Rule 2(a) classification treated assembled split air-conditioners as finished goods, with suppression-based extended limitation and cum-duty recomputation.

Split air-conditioners assembled from condensing units, cooling units and accessories at the assessee's premises were treated as complete goods under Rule 2(a) because the assembled product acquired the essential character of the finished article before clearance, attracting central excise duty. Non-disclosure of the manufacture and clearance supported invocation of the extended limitation period for suppression. Penalties under Section 11AC and Rule 209A were not sustained because the demand pre-dated Section 11AC and the order lacked reasons for the individual penalties. Modvat credit on duty-paid inputs was to be examined on supporting documents, and sale price was to be treated as cum-duty price for recomputation.

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Issues: (i) Whether the split air-conditioners assembled from condensing units, cooling units and accessories at the assessee's premises were classifiable as complete goods under Rule 2(a) of the Interpretation Rules and liable to central excise duty before clearance. (ii) Whether the extended period of limitation was invocable on the ground of suppression. (iii) Whether penalty under Section 11AC of the Central Excise Act and penalties under Rule 209A of the Central Excise Rules were sustainable. (iv) Whether the assessee was entitled to Modvat credit and whether the sale price had to be treated as cum-duty price for recomputation.

Issue (i): Whether the split air-conditioners assembled from condensing units, cooling units and accessories at the assessee's premises were classifiable as complete goods under Rule 2(a) of the Interpretation Rules and liable to central excise duty before clearance.

Analysis: The units received from the assessee's own factory and from another manufacturer were combined with accessories and cleared as complete split air-conditioners to customers' sites. The assembled product had the essential character of the finished goods at the assessee's premises, so the legal fiction in Rule 2(a) applied and the goods were treated as complete split air-conditioners for duty purposes before clearance.

Conclusion: The issue was decided against the assessee and the assembled split air-conditioners were held dutiable.

Issue (ii): Whether the extended period of limitation was invocable on the ground of suppression.

Analysis: The manufacture and clearance of split air-conditioners were not disclosed to the Department. The record supported the view that the activity had been kept back from the Department, which justified invocation of the extended period under the proviso to Section 11A(1).

Conclusion: The issue was decided against the assessee and the extended period was held invocable.

Issue (iii): Whether penalty under Section 11AC of the Central Excise Act and penalties under Rule 209A of the Central Excise Rules were sustainable.

Analysis: The demand related to a period prior to the coming into force of Section 11AC, so penalty under that provision could not survive. The order also did not record reasons for the penalties imposed on the individual appellants under Rule 209A.

Conclusion: The issue was decided in favour of the assessee and the penalties were set aside.

Issue (iv): Whether the assessee was entitled to Modvat credit and whether the sale price had to be treated as cum-duty price for recomputation.

Analysis: Since duty was held payable, credit of duty on inputs was directed to be considered on production of duty-paying documents, and the sale price was required to be treated as cum-duty price while recomputing assessable value and duty.

Conclusion: The issue was decided in favour of the assessee to the extent of Modvat credit and cum-duty valuation, and the matter was remanded for recomputation.

Final Conclusion: Duty liability on the assembled split air-conditioners was upheld, the extended period was sustained, the personal and statutory penalties were set aside, and the duty was ordered to be recomputed on a cum-duty basis with input credit consideration.

Ratio Decidendi: Where components cleared from different sources come together at the assessee's premises to form a product having the essential character of the complete article, Rule 2(a) of the Interpretation Rules permits classification and duty as the finished goods before clearance.

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