Commnr. Of Customs, New Delhi vs M/S. Sony India Ltd

"REPORTABLE"

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 8236 OF 2002

Commissioner of Customs, New Delhi .... Appellant

Versus

Sony India Ltd. .... Respondent

JUDGMENT

V.S. SIRPURKAR, J.

An Order by Customs, Excise & Gold (Control) Appellate Tribunal

(hereinafter called "the Tribunal" for short), allowing the appeal filed by M/s

Sony India Ltd. (the respondent herein), is in challenge at the instance of

the appellant herein. The said appeal was filed challenging the order-in-

original dated 30.1.1999, passed by Commissioner of Customs, Inland

Container Depot, Tughlakabad, New Delhi, wherein the said Authority had

confirmed the said differential duty demand of Rs.42,89,75,196/- under the

Proviso to Section 28(1) of the Customs Act, 1962 (hereinafter referred to

as "the Act"). The penalty was also imposed amounting to

Rs.30,19,92,183/- under Section 112(a) read with Section 114(a) with

interest under Section 28 AB of the Act. By the order of the Commissioner, 2

the import of several parts of Colour Television (hereinafter called "CTV"

for short) made by the appellant for the period from April 1995 to 1997

were treated as import of complete CTV Sets for the purpose of

assessment by the Commissioner.

2. Initially, there was difference of opinion amongst the two Learned

Members of the Tribunal on the application of Rule 2(a) of the General

Rules for Interpretation under First Schedule of Import Tariff, on the basis

of which the order-in-original was passed. Accordingly, the following

questions were referred to the larger Bench of the Tribunal:-

"Whether the goods in question are components and cannot be treated as complete colour Television sets and hence the duty demand, confiscation of penalty are unsustainable as held by Ld. Member (J.)?

OR

Whether the issue as to the circumstances under which Rule 2

(a) of the Interpretative Rules can be applied, as to whether the benefit of Notification exempting components only will be available, if the product is considered as complete or finished article by virtue of deemed provision of Rule 2(a), and whether the change effected in Explanatory Notes of HSN will give only prospective application or it will be applicable for the earlier period also, requires to be referred to a Larger Bench, as held by Ld. Member (T.)?"

Ultimately, the larger Bench seems to have agreed with the view expressed

by the Ld. Member (Judicial) to the effect that components imported by the

appellant could not be treated as complete CTV Sets. The larger Bench

also held that the duty demand, direction for confiscation and imposition of

penalty were unsustainable in law. Accordingly, the order-in-original 3

passed by the Commissioner was set aside, allowing the appeal. It is this

order of the larger Bench of the Tribunal, which is in challenge before us.

3. Shri Vikas Singh, Ld. Additional Solicitor General (ASG) of India,

painstakingly took us through the impugned order of the Tribunal, as also

to the records including the Show Cause Notice dated 4.3.1997. The main

plank of the argument is based on that Notice, whereunder the Revenue

asserted the evasion of duty on the part of the respondent on the CKD

(completely knocked down) Kits of CTVs by misdeclaring them as CTV

components and also proposed their confiscation under Section 111(m) of

the Act. In addition, the Revenue also asserted that the respondents had

contravened the provisions of the Exim Policy 1992-97 by importing CKD

Kits of the CTVs without an import license and thereby making the goods

liable for confiscation under Section 111(d) of the Act.

4. The Show Cause Notice further refers to an exhaustive list of

components imported by the respondents which go into the manufacture of

CTVs of models KV-2185 GE, KV-2197 PF and KV-2167 MT. Heavy

reliance is placed on the First Purchase Order No. IN-31PI-10 dt.

27.11.1994 placed by Sony India Pvt. Ltd. on Sony International

(Singapore) Ltd. It was on the basis of this order, which was treated to be

an order for 1500 CKD Kits of CTVs for the model KV-2185 GE only. The

Show Cause Notice also gives not only the quantity actually imported, but

also points out the quantity required for 1500 CTVs. The list consists of

100 such components and it was the assertion on the part of the Revenue 4

that all these components were nothing, but 1500 CTVs, for which the

order was placed on 27.11.1994. There are some other assertions

regarding some other items, which were once used, but discontinued to be

used, probably with an idea to show that the components mentioned in the

list were nothing, but 1500 CTVs. It was, however, clarified that the items

at S.Nos. 93, 94, 95, 97 and 98 could not be considered to be the

components or parts of CTVs. The assertion in the Show Cause Notice,

therefore, is that though the respondent was importing the CKD Kits of

CTVs for their assembly in India, which attracted higher customs duty, the

said imports were being shown as the imports of the components of the

CTVs, attracting lesser customs duty and as such, the respondent was

liable to pay not only the differential duty, but also the penalties on account

of the clandestine imports. A reference was also made in paragraph 8 of

the Show Cause Notice to Rule 2(a) of the General Rules for the

Interpretation of the First Schedule to the Customs Tariff Act, 1975 and it

was conveyed that any reference in a heading to an article should be taken

to include a reference to that article in complete or unfinished, if the

incomplete or unfinished article has the essential character of the complete

or finished article. It was on this basis that the respondent was accused of

misdeclaration of imported goods, as also breach of the Exim Policy. A

reference in the said Show Cause Notice was made to the reply dated

20.9.1996. However, relying fully on Rule 2(a), it was asserted that the

respondent was guilty of misdeclaration and confiscation of the imported

CKD Kits. In short, the assertion was that though the respondent had 5

imported the CKD Kits and had placed order therefor, numbering 1500 in

all, in that order, it had paid a lesser duty, showing it as import of

components, on which there was lesser duty, and as such, the respondent

had breached the provisions of the Act and had made itself liable for the

confiscation and imposition of differential duties and also the penalties.

Shri Vikas Singh, Ld. ASG heavily relied on Rule 2(a), which was referred

to by us in the earlier part of the judgment. In addition to this, the assertion

of Shri Singh was that the question was considered by this Court and

decided in favour of Revenue in a decision reported in (2007) 10 SCC 114

Commissioner of Customs, New Delhi Vs. Phoenix International Ltd.

& Anr.

5. Shri V. Lakshmi Kumaran, learned counsel appearing on behalf of

the respondent, however, pointed out that the Tribunal had correctly

deduced that the components imported by the respondent could not

amount to the CKD Kits. According to him, there was no evidence

available to suggest that the respondent had used these very components

in the manufacture of the CTVs. He disputed the claim on the part of the

Revenue that these components could and did form the complete CKD Kits

of 1500 CTVs. He pointed out that these could not have been used, as

they were imported in the manufacture of CTVs and there was a

complicated manufacturing process involved, according to which the

components which were imported, had to be treated and processed before

they could be used for the manufacture of CTVs. He further points out that 6

not only the customs duty was paid on these components, treating them as

components, but the respondent had also paid substantial excise duty on

the manufacture of these CTVs in Crores, which belied the claim of the

Revenue that these were not merely the components, but amounted to the

import of CKD Kits of CTVs. Shri Lakshmi Kumaran also seriously

disputed the interpretation, put forward by the Revenue on Rule 2(a) and

asserted that Rule 2(a) was not even applicable in the present case. We

were taken through number of entries and the notes by the learned

counsel. He also relied on number of decisions of this Court, as also the

High Courts and finally submitted that the decision in Phoenix

International Ltd. Case (cited supra) was not applicable to the facts of the

present case, as the said decision turned on its own facts, peculiar to that

case. It is on this backdrop that we have to consider the questions

involved.

6. The Learned ASG opened up his arguments by a proposition that

the issue involved in the present Appeal is covered fully by the judgment of

this court in Phoenix International Ltd. Case (cited supra). We would first

consider as to whether all the issues are closed in favour of the Revenue in

that judgment. This was the case, where various parts of the shoes,

namely shoe uppers, outer soles, insoles and sock liners were imported by

M/s. Phoenix Industries Ltd. ("PIND" for short) in the same container. It

was the claim of the Revenue that they could be considered as the import

of the shoe in SKD (Semi knocked down) condition. However, the importer 7

had declared them only to be the components. It was on that basis that the

matters proceeded. The Court first came to the conclusion that a synthetic

shoe consists of the vital parts, namely, the synthetic shoe uppers, outer

soles, insoles and sock liners. M/s Phoenix International Ltd. ("PIL" for

short) had the license under which it was entitled to import synthetic shoes

uppers, PVC compounds and natural rubber. However, the importer PIL

had imported 5215 pairs on 16.1.1996 on a declared value, while on the

same day, PIND imported soles and insoles numbering 5151 pairs. The

Court noted that while PIL had imported synthetic uppers under DEEC

Scheme, the PIND had imported the soles under Exim Policy, 1992-97.

Therefore, the Department was satisfied that there was an attempt to

mislead by importing the above items separately through two different

companies, but in fact, it amounted to the import of the complete synthetic

shoes in SKD form. The Court also noted that all the cartoons were placed

in one container with the marking of "Phoenix" without specifying whether

the container was meant for PIL or PIND. The Court also noted that in the

Show Cause Notice, it was claimed that the import orders had been placed

by the above two companies with the same supplier in Bangkok and that

both the import orders were signed by Mr. Bhupinder Nagpal, General

Manager of PIL. It was also alleged in the Show Cause Notice that import

invoices filed by the two companies referred to the same proforma invoice

dt. 2.11.1995, which was placed by Mr. Bhupinder Nagpal on behalf of both

the companies. The Court also further noted that in the Show Cause

Notice, it was specifically pointed out that the consumer items were placed 8

in the negative list vide Para 156(A) of Exim Policy, 1992-97 and under the

said Para, the consumer goods in SKD form or ready-to-assemble

condition were required to be imported under specific import license and

that the synthetic shoe amounted to a consumer item and as such, had

required specific import license and, therefore, it was further alleged in the

Show Cause Notice that the importer had imported the goods in SKD form

or ready-to-assemble condition without specific import license. The Court

further noted that in the Show Cause Notice, it was further alleged that the

PIL had resorted to the above subterfuge by importing the uppers of

"Reebok" shoes in their own name and the remaining three components in

the name of PIND in order to bypass restriction imposed by Para 156(A) of

Exim Policy. The Court also noted that the Department had alleged in the

Show Cause Notice that a loan of Rs.11.7 crores was advanced by PIL to

PIND which was interest free loan during the year ending 31.3.1995 and a

loan of Rs.7.7 crores was also advanced to the same company, which was

also interest free during the financial year ending 31.3.1994. The Court

noted that it was under these circumstances it was alleged that the good

imported were not parts or the components, but, were SKD goods, liable to

be assessed as complete finished goods under Tariff Sub-heading 6404.19

of the First Schedule of the Customs Tariff Act, 1975 and was liable to the

higher duty ad valorem and countervailing duty at 15% ad valorem. The

Court further referred to the replies sent by PIND and PIL and came to the

conclusion that in that case, the intention would play important role, since it

was the case of duty-evasion on imports. The Court came to the 9

conclusion that it was clear that the entire device of bifurcation was

arranged in order to bypass the restrictions imposed vide Para 156(A) of

the Exim Policy and the importer had found out the device for evading the

import duty. The Court further wondered as to why the three units of PIL

did not import all the four items when it was in complete charge of

manufacturing the said shoes. The Court, therefore, came to the

conclusion that the bifurcation was unnatural and it was cleared that if the

imports of two companies, namely, PIND and PIL were clubbed, it was

nothing, but the import of the shoes, which was in the negative list. The

Court wrote the finding that:

"Therefore, it is clear that the above device of importation of one item by PIL and three items by PIND was a subterfuge/fictitious arrangement intended to deceive the Department and fraud on Para 156(A) of Exim Policy, 1992-

97."

It was under these circumstances that the Court came to the conclusion

that the imports made by the two companies were fraudulent and with the

sole objective to deceive the Department.

7. Though, the Ld. ASG heavily relied on this case to draw a parallel

with the present case, we are of the clear opinion that the principles

emerging out of the decision of Phoenix International Ltd. Case (cited

supra) would have to be restricted to the facts in that case. Unlike in

Phoenix International Ltd. Case (cited supra), there is no allegation of

fraud against the present assessee. There is a complete absence of any

such device or "subterfuge" in the present case, nor is there any allegation 10

of the sort. Again the further point of differentiation is that in that case, the

Court was dealing with the consumer goods like shoes and that was

included in the negative list, whereas, the CKD in the present case (if at all

it is to be CKD which was imported), was not in the negative list, it was in

the restricted list. In our opinion, the other differentiating feature and the

most important one, in our opinion, is that while the parts imported by the

assessee in this case could be independently used as the spare parts or

sold in the market, that was not the case in Phoenix International Ltd.

Case (cited supra), at least there is no finding to that effect in Phoenix

International Ltd. Case (cited supra). It was very fairly admitted by the

Ld. ASG that the parts imported could be independently utilized or sold in

the open market, which was not the case with the parts involved in

Phoenix International Ltd. Case (cited supra). The Ld. ASG also very

fairly admitted that there was a specific fraud alleged and proved on the

basis of which the Court came to the conclusion that this was nothing, but a

device to deceive the Revenue. We cannot also ignore the factual

panorama in Phoenix International Ltd. Case (cited supra) where all the

parts imported both by PIL and PIND came in one and the same container

on one and the same day, which was not the case here, as the parts in the

present case came during 22 months on different dates in 94

consignments. A feeble attempt was tried to be made by the Ld. ASG to

suggest that all these imports were based on a single order dated

27.11.1994, in which the figure of 1500 is found to be ordered. However, it 11

was pointed out by Mr. V. Lakshmi Kumaran that in the present case, there

is no specific finding that all the parts imported could manufacture 1500

CTVs. It was also pointed out by the Ld. Counsel for the respondent that

much more number of CTVs were manufactured on the basis of the

imports. On the backdrop of all this, we would have to conclude that the

Phoenix International Ltd. Case (cited supra) must be restricted to the

facts involved therein, which cannot be matched with the facts in the

present case. In the Phoenix International Ltd. Case (cited supra), it was

clear that the imports of the components perfectly matched with the

number of shoes, which could be prepared from those imported

components. There is a finding to that effect in the decision of Phoenix

International Ltd. Case (cited supra). However, on that backdrop, when

we see the list of components as mentioned in the Show Cause Notice, it is

clear that out of the 100 imported components, the number does not match

with the components required for manufacture of 1500 CTVs in case of at

least 21 items. This is another distinguishing feature. In our opinion,

therefore, the arguments of the Ld. ASG that the Phoenix International

Ltd. Case (cited supra) decides the question involved here in favour of

Revenue, must be rejected.

8. Ld. ASG drew our attention to the order passed by the

Commissioner, who had held that there was a violation of Exim Policy for

period after 25.3.1996. It was pointed out that the Commissioner had

relied on Rule 2(a) and on that basis, he held that the said violation was 12

after 25.3.1996. As per Rule 2(a), the components imported had to be

treated as CTVs, which attracted the higher duty as also the penalty, since

the duty was paid only on the basis of the fact that it was a duty on

components only.

8A. It must be better to see some facts. It must be remembered here

that the respondent had clarified that in the first year of operation with the

respondent Sony India Ltd., a wholly owned subsidiary of Sony

Corporation, Japan, after liberalization in 1991 wanted to set up a large

manufacturing facility for consumer goods like CTVs and audio products.

They had clarified in their application before the Foreign Investment

Promotion Board ("FIPB" in short) that in the first year of operation, there

will be no indigenization and there will be a gradual increase in

indigenization. It was on that basis that the respondent obtained industrial

license from the Secretariat of Industrial Approval ("SIA" for short) and

applied for import license for CRT and PCB, since the same were in the

restricted list. All the other components were freely importable in India.

The respondent obviously used Sony Singapore as their indenting agent

because Sony Singapore had a close proximity with the approved vendors

of Sony Corporation situated in countries like Japan, Taiwan, Thailand,

Indonesia, Malaysia, China etc. All these vendors supplied the

components on the basis of Minimum Order Quantity (MOQ) for the

optimum utilization of containers, as also for the reduction in the transport

costs, standardizing the manufacture and dispatch procedures. The 13

advanced licenses were issued by the Director General of Foreign Trade

(DGFT) for import of components duty free by availing the benefit of

notification 79/65-Cus dt. 31.3.1995. A Duty Entitlement Exemption

Certificate (DEEC) passbook was also maintained and it was on this basis

that over a period of 22 months, 94 Bills of entry were filed for importing the

various components, concerning the present case.

8B. The components were assessed under different tariff headings by

applying Section Note 2 to Section XVI. It is an admitted position that the

PCBs which were in the restricted list, were further processed to convert

them into Motherboard, which was to be used in the assembly line for the

manufacture of CTVs. It is the case of the respondent that they

manufactured CTVs at their Plant and they were cleared for home

consumption on payment of excise duty and a percentage of them were

also exported under bond. There is also no complaint about the

indigenization and it is the case of the respondent that they cleared 52,640

and 1,26,009 units of CTVs and paid an excise duty of more than Rs.49

crores. As promised, the respondent also made the exports and the

entries to that effect were made in the DEEC Pass book.

8C The concerned Show Cause Notice dated 4.3.1997 was restricted

only to the 94 consignments of the components of CTVs imported by the

respondent and it was proposed to club all these 94 consignments. A

detailed reply was filed and it was asserted by the respondent that there

was no violation of Exim Policy, since the goods were not in CKD/SKD 14

condition. It was then asserted by the respondent that Rule 2(a) could not

have been invoked, as it was tried to be done, since the import took place

over a period of 22 months in 94 lots in containers containing different parts

sourced from different countries. As has already been stated earlier, the

Commissioner applied Rule 2(a) for the period subsequent to 25.3.1996.

There is a clear finding given by the Commissioner that before 25.3.1996,

there was no breach of Exim Policy by the respondent. Therefore, it is

clear that everything depended upon the applicability of Rule 2(a) and it

was solely on that basis that the breach of Exim Policy also was alleged for

the period prior to 25.3.1996 when the said Rule came to the anvil. It must

be noted here that against the finding of the Commissioner that there was

no breach of Exim Policy by the respondent prior to 25.3.1996, there is no

appeal filed by the Revenue and that finding had become final. Therefore,

all the difference, which was made, was owing to Rule 2(a). We have

already clarified that it is for this sole purpose that Rule 2(a) was relied

upon by the Department, because such reliance alone could justify the

Department's stand that the components would have to be treated as CTVs

and as such, it would attract more duty. There is no difficulty in holding that

the imports were perfectly in order and under the proper import license. At

this juncture, we must also appreciate the finding of the Commissioner that

the goods imported were sourced from different countries and the imported

components were not in CKD form, at least prior to 25.3.1996. 15

9. It is then only due to Rule 2(a) that these components are being

treated as the CTVs and that is the main plank of the argument of Mr. kas

Singh, Ld. ASG. We would, therefore, consider the implication of Rule 2

(a). Rule 2(a) is as under:-

"Any reference in a heading to an article shall be taken to include a reference to that article incomplete or unfinished, provide 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 dis- assembled."

The Ld. ASG, therefore, suggests that the articles though were not the

CTVs in CKD form and were incomplete or unfinished ones, they had the

essential character of complete or finished CTVs and applying this Rule,

every such component, would have to be taken as an import of CTV. The

Ld. ASG heavily relied on the second part of the Rule, starting from words

"It was also to be taken to new reference............." He says that

every component whether it is complete or finished and which is presented

in unassembled or dis-assembled condition, would have to be taken as the

finished article, like CTVs in this case. In our opinion, this argument is

completely illogical and again that is not the import of the language of the

Rule. If the argument of the Ld. ASG has to be accepted, then we would

have to concentrate only on the later part of the Rule, ignoring the first part

of the Rule and such dissection, in our opinion, is not possible. The sine

qua non for the application of this Rule is that any imported article, which is 16

"as presented", must have the essential character of the complete or

finished article." This condition cannot be ignored and we cannot allow the

reading only of the second part beginning with words "It was also to be

taken to new reference..........." for application of the Rule. The Rule must

apply as a whole. Ld. ASG was not able to point out as to how the first

condition can be satisfied in the present case. A mere PCB or a CRT, in

our opinion, under any circumstances, cannot be held to have essential

character of the CTV. It is only when this first condition is satisfied that the

remaining clause would have to be read and thereby, the words "that

article" used in the later part would have to pass the test of the opening

words of the clause "as presented, the incomplete or unfinished article has

the essential character of the complete or finished article". Once this

condition is satisfied then the further clause is activated, suggesting that

even when such article is in disassembled or unassembled condition, it

would still be taken to be a complete article. Therefore, essentially the

second part would come into play provided the component parts intended

to make up the finished product are all presented for customs clearance at

the same time which is not the case here.

10. In Phoenix International Ltd. & Anr. (supra) these conditions in

Rule 2(a) were fully satisfied inasmuch as the spare parts of the shoes

could formulate into a full pair of shoes. Though the learned Judges did

not refer to that specifically in their judgment, the facts clearly suggest that

Rule 2(a) was fully applicable in that case. This is one more reason why 17

the decision in Phoenix International Ltd. & Anr. is different on facts

from the present case.

11. Again the meaning of terms "as presented" in Rule 2(a) would

clearly imply that the same refers to presentation of the incomplete or

unfinished or unassembled or dis-assambled articles to the customs

for assessment and classification purpose. It is also a settled

position in law that the goods would have to be assessed in the form

in which they are imported and presented to the customs and not on

the basis of the finished goods manufactured after subjecting them to

some process after the import is made. In the reported decision in

Vareli Weaves Pvt. Ltd. v. Union of India [1996 (83) ELT 255 (SC)]

the question was as to whether the countervailing duty was liable to

be left on the imports made by the assessee at a stage they would

reach subsequent to their import after undergoing a process. It was

contended that such goods could be subjected to duty only in the

State in which they were imported. It was held that the countervailing

duty must be levied on goods in the State in which they are when

they are imported. This was on the basis of Section 3 of the

Customs Tariff Act. Though there is no reference to Rule 2(a), in our

opinion, the same Rule should apply subject ofcourse to the

applicability of the Rule. We have already held that the Rule is not 18

applicable. Similar view was taken in Dunlop India and Madras

Rubber Factory Ltd. v. UOI [1982 (13) ELT 1566 (SC).

12. Shri Lakshmikumaran argues on the basis of a German Court

decision on which the Tribunal also relied upon. According to the

learned counsel in that decision Rule 2(a) was considered and the

Court took the view that the article is to be considered to be imported

in unassembled or disassembled where the component parts, that is

the parts which may be identified as components intended to make

up the finished product are all presented for customs clearance at

the same time. The interpretation that we have given to Rule 2(a)

would mean that Rule 2(a) would be applicable only and only if all the

components which are intended to make a final product would have

to be presented at the same time for customs clearance. Such is

not the case in the present situation where the goods have been

brought in 94 different consignments.

13. In Union of India v. Tarachand Gupta & Sons [(1971) 1 SCC

487] the question was whether in respect of the goods covered by

Entries 294 and 295 of Schedule I, the import could have been

treated under Entry 294. The Court held that when the Collector

examines the goods imported under a licence in respect of goods

covered by Entry 295, he has to ascertain as to whether the goods 19

are parts and accessories and not whether the goods though parts

and accessories are so comprehensive that if put together would

constitute motocycle and scooters in CKD condition. The court

further held that it cannot be said that if the goods were so covered

by Entry 295 that when lumped together they would constitute other

articles, namely, motor-cycles and scooters in CKD condition. Such

a process, if adopted by the Collector, would mean that he was

inserting in Entry 295, a restriction which was not there and that

would tantamount to making a new entry in place of Entry 295. The

Court explained the term "CKD" in para 11 and observed in para 12

that merely because the goods imported, if assembled, would make

motor-cycles and scooters in CKD condition, it would not mean that

there was breach of Entry 294 if the imports under Entry 295 was a

valid import. What is important for the present case are the

observation in para 13 to the following effect:

"Therefore, the mere fact that the goods imported by them were so complete that when put together would make them motor-cycles and scooters in CKD condition, would not amount to a breach of the licence or of Entry 295. Were that to be so, the position would be anomalous as aptly described by the High Court. Suppose that an importer were to import equal number of various parts from different countries under different indents and at different times, and the goods were to reach here in different consignments and on different dates instead of two consignments from the same country as in the present case. If the contention urged before us were to 20

be correct, the Collector can treat them together and say that they would constitute motor-cycles and scooters in CKD condition. Such an approach would mean that there is in Entry 295 a limitation against importation of all parts and accessories of motor-cycles and scooters. Under that contention, even if the importer had sold away the first consignment or part of it, it would still b e possible for the Collector to say that had the importer desired it was possible for him to assemble all the parts and make motor-cycles and scooters in CKD condition....."

Relying on this case and referring further to the case of Girdhari Lal

Bhansidhar v. Union of India [(1964) 7 SCR 62] which was

distinguished in Tara Chand's case, the learned counsel also drew

our attention to the judgment in Sharp Business Machines v . CCE,

Bangalore [(1991) 1 SCC 154] as also the judgment of the Division

Bench of the Calcutta High Court in the case of Union of India v.

HCL Ltd. (unreported order). On this basis the learned counsel

says that the imports made in 94 consignments could not have been

clubbed together for the purposes of holding that there was a breach

by the importer of the Exim Policy. The complaint of the learned

ASG was that all these judgments do not refer to Rule 2(a) as Rule 2

(a) was not on the anvil when these judgments were delivered. That

may be true but the principles of law emerging would still apply.

Therefore, the clubbing of all 94 consignments of different dates was

not permissible.

21

14. We have already held that in this case the goods brought were

not having the essential character of CTVs. We do not find anything

to take a view that the goods were in unassembled or dis-assembled

condition and they should be taken to be the complete CTVs,

particularly when there is no finding recorded anywhere on facts that

all these goods could make 1500 CTVs. However, we accept the

argument that the goods brought in different consignments

separately on the basis of valid import licences would not attract the

import duty as if they were the finished goods. We have already

referred to this aspect vis-`-vis the facts in Phoenix International's

case where the goods were brought in one and the single congignment

and they were all brought together though they were imported by two

companies, i.e., PIND and PIL fraudulently.

15. Shri Lakshmikumaran, learned counsel for the respondent also drew

our attention to the HSN Explanatory Notes as it stood prior to 1997 which

is as under:

"(VII) For the purpose of this Rule, `articles presented unassembled or disassembled means articles the components of which are to be assembled either by means of simple fixing devices (screws, nuts, bolt, etc.) or by riveting or welding, for example, provided only simple assembly operations are involved."

22 Learned counsel further points out that in a decision in CCE v. Woodcraft

[(1995) 3 SCC 454] this Court took the view that HSN Explanatory Notes

should be referred to for understanding the true scope and meaning of

expressions used in the Customs Tariff. He further points out that the

Revenue did not dispute the fact that complicated processing of imported

parts had to be done before they could be fit in the assembly of CTVs.

Shri Vikas Singh, learned ASG also did not dispute this fact during the

debate before us that a complicated process had to be exercised before

these components could be brought in use for CTVs. There is also a

specific finding by the Tribunal on this issue. In that view since the

concerned Explanatory Note was applicable, there would be no question of

treating these notes to be in unassembled or disassembled condition since

a complicated process had to be exercised and then before it could be

used for the assembly of the CTVs. Ofcourse this Explanatory Note was

further amended by adding the words "no account is to be taken in that

regard of the complexity of the assembly method. However, the

components would not be subjected to any further working operation for

completion into the finished stage". It is an admitted position that this

amendment was not there and therefore, the complexity of the assembly

method would have to be taken into consideration atleast in case of the

present goods since the concerned period is pre 1997 period. The

Tribunal has correctly held that the HSN Explanatory Notes to Rule 2

(a) had to be applied while considering the relevant Tariff Entry. It 23

has also correctly held after considering the whole process that the

process involved in the user of the components is the complex

manufacturing process during which many components are

subjected to working operation requiring sophisticated machinery

and skilled operators. Further it has correctly assessed the effect of

the amendment of HSN Explanatory Notes which came on

14.3.1997. We approve of the finding given by the Tribunal in para

25 of its order which takes into account the fact that there was no

amendment to Clause (v) while this is amended to the effect that

complexity of the assembly method was made irrelevant. However, it

was made clear that the components would not be subjected to any

further working operation for completion in the finished state. The

Tribunal has referred in details to the manufacturing process to show

that some of the components require further working operation for

completing the manufacturing process and further that CTV is not a

machine which is presented in assembly for the sake of convenience

of packing, handling or transport. We are, therefore, in agreement

with the finding that even applying the amended HSN Explanatory

Notes the position would be no different.

16. Our attention was invited to a very interesting decision reported

in Modi Xerox Ltd. v. CCE, New Delhi (1998 (103) ELT 109] which 24

was confirmed by this Court in 2001 (ELT) A 91 (it must be noted

that the decisions in Woodcraft Products is specifically confirmed in

this decision). In this case, the Tribunal had relied on Tara Chand's

case as also the CC v. Mitsuny Electronics Works [1987 (13) ELT

345 (Cal. HC)] which we have made reference in the earlier part of

this judgment. The Tribunal had held that the fax machine in

completely knocked down condition imported by the appellant being

not a fax machine but part thereof, the benefit of exemption under

notification No.59/88/Cus. Dated 1.3.1988 would not be available.

Very interestingly, it was claimed by the importer that it had imported

the fax machine and not the components obviously because the duty

payable on the components was more. The Tribunal came to the

conclusion that in view of Section Note 2 to Section XVI Rule 2(a)

would not apply and confirmed the import of goods as components.

While interpreting Explanatory Note to Rule 2(a), the Tribunal had

held that this Rule would apply only when the imported articles

presented in unassembled or disassembled can be put together by

means of simple fixing device or riveting or welding. It came to the

conclusion that fax machines were not the type of goods which were

normally traded or transported in knocked down condition and

therefore, the imports were that of the components and not of fax 25

machines. Shri Lakshmikumaran also invites our attention to the fact

that Chapter 64 dealing with footwear does not have a note similar to

Note 2 in Section XVI. Thus this position would render support to the

proposition that Rule 2(a) would apply only when the imported

articles presented unassembled or disassembled can be put together

by means of simple fixing device or by riveting or welding. We have

already pointed out in the earlier part of our judgment that the

complicated process would be required for the user of those parts.

17. Lastly, we must take stock of the argument of Shri

Lakshmikumaran that Section Interpretative Rule 2(a) would not be

applicable at all in this case. For this he invited our attention to Rule

1 of Interpretative Rules as also to the decision in Simplex Mills v.

Union of India [2005 (181) ELT 345 (SC)] wherein this Court had

held in para 11 as under:

"11. The rules for the interpretation of the Schedule to the Central Excise Tariff Act, 1985 have been framed pursuant to the powers under Section 2 of that Act. According to Rule 1 titles of sections and chapters in the Schedule are provided for ease of reference only. But for legal purposes, classification "shall be determined according to the terms of the headings and any relevant sector or chapter Notes". If neither the heading nor the notes suffice to clarify the scope of a heading, then it must be construed according to the other following provisions contained in the Rules. Rule-I gives primacy to the Section and Chapter Notes along with terms of the headings. They should be first applied. If no clear picture 26

emerges then only can one resort to the subsequent rules."

Relying on this the further contention of the counsel is that Section

Note 2 of Section XVI provides mandate for classification of the parts

of machines falling under Section XVI. In terms of Rule 1 of

Interpretative Rules, invocation of Rule 2(a) for certain categories of

goods covered in Section XVI like the goods of CTVs are prohibited.

For this the learned counsel relied on the decision in Modi Xerox

(supra). In that view the learned counsel says that Rule 2(a) would

not be applicable at all. This question needs no consideration here

particularly in view of the interpretation that we have given to Rule 2

(a). On facts, we have already found that Rule 2(a) would not be

applicable to the present case since there is no question of the goods

having the essential character of CTVs. In that view, the question of

applicability of Section 2(a) on this account need not be gone into in

this judgment.

18. We also approve of the reliance by the Tribunal on the reported

decision in Susha Electronics Industries v. CC [1989 (39) ELT

585], Trident Television Pvt. Ltd. v. CC [(1990) 45 ELT 24], Vishal

Electronics Pvt. Ltd. v. CC, Bombay [1998 (102 ELT 188], Sharp 27

Business Machines (supra) and the judgment of the Calcutta

High Court in HCL Ltd. (supra).

19. Accordingly, we are of the clear opinion that the Tribunal's

judgment needs no interference. We accordingly confirm the same

and dismiss the present appeal. In view of the important question of

interpretation involved in the matter, we do not propose to inflict any

costs.

.......................................J. (Ashok Bhan)

....................................J. (V.S. Sirpurkar) New Delhi;

September 23, 2008

Digital Performa

Case No. : CA 8236 of 2002

Date of Decision : 23.9.2008

Cause Title : Commissioner of Customs, New Delhi

Versus

Sony India Limited 28

Coram : Hon'ble Mr. Justice Ashok Bhan Hon'ble Mr. Justice V.S. Sirpurkar

Judgment delivered by : Hon'ble Mr. Justice V.S. Sirpurkar

Nature of Judgment : Reportable