Classification of 'Fusible Interlining Fabrics of Cotton' under Customs Tariff Act

The case involved the classification of 'Fusible Interlining Fabrics of Cotton' under Chapter 52 or Chapter 59 of the Customs Tariff Act, 1975. The court ruled that the product should be classified under Heading 5903 of Chapter 59 based on the interpretation of relevant chapter notes, circulars, judicial precedents, and test reports. The decision aligned with the explanatory notes to HSN for Heading 5903, fulfilling the conditions for classification under that heading. Various judicial authorities also supported this classification under Heading 5903.

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The core legal question considered is whether the product 'Fusible Interlining Fabrics of Cotton' is correctly classifiable under Chapter 52 or Chapter 59 of the tariff schedule, specifically under the present Goods and Services Tax (GST) regime aligned with the Customs Tariff Act, 1975.

The issue arises from a historical and ongoing dispute over the classification of fusible interlining fabrics, which are cotton fabrics partially coated with pulverized plastic powder by a dot matrix printing process. The classification impacts applicable tax rates and compliance obligations.

Issue-wise Detailed Analysis:

1. Historical Classification and Amendments:

Initially, under the Central Excise regime, fusible interlining fabrics were classified under various chapters (50 to 55) depending on the fabric nature. Specifically, cotton fusible interlining fabrics were classified under Chapter 52. In 1989, an amendment introduced Note 2(c) to Chapter 59, mandating that fusible interlining cloth made by discrete coating of plastic by dot matrix process be classified under Chapter Heading 5903 (textile fabrics impregnated, coated, covered or laminated with plastics).

The Board issued Circulars clarifying that to merit classification under Heading 5903, the fabric should have a continuous and adherent plastic film on one side, be impervious, and satisfy conditions in Chapter Note 2 of Chapter 59. Later, the requirement of a continuous plastic layer was removed, but the fabric still needed to be impervious.

In 1995, Note 2(c) was deleted, raising classification doubts. The Board issued a Circular in 1998 asserting that the deletion did not change classification under Heading 5903, but this Circular was challenged and ultimately held invalid by the Madras High Court for violating Section 37B of the Central Excise Act, which protects quasi-judicial powers of authorities.

The Madras High Court ruled that deletion of Note 2(c) restored the pre-1989 position, i.e., classification under Chapters 50 to 55 depending on fabric nature. The Division Bench upheld the quashing of the Circular but remanded the matter for adjudication on merits. The Appellate Tribunal later confirmed that classification under Chapter 59 post-deletion of Note 2(c) was illegal and the product should be classified under Chapter 52.

Similar rulings were made by other High Courts, including the Allahabad High Court, reinforcing that post-deletion of Note 2(c), fusible interlining fabrics should be classified under Chapters 50 to 55 based on fabric predominance.

2. Characteristics of the Product and Test Report:

The applicant submitted a test report from the Ahmedabad Textile Industry's Research Association (ATIRA), an authoritative textile research institute, describing the product's characteristics:

• Polymer coated on one side, with coating non-continuous and invisible to the naked eye (distinct from visible film coating).
• Product can be bent without fracturing around a 7-meter diameter cylinder at 15-30^0C.
• Fabric is not completely embedded in plastic and remains porous and pervious.
• Coating bears a dot matrix design from the printing process.

The report confirms the fabric is only partially coated, porous, and not impervious.

3. Legal Framework and Interpretation of Tariff Chapters:

The classification under the GST regime is governed by the First Schedule to the Customs Tariff Act, 1975, which aligns with the Harmonized System of Nomenclature (HSN). The relevant chapters are:

• Chapter 52: Covers woven fabrics of cotton, including those containing 85% or more cotton by weight.
• Chapter 59: Covers impregnated, coated, covered or laminated textile fabrics, other than those in heading 5902.

Chapter Notes to Chapter 59 specify exclusions from Heading 5903, including:

• Fabrics where impregnation, coating or covering cannot be seen with the naked eye (usually Chapters 50 to 55, 58 or 60).
• Products that cannot be bent without fracturing around a 7 mm diameter cylinder.
• Fabrics completely embedded in plastics or coated on both sides with visible coating.
• Fabrics partially coated or covered bearing designs resulting from such treatments (usually Chapters 50 to 55, 58 or 60).

The Explanatory Notes to HSN for Heading 5903 require three conditions for classification under that heading:

1. The impregnation, coating or covering must be visible to the naked eye.
2. The product must be flexible enough to bend without fracturing around a 7 mm diameter cylinder at 15-30^0C.
3. The fabric must not be completely embedded in or coated on both sides with plastics.

The test report shows that the applicant's product meets conditions (2) and (3) but the coating is not visible to the naked eye, raising a question on condition (1).

4. Treatment of Competing Arguments and Circulars:

The applicant argued that the product should be classified under Chapter 52 as the coating is non-continuous, invisible, and the fabric remains porous, thus excluded from Chapter 59 by virtue of Chapter Note 2(a)(1) and (4). The applicant relied on earlier judicial rulings supporting classification under Chapter 52 post-deletion of Note 2(c).

However, the Authority noted CBEC Circular No. 433/66/98-CX.6 dated 27.11.1998, which treats fusible interlining cloth as an exception to the exclusion in Chapter Note 2(a)(4), classifying it under Heading 5903. The circular considers such fabrics as spattered with visible particles of thermoplastic material capable of bonding on heat and pressure, thus fitting Heading 5903.

The Authority also referred to the Appellate Authority for Advance Ruling, West Bengal's reasoning, which upheld the circular's view and noted that the circular has persuasive value despite the Madras High Court's quashing of an earlier circular on procedural grounds.

The applicant did not dispute the circular's correctness or applicability, and the Authority found it reasonable to accept the circular's classification approach.

5. Application of Law to Facts and Final Reasoning:

Despite the coating not being visible to the naked eye per the test report, the Authority reasoned that the condition (1) in the Explanatory Notes to HSN does not explicitly distinguish between polymer coating and film coating and only requires visibility of the coating. The product's coating, though non-continuous and invisible as a film, is a polymer coating and bears a dot matrix design visible under examination.

Conditions (2) and (3) are clearly met as per the test report. The product is flexible and not fully embedded in plastic.

The Authority concluded that all three conditions for classification under Heading 5903 are fulfilled.

Further, the Authority examined Chapter 52 headings and found that these do not cover laminated or coated fabrics with plastics, reinforcing that the product does not fall within Chapter 52.

6. Reliance on Precedents:

The Authority relied on several advance rulings and judicial decisions including:

• West Bengal Advance Ruling Authority's order classifying fusible interlining fabric under Heading 5903.
• Uttarakhand State Advance Ruling Authority's similar classification.
• Appellate Authority for Advance Ruling, West Bengal's upholding of the above rulings.

These authorities consistently held that fusible interlining fabrics of cotton are classifiable under Chapter 59, Heading 5903.

Significant Holdings:

"The product 'Fusible Interlining Fabrics of Cotton' of the applicant is correctly classifiable under Heading 5903 of Chapter 59 of the First Schedule to the Customs Tariff Act, 1975(51 of 1975)."

Core principles established include:

• The classification of fusible interlining fabrics is governed by the conditions laid down in the Explanatory Notes to HSN under Heading 5903.
• Deletion of Note 2(c) from Chapter 59 of the erstwhile Central Excise Tariff does not automatically revert classification to Chapter 52 if the product meets the conditions for classification under Chapter 59 per the HSN explanatory notes and CBEC circulars.
• CBEC Circular No. 433/66/98-CX.6 dated 27.11.1998, though previously challenged, holds persuasive value in classifying fusible interlining fabrics under Heading 5903.
• Classification under GST aligns with the Customs Tariff Act, 1975 and the internationally accepted Harmonized System of Nomenclature.

The Authority's final determination is that the product is not classifiable under Chapter 52 as a plain woven cotton fabric due to its plastic coating, even if partial and non-continuous, but falls within the scope of Chapter 59, Heading 5903, which covers textile fabrics impregnated, coated, covered or laminated with plastics, other than those excluded by Chapter Notes.

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