Classification of Goods Under Customs Act Hinges on ‘Most Akin’ Test, Not Mere ‘Preponderance of Probability’: Supreme Court - 2025-03-29

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Supreme Court Upholds ‘Most Akin’ Test for Customs Classification, Rejects ‘Preponderance of Probability’ in Oil Import Case

New Delhi, March 28, 2025 – In a significant judgment impacting customs law, the Supreme Court of India has set aside a Gujarat High Court order, ruling that the classification of imported goods must be determined by identifying goods that are “most akin” to specified categories under the Customs Tariff Act, and not merely based on the “preponderance of probability.” The bench, comprising Justices B.V. Nagarathna and Nongmeikapam Kotiswar Singh , delivered this verdict in a case concerning the classification of imported oil as either ‘ Base Oil ’ or ‘ High Speed Diesel ’ (HSD).

Background of the Dispute

The appeals arose from a dispute initiated when customs authorities at Kandla Port seized cargo imported by Gastrade International, Rajkamal Industrial Pvt Ltd, and Divinity Impex. The importers declared the goods as “ Base Oil ,” seeking classification under Chapter Heading 27101960. However, the Directorate of Revenue Intelligence (DRI) classified the cargo as HSD under Chapter Heading 27101930, a restricted item importable only by State Trading Enterprises, leading to seizure and proposed confiscation.

The core legal question was whether the imported goods should be classified as Base Oil , as claimed by the importers, or HSD, as determined by the Customs Authorities. This hinged on the interpretation of Indian Standards Specification IS 1460:2005, which defines HSD and lists 21 parameters for conformity.

Conflicting Findings Across Tribunals

The Adjudicating Authority sided with the Customs, classifying the oil as HSD and ordering confiscation and penalties. However, the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) reversed this, holding the goods to be Base Oil as all 21 parameters of IS 1460:2005 were not tested. The Gujarat High Court then overturned CESTAT’s decision, affirming the Adjudicating Authority based on the principle of "preponderance of probability" derived from partial test results.

Arguments Before the Supreme Court

The Revenue argued that test reports from three laboratories, although not covering all 21 parameters, sufficiently indicated the goods were HSD based on the principle of preponderance of probability. They emphasized expert testimony and the characteristics aligning with HSD specifications across the tested parameters.

The Appellants contended that the goods were Base Oil , that the test reports were inconclusive as they did not cover all parameters stipulated in IS 1460:2005, and that the 'preponderance of probability' standard was insufficient for classification under the Customs Act, which should rely on definitive conformity to specifications or the ‘most akin’ test.

Supreme Court's Observations and Reasoning

The Supreme Court scrutinized the test reports and expert evidence, finding them inconclusive and ambiguous. The court noted that none of the laboratories could test all 21 parameters of IS 1460:2005, and expert opinions were non-committal, especially regarding the critical parameter of flash point, which was higher than specified for HSD in the test reports.

The Court underscored the significance of the “General Rules for the interpretation of this Schedule” in the First Schedule – Import Tariff, particularly Rule 4 , which states that goods not classifiable under other rules should be classified under the heading appropriate to the goods to which they are “most akin.”

Highlighting the inadequacy of "preponderance of probability" in classification matters, the Supreme Court stated:

>“The real test for classification, according to us, would be as to whether any goods or substance in question is “most akin” or bears the closest resemblance or similarity to any of the specified goods mentioned under the Headings and relative Section or Chapter Notes under the Tariff Act, and not by applying the test of preponderance of probability.”

The Court criticized the High Court's reliance on "preponderance of probability" based on incomplete test reports and non-definitive expert opinion. It emphasized that for classification, especially with confiscatory consequences, a higher degree of certainty is required, leaning towards the "most akin" test.

The judgment further pointed out the ambiguity and lack of definitive conclusion in the expert opinions and lab reports.

>“But as noted above, neither the expert nor the test results categorically and in clearly terms mention that these samples are that of HSD, except for making an ambiguous remark that these samples conform to certain parameters of HSD as per IS 1460:2005. As discussed above, by mere conformation to certain parameters of HSD, the samples cannot be equated with HSD. The expert opinion and the test results are as vague as these can be qua classification of the oil as HSD.”

Final Verdict and Implications

The Supreme Court allowed the appeals, setting aside the High Court’s judgment. Giving the benefit of doubt to the appellants due to inconclusive evidence, the Court quashed the confiscation orders and penalties.

Furthermore, the Court issued a directive to ensure that proper testing facilities are established for all parameters laid down for goods classification under the Customs Act, to avoid similar disputes in the future. This directive mandates the respondents to ensure adequate facilities are available within six months for comprehensive testing, particularly for parameters deemed essential for the “most akin” test.

This judgment clarifies the standard for goods classification under the Customs Act, emphasizing the “most akin” test over “preponderance of probability,” particularly in cases involving technical specifications and potential penalties. It also mandates improvements in testing infrastructure to ensure accurate and complete assessments for customs classifications.