Customs, Excise and Gold Tribunal - Tamil Nadu
Ccs Infotech Ltd., M.A. Hasan Abdul ... vs Cce on 26 June, 2007
Equivalent citations: 2007(122)ECC35, 2007(148)ECR35(TRI.-CHENNAI)
ORDER P.G. Chacko, Member (J)
1. M/s. CCS Infotech Ltd. (appellants in Appeal No. E/872/2006) are aggrieved by a demand of duty of Rs. 5,07,24,688/- and imposition of equal amount of penalty. Shri M.A. Hasan Abdul Kader and Shri H. Ratna Kumar (appellants in Appeal Nos. E/873 & 874/2006) are Directors of the said company and are aggrieved by imposition of penalties. They are also partners of a firm viz. Consolidated Computer Services [CCS for short]. The firm was constituted in the year 1993 and was engaged in trading and servicing of computers and peripherals thereof since then. M/s. CCS Infotech Ltd. [CCSIL for short] are a public limited company incorporated in the year 1997 with a Board of Directors including S/Shri Hasan Abdul Kader and Ratna Kumar. The company acquired the business of the firm under a Deed of Acquisition dated 2.4.2001, but this acquisition was nullified in an Arbitration Order dated 28.8.2003 which was not challenged by any of the parties. In the impugned order, learned Commissioner found that, during the period from August 1998 to March 2000, M/s.CCS clandestinely manufactured computers and cleared the same without payment of duty and that M/s. CCSIL also indulged in similar activity during the period from December 1999 to 19.7.2001 and accordingly liability for payment of duty of Rs. 1,80,90,358/- and Rs. 3,26,34,330/- was fixed on M/s. CCS and M/s. CCSIL respectively. However, the entire amount of duty totaling to Rs. 5,07,24,688/- was demanded from the company. The proviso to Section 11A(1) of the Central Excise Act was invoked to demand this amount of duty from the company on the ground of 'wilful suppression of material facts with mala fide intention to evade duty'. Equal amount of penalty was imposed on the company on the same ground under Section 11AC of the act. The aforenamed Directors of the company were found to have rendered the goods liable for confiscation, by their "omissions and commissions in respect of the goods", and accordingly penalties were imposed on them under Rule 209A of the Central Excise Rules, 1944 / Rule 26 of the Central Excise (No. 2) Rules, 2001.
2. In their appeal, the case of M/s. CCSIL is that (a) they have no liability to pay any duty of excise leviable from the firm which was a separate and independent entity, the acquisition of whose business by the company was nullified in arbitration proceedings; (b) the fixation of duty liability on the firm without issuing any show-cause notice to them is illegal; (c) they [CCSIL] did not 'manufacture' any computer during the period of dispute and were only engaged in trading activities; (d) the activity of upgrading a computer by enhancing memory or processing speed or enhancing the capacity of hard disc drive did not amount to manufacture under Section 2(f) of the Central Excise Act, nor did the activity of affixing brand name to such computer amount to 'manufacture' under the said provision of law, and the Commissioner's finding that they were engaged in the assembly of computers out of bought-out components is arbitrary and contrary to his own observations recorded in the impugned order; and (e) they had believed bona fide on the basis of the CBEC's Circular No. 454/20/99-CX dated 12.4.99 that upgradation of computer was only a trading activity which did not amount to 'manufacture' under Section 2(f) of the Central Excise Act and therefore they were not liable to pay any duty of excise on the goods in question, and therefore the larger period of limitation was not liable to be invoked against them. Learned Counsel for the appellants has reiterated these contentions.
3. Learned SDR has filed written submissions on behalf of the respondent, wherein it is stated that all second sales of computers by the company and the firm were excluded from demand of duty and that the demand is only on computer systems assembled out of bought-out components and cleared by the company and the firm. The written submissions contain references to Order Notebook, System Inward Register or Installation Register, Customer Call Report, Stock Journal Register, Job Card etc., and claim that these documents conclusively prove assembly of computers by M/s. CCSIL. It is also claimed that the printouts taken from the CPUs of the company corroborate other documentary evidence against the company. These written submissions are accompanied by 2 annexures, "ANNEXURE - F" [EVIDENCES FOR CLEARANCE OF COMPUTER SYSTEMS AS AVAILABLE IN DOCUMENTS RECOVERED FROM M/S. CCSIL] and "ANNEXURE: S-I" [DETAILS OF COMPUTER PERIPHERALS PURCHASED BY CCS/CCSIL]. Learned SDR has submitted that the computer systems specified in ANNEXURE - F were assembled out of the components mentioned in ANNEXURE -S-I. Referring to the Board's Circular relied on by learned Counsel, learned SDR has submitted that that circular is applicable only to old and used computer systems and not applicable to new computer systems like the ones manufactured and cleared by the appellants. In this connection, she has also contested the appellant's plea of bona fide belief.
4. We have given careful consideration to the submissions. Learned Commissioner framed two issues as follows:
(i) Whether the activities performed by CCS/CCSIL [as reflected in the Job Cards] would amount to 'manufacture' within the scope of Section 2(f) of the Central Excise Act, 1944;
and if so,
(ii) Whether the duty payable by CCS can be recovered from CCSIL in addition to its own liability under a common show-cause notice.
Dealing with the first question, learned Commissioner found, after a scrutiny of the 'Job Cards', that the following activities were sequentially performed by M/s. CCS/CCSIL'(a) receipt of materials from stores for assembly; (b) return of machine to stores after assembly; (c) receipt of machine from stores for Quality Check; (d) return of machine to stores after Quality Check and (e) receipt of machine from Quality Check for delivery to customer. From the above, it appeared to the Commissioner that M/s. CCS/CCSIL were engaged in assembling of computers as per the configurations specified by customers, out of bought-out components/peripherals and delivery of such computers to customers after Quality Check. The demand of duty is on the clearances of such computers. It is the appellants' case that they were only engaged in the trading activity of purchasing computers and selling the same to their customers after upgrading the machines to the latter's specifications. Here is an illustration: If there is an order for a computer of 'Pentium - III 500' with a 128MB memory and 40GB Hard Disk, the appellants may either purchase a computer with the same configuration or a computer of Pentium - III 500 with a 32MB memory and/or a 4GB Hard Disk. On receipt of such computers, the CPU along with necessary additional hardware, as per the specification of the customer, would be handed over from stores to the Quality Check department under the cover of a Job card. The Quality Check department would inspect the CPU with regard to the configurations and add the additional hardware like additional memory, floppy drive, hard disc drive, CD-Rom drive etc. The CPU would then be tested with the diagnostic software for its performance and will be certified as 'Quality Check Passed' in the job card. Subsequently, the Quality Check Department will allocate and affix serial numbers on all such CPUs. Their brand-name will also be affixed on the CPUs if required by the customers. The input and output devices like monitor, keyboard, mouse, modem etc., which were either originally received during the purchase of the base machine or held as inventory stock, would also be supplied along with the CPU to the customer. The computers will not be subjected to Quality Check if sold without brand name or under others brand names. Similarly, only the sale of computers under their own brand-name will be covered by warranty and offer of annual maintenance/services beyond warranty period. According to the appellants, the above activity is in the nature of upgradation of bought-out computers and does not involve any 'manufacture' so as to attract levy of duty of excise. It is the case of the Department that the appellants were assembling bought-out components/peripherals into computers and marketing the same under their brand name and therefore was liable to pay duty of excise on the goods. It is in support of this case of the Revenue that learned SDR has filed statements captioned 'ANNEXURE - F' [EVIDENCES FOR CLEARANCE OF COMPUTER SYSTEMS AS AVAILABLE IN DOCUMENTS RECOVERED FROM M/S. CCSIL] and 'ANNEXURE: S-I' [DETAILS OF COMPUTER PERIPHERALS PURCHASED BY CCS/CCSIL]. ANNEXURE - F consists of 3 lists. List - I is a statement of particulars of computer systems found to have been cleared to dealers, List -II is a statement of computer systems found to have been cleared to educational institutions and List - III is a statement of particulars of computer systems cleared to corporate customers. There is a footnote to each list, which says that the list is not exhaustive. There is no such footnote to ANNEXURE -S-I, thereby meaning that ANNEXURE - S-I is a complete statement of details of computer peripherals purchased by CCS/CCSIL. Learned SR, however, has not been able to establish that the computer systems mentioned in ANNEXURE - F were assembled from the peripherals mentioned in ANNEXURE - S-I. We have found no correlation between the entries in ANNEXURE - F with those in ANNEXURE -S-I. In the result, Revenue has failed to demolish the appellants case that they were only engaged in the activity of upgrading bought-out computers to the specifications of their customers, which was essentially a trading activity. The respondent has not cited any Chapter Note in Chapter 84 of the First Schedule to the Central Excise Tariff Act or any Section Note in the relevant Section of the Tariff Schedule making such upgradation of computers deemed manufacture for the purpose of levy of duty of excise. No such deeming provision has been cited in respect of affixture of brand name on bought-out computers either. In the result, it has not been established, in this case, that the appellant's activity in question amounted to 'manufacture' under Section 2(f) of the Central Excise Act. The Board's Circular dated 12.4.1999 had clarified that upgradation of old and used computer systems did not amount to manufacture. We are of the view that the Board's reasoning as stated in the circular is equally applicable to upgradation of unused but obsolete computer systems also. It is not improbable that one might be possessed of an unused computer system of Pentium - II grade. By the time he becomes computer-literate, Pentium - II becomes obsolete and Pentium - IV grade is available in the market. It is quite probable that he may choose to get his computer upgraded and use it. Such upgradation of obsolete computer systems, in our view, can also get covered within the ambit of the Board's reasoning.
5. As our answer to the first question raised by the Commissioner is in the negative, we need not examine the second question framed by him. Even then, we think, we must express our view on a vital aspect of this case. The Commissioner's order says that the duty liability in respect of the clearances made by M/s. CCS during the period from August 1998 to March 2000 is on them but this duty has to be paid by M/s. CCSIL. We are not at all impressed with this decision of the adjudicating authority. When the Commissioner framed the second issue [whether the duty payable by M/s. CCS can be recovered from M/s. CCSIL], he referred to a 'common' show-cause notice, as if show-cause notice was issued to the form also. As a matter of fact, no show-cause notice was issued to the form. To fix duty liability on a person without issuing show-cause notice to him is against the basic tenet of the rule of natural justice. Assuming that M/s. CCS were held liable to pay duty on the computer systems cleared by them during the above period in adjudication of a show-cause notice duly issued to them, it would still be incumbent on the adjudicating authority to state valid reason as to why such duty is recoverable from a different entity viz. M/s. CCSIL. It is on record that the firm was started in the year 1993 by S/Shri Hasan Abdul Kader and Ratna Kumar and they were into the trading activity ever since then. Their business was acquired by M/s. CCSIL on 2.4.2001. But this acquisition was nullified in arbitration proceedings on 28.8.2003. The arbitration order attained finality. These are undisputed facts. Hence it cannot be denied that the business of the firm has ever been separate from that of the company. Having found that the demand of duty on M/s. CCSIL is not sustainable, we need not examine the limitation issue. The demand of duty and penalty on the company are liable to be set aside. When the company has no penal liability, the two Directors of the company have also succeeded in their challenge against the penalties imposed on them.
In the result, the impugned order is set aside and these appeals are allowed.
(Operative portion of the order was pronounced in open court on 26.6.2007)