By TIOL News Service

NEW DELHI: JULY 02, 2015: THIS appeal pertains to the period 1.8.1991 to 28.2.1993. On the same issue for the period from 20.3.1990 to 25.7.1991, the Supreme Court had passed an order in favour of the assesse - 2003-TIOL-101-SC-CX. Based on the judgement of the Supreme Court, the Tribunal in 2003 passed an order in favour of the assessee for the latter period i.e 1991 - 1993. The Revenue is in appeal against the order of the Tribunal, in spite of the fact that the Supreme Court in the case of the same assessee on the same facts, for an earlier period had ruled in favour of the assessee. The Revenue argued that the decision of the Supreme Court requires reconsideration and thus the matter came to be referred to a larger bench of three judges of the apex court.

The assessee is a manufacturer of car air-conditioning kits. It classified the said goods under Item No. 5 of Heading 8415 of the Schedule to the Central Excise Tariff Act, 1985 for the purpose of availing the benefit of exemption as given under Notification No. 166/86-CE dated March 1, 1986 (as amended from time to time). The assessee contended that it was only manufacturing parts of the air-conditioning kit and, therefore, the kit could not be treated as an air-conditioner. The Assistant Collector, disagreed with the stance of the assessee and treated the same as air-conditioning system falling under Item No. 3 of the Heading 8415 of the Notification. On March 20, 1990, a new Entry, Item No.8, was added to the table of the Notification and thereafter the assessee classified the air-conditioning kits under the said Entry for the purpose of levy of excise duty. The Assistant Collector, vide order dated January 24, 1992 rejected the stand put forth by the assessee and confirmed the demand which was affirmed by the Collector (Appeals) by his order dated July 13, 1992. On appeal being filed before the Tribunal, it dismissed the same. The two-Judge Bench of the Supreme Court referred to the column 3 of the table annexed with the notification and posed the question whether the car air-conditioning kit is classifiable under Item No. 3 or under Item no. 8 of the table of the said Notification. After reproducing the Item No. 3 of the said Notification, analysed the description of goods given against Item No.3 in column (3), referred to the amendment made on March 20, 1990 whereby in column (3), following words were added against Item No.5:-

"other than the parts and accessories of car air conditioner including car air-conditioning kit."

The Court observed that what is excluded from Item No.5 is mentioned against Item No.8, as per the portion quoted above.

Thereafter, the Court opined that a specific Entry prevails over the general Entry and, therefore, w.e.f. March 20, 1990 till July 25, 1991, air-conditioning kits which comprises of various parts are classifiable under Item No. 8 of the said Notification. The Division Bench reproduced the Explanation (2) that was added on July 25, 1991, which reads as under:-

"Explanation (2) - For the purposes of this notification, the term ‘car air-conditioner kit' or ‘car air-conditioning kit' shall exclude the kit or assembly of parts which contains automotive gas compressor with or without magnetic clutch."

While interpreting Explanation (2), the Court eventually held thus:-

"18. To resolve the controversy, we shall revert to the wording of the said Explanation. It provides that for the purposes of the Notification, the term "car air-conditioner kit" or "car air-conditioning kit" shall exclude the kit or assembly of parts which contains automotive gas compressor with or without magnetic clutch. In our view, the Explanation has the effect of taking away the automotive gas compressor (with or without magnetic clutch) from out of the car air-conditioning kit. The car air-conditioning kit which comprises of parts of car air-conditioner remains as part of Item No. 8 of the notification. The Explanation cannot be so construed as to remove the term "car air-conditioner kit" or "air-conditioning kit" itself from Item No. 8 of the Notification. What follows is that ‘car air-conditioning kit minus automotive gas compressor with or without magnetic clutch' will remain in the description of goods against Item No. 8 of the Notification and that the excluded part of the kit, namely, automotive gas compressor with or without magnetic clutch, will cease to be part of Item No. 8 and will be liable to duty separately."

Whether this decision is correct or not is the question before the larger bench.

The relevant part of the Notification No. 166/86-CE as it stood during the period of dispute reads as follows:-

The Supreme Court noted that air conditioners including car air-conditioning kits fall under Chapter 8415.00 of Central Excise Tariff Act, 1985. The Explanation to the Notification was inserted on 25.07.1991. During the period in dispute, as the factual matrix would unveil, the respondent-assessee had cleared the car air-conditioning kits without gas compressors under serial no.8 and automotive gas compressors under serial no. 1. To put in other words, the respondent has paid ad valorem excise duty at 65% on the car air-conditioning unit without gas compressors and 40% ad valorem duty on the gas compressors.

The stand of the revenue is that in terms of Explanation 2 read with Rule 2(a) and Section Note 4 to Section XVI, the goods manufactured would be covered by serial no.3 of the aforesaid Notification and they were chargeable under the same.

Whether interpretation as per Rule 2(a) would be applicable to the Notification . Rule 2(a) of Rules for the Interpretation of Schedule reads as follows:-

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

The Supreme Court observed, "It needs no special emphasis to state that rules or principles of interpretation are always subject to context and not binding commands on iron cast imperatives."

The Court further noted,

Rule 1 of the Rules of Interpretation lays down that for legal purpose classification shall be determined in accordance with the terms of headings and any relative section or Chapter Notes, provided such headings or Notes do not otherwise require a different interpretation.

Whether the earlier decision lays down the correct law : the question that would arise for consideration is whether Sanden Vikas (India) Ltd - 2003-TIOL-101-SC-CX lays down any incorrect proposition of law. In the said decision, in paragraph 18, the two-Judge Bench, construing the Explanation, has laid down that the expression cannot be so construed as to remove the term "car air-conditioner kit" or "car air-conditioning kit" itself from item no.8 of the Notification. What follows is that car air-conditioning kit minus automotive gas compressor with or without magnetic clutch will remain in the description of goods against item no.8 of the Notification and the excluded part of the kit, namely, automotive gas compressor with or without magnetic clutch will cease to be a part of item no.8 and will be liable to duty separately.

A car air-conditioning kit, if it contains an automotive gas compressor with or without magnetic clutch, the kit part will meet the description of goods against item no.8 of the Notification and the automotive gas compressor with or without magnetic clutch will be liable to duty separately and it will go away from description of Item no.8. To elaborate, if a car air-conditioning kit has both, there has to be two sets of duty; one for the kit and the other for the automotive gas compressor with or without magnetic clutch.

The Larger Bench observed, "if a manufacturer sells the kit and the automotive gas compressor as one unit of transaction, it will get out of serial no.8. If a manufacturer sells the kit and the automotive gas compressor separately by different invoice or by separate pricing, we do not see any reason for exclusion of the air-conditioning kit from the serial no.8 because there are two transactions and the kit is charged as per serial no.8 and compressor is charged as per serial no.1. There is no dispute over the fact that one can buy the automotive gas compressor with or without magnetic clutch with the kit, and both can also be purchased separately from different manufacturers. What the two-Judge Bench has said is that an air-conditioning kit minus automotive gas compressor with or without magnetic clutch will remain in the description of goods against item no.8 of the Notification and that the excluded part of the kit, namely, automotive gas compressor with or without magnetic clutch will cease to be a part of item no.8 and will be liable to duty separately. Thus, the Division Bench has quite categorically stated that if the air-conditioning kit does not contain automotive gas compressor with or without magnetic clutch, duty is paid as per item no.8 and if it contains the automotive gas compressor with or without magnetic clutch, it will not come under item no.8. The ratio laid down in the said decision cannot be found to be erroneous ."

However as a matter of clarification, the Larger Bench held that if a kit and compressor are sold in a singular invoice or in one pricing, it will go out of item no.8 and duty will be paid separately, but if there are two invoices for separate pricing, the air-conditioning kit would come under serial no.8 and the automotive gas compressor with or without magnetic clutch will be liable to duty separately .

The appeal is disposed of clarifying that the earlier Division Bench order is not erroneous.

(See 2015-TIOL-147-SC-CX-LB)