Bharat Bhushan (Senior Associate) & Ayush Patriya (Associate)

BACKGROUND

In a rapidly evolving technological landscape, the classification of products for customs purposes often becomes a complex legal exercise. A recent judgment by the Hon’ble Delhi High Court, delivered on November 20, 2024, in the case of Vivo Mobile India Pvt. Ltd. v. Customs Authority for Advance Rulings (CAAR) & Anr. (CUSAA 24/2024), sheds light on the nuanced interplay between technology and law. The case centered on the classification of MEMS (Micro Electro Mechanical System) Microphones imported by Vivo Mobile India Pvt. Ltd., raising critical questions about how technological advancements are accommodated within the legal framework of the Customs Tariff Act, 1975.

THE CONTEXT: EVOLVING TECHNOLOGY AND TARIFF CLASSIFICATIONS

With technological innovation driving the creation of multi-functional, integrated components, the distinction between “parts” and “finished products” has become increasingly blurred. MEMS Microphones, in particular, exemplify this shift. These silicon-based devices integrate multiple components, including sensors and circuits, to convert sound into electrical signals. The challenge for customs authorities lies in deciding whether such devices should be classified as traditional standalone products as microphones under CTH 8518 or as advanced electronic components as integrated circuits under CTH 8542. This distinction is not merely academic, as it has significant financial implications, given the telling difference between the rate of customs duty payable under such CTHs.

LEGAL FRAMEWORK GOVERNING PRODUCT CLASSIFICATION

India’s customs classification system is aligned with the globally recognized Harmonized System of Nomenclature (HSN). The Customs Tariff Act, 1975, divides products into chapters, headings, and subheadings, with General Interpretative Rules (GI Rules) guiding their application. The key elements of this framework include –

(1)        General Interpretative Rules (GI Rules): Rule 1 prescribes that the title of Section, Chapter and Sub-Chapters are for ease of reference only, and the classification is to be based upon the relevant Section and Chapter Notes. Further, Rule 6 states that for legal purposes, the classification of goods in the subheadings of a heading is to be determined according to such sub-headings and its related notes.

(2)        Note 12 to Chapter 85: This Chapter Note defines certain specified terms, including Multi-Component Integrated Circuits (MCOs) under Note 12 (b) (iv), for the purpose of Headings 8541 and 8542.

(3)        Explanatory Notes to HSN: These are explanations prescribed by the WCO in respect of the Sections, Chapters, Headings, sub-headings, and Section and Chapter Notes formulated in the system of HSN classification of goods, which ensures consistency in course of trade and commerce conducted different jurisdictions.

THE CRUX OF THE DISPUTE

The central question in the Vivo case was whether MEMS Microphones should be classified:

• Under Tariff Item 8518 10 00 (as “Microphones and stands therefor,” subject to a 15% customs duty); or
• Under Tariff Item 8542 39 00 (as “Electronic Integrated Circuits,” which though subject to standard customs duty @ 7.5%, but have been made duty-free by virtue of an exemption notification).

Vivo Mobile India argued that MEMS Microphones, given their integrated technology and technological architecture of the advanced electronic circuits, qualify as MCOs under Chapter Note 12 (b) (iv) of Chapter 85. By contrast, the Customs Authority maintained that the product’s fundamentally primary and essential function being transducing acoustic signals into electrical signals renders it to fall under CTH 8518 as microphones, which is further well-aligned with the sense in which microphones are traditionally and popularly appreciated in common parlance.

KEY CONSIDERATIONS IN CLASSIFICATION

(1)        Function vs. Technology – A recurring theme in customs classification disputes is the relative weight accorded to a product’s function versus its underlying technology. In this case, the MEMS Microphones incorporated cutting-edge technology, including silicon-based sensors and Application-Specific Integrated Circuits (ASICs). However, their primary purpose and function remained that of a microphone capturing sound and converting them into electrical signals. The legal framework prioritizes function over form. It is not the technology which is used in the product that defines the product and decides its classification under the CTH, but it is the product (which may be created using a particular technology) which decides the classification. This is further substantiated by Note 4 to Section XVI as well as the Explanatory Note to Note 12 (b) (iv) of Chapter 85.

(2)        Common Parlance Test – The common parlance test, a cornerstone of customs law, dictates that products should be classified based on the sense of identity appreciated commonly, popularly and ordinarily understood in trade and industry practice. Despite their technological sophistication, MEMS Microphones are widely recognized in the market as “microphones” only, and not as integrated circuits. This trade usage significantly influenced the court’s decision.

(3)        Precedence of Chapter Notes –Chapter Notes and Explanatory Notes to the HSN play a decisive role in resolving classification ambiguities. In this case, the Explanatory Notes clarified that devices performing the core function of a microphone, regardless of technological enhancements, fall under Heading 8518.

IMPLICATIONS FOR TRADE AND INDUSTRY

The judgment has far-reaching implications for industries importing technologically advanced components. By reaffirming the primacy of function in product classification, the Hon’ble Delhi High Court has provided much-needed clarity for businesses navigating India’s customs regime.

(1)        Impact on MEMS Technology –The ruling underscores that MEMS technology, while revolutionary, does not alter the functional character and understanding in common parlance of such good as microphones. This ruling may guide the classification of other MEMS-based products, such as sensors and actuators, ensuring consistency across categories.

(2)        Financial Considerations –For importers, the classification of goods directly impacts the cost of doing business. Products classified under higher-duty categories can significantly increase operational expenses, affecting pricing strategies and competitiveness.

(3)        Encouraging Innovation –By aligning product classification with established trade norms and the principles repetitively stressed upon by the judicial authorities in that regard, this judgment fosters a predictable regulatory environment. This stability encourages innovation and investment, as businesses can plan their operations with greater confidence.

CONCLUSION

The Hon’ble Delhi High Court’s judgment exemplifies the delicate balance between technological innovation and legal interpretation. By emphasizing the functional identity of products, the Court has reinforced the principles and rules that guides the HSN classification in terms of the Customs Tariff Act, 1975. As technology continues to evolve, the legal system must gradually catch-up with increasingly complex questions of HSN classification. This judgment serves as a critical reference point for future disputes, providing clarity not only to businesses, but also to customs authorities tasked with implementing the law.