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CASE NO.: Appeal (civil)  1825-1827 of 2002

PETITIONER: Commissioner of Central Excise, Delhi

RESPONDENT: M/s. Frick India Ltd. & Another

DATE OF JUDGMENT: 21/09/2007

BENCH: S. H. Kapadia & B. Sudershan Reddy

JUDGMENT: J U D G M E N T

KAPADIA, J.

1.      These civil appeals are filed by the Department under  Section 35-L(b) of the Central Excise Act, 1944 against order  passed by CEGAT dated 18.9.2001 in Final Order No.354- 356/2000-A, in Appeal Nos.E/1151 and 1192/2000-A,  E/3402/2000-A whereby the Tribunal allowed the appeals  filed by the assessee (respondents).

2.      Assessee-M/s. Frick India Ltd., Faridabad, (M/s. FIL)  manufactures air-conditioning and refrigerating machinery  and appliances classifiable under Chapter 84 of the Central  Excise Tariff Act, 1985.

3.      Assessee cleared compressors falling under tariff sub- heading 8414.10.  They also cleared to its buyers separately  "fly wheel" under separate tariff sub-heading 8483.00, "safety  valve" under separate tariff sub-heading 8481.80 and "filter"  under separate tariff sub-heading 8421.00.  Apart from the  above three items, assessee supplied to its buyers bought-out  items, namely, V. belt, motor, pulley, belt guard, gauge, gauge  board, angle valve, M.S. male flange, C.A.F. Gasket, set of  tools, bolts and nuts, etc.

4.      On 4.9.98, show cause notice was given to M/s. FIL in  which it was alleged by the Department that the assessee had  evaded payment of duty on the full value of the compressors,  manufactured and cleared by them, by separately invoicing  clearance of bought-out items and manufactured items.  At  this stage, it may be noticed that the factory of the assessee is  in Faridabad where the items, manufactured and cleared,  consisted of compressor, fly wheel, safety valve and filter  ("manufactured items", for short) whereas from their trading  office in New Delhi, the bought-out items consisted of V. belt,  pulley, belt guard, angle valves and other items referred to in  para 3 of the show cause notice ("bought-out items", for short).   According to the show cause notice, assessee had knowingly  cleared manufactured items and bought-out items separately;  that the value of the bought-out items and manufactured  items like fly wheel, safety valve and filter were includible in  the assessable value of the compressor as without the said  items the compressor was non-functional; that, M/s. FIL had  deliberately undervalued the compressor and overvalued the  accessories/parts which were supplied separately to the  buyers; that, there was a difference between the cost price and

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the declared assessable value for compressor and in the  circumstances the assessee became liable to pay differential  duty amounting to Rs.4,46,19,392.65 on the accessories  which stood worked out on the basis of includibility of the  value of bought-out items + duty on the parts of accessories,  manufactured and cleared by the assessee, at lower rate of  duty during the period August 1993 to March 1998.   According to the Department, the said accessories were in  effect parts of the compressor as the compressor was non- functional without the said items.  

5.      In reply to the show cause notice, assessee pleaded that  when the manufactured items, namely, fly wheel, safety valve  and filter were supplied along with the compressors, the said  items were classifiable under their own respective Headings,  namely, 84.83 (fly wheel), 84.81 (safety wheel) and 84.21  (filter).  According to the assessee, the said three items were  not classifiable as "compressor" under tariff Heading 84.14.  In  this connection, reliance was placed by the assessee on Note 2  to Section XVI of the Central Excise Tariff Act, 1985 which,  inter alia, states that parts of machines are to be classified  under their respective headings.   

6.      By order dated 31.12.99, the Commissioner held that fly  wheel, safety valve and filter were essential parts in the  compressors; that, similarly bought-out items, namely, motor  pulley, V. belt, belt guard, angle valve etc. were also to be  treated as parts, as the compressor was non-functional  without such bought-out items; that the compressors supplied  at sites by the assessee were basically compressors in SKD  condition; in that connection reliance was placed on General  Interpretative Rule 2(a), Part-V Section XVI of HSN, Part-III  Section XVI of the Interpretative Notes 2(a) and 3(b) as also  Note 3 to the Central Excise Tariff Act, 1985; that from the  cost statements filed by the assessee, the difference between  the manufacturing cost and the declared assessable value for  compressors of different sizes was clear.  Therefore, in the  aforesaid circumstances, the show cause notice stood  confirmed.   

7.      Aggrieved by the decision dated 31.12.99 given by the  Commissioner, the assessee carried the matter in appeal to  CEGAT which took the view that the compressor, cleared by  the assessee, stood cleared as a "stand-alone" item and that it  was not removed in an unassembled or disassembled  condition and, therefore, there was no question of applying  General Interpretative Rule 2(a), Part-V Section XVI of HSN;  that, similarly Part-III of Section XVI of Interpretative Notes  of  HSN was not applicable as the compressor was cleared as a  "stand-alone" item.  According to the Tribunal, since parts of  the compressor, namely, fly wheel, safety valve and filter as  also bought-out items were classifiable under separate  headings, namely, 84.83, 8481 and 84.21, the Department  had erred in classifying them as "compressors".  According to  CEGAT, the said items were classifiable under specific  headings by virtue of Note 2(a) to Section XVI of the Central  Excise Tariff Act, 1985 and, therefore, the said three items  could not have been classified as "compressor".  However, on  the question as to whether the assessee had transferred the  value of the compressor to the value of the parts, the matter  was remitted to the Commissioner.  The Department had  alleged in the show cause notice that the assessee had  undervalued the compressors and had overvalued the  accessories which were supplied either in the same packing or  separately to the buyers.  This question has been remitted to

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the Commissioner.  Aggrieved by the decision delivered by the  Tribunal dated 18.9.01, the Department has come to this  Court by way of the present civil appeals. 8.      We quote hereinbelow Rule 2(a) of the Rules for  Interpretation of the Schedule to the Central Excise Tariff Act,  1985 which reads as below: "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."    

9.      We also quote hereinbelow Section Note 2 to Section XVI  of the Central Excise Tariff  which reads as below:     "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 Chapter 85  (other than heading Nos. 84.09, 84.31,  84.48, 84.66, 84.73, 84.85, 85.03, 85.22,  85.29, 85.38 and 85.48) are in all cases to  be classified in their respective headings; (b)     Other parts, if suitable for use solely or  principally with a particular kind of  machine, or with a number of machines of  the same heading (including a machine of  heading No. 84.79 or heading No.85.43) are  to be classified with the machines of that  kind or in heading 84.09, 84.31, 84.48,  84.66, 84.73, 85.03, 85.22, 85.29 or 85.38  as appropriate.  However, parts which are  equally suitable for use principally with the  goods of heading Nos. 85.17 and 85.25 to  85.28 are to be classified in heading No.  85.17;  (c)     All other parts are to be classified in  heading 84.09, 84.31, 84.48, 84.66, 84.73,  85.03, 85.22, 85.29 or 85.38 as  appropriate or, failing that, in heading No.  84.85 or 85.48."   

10.     We also quote hereinbelow Section Note 2 to Section XVI  of the HSN which reads as below:     "2. Subject to Note 1 to this Section, Note 1 to  Chapter 84 and 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 84.09, 84.31, 84.48, 84.66,  84.73, 84.85, 85.03, 85.22, 85.29, 85.38  and 85.48) are in all cases to be classified  in their respective headings; (b)     Other parts, if suitable for use solely or  principally with a particular kind of  machine, or with a number of machines of

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the same heading (including a machine of  heading 84.79 or 85.43) are to be classified  with the machines of that kind or in  heading 84.09, 84.31, 84.48, 84.66, 84.73,  85.03, 85.22, 85.29 or 85.38 as  appropriate.  However, parts which are  equally suitable for use principally with the  goods of headings 85.17 and 85.25 to  85.28 are to be classified in heading 85.17; (c)     All other parts are to be classified in  heading 84.09, 84.31, 84.48, 84.66, 84.73,  85.03, 85.22, 85.29 or 85.38 as  appropriate or, failing that, in heading  84.85 or 85.48."

11.     We quote hereinbelow Explanatory Note dealing with  Parts of a Machine in HSN which reads as below:

"PARTS

       In general, parts which are suitable for use  solely or principally with particular machines or  apparatus (including those of heading 84.79 or  heading 85.43), or with a group of machines of  apparatus falling in the same heading, are  classified in the same heading as those machines  or apparatus subject, of course, to the exclusions  mentioned in Part (I) above. Separate headings are,  however, provided for:

(A)     Parts of the engines of heading 84.07 or  84.08 (heading 84.09). (B)     Parts of the machinery of headings 84.25 to  84.30 (heading 84.31). (C)     Parts of the textile machines of headings  84.44 to 84.47 (heading 84.48) (D)     Parts of the machine-tools of headings 84.56  to 84.65 (heading 84.66). (E)     Parts of the office machines of headings  84.69 to 84.72 (heading 84.73). (F)     Parts of the machines of heading 85.01 or  85.02 (heading 85.03). (G)     Parts of apparatus of headings 85.19 to  85.21 (heading 85.22). (H)     Parts of apparatus of headings 85.25 to  85.28 (heading 85.29). (IJ) Parts of apparatus of heading 85.35, 85.36  or 85.37 (heading 85.38).

       The above rules do not apply to parts which  in themselves constitute an article covered by a  heading of this Section (other than headings  84.85 and 85.48); these are in all cases  classified in their own appropriate heading even  if specially designed to work as part of a specific  machine. This applies in particular to:

(1)      Pumps and compressors (headings 84.13  and 84.14)

(2)      Filtering machinery and apparatus of  heading 84.21.

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(3)      Lifting and handling machinery (heading  84.25, 84.26 or   84.28).

(4)      Taps, cocks, valves, etc. (heading 84.81).

(5)      Ball or roller bearings, and polished steel  balls of a tolerance not exceeding 1% or 0.05  mm, whichever is less (heading 84.82).

(6)      Transmission shafts, cranks, bearing  housings, plain shaft bearings, gears and  gearing (including friction gears and gear- boxes and other speed changers), flywheels,  pulleys and pulley blocks, clutches and shaft  couplings (heading 84.83).

(7) Gaskets and similar joints of heading 84.84."

12.     We quote hereinbelow Part V Section XVI of HSN which  reads as below: "(V) UNASSEMBLED MACHINES (See General Interpretative Rule 2 (a))

       For convenience of transport many machines  and apparatus are transported in an unassembled  state.  Although in effect the goods are then a  collection of parts, they are classified as being the  machine in question and not in any separate  heading for part.  The same applies to an  incomplete machine having the features of the  complete machine (see part IV), presented  unassembled (see also in this connection the  General Explanatory Notes to Chapters 84 and 85).   However, unassembled components in excess of the  number required for a complete machine or for an  incomplete machine having the characteristics of a  complete machine, are classified in their own  appropriate heading."

13.     We quote hereinbelow Part III Section XVI of the  Interpretative Notes of HSN which reads as below:

"(III) ACCESSORY APARATUS (See General interpretative Rules 2(a) and 3(b) and  Section Notes 3 and 4)

Accessory instruments and apparatus (e.g.,  manometers, thermometers, level gauges or other  measuring or checking instruments, output  counters, clockwork switches, control panels,  automatic regulators) presented with the machine  or apparatus with which they normally belong are  classified with that machine or apparatus, if they  are designed to measure, check, control or regulate  one specific machine or apparatus (which may be a  combination of machines (see Part VI) or a  functional unit (see part VII)).  However, accessory  instruments and apparatus designed to measure,  check, control or regulate several machines  (whether or not of the same type) fall in their own  appropriate heading."

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14.     Chargeability from excise duty is on the manufacture of  excisable goods.  The assessee has to pay duty on the  manufacture of such goods.  With chargeability, question of  quantification of duty comes in.  Classification decides the  applicable rate.  It is followed by valuation i.e. value on which  the rate is to be applied.  The concept of "classification" is,  therefore, different from the concept of "valuation".  In the  present matter there is confusion in application of the  aforestated two concepts by the Commissioner.  In our view,  the thrust of the show cause notice is towards undervaluation  and not classification.  This is made clear even in the order of  the Commissioner vide para 53 which reads as under: "53.        On consideration of the arguments of  both sides and the facts on record I find that  show cause notice dated 1.10.86 proposed  classification of flywheel, safety valve and filter  under SH 8414.91 of CET 1985. The Show  Cause Notice dated 10.11.86, which  superceded  the above SCN also proposed the  same classification. The present show cause  notice also does not propose any fresh  classification. Here the issue involved is  different. The issue is not whether the items  like fly wheel, pulley and safety valve are  classifiable under SH 8414.10 or 8414.19 or in  the specific sub heading where these items  have been specifically mentioned. The issue  here is whether M/s FIL have made correct  assessment of duty and have paid appropriate  duty leviable thereon on the compressors  cleared by them during the period relevant to  this Show Cause. The case of the Department  is that since these items are essential parts of  the compressors and have been supplied  alongwith compressors in SKD condition, the  value of such parts is includible in the  assessable value of compressors. I have  already come to the conclusion that the above  items are essential parts of the compressors as  discussed in paragraphs 42 to 48 supra. Thus  the point raised by the notice becomes  redundant." (emphasis supplied by us) 15.     As rightly observed by the Tribunal, the General  Interpretative Rule 2(a) has no application to the present case  for two reasons.  Firstly, the compressor manufactured by the  assessee was removed as a "stand-alone" item.  It was not  cleared in an unassembled or disassembled condition.  Secondly, section and chapter notes in Central Excise Tariff  Act, 1985 and the Interpretative Rules do not provide  guidelines for valuation of excisable goods as they decide  classification of a product under different headings/sub- headings of the tariff.  Lastly, under Note 2(a) to Section XVI of  the Central Excise Tariff Act, 1985 as well as Note 2(a) to  Section XVI of HSN read with Explanatory Note referable to  Parts of a Machine in HSN clarifies that payment of duty at the  appropriate rates, relevant to the respective headings alone,  shall apply.  In the present case, as stated above a complete  compressor stood cleared under tariff Heading 84.14.  Duty  has been paid thereof.  Similarly, safety valves were cleared by  the assessee on payment of duty under tariff Heading 84.81.   Lastly, filters were also cleared by payment of duty under tariff  Heading 84.21.  In the circumstances, on the question of

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classification the Tribunal was right in holding that  parts/accessories could not have been classified as  "compressors" under tariff Heading 84.14.   

16.     However, we find merit in these civil appeals filed by the  Department on the question of valuation.  As stated above, the  concept of "classification" is different from the concept of  "valuation".  In the present matter, along with the "stand- alone" compressor, the assessee has supplied fly wheel, safety  valve and filter to its buyers.  They have also supplied bought- out items like V. belt, motor, pulley, belt guard, gauge, gauge  board, angle valve, M.S. male flange, C.A.F. Gasket, set of  tools, bolts and nuts, etc. to their buyers, as a package.   Therefore, on the question of valuation, the Commissioner  should have examined the pricing aspect of the entire package  supplied by the assessee to its buyers.  For example, when a  ceiling fan is sold to the buyer, apart from the parts of the  ceiling fan, there may be a remote which is a part of the  package supplied to the buyer.  That remote is fan-specific in  matter of valuation since the remote is an additional feature  provided with the ceiling fan its value has also to be taken into  account.  This is because the remote which operates the fan  may be an accessory but still it makes value addition and,  therefore, its value is liable to be included in the assessable  value of the ceiling fan.  These aspects have not been  considered by the Commissioner, therefore, in addition to the  question remitted by CEGAT to the Commissioner we also  direct the Commissioner to de novo consider the question of  valuation.  In this connection, the Commissioner will call for  the cost statements and shall also ascertain the manner in  which the assessee has priced its goods.  The Commissioner  may also consider invocation of Section 14A of the Central  Excise Act, 1944 which deals with "special audits in certain  cases".  In our view, in the present matter "costing" as a  concept will play an important role and, therefore, if the  Commissioner so deems fit he can order special audits and  call for the report of the cost accountant to assist him  (Commissioner) to arrive at the correct value of the entire  package cleared by the assessee from its factory gate.

17.     Accordingly, the civil appeals filed by the Department are  partly allowed with no order as to costs.