The Question Remains Whether the Customs Tariff Act, 1962 ('Tariff Act') Has Evolved with Corresponding Technological Advancements?

BACKGROUND

India's electronics industry has been witnessing a tremendous growth in the last decade. The "artificial intelligence" which was in theory books in the 90s, has become a reality today in various applications. Technology has been exceeding our thoughts and imagination. Thanks to the rapid advancement in technology everywhere, smart devices/ wireless devices are being invented every now and then and India has a fair share in importing these smart devices and wireless devices which are increasing day by day. The question remains whether the Customs Tariff Act, 1962 ('Tariff Act') has evolved with corresponding technological advancements?

COVERAGE OF PRODUCTS

The present article specifically deals with two categories of devices namely:

a. Smart devices: Devices that have now become "smart" due to technological advancement by incorporating a function of communication in a wired or wireless network. A smart device, as the name suggests, is an electronic gadget that is able to connect, share and interact with its user and other smart devices.¹ For instance, smart speakers, smart televisions, smart lights, smartphones etc.; and

b. Wireless devices: Devices which have become wireless due to incorporation of Bluetooth or any other wireless technology. These may also loosely be called by some as "smart" devices, but appropriately shall be called as "wireless" devices. For instance, wireless speakers, wireless headphones, wireless microphones, etc.

Differentiation between these two categories of devices: A unique example to distinguish these two categories of devices are 'smart speakers' and 'wireless speakers' (commonly known as Bluetooth speakers). Smart speakers are those whose function is much more than a speaker i.e. to communicate with the network/server (via internet) for accessing audio/video content, controlling smart devices at home, controlling other electronic devices like AVR/soundbar, setting alarms, etc. in addition to being a speaker, simpliciter, whereas wireless speakers (Bluetooth speakers) are those whose function is to act merely as a speaker, however, instead of wired connectivity with the audio source be it an audio player or a mobile phone or a laptop, it is connected with such devices through Bluetooth wirelessly.

OBJECTIVE OF THE PRESENT ARTICLE

As most of the electronic devices have become smart and/or wireless, the question arises whether all such devices should be classifiable under heading 8517² which inter-alia covers '…Other apparatus for the transmission or reception of voice, images or other data, including apparatus for communication in a wired or wireless network (such as a local or wide area network)'? This question arises because all such smart / wireless devices are capable of communicating in a wireless network.

PRINCIPLES OF CLASSIFICATION

For classification of any product, Rule 1 of the general rules of interpretation ('GI Rules') comes into picture at first place which inter-alia provides that '…classification shall be determined according to the terms of the headings and any relative Section or Chapter Notes'. However, for classification of any composite / multifunction machines falling under Chapter 84 or 85, Section Note 3 to Section XVI of the Tariff Act comes into the picture and provides that 'unless the context otherwise requires, composite machines consisting of two or more machines fitted together to form a whole and other machines designed for the purpose of performing two or more complementary or alternative functions are to be classified as if consisting only of that component or as being that machine which performs the principal function'.

CLASSIFICATION OF SMART DEVICES

For the present topic, the first question that arises for classification of smart devices is as to which GI Rules and / or section / chapter notes can apply. In a device like smart light or smart television or smart watch, the question to be considered is if these devices are performing more than one function or are these devices composite devices. One answer could be NO since the function of a light remains that to be of light even if you are able to switch it on through a remote location or with your voice command and the same goes for smart refrigerator, where it can be controlled from a remote location. Another answer could be YES since with the addition of wireless and smart functionality, a device also becomes a communication device even though the communication may be for the purpose of the traditional function of the device like speaker. Or there may be cases where the function of communication may go much beyond the traditional function of the device, e.g. smartphone (a smartphone performs many functions in addition to calling and messaging) or smart watch (a smart watch also performs many functions in addition to showing time on its screen).

If the answer is NO, we may not be able to take help of Section Note 3 to Section XVI of the Tariff Act which provides for classification of goods performing more than one function or GI Rule 3(b) which provides for classification of composite goods. If the answer is YES, we have to take resort to these provisions and find out the principal function or the component that gives essential character to the whole device.

For the purpose of classification of such smart devices, it is important to first understand the scope of Customs Tariff Headings ('CTH') 8517, which is considered as a competing entry while classifying any smart device. CTH 8517³ inter-alia covers '... Other apparatus for the transmission or reception of voice, images or other data, including apparatus for communication in a wired or wireless network (such as a local or wide area network)'.

The Harmonised System of Nomenclature ('HSN') explanatory note to CTH 8517 further explains that this heading covers apparatus for the transmission or reception of speech or other sounds, images or other data between two points by variation of an electric current or optical wave flowing in a wired network or by electro-magnetic waves in a wireless network. The signal may be analog or digital.

From the afore-stated, it can be inferred that CTH 8517 includes all those devices which has a transmission or reception function to exchange data through Personal Area Network (PAN) or otherwise as in case of smart devices. It is to be kept in mind that widely used Bluetooth is nothing but a technology for exchange of data through PAN.⁴

WCO CLASSIFICATION OF SMART WATCHES

In the case of import of smart watches which get connected wirelessly to a smartphone and can perform multiple functions, Chapter 91 of the Tariff Act specifically covers all kind of clocks and watches and parts thereof. However, smart watches are classifiable under CTH 8517. According to World Customs Organisation ('WCO') ruling⁵ smart watches due to its technical equipment with a display, processor, main memory etc. can fulfill several other functions, such as receiving, converting and sending or regenerating sounds, pictures or other data and hence, by applying Section Note 3 to Section XVI, it merits its classification under CTH 8517. Thus, it was held that smart watches by their functions go much beyond a simple watch and the principal function was held to be of communication function between the smart watch and the connected mobile phone.

Classification of Wireless devices: By wireless devices, as mentioned above, we intend to refer to those devices that are enabled with Bluetooth technology for the sole purpose of connection with another device wirelessly such as Bluetooth speakers (wireless connection with another audio source), Bluetooth headphones/earphone, etc. In these kinds of devices, wire to establish this connection is replaced by Bluetooth. The devices continue to perform their original functions only.

Most of these devices have a specific heading available under the Tariff Act and therefore, by applying the principle of the GI Rule 1, such devices strongly merit classification under such headings.

However, the same question, as asked above for smart devices, must be asked here also, i.e. if these devices are performing more than one function or are these devices composite devices. The answer here can in all the cases be NO since the device is performing only its original function, however, its connection to another device, which earlier was wired has now become wireless. Can the answer be YES here? Let us see how WCO looks at it in the following paragraphs.

If we take the example of wireless headphones/earphones, CTH 8518 of the Tariff Act by name covers all types of headphones with or without microphones within its ambit. Given the descriptions, there should not be any problem in classifying Bluetooth/wireless headsets under CTH 8518, however, it is not that simple.

WCO CLASSIFICATION OF BLUETOOTH WIRELESS HEADSETS

As per the WCO ruling⁶, HSN Explanatory Notes and circular no. 36/2013-Cus. dated 05.09.2013⁷ issued by the Central Board of Indirect Taxes & Customs, wireless Bluetooth headphones/earphones are to be classified under CTH 8517 as principal function of the "Bluetooth Wireless Headset for mobile phones/cell phones" is given by wireless communication system and the communication function for mobile telephony for the purpose of Section Note 3 to Section XVI⁸.

DILEMMA STARTS

However, the question still arises if the above understanding is correct and applicable for all the smart devices and/or wireless devices. This understanding may not be correct for all those devices which merely get connected to another device wirelessly such as wireless headphones since the function of wireless headphone remains to be of headphone only, and it is merely the medium of connection with the audio source that has changed from wired to wireless. In case of smart devices, one needs to determine the principal function. In case of smart watches, it was held that communication function performs the principal function, however it may not be true for all smart devices like smart lights or smartphones or smart refrigerators or smart meters. In these devices, the principal function remains as the traditional function of the device. However, there are smart devices like some smart audio/video devices in the market where the audio or video function has taken a backseat and communication function has taken the front seat by providing access to internet connectivity and data that may be stored on a server.

Therefore, there is no straightjacket formula to conclude when a product will fall under a parent heading, i.e. the entry covering the product by its name or a blanket heading of CTH 8517. Various characteristics have to be looked into to determine such classification such as exclusions given in a particular section note or chapter note, principal function of the product, WCO rulings and Indian judicial precedents etc. This will apply to most of smart devices such as smart speakers, smart televisions, smart lights etc. which have their specific entry in the Tariff Act.

Another extreme interpretation can also be that it is not required to determine the principal function in case of those wireless devices which merely get connected to another device wirelessly or that CTH 8517 shall not be taken into consideration for such devices as long as a tariff entry specifically covers such device by its description.

SUMMARY OF ABOVE CATEGORIES OF DEVICES

WHAT IS THE WAY FORWARD

Taking into consideration everything, there is no clear answer regarding the scope of CTH 8517 when it comes to classification of different kind of smart devices and/or wireless devices. Therefore, it becomes important for all importers/manufacturers to re-consider classification of smart devices and/or wireless devices. In order to come up with a solution, the new HSN edition 2022⁹ has been accepted wherein total of 351 sets of amendments has been proposed. In fact, it has been proposed that Smartphones will gain their own subheading and Note, which will also clarify and confirm the current classification of these multifunctional devices. Similarly, one may expect a clarification on the dilemma of these smart devices and/or wireless devices.