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CASE NO.: Appeal (civil)  3914 of 2001

PETITIONER: Commissioner of Central Excise, Delhi    

RESPONDENT: Carrier Aircon Ltd.                                      

DATE OF JUDGMENT: 05/07/2006

BENCH: ASHOK BHAN & Dr. AR. LAKSHMANAN

JUDGMENT: J U D G M E N T With C.A. Nos. 8418 - 8419 of 2001 C.A. Nos. 4715 - 4717 of 2002 C.A. No. 2898 of 2005

BHAN, J.

       This judgment shall dispose off Civil Appeal  Nos. 3914 of 2001,    8418 \026 8419 of 2001, 4715 \026  4717 of 2002 and 2898 of 2005 by a common order as  the point involved in all these appeals is the  same.   Facts are taken from Civil Appeal No.3914 of  2001.  The point which calls for consideration is  as to:

       "Whether the chillers manufactured by M/s.  Carrier Aircon Limited (respondent herein) are  classifiable under Chapter Heading 84.18 of the  Schedule to the Central Tariff Act (for short "the  Act") as claimed by them or under Chapter Heading  84.15 as contended by the Revenue?"   

       M/s. Carrier Aircon Limited (respondent herein)  is engaged in the manufacture of chillers besides  other goods i.e. room air-conditioners, air  handling units, gas compressors, radiators for  central heating and parts of aforesaid goods.   Respondent classified the chillers manufactured by  it as refrigerating and freezing equipments under  sub-heading No.8418.10 of the First Schedule to the  Central Excise Tariff Act, 1985 (for short the  "Tariff Act").  The classification list was  accepted by the Department.   

Commissioner of Central Excise, Central Excise  Commissionarate, Delhi-III, issued a show cause  notice dated 3.8.1999 to the respondent requiring  them to state their case, vis-a-vis, the  department’s proposal to classify their product  "chiller" under Chapter Heading 84.15 instead of  Chapter Heading 84.18 on the grounds mentioned  therein.  It was alleged in the notice that from  the end use of the "chillers" being manufactured by  the respondent, it was evident that the said  "chillers" were nothing but an integral part of the  centrally air-conditioning system.  That complete

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central air-conditioning plant comes into existence  when the said chiller is fitted with air handling  unit or fan coil unit, ducting, piping and pumps  etc,.   On perusal of the description of ’chillers’  as submitted by the respondent vis-‘-vis the  description of goods available under Chapter  Heading 84.18 it was observed that the description  and functioning of the chillers was not covered  under Chapter Heading 84.18.  During the course of  investigation, statements of Shri R.K. Verma, AGM  (CBU) who is a Mechanical Engineer, working with  the respondent and Shri A.K. Mehra, B.Sc.  Engineering Electrical, working as a Manager  (Mechanical) dealing with designs of mechanical  engineering in M/s. Jacob H & G Ltd., were  recorded.   

The Department on perusal of the statements  dated 31.12.1998 of Shri R.K. Verma and statement  dated 27.1.1999 of Shri A.K. Mehra, the  literature/brochure available on the subject and  the purchase orders placed by various customers  came to the conclusion that the respondent erred in  classifying the chillers under heading 84.18 as  ’other refrigerating or freezing equipments’, as  the majority of the customers (more than 90%) had  placed their purchase orders for supplying of  chillers of various capacities along with air  handling units or fan coil units and other  electrical accessories required for use in air- conditioning purposes; that chillers when used in  combination with AHU connected with chiller water  system cools and dehumidifies the air and there is  no difference between this system and central air- conditioning system as the effect will be the same.  That the main application of both types of chillers  is for air-conditioning of the various types of  large buildings/establishments and that the  chillers are one of the essential components of  air-conditioning systems. That ’other use’ of  chillers without AHU/FCU for control of temperature  (other than air- conditioning system) in various  industrial applications is very little i.e. 5 to  10% of the total application.  That the respondent  had willfully suppressed the material facts of  receipt of purchase orders of said chillers for  air-conditioning equipments and use of chillers in  combination with AHUs/FCUs for the purpose of air- conditioning system of star hotels, auditoriums,  large office complexes, big hospitals and other  large establishments from the department with a  malafide intent to evade appropriate payment of  duty in as much as they never informed the  department by way of any sort of correspondence  that the purchase orders  were placed by the  customers for air-conditioning equipments  comprising of chillers of required capacities, air  handling units or fan coil units etc.  The  respondent was called upon to show cause to the  Commissioner of Central Excise Delhi-III within 30  days of the receipt of the notice, as to why:

1.      The chillers should not be classified  under sub-heading No.8415.00 instead of  sub-heading NO.8418.00 of the First

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Schedule of the Central Excise Tariff  Act, 1985; 2.      Central Excise Duty of Rs.1,84,62,136/-  (Rupees One Crore Eighty Four Lac Sixty  Two Thousand One Hundred Thirty Six only)  short-paid on 249 number of chillers  collectively valued at Rs.10,79,55,623/-  cleared under sub-heading No.8418.00  instead of 8415.00 (details of which are  given in Annexure 6 to this Show Cause  Notice) during the period 01.08.94 to  30.9.96 and April 1997, January 1998  should not be demanded from them under  rule 9(2) of the   Central Excise Rules, 1944 read with  Section 11A of the Central Excise Act,  1944; 3.      Provisions of extended time limit of five  years under proviso to Section 11A of the  Central Excise Act, 1944 should not be  invoked for the extended period in view  of suppression and misrepresentation of  facts as discussed above; 4.      Penalty under Section 11AC of the Central  Excise Act, 1944 should not be imposed  upon the party; and 5.      Interest should not be charged from the  party under Section 11 AB of the Central  Excise Act, 1944.

The respondent in its reply inter alia briefly  submitted that the entire proceedings contemplated  under the impugned show cause notice invoking the  extended period of limitation of 5 years under the  proviso to Section 11A of the Act was without  jurisdiction and no valid proceedings could subsist  thereunder.  It was submitted that they were  manufacturing and clearing the chillers which are  also known in trade parlance as refrigerating  machinery for which classification/declaration list  had been accepted by the department.  On merits, it  was submitted that it was common knowledge that  chillers and cooling towers are generally used in  relation to central air-conditioning plants for  air-conditioning of large areas such as hotels,  airports, Govt. offices/departments and that the  facts which are within the common knowledge ought  to be presumed in law to be within the knowledge of  the excise department; the allegation made by the  department that end use of the chiller is for the  air-conditioning purposes and hence the chiller  must be treated as part of the air-conditioner, was  erroneous in law; that the process of manufacture  of a product and the end use to which it is put  cannot necessarily be determinative of the  classification of that product under a fiscal  schedule like the Tariff Act; that the liquid  chiller has many applications in industry such as  cooling the rolls used in manufacture of polyester  films; for providing chilled water in the  processing of colour picture tubes; to provide  chilled water to cool the plant in paint shops in  automobile manufacturing industry; to provide  chilled water/air to cool the equipments in nuclear  science centre; tool manufacturing companies; food

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industry; spot welding industry; textile  manufacturing industry and in the chemical  industry.  That in all these applications and even  in the central air-conditioning system, the  function of chiller is understood to be to chill  the liquid.  As per Section 2(a) of Section XVI of  the Tariff Act the chiller when cleared separately  which specifically falls under Chapter Heading No.  84.18 cannot by any stretch of imagination be  treated as part of an air-conditioner on the same  analogy as fans used in the air-conditioner are  classified at the time of clearance as an electric  fan and not as a part of air-conditioner.  That the  chiller itself does not do any air-conditioning as  it is designed only to refrigerate or produce  chilled water/liquid.  In support of its  submission, the respondent relied upon certain  judgments as well as the Board’s circulars.   

The Commissioner, Central Excise, in his order- in-original No. 9/2000 dated 24.3.2000 held that  the chillers are classifiable under tariff heading  No. 84.15 and not under tariff heading No. 84.18 as  had been claimed by the respondent.  It was held  that the chillers are nothing but an integral part  of the air-conditioning system.  A complete central  air-conditioning system comes into existence when  chiller is fitted with air handling unit or with  fan coil unit, ducting, piping, pumps etc. and no  central air-conditioning plant can come into  existence without a chiller.  Applying the  principal of ’end use’ it was held that since more  than 90% of the chillers manufactured and cleared  by the respondent had been used in the  commissioning of central air-conditioning plants  and hardly 5 to 10% were put to application for  other uses, the chillers were classifiable under  heading 84.15 as parts of air-conditioning machine.  Extended period of limitation was invoked as it was  found that the respondent was guilty of suppression  of facts.  Accordingly, the demand of differential  duty of Rs.1,84,62,136/- short paid on 249 chillers  valued at Rs.10,79,55,623/- was confirmed and  ordered to be recovered under Rule 9 (2) read with  Section 11A.  Penalty of Rs.1,84,62,136/- was  imposed under Section 11AC of the Act.  Interest  was also ordered to be charged under Section 11AB  of the Act.  

Being aggrieved by the orders passed by the  authority-in-original, respondent filed appeal  before the Central Excise and Gold (Control)  Appellate Tribunal (for short "the Tribunal").  The  Tribunal by the impugned order has accepted the  appeal, set aside the order-in-original and held  that the end use of "chillers" in the air- conditioning system would not take away the primary  or basic function of the chillers which is to  produce chilled water by using a refrigeration  circuit and the same shall fall under Chapter  Heading 84.18 of the Tariff Act.  

Aggrieved by the orders passed by the Tribunal,  the Department has filed the present appeals.  

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Shri K. Radhakrishnan, learned senior advocate  appearing for the Revenue submitted that the  chillers are nothing but an integral part of the  central air-conditioning system and a complete  central air-conditioning system comes into  existence when chiller is fitted with the air  handling unit or with fan coil unit, ducting,  piping, pumps etc.  It was emphasized by him that  more than 90% of the chillers manufactured and  cleared by the respondent were used in the  commissioning of central air-conditioning plants.   On the other hand, counsel appearing for the  assessee contended that the primary function of the  chiller is only to produce chilled water/liquid and  the function of the chiller comes to an end once  the chilled water/liquid is produced.  

Rival tariff headings read as under:-

"84.15  Air-conditioning machines,  comprising a motor driven fan and  elements for changing the temperature  and humidity, including those machines  in which the humidity cannot be  separately regulated."

"84.18  Refrigerators, freezers and other  refrigerating or freezing equipment,  electric or other; heat pumps other than  air-conditioning machines of heading No.  84.15."

       The chilled water produced by the chiller is  admittedly in turn being used in various industrial  applications namely:

(i)     In polyester film processing, chilled  water produced by chiller is used for  cooling the rolls used in the  manufacture of polyester films.   (ii)    The chilled water produced by chiller is  used in the processing of colour picture  tubes.   (iii)   For the painting of cars, a process is  used whereby the entire car body is  charged negative and dipped in paint  charged positive.  During the process, a  lot of heat is generated and the chiller  is used here for producing chilled  water, which cools the paint  continuously. (iv)    Nuclear science centre is engaged in  cryo-generator research wherein  equipment like ion accelerator is used  to bombard materials and study their  behaviour.  Chiller is used in the  process to produce chilled water, which  cools the equipment round the clock. (v)     Chilled water produced by the chiller is  used to cool manufacturing equipment. (vi)    Chillers are used for the purpose of

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process cooling in food industry.  (vii)   Metals subjected to welding are chilled  with the help of chilled water produced  by the chiller. (viii)  Chilled water produced by chiller is  used in flawless weaving in textile  industry. (ix)    Chillers are being supplied for use in  chemical process industry.  

       All these facts have been admitted by the  adjudicating authority in its order-in-original.  

       From the above, it is established that the  primary function of the chiller is to refrigerate  or chill water/liquid irrespective of the  industrial or other application which the chilled  water is put to.  Air-conditioning system is just  one amongst the various industrial applications in  relation to which chillers are used.  Only because  90% of the chillers manufactured by the respondent  are used in the air-conditioning system cannot be  the basis for classification of the chillers as  parts of air- conditioning system classifiable  under heading 84.15.   

       End use to which the product is put to by  itself cannot be determinative of the  classification of the product.  See Indian  Aluminium Cables Ltd.  vs. Union of India and  Others, 1985 (3) SCC 284.  There are a number of  factors which have to be taken into consideration  for determining the classification of a product.   For the purposes of classification the relevant  factors inter alia are statutory fiscal entry, the  basic character, function and use of the goods.    When a commodity falls within a tariff entry by  virtue of the purpose for which it is put to, the  end use to which the product is put to, cannot  determine the classification of that product.   

       Tariff heading 84.15 covers air-conditioning  machines which control and maintain temperature and  humidity in closed places.  The main function of  air-conditioning system is to control temperature,  which is not done by a chiller.  A reading of the  tariff entry 84.15 would show that it is intended  to cover only those machines which comprise of  elements for changing temperature and humidity and  chillers would fall outside the purview of the said  entry.  The function of the chiller is only to  chill water or bring it to a very low temperature,  and it is the air handling unit having an  independent and distinct function which produces  the effect of air-conditioning, controlling the  temperature and the humidity.   The chiller itself  does not do any air-conditioning as it is designed  only to refrigerate or produce chilled  water/liquid.   

       Revenue is classifying the impugned chillers as  parts of the air-conditioning system as the same is  used in central air-conditioning plant of star  hotels, airport, hospital, large office complexes  and large establishments.   The use of the chillers

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in the air-conditioning system would not take away  the primary or basic function of the chiller which  is to produce chilled water by using a  refrigerating circuit.  Heading 84.18 covers  refrigerators, freezers and other refrigerating or  freezing equipment.  Accordingly, the chillers in  question shall fall under specific heading 84.18 of  the Tariff Act.  This view is supported by the  explanatory notes of H.S.N. below heading 84.15.    HSN provides that "If presented as separate  elements, the components of air-conditioning  machines are classified in accordance with the  provisions of Note (2) (a) to Section XVI (heading  84.14, 84.18, 84.19, 84.21, 84.79, etc)......"     ’Chillers’ manufactured by the respondent are  cleared as separate elements and not as air- conditioning machine, therefore, the same have to  be classified under tariff entry 84.18 as  refrigerating or freezing equipments as the basic  function of the chillers is to chill the water or  liquid.  Chillers manufactured by the respondent  cannot be classified under heading 84.15 simply  because 90% of the chillers manufactured by the  respondent were being used in the commissioning of  central air-conditioning plant.  End use to which  the product manufactured is put to, cannot  determine the classification of the product when  the product manufactured falls under a specific  heading.   

       Chillers in the domestic and international  trade parlance are known as refrigerating  equipment.  The trade identifies chillers as  refrigerating machinery on the basis of its  function of chilling water using refrigerating  circuit.  Even by testing it from the commercial  parlance test as well the chillers would not be  classifiable under Chapter Heading 84.15.   

       Since the Tribunal decided the case on merits  it did not record any finding regarding invoking of  the extended period of limitation under Section  11A.  Since we are agreeing with the view taken by  the Tribunal on merits, there is no need for us as  well to go into the question regarding the extended  period of limitation.   

For the reasons recorded above, we do not find  any merit in these appeals and dismiss the same  leaving the parties to bear their own costs.