2007 (9) TMI 6 - SC - Central Excise

Supreme Court clarifies classification vs. valuation of compressor parts

Commissioner of Central Excise, Delhi Versus M/s. Frick India Ltd. & Another

The Supreme Court upheld the Tribunal's decision that parts and accessories supplied with compressors should be classified under their specific headings ... Demand – Department contended that assessee had evaded payment on full value of the compressors, cleared and manufactured by them by separate invoicing clearance of bought item and manufactured item – Department appeal allowed partly Issues Involved1. Classification of compressors and their parts under the Central Excise Tariff Act, 1985.2. Valuation of compressors and their parts for the purpose of excise duty.Detailed AnalysisClassification of Compressors and Their PartsThe primary issue was whether the parts and accessories supplied with compressors should be classified under their respective headings or as part of the compressors under tariff heading 84.14. The Department argued that the value of bought-out items and manufactured items like flywheel, safety valve, and filter should be included in the assessable value of the compressor as the compressor was non-functional without these items. The assessee contended that these items were classifiable under their own respective headings: 84.83 (flywheel), 84.81 (safety valve), and 84.21 (filter), based on Note 2 to Section XVI of the Central Excise Tariff Act, 1985, which states that parts of machines are to be classified under their respective headings.The Commissioner initially held that these items were essential parts of the compressors and should be treated as such, relying on General Interpretative Rule 2(a) and other relevant notes. However, the Tribunal reversed this decision, stating that the compressor was cleared as a 'stand-alone' item and not in an unassembled or disassembled condition. Therefore, the General Interpretative Rule 2(a) and related notes were not applicable. The Tribunal held that the parts and accessories should be classified under their specific headings by virtue of Note 2(a) to Section XVI of the Central Excise Tariff Act, 1985.The Supreme Court upheld the Tribunal's decision, emphasizing that the classification and valuation are distinct concepts. The classification should be based on the respective headings, and the parts/accessories could not be classified as 'compressors' under tariff heading 84.14.Valuation of Compressors and Their PartsThe second issue was the valuation of compressors and their parts for excise duty purposes. The Department alleged that the assessee had undervalued the compressors and overvalued the accessories supplied either in the same packing or separately to the buyers. The Tribunal remitted this question to the Commissioner for further examination.The Supreme Court found merit in the Department's appeal on the question of valuation. It noted that along with the 'stand-alone' compressor, the assessee supplied various parts and bought-out items as a package. The Court provided an analogy of a ceiling fan sold with a remote, stating that the value of the remote should be included in the assessable value of the ceiling fan as it adds value to the package.The Court directed the Commissioner to re-examine the pricing aspect of the entire package supplied by the assessee. The Commissioner was instructed to call for cost statements and ascertain the manner in which the assessee priced its goods. The Court also suggested that the Commissioner consider invoking Section 14A of the Central Excise Act, 1944, which deals with 'special audits in certain cases,' to assist in determining the correct value of the entire package.ConclusionThe Supreme Court partly allowed the Department's appeals, remitting the question of valuation back to the Commissioner for a de novo consideration. The Court emphasized the need for a thorough examination of the pricing and valuation aspects, potentially involving a special audit to determine the correct assessable value of the compressors and their parts. The appeals were allowed with no order as to costs.