not perform any communication or transmission function on its own.

The tribunal pointed out that, as per the Supreme Court’s decision in N.I. Systems (India) Pvt. Ltd., components that do not have a definite identity or function independent of the main equipment must be treated as parts. The tribunal also referred to earlier rulings such as Ciena Communications and Reliance Jio Infocomm, where similar OTN cards were classified as parts.

It explained that for a product to be treated as an apparatus, it must be a complete machine capable of performing functions independently, which was not the case here.

Based on these findings, the tribunal held that the imported OTN cards and modules were correctly classifiable as parts under the relevant heading. The reclassification made by the department was set aside, and the demand, interest, and penalties were quashed. The appeal was allowed in favor of Fiberhome India Private Limited.

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