Laboratory Chemicals: Challenges posed by this unique entry in Indian Tariff

Custom Duty applicable on goods imported into India is determined based on the classification of the goods, under the First Schedule to the Customs Tariff Act, 1975 (‘Customs Tariff’). The Customs Tariff up to 6 digit is aligned with the HSN Explanatory Notes issued by World Customs Organisation. However, while the HSN Explanatory Notes have only 97 Chapters, Indian Customs Tariff has an additional Chapter 98.

Chapter 98 is unique and has been created to cater to specific categories of imports, which are not covered by Chapter 1-97.  Chapter 98 covers: Project Imports (Heading 9801), Laboratory Chemicals (Heading 9802), Baggage (Heading 9803), Imports for Personal Use (Heading 9804), Stores (Heading 9805).

This article focuses on laboratory chemicals.

Note 3 to Chapter 98 sets out what is covered under Heading 9802 as laboratory chemicals. The Chapter Note has undergone an amendment[1] with effect from 19 September 2024.  The Chapter Note, as it stands today, and as it stood prior to 19 September 2024 is captured below:

Thus, prior to 19 September 2024, products could be classified as ‘laboratory chemicals’ under Heading 9802 even when imported for purposes such as trading. Vide the amendment made in September 2024, it has been made clear that only imports made by an importer for their own use and not for purposes such as trading, can be classified under Heading 9802.

In light of the above, the background of the amendment and the various facets that govern the classification of laboratory chemicals under Heading 9802 are examined below in greater detail.

The triggering point for the amendment

The amendment in Chapter Note 3 appears to have been triggered by an investigation being conducted by Customs Investigative Agencies into import of chemicals, by importers, by classifying the same under Heading 9802.

Chemicals are generally classified under Chapters 28 / 29 / 38 of the Customs Tariff. Under these Chapters, certain chemicals are restricted/prohibited for import into India under the ITC-HS issued under the Foreign Trade (Development & Regulation) Act, 1992. However, laboratory chemicals classified under Heading 9802 are freely importable. This then meant that if chemicals which were restricted/prohibited for import under other Chapters were imported in packings of less than 500 gm/500 ml, with markings claiming them to be laboratory chemicals, then the same could be imported freely into India, without any restriction/prohibition, by classifying the same under Heading 9802. The investigative agencies were of the view that the restriction/prohibition was being circumvented by certain importers, who were purposely importing such restricted/prohibited chemicals in packings of less than 500 gm/ml and post import, the product was being traded domestically.

The actual user condition now imposed vide the amendment, appears to have been aimed at plugging the above loophole.

Further, the condition now imposed seems to align the entry of ‘laboratory chemical’ in line with the other Headings of Chapter 98 which categorically covers imports for specific end use (unlike the rest of the Tariff which largely refrains from classifying goods based on their end-use). The other Headings in Chapter 98 seem to also insist on the end-use being fulfilled by the importer itself, such as: project imports (imported for expansion/construction of own factory), personal baggage, import of dutiable goods for personal use, stores aboard a vessel/aircraft.

True meaning of ‘laboratory chemical’ envisaged in Heading 9802

The definition in Note 3 requires the product to be classified as ‘laboratory chemicals’, if it ‘can be identified with reference to the purity, markings or other features to show them to be meant for use solely as laboratory chemicals’.  However, it is not clarified as to what purity / markings / other features will signify the product to be solely for use as laboratory chemicals.

General perception is that chemicals used in laboratories are of high purity. However, it is unclear from the definition –

• if chemical having low purity will be considered to be laboratory chemical, as long as the label of the product indicates the same to be used solely as laboratory chemical;

Or

• if the chemical’s purity is high, but there is no indication on its label to be used as laboratory chemical, can it still be classified as laboratory chemical?

This then leads to another question: is the product actually required to be used in a laboratory or intent / capability to be used in laboratory sufficient to classify the chemical under Heading 9802?  That is, is there any post import condition associated with the import? Chapter Note does not clarify this.

What is ‘own use’?

For classifying the products under Heading 9802, the imports must be for own use and not for purposes of trading, further sale, etc. Thus, it is made clear that import and trading of the goods post import is not permitted.

It is clear that if the importer effects import of the chemical and uses the same in its own laboratory for undertaking research for itself, then the chemicals are aptly classifiable under Heading 9802. However, it is unclear if a Diagnostics Laboratory imports the chemicals and uses the same for testing patient samples and providing test reports, then can the usage be considered to be own use or not.   What would be the position if the cost of testing includes cost of the sale of chemical, i.e. if the importer uses the chemicals for economic gains, and not just for research, can it be said that the import is still for ‘own use’ or not.  The amendment in Chapter Note 3 does not clarify these positions.

Primacy of classification under Heading 9802 over other Headings

Further, Note 1 to Chapter 98 makes it clear that classification under Headings of Chapter 98 will prevail over any other classification in the Customs Tariff:

1. This Chapter is to be taken to apply to all goods which satisfy the conditions prescribed therein, even though they may be covered by a more specific heading elsewhere in this Schedule.

In view of the above note, if the goods satisfy the definition of ‘laboratory chemical’ as set out in Chapter Note 3 to Chapter 98, they necessarily have to be classified under Tariff Item 98020000, and nowhere else.

Heading 3822 inter-alia covers certified reference materials. Chapter Note 2(B) of Chapter 38 states as follows:

(B) With the exception of the products of Chapter 28 or 29, for the classification of certified reference materials, heading 3822 shall take precedence over any other heading in the Schedule

In the above background, if a certified reference material is imported by an importer for their own use, in package of less than 500 ml, and it states clearly on the pack that it is for use as a laboratory reagent, then will the same be classified under Heading 3822 or under Heading 9802? There is no clear answer to this question.

Conclusion

While the Government achieves the objective behind amending Note 3 to Chapter 98, however, the authors feel that the amendment would pose more questions and uncertainty in business community.   In view of the above, the authors feel that in its current form, it could be a breeding ground for future disputes.  It would be better if the note could be refined further to align it with the rest of the Tariff, and to make the objective of the Heading clear.

In order to remove ambiguity, Government can consider amending the entry of laboratory chemicals to restrict it to the following situations, where classification under separate entries is not feasible (like in case of Project Imports):

• Varied chemicals are imported in small quantities: wherein it is a hassle to determine classification of each product separately.
• The chemicals are imported by someone who is not generally in the business of importing such chemicals. Thus, the imports are in-frequent.

Authors also suggest the industry to seek suitable clarification at this stage to avoid unnecessary litigation/ disputes on this issue in future. 

[The authors are Executive Partner and Partner, respectively, in Customs practice at Lakshmikumaran & Sridharan Attorneys, Mumbai]

[1] Vide Notification No. 62/2024-Customs (N.T.) dated 19 September 2024