Supreme Court Clarifies Exemption for Cutter Dredger Components: Dharti Dredging vs. Commissioner of Customs (2023)

Date of the Judgment: 01 March 2023

Citation: 2023 INSC 1842

Judges: S. Ravindra Bhat, J., Dipankar Datta, J.

Can parts of a machine, which are essential for its functioning, be classified separately for customs duty purposes? The Supreme Court of India addressed this question in a case concerning a “Cutter Suction Dredger” and its imported components. The court had to determine whether items like dredging pumps, pipes, and air compressors should be considered integral parts of the dredger, thus qualifying for a customs duty exemption, or as separate items. The judgment was delivered by a two-judge bench comprising Justice S. Ravindra Bhat and Justice Dipankar Datta, with the opinion authored by Justice S. Ravindra Bhat.

Case Background

M/s Dharti Dredging and Infrastructure Ltd. (the appellant) imported a “Cutter Suction Dredger” along with various accessories and equipment. These items included pipes, anchor boats, multicats, dredging pumping units, engines, and other spares. The appellant classified these goods under Chapter Heading 8905 10 00 of the Customs Tariff Act, 1975, and claimed a nil rate of duty benefit under Notification No. 21/2002-CUS dated 01.03.2002. They supported their claim with a certificate from a Chartered Engineer.

The Assistant Commissioner, after reviewing the Bill of Entry, concluded that items like multicats, M.S. pipes, and dredging pumping units should be classified under different tariff headings and were not eligible for the exemption as “DREDGERS”. The appellant then appealed this decision.

Timeline:

Course of Proceedings

The Commissioner of Customs (Appeals), Guntur, after analyzing the functions of each part, granted relief to the appellant on nine items, holding them eligible for exemption. This decision was based on a previous order by the CESTAT in Boskalis Dredging India Pvt. Ltd. Vs Commissioner of Customs, Bhubaneshwar [2001 (135) E.L.T. 1396].

The revenue appealed to the Customs, Excise and Service Tax Appellate Tribunal (CESTAT). The CESTAT, relying on other decisions and Chapter Note to Section XVII of the Customs Tariff Act, 1975, reversed the Appellate Commissioner’s order. It held that the items, though essential to the Cutter Dredger, were separate articles and not eligible for exemption.

Legal Framework

The case revolves around the interpretation of the Customs Tariff Act, 1975, specifically Chapter Heading 8905 10 00, which deals with dredgers. The appellant claimed exemption under Notification No. 21/2002-CUS, which provides a nil rate of duty for certain goods.

Note 2 to Section XVII of the Customs Tariff Act, 1975, was also considered. This note specifies that the terms “parts” and “parts and accessories” do not apply to certain articles, including machines or apparatus of headings 8401 to 8479, or parts thereof, articles of heading 8481 to 8482, or, provided they constitute integral parts of engines or motors, articles of heading 8483.

The relevant portion of the notification is not mentioned in the judgment.

Arguments

Appellant’s Submissions:

• The appellant argued that each item denied the exemption was integrally connected to the functioning of a Cutter Dredger.
• They cited the decision in Commissioner of Customs Vs. Boskalis Dredging India Pvt. Ltd. [2002 (139) ELT A 313 (SC)], where the Supreme Court affirmed the CESTAT’s order, which had held that pipelines were an essential part of a dredger.
• The appellant contended that without components like compressors and pipes, the cutter dredger could not function effectively.

Revenue’s Submissions:

• The revenue argued that the items in question should be classified separately under relevant heads, relying on Note 2 to Section XVII of the Customs Tariff Act, 1975.
• They cited the Supreme Court’s decision in Steel Authority of India Ltd. vs. Commissioner, Central Excise & Customs, Bhubaneshwar [2022 SCC Online (SC) 1232], which held that a guide car was not an integral part of a coke oven battery.
• The revenue contended that, similar to the guide car, the pumping units, air compressors, pipes, and other items were not integral components of the dredger and should not be treated as such.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issue was:

• Whether the items excluded by the CESTAT (and granted exemption by the Appellate Commissioner) are integral parts of a Cutter Dredger and thus eligible for exemption under Notification No. 21/2002-CUS.

Treatment of the Issue by the Court

The following table demonstrates how the Court decided the issue:

Authorities

The following authorities were considered by the court:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Boskalis Dredging India Pvt. Ltd. Vs Commissioner of Customs, Bhubaneshwar [2001 (135) E.L.T. 1396]: The Court noted that the Appellate Commissioner had correctly relied on this order to grant exemption.
• Commissioner of Customs Vs. Boskalis Dredging India Pvt. Ltd. [2002 (139) ELT A 313 (SC)]: The Court noted that this Supreme Court decision had affirmed the CESTAT’s view that pipelines are an essential part of a dredger.
• Steel Authority of India Ltd. vs. Commissioner, Central Excise & Customs, Bhubaneshwar [2022 SCC Online (SC) 1232]: The Court distinguished this case, stating that the facts were different and the ruling was not applicable to the present case.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the functional necessity of the disputed items for the operation of a Cutter Suction Dredger. The Court emphasized that the items like dredging pumps, pipes, and air compressors were not merely accessories but integral components without which the dredger could not perform its primary function of dredging.

The Court also considered the previous decision in Boskalis Dredging India Pvt. Ltd., which had established that pipelines are an essential part of a dredger. This precedent played a significant role in the Court’s reasoning. The Court distinguished the Steel Authority of India Ltd. case, highlighting that the guide car in that case was not essential for the functioning of the coke oven battery, unlike the components in question for the dredger.

The Court’s sentiment leaned towards a practical interpretation of the term “integral part,” focusing on the operational necessity of the items rather than a strict, literal interpretation of Note 2 to Section XVII of the Customs Tariff Act, 1975.

Fact:Law Ratio

The Court’s reasoning was more inclined towards the factual aspects of the case, such as the essential nature of the components for the functioning of the dredger, rather than a strict legal interpretation.

Logical Reasoning

Judgment

The Supreme Court set aside the CESTAT’s order and restored the order of the Appellate Commissioner. The Court held that the items excluded by the CESTAT were indeed integral to the functioning of the Cutter Dredger and were thus eligible for the exemption under Notification No. 21/2002-CUS. The Court emphasized that the test was not whether the items could be used for other purposes, but whether they were essential for the dredging process.

The Court quoted from the previous CEGAT order in Boskalis Dredging India Pvt. Ltd.:

“From the definitions of various Dredgers as extracted above, we find that Dredging, no doubt, means excavation. But there is definitely a need for continuous lifting of the dredged material and dumping the same at some other place…In the case of Cutter Suction Dredger, the procedure for carrying out the dredging work is different…It is this function of the Cutter Suction Dredger which involves the dredging as well as the discharging, which makes the Pipelines an essential part of the Dredger inasmuch as without these Pipelines the Dredger of the type in question will not be able to work properly…”

The Court also stated:

“A plain reading of the note extracted above shows that parts and parts of accessories cannot apply to specified articles, including items classifiable under 8401-79, 8481-82, and to some extent, 8483. In the present case, in this Court’s view, the error committed by the CESTAT is that each of the excluded items has been treated as a separate part and not integral to the functioning of a Cutter Dredger.”

Further, the Court noted:

“Without the compressors and the pipes necessary to pump the dredged material, the cutter dredger would cease to function as such. The other items, likewise, are integral parts of the Cutter Dredger, even though they might independently be utilized, for other purposes.”

The Court clarified that the reliance on Note 2 of Section XVII of the Customs Tariff Act, 1975, by the revenue was insubstantial in the present case. The Court also differentiated the facts of the present case from Steel Authority of India Ltd., stating that the guide car in that case was not essential for the functioning of the coke oven battery.

The Court, however, upheld the exclusion of generators from the benefit of the exemption, as both the Appellate Commissioner and the CESTAT had excluded them.

Key Takeaways

• Components essential for the functioning of a machine are considered integral parts and not separate articles for customs duty purposes.
• The functional necessity of a part is the key factor in determining whether it is integral to a machine.
• Previous decisions, like the Boskalis Dredging case, can serve as important precedents in similar cases.
• The court will look at the factual aspects of the case to determine if the part is essential for the functioning of the machine.

Directions

No specific directions were given by the Supreme Court other than setting aside the CESTAT order and restoring the order of the Appellate Commissioner.

Development of Law

The ratio decidendi of this case is that components which are essential for the functioning of a machine are to be considered as integral parts of that machine for the purpose of customs duty exemptions. This clarifies the interpretation of “parts” and “accessories” under the Customs Tariff Act, 1975, emphasizing a functional approach rather than a strict, literal one. This case also reinforces the importance of precedent when dealing with similar issues.

Conclusion

In conclusion, the Supreme Court’s judgment in M/s Dharti Dredging and Infrastructure Ltd. vs. Commissioner of Customs and Central Excise, Guntur clarifies that components essential for the functioning of a Cutter Suction Dredger are considered integral parts of the dredger and are eligible for customs duty exemptions. The Court’s decision emphasizes a functional approach, focusing on the operational necessity of the components rather than a strict, literal interpretation of the law. This ruling provides clarity on the classification of machine parts for customs purposes and reinforces the importance of considering previous decisions in similar cases.

Category

Parent Category: Customs Law

Child Categories:

• Customs Duty
• Exemptions
• Tariff Classification
• Dredgers
• Customs Tariff Act, 1975
• Section XVII, Customs Tariff Act, 1975

FAQ

Q: What did the Supreme Court decide in this case?

A: The Supreme Court ruled that components essential for the functioning of a Cutter Suction Dredger, such as pumps, pipes, and air compressors, are considered integral parts of the dredger and are eligible for customs duty exemptions.

Q: What does “integral part” mean in this context?

A: In this context, an “integral part” refers to a component that is essential for the functioning of the main machine. Without it, the machine cannot perform its primary function.

Q: Why were some items considered exempt while others were not?

A: Items like dredging pumps, pipes, and air compressors were considered essential for the functioning of the dredger. Generators, however, were not deemed essential and were thus not granted the exemption.

Q: How does this judgment affect future customs cases?

A: This judgment sets a precedent that components essential for the functioning of a machine should be considered integral parts for customs duty purposes. This means that customs authorities should focus on the functional necessity of the items rather than a strict, literal interpretation of the law.

Q: What was the main argument of the company that imported the dredger?

A: The company argued that items like pumps, pipes, and air compressors were essential for the functioning of the Cutter Suction Dredger and should be included in the exemption.

Q: What was the main argument of the customs authorities?

A: The customs authorities argued that the items should be classified separately under different tariff headings and were not eligible for the exemption.