The manufacturing process stops when the goods are completely finished and dismantling the same for ease of transportation have no effect

PJ/Case Laws/2012-13/1228

Case:-   M/S SALORA INTERNATIONAL LTD VS COMMISSIONER OF CENTRAL EXCISE, NEW DELHI

Citation: - 2012-TIOL-67-SC-CX

Brief fact: - The Appellant is a manufacturer of various components of television sets manufactured at its factory at Delhi. Thereafter, the said components are assembled in the same factory for the purpose of testing of each component and for checking the working of each television set. Thereafter the television sets so assembled are disassembled and then transported as parts to various satellite units of the appellant company at different places. In these satellite units, the separate components are re-assembled and, as per the appellant, some further processes are carried out in order to make those sets marketable. The issue is whether such components, which are manufactured at and transported from the factory of the appellant at Delhi are liable to be assessed as 'Television Receivers' or as 'Parts of Television Receivers'.
The Appellant was issued a show-cause notice dated 21.3.1990 by the Assistant Collector, New Delhi, whereby it was asked to show-cause as to why the goods manufactured by the appellant were not liable to be classified under sub-heading 8528.00 of the Tariff as 'Television Receivers', rather than under Entry 8529.00, as 'parts' of the same. The appellant replied to the show-cause notice that the goods/components as transported from its factory did not possess the essential characteristics of finished Television Receivers as required by Rule 2(a) of the Rules for Interpretation of the Tariff (in short the 'Rules for Interpretation'), and also detailed the various further processes required to be performed on those goods for them to be considered as complete Television Receivers. These contentions of the appellant appear to have been accepted as no further action was taken by the Revenue until the year 1993.
Thereafter, the Collector of Central Excise, exercising his power under Section 35E(2) of the Central Excise and Salt Act, 1944 vide order dated 18.02.1994 directed the Assistant-Collector to file an appeal before the Collector, Central Excise (Appeals) for setting aside the approval granted to the classification of the goods of the appellant. The Collector (Appeals) by order dated 21/22.07.1994 dismissed the appeal filed by the Department.
Against the aforesaid order, the Department preferred an appeal before the Tribunal. The Tribunal by its order dated 18.02.2000 remanded the matter to the Collector (Appeals), on finding that the earlier order of the Collector (Appeals) was a non-speaking order and violative of the principles of natural justice. Consequently, the Collector (Appeals) in the remand proceedings decided the issue in favour of the Department vide order dated 26.06.2002.
Against this, the appellant filed an appeal before the Tribunal, wherein the impugned order was passed. By the impugned order, the Tribunal has accepted the contentions of the Department and held the goods manufactured by the appellant liable to be classified under Tariff Entry 8528 as 'Television Receivers' rather than under Tariff Entry 8529 as 'parts' thereof. The appellant went to Apex court against this issue.

Appellant Contention: The Appellant contended that the Rules 1 & 2 of the Rules for the Interpretation of Excise Tariff framed under Section 2 of the Act may not be taken recourse to in the instant case, as there exists a clear stipulation to the contrary in the Section Notes to Section XVI of the Tariff, where the headings involved herein are located. Note 2 of the Section Notes to Section XVI is as follows:

"2. Subject to Note 1 to this Section, Note 1 to Chapter 84 and to Note 1 to Chapter 85, parts of machines (not being parts of the articles of heading No. 84.84, 85.44, 85.45, 85.46 or 85.47) are to be classified according to the following rules
a.     parts which are goods included in any of the headings of Chapter 84 or Chapter 85 (other than headings 84.85 and 85.48) are in all cases to be classified in their respective headings;"

The Appellant further submitted that the classification of the goods manufactured by the appellant was not correct. According to him, as per the sound principle of classification and more particularly as per the provisions of interpretative Rule 1, the goods ought to have been classified under Tariff Entry 8529 because the appellant had manufactured only parts of Television Receivers. He submitted that invocation of Rule 2(a) of the Rules for Interpretation was not justified because looking to the facts of the case, the provisions of Rule 1 of the Rules for Interpretation would apply because of the specific head for 'parts of Television Receiver', being Tariff Head 8529.00. The learned senior counsel cited the decision of this Court in Commissioner of Customs Vs. M/S Sony India Ltd. [(2008) 13 SCC 145 = (2008-770L-183-SC-CUS), wherein a case involving analogous headings as those in this case in the Schedule to the Customs Tariff Act, the goods imported by the assessee therein were held to be 'parts of Television Receivers', and further interpretative Rule 2(a) was held to be inapplicable to such goods. He further contended that as the goods transported by the appellant were substantially in the same position and condition as those transported by the assessee in the above case, the ratio in the said decision would be applicable to this case also.

He further submitted that the Rule 1 of the Rules for Interpretation clearly denotes that the title of Sections and Chapters are provided for ease of reference only but for legal purposes, the classification should be determined according to the terms of the headings, and as the appellant had manufactured only parts of Television Receivers, the Revenue ought not to have classified the goods manufactured by the appellant as 'Television Receivers' under a different head instead of as 'parts' of the same. In addition to these contentions, he also contended that if the goods manufactured by it are held to be Television Receivers covered by Tariff Entry 8528 mentioned above, it would lead to double-taxation as the satellite units, where such goods are finally assembled into Television Receivers, are in fact paying excise duty on the assembled goods under the above Tariff Entry 8528.

Respondent Contention:- The learned Additional Solicitor General justified the judgment delivered by the Tribunal. He tried to narrate the facts which lead the Revenue to classify the goods manufactured by the appellant as complete television for the reasons, some of which are as follows:
a. The appellant was assembling manufactured parts of TV sets and operating TV sets so as to check whether the entire set was complete and operative and then the TV sets were being disassembled.
b. The appellant was giving the same serial number on the chassis as well as the sub assemblies of the TV sets.
c. The matching of the said chassis and sub-assemblies was done at the factory of the appellant itself.
d. The packing material and literature were supplied by the appellant along with the disassembled parts. ....etc.

The Revenue further contended that the goods produced and temporarily assembled by the appellant, being essentially/substantially complete Television Receivers in a disassembled state, would necessarily have to be classified as such, owing to Rule 2(a) of the Rules for Interpretation. It was a simple contention of the Revenue that the appellant had chosen to disassemble the television sets as parts before transporting them in order to avail the lower duty payable on such parts.


Reasoning of Judgment: The Hon’ble Supreme court held that the entire case of the Revenue is based on an application of Rule 2(a) of the Rules for Interpretation to the goods produced by the Appellant, which read as under:
2. (a) Any reference in a heading to goods shall be taken to include a reference to those goods incomplete or unfinished, provided that, the incomplete or unfinished goods have the essential character of the complete or finished goods. It shall also be taken to include a reference to those goods complete or finished (or falling to be classified as complete or finished by virtue of this rule), removed unassembled or disassembled."

However, the applicability of this Rule cannot be established unless the classification is first tested against the relevant Section and Chapter Notes as reproduced:

"2. Subject to Note 1 to this Section, Note 1 to Chapter 84 and to Note 1 to Chapter 85, parts of machines (not being parts of the articles of heading 84.84, 85.44, 85.45, 85.46 or 85.47) are to be classified according to the following rules a. parts which are goods included in any of the headings of Chapter 84 or 85 (other than headings 84.85 and 85.48) are in all cases to be classified in their respective headings;

Therefore there is clear stipulation contained in Section Note 2 is to the effect that 'parts' of goods mentioned in the Chapters specified therein, shall in all cases be classified in their respective heading. In the viewpoint of the Hon’ble Supreme Court the goods of the appellant may not be said to be 'parts' as per Section Note 2 to Section XVI of the Tariff. The appellant not only used to assemble all parts of the Television Receivers and make complete television sets, but the said Television Receivers were also operated in the manufacturing unit of the appellant and thoroughly checked and only upon it being confirmed that the Television Receivers were complete in all respects, they were disassembled and along with relevant material and individual serial numbers, sent to the various satellite units. Once the Television Receivers are assembled or are made completely finished goods, the manufacturing process is over and we are not concerned as to what happens subsequently. Whether they are sent to the satellite units of the appellant in its complete form or in a disassembled form is irrelevant.

The Hon’ble Supreme court further held from the materials on record, that at the time of the parts of the TV set being transported from the factory of the appellant, the parts manufactured by it are already identified as distinct units. As it can be seen from the affidavit of the Revenue, which has not been controverted by the appellant, the parts manufactured by it are matched and numbered within the factory itself, and also assembled together to receive pictures for the purpose of testing and quality control. The consequence of this is that the goods assembled at the satellite units would be identifiably the same as those assembled together by the appellant in its factory for the purpose of testing, as all such parts are already numbered and matched. This element of identifiability shall take the goods manufactured by the appellant away from being classified as 'parts', and they will be classified as identifiable Television Receivers. The fact that the packing material for the products is also manufactured and transported by the appellant further lends credibility to this conclusion. The facts in the case of Sony India Ltd. (supra) may be distinguished in this respect. Therefore, it may also be stated that if the appellant had been in the practice of simply manufacturing and transporting parts of Television Receivers in bulk, while leaving the matching and numbering functions to be done at the satellite units, then it could have availed the benefit of Section Note 2, because in such a case, there would not have been any production of identifiable television sets such as in the present case. The Hon’ble Supreme Court are not convinced that the processes required to be carried out at the satellite units are so vital to the manufacture of the Television Receivers so as to render the goods transported by the appellant lacking the 'essential character' of Television Receivers. Rule 2(a) of the Rules for Interpretation has been couched in wide terms, and in terms of this Rule, it is our view that the goods produced by the appellant do in fact possess the essential character of Television Receivers.

On the plea of the appellant regarding double taxation of the said goods, The Hon’ble Supreme court are of the view that once the question of classification of the goods transported by the appellant has been answered in the above manner, it is not open to us to grant the appellant any relief on this ground alone. Further, it is always open to the satellite units of the appellant to avail input tax credit on the duty paid by the appellant on the goods transported by them.
So the Tribunal did not commit any error while passing the impugned order and, therefore, the appeal is dismissed with no order as to costs.

Decision:- Appeal dismissed

Comments:-This is very important Apex Court decision. Earlier we were saying that the excise duty is payable on the goods in the condition in which they are dispatched from factory. But now the Apex Court has held that when goods are completely assembled and tested, then the manufacturing process ends here and the duty is to paid on complete finish product. It does not make any difference when the goods are disassembled for ease of transportation. The duty is to be paid on complete finish goods. This decision will have great effect on machine manufacturers in times to come.

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PJ/Case Laws/2012-13/1228

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