Customs, Excise and Gold Tribunal - Tamil Nadu
Coimbatore Aero Based Control Sys. (P.) ... vs C.C.E. on 12 October, 1999
Equivalent citations: 2000(67)ECC538, 2000ECR233(TRI.-CHENNAI), 2000(116)ELT193(TRI-CHENNAI)
ORDER S.L. Peeran, Member (J)
1. This appeal arises from Order-in-Original dated 17-7-1996 passed by Collector of Central Excise, Coimbatore confirming duty demand of a sum of Rs. 22,18,132/- towards duty involved on the industrial fan said to have been manufactured by the appellants during the period January, 1992 to December 1996 under Rule 9(2) of Central Excise Rules read with Section 11A(2) of Central Excise Act, 1944. He has also imposed a penalty of like sum under Section 11 AC and Rules 9(2) and 173Q of C.E. Rules. Besides directed the appellants to pay the interest under Section 11AB of the Act on the duty confirmed.
2. The brief facts are that the officers attached to Hqrs. Preventive unit, Coimbatore visited the appellants' premises on 6-2-1996 and ascertained that they were basically contractors who undertook supply and erection of humidification plants; that they procure orders for supply of components of humidification plants and erection thereof; that they buy materials like impellers, casings, motors, grills, ducts, diffusers from various parties, take them to the site of their customer and erect/assemble them to make the humidification plant; that during the course of making such humidification plant, they assemble industrial fans out of the impellers, castings and motors procured by them at the site of their customers. After taking the statement of Mr. J. Andrews Vinu Mohan, Managing Director and others, it was alleged in the show cause notice that the appellants had manufactured "Industrial fans" at site and had not paid duty on such industrial fans manufactured and erected at site, hence demands were raised from the year 1990 on the allegation that appellants had not brought this fact to the notice of the department and had not followed any Central Excise procedure, had not paid any duty on such fans manufactured at site. Hence, they have suppressed the fact of manufacture of excisable goods with the intention to evade payment of duty and hence larger period was invoked demanding duty to the extent confirmed in the case.
3. The appellants' reply was that they had not manufactured industrial fan. Their plea was:-
(a) They are a team of technocrats and were working as a designing and trading organisation carrying out their business activities at their office premises; they do not manufacture any goods in their premises; that they had specialised in designing humidification systems for textile mills; that taking into account the factors viz. the machine load, lighting load, roof specifications, false ceiling specification and we bulb (sic) temperature, basic drawings for setting up a humidification plant house are supplied; and that the above basic engineering data was later translated by Civil Architects/structural engineering into Civil drawings and designs and working drawings.
(b) The humidification plant house comprises essentially of three aspects viz. (1) civil/structural designing; (2) erection and installation of the various mechanical portions; and (3) electrical and electronic engineering in the form of panel boards, distribution systems, power control etc.; that they do not construct the civil portion of the humidification plant house; that they do not manufacture any of the mechanical items; that they procure the items from various third party manufacturers and effect "transit sale" to their buyers; that the goods do not come to their premises; that their activities terminate after sale of the various mechanical items to their buyers; that their Engineers supervise the erection and installation operation of the mechanical items at the buyers site; and that they do not involve themselves in any erection activity at site.
(c) The Engineering aspect involving civil construction costs more compared to the mechanical and electrical portions; and that they are not involved in any of these activities and the show cause notice does not dispute this position.
(d) Even during the enquiry they had stated that they do not undertake any erection but only supervise the activities.
(e) The erection operations at site involve various factors like (a) infrastructure, tools, tackles and equipments for setting the plant; (b) a work force or labour to carry out the operations; (c) raw materials, consumables and other related items; and (d) Finance and procurement and disbursement; and that they were not involved in any of these operations.
(f) They are not engaged in manufacturing activity in terms of Section 2(f) of Central Excise Act, 1944.
(g) They contested the show cause notice on merits. A levy under Section 3 would arise only when there is production of goods; that it is a settled law that goods do not include "Immovables". The casing is placed in the prescribed opening and is welded, with RCC wall is raised in stage and is provided with stator-vanes so as to provide an inlet angle for the air flow to the impeller and finally the impeller and motor are mounted. These processes take beyond two months; and that it is not a fan in the yard and when it emerges as a fan, it becomes an immovable property. In this case it is not possible to restore a casing after embedding; and if removed they have to be rendered as scrap only.
(h) The duty has been demanded on the industrial fan which includes value addition, that the value addition had been taken from the balance sheet which includes expenses, overheads and profits; and that they would furnish a revised statement in line with the balance sheet during the personal hearing.
4. The Commissioner has rejected all their pleas and held the item fan being a movable one and excisable. He has distinguished all the Apex Court judgments. He also held that this item fan is marketable and is being marketed having specific mention in the Central Excise Tariff under sub-heading 8414.80 and excisable to excise duty. He also rejected their plea that they are not the manufacturers but had merely supplied the item and components for Humdification Plant and that they did not undertake any civil construction work. He rejected their plea that the erection work was undertaken by the respective mills by their own hired labour, tools and implements. The Certificates produced by them from their respective textile mills to the effect that they had not involved themselves in erection activities but it is the mills who had undertaken the erection operation with their own labour or by engineering contractor was also rejected. For arriving at this conclusion, the Commissioner has relied on the Memorandum of Articles of Association dated 4-9-1990 of the appellant firm wherein the Company has listed their objects and on this basis concludes that the manufacturing activity was done by them, however, rejecting the evidence on record that the activity was carried out by the respective mills only. He rejected their plea that they were only assisting the textile mills in the erection of fan by giving technical advise and held that as the responsibility of erection solely led on the shoulders of the appellants, therefore they are the manufacturers and not the mills. On the other hand, he held that the mills had only rendered assistance to the supervising engineers of the appellants by way of providing necessary workforce and hence their plea is required to be rejected. The Commissioner has also relied on the profit and loss account of the company to strengthen his findings. He has held that just because civil work connected with the Humidification Plant was done by respective mills it would not mean that the mills only had involved in the manufacture. He rejected the certificate issued by the respective textile mills in which they had claimed to be the manufacturers only on the ground that these certificates were issued as per the request of the appellants and in the format supplied by the appellants and hence the same is not acceptable. He has noted that most of the certificates were uniformly worded that the erection operation were carried out by their own labours/engineering contractors, therefore it is evident that those certificates were given without proper application of mind. He has noted that in the certificates, the mills had not clearly mentioned that the work was completed by them or by the employed engineering contractors. He has held that there is little doubt that these certificates were given at the instance of the appellants and are clearly in the nature of an after-thought to escape from the clutches of law and that there is no corroborative evidence to support the contents of the certificate. The Commissioner has also rejected their plea against invocation of larger period on the ground that they were involved in the manufacture of industrial fans without taking any registration and had not paid duty on the excisable goods so manufactured. He has noted that they had not revealed to the department about their activities and had not furnished the particulars and hence it amounted to intentional evasion of duty in invoking larger period. On the same premise, he has also proceeded to impose mandatory penalty under Section 11 AC of the Act.
5. We have heard Shri N. Venkatraman ld. Advocate for the Appellants and Shri S. Kannan, ld. D.R. for Revenue.
6. After hearing the matter, we had called for the report from the Commissioner with regard to his having jurisdiction to proceed against the appellants in respect of erection carried out in the factories outside the territory of the Coimbatore Collectorate. In response to the said query raised by the bench, Collectorate has filed their reply dated 17-6-1999 through the departmental representative clarifying with regard to jurisdiction, classification and the requirement of factory, etc. in the following manner : -
"POINT : 1 - JURISDICTION :
It appears that the contention that the Coimbatore Commissionerate does not have jurisdiction over the places of the buyers of the Industrial Fan is acceptable. The party had taken the bought out items to the factory of the buyers and erected the Humidification Plant and the goods "Industrial Fan" comes into existence during such erection. The Show Cause Notice alleged manufacture of Industrial Fan at site. The Order-in-Original, vide para 5, also charged that they manufactured industrial fan while erecting humidification plant. The factory of the buyers, thus, had become the place of manufacture and even though M/s ABC Systems, Coimbatore are held as the manufacturers only the respective Commissioners holding the jurisdiction over the buyers factory will be competent to demand duty. In view of the above it appears that this point lacks support of law and has to be conceded. However, in respect of the buyers situated within the jurisdiction of Coimbatore Commissionerate the demand holds good and the Bench may be apprised accordingly.
POINT : 2 - CLASSIFICATION :
The Show Cause Notice vide para 1, classified the Industrial fan as falling under Chapter Heading 8414 and alleged to have manufactured at site. At the time of reply to the show cause notice or personal hearing the party did not dispute the classification of the Industrial Fan and rate of duty adopted to work out the duty liability, vide the worksheet enclosed to the show cause notice. They only disputed the charge of manufacture of the item and the value adopted for demanding the duty. As such the matter of classification was taken to be settled and order was passed deciding the other issues. In the order-in-original, vide para 18 and 24, it was clearly held that, the industrial fans were marketable as such and was being marketed having specific mention in the Central Excise Tariff under Heading No. 8414.00 and hence liable to excise duty.
POINT : 3 - REQUIREMENT OF FACTORY :
A factory, as defined under Section 2 (f), means any premises, including the precincts thereof, wherein or in any part of which excisable goods other than Salt are manufactured or wherein or in any part of which any manufacturing process connected with the production of these goods is carried on or is ordinarily carried on. Since in the present case industrial fan is manufactured during the erection of humidification plant at the factory of the buyers the place in which such activity is carried on is the factory. The law does not require that the factory premises should be owned by the manufacturer. Even though the buyers did not lease out a portion of the factory to M/s. ABC Control Systems the fact remains that the buyers have allowed the appellants to carry out the operations of manufacturing processes in their factory and they have also made available some of their skilled and unskilled workers for the erection of the plant by the engineers of the appellants. In view of the above, it follows that failure to own or hold the factory on lease does not deprive the appellants of the status of manufacturer. The point may be taken up with the Hon'ble Bench accordingly".
7. Ld. Advocate again reiterated the pleas raised before the Commissioner on all the points that they are not the manufacturers, that they are only giving technical supervision and all the work was carried out by the respective Textile mills and they had themselves given the certificate to the effect that the work was carried out with their own labourers and contractors. He submits that when this position is clear, then the question of confirming the demand without issue of show cause notice to the respective mills and their contractors is void ab initio. It is his further contention that Commissionerate office has now conceded the point on jurisdiction and the Commissioner has not computed the duty with respect to the work carried out by each mill and therefore the duty demand in respect of mills carried out within the Commissionerate of Coimbatore is also not sustainable. He further pleaded that the item was erected piece by piece along with the civil construction work and it cannot come into existence without fabrication and civil work carried out simultaneously. In this regard he has relied on the technical literature as well as on the plants' photographs to contend that the item has arisen as part of immovable property and it cannot be considered as goods. He submits that it is not fan ab initio which was brought and fitted but the exhaust fan in the form of humidification plant comes into existence, and it is nothing but an immovable property. He also submits that Commissioner has committed an error in coming to a conclusion that they are manufacturers based on the aims and objectives in the memorandum of articles of Association of the Company. The company may lay down several articles but this is not the factor for the purpose of arriving at the conclusion that they have carried out manufacturing activity but the facts gathered from the work carried out in respect of places should be the point to conclude as to whether they are the manufacturer or not. Likewise, he submits that Profit & Loss account also is not the criteria for holding as to whether an activity is manufacture or not. Therefore, the basis on which the Commissioner has proceeded is totally erroneous and unsustainable in law.
8. Ld. Counsel also submitted that for the purpose of manufacture of excisable item, it is incumbent in terms of Section 2(f) of the Act to have a factory in existence. A factory has to be approved by the Commissionerate and only then the activity of manufacture can take place. In the present case, the activity of manufacture is being carried out within the precincts and premises of the "factory of textile mills" and it is unimaginable to think that the factory of the textile mills is the factory of appellants to bring into existence the item in question. He points out that the Commissionerate in their report on the aspect of manufacture is totally misleading in terms of the understanding the "term" factory as defined in Section 2(f) of the Act. He points out that the factory of the textile mills had been approved by the Commissionerate and the erection work was admittedly done by them and therefore their factory cannot be considered as a factory of the appellants. He points out that existence of factory is pre-requisite for the purpose of manufacture of the item in question, and the "site" should be registered as factory and the textile mills' site cannot be considered as the factory site of the appellants and hence the note given by the Commissionerate on this aspect is not in terms of the definition of the factory under Section 2(f) of the Act.
9. Ld. DR while conceding on the point of jurisdiction in terms of the Note placed by the Commissionerate, however pleads that appellants have to be declared as manufacturers as the work was carried out by them under their supervision and the Textile mills were only providing hired labour and their contractors who carried out the work also cannot be considered as a manufacturer. He reiterates the point given by the Commissioner on the certificates given by the Textile Mills that they are the manufacturers as an "after-thought".
10. On a careful consideration of the submission and on perusal of the entire records, we have to examine the issue in the light of the pleadings raised by the appellants before the Commissioner. The first issue raised was pertaining to jurisdiction to raise demands in respect of such work carried out beyond the jurisdiction of the Commissionerate. On this point as noted from the report which has been extracted above, the Commissioner has conceded the point that no demands can be raised in respect of manufacturing activity carried out in places outside the Commissionerate's jurisdiction. Therefore, on this point the findings has to be in favour of the appellants and all the demands raised in respect of the works said to have been carried out by the appellants beyond the Commissionerate's jurisdiction has to be held as not sustainable.
11. The second point raised before the Commissioner by the appellants is that they are not the manufacturers of the item in question, but it is the respective Textile Mills who carried out the activity and in this regard evidence was placed in the form of letters from Textile Mills to confirm that the activity was carried out by them with the assistance of their workers and contractors. This question is required to be examined before going into the question as to whether the item is goods or immovable property. The Commissioner has rejected their plea that appellant is not a manufacturer and the evidence of Textile mills placed to show that they are the manufacturers as an "afterthought". We are not agreeable with this finding as when on examination of the evidence and the facts and circumstances of the case, it is clear that the work is not carried out by the appellants as manufacturers in a factory owned by them or hired by them, but the work is carried out in the respective Textile mills in their factory. The appellants are Design and Marketing Engineers and they have designed the complete Humidification Plant and the work is carried out by procuring the items directly from the market in the name of the respective textile mills and the work order shows that the entire civil work has to be carried out by the respective textile mills and the appellants give their technical supervision and assistance only. The Managing Director of the appellant company has filed a detailed affidavit in support of the contentions raised by the company giving out the details of how a complete humidification plant comes into existence piece by piece along with the civil/structural work carried out at the spot. The affidavit further states that their company comprises of technocrats involved in designing and supplying a portion of the system and that the company does not possess any infrastructure for civil construction activity and that they are not engaged in civil construction activities of the Humidification Plant which in fact consumes a substantial part of the total cost of the project. They have provided machinery of mechanical items which are 7 in number like (1) Eliminators (2) Air Washer Piping, (3) Distribution Louvers, (4) Impeller, (5) Motor, (6) Damper & (7) Filters. Besides procuring panel boards comprising of the TPI switches, contractors, overload relay and electronic sensors, actuators and controllers. Their contention is that they are only suppliers and they depute engineers to supervise the erection work and that the scope of the supplies confines only to despatch of these items and components and does not involve erection or assembly of any industrial fan. The same is performed by the respective mills with their own or outside labour, tools and implements. The payments are also borne by the respective mills. In support of this affidavit, an affidavit of C.J. Ragunathan, Structural Engineer is also filed which also gives the details of work carried out and reiterating that they are only supervising and giving technical advice. The letters given by the respective Textile mills indicates the scope of supplies and the items to be made and price fixation in respect of humidification plant. The letter also indicates the following paragraph :-
" ERECTION:
A lumpsum of Rs.10,000/- towards supervision of the erection of the equipments supplied by you. We will be providing scaffolding arrangements for ducting and insulation. Skilled and unskilled workers and workshop facilities will be provided by us for erection.
Kindly acknowledge receipt of the above order and send us your order acceptance confirming delivery period".
12. All the Textile mills have given certificates and one of the certificates issued by them is extracted below :-
"ARUN TEXTILES (P) LTD."
CERTIFICATE TO WHOM-SO-EVER IT MAY CONCERN "This is to certify that we had vide our order dated 2-12-1993 requested M/s. Coimbatore Aero Based Control Systems (P) Ltd., to supply various components such as filter, air washer piping, filters, dampers, casing, nozzles, eliminator, PVC louver, diffusers, impeller, grills, doors, nozzles, tie rods, pump, motor, distribution plate, pot strainer etc. The above items have been supplied to us. The said M/s. Coimbatore Aero Based Control Systems (P) Ltd., have only deputed their Engineers for supervising the erection activity which took place in our factory. The erection operations were carried out by us with our own labour or by Engineering contractors. We have made the financial dispersements for the erection activity ourselves. We certify M/s. Coimbatore Aero Based Control Systems (P) Ltd., have not involved themselves in the erection operations in any manner. We also state that the casing once grouted, cannot be removed for reassembly elsewhere. Any displacement or removal would result in scrap".
The appellants had addressed letters to all the Textile mills asking them to give a certificate with a model draft and asking them to either alter the draft and give a certificate to show that the work was carried out by the Textile mills themselves. The individual textile mills have accepted the draft and also in some cases added certain sentences. The above extract is one such. These extracts clearly indicate that the "erection operations were carried out by us with our own labour or Engineering contractors". This itself is sufficient to indicate that Textile mills were carrying out the work. The affidavit of Managing Director and Structural Engineers and terms of contract indicate very clearly that the appellants were only giving technical supervision and not carrying out the work themselves and therefore the evidence on record clearly establishes this fact that appellants are only giving technical advice in the form of supervision and they are only suppliers and the entire operation of erection is carried out by the respective textile mills or by their engineering contractors. Therefore, we have to hold that the evidence on record is not an "afterthought" but clearly establishes that appellants are not the manufacturers and it is the textile mills who are the manufacturers. When the appellants and the textile mills have given this evidence, it was for the Commissioner to have amended the show cause notice to implicate the respective contractors and the Textile mills and raised the demand against them. However, instead of proceeding in that line, the Commissioner has chosen to ignore the evidence and held the appellants as the manufacturers and rejected the evidence as an "after-thought". We are not agreeable with this finding as the appellants are not having any factory of their own to carry out the work. Even if the textile mills factory is considered for argument's sake to be the site where the appellants carry out their activity, yet it has to be shown that the process of manufacture to bring into existence the goods had been carried out by the appellants themselves and there has to be complete involvement of labour, capital and machinery and not just giving the technical advice. A unit giving technical advice through their engineers without involving themselves in the activity of manufacture with total control over the workers, their payment and machinery which goes into the manufacture cannot be held to be the manufacturer. The term "manufacture" has been defined in Rule 2(f) to mean "manufacture includes any process (i) incidental or ancillary to the completion of a manufactured product; and (ii) which is specified in relation to any goods in the Section or Chapter notes of the Schedule to the Central Excise Tariff Act, 1985 as amounting to manufacture and the word "manufacture" shall be construed accordingly and shall include not only a person who employs hired labour in the production or manufacture of excisable goods, but also any person who engages in their production or manufacture on his own account".
In terms of the above definition, to bring within the ambit of "manufacture" a person should not only employ hired labour in the production or manufacture of excisable goods, but also any person who engages in their production and manufacture on his own account. Here, the evidence discloses that the appellants are not engaged in the production of the excisable goods and they had not manufactured on their own account, but they were only suppliers of raw material and assisted the manufacturer namely the Textile mills in the erection by giving their technical advice. A Technical adviser cannot be held to be a manufacture when clear evidence on record establishes that the manufacturing activity is carried out by the Textile mills themselves in their own premises and therefore, we hold that the appellants are not the manufacturers and demands raised against them are not sustainable.
13. In view of the above two points being answered in favour of the appellants, the question of going into the aspect as to whether the activity carried out has resulted in the production of a movable item in the form of "goods" or such an activity has resulted in the erection of immovable property is not required to be answered. The question of demands being time barred would also not arise for consideration as we have concluded that the demands cannot be raised against the appellants in respect of their activity carried out outside the jurisdiction of the respondent Commissionerate and the appellant is not the manufacturer.
14. In that view of the matter, the impugned order is set aside and appeal allowed with consequential relief, if any.