1994 (7) TMI 136 - AT - Central Excise

Manufacturer identified, penalty reduced, service charges added, appeal modified.

The Tribunal found that Adprint was a dummy unit of ORG, while DSI and Orbit were independent manufacturers. ORG was deemed the manufacturer of computers ... Manufacturer - Dummy Issues Involved:1. Whether Adprint, Orbit, and DSI are dummy units of ORG.2. Whether ORG/Adprint are manufacturers of computer systems.3. Whether the supply of raw materials, specifications, designs, peripherals, and systems software constitutes manufacturing by ORG.4. Whether the tariff entry against Tariff Item 33DD indicates that adding peripherals creates new goods.5. Whether the notification allowing set-off of duty on peripherals indicates a new product creation.6. Whether the conditions of the purchase order indicate ORG/Adprint as the manufacturer.7. Whether the service charges collected by ORG should be added to the value or only certain expenditures.8. Whether the Collector had traveled beyond the Show Cause Notice.9. Whether the demand was time-barred.10. Imposition of penalty.Detailed Analysis:1. Whether Adprint, Orbit, and DSI are dummy units of ORG:(i) Adprint as a Dummy Unit:The Tribunal found that Adprint was not a separate entity but a dummy unit of ORG. Adprint did not have its own staff, and all operations were managed by ORG employees. Financial dealings between Adprint and ORG were interconnected, indicating that Adprint was a facade created by ORG.(ii) DSI and Orbit as Dummy Units:The Tribunal held that DSI and Orbit were not dummy units but independent manufacturers. They had their own investments in plant and machinery and were not merely hired labor for ORG.2. Whether ORG/Adprint are manufacturers of computer systems:The Tribunal divided the period into two spells: (i) 1979 to 14th May 1982, and (ii) 14th May 1982 to May 1984. During the first period, ORG got computers manufactured from DSI and Orbit. From 14th May 1982, ORG started manufacturing computers themselves. The Tribunal found that ORG was the manufacturer due to the supply of designs, specifications, and systems software, which were essential for the functioning of computers.3. Whether the supply of raw materials, specifications, designs, peripherals, and systems software constitutes manufacturing by ORG:(i) Supply of Raw Materials:The Tribunal held that the supply of raw materials alone does not make ORG a manufacturer. The Tribunal relied on several case laws indicating that manufacturing involves more than just supplying raw materials.(ii) Supply of Specifications and Designs:The Tribunal found that the supply of designs and specifications, especially in the case of computers, constitutes manufacturing. The Tribunal reasoned that the compatibility of hardware and software is crucial, making the supply of designs and specifications an integral part of the manufacturing process.(iii) Adding Peripherals:The Tribunal held that adding peripherals to computers creates a new product known as computer systems. This new product is distinct and recognized in the market, thereby constituting manufacturing.(iv) Supply of Systems Software:The Tribunal found that systems software is essential for the operation of computers. The supply of systems software by ORG, which transforms the hardware into a functional computer, constitutes manufacturing.4. Whether the tariff entry against Tariff Item 33DD indicates that adding peripherals creates new goods:The Tribunal held that the tariff entry 33DD includes peripheral devices, expanding the meaning of computers to include computer systems. Adding peripherals creates a new product known as computer systems, which is subject to excise duty.5. Whether the notification allowing set-off of duty on peripherals indicates a new product creation:The Tribunal found that Notification No. 148/76 provided relief for duty paid on peripherals, indicating that adding peripherals to computers creates a new product known as computer systems, which is subject to duty.6. Whether the conditions of the purchase order indicate ORG/Adprint as the manufacturer:The Tribunal held that the conditions of the purchase order, which showed transactions on a principal-to-principal basis, did not negate the fact that ORG was the manufacturer. The Tribunal found that ORG's involvement in the entire process, including the supply of designs, specifications, and systems software, made them the manufacturer.7. Whether the service charges collected by ORG should be added to the value or only certain expenditures:The Tribunal held that the entire amount collected as service charges, including the cost of systems software and warranty charges, should be added to the assessable value. The Tribunal found that these charges were an additional consideration for the warranty and essential services provided by ORG.8. Whether the Collector had traveled beyond the Show Cause Notice:The Tribunal found that the Collector's findings were based on facts and did not travel beyond the Show Cause Notice. The Tribunal held that the systems software supplied by ORG was essential for the operation of computers and was correctly included in the assessable value.9. Whether the demand was time-barred:The Tribunal held that there was suppression of facts by ORG, including the relationship with Adprint and the collection of service charges. Therefore, the extended period for demand under Section 11A of the Central Excises and Salt Act, 1944, was applicable, and the demand was not time-barred.10. Imposition of Penalty:The Tribunal found that ORG had intentionally evaded payment of duty by creating a facade in the name of Adprint and holding back vital information. The imposition of penalty was justified, but the quantum was reduced from Rs. 25 lakhs to Rs. 10 lakhs.Summary of Findings:(a) Adprint is a dummy unit of ORG.(b) DSI and Orbit are not dummy units of ORG nor are they related to ORG.(c) ORG is the manufacturer of computers and computer systems.(d) The demand is not time-barred.(e) Service charges, including the cost of systems software and warranty charges, shall be added to the assessable value.(f) The value of peripherals shall be added to the value of computers.(g) Admissible deduction of duty paid on peripheral devices and computer frames shall be allowed to the extent proved.(h) Calculation inaccuracies and expenses incurred in the maintenance of computers not sold by ORG shall be adjustable by mutual discussion.(i) The quantum of penalty is reduced from Rs. 25 lakhs to Rs. 10 lakhs.The appeal is disposed of accordingly with the above modifications.