Customs, Excise and Gold Tribunal - Delhi
Baker Mercer (India) Ltd. vs Collector Of Central Excise on 7 March, 1995
Equivalent citations: 1995(78)ELT336(TRI-DEL)
ORDER G.R. Sharma, Member (T)
1. M/s. Baker Mercer (India) Ltd. have filed three appeals. As the issue involved in the three appeals is the same, therefore, they are being disposed of by this common order. These appeals have been filed against the orders of Collector of Central Excise (Appeals).
2. Briefly stated the facts of the case are that the appellants are engaged in the manufacture of mechanical/pneumatic/electronic gauges and parts thereof. They have been selling oil and moisture filters which they claim to be an optional accessory and happens to be a bought out item with the air gauges to some of the customers who order for them alongwith the order for air gauges. The department was of the view that oil and moisture filters are standard equipment/accessory of air gauges and therefore the value of the oil and moisture filters should be added to the assessable value of air gauges and duty will be computed on the composite value. The Asstt. Collector in his order after examining the evidence produced by the appellants and considering the relevant submissions made during the course of personal hearing held that oil V and moisture filters are an integral part and essential part of the air gauges. The main function of the oil and moisture filters is to prevent impurities in the compression line for entering info the air gauges. Thus, if the filters are not used, the impurities in the compression line will damage the air gauges and reduce its utility and also longivity. Thus, it was held that as the oil and moisture filters perform an important function to prevent the impurity from entering the air gauges and are as such an important, essential and integral part of the air gauges. After considering the rulings in the case of CCE v. Lavkein Pvt.. Ltd. reported in 1987 (31) E.L.T. 700, in the case of Lona Manufacturers of Home Appliances reported in 1980 (6) E.L.T. 482 and in the case of W.H. Brady and Co. v. CCE reported in 1990 (50) E.L.T. 61, the Asstt. Collector found that the value of the part is not excludible from the value of an article on the ground that the parts are not integral or essential parts thereof, but merely accessories etc. Thus, the Asstt. Collector concluded that as there were different judgments on both aspects and therefore, the facts in the instant case are to be considered separately and the issue to be decided in accordance with the facts available in the instant case. The Asstt. Collector, therefore, ordered that the value of oil and moisture filters shall be added to the value of the air gauges and Central Excise duty shall be computed on the composite value. The Asstt. Collector also imposed a penalty. These orders-in-appeal were confirmed by the Collector, Central Excise (Appeals).
3. Shri M. R. Mhaisker, the ld. Consultant appearing for the appellants submitted that oil and moisture filters are not parts of air gauges; that they are bought out items; that they are supplied as an optional accessory to the customers who order for them with the orders for air gauges; that there was no regular or normal trade practice to invariably supply filters with air gauges; that the mention of filters in the printed catalogue was to indicate the filters as standard equipment/accessories. On the issue that filters are standard accessories of air gauges, the appellants produced samples thereof before the Collector (Appeals). It was explained by the ld. Counsel that air gauges function without filters; that air gauges are complete without filters and are marketed as such; that filters are neither an essential part nor an integral part of air gauges; that filters are not fitted to air gauges at the time of clearance; that there were a number of cases where air gauges were cleared without filters and filters were sold without air gauges; that it was the choice - cum-option of the user whether to make use of filters for compression line or not; that oil and moisture filters are accessories and not component parts. Citing and relying on the ratio of the judgment in the case of Jyoti Limited v. UOI reported in 1979 (4) E.L.T. (J 546) and in the case of Electrosteel Castings Ltd. v. CCE reported in 1989 (43) E.L.T. 305, the ld. counsel for the appellants submitted that the term 'accessory' and parts have been defined in most unambiguous terms in these decisions and that the ratio of these decisions was squarely applicable to the appellant's case. The ld. Consultant also submitted that proper investigation to look into the facts of the case was not undertaken by the department and the show cause notice was issued simply because an audit objection was raised.
4. It was contended by the ld. consultant that oil moisture filters have general use to prevent dust and other impurities; that they are not essential components or parts; that filters are fitted to compression line to ensure that air passed to the air gauges is free from dust, moisture and other impurities; that this does not mean that air gauges cannot function without filters; that the department has not proved that filters are essential parts of air gauges; that onus of proving that filters were essential parts of air gauges has not been discharged by the department. The ld. consultant submitted that the entire issue can be summarised in the following heads :-
(a) that oil and moisture filters were bought out items;
(b) supply of oil and moisture filters with air gauges was not the regular practice but was optional purely on the request of the customer;
(c) that oil and moisture filters are accessories;
(d) that oil and moisture filters are not components or parts of air gauges but are optional accessories.
The ld. consultant submitted that their contention that oil and moisture remover filters are accessories is supported by an expert opinion. On the question of inclusion or otherwise of the value of bought out items, the ld. consultant cited and relied upon the ratio of the judgment in the case of Diamond Clock Manufacturing v. CCE reported in 1988 (34) E.L.T. 662.
5. In support of his contention that the value of optional accessories cannot be included in the assessable value, the ld. consultant cited and relied upon the decision of the Tribunal in the case of Webel Telecommunications v. CCE reported in 1987 (32) E.L.T. 453; that this decision of the Tribunal was confirmed by the Hon'ble Supreme Court. The ld. consultant also submitted that in support of their contention that air and moisture filters are not essential parts of an air gauge unit but were only optional accessories, the appellants relied upon the expert opinion and a certificate of the Chartered Engineer.
6. Shri A.K. Singhal, the ld. JDR appearing for the respondents submitted that for proper appreciation of the items it is necessary to refer to catalogue furnished by the appellant. The ld. DR submitted that in the catalogue filters have been described as standard equipment necessary for the air gauges. It was also pointed out by the ld. DR that in their invoices, the number of filters supplied is equal to the number of air gauges supplied, which shows that filter is an essential component and integral part of the air gauge unit. Referring to the Annexure to Classification List dated 1-3-1988, the ld. DR submitted that oil and moisture remover filters have been listed as Item No. 190 at page 3 of the Annexure under the description of goods as description of spares. The ld. DR, therefore, submitted that according to the understanding of the appellants themselves, oil and moisture remover filters were spares for air gauge units; that even in the invoice available at page 73 of the paper book, oil and moisture remover, tin filter, has been shown under the Heading Baker Mercer air gauging equipments. On the question of Specialist's certificate referred to by the ld. consultant, the ld. DR. submitted that the certificate has been given by one of the employees of the company. It was also submitted by the ld. DR that in the orders placed, oil and moisture filters have sometimes been described by the customers as spares. Summing up his arguments, the ld. DR submitted that looking to the definition of oil and moisture filters, it is very clear that they are an integral part of the air gauge unit and hence value thereof is includible in the price of air gauge units.
7. On the question of nomenclature of the filters, the ld. DR submitted that the customer's orders clearly showed that the parts namely oil and moisture filters are spare parts of air gauge unit. Now coming to the understanding of the appellants about the nomenclature of oil and moisture filters, the ld. DR submitted that in the Annexure to the Classification List, even the appellants have shown oil and moisture filters as spare parts. The ld. DR therefore submitted that spare parts of any equipment or any standard equipment can by no stretch of imagination be termed as accessories. It is an admitted position that spares are different from accessories as such moisture filters have already been described as spares in the Annexure to the classification list as well as in some of the orders placed with the appellants, and therefore oil and moisture filters are spares. Spares are nothing but components. It has been admitted by the appellants that components are an integral part of any machine and therefore the value of the components and in the instant case described as spare parts shall be includible in the value of the air gauge units for the purpose of computation of duty. In view of the above submissions, the ld. DR submitted that the appeal deserves outright rejection.
8. Heard the submissions of both sides and considered them. The admitted position is that oil and moisture filters are bought out items and are not manufactured by the appellants. The function of the filters is to remove impurities before the air passes through the air gauge. The issues for decision, therefore, are :-
(a) whether oil and moisture filters ate accessories or components of the air gauge unit, and
(b) whether the value of these items shall be includible in the assessable value of air gauge units for purpose of assessment of Central Excise
9. On the first issue namely whether oil and moisture filters are accessories or components,, the ratio of the following judgments was relied upon : Jyoti Ltd. v. UOI reported in 1979 (4) E.L.T. 546 wherein the Hon'ble Gujarat High Court [in paras 14 & 15] held :
* * * * * * * In para 6 of the judgment in the case of Electrosteel Castings reported in 1989 (43) E.L.T. 805, this Tribunal had held :-
"6. It is impossible to give a precise definition and categorisation for this kind of assessment. One cast product may remain A Casting long after it has left the mould and after it has undergone a number of further processes; some other Cast product will be as, good as finished as it comes out of the mould. These balls and cylpebs do not require finishing, and for this we have the words of the appellants themselves, because in the job in which they will be employed, the balls need to have as rough surfaces as possible,'because then the grinding is more Efficiently and quickly done. It is by no means an unreasonable assessment to say that after the fettling and cleaning or dressing, the balls and cylpebs become identifiable as ball mill accessories/parts and no longer as mere castings, There, might be a, case for saying that they are, in spite of this, steel casting; but there is also a case for saying that they are no longer castings; but have become ball-mill balls and equipments, and in that class they will move out Of the category of castings. The argument of M/s. Electrosteel Castings Ltd. that these are not machine parts and are not parts of the ball mill is only half true if one takes into account the fact that they are not fitted in the grinding mill. But the mill cannot grind, however much it may run, without the balls in the drum. The bills perforrn an essential part in the grinding by the ball mill and must, therefore, be classed as parts of the ball mill. A component, whose absence will disable a machine of appliance, must be regarded as an essential ingredient or part of that machine. The assessment of the balls and cylpebs under Item 68 is not unjustifiable, ,and accordingly this appeal is rejected."
10. On the second issue, namely the question of includibility of value in the value of air gauge units, the following case law was relied upon : Diamond Clock Mfg. Co. reported in l988 (34) E.L.T.662 In this case on the question of valuation bought out items whether, includible in the assessable value or not, the Tribunal had held "23. The appellants' claim that Anand Traders have supplied bought out items to their customers; These consisted of cable bracket and adopter. It appears that these three are essential for the operation of the meter but they are not manufactured by the appellants nor are they fitted into the machines before clearance. If this is the factual position and only incomplete machines are cleared from Diamond's factory, the value of such parts supplied to customers by Anand Traders later should not be inclduded.
In the caseof Webel Telecommunication v. CCE, reported in 1987 (32) E.L.T. 453, on the question of value of optional accessories which are not an integral partof the procedure, the tribunal held:
"7. We' have considered the arguments of both Sides. We have perused the invoices. The appellants have, before us, asserted that their equipment can be sold without the cable and did mention some institutions .who purchase the goods without the cables, There is nothing in the impugned.order to show that the base stations and walkie talkie do hot function 'without the cable. The unchallenged statement that the appellants sell the units without the cable shows that, the cable could not be Considered as an essential part of the equipment. It is also beyond dispute that these cables are bought out items and are dealt with by the appellants only as part of their trading operations and not as part of their manufacturing activities. We have also perused a copy of the Appellate orcder passed by the Collector on 6-11-1986 in respect of the same appellants.
8. Taking into consideration all these facts,and circumstances we hold that for the purpose of assessment of the base stations and talkie talkies manufactured by the appellants, the value of cable which is not an integral part of the sets but is an optional accessory should not be included in the value of the sets. .Accordirigly we allow .this appeal."
This decision of the Tribunal was confirmed by the Hon-ble Supreme Court.
11. On the question of inclvision of the value of the regulator in the value of the;fan, reference was made to the. case of Khaitan Fans. v. CCE reported in 1986(26) E.L.T. 250. The Tribunal had in that case held as under :
"3. The appellants relied on Delhi High Court judgment reported at 1984 (24) E.L.T. 526 and certain ruling of this Tribunal. But they conceded that this judgment and the rulings related to pre-18-6-1977 period when Tariff Item 33 read differently, With effect from 18-6-1977, this tariff item was specifically amended to include regulators alortgwith fans in the Tariff item/sub-items. The earlier judgment and the rulings cannot, therefore, apply when the law itself underwent a change. The amended tariff makes it abundantly clear that regulators go along with the fans and their cost has, therefore, to be included in the assessable value of the electric fans whenever regulators are supplied with the fans. The material period in the present/appeal is;from 1-7-1980 to 10-ll-1983) i,e after :18-6-l977. There is, therfore, no question pf deducting the cost;of regulators.
12. On the question of the inclusion of value of optional accessory, refererence was made to the decision of the Tribunal in the case of piyush Kumar Prabhudas Mehta v. CCE reported in 1991 (51)E.LT. 151 in which the Tribunal had held:
"5.3 From a perusal of the judgment of the Tribunal in the case of. Universal Luggage Mfg. Co. (mentioned' supra),' we find that one of the issues decided there in' is essentially the same as in this case, namely whether the value of optional accessories should be included in assessable value of main item. In that case what was considered was whethe the value of wheel kits ought to be added to the value of the suitcase. Even though fixing of wheel kits did not make any change in the nature and character of the product; the Tribunal on the factual aspect in that case found that wheel kit was not an integral part of the suitcase buts was only an optional accessory..Similarly, it is not disputed that a large; number; of electric motors are being cleared by the assessee without fixing any clutch assembly. It is only to a srnall percentage of 20 to 30%, of electric motors cleared from the assessee's factory that the clutch assembly was fixed as per the requirement of their customers. Accordingly, we hold, as has been held by the Tribunal in the case of Universal Luggage Manufacturing Co. (mentioned supra), that the value of the clutch assembly would not be includible in the value of the electric motors which had already been cleared on payment of duty. Hence on merits also, no demand of duty is leviable on the differential value on integral clutch motors."
13. Further reference was made to the decision of the Tribunal in the case of Col-Tubes Pvt. Ltd. v. CCE reported in 1994 (72) E.L.T. 342 in which the Tribunal had held:
"60. The definition of accessory in Black's Law Dictionary is given as under :-
"Any thing which is joined to another thing as an ornament, or to render it more perfect, or which accompanies it, or is connected with it as an incident, or as subordinate to it, or which belongs to or with it. Adjunct or accompaniment. Louis Werner Saw Mill Co. v. White, 205 La. 242.17 So. 2d 264, 270. A thing of subordinate importance. Aiding or contributing in secondary way or assisting in or contributing to as a subordinate. Gilfoil v. Greenspan, La. App. 216 So. 2d 829, 831".
66. The Bombay High Court while giving this decision has considered the amendment to the Tariff Item 27 by the Finance Bill of 1980 with reference to Item 27(e) of the Central Excise Tariff. The High Court had also considered the Supreme Court decision in the case of Bombay Tyre International Ltd. In fact, it was brought to the notice of the Bombay High Court that in the similar case, the court in Writ Petition 1104 of 1980 - in the case of Shalimar Textile Mfg. P. Ltd. v. UOI and Ors., the court had dismissed the petition in the light of the decision of the Supreme Court in the case of Bombay Tyre International Ltd. After considering all these submissions, the Court had observed in Para 9 as follows :
"However, Mr. Sethna submits that as against the dismissal of appeal by the Division Bench in Metal Box case, the deptt. has taken the matter to the Supreme Court and the matter is pending. But till such time, Metal Box case is reversed, the petitioners are entitled, to claim deductions in Therefore in the present case also the factual situation is similar. The records further show invoices indicating sale of aluminium flexible tube without caps from the appellants' factory. In such a situation, it may not be appropriate for the Tribunal to deviate from the ratio of the Bombay High Court Judgment in the Extrusion Processes (P) Ltd. case unless it is shown that the other decision of the Bombay High Court in the case of Metal Box Co. in Writ Petition No. 511 of 1973 has been upset by the decision of the Supreme Court where the appeal against that order is said to be pending. In the circumstances, the order proposed by the Hon'ble President is concurred with.
67. In view of the majority opinion of the Members, the appeal is allowed."
14. Whether oil and moisture filters are accessories or components, we find that the evidence before us is the catalogue, the Annexure to the Classification list effective from 1-3-1988, some of the orders placed by customers with the appellants and the various judicial pronouncements, some of which have been excerpted above.
15. In the catalogue, oil and moisture filters have been described as standard equipment/accessory: This catalogue has been issued by the appellants though they are not manufacturers of these filters. This clearly showed that the understanding of the appellants was that the filters were standard equipment. On the question of how the product was known to the trade who dealt with the product, we find that the product (filters) was known as spares or components of the air gauge units as is evident from the orders from the trade. The most important evidence on the question as to how the product is described by the appellants is Annexure to classification list. In this Annexure, oil and moisture remover filters are at S. No. 190 of the List of Spares. Thus examining the product from the Trade/commercial parlance, we find that filters are spares.
16. Now examining the item in the light of the rulings of the various Courts and Tribunal, we find that the filters advance the functioning of air gauges and hence are essential or integral part of air gauges. We also observe that this equipment has been supplied to some of the customers at the time of sale of the air gauge units, sometimes under the same invoice and sometimes under different invoices. A perusal of GP-I No. 60 dated 30-4-1991, we find that air gauge accessories have been supplied from the factory. Though in the gate pass, the description is given as air gauge accessories, but the covering invoice No.. AIR 7477, dated 30-4-1991 shows that the air gauge accessories were actually oil and moisture remover twin filters. Thus it would be seen that oil and moisture filters were being supplied from the factory alongwith air gauge units.
17. From whatever angle we examine, we find that oil and moisture filters are essential and integral parts of air gauges and hold accordingly.
18. Spares are described as components also. In the case before us, though spares are bought out items but having regard to the fact that oil and moisture filters are an essential and integral part of air gauge units and therefore, the value of spares should be added to the value of the air gauge units for purpose of computing Central Excise duty. However, they will be eligible for credit of duty on filters under the modvat scheme.
19. On the question of imposition of penalty, a lot of case law was cited and relied upon by both sides. We find that oil and moisture filters were removed from the factory in contravention of various Central Excise Rules. The contravention was with the intention to evade payment of duty. From the evidence on record, we find that the function of oil and moisture filters made them an important part of the air gauge unit. From the catalogue also, we find that they were standard equipment for air gauge units which shows their essential character in the functioning of an air gauge unit. The understanding in the trade parlance, both of the customers as well as the appellants indicated that the items were traded as spares. This leaves us with no doubt that imposition of penalty is maintainable in the instant case. As the quantum of penalty is low, we do not see any reason to interfere with the quantum of penalty.
20. Having regard to the above findings, we uphold the impugned order and reject the appeal.