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PJ/CASE LAW/2015-16/2704

Whether assembling items to form CNG kit treated as manufacture?
Case:-CEV ENGINEERING PVT. LTD. VERSUSCOMMISSIONER OF C. EX., DELHI-II

Citation:- 2015 (38) S.T.R. 93 (Tri. - Del.)

Brief Facts:-The facts leading to filing of these appeals and stay applications are, in brief, as under:-
The appellant are engaged in assembling and manufacturing of CNG kits for cars. For undertaking the said activity, the appellant import ECUs (Electric Control Units), regulators, injectors, filters, etc. on payment of appropriate customs duty and CNG cylinders, High Pressures pipes and gauge and hoses, etc. are procured from domestic manufacturers. For making a CNG kit, the appellant put the various imported and indigenously procured items in a box called CNG Kit and they also provide a diagram/blue print manual showing as to how the CNG kit is to be fitted in a particular vehicle. It is these CNG kits, which are sold by the appellant to individual customers and also installed in the vehicles. In some cases, the appellant sell the packaged CNG kits to independent traders as well. The department was of the view that this activity of the appellant - making CNG kit out of different components either imported or indigenously procured items, amounts to manufacture and would attract central excise duty. The appellant, however, had taken service tax registration and were paying service tax on the amount charged by them from their customers for installation of the CNG kits in their vehicles. On the value of the CNG kit, they paid only the Value Added Tax (VAT) or central sales tax (CST). The department accordingly issued a show cause notice, dated 8-11-2012 for demand of central excise duty amounting to Rs. 4,94,22,622/- on the CNG kits sold by the appellant during the period from 2007 to 17-10-2011 along with interest thereon under Section 11AA and also for imposition of penalty on them under Section 11AC. Since during the inquiry period, the appellant had deposited an amount of Rs. 25 Lakhs, the show cause notice sought appropriation of the above amount. The above show cause notice was adjudicated by the Commissioner of Central Excise, Delhi vide order-in-original dated 10-4-2013 by which the above mentioned central excise duty demand of Rs. 4,94,22,622/- was confirmed against the appellant along with interest and the amount of Rs. 25 Lakh already paid during investigation was appropriated and beside this, while penalty of equal amount of Rs. 4,94,22,622/- was imposed on the appellant company under Section 11AC of the Central Excise Act, a penalty of Rs. 50 Lakhs was imposed under Rule 26 of the Rules, 2002 on Shri Jong Sung Kim, Managing Director of the appellant company. Against this order of the Commissioner, this appeal has been filed along with stay application.
 
Appellants Contention:-Shri B.L. Narsimhan, Advocate, the ld. Counsel for the appellant, pleaded that the appellant either imported or domestically procured various components, which are put into a box along with installation manual, that the imported components have suffered customs duty and the domestically procured items have suffered central excise duty, that the appellant paid service tax on the installation charges charged from their customers whenever on the customer’s request; installation work was also done by them, that mere putting various components for installation in the vehicles so that it can run on the compressed natural gas would not amount to manufacture, that Hon’ble Andhra Pradesh High Court in the case of XL Telecom Limited v. Superintendent of Central Excise, Hyderabad - 1999 (105)E.L.T.263 (A.P.)has held that putting together various duty paid items in a kit called cable jointing kit does not amount to manufacture, as except that the kit has a distinct name, other tests laid down in various judgments of the Apex Court for attracting central excise duty are not satisfied, that the Tribunal in the case of Dalmia Industries Ltd. v. CCE, Jaipur reported in 1999 (112)E.L.T.305 (Tribunal)has held that buying various articles - bottles, feeder nipples and bottle lids from diverse sources in the market, packing them in a combine pack after sterilization and selling the product under brand name of “Milk Care Designer Feeder” does not amount to manufacture and this judgment of the Tribunal has been affirmed by the Apex Court vide judgment reported in 2005 (184) E.L.T. A37 (S.C.), that the Tribunal in the case of TI Diamond Chain Ltd. v. CCE, Chennai-II reported in 2000 (126)E.L.T.790 (Tribunal)has held that procuring sprockets and packing after testing and branding along with automotive chains and connecting links in a kit does not bring into existence any new product and is not manufacture, that this judgment was affirmed by the Apex Court vide judgment reported in 2001 (130) E.L.T. A231 (S.C.), that the ratio of the above judgments of the Tribunal and the Apex Court are squarely applicable to the facts of this case more so, when the appellant are simply procuring the various items of the CNG conversion kits from different sources and packing them in a box for sale and while they are paying sales tax on the sale of kits in case of installation into the customer’s vehicles, they are paying service tax on the installation charges. He, therefore, pleaded that the impugned order is not sustainable.
 
Respondents Contention:-Shri Pramod Kumar, ld. Departmental Representative, defended the impugned order by reiterating the findings of the Commissioner in it and cited the judgment of the Tribunal in the case of Transenergy Ltd. v. CCE, Chennaireported in 2009 (233)E.L.T.218 (Tribunal-Chennai), wherein it was held that CNG conversion kits manufactured and cleared by the assessee are classifiable under Heading No. 8409 of the Tariff as parts suitable for use wholly and principally with engines of headings 8407 and 8408. He also emphasized that the very act of collecting and packing together the various items required for conversion of a vehicle into a CNG run vehicle would amount to manufacture.
 
Reasoning Of Judgement:-The tribunal have considered the submissions from both the sides and perused the records. The appellant prepare the kit consisting of the items required for converting a motor vehicle into CNG run vehicle. For this purpose, some items like Electric Central Units (ECUs), Regulators, injectors, filters, etc. are imported on payment of appropriate customs duty and the other items - CNG cylinder, high pressure pipes, gauge and hoses are procured from the domestic manufacturers on which central excise duty has been paid and all these items are packed as CNG kits along with a diagram and instruction manual explaining how the kit is to be installed in a particular vehicle. It is the various components and installation manual which are sold as CNG kit. The appellant do not manufacture any of the above items. There is also no dispute that on the sale of the CNG kit, sales tax is paid on the value of the CNG kit and wherever the appellant installed the kit in a customer’s vehicle, service tax is paid on the installation charges. The point of dispute is as to whether the very act of collecting various components and fitting them into a box for installation in the CNG would amount to manufacture. The tribunal find that in respect of similar activity the act of making cable jointing kit, Hon’ble High Court of Andhra Pradesh in case of XI Telecom Ltd. (supra) has held that making cable jointing kit does not amount to manufacture. Similarly the Tribunal in the case of Dalmia Industries v. CCE (supra) held that collecting bottles, feeder nipples and bottle lids from diverse sources in the market, packing them in a combine pack after sterilization and selling the product under name of “Milk Care Designer Feeder” would not amount to manufacture and this judgment of the Tribunal has been affirmed by the Apex Court. Similarly, the Tribunal in the case of TI Diamond Chain Ltd. (supra) has held that procuring sprockets, and packing them after testing and branding along with automotive chains and connecting links in a kit does not amount to manufacture, even if various items of the kit after being procured from different sources had been subjected to testing and branding and this judgment of the Tribunal has also been affirmed by the Apex Court. The ratio of the above judgments of the Tribunal, Hon’ble Andhra Pradesh High Court and of the Apex Court is squarely applicable to the facts of this case. The judgment of the Tribunal in the case of Transenergy Ltd. (supra) is not applicable to the facts of this case as in this case, the Tribunal has not gone into the question as to whether mere packing of different items required for CNG conversion kit into a box would amount to manufacture. From the facts stated in the order in case of Transenergy Ltd., it is not clear as to whether the various items required for conversion kits were being procured by M/s. Transenergy Ltd. from outside and thereafter were being packed into a kit or were being manufactured by them before being packed into CNG conversion kit. The tribunal, therefore, hold that the impugned order is not sustainable. The same is set aside. The appeal as well as stay application is allowed.
 
Decision:- Appeal allowed.

Comment:- The analogy in the case is that procuring of different components through imports as well as indigenously procuring components and packing them as CNG kit along with instruction manual does not amount to manufacture in light of decisions affirmed by Apex Court like XI Telecom Ltd., Dalmia Industries v. CCE and TI Diamond Chain Ltd.

Prepared By:- Neelam Jain
 
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