Custom, Excise & Service Tax Tribunal
M/S. Gemini Communication Ltd vs Cce, Chennai Ii on 8 May, 2017
IN THE CUSTOMS, EXCISE & SERVICE TAX
APPELLATE TRIBUNAL
SOUTH ZONAL BENCH, CHENNAI
E/823/2007
(Arising out of Order-in-Appeal No.133/2007 (M-II) dated 31.7.2007 passed by the Commissioner of Central Excise (Appeals), Chennai)
M/s. Gemini Communication Ltd. Appellant
Vs.
CCE, Chennai II Respondent
Appearance Shri C. Saravanan, Advocate for the Appellant Shri S. Nagalingam, AC (AR) for the Respondent CORAM Honble Ms. Sulekha Beevi C.S., Member (Judicial) Honble Shri Madhu Mohan Damodhar, Member (Technical) Date of Hearing : 27.04.2017 Date of Pronouncement: 08.05.2017 Final Order No. 40673 / 2017 Per Madhu Mohan Damodhar The brief facts of the case are that the appellants were manufacturers of computer systems and allied products falling under Chapter 8471.00 of the CETA, 1985. Based on certain investigations, a show cause notice was issued on the appellant proposing to demand duty under proviso to section 11A(1) of the Central Excise Act, 1944 with interest under section 11AB and equal penalty under section 11AC and another penalty under Rule 173Q of the Central Excise Rules, 1944 on the grounds that the appellant had manufactured and cleared computer systems in the guise of trading of bought out items and evaded payment of duty. After due process of law, the lower adjudicating authority confirmed the demand of Rs.25,89,710/- under proviso to section 11A(1) of the Central Excise Act, 1944 with interest under section 11AB, imposed mandatory penalty under section 11AC and another penalty under Rule 173Q of the Central Excise Rules, 1944. Commissioner (Appeals), vide the impugned order dated 31.7.2007 upheld the order of the original authority. Hence this present appeal.
2.1 Today, when the matter came up for hearing, learned counsel Shri C. Saravanan took us to the Table at page 83 of the appeal folder where the summary of servers and nodes supplied by them have been indicated as follows:-
No. of servers supplied Value of servers @ Rs.31,500 per servers supplied No. Nodes supplied Value of Nodes @ Rs.27,700/- per Notes supplied Total M/s. Everonn Systems India Ltd.54
Rs.17,01,000 486 Rs.1,34,62,200 M/s. Pacific Blue Technologies Ltd.39
Rs.12,28,500 351 Rs.97,22,700/-
Total Rs.29,29,500 + Rs.2,31,84,900 Rs.2,61,14,400/-
3.1 He submits that the impugned goods were actually manufactured by independent contractors who were paid job charges for such activities. Hence, liability would be on such contractors. He submits that they had cleared only CPUs and not full assembled computer systems. He further submits that the integration of various components into a network system took place in schools and it cannot be construed as assembling of computer systems. The system that emerged in schools was not marketable and hence not dutiable. He contended that in any case the installation and commissioning of the manufactured CPU was done along with bought-out accessories like monitors, keyboards, mouse etc. Hence, there was no case for levy of excise duty invoking larger period.
3.2 Learned counsel further placed reliance on Board Circular No. 58/1/02-CX dated 15.1.2002 to support his stand that the activity done by the appellant cannot be treated as manufacture.
3.3 He placed reliance on the following case laws-
(i) Commissioner of Central Excise Vs. CMS Computers 2005 (182) ELT 20 (SC).
The learned counsel submits that the Honble Apex Court in the above judgment has clearly held that as the monitor and printer are not essential parts of computer, their value cannot be included in the value of a computer.
(ii) Commissioner of Central Excise Vs. ACER India Ltd. 2004 (172) ELT 289 (SC).
Learned counsel took us through para 67 of the above judgment wherein it has been laid down that an operational software, therefore, does not form an essential part of the hardware.
(iii) ORG Systems Vs. Collector of Central Excise 1998 (102) ELT 3 (SC) 3.3 Learned counsel further contends that at the most there could be duty liability only on the CPU manufactured by them, the aggregate value of which would be below Rs. One crore only and hence within SSI exemption limit, and there would be no demand that would arise for those clearances.
4. On the other hand, learned AR Shri S. Nagalingam, vehemently opposed the appeal and reiterated the correctness of the impugned order. He takes us to page 114 of the appeal folder, wherein in para 45.4 of the adjudication order, the adjudicating authority has shown with reference to Chapter Note VB of Chapter 84 of Central Excise Tariff Act that computer system is very much covered under CETA Heading 8471. He contend that function of data processing in the CPU can only be operated with the aid of keyboard, mouse etc. hence, usage of the system is possible only if the same is operated in complete conjunction with their peripheral units. Learned AR further submits that the computer system cannot be treated as an immovable property since it is capable of being dismantled and shifted to another place without causing any damage.
5. Heard both sides and gone through the facts.
6.1 What comes to the fore is that the appellants, for reasons best known to themselves, tried to create a web of deceit, by creating fictitious invoices purporting to project that 850 numbers of computer systems had been sold to them by one M/s. Metrotek Systems and Solutions Pvt. Ltd. But, that lie got caught and a clear admission of the same can be seen from the 2nd statement of Shri Vijaya kumar on 5.10.2001. While in his earlier statement dated 20.9.2001, Shri Vijayakumar, CMD of the appellant had projected totally a different story to the effect that they had done only trading activity, nonetheless, in his subsequent statement on 5.10.2001 he has spilled the beans of the entire modus operandi. Along with admissions, Shri Vijayakumar has admitted that their contract with M/s.Everonn Systems India Ltd. was for supply of 540 numbers of computer systems to 54 schools, which included assembly and installation at the respective school, and that similarly, they had a purchase order from M/s. Pacific Blue Technologies for supply of 390 computer systems. He has admitted that the assembly of these computer systems were organized and monitored by him under his control. In a further statement dated 25.10.2002, Shri R. Vijayakumar stated that the whole activity of assembling the said computer systems was done at his another office premises at Besant Nagar, Chennai. It is pertinent to note that there is nothing from the record which indicates that the last two statements of Shri Vijayakumar have been retracted. It is interesting to note that even in the grounds of appeal, the appellant has admitted to his acts and omissions as can be seen from the following para:-
23. The appellant submits that but for the ill-advice and mis-guidance of Mr. Kishore and Mr. Mohanraj, the appellant would not have resorted to the above method. The appellant was under a bonafide belief that obtaining a registration from excise department would be difficult to supply the computer in time to the school. Had they approached a professional at that juncture, they would have probably not committed the mistake which has exposed them to the show cause proceedings which culminated in the impugned order. 6.2 Though the aforesaid conduct of the appellant will inevitably cast a penumbra of doubt on the credibility of the appellant, however, we shall not allow that to cloud our adjudication of the core issues of this appeal.
6.3 The salient features of the contract entered into between M/s. Everonn and the appellant specifically mandates that the latter should supply computers/equipment and installing the softwares as per the specifications mentioned in Schedule thereunder at the locations as per the address list attached. 6.4 Interestingly, the contracts also specify that all parts of the computer / equipment supplied should be genuine, with all applicable duties paid to the concerned authority. [Emphasis supplied] 6.5 From this, it is evident that even though the supply of computer systems was under a Tamilnadu Government project for schools, however, no exemption from duties appears to have been obtained or extended. The contract itself requires that all applicable taxes/duties should be duly paid to concerned authority.
6.6 From the file recovered from M/s. Everonn Systems India Ltd. titled Gemini a letter dated 24.5.2000 of the appellant has been discovered, wherein the latter has assured M/s.Everonn that the whole project of providing computer systems in the schools would be completed by them in 25 days. It therefore clearly emerges that the appellant was fully in the knowledge that they were supplying completed computer systems and that such complete systems were required to be supplied to the schools. We, therefore cannot digest why appellants, at this stage, are taking resort to the plea that they had not supplied such complete systems or that they had only manufactured CPU.
6.7 The order of the original authority which has been upheld by the impugned order has made a well-reasoned analysis of the various issues at hand. It is seen from para 45.2 of the order that the original authority has cogently interpreted provisions of section 2(f) of the Central Excise Act, 1944 to hold that the appellant only is the manufacturer under section 2(f) of the Act as they had hired labourers for assembling of the computers on the materials supplied at their rented premises and since they had total control on the assembling activities.
6.8 The original authority has also correctly analyzed the Tariff Entry 84.71 to show that computers (CPU, monitor and keyboard, mouse, printer) as a unit by virtue of Chapter Note 5D to Chapter 84 of the Act will stand classified under the said heading.
6.9 With reference to learned counsels reliance on certain case laws, it is seen that while the Honble Supreme Court in the case CMS Computers (supra) has no doubt laid down that a monitor or printer, not being essential parts of a computer, their value cannot be included in the value of the computer, nonetheless, the Honble Apex Court has however clarified that situation may be different where a manufacturer sells a computer with a monitor and a printer as a unit.
6.10 In Acer India (supra), the Honble Supreme Court had laid down that it is not possible to agree that without the operating software the computers would become dysfunctional. We would have hesitation in following this ratio, however, the issue herein does not concern operating software like Windows etc. Here we are concerned with the functionality and essentiality of application software like drivers without which computer would not be even able to boot up and start functioning. This being the case, reliance on the Acer India judgment (supra) will not help the learned counsel.
6.11 So also in the case of ORG Systems (supra), it is not disputed that computers manufactured and supplied by the appellant therein were complete computers which had a CPU with etched-in or burnt-in software etc. and were cleared after discharging the appropriate duty liability. The Honble Apex Court held that peripheral devices and other system software were crucial additional devices meant to increase the memory or storage capacity of the computers and other facilities and hence the value thereof was held as not includible for the purpose of duty liability. This is certainly not the facts of the case at hand and hence the ratio thereof will also not be applicable.
6.12 The learned counsels reliance on Boards Circular dated 15.1.2002 will also not help the appellant because that circular was concerned with excisability of plant and machinery at site and not computer systems. Not only have the appellants manufactured computer systems at site which have separate new identity, character and usage distinct from the inputs / components and the resultant product cannot by any stretch of imagination be treated as immovable property.
7. We, therefore, have no hesitation in holding that the appellant was indubitably supplying completed computer systems as per the contract enjoined on them. This being so, whether the complete computer system was assembled by him after procuring the required components, peripherals and accessories in his own premises or whether he does it at the rented premises at Besant Nagar, Chennai or for that matter even at the schools where he is supposed to supply the systems, will not make any difference to the inevitability that appellant is the manufacturer of these goods. Duty liability cannot be escaped from. It is seen that from para 45.6 of the Order-in-Original, the original authority has been generous and considerate in allowing not only Rs.one crore exemption limit of SSI but also has extended cum-duty benefit. In the process, the contract value of Rs.2,78,80,500/- has been reduced to Rs.1,61,85,686/- for the purposes of duty levy. In our considered opinion, we do not find any reason to interfere with the classification of computer systems under Chapter 8471 of CETA and the demand of differential excise duty of Rs.25,89,710/- along with interest thereof.
8. Coming to the issue of penalty, contumacious conduct of the appellant has been exposed, they have attempted to weave a web of deceit with intent to suppress their value of dutiable clearances with intent to evade discharge of required duty liability to the exchequer. Penalty under section 11AC of the Act is therefore fully justified and the appeal on its score is also rejected. However, for the same reason, the equal penalty under section 11AC of the Act has been imposed, we set aside the penalty of Rs.5,00,000/- (Rupees five lakhs only) imposed under Rule 173Q of the Central Excise Rules, 1944.
9. In the result, the appeal is dismissed except for setting aside the penalty imposed under Rule 173Q of the Central Excise Rules, 1944.
(Pronounced in open court on 8.5.2017) (MADHU MOHAN DAMODHAR) (SULEKHA BEEVI C.S.) Member (Technical) Member (Judicial) Rex 11 E/823/2007