2025 (10) TMI 917 - AT - Central Excise

Appeal allowed; imported parts did not acquire character of complete televisions, duty, penalties and interest set aside

CESTAT ALLAHABAD (AT) allowed the appeal, holding there was no evidence that goods were first assembled, tested as CTVs and then disassembled for ... Manufacture - Clearance of goods after first assembling and then disassembling them into parts - Recovery of duty short paid on clearance of kits of Colour television sets during the period 14.10.99 to 3 1.10.02 - apprropriation of duty paid on shortage of goods and processed waste of Cenvatable inputs - levy of ineterst and penalty - applicability of sub-clause (ii) of Sl.No.229 of Notification No.5/98-CE - revenue neutrality - extended period of limitation - penalties. Whether the Appellant was clearing all the parts after first assembling then CTV test and then disassembling them into parts to clear them after classification as parts? HELD THAT:- There is no evidences available to show that these parts were first assembled in CTV, tested and then cleared to the OEM and the satellite manufacturing units of the Appellant. The basic difference which has been observed by the Tribunal in case of LG Electronics India Pvt. Ltd. [2022 (8) TMI 873 - CESTAT ALLAHABAD] was that in case of Salora International Ltd. [2013 (12) TMI 811 - CESTAT NEW DELHI] the parts were assembled, dismantled and then cleared. Similar distinction was drawn by the Hon’ble Supreme Court in the case of Sony India Ltd. [2008 (9) TMI 19 - SUPREME COURT] wherein the Hon’ble Supreme Court observed that 'Rule 2(a) would not be applicable to the present case since there is no question of the goods having the essential character of CTVs.' In view of the decision rendered in the case of Commissioner of Customs, New Delhi V/s Sony India Ltd. wherein the Hon’ble Supreme Court concluded that the parts of CTVs even after imported in bulk cannot be said to have essential character of CTV sets. There are no merits in the impugned order confirming the demand of duty on this account against appellant 1. Penalties - HELD THAT:- As the demand of duty itself is set aside, the penalties imposed on the appellants, under various provisions of the Central Excise Act, 1944 and rules made thereunder are also set aside. Appea allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether goods cleared as assemblies/sub-assemblies (including chassis, cabinet, remote controls and related items) to OEMs possess the 'essential character' of complete colour television receivers such that they must be classified under the tariff heading for complete TV sets rather than under the heading for parts. 2. Whether Rule 2(a) of the Rules for Interpretation (treating incomplete/unfinished goods as complete where they have the essential character of the finished goods, and including goods removed unassembled or disassembled) applies to the clearances in question or whether classification must be governed by Section/Chapter Notes (notably Section Note 2 to Section XVI and Chapter Notes 4 & 5). 3. Whether the facts establish that the assemblies/sub-assemblies were first assembled, tested and then disassembled at the manufacturer's premises (a factual predicate relied on in precedent to treat cleared goods as complete sets), thereby attracting the legal consequence of classification as complete TV sets. 4. Consequent upon classification, whether demands for differential excise duty, interest and penalties (including penalties on officers) are sustainable. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Classification: whether the cleared assemblies/sub-assemblies have the essential character of complete CTVs Legal framework: Classification is governed first by the terms of the headings and any relevant Section or Chapter Notes (Rule 1 of the Rules for Interpretation). Section Notes 4 & 5 of Section XVI identify when a machine consisting of individual components falls to be classified in the heading appropriate to the function; Rule 2(a) treats incomplete/unfinished or unassembled/disassembled goods as complete if they have the essential character of the finished article. Precedent treatment: The Supreme Court's analysis in the decision applying Rule 2(a) (the Salora line) holds that where parts have been assembled, tested and then disassembled such that the cleared consignments are identifiable units having the essential character of the finished article, they may be classified as finished goods. Other authorities (including Sony and subsequent tribunal observations) explain that where parts are supplied in bulk without matching/numbering and without identifiability, they remain 'parts' under Section Note 2. Interpretation and reasoning: The adjudicating record manifests that the appellant supplied assemblies/sub-assemblies in matched quantities with packing materials, remote controls and, in many consignments, the colour picture tubes arranged or supplied so that a definite predecided number of sets could be assembled at OEMs without any substantial manufacturing operation there. Statements and enquiries showed matching, numbering, supply of all parts (or arrangements for CPTs), sales staff control over dispatches and the absence of sales of subassemblies in the open market. The Tribunal found these facts sufficient to conclude that the cleared kits had the essential character of a CTV under Section Notes 4 & 5 and Rule 2(a). Ratio vs. Obiter: The central ratio drawn is that where the components/assemblies cleared are matched/numbered and supplied such that they form identifiable complete appliances and no substantial manufacturing is required at the OEMs, they possess the essential character of the finished article and fall for classification as the finished article. Observations about the nature of assemblies, technical process and trade practice supporting that conclusion are applied as ratio; distinguishing Sony (bulk, unmatched consignments) is treated as ratio in earlier precedent. Conclusion: On the facts found by the adjudicating authority (matching, identifiability, supply of all parts/packaging and minimal OEM activity), the assemblies/sub-assemblies merit classification under the tariff heading for complete CTV sets rather than as parts. Issue 2 - Applicability and primacy of Section/Chapter Notes vs Rule 2(a) Legal framework: Rule 1 gives primacy to Section and Chapter Notes and headings; Rule 2(a) is applicable only if the headings/notes do not otherwise determine classification. Section Note 2 to Section XVI directs that parts of machines in Chapters 84/85 are, in all cases, to be classified in their respective headings unless exceptions apply. Precedent treatment: Authorities emphasise first testing classification against Section/Chapter Notes; Rule 2(a) can then be resorted to if notes/headings do not yield a clear picture. The Salora analysis reconciles Section Notes with Rule 2(a) by examining whether goods fall within the scope of Section Note 2 (i.e., are they truly 'parts'?) before applying Rule 2(a). Interpretation and reasoning: The Tribunal and the adjudicating authority applied Section/Chapter Notes and then Rule 2(a) in sequence. The reasoning accepted that Section/Chapter Notes are primary but concluded that the factual matrix showed the goods were not 'parts' as envisaged by Section Note 2 (because of identifiability, matching and testing), hence Rule 2(a) applied to treat the delivered goods as complete/unassembled CTVs. Conversely, if Section Note 2 applied literally (goods were genuine 'parts' supplied in bulk/unmatched), Rule 2(a) would not be available. Ratio vs. Obiter: The ratio is procedural and doctrinal: classification must first be attempted via headings and notes; Rule 2(a) is invoked only where notes/headings do not require a contrary result. The adjudication applied this sequence and concluded Rule 2(a) supported classification as complete sets on the admitted facts. Conclusion: Given the factual findings of identifiability and complete kits, Rule 2(a) legitimately operated after Section/Chapter Notes were considered; the goods were not held to be 'parts' for Section Note 2 purposes. Issue 3 - Factual predicate of assembly/test/disassembly and its legal significance Legal framework: Salient precedents treat as critical whether the manufacturer had assembled and tested complete sets and then disassembled them for onward supply; such conduct evidences that the cleared consignments are identifiable re-assemblable units bearing the essential character of finished goods. Precedent treatment: Salora affirmed that prior assembly, testing and disassembly is a strong indicator that cleared consignments are to be treated as complete sets; Sony illustrates the contrasting scenario where parts are supplied in bulk and are not identifiable as discrete finished units. Interpretation and reasoning: The appeals court scrutinised whether the factual predicate (assembly ? testing ? disassembly) existed. It found no evidence that the assemblies/sub-assemblies here were first assembled and tested as complete TVs and then disassembled before clearance. The absence of such positive findings distinguishes the present factual matrix from Salora on that narrow point. Additionally, later tribunal and apex rulings emphasize that Rule 2(a) requires either presentation/ removal of all components together or identifiability at the time of removal; where neither occurs, Rule 2(a) cannot be invoked. Ratio vs. Obiter: The factual determination (no assembly/test/disassembly established) is a finding of fact (ratio for outcome here). Observations contrasting LG/Sony/Salora are applied as precedential ratio to the extent they set the criteria for identifiability and simultaneity of removal. Conclusion: Absence of evidence that complete televisions were assembled and tested at the manufacturer's premises before disassembly undermines the application of Salora's factual predicate; conversely, other findings (matching, supply of all parts and minimal OEM activity) supported identifiability for Rule 2(a) in the adjudicator's view, but the appellate analysis found the factual matrix insufficient to sustain the departmental classification demand. Issue 4 - Consequences: demand for differential duty, interest and penalties Legal framework: Differential duty arises if classification is altered to a heading attracting a higher specific rate; interest and penalties arise under provisions invoked for short payment, Cenvat irregularities and contravention of rules. Precedent treatment: Penalty and interest follow on a valid duty demand; absence of duty liability renders consequential penal and interest demands unsustainable. Jurisprudence treats levy of penalties as requiring culpability and a valid foundational duty demand. Interpretation and reasoning: Because the appellate conclusion rejects the departmental classification/duty demand on the facts (finding no merit in confirming the demand as framed), there is no sustainable basis for differential duty, interest or penalties tied to that demand. The Tribunal set aside penalties and interest as they were consequential on the impugned duty confirmation. Ratio vs. Obiter: Ratio: If primary duty demand is unsustainable, consequent penalties and interest fall with it. Conclusion: Demand, interest and penalties imposed in relation to the disallowed classification were set aside. OVERALL CONCLUSION On the factual record and applying the statutory interpretative hierarchy and controlling precedents, the impugned demand for differential excise duty (based on classification of supplied assemblies/sub-assemblies as complete CTVs) is not sustained. Because the duty demand cannot be upheld on the available evidence and legal tests, associated interest and penalties (including those on officers) are also set aside. Cross-references: Issue 1 and Issue 2 are interlinked (classification/note-rule sequence); Issue 3 is the key factual determinant that separates application of precedents; Issue 4 follows as a legal consequence of the conclusion on classification.