Lithium-ion batteries for mobile phone manufacturing attract 12% IGST under Serial No. 203, not higher rates

CESTAT New Delhi held that lithium-ion batteries imported for mobile phone manufacture attract 12% IGST under Serial No. 203 of Schedule II to IGST Rate Notification from 01.04.2018 to 31.03.2020, thereafter 18%. The tribunal rejected the demand for higher duty rates of 28% or 18% under different serial numbers, finding that end-use for mobile phone manufacturing qualified for the lower rate. The demand for short-paid customs duty under section 28(1) with interest under section 28AA, redemption fine, and penalty under section 112(a)(ii) of Customs Act were unsustainable. Appeal allowed.

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The primary legal issue considered by the Tribunal is whether lithium-ion batteries imported and used in the manufacture of mobile phones are liable to Integrated Goods and Service Tax (IGST) at 12% under Serial No. 203 of Schedule II of the IGST Rate Notification, as contended by the manufacturers, or at higher rates of 28% under Serial No. 139 of Schedule IV (up to 26.07.2018) and 18% under Serial No. 376AA of Schedule III (from 27.07.2018), as claimed by the department.

To address this, the Tribunal examined the classification of lithium-ion batteries under the Customs Tariff Act and the IGST Rate Notification, the applicability of General Rules of Interpretation (GRI), the relevance of Section and Chapter Notes, and the legislative intent reflected in GST Council meetings and official communications.

Issue-wise Detailed Analysis:

1. Classification of Lithium-ion Batteries under IGST Rate Notification and Customs Tariff

The manufacturers classified lithium-ion batteries under Customs Tariff Item (CTI) 8507 60 00, discharging IGST at 12% under Serial No. 203 of Schedule II, which covers "Parts for manufacture of Telephones for cellular networks or for other wireless networks." The department contended that the batteries fall under the more specific headings of Serial No. 139 of Schedule IV ("Electric accumulators") attracting 28% IGST until 26.07.2018, and subsequently under Serial No. 376AA of Schedule III ("Lithium-ion Batteries") attracting 18% IGST.

The Tribunal noted that the IGST Rate Notification entries are not perfectly aligned with the Customs Tariff classifications. Serial No. 203 of Schedule II is a sui generis entry covering parts for manufacture of telephones under Chapter 85, while lithium-ion batteries are classifiable under CTI 8507 60 00, a subheading of Chapter 85 but distinct from telephones. This non-alignment was demonstrated with examples of other entries where IGST Rate Notification and Customs Tariff descriptions differ.

The Tribunal emphasized that the phrase "so far as may be" in Explanation (iv) to the IGST Rate Notification mandates that the rules for interpretation of the Customs Tariff apply only to the extent possible, recognizing the partial misalignment between the two notifications.

2. Applicability of General Rules of Interpretation and Section Notes

The department relied on GRI Rule 3(a) and Section Note 2(a) of Section XVI of the Customs Tariff, which prioritize specific headings over general ones and require parts that are goods included in any headings of Chapter 84 or 85 to be classified under their respective headings. The department argued that lithium-ion batteries, being specifically classifiable under CTI 8507 60 00, cannot be classified as parts under Serial No. 203.

The Tribunal, however, held that these rules apply only "so far as may be" and cannot be blindly enforced when the IGST Rate Notification is not completely aligned with the Customs Tariff. It found that the language of Serial No. 203 must be interpreted on its own terms, without undue reliance on Customs Tariff classification rules that may not fully apply.

3. Interpretation of the Phrase "Parts for Manufacture of Telephones"

The Tribunal considered whether lithium-ion batteries qualify as "parts" of mobile phones. It referred to the Authority for Advance Ruling in Epcos India Pvt. Ltd., which held that lithium-ion batteries, though classified under CTI 8507 60 00, are parts for manufacture of mobile phones under Serial No. 203 of the IGST Rate Notification. The ruling explained that a part need not be classified under the same heading as the main product to qualify as a part and that a mobile phone cannot function without a battery, establishing the battery as an essential component.

The Tribunal also cited the Supreme Court ruling in State of Punjab v. Nokia India Pvt. Ltd., which defined a part as an item without which the main item cannot operate.

4. Legislative and Administrative Intent

The Tribunal examined official communications and GST Council meeting agendas. A communication dated 22.08.2017 from the Commissioner of Customs clarified that battery packs imported for manufacture of mobile phones attract IGST at 12%, whereas those imported as spares attract 28%. The 31st GST Council Meeting agenda (22.12.2018) reiterated that lithium-ion batteries used for manufacture of mobile phones attract 12% GST, while power banks attract 28%. The 39th GST Council Meeting (14.03.2020) recommended increasing GST on mobile phones and parts from 12% to 18%, confirming the prior rate of 12% for parts.

The Tribunal noted that Serial No. 203 was omitted post 31.03.2020, after which lithium-ion batteries for manufacture of mobile phones attract 18% IGST, aligning with the Council's recommendations.

5. Interpretation of Taxing Statutes and Notifications

The Tribunal emphasized that the IGST Rate Notification is a taxing notification and must be strictly construed. It referred to the Supreme Court's ruling in Chief Commissioner of Central Goods and Service Tax vs. Safari Retreats Pvt. Ltd., which laid down that taxing statutes must be read plainly without additions or subtractions, and if two interpretations are possible, the one favoring the taxpayer should be adopted.

The Tribunal found that the Principal Commissioner erred by treating the IGST Rate Notification as an exemption notification and interpreting ambiguities in favor of the revenue, contrary to established principles of strict interpretation favoring taxpayers.

6. Relevance of End Use and Timing of Classification

The department argued that the end use of lithium-ion batteries cannot be ascertained at import, so the lower IGST rate under Serial No. 203 should not apply. The Tribunal referred to the Supreme Court's decision in BPL Display Devices Ltd., which held that the phrase "for use" in notifications means "intended for use," thereby supporting the interpretation that "for manufacture" means "intended for manufacture." Thus, the intended use at the time of import is relevant and sufficient for classification under Serial No. 203.

The department's reliance on subsequent tribunal decisions distinguishing BPL Display was found unpersuasive, as those decisions dealt with different factual and legal contexts.

7. Penalty, Confiscation, and Redemption Fine

Since the Tribunal concluded that the manufacturers correctly classified lithium-ion batteries under Serial No. 203 and discharged IGST at 12%, the demand for differential IGST, confiscation under section 111(m) of the Customs Act, redemption fine, and penalties under section 112(a)(ii) were held unjustified and unsustainable.

Significant Holdings:

"The rules for the interpretation of the First Schedule to the Customs Tariff Act, 1975 (51 of 1975), including the Section and Chapter Notes and the General Explanatory Notes of the First Schedule shall, so far as may be, apply to the interpretation of this notification."

"The phrase 'so far as may be' means that the provisions of the referred statute are to be followed to the extent possible and not incorporated by pen and ink."

"Lithium-ion batteries imported for manufacture of mobile phones fall under Serial No. 203 of Schedule II to the IGST Rate Notification and attract IGST at 12% up to 31.03.2020."

"The IGST Rate Notification is a taxing notification and must be strictly construed; any ambiguity must be resolved in favor of the taxpayer and against the revenue."

"The words 'for manufacture' in the entry mean 'intended for manufacture' and the intended use at the time of import is relevant for classification."

"The demand for differential IGST, confiscation, redemption fine, and penalty in respect of lithium-ion batteries imported for manufacture of mobile phones is unsustainable."

"The Commissioner (Appeals) correctly held that lithium-ion batteries imported for manufacture of mobile phones are covered under Serial No. 203 of Schedule II to the IGST Rate Notification."

The Tribunal allowed the appeals filed by manufacturers of mobile phones, setting aside the impugned orders demanding higher IGST and penalties, and dismissed the appeals filed by the department against orders favorable to the manufacturers.

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