Customs, Excise and Gold Tribunal - Delhi
Universal Commercial Corpn. vs Collector Of Customs on 9 July, 1993
Equivalent citations: 1994(69)ELT150(TRI-DEL)
ORDER S.V. Maruthi, Member (J)
1. These two appeals are disposed of by a common order as the issue involved is common to both the appeals.
2. The first appellant is a proprietary concern i.e. M/s. Universal Commercial Corporation. The second appellant is its sole proprietor. The Additional Collector by his order enhanced the value of the imported goods from 4.01 lakhs to Rs. 13.43 lakhs and confiscated them. However, he gave an option to the appellants to redeem the goods on payment of a redemption fine of Rs. 8 lakhs. The Addl. Collector also imposed a penalty of Rs. 10 lakhs on the appellant firm and Rs. 10 lakhs on the proprietor of the firm. The facts in brief, according to appellants, are, they have imported 176 Condensing Units under three bills of entry No. 107256 and 107257 dated 1-2-1989 and 107888 dated 17-3-1989. The appellants in the bills of entry declared that the goods imported are 'Condensing Units' and the value was Rs. 4.1 lakhs. They have also declared in the bills of entry that the import was from USA. There was a search of the premises of the appellants' office and all the documents connected with the import were seized by the Directorate of Enforcement. After certain proceedings were taken by the appellants in the High Court against the department, a show cause notice dated 4-4-1990 was issued proposing to enhance the value of the goods on the ground that there is an undervaluation of the goods imported and proposing to confiscate the goods and also proposing to impose a penalty. The allegations in the show cause notice are that the goods actually imported are air-conditioners whereas in the bill of entry, they declared them as 'condensing units'. The value was proposed to be increased on the basis of imports of Toshiba RAC 46 E41.5 Tonnes at Hongkong Dollars 4165. It was also alleged that the appellants mis-declared the country of origin as Singapore while the goods were of U.S. origin. An exploded view of the air-conditioners was enclosed to the show cause notices. The exploded view consisted of 32 parts, which are enumerated below :
The appellants in their reply submitted that the goods were of U.S. origin but by mistake the custom house agent declared them as Singapore and on finding out the mistake, they have correctly declared them as of U.S. origin. They have also submitted that the goods are only condensing units but not air-conditioners and the value declared by them is also correct. On a consideration of the reply and after hearing the appellants, the Collector passed the impugned order. Hence, the appeal before us.
3. The Collector held after inspecting the sample of imported goods that the goods imported are "an evaporator (cooling) coil assembly with fins, condensing coils assembly with fins, compressor, motor, fan and blower wheel with the first three items inter-connected by metal tubing. It has also a capillary line (or expansion valve) duly connected. The whole is mounted on a steel frame (chassis)."
4. He further held that, "a condensing unit is a sub-assembly whose function in an air-conditioning system is to reclaim the vapour of the refrigerant gas and condense it into the liquid state. Condensing unit does not have evaportor (cooling) coil assembly, blower wheel, capillary line (expansion valve). It will have only a small base plate whereas the goods imported have a large enough base plate to accommodate the evaporator coil also."
5. According to the Collector, "the essential elements in an air-conditioner are the evaporator (cooling) coil, condenser coil, motor, fan, blower wheel, compressor and capillary line (expansion valve). All these elements are present in the imported unit. There is no doubt that the imported unit requires outer housing with grills etc., thermostat, a few capacitors and some wiring before it can be actually used as an air-conditioner. The issue is whether the goods in the form imported can be considered as having the essential characteristics of a room air-conditioner. In terms of Rule 2(a) of the Rules for Interpretation, an incomplete article can also be assessed as the article itself. This article can also be assessed as the article itself. This clearly implies that there could be missing parts and components (hence incompleteness of the article). Hence the fact that some minor parts such as capacitors and switches, plastic knobs, screws, bold, stand etc. are not present would not make a difference. These are low value items and as stated earlier, the imported unit has all the important components. Hence the mere fact that some parts are not present or some parts are not mounted on a stand etc. would not be an important factor. The essential character of the air-conditioner can be considered to have been achieved in the case of the imported unit since all the essential parts are present, already inter-connected with tubes. Though the unit to be used has to be fitted with front cover etc., it can still be stated that the imported unit has the essential character of a room air-conditioner."
6. In other words, according to the Collector, though the imported goods does not contain all the parts of the air-conditioner i.e. though it is an incomplete air-conditioner, since it contains essential parts of A/C, in view of Rule 2 of the Interpretative Rules providing that an incomplete article can be classified as a complete article provided it satisfies the essential character of an air-conditioner, the imported goods should be classified as an air-conditioner.
7. As regards the value, the Collector held that the appellants could not provide the indent and the correspondence entered into with the supplier in order to determine whether the transaction value can be accepted or not. He also held that the value of identical or similar goods is not available. He took the average price of Westinghouse models (1.5 ton) i.e. H.K. $ 4353 and H.K. $ 4857 ex-warehouse Hongkong and arrived at the assessable value at Hongkong Dollars 4605 and gave 20% reduction for the absent parts. By the above process, he arrived at the assessable value and compared it with the price indicated in the show cause notice. On a comparison he found that the said price mentioned in the show cause notice is nearer to the price indicated above. Holding as above, he confirmed the value mentioned in the show cause notice. The Collector also held that since the imported goods are being assessed as an air-conditioner and therefore, they are consumer goods and the licences issued under the Import Policy does not cover the goods imported. Hence there is a violation of Import Trade Control.
8. The main case of the department is that the appellants imported incomplete air-conditioners. Therefore, they are to be classified as an air-conditioner in view of Rule 2 of the Interpretative Rules.
9. Whereas the appellants' case is that they have imported 9 items of 32 items of the 'exploded view' of the A/C attached to the show cause notice. These 9 items are :
1. Evaporator Coil (Item No. 4 in the exploded view)
2. Blower Wheel (Item No. 7 in the exploded view)
3. Chassis (Item No. 16 & 17 in the exploded view)
4. Propeller Fan (Item No. 20 in the exploded view)
5. Fan motor (Item No. 22 in the exploded view)
6. Compressor (Item No. 23 in the exploded view)
7. Strainer with capillary tube (Item No. 26 in the exploded view)
8. Condenser coil (Item No. 27 in the exploded view).
The goods are of U.S. origin and the model of the goods is that of M/s. Westinghouse. It was further explained in the reply that these items constitute condensing units classifiable under T.I. 98.06. It was also explained that without the 23 parts, the condensing unit cannot be used for any purpose and cannot function as an air-conditioner. Therefore, it cannot be classified under T.I. 8415.10. In support of their claim that the imported goods are condensing units, they relied upon a clarification issued by the supplier which reads as follows:
"Ref : WHILE WESTINGHOUSE AIR CONDITIONERS. THIS IS TO CONFIRM THAT ALL PARTS MENTIONED BELOW, WHEN ASSEMBLED WILL BECOME A COMPLETE CONDENSING UNIT.
- CONDENSER -BLOWER WHEEL
- FAN & MOTOR
- COMPRESSOR
- BASE SHOULD YOU NEED ANY FURTHER ASSISTANCE, PLEASE LET US KNOW."
They also relied upon the opinion of experts of Hindustan Refrigeration Stores and from All India Air Conditioning & Refrigeration and Utility Engineers (India) Ltd., Poonaire Engineering Company. All the above experts expressed the opinion that the items imported by the appellants constitute the condensing unit. The appellants also submitted that the department has assessed these items as condensing units on previous occasions. Rule 2(a) of the Interpretative Rules is irrelevant as essential characteristics have direct relation to the functional characteristics. They also relied upon the order of this Tribunal in C.C.E. v. Subros Ltd. [1989 (43) E.L.T. 543 (Tribunal)]. Shri Asthana appearing for the appellants further submitted relying on Modern Air-conditioning Practice by Norman C. Harris that an incomplete condensing unit consists of compressor, evaporator, condenser, receiver and associated controls for automatic operation. The relevant passage of Modern Air-conditioning Practice reads as follows :
"COMPLETE CONDENSING UNITS:
In the sections above the several separate components of refrigerating machines have been discussed. The refrigerating engineer or air-conditioning engineer with a comprehensive training in theory and practice can select the separate components and field-assemble a refrigeration system. The present day trend is, however, toward factory-assembled complete condensing units, consisting of compressor, evaporator, condenser, receiver and associated controls for automatic operation.
(Emphasis supplied).
10. Shri Prabhat Kumar appearing for the department submitted that the goods imported are incomplete air-conditioners and therefore, they are liable to be classified as complete air-conditioners. He pointed out that the refrigeration cycle is complete in the condensing units and therefore, it is a complete air-conditioner. His further submission is that one of the components of the imported goods is an evaporator and a condensing unit does not consist of evaporator. Shri Prabhat Kumar pointed out that refrigeration cycle is complete and he explained by the following diagram how the cycle is complete.
He relied upon the following passage Principles of Air Conditioning in Theory & Practice by P.M. Patel and A.K. Mehta.
"Room Air Conditioners It is a self contained free delivery factory made unit (without any supply or return duct work) designed to be installed in the room to be conditioned. It is a unit for mounting in a window or wall bracket. Many units have air-cooled condensers, though water cooled types have also been made. Room air enters the casing at the front panel and is mixed with part of the outdoor air. The mixture is forced over the cooling coil by a centrifugal type of fan driven by an electric motor. Some of the moisture in the air condenses out. This condensate is disposed of by means of a slinger ring on the propeller type condenser fan. The slinger ring picks up the condensate and throws it over the condenser coil where it is evaporated into the outdoor air stream blown over the condenser coil by the propeller type of fan. The fan for condenser air is driven by either the same motor which drives the fan for cooling coil or by another motor. The air flow rate in cfm per ton of refrigeration is 350 to 400 for cooling coil and 650 to 700 for condenser coil. Sensible heat factor is 0.7 average. The available capacity of the units is 3000 to 18000 BTU per hour or more with compressor motors from 3/4 to 2 HP. The units have hermatically sealed reciprocating compressors using non-toxic refrigerants and driven by capacitor motors. The evaporator and condenser coils are made of copper, bonded with aluminium plate fins. Capillary tubes are normally used as expansion device for the liquid refrigerant, although expansion valves are specially used sometimes. The fan motor is either shaded-pole or permanent split capacitor type. A throw away or cleanable type of filter is generally used. A thermostat controls on of cycle for the unit. The outdoor air damper is adjustable."
11. Shri Prabhat Kumar further explained the Mechanics of the Compression Refrigeration System by referring to a paragraph in Modern Refrigeration Practice by Guy R. King. The relevant passage is as follows :
"If a system were set up as shown in Fig. 5-1 and the valve opened slightly, the pressure in the tank would drop very little. The temperature in the tank would remain very near room temperature. The pressure of the small amount of refrigerant escaping to the pipe would drop to atmospheric pressure and its boiling temperature would be 21°F. To reach this temperature, part of the warm fluid would instantly flash to vapor."
"The rest of the equipment in a refrigeration system, called the condensing unit, is used to reclaim this vapor to condense it back to a liquid so that it can be used over again."
"The condensing unit of a mechanical system consists of a motor-driven compressor, a condenser and usually a liquid receiver. The compressor has three functions. It removes the vapor produced by the evaporation of a liquid in the coil."
12. Shri Prabhat Kumar also vehemently contended that the presence of evaporator makes the unit an incomplete air-conditioner. Since evaporator is one of the components of the unit which was imported, it is not a condensing unit, it is an air conditioner. In a refrigeration cycle, according to Shri Prabhat Kumar, the principal piece of equipment are cooling coils (Evaporation), compressor, condenser, extension valve. He also referred to the functions of the equipment referred to above. The cooling coil (Evaporation) is a common component which is common to, both the air cycle and the refrigeration cycle. The principal purpose of this coil is to provide the surface over which air from the room can flow, and at the same time, a passage through which refrigerant can flow. The combination of warm air flowing over the cold refrigerant tends to cool the air and 'heat' the refrigerant. Actually the temperature of the refrigerant does not change; but the liquid does change to a vapor and in this sense, the refrigerant is heated.
In supplying a cool surface for the air, the cooling coil serves as a heat transfer device. As described earlier, heat is transferred from the air to the coil surface and then to the refrigerant in the coil. So, in effect, heat is transferred from the air to the refrigerant through the coil (heat transfer) surface.
13. According to Shri Prabhat Kumar the functions of the compressor are, "the compressor serves two purposes; first, it draws the refrigerant from the cooling coil and forces it into the condenser and secondly, it increases the pressure of the refrigerant.". He further explained that by discharging or forcing refrigerant vapor into the condenser, the compressor increases the pressure of the refrigerant. In so doing, the compressor actually increases the refrigerant vapor temperature. This makes it easier for the condenser to do its job. Shri Prabhat Kumar further explained that the condenser serves two important functions:
1. It removes the heat picked up by the refrigerant in the cooling coil (evaporator).
2. It condenses the refrigerant vapor to a refrigerant liquid.
The heat removal and condensing processes can take place in either of the two ways, namely, by water-cooling process or by air-cooling process.
14. He explained that the air is then blown to the outdoors, and the heat is dissipated in the atmosphere. In the condensing process, the air (or water) picks up heat from the refrigerant; in the cooling process, the refrigerant picks up heat from the room air. In both instances, a coil is the heat transfer surface.
In summary then, the refrigerant enters the condenser as a hot vapor and leaves as a hot liquid. The condenser has removed enough heat to change the refrigerant from a vapor to a liquid.
15. Therefore, Shri Prabhat Kumar submitted that the refrigeration cycle is complete as the units imported by the appellants consist of evaporator, compressor, condenser which are essential parts of air-conditioner. Since the refrigeration cycle is complete, the goods imported should be classified as air-conditioners by applying Rule 2(a) of the Interpretative Rules. In support of his arguments, he relied upon the Principles of Air-Conditioning by V. Paul Lang.
16. The Collector gave a finding that the condensing unit is an incomplete air-conditioner and therefore, it should be classified as a complete air-conditioner by virtue of Rule 2(a).
17. There is no doubt about the number of items imported by the appellants although the Collector refers to two additional items which, according to him, were also imported by the appellants while the appellants dispute the correctness of the said finding. In the light of the view which we will be expressing, it is not necessary to express any opinion on the three disputed items. We have already pointed out that the appellants have imported 9 items of the 32 items mentioned in the exploded view attached to the show cause notice. The question is whether the imported goods are air-conditioners. From a reading of the technical literature, it would appear that the imported goods complete the refrigeration cycle as explained by Shri Prabhat Kumar. In other words, hot room air enters the evaporator and passes through the compressor. Before it enters the compressor, the pressure is low and the gas is hot. From the compressor, the hot air enters the condenser under high pressure and high temperature. From the condenser the hot air is liquefied under high pressure and the liquid vapor enters the evaporator and cold air comes out of it. Therefore, the imported goods complete the refrigeration cycle. Putting it in a different way, the goods imported are essential parts of the air-conditioners but the further question to be considered is can the imported goods be classified as air-conditioners on the ground that the refrigeration cycle is complete and that essential parts of air-conditioners are present and therefore, the incomplete article can be classified as a complete article in view of Interpretative Rule 2(a). Admittedly, the imported goods cannot function as air-conditioners without the 23 parts mentioned in the exploded view attached to the show cause notice. These 23 parts are absent. The test to determine whether an incomplete article should be classified as a complete article is whether it can perform the functions of a complete article without adding or by adding minor parts. If the incomplete article can perform the functions of the complete article, then the goods imported can be classified as a complete or a finished article. The main contention of Shri Prabhat Kumar is that the refrigeration cycle is complete and therefore, it should be classified as an A/C. In our view, merely because the imported goods technically complete the refrigeration cycle, it does not follow that it is a complete air-conditioner. It cannot by itself perform the functions of the A/C. Technical completion of cycle is not the criteria to determine whether a particular incomplete article is a complete article. The test is whether it can perform the functions of A/C as it is or with minor additions. The Collector himself found that the imported goods cannot by themselves be used as an air-conditioner. The goods imported may be essential parts of air-conditioner but they do not possess the essential character of an A/C as they cannot by themselves perform the functions of A/C. Therefore, in our view the goods cannot be classified as complete air-conditioners under Rule 2(a) of the interpretative rules and they should be classified as an essential part of the A/C falling under T.I.98.06. We may seek support from the order of this Tribunal in 24 E.L.T. 111 [Hindustan Teleprinters Ltd., Madras v. C.C., Madras] wherein it was held that "the scope of entries in the Customs Tariff Schedule is governed by Interpretative Rules. Rule 2 provides that when an article at the time of import has reached such a stage of completion that it more or less approximates to the final article it will be classifiable as the complete article, itself". We have already pointed out that the appellants have imported only 9 components of A/C which are essential no doubt. However, the goods imported cannot be said to have reached near completion stage of an air-conditioner and therefore, it cannot be classified as such.
We may also take support from the order of this Tribunal in Collector of Central Excise v. Subros Ltd. [1989 (43) E.L.T. 543 (Tribunal)]. The relevant facts in brief are the respondents in that case manufactured gas compression cooling units for the air conditioning system and air conditioning parts and accessories for cars and light commercial motor vehicles. Two separate classification lists were filed in respect of gas compressors cooling unit in respect of parts and accessories of the air-conditioning system. The Central Excise Authorities classified the goods by clubbing the goods together as incomplete air-conditioners and by invoking Interpretative Rule 2(a) classifying them as complete air-conditioners.
17(a) This Tribunal held :
"The contention of the revenue authorities that the Respondent's product, though cleared in unassembled form have the essential character of complete and finished goods cannot be accepted and we are of the view that the goods should be assessed as have been claimed by the Respondents in their classification list. Sub-heading 8415.00 makes it absolutely clear that a machine in order to be called an air conditioning machine must comprise a motor driven fan and elements for changing the temperature and humidity. In the matters before us, motor driven fan and a blower is missing. The gas compressor, cooling unit and other parts and accessories cleared by the Respondents cannot perform the function of an air-conditioner viz., changing of temperature/humidity. This is possible only when a motor driven fan or blower is fitted in the air conditioning kit. Accordingly, the goods in dispute do not pass the test of essential character."
17(b) From the above, it is clear the test to determine when an incomplete article can be classified as complete is whether the incomplete article can perform the functions of a complete article. In other words, the true test is functional. The issue is to be approached by putting a question that can the article imported perform the function of a complete article? If the answer is yes, then classify the product as a complete article otherwise not.
17(c) Further the Subros order does not give the number of parts and accessories that are imported. It says the gas compressors and the air conditioning parts and accessories for cars and light commercial vehicles. The classification lists indicate gas compressors, cooling unit and other components and parts. In other words, they manufacture all parts and accessories plus gas compressor and cooling unit. The only items which are missing is motor driven fan and a blower. In view of the tariff description in the absence of these two items, it cannot be classified as an air conditioner, as held by the Tribunal above. Therefore, even in a case where they manufacture all parts and accessories alongwith compressor and coil, this Tribunal held that it cannot be classified as an A/C. Therefore, on the facts of the present case it is difficult to hold that the goods which are imported constitute an air-conditioner.
18. We may also point out that the technical literature produced distinctly identifies the condensing units and they are mentioned as parts of air conditioner. The letters produced by the appellants also indicate that the condensing units are known to the commercial world as such. From the technical literature as furnished by the appellants and the department, it is clear that the condensing units are known to the technical world as well as commercial world. However, there is no specific tariff heading covering the condensing unit. Therefore, though the refrigeration cycle is complete, the condensing units cannot be classified as an air conditioners by invoking Rule 2(a) of the Interpretative Rules.
19. The argument of Shri Prabhat Kumar that since the evaporator is present, the imported goods should be treated as a complete air conditioner cannot be accepted. The literature produced by him, namely Mechanics of the Compression Refrigeration System indicating that the condensing unit of a mechanical system consists of a motor-driven compressor, a condenser and usually a liquid receiver. However, we find from the Modern Air-conditioning Practice by Norman C. Hariss that the modern mechanical refrigeration is vapor compression system. The vapor compression system is by far the most effective and is used most extensively than any other arrangement. It consists basically of three elements, an evaporator, a compressor and a condenser.
20. Similarly, the Modern Air-conditioning Practice by Norman C. Harris also gives under the complete condensing units the following:
"The present day trend is however, toward factory-assembled complete condensing units consisting of compressor, evaporator condenser, receiver and associated controls for automatic operation."
In other words, a condensing unit consists of the part namely evaporator. From the above, it follows that the fact that the evaporator is present in the imported goods does not automatically follow that it is not a condensing unit. We are therefore, of the view that the goods imported are condensing units and not air-conditioners.
21. Shri Asthana as well as Shri Prabhat Kumar referred to a number of authorities. However, we are not referring to them in the light of the view which we are expressing on the facts.
22. The next question to be considered is what should be the assessable value of the imported goods. We have expressed the view that the imported goods cannot be classified as A/Cs. The Collector while assessing the value took the price of M/s. Westinghouse, air-conditioners at H.K. $ 4353 and H.K. $ 4857 and arrived at the average of H.K. $ 4165 and reduced it by 25% for the parts which are absent and the said value of H.K. $ 4605 is nearer to the value indicated in the show cause notice. Therefore, he assessed CIF value Rs. 7573.59/-.
23. The Collector rejected the invoice value on the ground that the appellants have not adduced any evidence in support of their case such as indent placed on the supplier, the correspondence, definite items to be imported specifications of the goods and other relevant details taking the plea that the documents have been seized by the FERA authorities. He also observed that the importer has no evidence to substantiate that what he wanted to import by the condensing unit or that he placed an order with the foreign supplier for the condensing unit. He also observed that the price list of the manufacturer M/s. Westinghouse is not available and the price at which it was sold to M/s. Uniden Systems, Singapore also is not available. Therefore, he rejected the invoice value. He also found that the value of identical or similar goods is not available. The Collector has not doubted the genuineness of the invoice value. In other words, had he classified the imported goods as condensing unit, perhaps he would have accepted the invoice value. Since he did not accept the classification of the goods as condensing units by applying Rule 2(a) of the Interpretative Rules he discarded the invoice value. In the absence of imports of higher value of identical or similar goods, there is no reason why the invoice value should not be accepted. Further arguing that the goods are classifiable under Rule 2(a) of the Interpretative Rules as air-conditioners, the goods cannot be valued as air-conditioners. The value of the goods actually imported should be the value for the purpose of assessment and not interpretative value. We have already pointed out that the condensing units are known not only to the technical world but also to the commercial world. The department could have ascertained the value of condensing units imported at the contemporary time. Since there is no price of identical or similar goods imported at a higher price available, there is no other alternative but to accept the invoice value. The department also has not adduced any evidence to indicate that the appellants have clandestinely remitted foreign exchange. They have also not adduced any evidence that the price is not the sole consideration for the sale of the goods. Therefore, the assessable value shall be on the basis of the transaction value.
24. The next question to be considered is whether the goods are imported in violation of Import & Export Policy.
25. The claim of the appellants is that the imported goods are covered by Appendix 3-A Sl. No. 503, under which all items of air-conditioning and refrigeration equipment are allowed import except those which appear specifically in Appendix 6 list 8 Part I or Appendix 2B. According to the appellants, since the parts are components of the condensing units, did not fall under Appendix 6 or Appendix 2B. They are automatically covered by the relevant Sl. No. of Appendix 3A.
26. The Collector held that the goods are consumer goods falling under Appendix 2 Part B of the Import & Export Policy, 1988-91. According to the Collector, the goods are covered by entry 146 which reads, "consumer goods in SKD condition" including sub-assemblies and assemblies thereof. He also held that customs are not bound by paragraph 20(6) of the Import Policy according to which, the definition of 'consumer goods' has been incorporated in Chapter I for the purpose of Import Policy only. This definition is illustrative and not exhaustive. It will be left to the customs authorities to identify the goods which, in their judgment, could be appropriately classified as 'consumer goods'. The Collector says in view of the above it is for the customs authorities to decide whether the goods imported are consumer goods or not and since he is of the view that the goods can be used as air-conditioners and since they directly satisfy human needs, they should be classified as consumer goods.
27. The expression 'consumer goods' is defined by the Policy under paragraph 6(13) which is as follows :
"Consumer Goods. - for the purpose of Import Policy will mean consumer goods which can directly satisfy human needs without further processing. It would include consumer durables also."
28. From a reading of the definition of consumer goods, it is clear that the goods imported should directly satisfy the human needs. We have discussed in the earlier paragraphs that the goods imported cannot by themselves function as air-conditioners. They require 23 more parts to be fitted in before they actually start functioning. Merely because the refrigeration cycle is complete, the goods cannot automatically be treated as A/Cs. Therefore/ before the goods imported are used as air-conditioners, further processing is necessary and the finding of the Collector that the goods imported directly satisfy human needs is not based on evidence. On the other hand, common man can directly arrive at the conclusion that the goods cannot directly satisfy human needs. Since we are of the view that the goods are not consumer goods, the claim of the appellants that they are covered by Sl. No. 503 of Appendix 3 Part A is accepted.
29. In the light of the above discussion, we allow the appeal and set aside the order of the Collector.
Sd/-
(S.V. Maruthi) Member (J) P.C. Jain, Member (T)
30. I have carefully gone through the order proposed by learned Sister Ms. S.V. Maruthi, Judicial Member but I regret that I am unable to agree to the conclusions reached by her. Even though the facts have been given in the said order of the learned Judicial Member, I will refer to some of the salient facts which are necessary for the purpose of my order.
31. The appellants herein filed three bills of entry - two dated 1-2-1989 and one dated 17-3-1989 declaring the goods as condensing units for air-conditioning. The appellant claimed assessment of the goods under Customs Tariff Heading (CTH) 98.06 of the First Schedule to CTA, 1985 and worked out Customs duty at the rate of 100% (Basic) plus 45% (Auxiliary) and 15% CVD. Customs Tariff Heading 98.06 which read as :
"Parts of machinery, equipments, appliances, instruments and articles of Chapters 84,85, 86,89 and 90."
32. The department, however, contends on the basis of physical examination of the goods and the technical literature relied upon by it that these are air-conditioning machines or at best incomplete air-conditioning machines which read with Rule 2(a) of the General Rules for the interpretation of the First Schedule, these have to be treated as an incomplete or unfinished air-conditioning machines and these would be covered under TH 8415.10. It has, therefore, been contended by the Revenue that the goods are to be classified under the aforesaid Tariff Sub-heading 8415.10 attracting a duty of 70% (Basic) plus 45% (auxiliary) plus Rs. 9000/- (CVD) per piece for the bills of entry filed before 28th Feb. 1989 and at the rate of 70% plus 45% plus Rs. 9430/- (CVD) per piece for the third bill of entry filed on 17th March 1979.
32.1 In view of the aforesaid controversy, the first question, therefore, is whether the imported goods are to be treated as air-conditioning machines in terms of the Customs Tariff or as parts of air-conditioning machines.
32.2 Next two questions which are largely dependent on the answer to the first question are :-
(1) Whether the goods imported are consumer goods in terms of Import (Control) Policy and (2) Correct value of the goods.
33. After careful examination of the goods there is no doubt that the goods imported are "an evaporator (cooling) coil assembly with fins, condensing coils assembly with fins, compressor, motor, fan and blower wheel with the first three items inter-connected by metal tubing, it has also a capillary line (or expansion valve) duly connected. The whole is mounted on a steel frame (chassis)".
33.1 On the basis of the aforesaid imported goods, the adjudicating authority had held that it is an incomplete air-conditioning machine and therefore, read with Rule 2(a) it would have to be treated as an incomplete air-conditioning machine and is, therefore, liable to be duty under Tariff Sub-heading 8415.10.
33.2 The appellant, on the other hand, contends that it is merely a part of the air-conditioning machine known as condensing units.
33.3 Lot of literature has been relied upon by both sides pointing out as to what is 'condensing unit' and what is air-conditioning machine. It has been discussed in detail in the order of the learned Sister but I am of the view that it is not necessary to go into all these details in view of the peculiar description of air-conditioning machine under Tariff Heading 84.15. It reads as follows :-
"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."
(Emphasis supplied) 33.4 Now, the word 'comprise', according to the Concise Oxford Dictionary means :-
(1) include, (2) comprehend, (3) consist of, (4) compose, (5) make up.
In other words, an air-conditioning machine, in terms of tariff description under Heading 84.15 would be one which contains at least -
(1) Motor driven fan, and (2) elements for changing the temperature and humidity.
It is immaterial whether the element for changing humidity is not separate.
33.5 Somewhat similar scope of the aforesaid Tariff Entry has been described in the Explanatory Notes to HSN :-
"This heading covers certain apparatus for maintaining required conditions of temperature and humidity in closed spaces. The machine may also comprise elements for the purification of air.
They are used for air-conditioning offices, homes, public halls, ships, motor vehicles, etc. and also in certain industrial installations requiring special atmospheric conditions (e.g., in the textile, paper tobacco or food industries).
The heading applies only to machines (1) Equipped with a motor driven fan or blower and (2) Designed to change both the temperature (a heating or cooling element or both) and the humidity (a humidifying or drying element or both) of air, and (3) For which the elements mentioned in (1) and (2) are presented together.
In these machines the elements for humidifying or drying the air may be separate from, those for heating or cooling it. However, certain types, incorporate only a single unit which changes both temperature and by condensation, the humidity of the air. These air-conditioning machines cool and dry (by condensation of water vapour on a cold coil) the air of the room in which they are installed, or, if they have an outside air intake (damper), a mixture of fresh air and room air. They are generally provided with drip pans to catch the condensate.
From the structural point of view, the air-conditioning machines of this heading must therefore incorporate, in addition to the motor driven fan or blower for circulating the air, at least the following elements :
An air heating device (operated by hot water, steam or hot air tubes or by electric resistances etc.) and an air humidifier (generally consisting of a water spray) or an air dehumidifier;
or A cold water coil or a refrigerator unit evaporator (either of which changes both the temperature and by condensation, the humidity of the air):
or Some other type of cooling element with a separate device for changing the humidity of the air.
In certain cases, the dehumidifier makes use of the hygroscopic properties of absorbent materials.
Air-conditioning machines may be supplied with their means of heating or cooling from an external source. They are usually fitted with air cleaners consisting of one or more layers of filtering material, often impregnated with oil (textile material, glass, wool, steel or copper wool, expanded metal etc.) through which the air is passed to remove suspended dust, etc. They may also be provided with devices for adjusting or automatically controlling the temperature and humidity of the air.
The heading also covers apparatus which, although not fitted with a device for separately regulating the humidity of the air, change the humidity by condensation. Examples of such apparatus are the self-contained window and wallmounted types and apparatus for cold stores consisting of a combined cooling evaporator and motorised blower. Also included are units for heating/cooling a closed chamber (lorry, trailer or container), consisting of a compressor, a condenser and a motor in a housing mounted on the outside of the goods compartment and of a ventilator and an evaporator within the container".
(Emphasis supplied) Since the imported goods contain motor driven fan or blower for circulating the air and also contain a refrigerator unit consisting of a compressor, condenser and cooling coil, the imported goods fully satisfy the definition of air-conditioning machines described under CTH 84.15. In fact, in view of the peculiar definition of air-conditioning machines under CTH 84.15 it cannot be said that the imported goods are incomplete air-conditioning machines although from the point of view of common parlance they may be incomplete air-conditioners and other parts are also required to make it a functional air-conditioner but for the purposes of assessment to Customs duty we are necessarily to go by the definition or description of goods as given in the CTA. That definition having been fully satisfied as stated above, there is no doubt that the goods are air-conditioning machines falling under TH 84.15. On this point, therefore, the appellant has no case. Reliance placed by the learned counsel on Tribunal's judgment in the case of CCE v. Subros Ltd. [1989 (43) E.L.T. 543 (Tribunal)] is incorrect. In that case in view of the goods under consideration it was held that in the absence of motor-driven fan the goods could not be treated as air-conditioning machines. Such is not the case here as motor driven fan is very much present apart from other elements necessary for changing the temperature and humidity. Further observation in para 26 of the aforesaid Report in Subros case, namely :-
"gas compressor, cooling unit and other parts cleared by the respondents cannot perform the function of an air-conditioner viz., changing of temperature/humidity"
is in the nature of an obiter and cannot be taken as technically correct. This becomes clear from the immediate subsequent observations, i.e. -
"This is possible only when a motor driven fan or blower is fitted in the air-conditioning kit".
Motor driven fan or blower, it is common knowledge, serves the function of circulating air and cannot serve the function of changing temperature/humidity.
33.6 We can look at the above problem "whether the imported goods, apart from containing motor-driven fan or blower also contain the elements for changing temperature/humidity" from the list of missing parts in the "exploded view" of the air-conditioner. From the "exploded view" appended at page 3 of the learned sister's order, it is clear that the appellant herein has imported the following nine parts, joined together and fitted on the base/chassis - chassis being included in those nine parts :-
S. No. E - Evaporator coil S. No. 7 - Blower wheel S. Nos. 16 & 18 - Chassis S. No. 19 - Fan motor bracket S. No. 20 - Propeller Fan S. No. 22 - Fan Motor S. No. 23 - Compressor S. No. 27 - Condenser coil (There is a dispute whether S. No. 26, - stainer with capillary tube has been imported or not).
If we go through the list of the remaining items not imported we find that none of those items performs the function of changing the temperature/humidity. In fact, it is not the case of the appellant that any of the items not imported by it performs the function of changing temperature/humidity.
34. Next question is regarding the value of the goods. After it has been held that the goods are different from what they have been declared, the value of the goods cannot remain the same as declared. It will have to be on the basis of the best judgment if proper material for the valuation of the goods has not been provided by the appellants or is not otherwise forthcoming. I find that the adjudicating authority treating them as air-conditioning machines, though requiring some parts for the purpose of a functioning air-conditioner in terms of commercial parlance have arrived at the valuation of the goods by taking the value of the complete air-conditioner and deducting therefrom the value of the parts required to make it a functional air-conditioner. The method adopted by the adjudicating authority which has been duly spelt out in the show cause notice given to the appellants cannot be termed to be unreasonable in the facts and circumstances of this case. The learned advocate for the appellants' pleas that proper yardsticks for valuing the goods had not been adopted inasmuch as (i) there is no evidence of import of comparable goods at higher prices, (ii) there is no evidence that dealings were not at arm's length and (iii) there is no evidence of excess/clandestine remittance of foreign exchange, are of no assistance to the appellants in the peculiar facts and circumstances of this case inasmuch as there has been a total mis-declaration of goods. Such a fact was not available in the cases relied upon by the learned advocate. The goods have been described by the appellants as "parts of air-conditioning machines" whereas in actual fact in terms of the CTH 84.15 they are air-conditioning machines. It is, therefore, but plain common sense that the value of the parts as declared by the appellants cannot be taken as equivalent to the value of the machines. In these circumstances, the adjudicating authority has adopted the method, as set out above, and as held earlier it cannot by any stretch of imagination be termed as unreasonable.
34.1 As regards the question of ITC Policy, it is to be noted that Schedule I to the ITC Order No. 17/55 which prohibits importation of goods, as mentioned in that Schedule, is fully aligned with the Customs Tariff, the description of air-conditioning machines which is prohibited from import is the same as that given in the Customs Tariff Act under TH 84.15. Air-conditioning machines are undoubtedly consumer goods directly satisfying the human need of comfort and convenience. It is also apparent from the description of the air-conditioning machines given in the first sub-para of the Explanatory Notes to HSN, as set out above, that such air-conditioning machines are used for air-conditioning offices, homes, public halls, ships, motor vehicles, etc. It has been found as a fact that the imported goods are window type air-conditioning machines. They are, therefore, clearly consumer goods and prohibited for import without suitable licence. On this point as well the appellants, therefore, have no case.
34.2 On one point, however, the impugned order is flawed. The adjudicating authority has imposed a penalty of Rs. 10 lakhs on the appellant concern M/s. Universal Commercial Corporation and Rs. 10 lakhs on Shri Mohan Babbar, proprietor of the said concern under Section 112 of the Customs Act. So far as the proprietary unit is concerned, there is a total identity of interest of the unit and of its proprietor. The two cannot be considered as separate person. In effect, therefore, there is a double penalty imposed by the adjudicating authority on the same person which is not permissible under the law. Accordingly, after imposition of personal penalty on the appellant concern, namely, M/s. Universal Commercial Corporation it was illegal on the part of the adjudicating authority to impose another penalty on Shri Mohan Babbar. Accordingly, a penalty of Rs. 10 lakhs imposed under Section 112 on Shri Mohan Babbar is set aside.
35. Appeals disposed of in the above terms.
Sd/-
(P.C. Jain) Technical Member 1-6-1992 Following points of difference of opinion have arisen for referring them to a third Member :-
(1) Whether the imported goods can be treated as air-conditioning machines falling under Tariff Heading 8415.10 or parts of air-conditioning machines falling under Tariff Heading 98.06.
(2) Whether the value of the imported goods, as upheld by the adjudicating authority is correct or not.
(3) Whether the imported goods require a licence in terms of the Import Trade Control Policy or not.
Sd/- Sd/- (P.C. Jain) (S.V. Maruthi) Technical Member Judicial Member 1-6-1992 N.K. Bajpai
36. I have heard Shri L.P. Asthana, the Learned Counsel for the appellants and Shri Prabhat Kumar, the Learned Senior Departmental Representative for the Respondent Collector. The hearings were spread over three afternoon sessions.
37. While reading extensively from the order of the Learned Member (Judicial), the main points which Shri Asthana submitted on the three points of difference were the following :-
CLASSIFICATION OF GOODS
(a) The goods imported are condensing Units and not Air-conditioning machines as understood in Customs Tariff sub-heading 8415.10 as is evident from the Tariff Entry which is 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.
8415.10 Window or wall types, self-contained.
(Emphasis added).
(b) What has been imported are parts of Air-conditioning machines because only 9 out of 32 parts have been imported, and these do not constitute a self-contained or in other words, what may be called, a "complete" air-conditioning machine. The interpretation of the Additional Collector as upheld by Learned Member (Technical) that by application of Rule 2(a) of the Rules of Interpretation of the Tariff, even incomplete air-conditioning machines would be covered by sub-heading 8415.10 is not correct. Rule 2(a) is not applicable to sub-heading 8415.10 because this sub-heading does not require the application of any of the Rules 2 to 6. In support of this contention Shri Asthana read out the following portion of Rule 1 :-
"for legal purposes classification should be determined according to the terms of the headings and any relative Section or Chapter Notes and provided such heading or Notes do not otherwise require, according to the following provisions "Rules (2) to (6)"
(Emphasis added).
(c) Thus, by specific mention of "self-contained" in sub-heading 8415.10, the 'incomplete' air-conditioning machine get excluded and, because of the provisions of Rule 1 extracted above, Rule 2(a) is not applicable. It cannot even be invoked.
(d) Since the goods imported are not covered by sub-heading 8415.10, they have necessarily to be taken to Heading 98.06 which is an omnibus entry for Parts of Machines of Chapters 84, 85, 86, 89 and 90.
(e) Learned Member (Technical) has disregarded the technical literature etc. submitted by the applicants because of the particular view he has taken of Heading 84.15 by totally overlooking the application of the trade parlance test for determining classification of goods - an aspect on which the appellants had submitted considerable evidence. In fact, he has not gone into the sub-headings of Heading 84.15 at all. It has to be decided whether the goods fall in sub-heading 8415.10 and not merely in Heading 84.15.
VALUATION OF GOODS
(a) The value of the complete air-conditioning machine cannot be taken to be the value of the incomplete machine by applying the fiction of Rule 2(a) which is a Rule for the interpretation of the Tariff for determining the classification of goods. He cited the following decisions in support of the view that legal fiction cannot be extended beyond its purpose :-
(i) K.R. Venkitaperumal Raju v. Commissioner of Income Tax - 1992 (93) ITR 213 (Kerala H.C.)
(ii) C.I.T. v. Amichand B. Doshi - 1992 (194) ITR 56 (Bombay) Legal fictions are created for a definite purpose and should not be extended beyond their legitimate field.
(iii) Vadilal v. Lalubhai - 1972 (86) ITC 2.
(b) Quotation of values cannot be relied upon unless it is held that the value of the subject goods is wrong. Reliance for this purpose was placed on the decision of the Supreme Court in the case of Sharp Business Machines Pvt. Ltd. v. Collector of Customs - 1990 (49) E.L.T. 640 (SC).
(c) There is no ground for rejecting the value declared by the appellants. No allegation of additional consideration has been found; nor is any evidence available of relationship. There is therefore no valid ground for rejecting the transaction value under Rule 4 of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988. The authorities could not proceed beyond Rule 4 because of the requirement of proceeding only sequentially. The findings of Learned Member (Technical) in para 34 of the order were strongly contested.
I.T.C. LICENCE FOR THE GOODS
(a) It is only by application of Rule 2(a) of the Rules of Interpretation that the goods have been treated as consumer goods. Since this rule is not applicable, the question of treating them as consumer goods would not arise. Reliance for this purpose is placed on paras 27-28 of the order of learned Member (Judicial) who has held that since the goods by themselves function as air-conditioners, they are not consumer goods.
(b) The appellants hold an import licence for parts of air-conditioners falling under Appendix 3A of the Import Policy for 1988-91 and since what has been imported are nothing but parts, the licence produced should have been accepted.
38. Shri Prabhat Kumar, the learned SDR, first explained in detail what is a condensing unit and what are its functions in an air-conditioning machine and how an evaporator is not a part of the condensing unit. He contested the claim of the appellants that they had imported condensing units and submitted that they had totally misdeclared the goods. What had been imported was an incomplete air-conditioner. He explained with the help of the publication "Principles of Air Conditioning" by V. Paul Lang that a complete Refrigeration Cycle involved the use of a compressor, evaporator, condenser and an expansion valve. On the other hand, the condensing unit consisted only of the compressor and the condenser. Shri Prabhat Kumar emphasised that while the appellants had declared that they had imported condensing units which consist only of the compressor and the condenser, it had been found, on examination of the goods that the appellants had imported the following 9 items which constitute the essential items of the air-conditioner :-
(a) Evaporator Coil (Item No. 4 in the exploded view)
(b) & (c) Chassis (Item No. 16 & 17)
(d) Propellor Fan (Item No. 20)
(e) Fan Motor (Item No. 22)
(f) Compressor (Item No. 23)
(g) Strainer with Capillary tube (Item No. 26)
(h) Condenser Coil (Item No. 27)
(i) Blower Wheel (Item No. 7)
39. He explained with the help of the book "Modern Air Conditioning Practice" by Norman C. Haries & Conde what a completely self-contained unit was. He quoted "Residential air conditioning units.
Air conditioning for homes has become increasingly popular in the past 15 years.... Most heating systems using forced warm air are readily converted to provides summer cooling. Several methods are used each involving a different type and arrangement of equipment.
a. Completely self-contained units incorporating water or air-cooled refrigeration and gas, oil or electric heating. These units may be installed in a basement., utility cabinet, mechanical room or attic. If the refrigeration unit is air cooled, the condensing unit will be outdoors or mounted through the wall...."
"Split-system units The term split system (or remove) unit refers to the separation of the condensing unit from the aid-handling unit. In most cases, the "split" divides the system into an indoor unit (fan coil section) and an outdoor unit (condensing unit) connected by refrigerant tubing and suitable electric controls...."
40. Referring to the decision of the Tribunal in the case of Collector of Central Excise, Meerut v. Subros Ltd. [1989 (43) E.L.T. 543 (Tribunal)], Shri Prabhat Kumar explained with reference to the diagrams appearing therein, that this decision fully supported the department's case. It is for want of a motor driven fan and blower in the air-conditioning kit that the Tribunal had held it not to be an air-conditioning machine and since these parts were available in the subject goods, the learned SDR thought, it fulfilled the requirement of an air-conditioning machine. Though the number of parts not present may be large, they were not essential parts of an air-conditioner and items like screws etc. were also not important value-wise. Shri Prabhat Kumar explained that the 9 items imported by the appellants constituted the essential parts of an air conditioner, (though incomplete) and, by application of Rule 2(a) of the Rules of Interpretation, gave it the essential character of the complete air-conditioner which was classifiable under sub-heading 8415.10. He submitted that in coming to her conclusion, Learned Member (Judicial) had equated "essential character" with "functional character" and referred to the following portion of the order in para 17 :-
"... Therefore the imported goods complete the refrigeration cycle. Putting it in a different way, the goods imported are essential parts of the air-conditioners but the further question to be considered is, can the imported goods be classified as air-conditioners on the ground that the refrigeration cycle is complete and that essential parts of air-conditioners are present and therefore, the incomplete article can be classified as a complete article in view of interpretation of Rule 2(a). Admittedly the imported goods cannot function as air-conditioners without the 23 parts mentioned in the exploded view attached to the Show Cause Notice.
The test to determine whether the incomplete article should be classified as a complete article is whether it can perform the functions of a complete article without adding or by adding minor parts ... the main contention of Shri Prabhat Kumar is that the refrigeration cycle is complete and therefore it should be classified as an A/C. In our view, merely because the imported goods technically complete the refrigeration cycle, it does not follow that it is a complete air-conditioner. It cannot by itself perform the functions of an A/C."
(Emphasis added)
41. The learned SDR submitted that Rule 2(a) did not stipulate that the incomplete article should perform the functions of an complete article in order to be classified under the same heading as the complete article. The words used in the Rule were different and to quote.
"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 presented, the incomplete or unfinished article has the essential character of the complete or finished article, its 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), presented unassembled or disassembled."
(Emphasis added)
42. Since the essential parts of an air-conditioning machine were present in the imported goods and the refrigeration cycle was completed, the goods had the essential character of an air-conditioning machine and clearly merited classification under sub-heading 8415.10.
43. It is a well settled principle of interpretation that the "language used in a statute has to be understood in its grammatical and ordinary sense without any addition or subtraction or substitution". Shri Prabhat Kumar placed . reliance on a number of decisions for this purpose including the Supreme Court judgments in the case of K.L. Sud v. P. Sadhukhan (AIR 1957 SC 907) and Tarulata Syam v. C.I.T. (AIR 1977 SC 1802). He also referred to the Supreme Court judgment in the case of J.K. Cotton Spinning & Weaving Mills v. State of U.P., (AIR 1961 SC 1170) from which he quoted the following observation :-
"Courts always presume that legislature inserted every part of a statute for a purpose and legislative intention is that every part of statute should have effect."
44. In view of these decisions, Shri Prabhat Kumar submitted that the words "essential character" occurring in Rule 2(a) cannot be substituted by the words "functional character" as had been done by Learned Member (Judicial) in her order, since this would amount to doing violence to the language used in Rule 2(a).
45. Shri Prabhat Kumar also referred to the following portion of General comments of Explanatory Notes of HSN on Section XVI relating to "incomplete machines" in support of his arguments -
SECTION XVI GENERAL IV. INCOMPLETE MACHINES [See General Interpretative Rule 2(a)] "Throughout the Section any reference to a machine or apparatus covers not only the complete machine, but also an incomplete machine (i.e. an assembly of parts so far advanced that it already has the main essential features of the complete machine). Thus a machine lacking only a flywheel, a bed plate, calendar rolls, tool holders, etc., is classified in the same heading as the machine, and not in any separate heading provided for parts. Similarly a machine or apparatus normally incorporating an electric motor (e.g. electro-mechanical hand tools of Heading 85.08) is classified in the same heading as the corresponding complete machine even if presented without that motor."
(Emphasis added)
46. He submitted that these general comments on the coverage of "machines" in Section XVI fortified his argument that the subject goods were fully covered by sub-heading 8415.10.
47. Shri Prabhat Kumar also countered the argument of Shri Asthana that according to the proviso of Rule 1, sub-heading 8415.10, as it is worded, did not require the application of Rules (2) to (6). He submitted that this position had been sufficiently explained by the Supreme Court in Para 28 of its judgment in the case of Khandelwal Metal and Engineering Works v. Union of India - [1985 (20) E.L.T. 222] which is extracted below :-
"28...What is meant by the clause in Rule 1: "and provided such headings or Notes do not require", is not that a Heading must require that the provisions contained in the Rules following Rule 1 should be applied. What is meant is exactly the opposite, namely that if a Heading does not require, the exclusion of the other rules, those other rules must also be applied."
(Emphasis added)
48. Shri Prabhat Kumar explained that the use of the expression "selfcontained" in sub-heading 8415.10 cannot be interpreted to mean that this sub-heading does not require the application of the Rules (2) to (6); the expression only describes a type of air-conditioner and this position has been explained in a number of publications which he had cited including "Modern Air Conditioning Practice" by Normal Haris as extracted in para 41. This being so, Rules (2) onwards would have full application and, by specific application of Rule 2(a), an 'incomplete' air-conditioning machine such as the one imported in the present case, would be covered by sub-heading 8415.10 just as the sub-heading covered air-conditioning machines, window or wall type self-contained. In other words, in terms of Rule 2(a), air-conditioning machines falling under 84.15 or "window or wall types, self-contained" under sub-heading 8415.10 include, in its ambit, an incomplete or unfinished item as well, provided that, as presented, the incomplete or unfinished article has the essential character of the complete or finished article.
49. Shri Prabhat Kumar also made elaborate submissions on the scope of a proviso in a clause and submitted that the proviso occurring in Rule 1 had necessarily to be limited in its operation to the ambit of the rule which it qualifies. He also referred to Notes 4 and 5 of Section XVI of the Customs Tariff Schedule in relation to the definition of machine, and sought to establish that the goods imported fell in the category of air-conditioning machines.
50. He assailed the expert opinions of Shri A.P. Khurana, Executive Secretary of the All India Air Conditioning & Refrigeration Association, Shri M.M. Pande and Shri R.K. Aggarwal Members of American Society Heating, Refrigerating and Air Conditioning Engineers (ASHRE) as opinions given without any reasoning and therefore not acceptable. (AIR 1959 SC 488). These opinions were "parrot like" unsupported by any reasons. Reliance was placed on the decisions of the Supreme Court in the case of Magan Beharilal v. State of Punjab (AIR 1977 SC 1970) and Ishawari Prasad v. Mohd. Isa (1963 3 SCR 722). He also submitted that the opinion of Shri Jaspal Singh of Hindustan Refrigeration Stores helped the case of the department inasmuch as it says "Fan coil unit constitutes essentially of an Evaporator, Motor, Blowers etc... and it cannot provide air-conditioning without complying to a different type of condensing unit."
51. While discussing the question of classification of the goods on the concluding day of his arguments, Shri Prabhat Kumar raised the question of alternative classification under sub-heading 8415.81 to 8415.83 as also the question of rate of countervailing duty. Shri Asthana objected to these matters being raised on the ground that they were not the points referred to the third Member in this case of difference of opinion. He cited the decisions of the Patna and Allahabad High Courts in the cases of Hanutram Chandanmal v. Commissioner of Income Tax, Bihar & Orissa [1953 (23) ITR 305] and fan Mohammed v. Commissioner of Income Tax, U.P. [1953 (23) ITR 5] as well as the decision of the Tribunal in the case of Collector of Central Excise v. MRF Ltd. [1990 (50) E.L.T. 604 (Tribunal)] in all of which it has been held that the third Member was competent to decide only the point referred to him. In view of these decisions, I rejected the oral prayer of the Learned SDR to raise any questions not covered by the reference to the third Member and directed him to strictly confine himself to the points of reference.
52. On the question of Valuation of the goods, the Learned SDR submitted that once it is held that the appellants had not imported the goods as per their declaration - namely condensing units - the question of accepting the declared value did not arise. For this purpose, Shri Prabhat Kumar relied on the order of Learned Member (Technical) specially para 34. He referred to the decision of the Supreme Court in the case of Kanungo & Co. [1983 (13) E.L.T. 1486] according to which the burden of proof shifted to the appellants because the goods had been misdeclared.
53. As for the question of I.T.C. licence, Shri Prabhat Kumar submitted that since the Indian Customs Tariff as well as Schedule I to the Imports (Control) Order 17/55 dated 7th December, 1955 had been fully aligned from 1986, the goods imported had to be classified as air-conditioning machines for licensing purposes also. This being so, the goods could not be allowed clearance against a licence for parts of air-conditioners falling under Appx. 3A of the Policy as claimed. He relied upon the decisions of the Tribunal in the case of Hindustan Teleprinters Ltd. v. Collector of Customs, Madras [1986 (24) E.L.T. 11] and in the case of Greaves Cotton & Co. v. Union of India [1990 (43) E.L.T. 263]. He also referred to a clarification given by the licensing authorities in a letter dated 19-12-1989 copy of which was annexed to the Show Cause Notice. Shri Prabhat Kumar emphasised that the items imported were consumer goods which were covered by Appendix 2B (Serial No. 146) of the Policy and their import was banned.
54. Replying Shri Asthana referred to the "General Rules for the Interpretation of the Harmonized System" and quoted from the Explanatory Note (V) which is as under :-
"(V) In provision (III)(b), the expression "provided such headings or Notes do not otherwise require" is intended to make it quite clear that the terms of the headings and any relative Section or Chapter Notes are paramount i.e., they are the first consideration in determining classification. For example, in Chapter 31, the Notes provide that certain headings relate only to particular goods. Consequently those headings cannot be extended to include goods which otherwise might fall there by reason of the operation of Rule 2(b)."
(Emphasis added) He submitted that the terms of the Headings and the relative Section or Chapter Notes are paramount i.e. they are the first consideration in determining classification. He also gave examples, by referring to Headings 31.02, 31.03 and 31.04 as well as Headings 91.08, 91.09 and 91.10 and submitted that, since in these cases the Headings themselves make the position clear so far as "complete and assembled" on the one hand and "unassembled" on the other hand, were concerned, there was no scope for applying Rule 2(a) of the Rules of Interpretation. His argument was that inasmuch as sub-heading 8415.10, relates to "window or wall type self-contained", this sub-heading would automatically exclude the "unassembled" as well as "incomplete" window or wall type air-conditioning machines. He therefore concluded that the interpretation placed by the learned SDR on the judgment in Khandelwal Metal and Engineering Works did not support the department's stand that the goods imported in the present case would, by application of Rule 2(a), fall under this sub-heading. He further submitted that the Department had not placed any evidence of particular usage; they had given only technical literature. He also submitted that the appellants had produced manufacturers certificate; although it was given after the arrival of the goods, since M/s. Westinghouse are not the suppliers of the goods but are the manufacturers, their opinion is an independent opinion and should be accepted. As far as valuation of the goods was concerned, the burden of proof that the value declared by the appellants was not the correct value of the goods was squarely on the department and they had not proceeded sequentially as provided for in the Valuation Rules. Application of Rule 4 of the Valuation Rules cannot be excluded since value of such or like goods is not available. Thus, Rules 5 and 6 cannot be applied. He strongly contested the determination of value by the best judgment criteria because transaction value of goods cannot be rejected in the manner in which it has been done in the present case. As regards the Import Licence, Shri Asthana submitted that the letter written to the Deputy Chief Controller of Imports & Exports on 17-10-1989 by the authorities of which the reply had been enclosed to the Show Cause Notice, had not been supplied to the appellants. They therefore did not know the context in which the reference was made to the licensing authorities and the clarification contained in that letter was therefore not applicable to them. What the Policy prohibits is a completely built-up air conditioners, and since the goods imported were, even according to the department, not completely built-up units, the clarification given by the D.C.C.I. & E. was not applicable to their case. He strongly questioned the applicability of the fiction available in Rule 2(a) for interpretation of the Customs Tariff to the interpretation of the I.T.C. Policy. Thus, the conclusion drawn by the Learned Member (Technical) that for ITC purposes also the imported goods should be taken as complete air conditioning machines was not permissible.
55. I have carefully considered the submissions made before me at the hearings. I have also carefully looked into the elaborate written submissions given by Shri Prabhat Kumar, the Learned SDR. The first question to be considered by me is whether the imported goods can be treated as air conditioning machines falling under sub-heading 8415.10 or parts of air conditioning machines falling under Heading 98.06. For this purpose, the General Rules of Interpretation of the Tariff have to be referred to. While Rule 2(a) provides that any reference in a heading to an article shall be taken to include a reference to that article incomplete or unfinished, provided that, as presented, the incomplete article has the essential character of the complete or finished article, Shri Asthana's argument is that in view of the specific mention of self-contained window or wall type air conditioning machines in sub-heading 8415.10, Rule 2(a) will have no application to this sub-heading because of the proviso existing in Rule 1. Shri Prabhat Kumar's contention, on the other hand, on this point, is that the Supreme Count's observations in paragraph 28 of Khandelwal Metal and Engineering Works makes it very clear that unless there is a specific exclusion about the applicability of Rules 2 onwards in the Heading or Section and Chapter Notes, these rules must necessarily apply to the interpretation of the Headings of the Tariff. I am in agreement with the Learned SDR that the application of Rule 2 is not excluded. The interpretation placed on the words "self-contained" by Shri Asthana - that it has the effect of excluding whatever is not "self-contained" - is mis-conceived. The Supreme Court has made it very clear that the Rules of Interpretation "are not a mere adornment". In fact, the following sentences of the judgment is very significant :-
"Therefore, all the relevant Rules of Interpretation in the Import Tariff come into play in the classificatory process. Rules 2 to 4 of the Import Tariff are not a mere adornment. Nothing ever is an adornment in an Import Tariff. Therefore, the classification has to be determined both according to the terms of the Heading and according to the provisions of the Rules and unless, a particular Heading or Note excludes application of Rules other than Rule 1."
In view of this clear position, Rule 2(a) has to be applied for the interpretation of sub-heading 8415.10, and this would mean that incomplete machines would be covered by this sub-heading if they have acquired the essential character of the complete article. This brings us to the question whether the goods as imported and described as condensing units can be considered to be incomplete air-conditioning machines.
56. There is no dispute that besides the compressor, fan motor, propeller fan, and condenser coil etc., an evaporator has also been imported. Shri Prabhat Kumar has placed considerable technical material before us to prove that the refrigerating cycle is completed. In fact, on this point there is no disagreement between the two Members of the referring Bench. The disagreement is only about the interpretation whether the incomplete machine should be classified as a complete machine. The ld. Member (Judicial) has applied the test whether it performs the function of the complete machine. The learned SDR has contested this finding on the ground that the expression in Rule 2(a) is "essential character" and not "essential function", and has placed considerable material in support of his contention. I agree with him that the word "essential character" occurring in Rule 2(a) cannot be interpreted to mean "functional character". The view of the learned SDR is also supported by the General comments in Section XVI of the Harmonized System cited by him. I agree that the imported goods therefore have the essential character of an air-conditioning machine as understood in Rule 2(a) and are, therefore, classifiable under sub-heading 8415.10. I do not therefore see any justification for taking the goods to Heading 98.06.
57. The second question referred to me is whether the value of the imported goods as determined by the adjudicating authority is correct or not. The appellants had declared the goods to be condensing units and had submitted suppliers invoice for the same. The authorities alleged that since the declaration made by the importer i.e. condensing unit did not tally with the actual goods (i.e. full air-conditioner without outer metal cover and selector switch), the actual price will be much more than the declared price. On this allegation, they deduced the value starting with the lowest price of Toshiba 1.5 tonnes Air-conditioner available in Andrews Mail Order Catalogue after deducting 20% on account of the missing parts and adding 1% for arriving at the FOB price. To this, further addition of 16.125% has been made on account of freight and insurance (in the absence of information of actual freight and insurance charges). In their reply to the show cause notice dated 4th April 1990 the appellants contested the basis of valuation on the following grounds :
"The Department has gone wrong completely when it says that the items under import will be complete room air-conditioner if a top cover, a thermostat, a front grill and a control panel are also provided....
In view of the aforesaid if complete air-conditioner cannot come into being, there arises no question of taking value of an air-conditioner for the purpose of evaluating these goods for customs assessment. It may be submitted that the Department has no proof whatsoever that similar items have ever been imported by anyone at a price higher than those declared by us. These items were also imported by us in the past and were allowed clearance at the same value now declared. The value of various types of air-conditioners taken from the Andrews Mail Order Book have no bearing in our case. At the same time, the value given in the Mail Order Book is retail in nature and is invariably subjected to heavy discount.
...The basis of the Department's valuation is, therefore, wrong. The department's method of valuation is also based on assumptions and presumptions. There is no basis whatsoever as to how the department has worked out the price of outer covers and control switches as well as other items to be 20% of the value of the goods under import. Remaining 23 items which we have imported cost more than the price of the goods under import....We also crave liberty to produce additional evidence in this regard at the time of personal hearing apart from local market opinions in the matter".
(Emphasis added)
58. After considering the reply and after hearing the appellants the Additional Collector has recorded the following finding :-
"11. The goods as above are quite different from a condensing unit. - The condensing unit is a sub-assembly whose function in an air-conditioning system is to reclaim the vapour of the refrigerant gas and condense it into the liquid state. Condensing unit does not have evaporator (cooling) coil assembly, blower wheel, capillary line (expansion value). It will have a small base plate whereas the goods imported have a large enough base plate to accommodate the evaporator coil also.
"12. I have considered the submissions of the importer. The essential elements in an air-conditioner are the evaporator (cooling) coil, condenser coil, motor, fan, blower wheel compressor and capillary line (expansion valve). All these elements are present in the imported unit. There is no doubt that the imported unit requires outer housing with grills etc., thermostat, a few capacitors and some wiring before it can be actually used as an air-conditioner...."
59. The relevant portion of the order of the Additional Collector rejecting the invoice value needs to be extracted in full for a proper appreciation of the rival contentions on the subject:
"15. Regarding the question of value of the imported goods, in the show cause notice it is stated that details of model no. etc. of the goods are not available. The country of manufacture was also misdeclared by the importer, as discussed earlier. The importer has not submitted any original documents such as indent placed on the suppliers, the correspondence defining the items to be imported, specifications of the goods and other relevant details taking the plea that the documents have been seized by the FERA Authorities.
"He has not however submitted the seizure list indicating what documents had been seized by the FERA authorities and whether they relate to this import transaction. In short, the importer has no evidence to substantiate that what he wanted to import was a condensing unit or that he placed an order with the foreign supplier for a condensing unit. The complete correspondence with the foreign supplier would have shown the nature of the goods and the proper value and description. The charge in the SCN that the importer has not furnished relevant information with the view to declare a low price for assessment is therefore correct. Since the price list of the manufacturers M/s. Westinghouse is not available nor the price at which it was sold to M/s. Uniden Systems, Singapore, no evidence of the true transaction value is available; since no documentary evidence relating to the transaction as above or the documents as called for from the importer has been submitted by the importer in support of the invoice value, the invoice value is not acceptable. In view of the facts and circumstances relating to this import, it is seen that the value of identical or similar goods is also not available".
60. It will appear from a detailed consideration of the matter that the invoice price was rejected because it was the price of the condensing unit whereas the goods imported contained the essential elements of an air-conditioner. Right from the stage of the examination of the goods, the issue of the show cause notice and, later, during the adjudication of the case, the allegation was that the goods imported were not merely condensing units, but consisted of essential elements of an air-conditioner. It is on the basis of this finding that their classification has been upheld under sub-heading 8415.10. This is also the basis for not accepting the value of condensing units as indicated in the invoices. The plea of the appellants that the transaction value cannot be rejected under Rule 4(2) of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 without complying with the conditions stipulated therein would hold good only if the goods imported are the same as indicated in the invoice. Since there is no dispute that the goods imported are different, the question of accepting the invoice value would not arise. When the department had proposed a higher value based on the Mail Order Catalogue, it was open to the appellants to have submitted their own evidence in support of any price which they considered appropriate. But they did not do so. In fact, even while disputing the deduction of 20% from the Andrews Price List for the missing parts, the appellants had stated that these parts cost more than the price of the goods under import and that they craved liberty to produce additional evidence at the time of personal hearing. But this also was not done. The reasons for rejecting the invoice price and the circumstances under which a 'transaction value', as also value of 'identical goods' or of 'similar goods' could not be ascertained have been stated in Para 15 of the impugned order extracted above. Thus, since the value of the goods actually imported (as found on examination), could not be ascertained under Rules 4 to 7, recourse to the determination of value under Rule 8 had necessarily to be done. The Additional Collector has fully explained how the price as deduced by him accounts for a reduction of 27.64% of the average ex-warehouse Hong Kong price. In these circumstances, it cannot be said that the adjudicating authority has gone wrong in arriving at the price in the manner he has done. The argument vehemently made by Shri Asthana that the valuation Rules did not permit rejection of transaction value until one proceeded sequentially is also met when the findings of the Additional Collector are carefully studied.
61. The third question referred to me is - 'whether the imported goods require a licence in terms of the Import Control Policy or not'. I notice that the appellants have claimed clearance of the goods against two Replenishment Licences valid for items falling under Appendix 3A of the Import Policy for 1988-91, whereas the Additional Collector has held that the goods imported are consumer goods covered by Appendix 2B and specifically under serial No. 146. In Para 28 of her order Learned Member (Judicial) has held that the goods imported do not directly satisfy human needs and do not therefore fall in the category of 'consumer goods' as defined in Para 6(13) of the Import Policy. On the other hand, learned Member (Technical) has held that the imported goods are window type air-conditioning machines and are, therefore, "clearly consumer goods" and prohibited for import without a suitable licence.
62. A careful consideration of the matter shows that the goods imported are not merely condensing units but also have all the essential parts of an air-conditioner. Even though the refrigerating cycle may be complete with the goods as imported, it cannot be said that they are capable of satisfying human needs directly without further processing. It would not, therefore, be correct to hold them as "consumer goods" for purposes of the import policy. The fact of the alignments of the heading in the Import Tariff and the Schedule to the Import Trade Control Order does not affect the determination of the question whether they are "consumer goods", since this fact is to be decided on the basis of the meaning given to "consumer goods" in Para 6(13) of the import policy. I agree with Shri Asthana that the fiction applicable in Rule 2(a) of the Interpretative Rules cannot be applied for the interpretation of the Import Policy. Similarly, the context in which the Dy. Chief Controller has furnished certain clarification not being known, it would not be possible to decide the question on the basis of the clarification.
63. Therefore, the question to be finally decided is whether the Replenishment licences submitted by the appellants are valid for the import of the goods in terms of Appendix 3A. The wordings of entry at serial No. 503 of Appendix 3A is as under:
"Components of air-conditioning and refrigeration equipment and their subsystems viz., compressors, thermostats, overload protection relays, solenoid valves and expansion valves (other than those specified in Appendix 6, List 8 Parti)".
64. It will appear from the above that the import only of compressors, thermostats, overload protection relays, solenoid valves and expansion valves is permitted, whereas, as we have seen, the appellants have imported all the essential components of the air-conditioning equipment. Even though import of compressors is permissible under the licence, the appellants have not imported the "compressor" as a separate identifiable component. It would, therefore, appear that even the import of that compressor as a part of essential components of the air-conditioning machine is not permissible under the licences produced. In these circumstances, the import licences produced are not valid. The appellants would, therefore, require import licence under the Import Policy.
65. In view of the foregoing, the points of differences are answered as follows:
(a) The imported goods can be treated as air-conditioning machines falling under sub-heading 8415.10 of the Customs Tariff. They are not parts of air-conditioning machines falling under Heading 98.06.
(b) The value of the imported goods as upheld by the adjudicating authority is correct.
(c) The imported goods required import licence in terms of the Import Trade Control Policy.
66. The matter may now be placed before the referring Bench.
Sd/-
(N.K. Bajpai) Member (Technical) Dt. 5-1-1993 P.C. Jain
67. On receipt of the opinion of the third Member on the three points of difference arising between the two Members who originally heard the matter Counsels from both sides were again heard on the impact of the third Member's opinion on the final order. Their views were recorded in the open Court as follows :-
"Shri L.P. Asthana, ld. Advocate for the appellants has pointed out that 3 questions were referred to the 3rd Member by way of points of difference between the first two Members. On the first two questions, namely;
Q. No. 1 : Whether the imported goods can be treated as air-conditioning machines falling under Tariff Heading 8415.10 or parts of air-conditioning machines falling under Tariff Heading 98.06.
Q. No. 2 : Whether the value of the imported goods, as upheld by the adjudicating authority is correct or not.
Opinion of the 3rd member is very categorical and there would be no difficulty, according to him, in delivering the judgment on those two points i.e. regarding the classification of the goods imported and valuation of goods imported. On the 3rd question, whether there is an infraction of ITC policy or not, he submits that opinion of the 3rd Member complicates the matter inasmuch as he has held that goods imported are not consumer goods and yet he has gone on to hold that the replenishment licences produced for the part or specifically for condensing units are not valid. Shri Asthana submits that, if we go by the first conclusion of the 3rd Member, then the Importer should get the benefit inasmuch as the 3rd Member has concurred with the Judicial Member and therefore, the majority view on the basis of the conclusions of the 3rd Member emerges that the imported goods are not consumer goods. Consequently, the licences produced by the appellants should be accepted. None of the Officers including the two Members of the Tribunal examined the validity of the replenishment licences or specific licence for condensing units produced by the appellants. He is, therefore, of the view that so far as validity of the licences produced by the appellants is concerned, matter would require to be remanded to the adjudicating authority. Consequently, the question of fine and penalty would also be remanded to the adjudicating authority because there are composite fines and penalties in respect of ITC violations as well as of other violations and contraventions.
2. Opposing the contentions of the ld. Advocate Smt. C.G. Lal, ld. SDR submits that majority view on the 3rd question clearly emerges. Clear implication of the Technical Member's opinion is that the licences produced by the appellants are not correct. When it was held by the said Member that importation of the goods in question is prohibited without a suitable licence. In other words, it has been held, according to her, by the Technical Member that specific licences for condensing units or replenishment licences produced for the parts by the appellants are not valid. This is also the finding of the 3rd Member. She, therefore, urges that the majority view is clear that the import licences produced by the appellants are not valid for the importation of the goods under consideration. In the circumstances, there is no need for a remand on various points urged by the ld. advocate."
68. On the first two questions referred to third Member, there is no dispute from either side. There is, however, a controversy on the third question, as set out above. We are inclined to agree with the views advanced by the learned SDR for the Revenue that question of validity of import licence produced by the appellant Corporation has also been decided in favour of the Revenue inasmuch as the third Member has held that the licences produced by the appellant Corporation are not valid for the goods. This was the finding of the Technical Member when he upheld the views of the adjudicating authority that a separate licence for air-conditioning machines as consumer goods is required and by way of inference the licence produced by the appellant is not valid for the imported goods. Hence, we pass the following order :-
(1) Imported goods are classifiable under Tariff sub-heading 8415.10 as air-conditioning machines and are subject to duty accordingly.
(2) Value of the imported goods as found by the adjudicating authority is correct.
(3) Licences produced by the appellant Corporation before the adjudicating authority are not valid to cover the imported goods.
(4) Consequently the fine in lieu of confiscation of the goods and the penalty imposed on the appellant Corporation by the adjudicating authority is upheld.
(5) Penalty of Rs. 10 lakhs imposed on the proprietor Shri Mohan Babbar is set aside in view of there being no difference of opinion between the two Members who originally heard the matter on the question of imposition of penalty on the proprietor when a penalty had been imposed on the appellant Corporation.