Submarine Fired Decoy System classified as submarine parts under Chapter 8906, attracts 5% GST rate

The AAAR for Andhra Pradesh held that Submarine Fired Decoy System (SFDS) is classifiable as parts of submarine under Chapter Heading 8906, attracting 5% GST rate. The Authority determined that SFDS is tailor-made for Indian Navy submarines, has no independent commercial use, and is essential for submarine defense against torpedoes. The system was deemed a defense mechanism critical for submarine survival, not merely additional equipment. The ruling followed precedent from Karnataka AAR regarding similar submarine systems, overturning the lower Authority's classification of SFDS as arms and ammunition.

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Issues Involved:
1. Classification of Submarine Fired Decoy System (SFDS) under GST.
2. Applicable GST rate for SFDS.

Detailed Analysis:

1. Classification of Submarine Fired Decoy System (SFDS) under GST:

The appellant, M/s Bharat Dynamics Limited (BDL), sought clarification on whether the SFDS supplied by them is classifiable as 'parts of submarine' under Chapter Heading 8906, which would attract a GST rate of 5% by virtue of entry no. 252 of Schedule I in Notification No. 1/2017-Integrated Tax (Rate) dated 28.07.2017.

The Authority for Advance Ruling, Andhra Pradesh, had previously classified the SFDS under SI.No.434 under Chapter/Heading/Sub-heading/ Tariff Item 9306 under Schedule III of Notification No. 1/2017 - Central Tax (Rate) dt: 28.06.2017, attracting a tax rate of 18%.

The appellant argued that the SFDS is an integral part of the submarine, designed specifically for use in submarines to counter torpedo attacks. It was emphasized that the SFDS has no other use than in a submarine, making it an essential and integral part of the warship. The appellant cited various judicial precedents and dictionary definitions to support their claim that SFDS qualifies as a 'part' of a submarine.

2. Applicable GST rate for SFDS:

The appellant contended that the SFDS should attract a GST rate of 5% as it falls under entry no. 252 of Schedule I in Notification No. 1/2017-Integrated Tax (Rate). This entry covers parts of goods of headings 8901, 8902, 8904, 8905, 8906, and 8907. The appellant argued that since submarines are classified under heading 8906, parts of such goods should be eligible for the 5% GST rate.

The appellant provided additional submissions, including an Inspection Note and Certificate of Acceptance from the Ministry of Defence, to further substantiate that the SFDS is an integral part of the submarine. They also referenced several advance rulings and judicial precedents under the pre-GST regime to support their claim.

Discussion and Findings:

Upon reviewing the entire records of the appeal, the facts of the case, and the written and oral submissions, the appellate authority observed that the main issue was the classification and relevant HSN code of the proposed supply of SFDS. The authority noted that the SFDS system is tailor-made for use in submarines by the Indian Navy and has no independent use outside of this context.

The authority concluded that the SFDS is an essential part of the submarine, as it is permanently fitted and periodically maintained. The defense market also recognizes SFDS as necessary for anti-torpedo attacks, further supporting its classification as a part of the submarine.

The authority referenced similar cases, such as Bharat Electronics Limited, where systems like radar and fire control systems were classified as 'parts of submarine.' Following the spirit of these advance rulings, the authority differed from the lower authority's ruling and held that SFDS is a part of the submarine under Chapter 8906.

Order:

The appellate authority modified the ruling of the Advance Ruling Authority, holding that the SFDS is classifiable as 'parts of Submarine' falling under Chapter 8906 and consequently attracts a GST rate of 5% by virtue of entry No.252 of Schedule I in Notification No. 28.06.2017.

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