05 - Principles of Interpretation of Specified Description of Services or Bundled Services

First principle is Cost of components of the product i.e. which.component has highest value, will give the essential character to the product. In the case of Xerox India Ltd. [2010 (11) TMI 20 - Supreme Court of India] it was held that It is not in dispute that the Multi-Functional Machines in question, Xerox Regal 5799 has about 85% of the its total parts and components along with manufacturing cost allocated to printing, as does 74% of the Xerox XD155df model. This clearly shows that the printing function emerges as the principal function and gives the Multi-Functional Machines its essential character.

Second principle is Functionality of the product i.e. which component gives the identity/ basic function to the product. In the case of Bakelite Hylam Ltd. [1997 (3) TMI 598 - SUPREME COURT] it was held that, in the present case, the essential character of a decorative laminated sheet is its rigidity or strength and its resistance to heat and moisture. These are essentially characteristics which are imparted by resins. Paper does not possess any of these characteristics. Therefore, applying Rule 3(b) and going by the essential characteristic of such laminated sheets, these goods are more appropriately classifiable under Chapter 39.

Essential character of a product determined by dominant cost component or defining functionality for classification. Determination of the essential character of a bundled product relies on two main tests: cost allocation, where the component with the highest share of parts or manufacturing cost typically imparts essential character (as in Xerox India Ltd.), and functionality, where the component that confers defining physical or operational attributes supplies the product's identity (as in Bakelite Hylam Ltd.).