Customs, Excise and Gold Tribunal - Delhi
Bharat Heavy Electricals Ltd. vs Collector Of Customs on 9 November, 1986
Equivalent citations: 1987(11)ECC55, 1987(10)ECR592(TRI.-DELHI), 1987(28)ELT545(TRI-DEL)
ORDER V.T. Raghavachari, Member (J)
1. These two appeals were initially heard by a Bench consisting of three members who felt that there were conflicting judgments by different Benches of this Tribunal on the issue arising for determination in these appeals, mainly with reference to the construction of the interpretative rule 2(a) as also on the test of post importation costs in that connection and therefore it would be better if the appeals are heard by a Bench consisting of more than three members in order to arrive at uniformity in the view to be taken on the issue in these appeals. Accordingly the papers were placed before the President who constituted this Bench of five members for hearing the appeals.
2. After the appeals had been posted for hearing before this Bench M/s. Enfield India Ltd. and also M/s. Tata Engineering & Locomotive Co. Ltd., both represented by Shri S. Subramanian, Consultant, applied that they may be permitted to participate in the proceedings before us as inter-veners since a large number of their cases are also to be heard by this Tribunal in which the issue now before us would be the main issue. After hearing Shri Gujral, the learned counsel for the appellants, M/s. Bharat Heavy Electricals Ltd. and Shri J. Gopinath, SDR for the Department permission was granted for the said two firms to participate in the proceedings as interveners, making it specific that submissions on their part would be confined to general principles of law such as interpretation of the rules and other legal questions and not on the facts of their respective cases, since the appeals of the interveners are not before this Bench for disposal.
3. The goods imported by the appellants were Rough machined banding ring forgings. The appellants claimed that they were to be assessed under heading 84.11(1) CTA. But the Department assessed the goods in one case under heading 73.06/07(2) CTA and in the other case under heading 73.33/40 CTA. After payment of duty as assessed the appellants claimed refund on the basis that the proper heading would be heading 84.11(1) C.T.A. and hence the differential duty was to be refunded. Both claims were rejected by the Assistant Collectors concerned. On appeal the appellants claimed assessment under an alternative heading also under heading 85.01 C.T.A. The appeals were rejected by the Collector (Appeals) confirming the classification already made. The appellants preferred revision petitions to the Govt. against the said orders of the Appellate Collector. It is those revision petitions that are now before us as the present deemed appeals.
4. We have heard Shri B.B. Gujral, Advocate for the appellants; Shri S. Subramanian, Consultant for interveners and Shri Gopinath, SDR for the Department.
5. The imports were of rough machined banding ring forgings for use as component parts of boiler feed pump motors. The claim of the appellants is that, as imported, the goods had attained the approximate shape or outline of the finished article to be made out of the same and that the imported material could not be used except in the machinery for use in which it had been imported and, in the circumstances, applying interpretative rule 2(a) they are to be classified as the finally fabricated part itself and hence the proper classification would have been under heading 84.11(1) CTA only. In advancing this contention they relied upon the fact that, according to them, the charges incurred in the processes to be applied on the imported product for the fabrication of the final product was less than 1.5% of the c.i.f. value and that would also be a relevant circumstance for the application of rule 2(a). Thus it was this question of the interpretation of the provisions of the interpretative rule 2(a) that was argued in extenso by both sides as also the interveners.
6. Interpretative Rule 2(a) reads as follows :-
"2(a) Any reference in a heading to an article shall be taken to include a reference to that article incomplete or unfinished, provided that, as imported the incomplete or unfinished article has the essential character of the complete or finished article. It shall also be taken to include a reference to that article complete or finished (or falling to be classified as complete or finished by virtue of this rule), imported unassembled or disassembled."
This Bench of five members had been constituted for the purpose of evolving, if possible, any general guidelines that would govern the application of the provisions of rule 2(a). It was in this connection that various earlier decisions were referred to. In these earlier decisions the provisions of this rule were applied to determine whether the incomplete or unfinished product imported will have to be classified under the heading under which the completed product would fall. Naturally, in applying the rule the conditions set forth in rule 2(a) were taken into consideration in order to decide whether the said conditions were fulfilled in terms of rule 2(a). In order to classify the incomplete or unfinished product under the heading relevant to the complete product the condition to be fulfilled would be that as imported the incomplete or unfinished articles should have the essential character of the complete article. In page 2 of Vol. I of CCCN Explanatory notes it has been mentioned with reference to the provisions of rule 2(a) in the CCCN (which is the same as rule 2(a) in the first Scheduls to Import Tariff of our Customs Tariff Act) that the provisions of that rule also apply to blanks, the term 'blank' being taken to mean an article, not ready for direct use, having the approximate shape or outline of the finished article or part, and which, other than in exceptional cases, can only be used for completion into the finished article or part. Therefore, in order to find out whether the incomplete article as imported has the essential character of the completed article the tests to be applied would be whether the imported article has attained the approximate shape or outline of the finished article or part and whether it can only be used for completion into the particular finished article.
7. We find that the words "essential character" have been used in rule 2(a). These words are again t6 be found in rule 3(b) also. In Vol.1 of the CCCN Explanatory Notes in dealing with this rule 3(b) of the CCCN [which is the same as our rule 3(b)] it has been observed that the factor which determines essential character will vary as between different kinds of goods and may be determined by the nature of the material or component, its bulk, quantity, weight or value or by the role of a constituent material in relation to the use of the goods. No doubt rule 3(b) dealt with mixture and composite goods and it was in that context that the words "essential character" had been construed in the manner mentioned above. But we feel that the test of essential character as mentioned in the CCCN under rule 3(b) would also be very relevant in construing the said words in rule 2(a) also.
8. It, therefore, appears that in order to apply the provisions of rule 2(a) it has to be seen (1) whether the imported product had attained the approximate shape or outline of the finished article; (2) whether the said imported article can only be used for completion into the finished article and (3) these would have to be determined with reference to the nature of the material, its bulk, quantity, weight or value. This very enumeration would therefore establish that no general principles can be laid down as to how and in what circumstances rule 2(a) could be pressed into service for assessment of the imported unfinished article. In each case the factors enumerated above would have to be taken into consideration individually, and then collectively, to determine whether the imported article had attained the approximate shape or outline of the finished article and could be used only for completion into the finished article.
9. One of the tests stressed by Shri Gujral during his submissions was the test of the cost of the operations to be performed on the imported article to manufacture the complete article. He pointed out that, earlier, the Govt. of India itself had laid down a general principle that when such cost would be not more than .5% of the c.i.f. value of the imported product the provisions of rule 2(a) could be deemed to have been satisfied. We find a reference to some such principle in the case of Central Railways Bombay v. Collector of Customs Bombay (1984 ECR 1201) and also the case of Philips India Ltd. v. Collector of Customs, Bombay (1984 ECR 1524). But a perusal of the judgment in the case of Central Railways shows that the directive appears to have been issued with reference to material imported for use by the Railways and not by way of any general principle. Nor have we been specifically shown any such general directive issued by the Central Government based on the cost of the post importation operation! being relevant for determining the mode of assessment, applying rule 2(a). Nor are we convinced that this fact of the cost of post importation operations could be decisive in directing the applicability of rule 2(a). Firstly, the said cost would vary from importer to importer, depending upon the facilities available to the importer for carrying out the post importation operations himself, or the need for having it done through another on payment of charges. Secondly, no definite material on this account would be available with the assessing authority at the time of the import, since the cost of post importation operations would be available only subsequent to the assessment and clearance. Thirdly, the percentage of the cost of such operations will depend upon the value of the import, as this would depend on the nature of the material, while the cost of post importation operations would not depend on the cost of the material but on the nature of the operations. Taking into consideration all the above considerations it appears to us that to lay down a general rule, that the applicability of rule 2(a) would depend on the percentage of cost of post importation operation as compared to the c.i.f. value of the import, would not be a proper criterion.
10. Shri Subramanian during the course of his submissions had stated that the question as to what will constitute considerable or substantial post importation operations would be a question of fact which has to be determined in each case and that the determination would depend upon the engineering or functional qualities of the finished article and not by mere shape or contour of the imported item. But in respect of this submission it has to be noted that in the explanatory notes of the CCCN one of the criteria for the applicability of rule 2(a) has been mentioned as the incomplete article having the approximate shape or outline of the finished article. It would therefore appear to us that an outright rejection of the concept of this approximate shape or outline may not be proper. While it may be true that the question whether the imported incomplete article has already attained, though in an incomplete form, the engineering/ functional quality of the finished article may also be relevant, it would not be proper to say that the shape or contour of the imported article would not be relevant.
11. In view of the above discussion we are of the view that no general and precise guidelines can be laid down regarding the considerations that should weigh as to when interpretative rule 2(a) would be applicable for assessment and when assessment will have to be done without reference to this interpretative rule 2(a) and a view has to be taken on the basis of facts of each case.
12. It has now to be seen whether the requirements of rule 2(a) are satisfied in the case of the two imports of the appellants and whether, applying the provisions of the said rule, the appellants would be entitled to the classification claimed by them and, on that basis, refund of the differential duty. The products imported in both cases were Rough machined banding ring forgings. The learned counsel explained that the imports were in terms of orders placed, giving detailed specification of the goods, with special reference to chemical composition, mechanical and metallurgical properties and heat treatment, machining being done to prescribed dimension, and surface finished. According to him these pre-import processes are highly sophisticated and as provision for carrying out these operations would not be available with the appellants in India they had specifically requested the suppliers to carry out all these processes before export, leaving it necessary for the appellants to carry out minor post-import operations only which, according to him, would be in the nature of fitment operations only, making the imported goods ready for being mounted at the appropriate places in the boiler feed pump motor. A copy of the purchase order, and the specifications accompanying the purchase order, has been filled and the learned counsel took us through the various specifications accompanying the purchase order to make out that detailed specifications had been given in order to ensure that the goods as imported would be otherwise ready except for carrying out the minor fitment operations after import. According to him the post import operations were (1) reduction of outer diameter by 10 mms; (2) increase of inner diameter by 10 mms; (3) reduction of width by 10 mms; (4) parting of the product into two pieces; (5) vertical milling for cutting 4 grooves in the inner diameter (6) cleaning with compressed air and deburring the machined portion. According to him the cost of all such operations came to Rs. 165/- which was less than 1.5% of the c.i.f. cost.
13. In reply to a query from the Bench as to exact details of these post importation processes and the functional purpose to be served by each of these operations the learned counsel was not in a position to give the necessary information during the hearing on the first day and undertook to file the same in writing after obtaining details from a technical person acquainted with the said information. On the next adjourned date this information was filed by way of (1) a certificate about the post importation processes and (2) another certificate regarding the cost of such operations. Both were signed by Shri M. Keshavrao, Manager (Purchase and Foreign Exchange) of the appellants at Hyderabad. Shri Keshavrao was also present on the adjourned hearing when this information was filed but we noticed that when Shri Keshavrao was questioned with reference to the details contained in the certificate about the post importation processes he was not in a position to give further details as enquired by the Bench and had to be assisted by two other Engineers who were present and who spoke only with reference to their general knowledge about these processes and not particular knowledge about these two imports. We refer to this only to express our concern that though these details were required by the Bench and it was undertaken that the information would be furnished by a person technically qualified and with knowledge of these processes the certificate was finally filed by a person who obviously had no personal knowledge thereof. Similarly, in respect of the cost of operations also, Shri Keshavrao obviously had no personal knowledge since even the certificate read that the cost was being furnished as mentioned earlier and that the same had been checked up by the Cost Accounts Department. No details have been given as to how this figure of Rs. 165/- was arrived at. In the circumstances we have necessarily to observe that these two certificates were not of much help to us in the determination of the dispute in these two appeals. Anyway, as already held in the earlier part of the order, the cost of post-importation processes is not a relevant consideration.
14. In this certificate regarding the post importation processes the details of processes have been furnished as (1) Removal of test piece; (2) parting into two equal pieces; (3) groove cutting; (4) Champering; (5) Taper cutting; and (6) Cleaning and deburring. We may note that no reference has been made in this certificate to the process of reduction of outer diameter; increase of inner diameter and reduction of width, as had been mentioned in the technical write up filed earlier.
15. The removal of the test piece is said to be done on a vertical milling machine and the test piece is said to be removed for conducting mechanical property test. This is done evidently in order that the appellant may be satisfied that the material is in accordance with their quality specifications. As mentioned earlier, each piece is separated into two parts. We were told that this was done on a turning machine. It was explained that since the two pieces (obtained after splitting up) are to be used at either end of the rotor arm they are to have exactly the same physical and metallurgical characteristics and that is why the goods are imported in a single unit and subsequently split into two parts for being fitted at either end of the rotor arm. The reduction of the outer diameter and the increase of the inner diameter are for the purpose of exact fitting on the rotor arm. It is explained that the groove cutting (at 4 equi-distant points on the surface of the inner diameter) is done in order to obtain a proper fitting, so that during the course of the high revolutions of the rotor arm (3600 RPM) the rings do not get dislodged but rotate alongwith the rotor arm. The other operations such as turning, cleaning, deburring etc. are only to provide a proper surface finish. It is with reference to the information (as to the nature of the post-importation process) made available in the write up filed and also during the hearing before us, that we have to decide whether the conditions stipulated in rule 2(a) are satisfied in order to enable assessment applying the said rule.
16. The contention for the appellants is that these operations are minor in nature and are more in the nature of fitment operations, the product as imported having already attained the essential character of the complete product. The main contention of Shri Gopinath for the Department is that when the imported product has to be split into two it cannot be said that as imported the product had attained the essential character of the complete article. But it appears to us that this splitting into two would not be a circumstance to militate against compliance with the requirements of rule 2(a). As imported the product had the shape and contour of the complete product except in the thickness, the thickness being a little over double the thickness of each of the complete rings. As explained for the appellants the product is imported in this form so that the two parts made out of the same have the same metallurgical properties, structural strength etc. since the two parts have to be used at either end of the same rotor arm. We see from the record of the personal hearing before the Collector (Appeals) (as extracted in his order) that the appellants had extended an invitation to the Collector to visit their factory and verify for himself the nature of the operations to appreciate their contentions. That does not appear to have been done. Nor has any other information been made available to us by the Department to establish that the unsplit part did not have in shape, contour etc. the essential character of the finished product. In the circumstances we are unable to accept the contention for the Department that this process of splitting into two would deny the applicability of rule 2(a).
17. During the hearing a further doubt was felt whether the operation of groove cutting by means of vertical milling would not be a militating circumstance. It was enquired whether but for this groove cutting the two parts would serve the intended purpose since they are likely to slip on the rotor arm and not keep pace with the RPM of the rotor arm. But it is explained that it was to avoid such a situation that groove cutting had to be done and that groove cutting could not be done before import since grooves will have to be cut after the inner diameter is enlarged and also in line with the corresponding provision in the rotor arm. In the circumstances we are satisfied that this groove cutting would also be in the nature of a fitment operation.
18. It may be noted that the imported article was not a general purpose blank that could be further fabricated for being fitted in any one of the several machines that may require the complete article. Orders had been placed for supply of this forging [for use in a particular machine, detailed specifications being given in respect of the composition, metallurgical properties, strength etc. and the semi-finished article had been manufactured to the particular dimensions, except for minor variations mentioned, as were to be set right during the post import operations mentioned earlier. In the circumstances it is clear that the imported article could be used only for completion into the finished article to be fitted on the rotor arm of the boiler feed pump motor] of the appellants.
19. Therefore, on a careful consideration of the facts in the instant case we are satisfied that on the particular facts of the instant cases the classification of the products imported would have to be done pressing into service the provisions of rule 2(a). If it is so done it would admit of no dispute that the proper classification would be under heading 84.11.(1) CTA as claimed for the appellants. Accordingly both these appeals are allowed and the products imported are directed to be classified under heading 84.11(1), CTA with consequential relief to the appellants.