Manufacture of computer systems through split invoicing sustains duty demand, while unsupported penalty enhancement in de novo proceedings is set aside.

Clearance of fully assembled computer systems through split invoicing was treated as manufacture rather than mere trading, because invoice-wise records, purchase orders, customer statements and the appellant's own statement showed supply of complete workable systems. On that basis, the duty demand was sustained, with valuation reworked by excluding peripherals in line with the applicable position on computer systems and peripherals. The de novo enhancement of penalties was not supported, as no new facts or fresh basis justified a higher penalty than in the first round of adjudication; the enhanced penalties were therefore set aside and the earlier penalty levels restored.

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Issues: (i) Whether the activity of assembling and clearing computer systems by adding peripherals amounted to manufacture, or was only trading activity, and whether the duty demand on the cleared systems was sustainable. (ii) Whether the penalties imposed in the de novo order could be enhanced beyond the penalties imposed in the first round of adjudication.

Issue (i): Whether the activity of assembling and clearing computer systems by adding peripherals amounted to manufacture, or was only trading activity, and whether the duty demand on the cleared systems was sustainable.

Analysis: The invoice-wise examination, purchase orders, customer statements and the appellant's own statement showed that the goods supplied were fully assembled workable computer systems and not mere trading of bought-out items. The evidence also showed that the appellant used split invoices to describe parts and peripherals separately while effecting clearance of complete systems. The valuation was reworked by excluding peripherals in line with the applicable legal position on computer systems and peripherals.

Conclusion: The activity amounted to manufacture of computer systems and the duty demand was sustained against the assessee.

Issue (ii): Whether the penalties imposed in the de novo order could be enhanced beyond the penalties imposed in the first round of adjudication.

Analysis: The de novo adjudication reduced the duty demand but enhanced the penalties without recording any new facts or a fresh basis showing any greater role in evasion. Penalty, in such circumstances, had to remain commensurate with the duty involved and the conduct established on record. The enhancement was held to be unsupported.

Conclusion: The enhanced penalties were set aside and the earlier penalty levels were restored in favour of the assessee and the co-noticee.

Final Conclusion: The duty demand was upheld, but the enhanced penalties were quashed and restored to the earlier quantum, resulting in only partial relief to the appellants.

Ratio Decidendi: Where the evidence shows clearance of fully assembled computer systems through split invoicing, the activity constitutes manufacture; however, penalties in de novo proceedings cannot be arbitrarily enhanced without a fresh factual basis and must remain proportionate to the established liability.

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