Customs, Excise and Gold Tribunal - Mumbai
Jayshree Industries vs Collector Of Central Excise on 24 September, 1992
Equivalent citations: 1992(40)ECC220, 1993ECR185(TRI.-MUMBAI), 1993(63)ELT492(TRI-MUMBAI)
ORDER R. Jayaraman, Member (T)
1. All the above 15 Appeals are against the Common Order in Appeal passed by the Collector (Appeals) under his Order No. 363 to 377/91, dated 25-4-1991.
2. Since the issue involved in all these appeals is one and the same, they were heard together and hence proposed to be disposed of by this common order.
3. Though, in some cases, some minor issues (which are not common) exist, the Ld. Advocate pleaded that they have not appealed against them and they are pressing only, one issue namely the eligibility of Modvat Credit in respect of duty paid on dry battery cells fitted to the Quartz, Clocks and time pieces.
4. All the four appellants referred to above are engaged in the manufacture of Quartz, Wall Clocks classifiable under 9105.00 of Central Excise Tariff. They bring in duty paid dry battery cells, which are reportedly placed in the battery compartment in such a manner to prevent leakage of the dry cells and thereafter sealed and packed for delivery at the factory gate to the buyers. They filed a declaration under the Modvat Scheme, showing these battery cells as an input against the final product Quartz, Wall Clocks. This, however, came to be objected to by the Department by issue of various Show Cause Notices (all reported to be within the normal limitation period).
5. The Show Cause Notice, only contends that the battery cell cannot be considered as an input used in the manufacture of final product namely clocks. However, in the order of the Assistant Collector, the following reasoning is given for holding that it is not an input for wall clock. "Rule 57A of the Central Excise Rules speaks of goods used in or in relation to the manufacture of the final product as specified in the notification issued under this Rule. The battery cells are not required in the course of manufacture of Quart/, Clocks but are required only to run the same. The battery cells are used for operational functions and are more in the nature of accessories of clocks than inputs in the same. Therefore the dry battery cell cannot be regarded as an input used in or in relation to the manufacture of Clock and time pieces".
6. In Appeals before the Collector (Appeals), he rejected the appeals by the Common Order, which is now impugned before us.
7. The only issue for consideration in all these appeals is whether Modvat Credit of duty paid on dry battery cells is available for payment of duty towards the final product - Quartz, Wall Clock/time pieces, treating the cells as inputs for the above final products in terms of Rule 57A of the Central Excise Rules.
8. We heard the elaborate, interesting and attractive arguments from the Ld. Advocate Shri Sheth on behalf of the appellants and equally effective rebuttal by the Ld. SDR Shri Mondal.
9. For the sake of avoiding repetition, we are not separately recording them but would consider them in our findings at the appropriate stage.
10. Before proceeding to consider the rival contentions from both the sides, certain factual position, presented before us by the Ld. Advocate is required to be stated.
They are as below :-
(i) These battery cells, in some cases, are purchased from manufacturers of dry cells on 'Made to Order' basis with the names of the appellants embossed on the cells, (samples shown to us).
(ii) These cells are placed in the compartment meant for fitment of cells in the clock, in such a manner that they are not exposed to leakage. Thereafter they are sealed and the clocks packed with battery cells placed in the clock. These packs with dry cells only are delivered in the course of wholesale to dealers at the factory gate.
(iii) Quartz Clock is a modern development and it is an electronic item. It uses quartz crystals, which control the impulses on the clock movement. Battery cells provide the requisite power for motivating the impulses.
(iv) As against Quartz Clocks, old time clocks were operated on spring mechanism motivated by a key, operated mechanically.
11. Against the aforesaid factual position, we proceed to consider the various issues posed before us. For the sake of convenience, we are dealing with the same under the following headings, seriatim.
(i) Contentions raised in Show Cause Notice, Assistant Collector's order and Order of the Collector (Appeals).
(ii) Arguments advanced on legal grounds by both sides,
(iii) Board's classification on this issue and connected matters,
(iv) Modvat Scheme and its economic objective.
11.1. Contentions raised in S.C.N./A.C.'s Order/Order in Appeal.
(i) The S.C.N. is cryptic in its allegation. It does not specify any reason for alleging that battery cell is not an input. Hence there is no scope for us to consider the objection in detail.
(ii) However this allegation is upheld by the Assistant Collector by a reasoning to the effect that Rule 57 A refers to inputs as the goods used, in or in relation to the manufacture of the final product. Battery Cells are not required in the course of manufacture of Wall Clocks but they are used for operational functions and hence are more in the nature of accessories of Clocks than as inputs required for the manufacture of Clocks. There is prima facie fallacy noticed in this reasoning of the Assistant Collector. Rule 57A does not stipulate that goods are to be only used in the course of manufacture of final product. In other words Rule 57A does not stipulate that only goods used in the mainstream of manufacturing line of the final product, can be construed as inputs. The words used are "in or in relation to the manufacture" of the final product. If the Assistant Collector's view is to be accepted, paints and packaging materials can never enter the mainstream in the line of manufacture. They would come only posterior to the completion of the product at the stage of finishing and painting. All the same, paints and packaging materials are included as inputs and there is an internal usage of the term 'in relation to' the manufacture in the Rule 57A, to cover such contingencies of usage of materials as inputs, even after the emergence of the product, having the essential characteristics of the final product. We will deal with the question whether dry cells, in the facts and circumstances of the case, can be regarded as an accessory or component elsewhere in our findings.
(iii) Now coming to the reasoning given by the Collector (Appeals) in his order, he holds that dry cell is not required either in the manufacture or in relation to the manufacture of Quartz Wall Clocks. They are required only after these clocks are fully manufactured and are ready for delivery stage, merely for the purpose of providing power. These clocks are fully manufactured even before fitting the dry cells. The role and usage of dry cells is identical and similar to that of petrol in the motor car. The motor car cannot be said to be not manufactured unless petrol is put. The petrol is used only as a fuel only after the car has been fully manufactured. Similarly dry cells are used as a source of power to run the clocks, after they have been fully manufactured. The appellants plea based on marketability and inclusion of value of cells in the value of Wall Clocks is not relevant. They are relevant only for computation of the assessable value. While we propose to consider this aspect of relevance of marketability and value of the cell being included in our findings elsewhere, at this stage, we are only required to state that the analogy drawn by the Collector, comparing it to petrol used in the Motor car does not appeal to us. Petrol is a fuel for running the engine. A dry cell is a sealed vessel containing dry electrolyte and electrodes for release of power in the electrical circuit of the apparatus, where it is fitted to. Both cannot be construed to be indentical or similar excepting to the extent that in the case of dry cell, they provide power for running of the Wall Clock, while petrol provides the fuel for running the Combustion engine. We would deem it more appropriate to compare the dry battery cell to storage battery fitted to the motor car. Because both belong to the same genus and perform similar functions. However it was pleaded by Shri Mondal that storage battery in a car is only for starting the engine and once the engine is started, petrol provides the power for running the engine. While we appreciate this argument, we are to ask this question namely when, for a similar item storage battery confined only to the function of starting the engine of a car, Modvat credit is given, could it be denied to the battery cell, which is fitted into the Clock for the purpose of running the Clock?
11.2(i) Arguments on legal grounds : The Ld. Advocate's main plea is that the term 'Manufacturer' used in Rule 57A is to be construed in the light of the definition given under Section 2(f) of the Central Excise Act and viewed in that context, even processes incidental or ancillary to the completion of the Manufactured product would come within its purview. Completion of the manufactured product can be only when the goods reach the state of delivery. We have taken a similar view in another case of Ashwin Vanaspathy, reported in 1992 (20) ETR 220, but the issue has been referred to the Larger Bench, since it is a variation with the view taken by the South Regional Bench. Moreover Shri Mandal's argument in this regard is worthy of acceptance. He pleaded that a process like polishing, painting or packing can be construed to be processes incidental or ancillary to the completion of the manufactured product and not one of insertion of dry battery cells in the space meant for it in the Wall Clock. Even in the case of Ashwin Vanaspathi (supra), the processing related to packaging, where we have referred the issue to the larger Bench. Hence we do not propose to go by this Yardstick alone for coming to the conclusion.
11.2(ii) Another argument of the Ld. Advocate is that it is not an accessory but is an essential component supplied along with the clock for running of the clock. Though the watch movement is complete, unless it is provided with the cell, it cannot have any use. Clock, if it does not run, has no market. For marketability, a cell is necessarily and compulsorily supplied and its value is included in the value of the clock. It is not given as a complimentary gift nor it is given only for sales promotion. It is a component required for the running of the clock. In that sense it is an essential component and not an accessory. The trade practice is to sell the clock with the battery cell, though subsequent replacements are done by the customer on his own. Hence when it is an essential component supplied along with the clock for the running of the clock and its value is included in the value of the Wall Clock, it cannot be dismissed as an optional accessory.
11.2(iii) As against this, Shri Mondal contends that battery cell, even if it is required for running the clock, it can be purchased from anywhere by the customers and need not have to be supplied with the Wall Clock. Battery Cell is only a consumer item available for sale as such and cannot be construed to be an identifiable component for the Wall Clock.
11.2(iv) The rival contentions, both equally attractive, are required to be considered from a slightly different angle. That is what we proposed to do. Before, doing this we must first stear clear of the dispute on the question whether the battery cell, in this case, is a component or accessory. We draw assistance from the citations made by both the sides and also looked into the dictionary meanings of the terms. In the case of Jyoti Ltd. v. U.O.I. 1979 (4) E.L.T. (J 546) (Guj.), the Gujarat High Court construed an accessory as an object or device, which is not essential by itself but adds to the beauty, convenience or effectiveness. In the case of Precision Rubber Industries v. Collector of Central Excise 1990 (49) E.L.T. 170 (Bom.), the Bombay High Court construed a component as a constituent part or ingredient such as the various components of electric motor. In the case of Chemical system, it is used to denote an ingredient of a Chemical compound. The word 'accessory' is taken to mean an altogether different connotation. It signifies aiding or contributing in a secondary or subordinate way. It is used to suggest a role or status, which is supplementry or secondary to something of a greater or primary importance. In other words, accessory is something which is essential and secondary or subordinate or, incidental to the main object.
The Bombay High Court also holds the view that a 'component' is always an essential element of the machine, while accessory is an aid to the machine. "A, machine is not a machine without a component, but a machine can perform without a given accessory".
(Emphasis supplied).
11.2(v) In the case of East End Paper Industries 1989 (43) E.L.T. 201 (S.C.), the Apex Court held that 'goods' must be something, which can ordinarily come to the market to be bought and sold and is known to the market as such. Since the Tribunal found that and there was material to show that the market, in which the article in question is sold were paper packed in wrapper paper, such wrapper paper must be deemed to be raw material or component of the packed paper being the end product and must be deemed to have been used in completion of manufacture of the end product. The Apex Court also took note of their earlier decision in the case of Jay Engineering Works -1989 (39) E.L.T. 169 (S.C.) where based on the same principle, they allowed the set off of duty involved on name plates affixed to the electric fan. Thus, from these two decisions of the Supreme Court, (though in the context of proforma Credit or Notn. 201/79), the view of the Apex Court appears to be that anything which goes in to the marketable stage of the final product could be regarded as component.
11.2(vi) We also looked into the dictionary meanings of the terms 'accessory' and 'components', which also indicate that accessory is an item of secondary or subordinate importance in the performance of the machine. It only adds or aides to the efficiency of the machine, where as a component is an essential constituent of the machine and it is of prime importance to the machine.
11.2(vii) With these materials before us, we take up the case of battery cells in a Quart/, Clock. It is not in dispute that battery cell is essential for the running of the Quartz Clock and the Clock cannot perform its function without the battery cell being fitted into it. It is not an item, which goes as an attachment to the Clock for improving its efficiency or for performing a secondary or subordinate function. Clock is dead, if battery goes away. In this view, battery cell does not fit in with the concept of an accessory as held by the Assistant Collector and as pleaded by Shri Mondal.
11.3(viii) Once we hold that it is not an accessory, then what is it? It cannot be just dismissed as a common place consumer item, which can be purchased from anywhere like petrol and not a component for running the Clock for the following reasons.
In the olden days, the Clock was operated by spring mechanism, which is to be wound with a key, invariably supplied with the Clock for winding. The key does not go into the mainstream of manufacture of Clock movement, fitted into the casing with dial and hands. A hole is provided in the casing for insertion of the key to wind the spring and key used to be placed separately and packed along with the clock. Now, with the advancement of technology, clocks with spring machanism are replaced by Quartz Clocks, when the motive power for running the clock is provided by the battery cell. If a key could be construed to be an external component essentially required for running Quartz Clock, (which the Ld. SDR does not dispute) why not battery cell fitted and supplied along with Quartz Clock? This is the question which we are to answer, having regard to the ratio of the decision of the Apex Court in the above cases.
11.2(ix) In the case of Jay Engineering, even name plates affixed to the fan have been construed to be a component for the electric fan, though it is not an item essential for running of the fan but an item essential for marketing it. The Apex Court have held that an item entering into the stream for completion of the manufactured product rendering it fit for marketing can be construed to be a component. Hence, with these judicial pronouncements from the Apex Court, we are to hold that the battery cell (even it can be purchased independently), if supplied as a component essential for running of the Clock and such Cells are neither sent as complimentary gifts nor in numbers more than what is required for the running of the Clock, they would have to be construed as essential component being supplied, with Clock mechanism in the course of sales from the factory. Shri Mondal however argued that he cannot be sure whether this is the marketing pattern of sale of Quartz Clocks and whether the battery cells involved in the present dispute are confined only to the number of cells required for running of each clock. On this we may observe that claim made by the appellant's Counsel before us has also been made before the lower authorities and there is no challange to the claim by the lower authorities. In any case, we allow the liberty to the Department to verify on this aspect to ensure that Modvat credit is claimed only in respect of battery cells of the required number for running of each clock and packed with the clock and the cost of battery cells is included in the value of the Quartz Clocks.
11.2(x) Thus we could arrive at an answer to this contentious issue, in favour of the appellant, based on the decision of the Apex Court at this stage itself, without going into the other considerations of Board's Circulars and the economic objective of the Modvat Scheme. However for the sake of record and to set at rest any doubt on this and possible similar issues likely to be raised in future, we would deem it proper to consider them, as well, obiter.
11.2(xi) Before doing that, we deem it necessary to deal with certain questions raised by Shri Mondal. He pleaded that torch lights are sold independent of dry cells, though torch light cannot function without the presence of the dry cells. Likewise there are many electronic gadgets like transistor radios, two-in-ones, etc., where they need dry cells for their operation. Would Modvat credit in respect of dry cells be available to them? We may not able to precisely answer this question on a hypothetical basis. However, if the dry cells are essentially required for their operation and are invariably supplied along with these gadgets and those gadgets are marketed along with those cells fitted into and packed with gadgets, and this is the marketing pattern for those goods, Modvat credit cannot be denied to the dry cells, dismissing it as an accessory in view of the decision of the Apex Court considered by us. Dry Cells in such gadgets are not complimentary gifts, like spoons given with Tea packets or soap cake given with talcum powder, as sales promotion measure, where eligibility of Modvat credit on spoons and soap cakes could be questioned. Eligibility therefore depends on the facts of the each case and no generalisation is possible.
However, questions, to be asked would, in our view, be whether they are essentially required for the operational need of this gadget, if the answer is 'yes'; whether it is compulsorily supplied with the gadget at the point of delivery through factory gate and if the answer is 'yes'; then whether its value is included in the value of the gadget at the factory gate? If the answer to all the questions is positive, then in terms of the Apex Court's judgment, cited supra, we are to allow Modvat credit. If the Govt. feels that it should not be allowed, they are at liberty to specifically exclude 'dry cells' by incorporating it in the exclusion clause to Rule 57A, as they have done in the case of some other items or deleting the item from the Notification issued under Rule 57A.
12.1 Board's and Departmental Clarifications : We were informed that for the sake of ensuring uniformity, the Board have identified certain inputs as eligible and certain others as not eligible. This is available in Madya Pradesh Collectorate Trade Notice 62/91 dated 7-6-91 reproduced in one of the issues of Excise Law Times, referred to by the Ld. Advocate. On seeing this list we find items like tool kit, Jack assembly, spare wheel supplied with motor vehicles, whose value is included in the assessable value of the Motor vehicle, are declared to be eligible inputs. On the question of eligibility of Modvat credit on tool kits for scooters, the South Regional Bench of the Tribunal in the case of Sundaram Clayton -1989 (44) E.L.T. 578 (Tribunal) held that the Modvat credit is not admissible. The reasoning given is that tool kit is not an integral part of scooter and it is not required in or in relation to the manufacture of scooter and scooter cannot be construed as unfinished without tool kit.
However, we find that the decisions of the Apex Court (supra) were not cited before them nor they were considered. The East Regional Bench of the Tribunal in the case of Telco - 1991 (32) ECR 165 (CECAT-ERB), however allowed Modvat credit for tool kit and jack assembly, accepting the Board's clarification as within the framework of law. We are inclined to accept the view of the East Regional Bench for the reason that if the items are essentially supplied for the running of the vehicle and this is the pattern of marketing at the factory gate, they would have to be construed as eligible components, in terms of the Apex Court's decision. That appears to be the probable reason, why the Department in the aforesaid Trade Notice, have also construed labels, stickers, nameplates affixed to the final products as eligible inputs.
12.2 When these views of the Board are found to be in line with the decision of the Apex Court, we are unable to appreciate the rationale behind the Madurai Collectorate Trade Notice No. 49/91 dated 29-5-1991 conveying the Board's views to the effect that after reconsideration of the issue regarding eligibility of Modvat Credit on dry cells for Quartz Clocks, it has been decided by the Board not to allow the credit. No reasoning is forthcoming in the said Trade Notice, nor it was specifically put forth by the Ld. SDR as to why the Board have arrived at this decision. While we do not propose to dismiss the Board's advice to the field formations on the ground that it is not binding on us, we are rather intrigued as to how such a stand could be maintainable in the context of their own instruction on tool kits, jack assembly, spare wheel for vehicles, and also in the context of their instructions on labels, stickers and nameplates affixed to final products. Hence we prefer to ignore the Board's view contained in Madurai Collectorate Trade Notice (supra) and go in all cases, by the ratio of the decision of the Apex Court.
12.3 It may also not be out of context to mention here that even the Tax Reforms Committee Chaired by Professor Raja Chellia in their final Report Part 1 (vide para 4.11 of Chapter 4) have cited this specific case of dry cell used in Quartz Clock as one example, arising out of lack of understanding of the economic justification for extension of Modvat Credit and it is a case of denial of relief, at the Officer's discretion.
13. Context of Modvat Scheme of economic objective - Now we come to the last in our agenda - namely problem viewed in the context of Modvat Scheme and its objective. 'Modvat', as reflected in the Honourable Finance Minister in his Budget speech, while introducing the scheme in 1986 in a lighter vein told the Parliament that the scheme is a modified Value Added Tax Scheme and not 'Mad Vat', (which we now find, driving us mad). Value Added Tax or 'VAT' is a tax collected at each of stage of value addition. Since a wholesale VAT is not possible in India because of the division of Taxation powers between the Centre and the States by the Constitution of India, a modified VAT has been introduced at the manufacturer's level so as to reduce the cascading effect of input taxation on the final product. The economic objective of the scheme is to mitigate the burden of levies on inputs going into the manufacture of the final product, by giving credit in respect of the duty paid on all inputs, which go into the making of the goods for delivery at the factory gate by the manufacturer. Thus, the scheme could be brought within the purview of excise law and would not disturb Centre-State division of Taxation powers.
In this background, we are to take a view that the inputs, which go upto the stage of ready for delivery at the factory gate, may have to be given the credit and this is also in line with the law as per the ratio of the decision of the Apex Court. If, on revenue or other considerations, the Govt. wants to deny this scheme to some inputs as in the case of Petroleum products, Textiles, or in the case of selected categories of items such as machinery equipment etc., they can specifically exclude such inputs either by placing them in the exclusion clause under Rule 57A. or by deleting them from the Notification issued under Rule 57A. In our view, such a denial cannot be resorted to by means of a Trade Notice, especially when the provision of the Trade Notice are repugnant to the ratios of the decision of the Supreme Court and also against the very economic criterion behind the Modvat Scheme.
14. In the result, judged from all angles, we are satisfied that the appeals are required to be allowed. Hence we allow all the appeals on this main issue, but would give the liberty to the Department to verify on the factual position, as to whether the dry cells are supplied only of the required number for each Clock and they are packed and sealed with the each Clock and the value of dry cell is included in the assessable value of the Quartz Clock. If, on such verification, the authorities find the position as stated by the appellants before us, they are directed to restore the Credits, which were earlier disallowed by them. Appeals are thus allowed in the above terms.