Customs, Excise and Gold Tribunal - Delhi
Shriram Refrigeration Industries Ltd. vs Collector Of Central Excise on 4 August, 1986
Equivalent citations: 1986ECR298(TRI.-DELHI), 1986(26)ELT353(TRI-DEL)
ORDER K.L. Rekhi, Member (T)
1. This order is made in continuation of our Miscellaneous Order No. 37/86-B1 dated 28.4.1986 in which, by a majority judgment on a preliminary point, we held that the revision application filed by the appellants under the then Section 35A of the Central Excises and Salt Act, 1944 before the Central Board of Excise and Customs was maintainable and ought to be heard on merits. The said revision application, on transfer of the proceedings to this Tribunal is now before us for disposal as if it were an appeal. We have heard the merits of this appeal on 9.7.1986 and 10.7.1986 and this order is made to dispose of the said appeal.
2. In the impugned order, the Collector has held that in the guise of bringing the defective compressors to their factory and clearing them after repairs/re-conditioning/re-making in terms of Rule 173H of the Central Excise Rules, 1944, the appellants used the returned compressors merely for salvaging a few serviceable parts therefrom which they utilised in the manufacture of new compressors and that they cleared those new compressors without payment of duty by engraving on the new compressors the serial number of the old compressors, thus "throwing dust into the eyes of the departmental officers" and in the process evading the heavy Central Excise Duty (100%) on the new compressors. The Collector has demanded under Rule 9(2) Central Excise Duty of Rs.3,07,35,200/- on 29,494 compressors so removed during the period from 1.4.1974 to 31.12. 1976 and has imposed penalty of an equal amount on the appellants under Rule 173Q.
3. During the hearing before us, the learned Joint Chief Departmental Representative reiterated the charge as held to have been established by the Collector and argued that merely by embossing the serial number of the old defective compressors on fresh compressors, the appellants could not be said to have repaired/reconditioned/re-made the old compressors. He stated that the actual state of affairs was proved by the incident of seizure of 15 new compressors carrying duplicate serial numbers of another lot of 15 defective compressors. The show cause notice in the case begins with the narration of this incident. The Central Excise Officers belonging to the Special Checking Squad of the Collector's office visited the factory of the appellants on 20.9.1976 and inspected the records and stocks relating to compressors received for repair. "They found 15 compressors received for repairs in the same condition in which they were received. They also found that 15 other compressors bearing the same serial numbers as those of the 15 compressors received lying in tact, were removed as if the 15 comressors received for repairs were repaired and returned." The learned Joint Chief Departmental Representative stated that this detection of 15 compressors embossed with serial numbers of the defective compressors "was the tip of the ice-berg". However, the learned Joint Chief Departmental Representative added that the tip of the ice-berg had since melted because the case in respect of this incident of 15 compressors was decided by the Appellate Collector in favour of the Appellants. Shri Soli J. Sorabjee, learned Senior Advocate of the appellants, stated that the incident of seizure of 15 compressors with duplicate marks was the sole evidence on which the Collector had drawn a sweeping conclusion, that the facts of that incident were not as made out by the Collector, that they had properly explained that incident to the Appellate Collector, that the Appellate Collector decided that case in their favour, that the department filed no appeal or revision against the order of the Appellate Collector and that the said order of the Appellate Collector, therefore, had become final and reliance could no longer be placed by the department on that incident. He stated very fairly that if it could be proved by evidence that the appellants had been clearing new compressors for the old ones, by merely embossing the serial numbers of the old ones on the new compressors, he would be out of Court.
4. The order-in-appeal dated 20.6.1978 relating to the case of seizure of the 15 compressors was placed before us. We find from that order that the appellants explained their case to the Appellate Collector in the following terms:
"2. The case, according to the appellants, is that 15 compressors were originally cleared from their godown without payment of duty on their internal gate passes for assembly into water coolers but after finding them defective, they were returned to the repair shop on 14.9.76 for rectification and were duly entered in form V Register, that during the later part of 1976 they had an export order of 4000 water coolers and therefore, the water cooler Department in their anxiety to get back the 15 compressors returned by them on 14.9.76, did not wait to dismantle or repair them but instead picked up fifteen other compressors which were already dismantled and reassembled and they were supplied to the water cooler department after assigning the same serial numbers to them. They have contended that such compressors were only reassembled ones and not new and therefore, there should be no question of being entered in the R.G.I but they were duly accounted for in the form V register."
On consideration of the matter, the Appellate Collector concluded as under:
"The appellants appear to have issued 15 other compressors of the same type which were already repaired and kept ready for despatch as per the Form V Register. There is no evidence to conclude that they have issued 15 new compressors without accounting for in the R.G.I register. Further it is not understandable as to why the appellants should do so especially when they are eligible for exemption from the whole of excise duty in respect of compressors manufactured and used in the factory for fitting to the water coolers as per Notification 186/73 dated 28.9.1973".
As already stated, the Appellate Collector allowed the appeal of the appellants. The department also appears to have accepted the Appellate Collector's order as no proceedings seem to have been initiated to have it reviewed or modified. In other words, so far as the incident of the 15 compressors is concerned, the order-in-appeal decided in favour of the appellants became final.
5. Before we start discussion on the other issues, relied on against the appellants, it would be worthwhile to determine the parameters of what Rule 173H permitted. This rule, as amended on 26.6.1976, reads as under:-
"Rule 173H. Retention or re-entry of duty paid goods in factory or warehouse - (1) The assessee may, subject to such conditions as may be specified by the Collector, retain in, or bring into, his factory or warehouse the goods on which duty has been paid, if such goods-
(a) are required for use in the manufacture of other goods in the factory,or (aa) are required in the factory for construction or repairs or for use as fittings or equipment or for any other purpose for which such goods are normally consumed; or
(b) need to be re-made, refined, reconditioned, repaired or subjected to any similar process in the factory; or
(c) cannot be transported due to circumstances beyond the assessee's control such as the suspension of booking on railways, nonavailability of railway wagons or the break down of carriers; or
(d) are required for test or for studying designs or method of construction; or
(e) are required to be stored in the factory premises for retail sale or for issue as complimentary gifts or for repacking into packages so as to suit the requirements of individual customers.
(2) The goods retained in, or brought into a factory or warehouse in accordance with the provisions of Sub-rule (1) may, if not subjected to any process amounting to manufacture be removed from the factory or warehouse without payment of duty subject to such conditions as may be specified by the Collector." (The portions under-lined above were added by the amendment dated 26.6.1976).
We do not agree with the appellants that irrespective of whether the activity amounted to manufacture or not, so long as the activity was one of repair/re-conditioning/re-making, the benefit of the Rule would be available. "On a perusal and harmonious construction of the clauses of Rule 173(H), it would appear that to avail of the benefit of the said rule the process of "remaking" should be such that it falls short of re-manufacture. A contention to the contrary ignores Clause (2) of the said Rule altogether" [1983 E.L.T. 1927 (C.E.G.A.T.) - Sriram Pistons and Rings Ltd., Ghaziabad v. Collector of Central Excise, Meerut, paragraph 16(a)]. Though the stipulation that the activity of repair/reconditioning/remaking should not amount to manufacture was specifically put in Sub-rule (2) of Rule 173(H) with effect from 26.6.1976, the said stipulation was implied even earlier when Rule 173(H) is read together with the charging provision in Section 3 of the Act and the two are interpreted harmoniously. We hold, therefore, that all along Rule 173H permitted only repair/reconditioning/remaking provided the process employed did not amount to manufacture.
6. This brings us to the question as to what is repair and what is manufacture and where exactly the line is to be drawn between the two. The Central Excise Act and the Rules do not define repair/reconditioning/ remaking. These words have, therefore, to be interpreted in their popular sense as commonly understood. The impugned order, in its paragraph '6', gives the following meanings of these words as taken from "The Concise Oxford Dictionary" (Third Edition):-
"(a) the word "recondition" is recorded to mean 'Overhaul and refit';
(b) XXX XXX XXX
(c) The word "remake" is recorded to mean to make once more or again "often with the implications that previous doing was deficient or erroneous or now requires alteration or improvement...."
(d) the word "repair" is recorded to mean 'restore to good condition, renovate, mend by replacing or refixing parts'."
When the Government of India amended Rule 173H on 26.6.1976, simultaneously, by their letter dated 2.7.1976, the Government clarified:-
"It may, however, be noted that remaking, refining, reconditioning or subjecting the goods to any other similar process will not amount to manufacture if the goods are subsequently cleared after rectification of defect in the same form in which they were retained or brought in the factory".
The above clarification was circulated for information to the public by the Collector by means of a Trade Notice dated 20.7.1976. These contemporary expositions of the meaning of Sub-rule (2) of Rule 173H let 1 it be known that if the goods were cleared after rectification of defect in the same form in which they were brought into the factory, the activity would not amount to manufacture.
7. On the point as to what is the meaning of manufacture as contrasted to repair, guidance is also available from two judgments of the Hon'ble Supreme Court. Though both these judgments were in the context of Section 106 of the Transfer of Property Act (the point at issue being whether certain premises were used for manufacturing purposes or not), still they are relevant to the issue before us for the reason that the Hon'ble Supreme Court applied 'the same popular meaning of 'manufacture' to the provisions in the Transfer of Property Act, as applicable in the Central Excises Act. The first of these two judgments [(1973) 2 S.C.R. 257 - Allenburry Engineers Private Ltd. v. Ramakrishna Dalmia and Ors.] was by a Bench of five Supreme Court Judges. In this case, certain premises were used for storage, reconditioning and resale of army disposal vehicles. The reconditioning activity was quite of an extensive nature and involved replacement of parts, including bodies of the vehicles. Some of the new spare parts required were manufactured in the premises. Applying the same popular meaning of 'manufacture' as applied to the Central Excises Act - bringing into existence a commercially distinct article - the Supreme Court held that the premises were not used for manufacturing purposes and that the reconditioning process, including manufacture of new spare parts, carried on in the premises was one of repairs which itself was incidental to the dominant activity of storage and resale of vehicles undertaken in the premises. We quote certain relevant portions from this Constitution Bench judgment of the Supreme Court:
"In South Bihar Sugar Mills v. Union of India the Act with which the Court was concerned was the Central Excises and Salt Act, 1944, which furnished no special definition of the word ''manufacture'. The question canvassed there was whether carbon dioxide, one of the constituents of klin gas produced as one of the processes necessary for refining sugar, could be said to have been manufactured, quite apart from the manufacture of sugar itself. This Court held that what was produced was kiln gas, a compound of different gases and not carbon dioxide, though it was one of the different gases which made up kiln gas and therefore did not attract item 14-H in the Schedule to the Act. Since the Excise duty was leviable under the Act on manufacture of goods, the Court explained the connotation of the word 'manufacture'. In- so doing, the Court said that the word 'manufacture' implied a change, but that a mere change in the material was not manufacture. There iTiust be such a transformation that a new and different article must emerge having a distinctive name, character or use. This was also the meaning given to the word 'manufacture1 in Union of India v. Delhi Cloth & General Mills...."
"In all these cases the statute of the notification concerned did not furnish any artificial meaning to the expression 'manufacture' and the Court applied, therefore, the ordinary meaning as commonly understood to that expression...."
"According to him, Allenbury & Co. Ltd. had in 1948 purchased disposal vehicles which were stored for sale in the premises in question. The vehicles were in a damaged condition when they were purchased. In some cases chassis were missing or they were bent or broken; most of the parts were broken and missing. These used to be repaired and then sold. The Company had put up a workshop where these vehicles were repaired, reconditioned and painted before they were sold. The repairs, according to him, involved in some cases making of new bodies and new parts. For that purpose; the appellant company had to have in the workshop lathes, drill machines, welders etc. and had employed some 200 to 500 workmen...."
"Even if the evidence of Jain were accepted in toto, and we were to find that some spare parts were being manufactured for repairing or reconditioning the vehicles, the dominant purpose of the lease would still have to be regarded as one for storage and resale of the vehicles and not for manufacturing purposes. Manufacturing of spare parts would then be merely incidental to the main purpose of disposal of these vehicles as without repairing or reconditioning them, such disposal could hardly have been possible. In our opinion, the appellants failed to establish that the dominant purpose of the lease was manufacturing purpose...."
The second judgment [1979 E.L.T. (J. 593) - P.C. Cheriyan v. Mst. Barfi Devi] was by a Bench of three Supreme Court Judges. Reiterating that "The broad test for determining whether a process is a manufacturing process, is whether it brings out a complete transformation for the old components so as to produce a commercially different article or commodity", the Supreme Court held that the premises used for retreading of tyres could not be held to have been used for manufacturing purposes. However, in paragraph 11 of this judgment, the Supreme Court added:-
"In some enactments, for instance in the Excise Act, the term "manufacture" has been given an extended meaning by including in it "repairs", also".
8. It is apparent that when the Government of India and the Collector clarified that if the goods, after rectification of defects, were cleared in the same form in which they had been brought into the factory, the process would not amount to 'manufacture' for the purpose of Rule 173H(2), they were conforming to the ratio of the Supreme Court judgments on 'manufacture' as applied to the Central Excises Act. Reading the judgments and the clarification together, it amounted to saying that if the process of rectification of defects did not result in bringing into existence of commercially distinct goods and the goods were cleared in the same form in which they had been brought into the factory, the process would be one of repair and not of manufacture.
9. Let us now see what the evidence on record shows the appellants were doing to the defective compressors received in their factory. According to the show cause notice in the case and further particulars given to us during the hearing, the process employed by them was as follows:-
(i) The outer shell of the compressors was cut open.
(ii) The inner components of the compressors were then dismantled piece by piece.
(iii) The individual parts so obtained were sent to the respective sections in which similar new parts were manufactured. In these sections the received parts were tested and repaired. Irreparable parts were rejected and were replaced by new parts.
(iv) After such testing/repairs/replacements, the parts were brought back to a separate repair assembly line setup in 1971. Here, the parts were re-assembled to make a compressor.
(v) In about 60% cases, bottom shells of the returned compressors required replacement. Serial number of the compressor is engraved on the bottom shell. So, when the bottom shell itself was replaced, serial number of the returned compressor was re-engraved on the new bottom shell of the re-assembled compressor with a prefix 'R' (to denote repair). In the remaining 40% or so cases, where bottom shells were not replaced, the serial number was nevertheless re-engraved with the pre-fix 'R' since the original engraving became distinct because of wear and tear, acid bath etc. The appellants used to receive about 600 to 800 defective compressors per month. Because of the large scale operations, they could not dismantle and reassemble each compressor individually and separately. They were doing this work in batches. It was quite common, because of the batch operation, that original components of one defective compressor would go into the re-assembly of another defective compressor, of course, of the same model and specification.
On the accounting side, the appellants used to send an intimation to the authorities when defective compressors were received in their factory. They maintained a register of 'repairs' in Form V prescribed by the department. At the time of re-issuing, separate series of gatepasses were made out for clearance of the reassembled compressors. In the monthly RT 12 returns sent to the authorities, a separate note was made about the repaired compressors cleared in the factory.
10. The above procedure had been evolved between the appellants and the department over the years since the inception of the appellants' factory in 1964. During 1969, the Collector proposed certain amendments in the procedure. Inter alia, he wanted to amend the proforma of the register in Form V making provision for noting the particulars of parts required at the time of receipt of the compressors instead of filling in this information after servicing was completed. He also wanted to prescribe a job card for each defective compressor. The appellants when consulted by the Collector expressed certain practical difficulties in implementing the proposed changes. Nevertheless, the Collector went ahead and issued a notification on 3.10.1969 prescribing maintenance of a job card. However, in view of the difficulties expressed by the appellants, the Collector rescinded his notification on 22.10.1970. Three years later, on 8.6.1973, an offence case was registered against the appellants on the ground that they were not filling up columns 7, 8 and 9 of the Form V register and that the intimation of receipt of compressors sent by them to the authorities did not give co-relation to the original duty paying documents under which the defective compressors had been initially cleared from the factory. In their defence reply, the appellants stated their difficulties in filling up columns 7, 8 and 9 and added that in view of these difficulties the authorities had earlier agreed on 26.6.1968 that the appellants need not indicate the details of re-processing/repairs in columns 7, 8 and 9 of Form V register. On 15.10.1973, the Collector dropped further proceedings against the appellants in the case booked on 8.6.1973.
11. Having given the aforesaid factual background, we now come to the genesis of the Collector's charge. Apart from the incident of 15 compressors with duplicate marks which, as we have already discussed were ultimately decided finally by the Appellate Collector in favour of the appellants, we find that the Collector has held the charges as proved in his order on the following two grounds:
(i) the dictionary meanings of repair/reconditioning, remaking, as extracted in paragraph 6 above, implied that identity of the article must be preserved but in the process employed by the appellants the identity of the returned compressors was lost.
(ii) the contents of the appellants' letters dated 18.6.1969 (stating appellants' objections to amendments proposed by the Collector in the maintenance of Form V and prescription of job card) and 29.12.1976 (stating the appellants' difficulties in attaching a job card or ticket to each individual component of the defective compressor to facilitate reassembly of the very same parts to form the rectified or repaired compressor) and 30.4.1977 (defence reply of the appellants to the show cause notice) disclosed "that the so called repairing of the compressors was nothing short of the manufacturing of compressors by assembling salvaged parts from the defective compressors received from places outside the factory of the assessee, with certain other parts, which (other parts) could be new or the salvaged ones".
Let us examine each of these two grounds.
12. Taking the point of identity first, the Collector has relied on the following sentence occuring in the appellants' letter dated 29.12.1976:-
"The defective compressors received for repairs cannot be identified after they are dismantled. Before dismantled, section, however, records the particulars of the defective compressors received for repairs. This section also maintains records of the defective components sent to components shops for reconditioning".
From this, the Collector concluded as under:-
"It has to be held in view of the foregoing that S.R.I. had in fact manufactured the aforesaid 29,494, compressors, and that they had not merely repaired the said compressors. It has also to be held that defective compressors, brought back into the factory were utilised by S.R.I. solely for the purpose of salvaging the serviceable parts out of the defective compressors".
The appellants explained during the hearing before us that what they meant by loss of identity was that because of batch wise dismantling, identity of the individual components with reference to the original defective compressor was lost and not that the identity of the reasembled rectified compressor was lost. However, on careful consideration, we find that there is nothing objectionable in the statement of the appellants even if its literal meaning is taken. It is a matter of common knowledge that compressors are sealed units. There is no way of repairing a defective compressor unless its outer shell is cut open and the assembly inside the compressor is dismantled. After such dismantling, what would be visible to the naked eye would be only individual parts and not a compressor. This situation is not peculiar to compressors but occurs in the matter of repairs of practically all items of machinery and appliances. The important point is that after rectification/replacement of the defective parts, the parts are reassembled in. the form of the parent equipment. The equipment is once again identifiable with the form in which it had been received for repairs, with the difference that after removal of the defects it has been made serviceable and thus given a new lease of life. If one were to object to the process of dismantling in the course of repair work, the provision for repairs made in Rule 173H would become a dead letter so far as machinery items were concerned. Even in the case of non-machinery items, the identity of the article is liable to change in the course of repairs/refining/reconditioning/remaking, for example, when old and worn out tyres are taken up for retreading, the remanents of the original tread have to be shaved off first before putting on fresh rubber for retread. In the course of retreading, the shaved-off tyre hardly looks like a tyre; it is only carcas or base of a tyre. But after retreading the article again emerges in its original form as a tyre. In the same way, no objection can be taken if the identity of the defective compressor is lost for the time being when it is cut open and dismantled. We saw in paragraph 6 earlier that the Government of India and the Collector in their clarifications of Rule 173H(2) did not insist on any in-process identity but only stipulated that the article, after rectification of defects, should be cleared in the same form in which it had been received into the factory. In other words, the question of identity or that of the same form is relevant only at the time of re-issuing of the repaired article.
13. That brings us now to the question as to what is the meaning of 'the same form'. To put it in more precise terms, in the context of the case before us, if the parts taken out-of one defective compressor go into the reassembly of another defective compressor of the same model and specification, because of the large scale batch operation, can it be said that identity of both the defective compressors has been destroyed and the reassembled unit ceased to be in the same form as the defective compressors received into the factory were. On this issue of identity and form, guidance is available from a judgment of the Bombay High Court reported at 1981 E.L.T. 676 (Bom.) - Century Spinning and Manufacture Company Ltd. v. Union of India. In this judgment customs notification No. 58/61 was in focus. This notification provided for concessional duty for articles which were re-imported into India after having been exported for repairs. The petitioners in that case exported old unserviceable wornout spinnerettes for remelting, refining and remaking of new spinnerettes. The department denied duty concession on the ground that the imported goods were really new or re-manufactured spinnerettes and that their identity could not be established with those exported for repairs. The Hon'ble Bombay High Court held that "the goods exported are of identical weight and exact description. Merely because the worn out spinnerettes are melted for the purpose of repair, it cannot be concluded that the said spinnerettes have lost their identity". We have to bear in mind that in the case of this customs notification, the question of 'manufacture' was not involved; emphasis was only on identity of the exported and re-imported goods. The High Court held that the identity was to be decided on the basis whether the re-imported articles were of the same weight and description or not; the consideration that in the course of remaking the exported worn-out spinnerettes were melted and because of such melting they lost their identity was not given any importance. In the case before us, there is no evidence that the returned defective compressors are totally scrapped. Rather, objection is taken by the department to the appellants' activity on the ground that in the course of repair/reconditioning/remaking, parts taken out of different compressors of the same model get inter-mixed and hence the reasembled compressors, because of not having their original components in them, cannot be called identical with those that were received in the factory. This objection of the department cannot sustain in view of the ratio of the Bombay High Court judgment. According to the said ratio, if the remade spinnerettes were of identical weight and exact description, as of worn out spinnerettes, there was no loss of identity because of in-process melting of the old spinnerettes. Applying the same ratio, if the reassembled compressors are in identical quantity and of identical model and specification, as of the returned defective compressors, there is no loss of identity of the defective compressors because of inter-mingling of parts between defective compressors of the same model and specifications. To put it in simplier words, if 500 defective compressors of a particular model and specification come in and in lieu thereof 500 repaired compressors of the same model and specification go out, there is no loss of identity. Two compressors of identical model and specification would be having identical parts. It is hardly material if serviceable parts .of one, on reassembly, go into the other and vice versa. We saw in paragraph '6' above that the definition of repair contemplated renovating or mending by replacement or refixing parts. If there is no loss of identity when the original defective parts of a compressor are replaced by new spare parts, how could there be loss of identity if serviceable parts of one defective compressor went into reassembly of the other identical defective compressor and vice versa. We would go even further and say that even if it could be said that a repaired compressor has lost its identity because of addition of new part(s) or inter-mixing of old parts, as in this case, so long as the activity remains one of repair and no commercially different article comes into existence, rule 173H would still be admissible. >
14. We have no doubt in our mind that this is also what the Government of India and the Collector meant when they said that if the returned goods are re-issued 'in the same form', it would not amount to 'manufacture'. Whether there is manufacture or not, has to be judged by the test laid down by the Hon'ble Supreme Court. Unless it can be established that a commercially distinct article having a different name, character or use has come into existence, there is no manufacture. As per the evidence available on record, defective compressors come in and repaired compressors of the same model and specification and in the same-quantity (or number) go out. Since, the re-issued compressors are in the same form, going by the test laid down by the Bombay High Court, the activity should not, according to clarification of the Government of India and the Collector, amount to manufacture. And it does not amount to manufacture as per the test laid down by the Hon'ble Supreme Court. Just because two re-issued compressors of the same model and specification may be having parts taken out from the one or the other, they do not, by any stretch of imagination, become a commercially distinct product; they are still compressors and are of the same model and specification as brought in for repairs.
15. We have asked ourselves the question whether it would be possible to conclude that there was manufacture involved where the bottom shell, which carried original serial number, had to be replaced and, consequently, the same serial number re-engraved with the pre-fix 'R' on the new bottom shell. Our answer is in the negative. The bottom shell is just one of the parts of a compressor. If it is permissible to replace any unserviceable part, logically, no objection could be taken on replacement of the unserviceable bottom shell also. The bottom shall does not become something special just because serial number of the compressor is engraved on it. Even after replacement of the bottom shell, the reassembled unit would still be a repaired compressor of the same model and specification. By no stretch of imagination, can it be said that a commercially new or distinct article has come into existence.
16. The learned Joint Chief Departmental Representative relied on two judgments of this Tribunal [1983 E.L.T. 1927 - Sriram Pistons and Rings Ltd. v. Collector of Central Excise, Meerut and 1985 (22) E.L.T. 837 - Collector of Central Excise, Baroda v. Lathia Industrial Supplies Co. Ltd.] and a judgment of the Calcutta High Court 1986 (25) E.L.T. 14 (Cal.) in support of his contention that there was manufacture of new articles in the present case. We do not agree with him. In Sriram Pistons' case, the Tribunal held that the returned pistons were nothing but scrap, that they were, in fact, scrapped and new pistons made therefrom and that, therefore, it was a case of conversion of scrap into a different and distinct commodity known as pistons. In the case before us, as we have already stated, there is no evidence to show that the returned compressors are just scrap or that they are, in fact, scrapped. In the Lathia's case, the Tribunal held that the metal roller without coating of rubber which came in could not be said to be the same goods as a rubber coated roller which went out and hence the activity of rubber coating brought into existence a commercially new product. The Calcutta High Court case related to dismantling of ships. In that case, a ship was dismantled into scraps of various types and, therefore, the Hon'ble High Court held that one commodity was converted into another commodity amounting to manufacture. Unlike these three cases, what happens in the case before us is that defective compressors come in and equal number of repaired compressors of the same model and specification go out. Hence, the cases are clearly distinguishable.
17. In support of the Collector's conclusion that returned compressors were utilised for salvaging a few serviceable components from there which were used in the manufacture of fresh compressors and such fresh compressors were cleared merely by embossing thereon the serial number of the returned compressors with the pre-fix 'R', the learned Joint Chief Departmental Representative putforth the following two arguments, as contained in the show cause notice:
(1) "The officers observed from the Scrap Transfer Notes in which rejected components of service Compressors were accounted for that rejected components were more in quantity than those found serviceable. The motor housings and the bottom shells which constitute the main structure of the compressors were also rejected and transferred to Scrap as unserviceable. It was observed that during the year 1975-76 in the case of motor housing and bottom shells which are used at the rate of one each for a compressor the rejections were to the tune of 6423 and 6075 respectively as against 10,977, compressors shown as repaired during the year. Thus, it appears that the process is one of manufacture of fresh compressors in which a few old components salvaged from the returned compressors might have been used.
(2) The Officers also observed that M/s Shriram Refrigeration Industries, are not collecting repair charges on the merits of each case. The following were found to be repair charges fixed by the company in comparison with the value of a compressor of fresh manufacture.
Compressor Model Value of Fresh Repairing charges in respect
Compressor of old compressors received
for repairs
Motor Burnt Motor O.K.
Rs. Rs.
SR 1822 1145 700 550
SR 1622 1145 700 550
SR 1322 1100 700 550
SR 1022 985 700 550
SR 1012 1015 700 550
SR 1012L 1015 700 550
SR 912 1025 700 550
SR 712 1015 700 550
SR 522 775 550 400
SR 412 700 550 400
SR 412L 700 550 400
SR 312 610 550 400
SR 212 560 550 400
SR 112 540 550 400
It appears from the above that the repair charges are invariably more than 50% of the value of fresh compressor, and in some cases even exceeding the value of fresh compressor and such charges can hardly be called repair charges. The repair charges appear to be actual value of fresh compressors with a suitable reduction in consideration of the old, serviceable components salvaged from the returned compressors and used in the assembly."
18. In their reply to the show cause notice, the appellants explained the above two grounds to the Collector as under:-
"In paragraph (3) of the show cause notice, it has been stated that the officers observed from scrap transfer notes that rejected components were more in quantity than those found to be usable. Reliance has been placed on two components viz., motor housings and bottom shells.
8. It has been stated that whereas the rejections of motor housing and bottom shells were 6423 and 6075 respectively the number of compressors received for repairs was 10,977. At this stage, we beg to submit that the department itself has specified in the SRP Handbook that the principal raw materials which go into the manufacture of compressors are stators and rotors. During the period 1.10.74 - 31.12.76 there was not a single rejection of stators while the number of rotors scrapped was only 2427 (about eight per cent of compressors repaired). There is bound to be a higher rejection in the case of rotors as- these are shrink-fitted on the crankshaft. In case the crankshaft journal wears out beyond the specified tolerance limits, the rotor has to be pulled out mechanically from the crankshaft. In the process it gets distorted and has to be scrapped.
9. The reasons for the comparatively higher incidence of scrap in the case of bottom shells and motor housings have been given in detail in our letter No. SC/EXC/M-17/10548 dated 29.12.76 (Anne-xure-II). These are reproduced below for ready reference.
Bottom Shells: A glassmatic terminal is welded to the bottom shell. In the event that the glassmatic terminal is damaged or its insulation breaks down, it become necessary to scrap the bottom shell as it is not possible to remove the welded terminal and reuse the bottom shell. Sometimes the shells are damaged in transit and are dented or distorted to such an extent that compressor motor cannot be remounted inside them. Such shells have to be scrapped. Motor Housing: In the event that the compressor is rendered defective because of motor failure, the stator is to be removed from the motor housing. The stator is originally shrink-fitted inside the motor housing. The process of shrink-fitting involves heating the motor housing so as to allow it to expand and the stator is then dropped inside it. On cooling, the housing contracts and grips the stator firmly. No mechanical pressure is applied so as to prevent distortion. For removing the stator from the motor housing, it has to be forcibly pulled out on account of which the motor housing gets distorted and is rendered unusable. The defective bottom shells are sold as sheet metal scrap, after damaging the glassmatic terminal so as to prevent any misuse or resale as a spare part. The scrapped motor housings are sent on our account to aluminium suppliers for remelting and refining. The refined alloy is returned to us and is used again in the Die Casting shop for making the die case components like motor housings, pistons, connecting rods, end bearings etc." "18. Another ground for alleging that the compressors are "manufactured" are the so called high repair charges fixed by the company in comparison with the value of compressors of fresh manufacture. We submit that 60% of the compressors received by us for repairs are within the warranty period and no charges are realised for repairing these compressors (Annexure-IV). The repairs in these cases are done free of cost. It is only in respect of the remaining 40% which form a negligible percentage of the total market population of compressors manufactured by us, that the repair charges mentioned in paragraph 4 of the show cause notice have been fixed. It will be appreciated that compressors are hermetically sealed and are known in the market as sealed units. Each of these has to be out open irrespective of the value of the compressor or of size or model. Thereafter each part has to be checked, rectified or replaced. The amount of labour involved, besides the cost of repairs and replacements, is almost the same in all cases. The charges for repairs, which appear to be more than the valueof the compressor in one or two cases, have been deliberately kept high as the models in question are slow moving. Another reason for the higher charges is to discourage the repairs of these models".
19. In his impugned order, the Collector neither adverted to the aforesaid two grounds mentioned in the show cause notice nor to the appellants' reply thereto. The only reasonable conclusion from this would be that the collector was convinced by the' appellants' reply and he dropped these two grounds while adjudicating upon the matter. The learned Joint Chief Departmental Representative wants us to take these two grounds into account without telling us as to what is wrong with the appellants' explanation in regard to these two grounds. Obviously, we are unable to accede to his request.
20. To sum up, of the various grounds taken up by department against the appellants -
(1) The incident of 15 compressors detected with duplicate marks and numbers was ultimately decided in favour of the appellants;
(2) the two grounds of high quantity of rejected parts and high cost of repairs were dropped by the Collector himself during adjudication;
(3) the argument of loss of identity cannot sustain in view of the test laid down by the Hon'ble Bombay High Court in the spinner-ettes' case; and (4) just by inter-mixing of identical parts as between defective compressors of the same model and specification, it could not be said that the reassembled or repaired compressors were not in the same form as those brought into the factory; nor going by the test laid down by the Constitution Bench of the Hon'ble Supreme Court in the Allenbry Engineers' case and reiterated by a Full Bench of the Hon'ble Supreme Court in the Barfi- Devi's case, could it be said that reassembled or repaired compressors were commercially distinct article as compared to the goods that were brought into the factory for repairs.
Apart from the above specific grounds, the Collector has also stated in paragraph 9 of the impugned order that the contents of the letters dated 29.12.1976; 18.6.1969 and 30.4.1977 of the appellants' disclosed that the so called repairing of the compressors was nothing short of the manufacturing of compressors by assembling salvaged parts from the defective compressors, received from places outside the factory of the assessees, with certain other parts, which (other parts) could be new or the salvaged ones. This is a vague statement. The Colllector does not say specifically as to which parts of these letters of the appellants lead to his conclusion. The appellants' say that there is nothing at all in these letters to warrant the conclusion arrived at by the Collector. The only specific portion quoted by the Collector is from the appellants' letter dated 29-12-76 where they have stated that "the defective compressors received for repairs cannot be identified after they are dismantled". This particular portion has already been discussed by us in detail in paragraph 12 above and we have held that there was nothing objectionable in it for the simple reason that after dismantling what is visible are various parts of the compressor only and not the compressor itself and that the material thing is that after repairs the parts can be put back in the form of the original compressor.
On the available evidence, we have, therefore, to agree with the appellants, so far as the substantive issue is concerned, that their activity was one of repair/reconditioning/remaking which did not amount to manufacture of any new article and hence they were entitled to the benefit of Rule 173H. If the authorities have a feeling that what is really happening is not what is made out to be, they would have to investigate the matter thoroughly and substantiate their case with proper evidence. On the present showing, however, no violation of rules by the appellants is proved and hence the demand for duty and the imposition of penalty in the impugned order cannot sustain.
21. In view of our finding on the substantive issue, it is unnecessary for us to go into the other points raised before us in detail. Suffice it to say that the procedure followed by the appellants was within the knowledge of the authorities and had, in fact been evolved over the years in agreement with the authorities. The appellants were sending intimations to the authorities at the time of receipt of defective compressors, were maintaining accounts in Form V, were isssuing separate gate passes and were making a separate note in their monthly RT 12 returns regarding re-issue of the repaired compressors. The charge of clandestine removal is, therefore, not proved nor is any suppression or fraud established to warrant invoking of limitless time for making of duty demand under Rule 9(2). Imposition of penalty of the amount of over Rs.3/- crores under Rule 173Q was also not warranted.
22. In view of our above discussion, we set aside the impugned order and allow this appeal with consequential relief to the appellants.