2022 (10) TMI 468 - SC - Central Excise

Court rules Modified Vapour Absorption Chillers not heat pumps, classified as refrigerating equipment

The court concluded that the product, Modified Vapour Absorption Chillers (MVAC), manufactured by the appellant, does not meet the definition of a heat ... Classification of goods - heat pump - to be classified under heading 84.18 of the Schedule to the Central Excise Tariff Act, 1985 or not - under notification 155/86-CE dated 1.3.1986, heat pumps falling under Chapter 8418, enjoyed a limited exemption from the levy of excise duty - HELD THAT:- The definition of a product given in the HSN should be given due weightage in the classification of a product for the purpose of levying excise duty. This is because in the Statement of Objects and Reasons of the Bill leading to enactment of Central Excise Tariff Act, 1985, it was clearly stated that the pattern of tariff classification is broadly based on the system of classification derived from the International Convention on the Harmonised Commodity Description and Coding System (Harmonised System) with such contraction or modification thereto as are necessary, to fall within the scope of the levy of central excise duty - The heat pumps by utilizing energy, as per HSN becomes a source of more intense heat. However, since the final output of MVAC is cold/chilled water, the MVAC obviously does not fit into the given definition. The hot water, that is produced for generating chilled condition/ refrigeration, is only an incidental purpose of the MVAC and therefore classification of the appellant’s product as a heat pump on this basis, would in our view, be irrational. When the market/common parlance test is applied for the manufactured product, it is seen that the appellant in their website have identified Vapour Absorption Chillers and heat pumps separately. Significantly in the description of the product on the appellant’s website, Vapour Absorption Chillers do not mention about its heating capability. Likewise, heat pumps do not mention about the cooling function. This would suggest that the appellants do not themselves recognize the incidental hot water generating capacity of the Vapour Absorption Chillers, to treat it as a heat pump - what is important to keep in mind is that the additional purpose does not alter the primary character/functionality of the product which is to function as a vapour absorption chiller, used to produce chilled water for the purpose of refrigeration and air conditioning. This is how the product is recognized in the market. The incidental output from the machine cannot therefore justify classification of the product in the category of heat pump. Whether Chapter Note 7 to Chapter 84 can have a bearing in the present matter? - HELD THAT:- The present case pertains to heading 84.18 and the expression and phrases must therefore be literally construed to include two commercial classifications within the same heading. For example, a product under heading 84.18 can either be a refrigerator or a freezer or a refrigeration equipment or a heat pump not falling under Chapter 8415. In a situation like this, if we apply Chapter Note 7, the same can act as a tie-breaker mechanism. The resolution can be achieved by looking at the Principal Purpose Test, which if applied, can also resolve the intra-heading dispute. Such mode of interpretation in our understanding will aid in settling, the classification dispute by adhering to the HSN Code. The end use of MVAC is to produce Chilled Water. The use of heat as one of the sources in the air-conditioning system would not take away the primary or basic function of the MVAC, which is to cool and not heat water. The additional heating capability of the machine thus raises a peculiar dilemma, but then one can be guided by the market parlance test which shows that the machine is perceived and purchased only as a cooling device - it is declared that the product manufactured by the appellants merit classification under Sub-heading 8418.10 of the central excise Tariff Act, 1985, in the category of refrigerating equipment. The view of the CESTAT is thus affirmed. Appeal dismissed. Issues Involved:1. Classification of the product manufactured by the appellant.2. Eligibility for concessional excise duty under Notification No. 155/86-CE.3. Application of Harmonized System of Nomenclature (HSN) for classification.4. Market parlance and principal purpose test for classification.5. Relevance of previous judgments in similar cases.Detailed Analysis:1. Classification of the Product Manufactured by the Appellant:The primary issue is whether the product manufactured by the appellant, Modified Vapour Absorption Chillers (MVAC), should be classified as a heat pump under heading 84.18 of the Central Excise Tariff Act, 1985. The appellant claims that MVAC is a heat pump because it can produce both chilled and hot water, whereas the Revenue argues that MVAC is primarily a chiller, not a heat pump.2. Eligibility for Concessional Excise Duty under Notification No. 155/86-CE:The classification is crucial because heat pumps under heading 84.18 enjoy a limited exemption from excise duty under Notification No. 155/86-CE dated 1.3.1986. The Assistant Commissioner of Central Excise initially negated the appellant's description of the product as a heat pump. However, the Commissioner of Central Excise (Appeals) agreed with the appellant, but this decision was reversed by the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT), which concluded that the product is not a heat pump and is ineligible for the concessional duty rate.3. Application of Harmonized System of Nomenclature (HSN) for Classification:The court emphasized the importance of the HSN in classifying products for excise duty purposes. The HSN defines a heat pump as 'a device which draws heat from a suitable heat source and converts it with the assistance of a supplementary energy source into a source of more intense heat.' The court found that MVAC does not satisfy this definition because its primary output is chilled water, and the production of hot water is incidental.4. Market Parlance and Principal Purpose Test for Classification:The court applied the market parlance test and the principal purpose test to determine the classification. It noted that customers do not purchase MVAC for its ability to produce hot water, and in commercial parlance, the product is known as a Vapour Absorption Chiller used for air conditioning and refrigeration. The court also applied Chapter Note 7 to Chapter 84, which states that a machine's principal purpose should be understood as its sole purpose for classification. Since MVAC's principal purpose is to produce chilled water, it cannot be classified as a heat pump.5. Relevance of Previous Judgments in Similar Cases:The appellant cited previous judgments in the cases of Blue Star Ltd. and Voltas Ltd., where similar products were classified as heat pumps. However, the court distinguished these cases, noting that they involved classification under two rival entries, whereas the present case involves classification under a single entry. Additionally, the court noted that the previous judgments did not address whether the products met the HSN definition of a heat pump.Conclusion:The court concluded that MVAC does not meet the HSN definition of a heat pump and should be classified under Sub-heading 8418.10 as refrigerating equipment. The court affirmed the view of the CESTAT and dismissed the appeals, leaving the parties to bear their own costs.