Customs, Excise and Gold Tribunal - Mumbai
India Medtronics Pvt. Ltd., Shri Nitin ... vs The Commissioner Of Central Excise on 1 May, 2005
ORDER Archana Wadhwa, Member (J)
1. The Commissioner vide his impugned order has confirmed demand of duty of Rs. 76,86,875/- against M/s. India Medtronics Pvt Ltd., in respect of their product "custom pack" by holding that the same is a manufactured excisable goods classifiable under heading 9018.00 of the First Schedule to the Central Excise Tariff Act, 1985. In addition, personal penalty of identical amount has been imposed upon the said appellants under the provisions of Section 11AC of the Central Excise Act, 1944, along with confirmation of interest. The goods seized from their premises have also been confiscated with an option to them to redeem on payment of redemption fine of Rs. 5 lakhs. Penalty of Rs. 10 lakhs have been imposed upon the said appellants under the provisions of Rule 173Q of the Central Excise Rules, 1944. In addition, plant, machinery, building and land belonging to the said appellants have been confiscated with an option to redeem the same on payment of redemption fine of Rs. 5 lakhs. Penalty of Rs. 5 lakhs have been imposed upon Shri Nitin J. Shah, Director of the company.
2. As per the facts on records, the said appellants are engaged in the manufacture of Heart Valve and ECG Electrodes falling under Chapter 90 of the Schedule to the Central Excise Tariff Act, 1985, for which they hold a proper Central Excise Licence and are clearing the same on payment of duty. There is no dispute about the said product. Apart from the manufacturing the above goods, appellants are importing various parts like, Plastic Tubes, Connectors, Blood Filters, Caps, Oxygen Filters, etc., from their holding company and are assembling the same in their factory. Their factory was visited by the Central Excise Officers on 25/11/98, who conducted various checks and verifications. It was noticed that the product "Custom Pack", which emerged as a result of assembling of the above imported parts was being cleared by the appellants without payment of duty. The officers entertained a view that the said product was excisable. Accordingly, they seized the lying stock of 1493 Nos. of Custom Pack valued at Rs. 23,37,455/-. The factory was again visited by the officers on 18/12/98, when the samples were drawn. As a result of post seizure investigation statements of various persons were recorded. As a result of revelation made in the statements, it was noticed that the appellant is a subsidiary of Medtronic International Ltd., a multi national company based in U.S.A; that they have entered into a technical collaboration with their parent company to process the Custom pack; that all the components required for processing the tubing packs are imported from their parent company; that they assembled and the sterilize the components; that they hold ISO 9002 certification for assembling of tubing packs; that the parts cannot be used, as such without assembling.
3. Based upon the above statements and the scrutiny of the records, show cause notice was issued to the appellants alleging that they are engaged in the manufacture and clearance of Custom Pack without payment of duty. Accordingly notice proposed confirmation of duty in respect of the goods cleared, along with proposal to imposition of penalty and confiscation of various seized goods. During the course of adjudication, the appellants took a stand that the activity carried out by them does not amounts to manufacture inasmuch as they are merely assembling various parts imported by them for the facility of conducting heart operations in the hospitals; that mere assembling of various imported parts like tubing, connectors, blood filter, oxygen filter, stop cock, cable ties, caps, etc. are nothing but accessories to Heart Lung Machine and these configurations are made according to the specifications and parameters of various hospitals and it is not a standard products; none of the components looses its original identity and, as such, the final product cannot be called a manufactured product; that they merely undertake the process of cutting, wrapping, joining, cutting and then sterlising. The various components are put together for functional capacities and the said activity cannot amount to manufacture. The demand was also assailed on the point of limitation on the ground that they were harboring bonafide belief that the process carried out by them does not amounts to manufacture. Their belief was also confirmed by a legal opining given by their consultant vide his letter dated 28/07/96.
4. The Commissioner did not accept the above contention of the appellants and vide his impugned order held that the activity undertaken by the appellant results in emergence of a new product having distinct name, use and character, which is different from the various parts and components. As such, he held that the goods is a manufactured excisable commodity classifiable under heading 9018.00. As regards the limitation, the Commissioner invoked the longer period on the ground that the appellants had earlier filed a declaration, as regards the said product, when the same was exempted. No such intimation was given or declaration was filed, when the product subsequently became an excisable goods. As such, by holding that the appellants were indulging in clandestine activity, he confirmed the demand for longer period and imposed penalties, as detailed in the preceding paragraphs. The said order of the Commissioner is impugned before us.
5. We have heard Shri Willingdon Christian, Ld. Advocate and Shri Hitesh Shah, Ld. SDR for the Revenue.
6. The dispute in the present appeal is as regards the exciseability of the appellant's product "custom pack". Whereas the revenue has held that the said product is a manufactured product attracting duty of excise, the appellants had contended that various activities undertaken by them does not result in emergence of a new manufactured product. One of the seized records by the revenue was a file named "Business Quality System - Custom Pack Level-III", which contains a set of documents titled "manufacturing procedure - Customs Pack". The said file contains manufacturing flow chart of the customs pack showing the various stages of the manufacture of the said pack, like tube cutting, taping, capping, joints, tie bands, line sub assembly, sash wrap, final wrap, pack label, heat seal, inspection, sterilization, packing Q.C. release, etc. It is noted by the Commissioner that the said documents contained details and specifications of each of the above operations and gives various requirements for the manufacture of custom pack like, raw materials, packing materials, etc. There is no dispute to the processes undertaken by the appellants, as detailed in the above documents.
7. The appellants contend that the above processes undertaken by them cannot be held to be a manufacturing processes, inasmuch as the same is nothing but the assembly of various imported goods into a kit, which is used by the Doctors to connect the Heart Lung Machine with oxygenerator and the patient's body during open heart surgery. It is meant for use in the extra corporeal circuit during cardiopulmonary bypass. The processes of assembly of custom pack is a simple operation and no machinery is involved for conducting the above operations except "Sterilizer Plant". Sterilization does not bring any change in the imported components except that the bacteria are eliminated. The definition of manufacture as appearing in Section 2(f) of the Central Excise Act, 1944 does not cover the processes undertaken by the appellants.
8. We observe that it is not a simple or complicated nature of the process, which is the criteria to arrive at the finding of manufacture. The test as laid down by the various decisions and judgments of the Hon'ble Supreme Court is as to whether the resultant product which emerges after carrying out the said process is a new and different product having its own identity and but for the said processes the various inputs could not have been used as such. The nature and the extent of processes may vary from case to case. As such, it is to be examined as to whether a new and distinct article has come into existence known to the consumers and the commercial community as a commodity different from the various parts of which commodity is constituted. In the present case, admittedly, what was imported by the appellants was various parts like, plastic tubes, connectors, caps, blood filters, oxygen filter, stop cock, cable ties, etc. They were imported in bulk and not in kit form. The process of cut - Tubing into specified lengths, join - Tubing with connectors and place caps, join - Tubing with blood filter/oxygen filter and then packing the tubings/connectors/filters in wraps and plastic trays and sterlising the same to make it bacteria free and then final by packing the same in custom pack and marketing it under a brand name, in our view, resulted in emergence of a new product, which takes a different identity from the various components, it is made of. Admittedly, the various parts cannot be put to use to which custom pack can be used. The custom pack was not already in existence and the parts were not of any commercial use but for the aforesaid processes undertaken by the appellants. The appellant's contention is that various parts of the said pack does not loose their identity and, as such, final product cannot be held to be a different from the parts does not appeal to us, inasmuch as it is not necessary for the various components to loose their identity while being used in the manufacture of another product. The immediate example, which comes to out mind at this stage, the pen held in our hands. In a given hypothetical situation, if somebody is importing the caps, the lower body and upper body of the pen and the refills separately and in bulk and merely assemble the three parts, it cannot be said that the pen is not different from its various constituents. In this example also neither of the part looses its identity but still it cannot be said that either the cap or the body of the pen or refill can be used for the purposes of writing. It is only after the processes of assembling all the three components together that a pen, which is a new and distinct product emerges. As such, it is not the processes undertaken but the final product which is decisive of issue of manufacture.
9. In the present case, not only the process undertaken by the appellants but even the literature accompanying the said product as also the documents recovered from the appellants seized documents clearly laid down the manufacturing flow chart showing the various stages of the manufacturing, thus, indicating that the activity being undertaken by the appellants was a manufacturing activity.
10. Here, we may refer to some of the decisions of the Hon'ble Supreme Court on the disputed issue. In the case of Narne Tulaman Manufacturers Pvt Ltd., v. Collector of Central Excise , it was held that assembling of duty paid components of the weighbridge amounts to manufacture. Similarly in the case of BPL India Ltd., v. Commissioner of Central Excise, Cochin , it was held that assembly of imported kits of VTR with colour monitor was held to be a manufacturing activity inasmuch as after undertaking the process for the assembly, transformation of the character of imported goods took place and a new product emerges. In the decision of Commissioner of Central Excise v. Hindustan Zinc Ltd. , it was held that lead and aluminum sheets attached with headers to convert them into positive and negative electrodes was held to have converted into electrodes which was a new product known in the market with distinct name, character and use.
11. Tribunal in the case of Poonam Spark Pvt Ltd., v. Commissioner of Central Excise, Delhi held that assembly of various components received from another company on a base plate bring into existence a new and commercially different commodity known as water purification and filtration system. In an another decision of the Tribunal in the case of Shriram Pistons & Rings Ltd., v. Commissioner of Central Excise, it was held that the activity of matching the size and other specifications of the piston rings with other rings and supplying them after making a coil piston ring set to be used in a particular model of motor vehicle will result in emerges of a new and different article and the process would amounts to manufacture. In the case of Satnam Overseas Ltd., v. Commissioner of Central Excise, New Delhi, , mixing of raw rice, dehydrated vegetables and certain spices and condiments in a pre-determined proportion and blending them together in a mixer for uniformity and heating the blended mixer to sterilize the product and then packing the same in pouches with nitrogen flushing for a longer shelf life was held to be a manufacturing activity resulting in the manufacture of a new commodity known as a distinct and separate commodity having its own character, use and name.
12. By applying the test laid down by the Hon'ble Supreme Court in Empire Industries v. Union of India laying down that it is not the nature of the process or activity which determines the issue but the end result of that process or activity i.e. whether or not a new or different commercial product comes into existence, we find that in the present case the final product is known in the market as an identifiable product different than the various components it is made of. The product in question i.e. custom pack is being sold by them under a different name and has got a specific usage, which the individual component cannot perform. The function of carrying blood in between Heart Lung Machine and patient's body during bypass surgery can only be performed by the final product i.e. custom pack and the components cannot individually be used for the same.
13. The literature supplied along with the said pack by the appellants has been taken note of by the Commissioner and states as under:
Description/Contents: The design and components of this product were specified by the user from an array of components and designs offered by the manufacturer. Any change in the Cardiopulmonary bypass procedure that comprises the function of this custom pack is the responsibility of the user.
A reading of the above also reflects upon the fact that the appellants has itself considered him as a manufacturer of the customs pack.
14. The appellants have referred to Hon'ble Supreme Court's decision in the case of Deputy Commissioner Sales Tax (Law), Board of Revenue (Taxes), Ernakulam v. Pio Food Packers 1980 ELT 343 (SC) as also to the Hon'ble Supreme Court's decision in the case of Sterling Foods v. State of Karnataka and Anr. holding that conversion of pineapple fruit into slices or processing of shrimps, prawns and lobsters does not amounts to manufacture, inasmuch as they remain to be same commodity after subjecting to various processes. As already observed the question of manufacture is a mixed question of facts and law and has to be decided on the basis of processes undertaken and the final products emerging out of the said processes. In the above case, Hon'ble Supreme Court held that inasmuch as the final product remains the same as the starting raw materials, there was no manufacturer involved. The said decisions are not applicable to the facts of the instant case. Similarly, the appellant's reliance on the Supreme Court's decision in the case of Union of India v. J.G. Glass Industries Ltd. 1997 (23) RLT 768 (SC), holding that printing of names and logo on the duty paid commodity does not amounts to manufacture as basic character of commodity is not changed, does not advance the appellant's case inasmuch as the final product emerged after various processes is different than the starting components, as already observed by us.
15. The Commissioner has also observed in his impugned order that the product i.e. custom pack is being marketed by the appellants under their own brand name "Intercept (R)" which is being printed on the packing as well as on the custom pack. The said brand name appears to belong to the holding company. The appellant is also an ISO 9002 certification company and as such consider themselves as manufacturing unit.
16. In view of the above decisions, we hold that the appellants are engaged in the manufacture of custom pack, which they were bound to clear on payment of duty.
17. Demand has also been challenged on the point of limitation. The appellants have contented that they were under the bonafide belief that the process does not amount to manufacture and, as such, the fact of manufacture and clearance of said product without payment of duty was never disclosed to the department. It is their contention that such belief was based upon the opinion of the legal consultant rendered vide his letter dated 28/07/96. The above contention has not been accepted by the Commissioner on the ground that no such fact was placed before the department and the appellants have chosen not to take the opinion of the revenue. They were L-4 licence for an other product and instead of obtaining an opinion from some consultant, should have intimated the revenue and should have sought their opinion on the point.
18. The Commissioner has also observed that the appellants had filed a declaration dated 26/09/91 relating to the manufacture of the custom pack claiming exemption from the provisions of Rule 174 of the Central Excise Rules, 1944. In the said declaration, the appellants had declared themselves to be a manufacturer of custom pack falling under chapter heading 9018.00, which was during the relevant period attracted nil rate of duty under Notification No. 339/86 and 11/88. No such declaration was ever filed by them for the subsequent years. From the above, the Commissioner has concluded that when there was an exemption Notification, the appellants filed a declaration claiming the same but when the product became liable to duty, they did not file any declaration and took altogether different stand that the processes does not amount to manufacture. Even in the application filed for registration before the range officers, the appellants have only declared the Heart Valve and ECG electrodes, being manufactured by them but there was no mention of the custom pack.
19. In the ordinary course, we would have accepted the appellant's stand of entertaining a reasonable belief on the basis of opinion given by the legal consultant but for the fact that in the year 1991 they themselves have filed a declaration with the Central Excise department claiming them to be a manufacturer of customs pack and seeking exemption under Rule 174 read with various notifications. Surprisingly, no such declarations were filed by the appellants during the subsequent years, when their products became dutiable. One can argue that by filing a declaration in the year 1991, the fact of manufacture of custom pack was placed before the department and, as such, there was no suppression. However, in the absence of any such declaration filed in the subsequent year or any intimation having been given to the revenue about the continuation of manufactured said product, it cannot be accepted that the revenue would be aware of the continuation of the said production of the disputed item. The Commissioner has rightly observed that once having declared themselves to be a manufacturer of the items in question, even if the appellants subsequently entertained a different view, they should have approached the department for seeking a clarification instead of getting the same from a consultant and keeping the same in their files. The fact of manufacture of product during the relevant years came to the knowledge of the revenue only on their visit to the appellant's factory, whereas it was necessary to the appellants to disclose the activity undertaken by them. This facts having never been disclosed, we are of the view that the extended period has been rightly invoked.
20. In view of the foregoing, we confirm the demand of duty against the appellants. However, in the facts and circumstances of the case, penalty is reduced from Rs. 76,86,875/- imposed under Section 11AC to Rs. 30 lakhs. Penalty imposed under Rule 173Q of Central Excise Rules, 1944 is reduced to Rs. 3 lakhs. The confiscation of goods with an option to redeem the same on payment of fine of Rs. 5 lakhs is reduced to Rs. 2.5 lakhs. Confiscation of plants and building is however set aside. Penalty of Rs. 5 lakhs imposed upon the Director is also set aside.
21. Both the appeals are disposed off in above manner.
(Pronounced in Court on....)
Sd/- 05-05-05
(C.N.B Nair) (Archana Wadhwa)
Member (T) Member(J)
C.N.B. Nair, Member (T)
22. I have given my careful and earnest consideration to the view taken by the learned Member (Judicial). I see the issue quite differently. Therefore, I am recording my order separately :
23. The main issue in this case is whether Customs Pack (also called 'Custom Tubing Pack') is to be treated as manufactured goods. At the cost of repetition, I may note the process involved. Arterial and Venous Tubing are imported in running length. Connectors, filters, caps etc. are also imported in bulk. Arterial and Venous tubing are cut to specified lengths and are connected to filter, connector and cap. Filter is not an invariable item since in some cases, filters are not ordered by the buyer. Once so assembled, the customs pack is ready for use in a heart surgery (other than beating heart). As the surgeon fixes the grafts (sic) on the patient's heart, a heart lung machine keeps the patient's blood oxygenated and purified. The Customs Pack connects the patient's artery and vein to the oxygenator and heart lung machine for blood purification during the course of the surgery, until his own heart resumes its function. The Custom Pack is, thus, a pack of accessories to the surgery. The items in the pack are one time consumables for surgery. At the end of a surgery, the items are disconnected and discarded. The dispute that has arisen between the Revenue and the appellant is whether the putting together of various items in a (sic) Custom Pack is manufacture of goods. I am of the view that the very name of Customs Pack described the activity as well as the item. The activity is one of packing and the items in the package are as ordered. That the activity is essentially one of packing is clear from the processes already described. Having, thus, noted that the activity involved is (sic) packing, and the product is a custom made pack, the question to be answered is whether packing amounts to manufacture. Dictionary describes a pack as "full set of like or associated things", also usually as "combination of items considered as a unit". The items in the present case are 'associated things' for a surgery and they are also a unique combination of 'items considered as a unit' i.e. required for one use.
24. There could be no argument that packing is the same as manufacture. Because, manufacture involves bringing into existence something new, whereas, packing is merely putting together or covering items already in existence. In the present case, all the items assembled in a pack were already in existence. The appellant is only arranging them in a particular order and thus, putting them together as a set for ready use. The items retained their individual entity even after coming together in a temporary arrangement for one use. They have not dissolved into a new product with a new name, use etc. After all, 'pack' is not a name of any product. A pack can be of any item or items.
25. In fact, the distinction between 'manufacture' and 'packing' runs through Central Excise Law. The valuation provision for manufactured goods clearly specifies to what extent the cost of packing would be includible in the assessable value of the goods. Similarly, the Tariff specifies through 'Notes' when packing shall be deemed to be manufacture. That being, the legal situation, it would not be permissible to equate packing with manufacture. At best, packing may form one of the processes of manufacture; but is not, by itself, manufacture. In the present case, since the activity is one of the packing, there was no manufacture and no duty was liable to be demanded.
26. The classification approved in the impugned order also brings out the incorrectness of the finding. It has been held that the 'Custom Pack' is liable to be classified under heading 9018.00. During the period of demand, heading 90.18 read as under:
Instruments and appliances used in medical, surgical, dental or veterinary science, including scientigraphic apparatus, other electromedical apparatus and sight-testing instruments.
Custom pack is no instrument or appliance. It is merely a collection of accessories for a surgery.
27. In the material facts of this case, the relevant case law are the decisions relating to excisability of packing. The decisions are in the assessee's favour. In the case of T.I. Diamond Chain Ltd. -- 2000 (126) ELT 790), the Tribunal held that procuring sprockets and packing them after testing and branding along with automotive chains and connecting limbs in a kit is not manufacture. This decision remains approved by the Hon'ble Supreme Court [2001 (130) ELT A 259 (SC)]. Same was the finding of the Tribunal in the case of packing of soap, shampoo, hair oil and cream in the case of A.D.I. Enterprises [.
28. In view of what is stated above, I am of the view that Customs Pack in question is not manufactured goods and for that reason, no excise duty is attracted on it. The impugned order which has held to the contrary is required to be set aside and appeal allowed.
Sd/- 24-05-05 (C.N.B. Nair) Member (T) Difference of opinion Whether the demand of duty is to be confirmed and various penalties reduced or/and set aside, as recorded by Member (J) or the impugned order is to be set aside in its totality and appeal allowed as held by Member (T).
Jyoti Balasundaram, Vice President
29. I have heard both sides on the difference of opinion between the Members of the Original Bench. The issue relates to excisability of "custom pack" consisting of Plastic tubes, Connectors, Blood Filters, Caps, Oxygen Filters, etc. While the ld.Member(J) has held that the product is a result of manufacture falling for classification under CET Sub-heading 9018.00 attracting duty at the appropriate rate and that the appellants are also liable to penalty, the ld.Member(T) has held that the product in question is not manufactured goods and for that reason no excise duty is attracted. The process involved in making "customs pack" has been set out in para 23 of the order recorded by the ld.Member(T) and is hence not being reproduced by me. As correctly noted by him, 'pack' is not a name of any product and a pack can be of any item or items. In the present case, the items are associated things for heart surgery, all the items assembled in the 'customs pack' were already in existence and were only arranged together in a particular order for ready use as a set. The packing or assembling of the items in a particular order is not a process amounting to manufacture. Further, the classification adopted in the impugned order viz. CET Sub-heading 9018.00 is also not correct for the reason that the heading during the relevant period covered 'instruments and appliances used in medical, surgical, dental or veterinary science including ... while the customs pack is not instrument or appliance but merely a collection of accessories for heart surgery. It would be relevant to consider the decisions relating to excisability of packing. The ld.M(T) has considered case laws relevant in the context of excisability of packing viz. Tribunal's decision in T.I. Diamond Chain Ltd. which has been approved by the Supreme Court and A.D.I. Enterprises to hold that packing various items in a kit does not amount to manufacture. The ld.SDR has not cited any decisions to the contrary on excisability of packing. He, however, relies on certain decisions to support his argument that a new product having different name, character and use comes into existence as a result of process carried out by the appellants on the imported items. However, these decisions are distinguishable from the facts of the present case. In the case of Narne Tulaman Manufacturers Pvt.Ltd. v. CCE , the Apex Court held that the activity of assembling of three components viz. Platforms, load cell and indicating system amounts to manufacture for the reason that it brings into existence a weighbridge, which is a new product known to the market, in B.P.L. India Ltd. , the Supreme Court held that assembly of imported kits of VTR with colour monitors imported in disassembled/SKD condition falling under T.I.68 of erstwhile Central Excise Tariff for levy of countervailing duty amounts to manufacture, upholding the Tribunal's finding that after undergoing the process of manufacture for the assembly, the product at the time of clearance from the factory was classifiable under T.I. 37BB and therefore, a transformation in the character of the imported goods took place and a new product is emerged. In Hindustan Zinc Ltd the Apex Court held that the attachment of lead and aluminium sheets with headers to see that lead and aluminium sheets become positive and negative electrodes so that current can pass through them, amounted to manufacture as the sheets were converted into electrodes which is a new product known to the market with distinct name, character and use. In the case of Poonam Spark P. Ltd. also, the same reasoning viz. emergence of a new and commercially different commodity i.e. Water purification and Filtration system, lead the Tribunal to hold that the assembly of various components such as Filter Housing Cartridge, U.V.Units, Timer, Tubings and Fittings etc. amounted to manufacture. In Shriram Pistons & Rings ltd. , the Tribunal held that since new and different article having distinct character and use emerges as a result of making coil piston ring set for use in a particular model of motor vehicle, the process carried out by the appellants amounted to manufacture within the meaning of Section 2(f) of Central Excise Rules, 1944. In Satnam Overseas Ltd. , a new product classifiable under Chapter Heading 21.08 of the Schedule to the CETA 1985, consisting of raw rice mixed in a pre-determined proportion with dehydrated vegetables, spices and condiments, emerged as a result of mixing and the product no longer remains the product of milling industry classifiable under Chapter 11 but becomes an edible preparation classifiable under Chapter 21.
30. The common thread running through all these cases is the emergence of a new and commercially different commodity, having a different name, character and use. However, in the present case, no new product emerges as a result of cutting tubing with connectors, tubing with blood filter/oxygen filter and packing the same in ready to use condition for heart surgery, so as to hold the process as amounting to manufacture and liability to duty.
31. In the light of the above discussions, I concur with the view of the ld.Member(Technical).
32. The file is now returned to the Original Bench for passing majority order.
Sd/- 24-03-06 (Jyoti Balasundaram) Vice President 09/03/06 FINAL ORDER In view of the majority order, the demand of duty is set aside and appeal allowed with consequential relief to the appellants.