Commissioner Of Customs, Bangalore vs M/S. N.I. Systems India P.Ltd

Commissioner of Customs, Bangalore ... Appellant (s)

Versus

M/s. N.I. Systems (India) P. Ltd. ... Respondent(s)

J U D G M E N T

S. H. KAPADIA, CJI

Delay condoned.

Facts:

2. M/s. N.I. Systems (India) Private Limited

(hereinafter referred to as "importer") is a 100%

subsidiary of N.I. Corporation at Austin, Texas, USA.

3. Assessee imports various products from its Holding

Company and supplies the same to its customers in India.

During the relevant assessment year, the assessee imported

various products from their Principal. The products were

computer based instrumentation products. The importer

filed 64 bills of entries. The importer claimed the items

to be computers and/ or parts of computers. The importer

grouped the items in accordance with similar/ identical

functions broadly under CTH 8471, 8473 and other headings falling under Chapter 84. Broadly, the importer

categorized the imported items as follows:

(i) PXI Controllers

(ii) Input/Output Modules (also known as Modem or Control/Adaptor Units)

(iii) Signal Converters.

(iv) Chassis and its parts.

4. On verification of the technical data (including the catalogue and the webcast

of the importer), the Original Authority ("O.A.") vide its decision dated 15.11.2006

held that the subject goods were not structurally designed to function as a computer.

Further, according to the O.A., in the ordinary course of trade no buyer will purchase

the subject goods as computers on account of price differential between the price of the

subject goods and the price of the computer. According to the O.A., the subject goods

stood manufactured for a special purpose and that purpose was either measurement or

control. According to the O.A., the importer, in this case, had conceded before it that a

complete system performs the function of measurement whereas if one looks at the

subject goods item-wise, it shows that each item performs a sub-function of data

acquisition processing. On the basis of the said concession, the O.A. concluded that

each imported item constituted a part of a complete Measurement System. According to

the O.A., if one applies the test of common parlance then the subject goods are

measuring/controlling instruments and even in trade parlance they are not known as

computers. Lastly, the subject goods are costlier than ordinary computer and the trader

buys them because of their enhanced capabilities for the purposes of measuring/controlling instruments. According to the O.A., the subject goods are

specially designed for industrial use which is indicated by the catalogue submitted by

the importer. The embedded controllers may perform all functions of a CPU but,

according to the O.A., the embedded controllers are not CPUs. According to the O.A.,

one more concession is made by the importer. In its reply to the show cause, the

importer stated that they use real-time operating systems (software) and not the

standard operating systems such as Microsoft Windows. Accordingly, the O.A. held

that controllers are manufactured for a specific purpose and not as ADP Machines. The

specific purpose being controlling/measurement as enumerated in the catalogue. In the

circumstances, the O.A. has broadly classified embedded Controllers, Programmable

Automation Controllers ("PACs"), Data Acquisition Boards, Digital Input Output

Boards, PXI Chassis etc. under Chapter 90. The O.A. has rejected the classification

sought by the importer under CTH 8471.

5. Aggrieved by the decision of the Additional Commissioner dated 15.11.2006,

the importer preferred Appeal No. 98/07-CUS(B) before Commissioner of Customs

(Appeals). Vide decision dated 31.7.2007, the Commissioner (A) dismissed the appeal

preferred by the importer.

6. Against decision dated 31.7.2007, the importer preferred Customs Appeal No.

678/07 before CESTAT. Vide its decision dated 29.6.2009, the Tribunal held that the

main item of import was PXI Controller and other Controllers. According to the

Tribunal, these imported Controllers were nothing but ADP Machines. According to the Tribunal, the importer had placed before it the sample of imported items with

enormous data including a diagram which read as follows:

"PXI Controllers = Computers = Data Processing

Machines"

[See page 10 of presentation of the

importer company]

7. According to the Tribunal, the diagram, on which

reliance was placed by the importer, indicated that both

PC and PXI Controller had a structure/ design which was

common to Automatic Data Processing Machines. According

to the Tribunal, PXI controller in itself is not a

measuring instrument; that the input of PXI Controller is

only in the digital form as in the case of a PC; that PXI

Controller is in turn connected with the processors,

motherboard, hard drive with Windows XP, Serial Port, USB

Port, Video Port, Ethernet Port, etc. According to the

Tribunal, since the PXI Controller is identical in

function to the normal home computer, both the items are

comparable. According to the Tribunal, a PXI Controller

acts as a Central Processing Unit for the entire PXI

system. According to the Tribunal, a PXI Controller

processes the data that enters from the external

peripherals such as a mouse and a keyboard as well as from the internal peripherals such as PXI Signal Converting

Modules (Cards). There is no difference between a PXI

Controller and a PC. Thus, according to the Tribunal, a

PXI Controller and other Controllers imported by the

assessee are all ADP Machines. According to the Tribunal,

all the imported Controllers carry out the functions of

ADP Machines. According to the Tribunal, each and every

imported Controller retains the characteristics of ADP

Machine. According to the Tribunal, a PXI Controller can

be used for a variety of applications ranging from

advanced data acquisition to automatic manufacturing which

clearly indicated that the imported items were not

measuring instruments or their parts as claimed by the

Department. According to the Tribunal, the imported items

cannot be categorized as measuring instruments. According

to the Tribunal, PXI Controller per se is not a measuring

instrument. It can be used only in conjunction with an

independent measuring instrument with suitable interface,

hence, the PXI Controller/ other Controllers imported by

the assessee cannot be classified under Chapter 90 of the

Customs Tariff Act, 1975. Hence, this Civil Appeal is

filed by the Department against the decision of the

Tribunal dated 29.6.2009 in favour of the importer. Relevant Provisions of CTA:

8. Before proceeding further, we need to quote

hereinbelow the relevant entries referred to in the

Customs Tariff (2004-2005). At the outset, it may be

mentioned that Chapter 84 finds place in Section XVI which

deals with machinery and electrical equipments. The

Section Note to Section XVI states that Section XVI does

not cover articles falling in Chapter 90.

Notes 3 and 4 to Section XVI read as under:

"3. Unless the context otherwise requires, composite machines consisting of two or more machines fitted together to form a whole and other machines designed for the purpose of performing two or more complementary or alternative functions are to be classified as if consisting only of that component or as being that machine which performs the principal function."

"4. Where a machine (including a combination of machines) consists of individual components (whether separate or interconnected by piping, by transmission devices, by electric cables or by other devices) intended to contribute together to a clearly defined function covered by one of the headings in Chapter 84 or Chapter 85, then the whole falls to be classified in the heading appropriate to that function."

9. Note 5(A) to Chapter 84 defines the expression

"automatic data processing machines". Note 5(B) to Chapter 84 clarifies that an ADP may be in the form of

systems consisting of variable number of separate units.

We quote hereinbelow, Notes 5(A) and 5(B) to Chapter 84,

which read as follows:

"5.(A) For the purposes of heading 8471, the expression "automatic data processing machines" means:

(a) digital machines, capable of (1) storing the processing programme or programmes and at least the data

immediately necessary for the execution of the programme; (2) being freely programmed in accordance with the requirements of the user; (3) performing arithmetical computations specified by the user; and (4) executing, without human intervention, a processing programme which requires them to modify their execution, by logical decision during the processing run;

(b) analogue machines capable of simulating mathematical models and

comprising at least: analogue elements, control elements and programming elements;

(c) hybrid machines consisting of either a digital machine with analogue elements or an analogue machine with digital elements.

5(B) Automatic data processing machines may be in the form of systems consisting of a variable number of separate units. Subject to paragraph (E) below, a unit is to be regarded as being a part of a complete system if it meets all of the following conditions:

(a) it is of a kind solely or principally used in an automatic data processing system;

(b) it is connectable to the central processing unit either directly or through one or more other units;

and

(c) it is able to accept or deliver data in a form (codes or signals) which can be used by the system."

(emphasis supplied)

10. We quote hereinbelow Note 5(E) to Chapter 84, which

reads as follows:

"5(E) Machines performing a specific function other than data processing and incorporating or working in conjunction with an automatic data processing machine are to be classified in the headings appropriate to their respective functions or, failing that, in residual headings."

(emph

asis supplied)

11. Similarly, Note 7 to Chapter 84 is also relevant and

it reads as follows:

"7. A machine which is used for more than one purpose is, for the purposes of classification, to be treated as if its principal purpose were its sole purpose.

Subject to Note 2 to this Chapter and Note 3 to Section XVI, a machine, the principal purpose of which is not described in any heading or for which no one purpose is the principal purpose is, unless the context otherwise requires, to be classified in heading 8479. Heading 8479 also covers machines for making rope or cable (for example, stranding, twisting or cabling machines) from metal wire, textile yarn or any other material or from a combination of such materials."

12. We also quote hereinbelow for the sake of clarity

Chapter Heading 8471, which reads as follows:

"Automatic data processing machines and

units thereof; magnetic or optical

readers, machines for transcribing data

on to data media in coded form and

machines for processing such data, not

elsewhere specified or included"

Chapter Sub-Heading 8471 50 00 reads as follows:

"Digital processing units other than

those of sub-headings 8471 41 or 8471 49,

whether or not containing in the same

housing one or two of the following types

of unit: storage units, input units,

output units"

13. Chapter 90 falls in Section XVIII which refers to

"measuring and checking instruments/apparatus as also

parts and accessories thereof."

Chapter Notes 1(h), 2 and 3 of Chapter 90 read as under:

"1 This Chapter does not cover:

(h) searchlights or spotlights of a kind used for cycles or motor vehicles (heading 8512); portable electric lamps of heading 8513;

cinematographic sound recording, reproducing or re-recording apparatus (heading 8519 or 8520); sound-heads (heading 8522); still image video cameras, other video camera recorders and digital cameras (heading 8525);

radar apparatus, radio navigational aid apparatus or radio remote control apparatus (heading 8526); numerical control apparatus of heading 8537;

sealed beam lamp units of heading 8539; optical fibre cables of heading 8544;"

"2. Subject to Note 1 above, parts and accessories for machines, apparatus, instruments or articles of this Chapter are to be classified according to the following rules:

(a) parts and accessories which are goods included in any of the headings of this Chapter or of Chapter 84, 85 or 91 (other than heading 8485, 8548 or 9033) are in all cases to be classified in their respective headings;

(b) other parts and accessories, if suitable for use solely or principally with a particular kind of machine, instrument or apparatus, or with a number of machines, instruments or apparatus of the same heading (including a machine, instrument or apparatus of heading 9010, 9013 or 9031) are to be classified with the machines, instruments or apparatus of that kind;

(c) all other parts and accessories are to be classified in heading 9033."

14. We quote hereinbelow CTH 9031 which refers to

measuring or checking instruments, appliances and machines, not specified or included elsewhere in Chapter

90. The Department seeks to place reliance on Chapter

Sub-Heading 9031 80 00, which reads as under:

"Other instruments, appliances and

machines"

15. The Department also places reliance on Chapter Sub-

Heading 9031 90 00, which refers to "parts and

accessories".

16. For some of the items, the Department places

reliance on Chapter Sub-Headings 9032 89 10 and 9032 90 00

which read as follows:

"9032 89 10 Electronic automatic

regulators

9032 90 00 Parts and accessories"

17. At this stage, we may deal hereinbelow the

Explanatory Notes from HSN. Our customs tariff is

basically based on HSN. Even the HSN makes it clear vide

Section Note 1(m) that Section XVI which refers to Chapter

84 will not cover articles mentioned in Chapter 90.

Similarly, Section Note 3 to Section XVI states that

multi-function machines are to be classified according to

the principal function of the machine. According to the

Explanatory Notes, a printing machine with a subsidiary machine for holding the paper or an industrial furnace

combined with lifting or handling machinery is a composite

machine in terms of Section Note 3. Further, referring to

Functional Units, the Explanatory Note, referring to

Section Note 4, inter alia states that when a machine

including a combination of machines consists of separate

components which are intended to contribute together to a

clearly defined function covered by one of the headings in

Chapter 84 then the whole shall fall for classification in

the heading appropriate to that function, whether the

various components remain separate or are inter-connected

by devices used to transmit power, either by electrical

cables or by other devices. At this stage, we quote

hereinbelow Chapter Sub-Heading 8471 49 00, which reads as

follows:

"Other, presented in the form of systems"

18. According to HSN, the word "systems" in Chapter Sub-

Heading 8471.49 means ADP machines whose units satisfy the

conditions of Note 5(B) to Chapter 84 and which comprises

of a CPU, one input unit (for example, a keyboard or a

scanner), and one output unit (for example, a visual

display unit or a printer).

19. According to HSN, the following classification principles have to be applied in accordance with Note 5(E)

to Chapter 84 in the case of machine incorporating or

working in conjunction with ADPM and performing a specific

function. These principles are as follows:

"(1) A machine incorporating an automatic data processing machine and performing a specific function other than data processing is classifiable in the heading corresponding to the function of that machine or, in the absence of a specific heading, in a residual heading, and not in heading 84.71.

(2) Machines presented with an automatic data processing machine and intended to work in conjunction therewith to perform a specific function other than data processing, are to be classified as follows:

The automatic data processing machine must be classified separately in heading 84.71 and the other machines in the heading corresponding to the function which they perform unless, by application of Note 4 to Section XVI or Note 3 to Chapter 90, the whole is classified in another heading of Chapter 84, Chapter 85 or of Chapter 90."

20. The most important aspect which needs to be

emphasized in this case is that, according to HSN, data

processing consists of handling information of all kinds,

in pre-established logical sequences and for a specific

purpose(s). According to HSN, ADP machines are machines

which, by logically interrelated operations performed in

accordance with pre-established instructions (program), furnish data which can be used as such or, in some cases,

serve in turn as data for other data processing

operations. The important thing to be noted is that there

is a wide difference between handling information,

referred to at page 1575 of HSN in the context of CTH 8471

and automatically controlling the flow, level, pressure or

other variables of liquids or gases, referred to at page

1856 of HSN in the context of CTH 90.32.

21. To complete the chronology of the paragraphs used in

the Explanatory Notes, the HSN has stated in the context

of CTH 84.71 that a CPU incorporates storage, arithmetical

and logical elements and control elements, an input unit

which receives input data and converts them into signals

which can be processed by machines and an output unit

which converts the signals provided by the machine into an

intelligible form (printed text, displays, etc.) or into a

coded data for further use (processing, controlling,

etc.). [See page 1577 of HSN] In this connection, we

quote hereinbelow the conditions laid down by the HSN for

classifying a unit as a part of digital data processing

system. These conditions are laid down at page 1577 of

HSN, which read as follows:

"A unit is to be regarded as being a part of a complete digital data processing system, if it satisfies the following conditions:

(a) It is of a kind solely or principally used in an automatic data processing system;

(b) It is connectable to the central processing unit either directly or through one or more other units;

and

(c) It is able to accept or deliver data in a form (codes or signals) which can be used by the system.

The interconnections may be made by material means (e.g. cables) or by non- material means (e.g., radio or optical links).

In accordance with Note 5(D) to this Chapter, printers, keyboards, X-Y co-ordinate input devices and disc storage units which satisfy the conditions of items (b) and (c) above, are in all cases to be classified as constituent units of data processing systems.

The foregoing provision is, however, to be considered in the overall context of Note 5 to Chapter 84 and is therefore applicable subject to the provisions of paragraph (E) of that Note, by virtue of the introductory part of paragraph (B) thereof. Thus, ink-jet printers working in conjunction with an automatic data processing machine but having, particularly in terms of their size, technical capabilities and particular applications, the characteristics of a printing machine designed to perform a specific function in the printing or graphics industry (production of pre-press colour proofs, for example) are to be regarded as machines having a specific function classifiable in heading 84.43.

Furthermore, appliances such as measuring or checking instruments adapted by the addition of devices (signal converters, for example), which enable them to be connected directly to a data processing machine, are, in particular, not to be regarded as of a kind solely or principally used in automatic data processing systems. Such appliances fall to be classified in their own appropriate heading.

Digital data processing machines are put to many uses, for example, in industry, in trade, in scientific research and in public or private administrations."

22. Further, at page 1578 of HSN, it is stipulated that

Chapter Heading 84.71 also covers constituent units of

data processing systems. These may be in the form of

units having a separate housing and designed to be

connected, for example, by cables or in the form of units

not having a separate housing and designed to be inserted

into a machine. Display units of ADP machines provide a

graphical presentation of the data processed. (See page

1579 of HSN).

23. Coming to Section XVIII, in which Chapter 90 falls,

the Explanatory Notes in HSN amongst other things indicate

that instruments and apparatus for automatically

controlling the flow, level, pressure or other variables

of liquids or gases, or for automatically controlling

temperature fall in CTH 90.32. (See Note 7 to Chapter 90

at pages 1766 and 1856) Case of the Department:

24. Based on the technological write-ups given by the

importer read with the description provided in the

catalogue and the website it was argued on behalf of the

Department that a complete system performs the work of

measurement whereas the item imported by the assessee

forms a sub-function of data acquisition and processing.

According to the Department, the terms "control" and

"control systems" generally refer to the control of a

device, process or system by monitoring one or more of its

characteristics. This is used to ensure that output,

processing, quality and/or efficiency remain within the

parameters over the duration of time. According to the

Department, in several control systems, digital data

processing monitors a device, process or system and

automatically adjusts its operational parameters. In other

control systems, such an apparatus only monitors the

device, process or system and displays alarm leaving

responsibility for adjustment to the operator. Thus,

process control is typically employed in the manufacturing

sector for process and discrete manufactures. According to

the Department, field devices include temperature, flow and other sensors that measure characteristics of the

device, process or system being controlled. On the other

hand, control devices include valves, actuators which

control the devise, process or system itself. According to

the Department, controllers generate settings for the

control devices based on measurements from the field

devices. Controller operation is typically based on

control algorithm that maintains a control system at a

desired level by minimizing differences between the values

measure by the sensors. According to the Department,

controllers may be connected to other computing apparatus

that facilitates monitoring or administration. According

to the Department, the principal function of controllers

is to execute control algorithms for the real time

monitoring and to control devices, processes or systems.

They have neither the computing power nor user interfaces

required to facilitate the design of a control algorithm.

Historically, the process control industry has used manual

operations, such as manually reading level and pressure

gauges, turning valve wheels, etc. in order to operate the

measurement and control field devices within a process.

However, with the emergence of the microprocessor-based

Distributed Control System ("DCS"), the distributed electronic process control came into existence in the

process control industry. A DCS includes an analog or a

digital computer, such as a Programmable Logic Controller

("PLC"), connected to numerous electronic monitoring and

control devices like electronic sensors, transmitters,

transducers etc. located throughout a process. The DCS

computer stores and implements a centralized and complex

control scheme in order to effect measurement and control

of devices within the process so as to control process

parameters according to the overall control scheme.

According to the Department, PACs are not meant to be used

as personal computers. The purpose of controllers is to

control industrial processes. Thus, according to the

Department, a controller by its very name performs

functions distinct from data processing. Moreover,

according to the Department, there are differences in the

structure and the function of a controller and the

function of a PAC vis-a-vis the PC. According to the

Department, PAC cannot be equated to a PC as is sought to

be done by the Tribunal. A PAC combines a PLC and a PC.

The Department also placed reliance on the webcast to show

that a processor is separated from FPGA by a high-speed

bus. According to the Department, the webcast further shows that a processor is separate and distinct from the

main controller wherein the hardware is dedicated to

perform measurement and control applications. According to

the Department, the software used in order to programme

the processor is designed using a proprietary software

known as Lab View. The catalogue is relied upon by the

Department to show that the controller, in the present

case, has been designed and made for a specific function

and regulating and controlling industrial processes.

According to the Department, none of the above aspects

have been duly considered by the Tribunal. The entire case

of the Department before us was that the Programmable

Process Controllers when imported were suitable for use

principally with industrial process control equipment,

i.e., sensors which measure temperature, pressure, flow

etc. and therefore such programmable process controllers

were classifiable as a part of the said equipment,

instrument or apparatus. The programmable process

controller, though separate from sensors, is necessarily

an individual component intended to contribute to a

clearly defined function. According to the Department, the

programmable process controllers being parts and

accessories of a regulating or controlling apparatus have been classified rightly by the adjudicating authorities

under CTH 9032 89 10. According to the Department, PACs

whether embedded or otherwise are in essence Programmable

Process Controllers. In support thereof, the Department

has placed reliance on two circulars issued by Central

Board dated 2.9.1996 and 9.5.1997.

25. As regards Input-Output ("I.O.") Modules and

Chassis, the Department contended that I.O. modules and

chassis have been rightly classified by the adjudicating

authorities as parts and accessories of regulating and

controlling apparatus classifiable under

CTH 9031 90 00/9032 90 00. In this connection, the

Department submitted on the basis of the catalogue and

technical write-ups that each and every imported I.O.

Modules is configured primarily to match with a sensor. In

this connection, the Department has demonstrated by way of

an illustration that one of the items imported by the

assessee is Instrument Control Boards (Cards). Instrument

Control Board (Card) is a stand-alone instrument. It

acquires data from external sensors, but it is unable to

send the data directly to a computer. Therefore, a

suitable board like instrument control board is required

to be placed inside the computer to allow the data to be sent directly to the computer. Similarly, another example

given by the Department is concerning Data Acquisition

Board. The purpose of a Data Acquisition Board is to

acquire data from external sensor and convert it to

digital sensors which the PC can understand. Thus I.O.

Module is tailored to a specific function and is therefore

a part of regulating a controlling apparatus. According to

the Department, a signal converting device or I.O. unit

has got to be properly aligned with the measuring or

checking instrument. According to the Department,

industrial process controllers and I.O. modules are parts

of a functional unit, the function of which is to be

judged as a whole and is therefore classifiable in Chapter

90. According to the Department, for the abovestated

reasons Controllers imported by the assessee including

embedded controllers are not merely PCs. They have a

specialized structure. They have a specialized function to

perform. Moreover, I.O. modules and chassis, which are the

subject matter of import are also specialized to operate

with specific sensors and devices. The data available from

sensors is transmitted to the controller for the execution

of control functions. Therefore, the package as a whole -

both hardware and software - must be seen as one functional unit. Hence, the imported goods, according to

the Department, have been rightly classified by the

adjudicating authorities under Chapter 90. According to

the Department, I.O. modules and chassis have been rightly

classified by the adjudicating authorities as parts and

accessories of Automatic Regulating or Controlling

Instruments and apparatus under CTH 9032 90 00.

Case of the Importer:

26. Briefly, the case of the importer before us was that

imported items cannot perform any specific function unless

the end-users have an appropriate programming software.

According to the importer, the input for the above items

is digital signals captured by sensors. According to the

importer, just because the imported items were to be used

with measuring instruments, it cannot be said that such

items are to be classified under Chapter 90. According to

the importer, PXI controller, I.O. modules and signal

converters are all varieties of ADP Machines. They all run

on operating systems like linux, windows etc. According to

the importer, no ADP Machine can capture an electrical

signal such as temperature, voltage, pressure etc. on its

own as a stand-alone item. According to the importer, an

ADP Machine requires various types of interface boards/units which are required to be installed in it and

connected to sensors so that temperature, voltage and

pressure can be received by the interface boards/units and

converted into digital signals and then sent to ADPM

processing. Therefore, according to the importer, it is

the sensor which measures the real world phenomena as ADPM

cannot interface by itself directly with the sensors.

Thus, assessee imports a variety of such interface

boards/units which are then installed into ADPM. According

to the importer, these boards/units meet the criteria

mentioned in Chapter Note 5(B) as well as Explanatory

Notes (I)(D)(4) & (5) which inter alia state that such

boards/units when imported should be classified under CTH

8471 as units of ADPM. According to the importer, an ADPM

when imported has only an operating software which cannot

perform any specific function without application of

software. For example, a PXI Controller is incapable of

processing the digital data fed to its CPU unless a

specific software is written for such processing. At the

time of import no software is written or provided. It is

the end-user who uses a programming language or an

appropriate tool such as Lab View software to write a

specific software for its own stand-alone instrument or application like thermostat, spectrum analyzer,

oscilloscopes etc.. According to the importer, at the time

of import, the assessee is not aware of what application

the end-user may put the PXI controller to use. Moreover,

a PXI controller is not dedicated to a single type of

machine or operator. It is capable of being connected to

multiple apparatuses simultaneously which apparatuses can

be changed continuously. As such, the PXI controller is

freely programmable as per the requirements of the user.

This end-user developed software or programme is stored in

the memory and is executed by PXI controller. It is

according to the software and the data fed to the CPU that

the PXI controller processes the data and provides the

required processed output. According to the importer, as

the PXI controller satisfies the requirement of free

programmability, storing and processing of programmes,

performance and arithmetical computation and execution of

programmes, the PXI controller qualifies as ADP Machine in

terms of Chapter Note 5(A) to Chapter 84 of Customs

Tariff.

27. According to the importer, the above position has

not been disputed by the Department. That, the Department

has not disputed that the Controllers imported by the assessee satisfy all the requirements of Chapter Note

5(A). According to the importer, the only reason why the

Department was to classify the imported items under

Chapter 90 is because according to the Department, in

addition to Chapter Note 5(A), Chapter Note 5(E) also

applies. The same test is applied by the Department to

I.O. Modules. According to the importer, even the

Department accepts that these modules satisfy the

definition of ADP given in Chapter Note 5(B). However, the

Department has classified the said modules under Chapter

9031 by virtue of Chapter Note 5(E). The same test is also

applied by the Department in the context of signal

convertors. According to the importer, even the signal

convertors satisfy the definition of units of ADP as

provided in Chapter Note 5(B). However, the Department has

classified the said items under Chapter 9031 only by

virtue of Chapter Note 5(E) of Chapter 84. In short, the

Department has classified the Controllers under heading

9031 or 9032 as measuring, checking or controlling

instruments. They have classified signal converter units

and I.O. modules under heading 9031 as parts of measuring

and checking instruments which is objected to by the

importer. The basis for the Department case has always been that the imported goods, though ADPM, are meant for

use with checking or controlling instruments are therefore

classifiable under heading 9031 and 9032.

Findings:

28. For the reasons given hereinafter, we hold on the

basis of technical material (including the importer's own

catalogue and webcast) that Controllers (including

embedded controllers) are not merely PCs/ADPMs, but have a

specialized structure and specific functions to perform

and are therefore classifiable under Chapter 90.

29. Similarly, I.O. Modules and Chassis, which are the

subject matter of import in this civil appeal are meant to

operate as parts of Industrial Process Control equipments

like sensors. These I.O. Modules come with software

tailored to their specific pre-defined functions.

Therefore, one has to see the package in the holistic

manner. The package as a whole - both hardware and

software - constitutes one single functional unit.

Accordingly, we hold that I.O. Modules and Chassis are

classifiable as parts and accessories of Automatic

Regulating or Controlling Instruments/Apparatus under CTH

9032.90.00.

Reasons:

(A) Based on Technical Material:

30. Whether a PXI Controller = PC Controller = ADPM?

This is the basic issue which we need to answer in this

civil appeal.

31. On examination of the technical write-up, before

going into the analysis of the classification principles,

we are of the view that the purpose of Controllers whether

embedded or not, is to control industrial processes.

Programmable Automation Controller is the combination of

PLC and PC technology and this means the ruggedness of

PLCs, software stability of a PC and the independence to

incorporate modular and diverse I/O. PAC is an improvement

over PLC. PAC is capable of being controlled by a

PC/Laptop but it is not a PC/Laptop. The principal

function of Controllers is executing Control Algorithms

for the Real-time monitoring and control of devices,

processes or systems whereas the principal function of a

PC by itself is acquisition, analysis and display of data.

A controller performs functions in addition to data

processing. The webcast presentation also shows the

difference in the structure and functions of a Controller

vis-`-vis a PC (simpliciter). The hardware in the Controller is dedicated to perform Measurement and Control

Applications. Basically, PACs are Programmable Process

Controllers which are suitable for use principally in

conjunction with Industrial Process Control equipment like

sensors which measures temperature, pressure etc. The

programmable process controller, though distinct from

sensors, is an individual component intended to perform a

specific function. The programmable process controller is

a part and accessory of a controlling apparatus.

32. A word about PXI, PAC, Sensor and FPGA.

(i) PXI: PXI is designed for measurement and

automation applications which require high performance and

a rugged industrial form. In the Chassis of PXI, there are

about 8 slots. PXI is a system. It consists of three

components, namely, chassis, system controller and

peripheral modules. One can select the modules to be

installed in the PXI System. PXI uses PCI-based

technology. There are PXI Modules, including those which

are imported herein, available for almost every

conceivable measurement and automation application.

(ii) PAC: PAC stands for Programmable Automation Controller. PAC is a Controller. PAC is an improvement on

PLC. Various characteristics of PAC includes multi-

domain functionality - ability of handling logic, motion

and process control - all on a single control platform.

Every computational algorithm cannot be solved with a PC.

PAC is meant for a wide variety of applications. PAC

incorporates multiple disciplines such as logic control,

process control and motion control all on a single open

platform with a single data base.

A classic example of the uses of a PAC would be in a

large bakery with multiple ovens. The ovens must stay

within a specific temperature range in order to properly

bake the products; this can be accomplished by someone

physically inspecting thermometers on each oven, then

manually adjusting the burners on each as needed. A PAC

could automate these tasks by monitoring temperature

remotely, then sending instructions to the burners to

either increase or decrease the heat until the temperature

returns to the acceptable range. A person in an office

overlooking the ovens can view all of the temperature data

in real-time from their Personal Computer, which can be

connected to the PAC's by serial cable, Ethernet or a

wireless modem.

(iii) Sensor: In the field of measurement and

instrumentation, the parameter to be measured (motion,

pressure, temperature, etc.) is first detected with the

help of a sensor. The sensor converts the detected

information into a suitable form (measurable currents and

voltages) for acceptance in the later stages for decision-

making. There are many types of sensors. Example: Photo

electric sensor, motion detector, pressure sensors etc..

(iv) FPGA: FPGA stands for a Field-programmable Gate

Array. FPGAs are integrated circuits which are used in

electronic equipments. It is a special kind of chip on

which there is embedded software. FPGA receives signals

(information) from devices like sensors or any other input

device. Such information is processed by FPGA. After

processing, the processed data/command is sent to the

required destination like a computer, actuator,

thermostat, motor etc. to perform a specific function like

Controlling. For example, on receiving the command the

motor can start or stop. Similarly, on receipt of the

command the thermostat can regulate the temperature.

33. At this stage, it is required to examine each of the

imported items, including I.O. Modules, to see whether the

hardware coupled with pre-installed software gives a definite identity and function. For example, the purpose

of Data Acquisition Boards ("DAQ") is to acquire data from

external sensors, usually in the form of Analog Voltage of

+/- 10 volts, which is then converted into digital

signals, which the personal computer can understand.

Similarly, Analog Output Boards are meant for converting

signals from external units such as PXI controller.

Similarly, Network Interface Module ("NIM") is used to

connect measuring instruments to a PC by sending and

receiving messages, two ways. The Chassis of PXI provides

connectivity and housing for embedded controllers and data

acquisition modules, allowing them to communicate with

each other. To sum up, the I.O. Module is tailored to a

specific function. Each of the abovementioned Boards

(cards) is inserted into the slots of PXI. Each of the

I.O. Modules is tailored to a specific function and is,

therefore, a part of a regulating and controlling

apparatus like a sensor, thermostat etc. Therefore, one

has to look at the machine (PXI Machine) holistically.

(B) Application of above technical material to the relevant Tariff Entries:

34. At the outset, it needs to be stated that PACs,

whether embedded or otherwise, are in essence Programmable Process Controllers.

35. In the matter of classification, we need to discuss

"PACs" and "Input/Output (I.O.) Modules and Chassis" in

two separate parts.

36. Chapter 84 is located in Section XVI. Note 1(m)

shows that if an article falls in Chapter 90, regardless

of whether or not it may otherwise fall within Chapter 84,

that Chapter (No. 84) stands excluded. There are eight

Chapter Notes to Chapter 84. The key Chapter Notes for

deciding the present Civil Appeal are Notes 5(E), and 7,

which are quoted hereinabove. Chapter Note 5(E) inter alia

refers to machines performing specific functions other

than data processing and incorporating in it a data

processing machine or it may be working in conjunction

with ADPM in which event the said machines performing

specific functions are to be classified in the heading

appropriate to their respective functions. Under Note 7, a

machine which is used for more than one purpose is, for

the purpose of classification, to be treated as if its

principal purpose is its sole purpose.

37. Chapter 90 includes measuring and checking

instruments and apparatus; parts and accessories thereof. In view of Section Note 1(m) of Chapter 84, quoted above,

it is first to be seen whether or not PACs fall within

Chapter 90. Keeping in mind the scheme of Chapter 84 and

Chapter 90, we are of the view that, in the present case,

the correct approach would be to examine the scope of

Chapter 90 first and foremost and only then we need to

examine the scope of Chapter 84. At this stage, we need to

state that Chapter Note 1(h) of Chapter 90 does not

exclude CTH 8471. Hence, even if an item falls under CTH

8471, it could still come under Chapter 90, however, in

view of Section Note 1(m) Chapter 84 would stand excluded.

This is because the application of Chapter 84 is subject

to the applicability of Chapter 90.

38. At this stage, we may refer to Chapter Note 2 to

Chapter 90 which is in two parts. Note 2(a) inter alia

states that what is otherwise parts or accessories, but is

classifiable as goods under Chapter 84, shall be

classified in their respective headings. The effect of

Note 2(a) is that if it can be shown that Programmable

Process Controllers/PACs are classifiable as "goods" under

Chapter 84 then such a classification would include the

same for being considered as parts or accessories of goods

under Chapter 90. However, in this case, Note 2(a) is not attracted as PACs are not classifiable as "goods" under

Chapter 84. It has been argued on behalf of the importer

itself that PACs/Programmable Process Controllers by

themselves are not measuring, regulating or control

instruments and hence CTH 9032 classification relied upon

by the Department was unsustainable. It was further argued

on behalf of the importer that physical variables such as

temperature and voltage are measured by sensors which

could be classified under Chapter 90, but this does not

extend to PACs/Programmable Process Controllers. It had

been further argued on behalf of the importer that

automatic control apparatus referred to in Chapter 90 must

consist of a device for measuring a control device and a

starting-stopping/operating device, all of which should

form a "single entity" and since a PAC does not fulfil the

said test, CTH 9032 is not attracted in the case of

PAC/Programmable Process Controllers.

39. In our view, the above argument of the importer is

unsustainable for the following reasons. Firstly, it is

nobody's case that a PAC/Programmable Process Controller

by itself is an automatic regulating, controlling

instrument or apparatus in terms of Chapter 90. On the

contrary, in view of Chapter Note 2(b) to Chapter 90 read with Note 3 of the same Chapter, PACs/Programmable Process

Controllers are parts and accessories of a

system/instrument which are suitable for use solely or

mainly with a number of machines, instruments, apparatus

of the same Heading, i.e., 9032 like sensors, thermostats

etc. In our view, PACs/Programmable Process Controllers

imported by the assessee herein are suitable for use

principally with Industrial Process Control Equipment like

sensors, thermostats etc. which measures temperature,

process etc. Therefore, they are correctly classifiable as

a part of the said machine, instrument or apparatus.

Secondly, a "control system" generally refers to the

control of a device, process or system by monitoring one

or more of its characteristics. It ensures that output

processing remains within the desired parameters over a

period of time. Controllers are generally connected to

other computing apparatus. The principle function of

controllers is to execute control algorithm for real time

monitoring and for controlling devices, processes or

systems. In this connection, it may be noted that, a

PAC/Programmable Process Controller ("PPC") is not by

itself an automatic regulating, controlling instrument or

apparatus. A PAC/PPC when imported is suitable for use mainly with an industrial process control equipment like

sensors, which measures temperature, pressure etc. As

such, a PAC/PPC is a part of an industrial process control

equipment/system and accordingly such controllers are

classifiable as a part of instrument or apparatus (see

Chapter Note 2(b) read with Note 3 of Chapter 90).

Thirdly, in this case, we are concerned with not only

classification of PXI Controller and other controllers, we

are also concerned with classification of Input-Output

Modules and Chassis. The key aspect, therefore, concerns

the nature and function of I.O. Modules and Chassis along

with controllers. One has therefore to take into account

all the imported items as constituting a complete System

which performs the work of measurement. PXI is a system.

It is composed of three basic components - chassis, system

controller and peripheral modules. These modules are also

imported by the importer in this case. One such module is

Network Interface Module. This module is used to connect

to a network for distributed control applications. It

interconnects a PC to a measuring instrument by sending

and receiving messages from the two units. It is important

to note that in the chassis of the PXI there are slots in

which Analog Output Boards (Cards); Digital Input-Output Boards, Image Acquisition Boards, Distributed Input-Output

Boards, NIM etc. are inserted. Each I.O. Module imported

by the assessee is tailored to a specific function and

therefore such I.O. Module is a part of a regulating or

controlling apparatus. Take the case of NIM. It is a

hardware device. It may be in the form of a network

interface card or a network adapter or in the form of

Network Interface Controller ("NIC"). NIM is a computer

hardware component designed to allow computers to

communicate over a computer network. It provides

connectivity between the industrial network and the I.O.

Module. A network interface module works as a connector

and adapter unit in order to provide a two way

interconnection between external sensor unit and the ADP.

Thus, I.O. Module is a hardware. It is also known as I.O.

device or I.O. Point. It may be in the form of I.O. Cards

or I.O. Boards. When I.O. Module is used to accept data

(input) from sensors, transducers, Programmable Logic

Controllers ("PLC"), computers etc. and then distributes

the data (output) to other devices in the system, then

I.O. Module is called as Distributed I.O. Module. Such

system is also called as Distributed Control System

("DCS"), which is a control system used normally in a manufacturing plant or in any other kind of dynamic

system. DCS, therefore, is used in a variety of industries

to monitor and control distributed equipments. An I.O.

Module is important from another angle also. It converts

readings from sensors and provides output signals which

are used for operating actuators (which make a device move

or start working) via Network Interface Module. A Modular

Distributed I.O. System which is also known as a Field

Point provides for industrial monitoring and control

applications. Thus, the Field Point System includes Analog

and Digital I.O. Modules, terminal bases and network

modules which connect I.O. Modules to industrial networks

and software tools. Field Point Systems are ideal for use

in industrial environment. Fourthly, Programmable Logic

Controller ("PLC") is a control device. It is normally

used in industrial control applications. It is a

Programmable Microprocessor based device which is used to

control assembly lines and machinery on the shop floor as

well as to control many other types of mechanical,

electrical and electronic equipment in a plant. A PLC is

designed for real-time use in rugged industrial

environments, connected to sensors and actuators. PLCs are

characterized by the number of I.O. Ports which they provide. PLCs are also categorized by their I.O. scan

rates. As stated, PACs, which expands the role of PLCs

and, at the same time, combines the capabilities of

several traditional controls and monitoring systems,

offers several benefits in the form of enhanced

functionalities. Thus, a PAC does not replace the

traditional PLCs but it expands the role of a PLC. A PAC

has features found in Programmable Logic Controllers,

Distributed Control Systems, Remote Terminal Units and

PCs.

40. The summary of what we have stated above is that

PACs/Programmable Process Controllers and I.O. Modules by

themselves are not measuring, regulating or controlling

instrument (system). Physical variables such as

temperature and voltage are measured by device, like

sensors which constitute measuring and control systems. In

other words, controllers and I.O. Modules each have a

specific function to perform being parts of a measuring

and control system i.e. sensors.

41. We also do not find any merit in the submission of

the importer that in view of the Explanatory Notes, the

Measuring Device, the Control Device and the Operating Device has to form a "single entity". There is no dispute

that if all the above three devices are found in one

"single entity" then classification will fall under

Chapter 90. However, the test of "single entity"

containing three devices is not a pre-condition for

classification under CTH 9032. On the contrary, the test

is not that of single entity, but of the device being

capable of working as a functional unit. In this

connection, Note 3 of Chapter 90 is to be read. Note 3

incorporates Note 4 to Section XVI. Note 4 inter alia

provides for a machine consisting of individual components

which may be separate as long as they are intended to

contribute to a clear defined function. The

PACs/Programmable Process Controller, though separate from

sensors, is an individual component intended to contribute

to a clearly defined function. Note 3 of Chapter 90 has to

be read with Note 2(b) of Chapter 90 and if so read then

it becomes clear that PAC/Programmable Process

Controllers, being parts and accessories and a regulating

or controlling apparatus like sensors have got to be

classified under CTH 9032.89.10.

42. For the above reasons, we hold that PACs (including embedded Controllers/Programmable Process Controllers)

have been rightly classified by the Department under CTH

9032.

43. On the question of Input-Output (I.O.) Modules and

Chassis, the Tribunal has not given any finding whatsoever

thereon. However, on going through the technical material

and the demonstration given to us in Court, we are of the

view that I.O. Modules and Chassis have also been rightly

classified by the Department as parts and accessories of

regulating and controlling apparatus classifiable under

Chapter 90. In this connection, one needs to examine the

nature and function of I.O. Modules and Chassis which we

have already discussed hereinabove. To put it briefly, at

the cost of repetition we may say that the primary

function of I.O. Modules (Boards) is to function as a part

of measuring and control System. It is for this reason

that such Modules are required to be classified as parts

and accessories of regulating and measuring System. For

this purpose, it is necessary to examine each of the

imported items apart from Controllers in order to see

whether the hardware coupled with the pre-installed

software gives it a definite identity and function. From

the catalogue and technological write-ups we find that each and every I.O. Module imported by the assessee is

configured with a sensor at one end. This aspect is very

important. Take the example of Data Acquisition Boards

(DAQ). The purpose of DAQ Boards is to acquire data from

external sensor, usually in the form of analog voltage of

+/- 10 volts. This data is converted by DAQ Boards into

digital signals which the personal computer can

understand. On the other hand, Instrument Control Boards

which are placed inside the computer allow data required

from external sensors to be communicated directly to the

computer. This is called as handling of information (see

Explanatory Notes of HSN at page 1575) which is different

from controlling temperature, pressure etc. (see

Explanatory Notes of HSN at page 1856). On the other hand,

we have what is called as Analog Output Boards which are

meant for converting signals from external units such as

PXI. Similarly, the Chassis provides connectivity and

housing for embedded controller and the data acquisition

modules, allowing them to communicate with each other. A

network interface module is used to connect to a network

for distributed control applications. It interconnects

measuring instruments to a PC by sending and receiving

messages from the two units. Thus, each I.O. Module is tailored to a specific function and is therefore a part of

regulating and controlling apparatus. Handling of

information under the HSN Notes is separate and distinct

from regulating and measuring temperature, pressure etc.

44. Lastly, we need to analyse Chapter Note 5(E) to

Chapter 84. In our view, once a machine incorporating an

ADPM performs a specific function other than data

processing then that machine is classifiable in the

heading corresponding to the function of that machine (see

Note 4 of Section XVI and Note 3 to Chapter 90, the scope

whereof has already been explained hereinabove). Further,

HSN clearly indicates that Heading 8478 is excluded where

the case is of a clearly defined function to which

separate components contribute.

45. In our view, in order to attract Note 5(E) the real

test is whether or not the machine imported is performing

a specific function relatable to the functional unit as a

whole. The said machine should be seen as a System. As a

functional unit, the imported machine should perform a

function other than data processing or it should perform a

function in addition to data processing. In our view,

Industrial Process Controllers and I.O. Modules, which are

part of a functional unit, the function of which is to be judged as a whole are therefore classifiable in Chapter

90. The sentence in Chapter Note 5(E) "incorporating or

working in conjunction with an ADPM" merely indicates that

the overall package, which is presented before the

Department, had an ADP Machine in it. In other words, what

is imported is a System containing an ADPM. Our above

interpretation stands to reason because if the contention

of the importer herein is accepted, it would mean that

every machine that contains an element of ADP would be

classifiable as an ADP Machine under Chapter 84. This

would completely obliterate the specific function test and

the concept of functional unit.

46. For the aforestated reasons, we are of the view that

the imported goods were rightly classified by the

Department under Chapter 90. We are also of the view that

the Department was right in classifying the I.O. Modules

and Chassis as parts and accessories of Automatic

Regulating or Controlling Instruments and Apparatus in

terms of CTH 9032.90.00.

47. For the aforestated reasons, the impugned order of

CESTAT is hereby set aside and the Civil Appeal filed by

the Department stands allowed with no order as to costs. ..................CJI (S. H. Kapadia)

...................J. (K.S. Radhakrishnan)

...................J. (Swatanter Kumar)

New Delhi;

July 15, 2010