By TIOL News Service

CHANDIGARH, MAY 11, 2018: THE appellant after purchasing engine/pump/base frames from various suppliers undertook inspection and testing in respect of the parts for proper alignment of pump set on engines, pump and base frames.

Thereafter, the appellant packed all three items in a master carton with logo/model number and name of their company and dispatched the same to their godown/depots for sale.

The case of the Revenue is that the process of alignment and testing/inspection does not amount to ‘manufacture' and as the appellant had sold all these parts as such after re-packing, therefore, they are not entitled to avail cenvat credit on the same. Action was also proposed u/s 11D of the CEA, 1944 and for imposition of penalty u/r 15 of CCR.

The adjudicating authority upheld the charges leveled. Inasmuch as the AA held that the activity does not amount to ‘manufacture' and CENVAT credit is inadmissible. However, the action proposed u/s 11D of CEA, 1944 was dropped and so also the imposition of penalty u/r 15(2) of CCR. However, penalty u/r 15(1) of CCR, 2004 was imposed.

The appellant is before the CESTAT challenging this order.

The Member (Judicial) adverted to Note 6 to Section XVI of Central Excise Tariff Act and observed that what was sold was pump sets, therefore, a new product had come into existence and hence activity undertaken by the appellant amounts to manufacture.

Relying upon the decisions in Western Refrigeration Pvt. Ltd. - 2009-TIOL-2528-CESTAT-AHM and the Bombay High Court decision in Ajinkya Enterprises - 2012-TIOL-578-HC-MUM-CX wherein it is held that even if activity does not amount to manufacture, the goods when cleared on payment of duty shall amount to reversal of credit, the appeal was allowed with consequential relief.

However, the Member (Technical) did not agree with the order of the Member (J).

In a detailed order, the Member (T) observed -

“…I find that the Section Note 6 has not been correctly interpreted by the appellant because the article which is incomplete or unfinished should have the essential character of the complete or finished article. The contention that the engines, pumps and frames all have the essential character of the pump is clearly erroneous and hence not tenable. While incomplete pumps may be having essential character, it cannot be said that engine and frame have essential character of P.D. Pumps. The latter are just components of P.D. Pumps. Further, the process of converting three components into complete or finished article, namely, P.D. Pumps does not take place in the factory where inspection is only done selectively, but at the location, where pumps, engines and frames are assembled and converted into a complete or finished pump. Hence, process of manufacture takes place at the place of installation and use.”

Distinguishing the case laws cited by the appellant, the Member (T) concluded that the activity of putting three components i.e. pumps, engines, frames in their original packing in one master carton after random checking/inspection does not amount to manufacture in the factory of the appellants.

Upholding the order of the adjudicating authority,the appeal filed was dismissed.

The following difference of opinion was, therefore, referred to the third Member -

Whether the activity of inspection and testing in respect of the parts for proper alignments of pump set on engines, pump and base frames and packing thereof in master box amounts to manufacture as held by the Member (Judicial);

or

Whether the activity of putting three components i.e. pumps, engine and frame in their original packing in one master carton after random checking/inspection does not amount to manufacture as held by Member (Technical).

The Third Member (T) on reference observed as under -

“24. …I find from para 11 of this order recorded by Brother Member (Technical) that the contention of the appellant is that after the inspection of engines, pumps and frames is carried out and they are checked for alignment, the pump set becomes complete. Whereas, Brother Member (Technical) in para 15 has recorded that the contention of the appellant is that engines, pumps and frames are all incomplete or unfinished until the alignment is tested by the appellant. The contention of the appellant as recorded by Brother Member (Technical) in two different paragraphs has been recorded in different manners. In para 15 his understanding is that the engines, pumps and frames are all incomplete whereas, he has recorded contention of the appellant in para 11 that until the engine, pump and frames are inspected and check for alignment the pump set is incomplete. Therefore, I do not agree with the Brother Member (Technical) insofar as his finding that the goods in question are not covered by Note 6 to Section XVI of the first schedule to Central Excise Tariff Act, 1985. I also find from statement of Shri. Lokesh Kaul who has stated on 12.01.2007 that pump frames and engine are inspected and they are assembled to check for alignment and fitment and after the said process the goods are described as kerosene pump set. I note that before the said process, components have individual identity. Therefore, I agree with the view expressed by Brother Member (Judicial) that the process of manufacture is involved in the subject goods…”

In fine, the Majority decision is that the activity undertaken by the appellant amounts to manufacture.

The appeal was allowed with consequential relief.

(See 2018-TIOL-1491-CESTAT-CHD)