Win for Samsung: CESTAT Classifies Lithium-Ion Batteries Used in Mobile Phones as 'Parts', Attracting 12% GST instead of 28% [Read Order]

The New Delhi Principal Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) ruled that lithium-ion batteries imported for use in the manufacture of mobile phones are to be treated as “parts” of mobile phones and are eligible for Integrated Goods and Services Tax (IGST) at 12%, not 28% as claimed by the department.

Samsung India Electronics Pvt. Ltd., the appellant, is engaged in the manufacture of mobile phones in India. For this purpose, it imported lithium-ion batteries, classifying them under Customs Tariff Item 8507 60 00 and paid IGST at the rate of 12% under Entry No. 203 of Schedule II to the IGST Rate Notification.

The department issued a show cause notice to Samsung, alleging that the correct IGST rate should have been 28% under Entry No. 139 of Schedule IV for the period up to 26.07.2018, and 18% under Entry No. 376AA of Schedule III thereafter. It argued that lithium-ion batteries were classifiable as “electric accumulators” and not as parts of mobile phones.

In response, the appellant’s counsel argued that the batteries were used specifically in the manufacturing of mobile phones and formed an essential component without which the phones could not function. The company contended that the batteries qualified as “parts” under Schedule II and that the 12% IGST rate was correctly applied. They also pointed to CBEC’s 2017 clarification that lithium-ion batteries imported for use in manufacturing mobile phones attracted 12% IGST, while only those imported as spares attracted a higher rate.

The Revenue counsel argued that lithium-ion batteries fall under a specific tariff heading as electric accumulators and that such items, even if used in mobile phones, should be taxed under the heading that most specifically describes them. They said the classification as “parts” was improper since the batteries were separately classifiable and Samsung had wrongly availed a concessional rate to reduce tax liability. They also explained that the end use of the product at the time of import was unverifiable.

The two-member bench comprising Justice Dilip Gupta (President) and Hemambika R. Priya (Technical Member) observed that the IGST Rate Notification is a taxing notification and must be interpreted strictly. It observed that Entry 203 of Schedule II applied to goods under Chapter 85 that are parts used for manufacturing telephones. Since lithium-ion batteries are classified under Chapter 85 and used in the manufacture of mobile phones, they fall within the scope of the entry.

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The tribunal further observed that the Customs Tariff and the IGST Rate Notification are not fully aligned, and rules of interpretation under the Customs law apply only “so far as may be.” It also referred to GST Council clarifications and an Advance Ruling in the case of Epcos India, both of which supported the view that lithium-ion batteries used in mobile phone manufacturing attract 12% GST.

The tribunal rejected the department’s argument that use-based classification was not possible, holding that the phrase “for manufacture” includes goods intended for such use. It also disagreed with the view that the IGST Rate Notification was an exemption notification, clarifying instead that it was a taxing notification, where ambiguity must be resolved in favor of the taxpayer.

The tribunal held that Samsung and other appellants had correctly paid IGST at 12% and that the department’s demand for the differential tax, penalty, and redemption fine could not be sustained. The appeals filed by the manufacturers were allowed, and the department’s appeals were dismissed.

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