Commissioner
of Central Excise, Delhi Vs. Carrier Aircon Ltd [2006] Insc 374 (5 July 2006)
Ashok
Bhan & Dr. Ar. Lakshmanan
With
C.A. Nos. 8418 - 8419 of 2001 C.A. Nos. 4715 - 4717 of 2002 C.A. No. 2898 of
2005 BHAN, J.
This
judgment shall dispose off Civil Appeal Nos. 3914 of 2001, 8418 8419 of 2001,
4715 4717 of 2002 and 2898 of 2005 by a common order as the point involved in
all these appeals is the same.
Facts
are taken from Civil Appeal No.3914 of 2001. The point which calls for
consideration is as to:
"Whether
the chillers manufactured by M/s. Carrier Aircon Limited (respondent herein)
are classifiable under Chapter Heading 84.18 of the Schedule to the Central
Tariff Act (for short "the Act") as claimed by them or under Chapter
Heading 84.15 as contended by the Revenue?" M/s. Carrier Aircon Limited
(respondent herein) is engaged in the manufacture of chillers besides other
goods i.e. room air-conditioners, air handling units, gas compressors,
radiators for central heating and parts of aforesaid goods.
Respondent
classified the chillers manufactured by it as refrigerating and freezing
equipments under sub-heading No.8418.10 of the First Schedule to the Central
Excise Tariff Act, 1985 (for short the "Tariff Act"). The
classification list was accepted by the Department.
Commissioner
of Central Excise, Central Excise Commissionarate, Delhi-III, issued a show
cause notice dated 3.8.1999 to the respondent requiring them to state their
case, vis-a-vis, the department's proposal to classify their product
"chiller" under Chapter Heading 84.15 instead of Chapter Heading
84.18 on the grounds mentioned therein. It was alleged in the notice that from
the end use of the "chillers" being manufactured by the respondent,
it was evident that the said "chillers" were nothing but an integral
part of the centrally air-conditioning system. That complete central
air-conditioning plant comes into existence when the said chiller is fitted
with air handling unit or fan coil unit, ducting, piping and pumps etc,. On
perusal of the description of 'chillers' as submitted by the respondent vis-`-vis
the description of goods available under Chapter Heading 84.18 it was observed
that the description and functioning of the chillers was not covered under
Chapter Heading 84.18. During the course of investigation, statements of Shri
R.K. Verma, AGM (CBU) who is a Mechanical Engineer, working with the respondent
and Shri A.K. Mehra, B.Sc. Engineering Electrical, working as a Manager
(Mechanical) dealing with designs of mechanical engineering in M/s. Jacob H
& G Ltd., were recorded.
The
Department on perusal of the statements dated 31.12.1998 of Shri R.K. Verma and
statement dated 27.1.1999 of Shri A.K. Mehra, the literature/brochure available
on the subject and the purchase orders placed by various customers came to the
conclusion that the respondent erred in classifying the chillers under heading
84.18 as 'other refrigerating or freezing equipments', as the majority of the
customers (more than 90%) had placed their purchase orders for supplying of
chillers of various capacities along with air handling units or fan coil units
and other electrical accessories required for use in air- conditioning
purposes; that chillers when used in combination with AHU connected with
chiller water system cools and dehumidifies the air and there is no difference
between this system and central air- conditioning system as the effect will be
the same.
That
the main application of both types of chillers is for air-conditioning of the
various types of large buildings/establishments and that the chillers are one
of the essential components of air-conditioning systems. That 'other use' of
chillers without AHU/FCU for control of temperature (other than air-
conditioning system) in various industrial applications is very little i.e. 5
to 10% of the total application. That the respondent had willfully suppressed
the material facts of receipt of purchase orders of said chillers for
air-conditioning equipments and use of chillers in combination with AHUs/FCUs
for the purpose of air- conditioning system of star hotels, auditoriums, large
office complexes, big hospitals and other large establishments from the
department with a malafide intent to evade appropriate payment of duty in as
much as they never informed the department by way of any sort of correspondence
that the purchase orders were placed by the customers for air-conditioning
equipments comprising of chillers of required capacities, air handling units or
fan coil units etc. The respondent was called upon to show cause to the
Commissioner of Central Excise Delhi-III within 30 days of the receipt of the
notice, as to why:
-
The chillers
should not be classified under sub-heading No.8415.00 instead of sub-heading
NO.8418.00 of the First Schedule of the Central Excise Tariff Act, 1985;
-
Central Excise
Duty of Rs.1,84,62,136/- (Rupees One Crore Eighty Four Lac Sixty Two Thousand
One Hundred Thirty Six only) short-paid on 249 number of chillers collectively
valued at Rs.10,79,55,623/- cleared under sub-heading No.8418.00 instead of
8415.00 (details of which are given in Annexure 6 to this Show Cause Notice)
during the period 01.08.94 to 30.9.96 and April 1997, January 1998 should not
be demanded from them under rule 9(2) of the Central Excise Rules, 1944 read
with Section 11A of the Central Excise Act, 1944;
-
Provisions of
extended time limit of five years under proviso to Section 11A of the Central
Excise Act, 1944 should not be invoked for the extended period in view of
suppression and misrepresentation of facts as discussed above;
-
Penalty under
Section 11AC of the Central Excise Act, 1944 should not be imposed upon the
party; and
-
Interest should
not be charged from the party under Section 11 AB of the Central Excise Act,
1944.
The
respondent in its reply inter alia briefly submitted that the entire
proceedings contemplated under the impugned show cause notice invoking the
extended period of limitation of 5 years under the proviso to Section 11A of
the Act was without jurisdiction and no valid proceedings could subsist thereunder.
It was submitted that they were manufacturing and clearing the chillers which
are also known in trade parlance as refrigerating machinery for which
classification/declaration list had been accepted by the department. On merits,
it was submitted that it was common knowledge that chillers and cooling towers
are generally used in relation to central air-conditioning plants for
air-conditioning of large areas such as hotels, airports, Govt.
offices/departments and that the facts which are within the common knowledge
ought to be presumed in law to be within the knowledge of the excise
department; the allegation made by the department that end use of the chiller
is for the air-conditioning purposes and hence the chiller must be treated as
part of the air-conditioner, was erroneous in law; that the process of
manufacture of a product and the end use to which it is put cannot necessarily
be determinative of the classification of that product under a fiscal schedule
like the Tariff Act; that the liquid chiller has many applications in industry
such as cooling the rolls used in manufacture of polyester films; for providing
chilled water in the processing of colour picture tubes; to provide chilled
water to cool the plant in paint shops in automobile manufacturing industry; to
provide chilled water/air to cool the equipments in nuclear science centre;
tool manufacturing companies; food industry; spot welding industry; textile
manufacturing industry and in the chemical industry. That in all these
applications and even in the central air-conditioning system, the function of
chiller is understood to be to chill the liquid. As per Section 2(a) of Section
XVI of the Tariff Act the chiller when cleared separately which specifically
falls under Chapter Heading No. 84.18 cannot by any stretch of imagination be
treated as part of an air-conditioner on the same analogy as fans used in the
air-conditioner are classified at the time of clearance as an electric fan and
not as a part of air-conditioner. That the chiller itself does not do any
air-conditioning as it is designed only to refrigerate or produce chilled
water/liquid. In support of its submission, the respondent relied upon certain
judgments as well as the Board's circulars.
The
Commissioner, Central Excise, in his order- in-original No. 9/2000 dated
24.3.2000 held that the chillers are classifiable under tariff heading No.
84.15 and not under tariff heading No. 84.18 as had been claimed by the
respondent. It was held that the chillers are nothing but an integral part of
the air-conditioning system. A complete central air-conditioning system comes
into existence when chiller is fitted with air handling unit or with fan coil
unit, ducting, piping, pumps etc. and no central air-conditioning plant can
come into existence without a chiller. Applying the principal of 'end use' it
was held that since more than 90% of the chillers manufactured and cleared by
the respondent had been used in the commissioning of central air-conditioning
plants and hardly 5 to 10% were put to application for other uses, the chillers
were classifiable under heading 84.15 as parts of air-conditioning machine.
Extended
period of limitation was invoked as it was found that the respondent was guilty
of suppression of facts. Accordingly, the demand of differential duty of
Rs.1,84,62,136/- short paid on 249 chillers valued at Rs.10,79,55,623/- was
confirmed and ordered to be recovered under Rule 9 (2) read with Section 11A.
Penalty of Rs.1,84,62,136/- was imposed under Section 11AC of the Act. Interest
was also ordered to be charged under Section 11AB of the Act.
Being
aggrieved by the orders passed by the authority-in-original, respondent filed
appeal before the Central Excise and Gold (Control) Appellate Tribunal (for
short "the Tribunal"). The Tribunal by the impugned order has
accepted the appeal, set aside the order-in-original and held that the end use
of "chillers" in the air- conditioning system would not take away the
primary or basic function of the chillers which is to produce chilled water by
using a refrigeration circuit and the same shall fall under Chapter Heading
84.18 of the Tariff Act.
Aggrieved
by the orders passed by the Tribunal, the Department has filed the present
appeals.
Shri
K. Radhakrishnan, learned senior advocate appearing for the Revenue submitted
that the chillers are nothing but an integral part of the central
air-conditioning system and a complete central air-conditioning system comes
into existence when chiller is fitted with the air handling unit or with fan
coil unit, ducting, piping, pumps etc. It was emphasized by him that more than
90% of the chillers manufactured and cleared by the respondent were used in the
commissioning of central air-conditioning plants.
On the
other hand, counsel appearing for the assessee contended that the primary
function of the chiller is only to produce chilled water/liquid and the
function of the chiller comes to an end once the chilled water/liquid is
produced.
Rival
tariff headings read as under:-
-
"Air-conditioning
machines, comprising a motor driven fan and elements for changing the
temperature and humidity, including those machines in which the humidity cannot
be separately regulated." "84.18 Refrigerators, freezers and other
refrigerating or freezing equipment, electric or other; heat pumps other than
air-conditioning machines of heading No. 84.15." The chilled water
produced by the chiller is admittedly in turn being used in various industrial
applications namely:
-
In polyester
film processing, chilled water produced by chiller is used for cooling the
rolls used in the manufacture of polyester films.
-
The chilled
water produced by chiller is used in the processing of colour picture tubes.
-
For the painting
of cars, a process is used whereby the entire car body is charged negative and
dipped in paint charged positive. During the process, a lot of heat is
generated and the chiller is used here for producing chilled water, which cools
the paint continuously.
-
Nuclear science
centre is engaged in cryo-generator research wherein equipment like ion
accelerator is used to bombard materials and study their behaviour. Chiller is
used in the process to produce chilled water, which cools the equipment round
the clock.
-
Chilled water
produced by the chiller is used to cool manufacturing equipment.
-
Chillers are
used for the purpose of process cooling in food industry.
-
Metals subjected
to welding are chilled with the help of chilled water produced by the chiller.
-
Chilled water
produced by chiller is used in flawless weaving in textile industry.
-
Chillers are
being supplied for use in chemical process industry.
All
these facts have been admitted by the adjudicating authority in its
order-in-original.
From
the above, it is established that the primary function of the chiller is to
refrigerate or chill water/liquid irrespective of the industrial or other
application which the chilled water is put to. Air-conditioning system is just
one amongst the various industrial applications in relation to which chillers
are used. Only because 90% of the chillers manufactured by the respondent are
used in the air-conditioning system cannot be the basis for classification of
the chillers as parts of air- conditioning system classifiable under heading
84.15.
End
use to which the product is put to by itself cannot be determinative of the
classification of the product. See Indian Aluminium Cables Ltd. vs. Union of India and
Others, 1985 (3) SCC 284. There are a number of factors which have to be taken
into consideration for determining the classification of a product.
For
the purposes of classification the relevant factors inter alia are statutory
fiscal entry, the basic character, function and use of the goods.
When a
commodity falls within a tariff entry by virtue of the purpose for which it is
put to, the end use to which the product is put to, cannot determine the
classification of that product.
Tariff
heading 84.15 covers air-conditioning machines which control and maintain
temperature and humidity in closed places. The main function of
air-conditioning system is to control temperature, which is not done by a
chiller. A reading of the tariff entry 84.15 would show that it is intended to
cover only those machines which comprise of elements for changing temperature
and humidity and chillers would fall outside the purview of the said entry. The
function of the chiller is only to chill water or bring it to a very low
temperature, and it is the air handling unit having an independent and distinct
function which produces the effect of air-conditioning, controlling the temperature
and the humidity. The chiller itself does not do any air-conditioning as it is
designed only to refrigerate or produce chilled water/liquid.
Revenue
is classifying the impugned chillers as parts of the air-conditioning system as
the same is used in central air-conditioning plant of star hotels, airport,
hospital, large office complexes and large establishments. The use of the
chillers in the air-conditioning system would not take away the primary or
basic function of the chiller which is to produce chilled water by using a
refrigerating circuit. Heading 84.18 covers refrigerators, freezers and other
refrigerating or freezing equipment. Accordingly, the chillers in question
shall fall under specific heading 84.18 of the Tariff Act. This view is supported
by the explanatory notes of H.S.N. below heading 84.15.
HSN
provides that "If presented as separate elements, the components of
air-conditioning machines are classified in accordance with the provisions of
Note (2) (a) to Section XVI (heading 84.14, 84.18, 84.19, 84.21, 84.79,
etc)......" 'Chillers' manufactured by the respondent are cleared as
separate elements and not as air- conditioning machine, therefore, the same
have to be classified under tariff entry 84.18 as refrigerating or freezing
equipments as the basic function of the chillers is to chill the water or
liquid. Chillers manufactured by the respondent cannot be classified under
heading 84.15 simply because 90% of the chillers manufactured by the respondent
were being used in the commissioning of central air-conditioning plant. End use
to which the product manufactured is put to, cannot determine the
classification of the product when the product manufactured falls under a
specific heading.
Chillers
in the domestic and international trade parlance are known as refrigerating
equipment. The trade identifies chillers as refrigerating machinery on the
basis of its function of chilling water using refrigerating circuit. Even by
testing it from the commercial parlance test as well the chillers would not be
classifiable under Chapter Heading 84.15.
Since
the Tribunal decided the case on merits it did not record any finding regarding
invoking of the extended period of limitation under Section 11A. Since we are
agreeing with the view taken by the Tribunal on merits, there is no need for us
as well to go into the question regarding the extended period of limitation.
For
the reasons recorded above, we do not find any merit in these appeals and
dismiss the same leaving the parties to bear their own costs.
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