Customs, Excise and Gold Tribunal - Delhi
Ingersoll-Rand (India) Ltd. vs Collector Of C. Excise on 8 December, 1993
Equivalent citations: 1994(69)ELT737(TRI-DEL)
ORDER P.K. Kapoor, Member (T)
1. This is an appeal against the order passed by the Collector of Central Excise, Bangalore. Briefly stated the facts of the case are that the appellants are engaged in the manufacture of Water-well Drilling Rigs, construction/mining equipments etc., falling under Chapter 84 of the Central Excise Tariff Act, 1985. Enquiries made by the Central Excise officer revealed that the appellants were not paying duty on drag bits and drill pipes which were being supplied to the customers along with water-well drilling rigs. During the course of their enquiries, the officers recorded the statements of Shri P.A. Sreekanta, Executive Engineer and K.S. Upadhyaya, Executive of the company who stated that duty was not being paid on drag bits and drill pipes since they were not considered as forming integral parts of the machinery manufactured by the appellants. Thereafter, a show cause notice was served on the appellants on 15-2-1992 proposing to recover under Section 11A of the Act, the differential duty amounting to Rs. 48,23,684/- on the grounds that during the period 1985-86 to 1989-90 the appellants had under-valued the goods by not including the value of accessories, spare parts and components in the value of Drilling rigs, Construction and Mining equipments cleared by them. By the said notice the appellants were also asked to show cause as to why penalty should not be imposed on them under Rule 173Q. In their reply to the show cause notice the appellants denied all the charges. They submitted that there was no undervaluation since they had paid duty on accessories, which were manufactured by them. They stated that they were not paying duty on duty-paid accessories and other items bought by them from other suppliers which were optional in character and did not form an integral part of the machine. It was further submitted that composite orders received from customers include certain optional accessories, which are not essential for operation of the machine since they only enable the machinery to work more effectively. They submitted that bought out items did not undergo any manufacturing operation in their factory, and the machinery supplied by them was complete even without such optional accessories. The appellants also contended that the extended period of limitation was not invokable and the demand was time-barred. They further submitted that no penalty was called for under Rule 173Q. The appellants were also heard in person. Thereafter, by the impugned order dated 4-3-1991 the Collector confirmed the demand of differential duty amounting to Rs. 45,21,729.42 and also imposed a penalty of Rs. 5,00,000/- under Rule 173Q(1) on the appellants.
2. On behalf of the appellants the learned advocate Shri C. Natarajan with Shri N. Venkataraman appeared before us. Shri Natarajan stated that the appellants were manufacturing Water-well Drilling Rigs, and other Construction and Mining machinery. He referred to the typical model of a Drilling Rig illustrated on pages 256 to 259 of the paper book and contended that machine is complete by itself. He submitted that such drilling machines can drill on their own upto a depth of 4 feet but when drilling operations are required to be carried out beyond 4 feet, the machines are attached with drill rods/pipes having diameter between 3 1/2, 4 and 4 1/2 inches and the length between 10 feet to 30 feet. At the end of these pipes depending upon the earth strata, various types of bits are fitted for cutting the earth formation and deepening the hole and on completion any drilling operation the rod and the bits are disconnected from the machine which is complete by itself. Shri Natarajan stated that there was no controversy as to the classification and the value of rigs/machines which are cleared by the appellants on payment of duty. He added that the controversy was only with regard to Drill rods/pipes and Bits (Rock Roller Bits, Drag Bits, Unicon Bits, Finger Bits and Button Bits). He submitted that Drill rods/pipes and Bits except Button Bits supplied by the appellants are wholly bought out items. He reiterated his stand that Drilling Rigs are complete machines by themselves and pipes /rods and bits are only optional accessories which are purchased by the customer only when specifically required. In support of his contentions he referred to the statement at pages 363 to 367 of the paper book showing the total sales of machines, machines with accessories and accessories alone during the year 1986 to 1989. He submitted that in the price circulars issued by the appellants to buyers through their various sales centres the price of Standard Equipment (i.e. Drill machine and accessories) and optional accessories are listed separately. He stated that according to the copies of I.S. 7209/1974 for "Blast Hole Drilling Rigs", certificate of the Engineering Well Boring Division, Government of Karnataka and certificate by Drilling Engineer of International Development Agency, filed by the appellants Drill rods and Bits of various types are tools and accessories which vary according to the needs of the user. The learned Counsel submitted that the findings of the Collector in para 12 of the order that Drill rods, pipes and bits are not integral parts of drilling rigs, they are essential parts without which drilling rigs would not be useable for achieving the desired purpose of boring wells, in fact supports the appellants' contention that these items do not make the machine complete. Shri Natarajan further contended that the confirmation of the demand by the Collector by invoking the extended period on the ground of suppression of facts is erroneous since the same controversy raised by the audit was communicated by the Department on 14-3-1980 and 27-9-1980 and reply to these objections was furnished by the appellants vide letters dated 6-5-1980 and 3-7-1980 respectively. He added that along with each of price lists in Part-II copies of the relevant contracts were also filed and the price lists were approved. He argued that from 1980 onwards the Department was aware of the pattern of operations and removals, and the price lists having been approved there could be no allegation of suppression. He contended that under these circumstances the demand invoking the extended period has to be held as time-barred. In support of his submissions he placed reliance on the following case law :-
(i) Collector of Customs v. Premier Mills Stores - 1992 (57) E.L.T. 197 (Tri.)
(ii) Koron Business Systems Ltd. v. Union of India - 1991 (51) E.L.T. 212 (Bom.)
(iii) CCE v. Chemphor Drugs and Liniments -1989 (40) E.L.T. 276 (S.C.)
(iv) Padmini Products v. CCE - 1989 (43) E.L.T. 195 (S.C.)
(v) Electrical Mfg. Co. Pvt. Ltd. v. CCE -1989 (40) E.L.T. 472 (Tribunal)
3. On behalf of the respondents Shri Prabhat Kumar, learned SDR stated that the drilling machines manufactured by the appellants are capable of drilling on their own only upto 4 feet, even though with attachment of drill rods, they can drill upto 450 feet. He added that it was an admitted fact that different customers invariably order certain quantities of Drill rods and bits depending upon the terrain and soil where they are to carry out the drilling operations. He contended that under these circumstances the entire equipment including the Drill rods and bits ordered by a customer under a contract should be assessed to duty on the total price as declared in the price list filed in Part-II. He stated the fact that Drill rods are essential items without which drilling operations cannot be carried out is also confirmed by the details in ISI-7209-1974 provided that tools and accessories such as Drill rods and Drill bits have to be supplied according to the needs of the customer along with drilling rigs. He contended that even according to the opinion given by Engineer-in-Chief on pages 213 to 215 of the Paper Book - Vol. I Drill rods and Drill bits are accessories they are essential requirements for carrying out any drilling operation. He submitted that Drilling rods and bits are invariably attached to the drilling machine for carrying out drilling operations even though for the convenience of transportation they may be packed separately. He contended that the opinion given by Danish International Development Agency cannot be accepted as correct in the light of the opinion given by the Engineer-in-Chief. He submitted that the opinion of expert cannot always be relied upon since as held in the case of Guest Keen Williams Ltd. v. Collector of Customs, Calcutta reported in 1987 (29) E.L.T. 68 (Tribunal) independent conclusion has to be arrived at keeping in view the nature of the equipment. He contended that on the analogy of computer which is treated as a single equipment even though it consists of different parts, Drill rods and Drill bits though packed separately have to be treated along with the Drilling rig as parts of the complete drilling equipment. He added that the fact that Drilling rods and bits are "bought out items" will not make any difference since the value of such part will form a part of the value of the drilling equipment taken as a whole. In support of his contentions he cited the following case law :-
(i) Rallis India Ltd. v. CCE -1993 (67) E.L.T. 144
(ii) Daya Ram Metal Works Pvt. Ltd. v. CCE, Baroda - 1985 (20) E.L.T. 392
(iii) Name Tulaman Mfg. Pvt. Ltd. v. CCE - 1988 (38) E.L.T. 66 (S.C.)
(iv) CCE, Bangalore v. Sunray Computers (P) Ltd. - 1988 (33) E.L.T. 787 Shri Prabhat Kumar contended that the nature of Drill rods and bits is quite different from the types of accessories whose cost has been held as excludable from the assessable value of the main equipment by various decisions of the Tribunal such as Universal Luggage Mfg. Co. Ltd. v. CCE, reported in 1990 (45) E.L.T. 508 (Tribunal).
4. On the question of limitation Shri Prabhat Kumar stated that the appellants had failed to supply the basic information by filing necessary declaration. He submitted that appellants had not disclosed that separate invoices were being raised in respect of Drill rods and bits. In support of his submissions he cited the following case law :-
(i) Continental Engineering Inds. (P) Ltd. v. CCE - 1989 (42) E.L.T. 14 (Tribunal)
(ii) TIL Ltd. v. CCE - 1991 (52) E.L.T. 602 Continuing his submissions Shri Prabhat Kumar stated that invocation of extended period was also justified since the appellants had indulged in the contravention of the Rules and the provisions of the Act. In this regard he placed reliance on the decision of the Tribunal in the case of Lustre Lampions, Madras v. Collector of Central Excise, Madras, reported in 1984 (18) E.L.T. 76 (Tribunal). He added that alternatively, if it is held that the extended period cannot be invoked, the notice served could be treated as in continuation of the notice for the shorter period and the demand for the normal period can be upheld. In this regard he placed reliance on the judgment of the Karnataka High Court in the case of Raletronics Ltd. v. Union of India, reported in 1992 (60) E.L.T. 388.
5. We have examined the records of the case and considered the submissions made on behalf of both sides. It is seen that the main points that arise for consideration in this case are whether, (i) Drill rods and Drill bits supplied by the appellants along with Drilling rigs for boring water wells constitute integral parts of Drills and the assessable value of the rig has to be arrived at by including the value of Drill rods even when they are "bought out items", (ii) the demand issued to the appellants was time-barred.
6. The appellants' case is that the water well drilling rigs manufactured by them are complete machines and even without any attachments they can perform drilling operations upto a depth of 4 feet. However, when drilling is to be carried out to greater depths a number of drilling rods/pipes of lengths varying between 10 feet to 30 feet and diameter between 3 1/2 to 4 112 inches are used depending upon the depth of the hole to be bored. One end of the pipe is attached to the drilling machine and at other end of the pipe, depending upon the earth strata various types of bits for cutting the earth and deepening the hole have to be fitted. On completion of the drilling operation the rods and bits are retrieved and disconnected from the machine. It has been contended that the Drilling rods/pipes and bits are only optional accessories and not integral parts of Drilling machines and requirement of these accessories varies from customer to customer depending upon the earth strata at the place where drilling is to be carried out and the depth upto which the drilling operation is to be carried out. For these reasons the appellants have contended that the price of such Drilling rods/pipes and bits would not be includible in the price of the Rigs for the purpose of determining their assessable value.
7. On the other hand, we find that while admitting that Drilling rods/ pipes and bits are not integral parts of Drilling rigs, in the impugned order the Collector has held that these items have to be deemed as parts of drilling rigs and their price would have to be added to the price of rigs for the purposes of levying duty since such rigs cannot be used independently without these essential parts for boring wells and carrying out other drilling operations. In this regard the relevant extract from para 12 of the impugned order is reproduced below :-
"12. Regarding the undervaluation of the drilling rigs by not including the value of certain essential parts required for use in the drilling rigs, it is observed that drilling rig is a machine used for drilling bore wells. Borewell can be drilled using drilling rigs only after fitting the required parts such as Hammers, drill rods, button bits, drag bits and using the drill pipes, without all or any of the above parts a bore well cannot be drilled using a drilling rig therefore, even if a drilling rig can be run without the above-mentioned parts, the very purpose of which the drilling rig purchased by the customers is not served. Therefore, though the above parts are not integral parts of the Drilling rig required to achieve the results. As admitted by the party in their reply these essential parts are required, according to the needs of the user in drilling a borewell at different locations having different earth strata formations, depth and diameter of the hole to be drilled etc. It is, therefore, evident that a drilling rig cannot be used independently to drill a bore well without the use of the above essential parts. Therefore, there is no substance in the argument of the party that drilling rig is a complete machine and can function independently without these essential parts when purpose for which it is purchased is not served. Therefore, the customers place order for these essential parts alongwith the drilling rigs and M/s. Ingersoll Rand supplies these essential parts along with the drilling rigs according to the needs of the customer but only to evade C. Excise duty on such parts, prepares separate invoices for such parts, with a plea that the drilling machine can function independently. I therefore hold that M/s. Ingersoll Rand have purposely invoiced separately the drilling rigs and the essential parts even though covered by the same purchase order to evade payment of C. Excise duty. This function is evident from the fact that the invoices under which the main drilling rig is supplied and invoice under which the essential parts are supplied are on the same date and it is only on record that these two items are separately invoiced even though supplied together as per the customer order. In the circumstances I hold that M/s. Ingersoll Rand have under-valued the drilling rigs manufactured and cleared by them without including the value of essential parts supplied along with the drilling rigs which are required for the effective functioning of the drilling rigs with an intention to evade payment of C. Excise duty. They have suppressed the fact of supply of these essential parts from the department by not mentioning them and their value in the Price lists and classification lists. Therefore, they are liable to pay duty due on the such essential parts cleared along with the drilling rigs without the drilling rigs without payment of duty during the period 1985-86 to 1989-90."
8. It is seen that the main finding of the Collector in the impugned order is that even though Drill rods/pipes and bits are not integral parts of Rigs they are nevertheless essential parts of the machines the appellants had deliberately invoiced them separately with the objective of evading Central Excise duty.
9. It is seen that in view of the findings of the Collector the question that needs to be examined whether Drilling rods/pipes and bits constitute essential parts of Drilling rigs and when any such items are cleared along with a Rig they would be assessable collectively as a single item namely, 'Drilling rig'. In this regard we consider it desirable to refer to the relevant extracts from the Headings 84.30 and 84.31 and the notes to these headings in the Harmonised System (HSN) which is an internationally recognised text and has been held as having of persuasive value in the determination of classification under the Central Excise Tariff. For the sake of convenience, these provisions in the HSN are reproduced below :-
"84.30 Other Moving, Grading, Levelling Scraping, Excavating, Tamping, Compacting, Extracting or boring machinery, For Earth, Minerals or Ores, Pile Drivers and Pile Extractors, Snow Ploughs and Snow Blowers.
...................................
...................................
Other boring or sinking machinery.
8430.41 - Self-propelled.
8430.49 - Other Note(F) - Well sinking or boring machines for extraction of petroleum, natural gases, sulphur (Frasch process), etc; for rasing well prospecting, for sinking of artisan wells, etc. These machines are two main types :
(1) Rotary well sinking machinery, (2) Percussion machines.
84.31 Parts suitable for use Solely or Principally with the Machinery of Heading Nos. 84.25 to 84.30.
..........................
..........................
The heading also excludes:
(a) Transmission or conveyor belts or belting of plastics ( ).
(b) ...
(c) Hollow drill bars and rods (Heading 72.28)
(d) Casing tubing and drill pipes (Heading 73.04 to 73.06)....
(g) Rock drilling bits and chisels, boring bits, auger bits and similar rock drilling or earth boring tools (Heading 82.07).
(h) ...
(i) ...
On a plain reading of the provisions of HSN extracted above it follows that Drilling Machines for sinking or boring of wells fall under Heading 84.30, the parts of these machines are covered by Heading 84.31. However, Drill bars/rods and Drill pipes are not classifiable as parts of Drill machines under Heading 84.30 as they are classifiable under Heading 72.28 and Headings 73.04 to 73.06 respectively. Similarly, Drill bits of various types are also not classifiable as parts of Drilling rigs and being earth boring tools they are classified under the more specific Heading 82.07. It is evident that even though Drilling rigs have necessarily to be used in conjunction with items such Drill rods/pipes and bits, these items do not constitute parts of such machines which are complete items in themselves.
10. In our view the conclusion that Drill rods/pipes and Drill bits are not integral parts of Drilling machines and the requirement of these items which are essentially in the nature operating equipment and tools varies from user to user also emerges from the reading of para 2.2.13 of ISI specification IS 7209/1974 for Blast Hole Drilling rigs which provides that Drill rods and bits of various types and capacities and tools and accessories which vary according to the needs of the user have to be supplied with such machines. The relevant extracts from the said specification are reproduced below :-
"2.2.13 Tools and accessories - The drilling rig shall be provided with the complete set of all operating equipments and small hand tools for carrying out repairs to both power units and other equipments. The following tools and accessories that are ordinarily to be supplied along with the drill shall be included but this is variable according to the need of the user of the drilling rig :-
(a) Drill bits of various sizes and types of drill through the different soil formations;
(b) Sufficient numbers of drill rods to cover the rated capacity of the drill;
(c) Drill rod hoisting fienge;
(d) Drill rod slip;
(e) Spirit level;
(f) Chain wrenches;
(g) Adjustable wrench;
(h) Set of files - flat, round, half-round etc. (rough and smooth).
(j) Cold chisel;
(k) Centre punch;
(m) Hammer;
(n) Pliers;
(p) Screw driver;
(q) Adjustable spanner;
(r) Set of double-ended spanners;
(s) Set of ring spanners;
(t) Set of box spanners; (u) Grasse-gun;
(v) Oil can;
(w) Steel tape;
(y) Hacksaw frame with blades; and (z) Set of alien keys.''
11. On behalf of the respondents the learned SDR has contended that even though Drill rods and bits are attached to the Drilling machine only while the machine is in use for any drilling operations, they have to be treated as essential parts of drilling machine and assessed along with the machine. In support of his contention he has cited the example of computer in which even though CPU, Key Board and the visual unit are detached, it is treated as single unit for the purposes of assessment. In this regard another example given by the learned SDR is that of a domestic kitchen mixer in which a number of attachments are packed separately. In our view these examples are not relevant since CPU, Key board and the visual unit are essential parts which go into the making of a computer and in the absence of any one of these it will neither be useable as computer nor will it constitute an item which is normally known as a computer. Similarly a mixer is always sold as a complete machine and only certain optional accessories are offered as separate or detached items. As against this, a Drilling machine is a complete machine in itself which is useable for drilling without any attachments upto a certain depth and such machines are known and even sold as complete machines.
12. It is seen that in the case of State of Uttar Pradesh v. Kores (India) Ltd. reported in (1977) 39 STC 8 on the question whether typewriter ribbon is a part/accessory of a typewriter, the Hon'ble Supreme Court has held that it is an accessory and not a part of typewriter even though it may not be possible to use the latter without the former, just as aviation petrol is not a part of the aeroplane. Relevant extracts of the said judgment are reproduced below :-
"Regarding ribbon also to which the abovementioned rule of construction equally applies, we have no manner of doubt that it is an accessory and not a part of the typewriter (unlike spool) though it may not be possible to use the latter without the former. Just as aviation petrol is not a part of the aeroplane nor diesel is a part of a bus in the same way, ribbon is not a part of the typewriter though it may not be possible to type out any matter without it."
13. In this regard it is also seen that in the case of Karon Business Systems Ltd. v. Union of India, reported in 1991 (51) E.L.T. 212 (Bom.) the Hon'ble Bombay High Court has held that photo conductive plates and black shields which play the same role in a photocopying machine as a film or plate in a conventional camera, cannot be deemed as parts of the copying machines even though they are required for the working of the machines. Para 4 of the said judgment being relevant is reproduced below :-
* * * * * *
14. We find that the Tribunal's decision in the case of Collector of Customs v. Premier Mills Stores, reported in 1992 (57) E.L.T. 197 (Tribunal) is also relevant to the issue under examination in this case. Paras 9 and 10 of the said decision in which the Tribunal had arrived at the finding that a drill or a drilling tool does not form a part of drilling machine even though a drill bit has necessarily to be attached to the machine for carrying out a drilling operation are reproduced below :-
"9. It follows from these definitions that even though a drill or drilling tool has necessarily to be attached to a drilling machine for any drilling operation, yet it does not form an integral part or a constituent of the drilling machine, which in itself is a complete item designed simply for holding and rotating the drill at a high speed.
10. It is common knowledge that drilling machines are not bought and sold with drills fitted to them. Drills are generally sold in the market as tools in the form of sets comprising of drill bits of different sizes and diameters. The choice of the drilling tool for a particular operation depends mainly on the size of the hole to be made and the nature of the solid material in which the hole is required to be drilled. According to Mc Graw Hill Dictionary of Scientific and Technical Terms, a drill is "a rotating end cutting tool for creating or enlarging holes in a solid material. Also known as a drill bit"."
15. On the basis of our findings that Drill rods/pipes and Drill bits are classifiable on merits under the relevant headings of the tariff and not as parts of Drilling rigs under Heading 84.31 and also on the ratio of the judgments discussed above we hold that Drill rods/pipes and Drill bits when supplied along with a Drilling rig would be assessable on merits under the relevant headings of the tariff and not as parts or attachments of Drilling rig and their value shall not be includible in the value of the machine. On these considerations, it follows that if such Drill bits/pipes and Drill bits are manufactured by the appellants they will attract duty under the relevant headings of the Tariff. However, if any of these items are received by the appellants as duty-paid "bought out" items for being supplied to customers along with Drilling rigs according to requirements of particular customers, then they shall not be chargeable to any further duty.
16. The learned SDR has contended that the value of bought out items has to be included in the assessable value of the equipment, provided they are compulsory or essential for the operation of the machine or equipment in question. In support of his contention he has placed reliance on the following decisions :-
(i) Rallis India Ltd. v. CCE - 1993 (67) E.L.T. 144
(ii) Daya Ram Metal Works Pvt. Ltd. v. CCE, Baroda - 1985 (20) E.L.T. 392
(iii) Name Tulaman Mfg. Pvt. Ltd. v. CCE - 1988 (38) E.L.T. 66 (S.C.)
(iv) CCE, Bangalore v. Sunray Computers (P) Ltd. - 1988 (33) E.L.T. 787 We find that in these decisions the question that arose for examination was whether the value of bought out items which are used as components for assembly or manufacture of any machine or equipment would be includible in the value of the machine or final product. In our view these decisions are distinguishable since as held by us the Drill rods in question do not become integral parts of the Drilling rigs and they are classifiable on merits under different headings of the tariff and not under Heading 84.30 along with Drilling rigs and not even under Heading 84.31 as parts of such rigs.
17. The second point to be examined is whether the demand issued to the appellants was time-barred. In this regard it is seen that the Collector had confirmed the demand by invoking the extended period in terms of proviso to Section 11A on the ground that the appellants had intentionally suppressed the facts by misdeclaring the value of the drilling rigs by raising separate invoices in respect of the certain essential parts and not including the price of such spares in the value of the Drilling rigs declared in the price lists, even though the parts in question were supplied along with the Rigs. In this regard the appellants have contended that from 1980 onwards the department was fully aware of the appellants' activities and the method of invoicing of the disputed items. They have stated that in March, 1980 and again in September, 1980 the same controversy was raised through audit objections and in their letters dated 6-5-1980 and 27-9-1980 while dealing with these audit objections they furnished all the required information to the Department. They have pointed out that along with the price lists filed from time to time in Part-II, the copies of the relevant contracts showing the details of all the items to be supplied along with the Drilling rigs were also furnished and all the price lists were approved. On these grounds they have contended that the Collector's finding that the appellants had intentionally suppressed facts by misdeclaring the value of Drilling rigs was erroneous.
18. We are inclined to agree with the appellants that there could be no allegation of intentional suppression since the relevant contracts showing the details of the Drilling rig and the other items contracted for sale along with the Rig were filed with the price lists which were duly approved. Further the same controversy on account of separate invoices having been raised in respect of items supplied with the Drilling rigs was raised earlier on two occasions in 1980 by way of audit objections which were duly replied to by the appellants.
19. In the case of Padmini Products v. Collector of Central Excise, reported in 1989 (43) E.L.T. 195 the Supreme Court has held that mere failure or negligence on the part of the manufacturer either not to take out a licence or not to pay duty in case where there was scope for doubt does not attract the extended limitation, unless there is evidence that the manufacturer knew the goods were liable to duty or he was required to take out the licence. Again in the case of Collector of Central Excise v. Chemphar Drugs and Liniments, reported in 1989 (40) E.L.T. 276 the Supreme Court has held that something positive other than mere inaction or failure on the part of the manufacturer or producer or conscious or deliberate withholding of information when manufacturer knew otherwise, is required before it is saddled with any liability beyond the period of six months. Having regard to the fact that the relevant contract showing the details of Rigs and other equipments contracted for sale was appended by the appellants with each price list and the price lists filed during the relevant period were duly approved, on the ratio of the Supreme Court's judgment quoted above we hold that the Collector's finding in regard to suppression of fact is not sustainable. For these reasons we hold that demand issued and confirmed by invoking the extended period beyond six months was time-barred.
20. In view of the above discussion the impugned order confirming the demand is set aside and the appeal is allowed.