2004 (97) ECC 25 (Tri)

CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL

West Zonal Bench -- Mumbai

Shri Krishna Kumar, Member (J) and Shri K.D. Mankar, Member (T)

Jolly Electrical Industries & Ors

Versus

Commissioner of Customs, Ahmedabad

Appeals No. C/475 to 478/2002/B & C/CO/395 to 398/2002/B

[Arising out of Order-in-Original No. 31/Commr/2002 dt. 17.5.02 passed by CC, Ahmd]

M/184-187/WZB/04-C-II
Order No. A/524-527/WZB/2004-CII, dt. 15.7.2004, Certified on 19.7.2004

Demand & Penalty (Customs)

Limitation -- Parts of Machineries -- No additional documentary evidence that was brought on record to make the allegation of import in SKD condition than the documents already in possession of the department. Thus, merely on account of change of view on the documents already furnished to the department, the demand cannot be issued by invoking the proviso to Section 28, Customs Act.

PRESENT :

Shri A.K. Jain, Adv. for the appellant.
Shri A. Chopra, JDR for the respondent.

Cases cited

1. Gujarat Petrosynthese v. CCE, Vadodara 1998 (102) ELT 293 (Tri)................... [Para 17]

2. Tanya Diagnostic v. CC (Port), Calcutta 2002 (146) ELT 198 (T)....................... [Para 17]

Per : K.D. Mankar

The appeal of the appellants is directed against the Order-in-Original passed by the Commissioner of Customs, Ahmedabad. Vide the said order, the Commissioner had confiscated the parts of Photocopiers, Micro Film Reader Printers, Micro Film Cameras and Paper Shredders imported by the importers holding that the import was of complete machines in SKD condition, and not of the part as declared in the import documents. The Commissioner applied Rule 2 of "General Rules for Interpretation of Schedule" (Customs Import Tariff) (referred to as GIR) and held that the goods imported are complete machine and not the parts. The appellant disputes this finding.

2. The imports in question have been effected during the period April 93 to March 97 under the cover of 122 Bills of Entry (B/Es). The said imports were effected at Ahmedabad Airport. The appellants are the manufacturer of electronic products in their factory located at Vadodara. The appellants use the imported parts for manufactures of finished goods after adding components sourced from the domestic sources and the same cleared on payment of excise duty on such assembled machines. Vide the show cause notice (SCN) dated 1.5.98, the importers were directed to show cause, as to why the imported components should not be treated as machines imported in SKD condition on applying Rule 2 of General Rules for Interpretation (GIR). Besides, the importers were also asked to show cause, in respect of goods covered by 22 B/Es as to why the declared value should not be rejected and the value re-determined by applying provisions of Customs Valuation Rules, 1988. The Commissioner, on adjudication of the SCN, confirmed the value enhancement as also the grounds that the imported goods are complete machines in SKD form. Consequently, the duty amount of Rs. 1,51,09,480 was confirmed by invoking extended period of five years under proviso to Section 28 of the Customs Act, 1962. Besides, he confirmed the Customs duty recovery of Rs. 8,13,462 as calculated in Annexure A-5 of the show cause notice and Rs. 67,86,007 calculated in Annexure C-5 (a), C-5(b) and C-5(c) to the show cause notice alongwith imposition of equivalent penalty under Section 114A of the Act, and penalty of Rs. 1,12,000 was also imposed on Shri Nilesh Shah.

3. We have heard both sides.

4. The appellants have challenged the order on two main grounds i.e. valuation as well as the applicability of Rule 2 GIR.

5. So far as the classification of the machine parts imported by the importers is concerned, the appellants have strongly contested that, the import consignments were opened by the Customs staff at the point of importation and verified, and no objection thereon was taken. The packing list invoices and all other documents were made available to the respective assessing authorities and there is no adverse findings that has come on record through the examination report of the series of examining officers who conducted the examination of the individual consignments. The goods were allowed to be cleared on the basis of such report, which did not indicate any discrepancy.

6. While dealing with this aspect, the Commissioner in his order observed that in respect of Minolta Photocopiers Model No. 3170, the clearance was permitted on the basis of declaration and affidavit that, the imported goods are parts, as the overseas suppliers could not give the required information from the respective suppliers/manufacturers. The Commissioner therefore sought to draw an adverse inference to the effect that imported goods are not the parts but are complete machines in SKD form.

7. Besides, the Commissioner has also relied upon the minutes of the conference of the Collectors of Customs held on 29-30 June 1976, which the importers themselves cited. The minutes of the conference stated the following:

"When all the packages are imported in the very same consignments and the assembling of the machine involves only sample, operations like fixing devices (screws, nuts, bolts, etc.) or by riveting or welding the goods so imported should be classifiable as a complete machine".

8. Hence, the Commissioner held that even riveting and welding operations are covered under the category of simple operations, which will not change the character of the machines for the purpose of classification. The Commissioner further concluded that since soldering is a type of welding, the act of making populated Printed Circuit Boards (PCBs) within the factory premises of the importer will not entitle the imported items to be classified as parts. It is also mentioned that, imported PCBs are propulated. The populated PCBs are restricted items, which require Special Import Licence (SIL). On going through the Bills of Entry, the Commissioner noted that, the PCBs are classified under CTH 9009 as parts and in every case the importer has produced SIL before clearance. It was also noted that, the importers did not have any facility for populating the PCBs. Even though the importer subsequently produced some documents regarding purchase of solder paste etc, but the same was treated to be an afterthought. The Commissioner also observed that, population of PCBs particularly the fixing/joining of ICs on a PCB is very complex process and requires machinery, which are very expensive and economical only for large volume. There was no such machine found in the importer's factory nor they have claimed that they had such machine. Even if, the contention of the importer is accepted that they were soldering the capacitor etc. on the PCBs, the operation is fairly simple and equivalent to welding. Therefore, it was held that the PCBs imported were populated PCBs and even if some minor operations were conducted on some of the PCBs in the factory premises of M/s. Jolly Electricals, those were simple operations like soldering which does not alter the characteristics of the imported goods from being different from being complete machines in SKD condition, as against the declaration of being parts. It was further observed in the order that even for the sake of argument, the importer's contention that some minor parts were purchased locally is accepted, then also there is no doubt that all the critical components were imported by the importer, which gave the essential character of the machines.

9. We are required to examine this version very critically. On summarizing the arguments enumerated above, we note that, it is department's case that the imported parts are complete machine in SKD condition and not parts. The allegations leveled against the importers is that, they had imported "complete machine in SKD condition". This allegation requires to be substantiated by establishing that all the parts, which comprise of a complete machine are imported, if not together, then in separate consignments so as to form a definite number of machines.

10. On going through some of the invoices that have been made available, it appears that the importers did import several parts together, so as to indicate that these were meant to yield a fixed number of sets of the machine on assembling them together. So this leads one to believe that, perhaps all the parts that have been imported together on their assembly would make a definite number of machines. However, it needs to be seen as to whether or not the imported components in a package (if these can be referred to as kits) can be said to be having the essential characteristics of a complete machine. Only in that event the propositions made in the impugned order can be substantiated.

11. It is obvious that, the Rule 2 (a) of the GIR has been invoked which reads as under:-

"2.(a) Any reference in a heading to an article shall be taken in include a reference to that article incomplete or unfinished , provided that, as presented, the incomplete or unfinished article has the essential character of the complete or finished article. It shall also be taken to include a reference to that article complete or finished (or falling to be classified as complete or finished by virtue of this rule), presented unassembled or disassembled".

12. From the text extracted above, we note that, mere importation of all parts together can not lead to automatic application of this Rule. It is also necessary that, the article as presented in any incomplete or unfinished form, has the essential characteristic of a complete or finished article. In this connection, we note that, the appellants have disputed that, one of the critical components viz., PCBs were functionally incomplete and even though as the Commissioner held the same to be populated PCBs and these were indeed populated PCB, without any doubt, the appellants have claimed that they were required to further populate the PCBs before these could be fixed together with other parts, to make a functional machine. The appellants have disputed the allegation to the effect that they had not merely applied the screwdriver technology but undertook the activity of populating the imported PCB which was complex technical process requiring considerable engineering effort. The fact that populating PCBs is a complex process has not only come on record though the cross examination but is also a fact recorded in the impugned order itself. But the order proceeds on the basis that what the appellants undertake by way of soldering the capacitors etc is simple operation equivalent to welding.

13. We note that the findings of the Commissioner on this critical aspect are full of sell contradictions. In paras 25 and 26 of the order, on referring to the decision of the Tariff conference, the Commissioner observes that "welding" is a simple operation of assembly and since soldering is also a king of welding, the process of soldering to populate the PCBs within the factory premises will not entitle the goods to be classified as parts. While on one hand it is an admitted position in the order that populating PCBs is a complex process, requiring heavy capital investment etc. and the Commissioner records a finding that the appellants lack the necessary machinery to populate the PCBs, and imported PCBs being already populated the Commissioner discounts the appellant's version that the PCBs were populated by them, on the other hand attempt is made through the interpretation of the minutes of the Tariff conference to the effect that even the process of populating PCBs through soldering being akin to the process of welding, is a simple process, which does not alter the characteristics of a machine.

14. We note that the impugned order fails miserably to establish any of the versions through any credible evidence. We are unable to fathom as to what the ultimate conclusion has been arrived at on facts. Either the Commissioner should say that the appellants did not populate the PCBs, for the reason that they did not have the necessary facilities such as installation of complex machinery that is required, as stated in the first part of the argument or he ought to have stated that though the appellants are populating the PCBs, being a simple process of soldering, as advised by the Tariff conference, the classification has to be held as a machine and not as parts. By adopting both the grounds, which are mutually exclusive of each other, the order clearly suffers from non-application of mind Tribunal can not be expected to choose from the alternative grounds to apply against the appellants to confirm the department's case of misclassification. It is for the department to state as to what its case is, and prove the same through facts and evidence.

15. Notwithstanding the above fallacy in the impugned order, the appellants have tried to demonstrate that none of the above grounds are factually correct. It is claimed by the appellants that they have the necessary machinery to undertake the population of the PCBs, which were imported in partly populated condition and the balance components were procured locally and used for completing the process of population. The value of domestic components being 30% to 35% vis-a-vis the price of the assembled machines. The use of local components and the extent of value contribution thereof has been verified by the Central Excise department and the claim was found to be acceptable on such verification. The appellants also have claimed that they have necessary machinery, equipment and parts (procured locally) to assemble photocopiers, contrary to the findings given by the Commissioner. We note that the activity of assembly of machines has been undertaken by the appellants in a factory, which is under the control of Central Excise. The goods on assembly were cleared on payment of duty, part of which is from Modvat account in respect of duty paid on local inputs used in the manufacture of the said machines. These facts prima facie lead one to believe that the imports in question were correctly treated to be imports of parts and not of complete machines in SKD condition as held in the impugned order in the absence of any positive evidence to conclude that the machines could functions even without undergoing the process of populating the PCBs. Based on these facts, we note that the allegations levelled against the importers to the effect that the imported components are complete machines themselves imported in a SKD condition, by application of Rule 2 of GIR is not substantiated.

16. In any case, we also note that on noticing the declaration of import goods as parts in the import documents the said declaration was always subject to verification by the Customs authorities at the point of importation to check as to whether or not complete machines were sought to be imported. There is no allegation to effect that invoices, packing lists and other related documents were not made available to the assessing officers. The invoices are quite transparent of the fact that various components for a specified number of sets of a machine have been imported. Therefore, even assuming that the department had a case to apply Rule 2 (a) of the GIR, in that event also, the importers could not be accused of any suppression so as to invoke larger period of limitation. It has not been brought on record as to on the basis of which facts or document which were concealed from the department that the allegation of suppression and duty evasion has been leveled. We observe that the authorities are proposing to give a different interpretation to the documents presented at the time of assessment at a later point of time. In such a situation the charge of suppression can not be sustained.

17. In this case we note that the import have effected between April 93 to March 97 and the show cause notice proposing duty recovery was issued on 1.5.98 which is clearly beyond the normal limitation of Section 28 of the Customs Act. It is obvious in this case was that, there was no adverse observation against the importers in this case on presenting the relevant import documents, which have ben scrutinized by the respective authorities. It is only at a later date, the departmental authorities felt that a different view was warranted than the view taken by the assessing authorities. There was no additional documentary evidence that was brought on record to make the allegation of import in SKD condition than the documents already in possession of the department. Thus merely on account of change of view on the documents already furnished to the department, the demand cannot be issued by invoking the proviso to Section 28. The appellant's reliance on the judgment of the Tribunal in the case of Gujarat Petrosynthese Ltd., v. CCE, Vadodara 1998 (102) ELT 293 (Tri) as also the judgment of Tribunal in the case of Tanya Diagnostic Centre v. Commissioner of Customs (Port), Calcutta 2002 (146) ELT 198 (Tri. Kol) is well founded. We have therefore no hesitation in holding that the duty demand is time barred and is required to be set aside.

18. So far as the allegation relating to under valuation of goods covered by twenty two bills of Entries is concerned, the Department has resorted to Rule 5 and Rule 7 of Customs Valuation Rules, 1986 to adopt respectively the valuation on the basis of comparable goods/contemporaneous imports and that on the basis of import price of similar goods.

19. It has been brought to our notice that, to substantiate the allegations of under valuation, not evidence of additional remittance against the imports made or any manipulations of import documents has been brought on record. Transaction value of two machines (OCE-9400 and Minolta 2050) has been rejected only on the basis of imports by others at different ports. So far as the OCE products imported by Methodex is concerned, it has been admitted by the said importer that, they had received a flowback from the overseas supplier. The said price therefore, cannot be adopted to discard the transaction value declared by the appellants. It is also mentioned in the show cause notice that the agreement between the OCE and Methodex is yet to be finalized. Hence, the particulars of import by Methodex being not a fair price cannot be applied to the appellant's imports of the machine. The Commissioner had adopted the value of complete machines viz. OCE-7056, photocopiers, OCE-4900 Digital Printing systems and Minolta EP-2050 and EP-4050 Photocopiers (allegedly the complete machine) based on the imports made by Indian companies, by applying the Rules of Customs Valuation Rules. However, in the light of the view, we have taken that the import made by the appellant is not of a complete machine but is only of parts, the value applicable to import of complete machine cannot be pressed into use to discard the declared transaction value for import of parts. Besides, it has also not been demonstrated that the importer and the overseas buyer had any related relationship involving any flowback.

20. Since the basic allegations of the import of the complete machines having failed and resort to valuation rules and adoption of value of complete machines imported elsewhere cannot be sustained, we hold that, the order for demanding duty and imposition of penalty is not sustainable. Consequently, we allow the appeals with all the consequential reliefs is accordance with the law and set aside the impugned order.

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