2021 (3) TMI 291 - SC - Central Excise

Supreme Court rules on 'Relays' classification & show cause notice timeliness under Central Excise Act

Westinghouse Saxby Farmer Ltd. Versus Commr. of Central Excise Calcutta

The Supreme Court ruled in favor of the appellant in a case concerning the classification of 'Relays' and the timeliness of show cause-cum-demand notices ... Classification of goods - Relays manufactured by the appellant used only as Railway signaling equipment - fall under Chapter 86, Tariff Item 8608 as claimed by the appellant or under Chapter 85 Tariff Item No.8536.90 as claimed by the Department? - time limitation of SCN - absence of any fraud, collusion, willful misstatement or suppression of facts, especially since the classification list submitted by the appellant have been approved on 27.08.1993 - Section 11A of the Central Excise Act,1944. Classification of Relays - HELD THAT:- What is recognized in Note 3 can be called the “suitability for use test” or ‘the user test’. While the exclusion under Note 2(f) may be of goods which are capable of being marketed independently as electrical machinery or equipment, for use otherwise than in or as Railway signaling equipment, those parts which are suitable for use solely or principally with an article in Chapter 86 cannot be taken to a different Chapter as the same would negate the very object of group classification. This is made clear by Note 3 - It is conceded by the Revenue that the relays manufactured by the appellant are used solely as part of the railway signaling/ traffic control equipment. Therefore, the invocation of Note 2(f) in Section XVII, overlooking the “sole or principal user test” indicated in Note 3, is not justified. As pointed out by the Commissioner (Appeals), the goods were previously classified (before 1993) under Subheading 8536.90, but a revised classification list, classifying them under subheading 8608, submitted by the appellant, was approved by the competent Authority on 27.08.1993. After such specific approval of the classification list, it is not proper on the part of the Authorities to invoke Note 2(f) of Section XVII - decided in favour of the appellant and against the Revenue. Whether the show cause-cum-demand notices issued by the Department on various dates during the period 19951998 were not barred by time under Section 11A of the Central Excise Act, 1944, in the absence of any fraud, collusion, willful misstatement or suppression of facts, especially since the classification list submitted by the appellant have been approved on 27.08.1993? - HELD THAT:- All show cause notices were of a date prior to 12.05.2000 and hence the normal period of limitation was only six months; and (ii) that at least a couple of show cause notices were issued in respect of a period partly or fully beyond the period of limitation. Unfortunately neither the Appellate Authority nor CESTAT took care to analyze the show cause notices individually with reference to the period covered by them. In any case all the show cause notices were issued only on and after 30.08.1995, raising a classification dispute, after having approved the classification list submitted on 27.08.1993. The dispute in the case on hand was one of classification alone, applicable to the product manufactured during the entire period after 27.08.1993. The dispute was not invoice-centric. Therefore, what was sought to be done by the Original Authority was actually to review the approval of the classification list submitted on 27.08.1993 by cleverly issuing separate notices covering certain specific periods. What is to be seen here is that the attempt to undo the effect of the approval of the classification done on 27.08.1993, was actually time barred. Therefore, despite the fact that some of the individual notices were issued within the period of limitation either in respect of the part of the period or in respect of the whole of the period covered by them, the very invocation of Section 11A, in the facts and circumstances of the case, cannot be said to be within time. Both questions of law are answered in favour of the appellant - Appeal allowed - decided in favor of appellant. Issues Involved:1. Classification of 'Relays' under the appropriate tariff heading.2. Timeliness of the show cause-cum-demand notices under Section 11A of the Central Excise Act, 1944.Issue-wise Detailed Analysis:Issue 1: Classification of 'Relays'The primary question was whether the 'Relays' manufactured by the appellant, used exclusively as Railway signaling equipment, should be classified under Chapter 86, Tariff Item 8608, or under Chapter 85, Tariff Item 8536.90.The appellant argued that their relays should be classified under Chapter 86, specifically under Tariff Item 8608, as they are used solely as part of Railway signaling equipment. The Department contended that the relays should fall under Chapter 85, Tariff Item 8536.90, which covers electrical apparatus for switching or protecting electrical circuits.The Assistant Commissioner initially classified the relays under Chapter 85, citing Note 2(f) of Section XVII, which excludes electrical machinery or equipment from being classified under Chapter 86. The Commissioner (Appeals) upheld this classification but set aside the penalty imposed by the Original Authority. CESTAT concurred with the Appellate Authority's reasoning and dismissed the appeal.Upon review, the Supreme Court noted that the classification of goods should be determined according to the terms of the Headings and any relative Section or Chapter Notes, as per Rule 1 of the General Rules for Interpretation of the First Schedule. Rule 3(a) of these Rules, which states that the heading providing the most specific description should be preferred, was invoked by the authorities. However, the Court found a fundamental fallacy in this reasoning, as Rule 3(a) should only be applied when goods are classifiable under two or more headings.The Court highlighted Note 3 of Section XVII, which emphasizes the 'suitability for use' test, indicating that parts or accessories suitable for use solely or principally with articles of Chapters 86 to 88 should be classified under the relevant heading. The Court concluded that since the relays were used solely as part of railway signaling equipment, they should be classified under Chapter 86. Thus, the invocation of Note 2(f) by the authorities was not justified. The Court answered this question in favor of the appellant.Issue 2: Timeliness of Show Cause-Cum-Demand NoticesThe second question concerned whether the show cause-cum-demand notices issued by the Department during 1995-1998 were barred by time under Section 11A of the Central Excise Act, 1944, given that the classification list submitted by the appellant had been approved on 27.08.1993.The Court noted that the extended period of limitation would not apply in this case, as there was no evidence of fraud, collusion, willful misstatement, or suppression of facts by the appellant. The appellant had reclassified their goods under subheading 8608 with the approval of the competent authority on 27.08.1993. Therefore, the normal period of limitation was applicable.The Court observed that the normal period of limitation was six months until 11.05.2000, after which it was extended to one year and later to two years. The show cause notices issued before 12.05.2000 were subject to the six-month limitation period. The Court found that several show cause notices were issued beyond the normal period of limitation. Furthermore, the attempt to review the approved classification list of 27.08.1993 through separate notices for specific periods was deemed time-barred.Consequently, the Court concluded that the invocation of Section 11A by the Department was not within the permissible time frame. This question was also answered in favor of the appellant.Conclusion:The Supreme Court allowed the appeal, setting aside the Orders-in-Original, the Order of the Appellate Authority, and the Order of the CESTAT. The show cause-cum-demand notices were also set aside, with no order as to costs.