In recent times, the telecom sector has witnessed multiple litigations over the classification of network equipment. Given the rapid pace of technological evolution, telecom products are frequently upgraded, making classification disputes almost inevitable on such networking products. Every few years, new versions of antennas, RF modules, routers, and optical transceivers etc. enter the market, further complicating the classification of these products.
It is a well-known fact that several multinational companies have been involved in high-stakes classification disputes under Customs law. The primary issue in many disputes is whether goods are properly classifiable as components/ parts of telecom equipment (eligible for exemption) or as complete machine/ apparatus (liable for duty). This is considering the policy backdrop that India incentivises import of parts for manufacture in India. For this, it issues exemptions that cover tariff lines meant for parts.
For the sake of this article, we shall be focusing on the recent decision pertaining to classification of small form-factor pluggable (‘SFPs’). Judicial forums including the Supreme Court have recently ruled in favour of telecom companies classifying SFP as part of networking telecom equipment under Tariff Item 8517 70 90.[1]
Recent reports indicate that the Union Finance Ministry[2] is reportedly considering a 10% Basic Customs Duty (BCD) on telecom network equipment components. This move comes with a background that upon Courts approving classification of SFPs as parts they became eligible to exemption from BCD. The news report indicates that the Government policy going forward will keep such goods outside the scope of exemption keeping in mind the Phased Manufacturing Programme (‘PMP’) scheme, which has been introduced for the telecom sector.
One possible approach is to restrict the exemption for a wide range of telecom products. The Government may be considering an approach similar to what was done previously in Notification No. 24/2005-Cus., dated 1 March 2005 (‘NN 24/2005’). Initially, this notification granted exemption to ‘All Goods’ under Heading 8517, with specific exclusions. Over the period of time, the scope of this exemption was narrowed through amendments:
- In 2017, vide Notification No. 58/2017-Cus., dated 30 June 2017: Sl. No. 13 was split into Sl. Nos. 13A to 13S, each covering specific tariff items, and exemption was continued on ‘All Goods’.
- In 2018, vide Notification No. 76/2018-Cus., dated 11 October 2018: Sl. No. 13S was amended to exclude Printed Circuit Board Assemblies (‘PCBAs’) of certain telecom products from exemption, thereby imposing BCD on them.
This historical pattern demonstrates that the government has effectively used tariff line restructuring to withdraw exemptions and impose duties on the products.
The afore-cited news report also indicated that the government may be trying to introduce a new tariff line. Considering that the Courts have ruled that SFPs are classifiable as Parts, it will be interesting to see where exactly the new tariff line is introduced. If the government considers introducing a new tariff line purporting to correctly classify SFPs as machines, it will mean that they have deviated interpretation of the Import Tariff interpreted by the Courts. It would be interesting to see if impacted importers will look to challenge the legislative competence of the Government to enact such a change.
These are interesting times, and it remains to be seen what approach the government will adopt to resolve this issue. Will the government continue with its established approach of amending the existing notification to exclude specific product lines from exemption? Or will it introduce a completely new tariff line? If a new tariff line is introduced, it also raises the possibility of legal challenges in the near future.
In any case, it is yet to be seen whether such products will continue to enjoy duty exemptions under India’s Free Trade Agreements (‘FTAs’), such as, ASEAN-India Free Trade Area (AIFTA) under the Framework Agreement on Comprehensive Economic Co-operation between the Republic of India and the Association of Southeast Asian Nations; The India–South Korea Comprehensive Economic Partnership Agreement (‘CEPA’) and the India–Japan CEPA.
These agreements offer preferential duty rates for products classified under Heading 8517. However, if a new 8-digit tariff code is introduced that deviates from the existing FTA nomenclature or is not recognized by partner countries, several important questions arise:
- Will FTA-based exemptions still apply to the newly classified products?
- Could trading partners challenge the reclassification under the terms of the FTA or WTO?
- How will importers demonstrate eligibility for preferential treatment under the new tariff lines when claiming FTA benefits?
These uncertainties highlight the need for clarity and consistency in tariff classification, especially in a globally integrated trade environment.
Any development on this issue will impact the Indian consumer as India is a major importer of these goods. Therefore, the government needs to assess whether these products are capable of being manufactured to the desired scale and quality parameters in India. The performance of telecom networks depends on the seamless integration and synchronization of various components, any compromise in quality could disrupt the entire system.
Furthermore, the financial burden of these taxes ultimately falls on the importing companies, which is then passed on to end consumers. This could indirectly lead to higher costs for telecom services.
The only certain outcome is that yet again the tax landscape is liable to change, and it will require impacted players to re-align their strategies for the future.
[The authors are Partner and Principal Associate, respectively, in Customs practice at Lakshmikumaran & Sridharan Attorneys, New Delhi]
[1] Commissioner v. Reliance Jio Infocomm Ltd. – 2022 (8) TMI 76 - CESTAT Mumbai affirmed by Supreme Court in the Commissioner v. Reliance Jio Infocomm Ltd. – 2023 (2) TMI 1295 - SC ORDER.
[2] Article on ‘Finance ministry considers 10% duty on key telecom gear amid tax disputes’, available here.
