TaxTMI 
TaxTMI 
1995 (9) TMI 180
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....ir products under Chapter sub-heading No. 7224.00 in their classification lists w.e.f. 13-5-1988, 1-3-1989 and 20-3-1989. Later on the appellants claimed classification of these products under Chapter sub-heading 7326.90. However, the department was of the view that these forgings had already attained essential character of finished products as parts of motor vehicles and hence by virtue of Interpretative Rule 2(a) these products though not fully finished were to be classified as if they were finished parts under Chapter sub-heading 8708.00 of CETA, 1985. Accordingly, a show cause notice was issued to the appellants asking them to explain as to why the goods manufactured by them should not be classified under Chapter Heading 8708.00 of CETA, 1985 and why differential duty should not be demanded from them and why penalty should not be imposed. 3. Shri Gautam B. Doshi, Chartered Accountant alongwith Shri Jitendra Singh, Advocate appearing for the appellants submitted that the appellants are engaged in the manufacture of forgings and forged products; that the admitted position was that the goods were forgings and forgings can be machined to gears, pinions etc.; that the disput....
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.... the duty is payable only at two stages viz., under Item 26AA on the forged products and under Item 68 on the completion of the manufacture of finished goods." The ld. Chartered Accountant therefore submitted that even after the forgings, the forged products had not acquired the essential character of component parts as they needed further to be worked and further working of these forged products was done by the purchasers before they are identifiable as motor vehicle parts and hence the appellants' products were neither motor vehicle parts nor the forgings can be said to be motor vehicle parts. 4. It was argued by the ld. Chartered Accountant that the product of the appellants was roughly shaped forgings; that forging is the primary product; that alloy steel is used in these forgings; that the goods are un-machined forgings; that in para 9.4 of their order, this Tribunal had interpreted Rule 2(a); that according to this interpretation of Rule 2(a), the appellant's goods had not acquired the character so as to be classified under Central Excise Tariff Sub-Heading 8708.00. In support of his contention, the ld. CA cited and relied upon the decision of the Tribunal in the c....
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....s that the appellants have indicated the use of the forged products as for motor vehicle parts; that in that letter the appellants have nowhere shown that they were rough forgings; that the invoices clearly show part number and not the drawing number; that the part numbers are indicated only in finished parts; that the photographs do not show rough forgings; that Central Excise Tariff Heading 7224 reads "Other alloy steels in ingots or other primary forms; semi-finished products of other alloy steel"; that Chapter note (ij) excludes classification of the product of the appellants under CE Tariff Chapter Heading 7224; that classification under 7326.90 is ruled out in view of explanatory notes on page 1038 wherein it has been provided that "This heading does not cover forgings which are products falling in other headings of the Nomenclature (e.g. Recognisable parts of machinery or mechanical appliances) or unfinished forgings which require further working but have the essential character of such finished products." that HSN Explanatory notes at page 1433 provided that forged products are not excluded from the purview of Tariff Heading 8708.00 as motor vehicle parts; that the product ....
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....on of Interpretative Rule 2(a), the product manufactured by the appellants was classifiable under CET sub-heading 8708.00. For proper appreciation of these contentions, Tariff description and the provision of Rule 2(a) is reproduced below : - 7224.00 Other alloy steel in ingots or other primary forms; semi-finished products of other alloy steel. (i) forged       (ii) other       73.26 Other articles of iron or steel   - Forged or stamped, but not further worked:       7326.90 - other  8708.00 Parts and accessories of the motor vehicles of Heading Nos. 87.01 to 87.05. RULE 2(a): Any reference in a heading to goods shall be taken to include a reference to those goods incomplete or unfinished, provided that, the incomplete or unfinished goods have the essential character of the complete or finished goods. It shall also be taken to include a reference to those goods complete or finished (or falling to be classified as complete or finished by virtue of this rule), removed unassembled or disassembled." 9. The admitted....
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....le is complete when it has been proof-machined and surface defects have been removed. Earliest form of `cast article' is when it comes out of the casting mould. The Heading 73.25 would, therefore, include all "castings" from the stage of their emergence from the casting mould to the stage of being proof-machined. Similarly, an incomplete/unfinished part of machine or motor vehicle would also be covered under Chapters 84, 85 or 87 as the case may be. A machine part or motor vehicle part, subject to any section or Chapter note, would normally be one which is ready for use in a particular machine or motor vehicle. Application of Rule 2(a) would lead us to conclude that an incomplete or unfinished part of a machine or motor vehicle would fall under Chapters 84, 85 or 87, subject to fulfilment of the condition of "essential character". Rule 2(a) does not permit us to conclude that when an article squarely falls under a particular tariff heading, it can be made to fall under another heading by invoking the concept of essential character. This is against the plain reading of Rule 2(a). But this is precisely what is attempted to be done by the lower authorities in the impugned orders. It i....
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....n list also for the subsequent period, the goods have been described as forgings and forged articles of steel. In the purchase orders placed by M/s. Gajra Gears and Bharat Gears, the goods have been described as forgings for different parts of motor vehicles. M/s. Bharat Gears in their letter dated 3-8-1992 have certified that "un-machined forgings supplied to us as forged condition by you undergo normalising, shot blasting, plank turning, gear cutting and further operations as required before the end use." M/s. Gajra Gears in their letter dated 22-8-1992 have certified that "We are availing modvat credit on forgings received from M/s. Jaypee Forge". However, in the purchase order of M/s. Gajra Gears, it is clearly indicated as : "FORGINGS AS PER SHEET ENCLOSED  Note : 1. The material used for forgings should be from HUSCO, ASP-KALYANI, Oswal Steel (Forged Circuit) and Test Certificate as per Form already with you should be sent alongwith each batch of forging despatched. 2.    The prices are in As Forged Condition. 3.    Excise Duty : 10% of the value plus special du....
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....emergence to the stage of machining. A machine part or a motor vehicle part subject to any Section or Chapter note would normally be one which is ready for use in a particular machine or motor vehicle. Application of Rule 2(a) would lead us to conclude that an incomplete or unfinished part of a machine or motor vehicle would fall under Chapters 84, 85 or 87 subject to fulfilment of the condition of essential character and that Rule 2(a) does not promise us to conclude that when an article squarely falls under particular Tariff heading, it cannot be made to fall under another Tariff heading by invoking the concept of any essential character. It is not denied that forgings of steel do fall under Heading 73.25 not because the forgings had acquired the essential character of products under Chapters 84, 85 or 87, such forgings should be deprived of their most appropriate and only classification under Chapter Heading 73.25. Such an interpretation of Rule 2(a) is untenable. 17. We also note that forged products which are machined polished, etc. and made fit for being used as machine parts, assume altogether different character from what it was when forged so as to make them identi....
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....to shape them into machine parts were to be recorded as pieces roughly shaped under the old tariff item 25 prior to 28-2-1986 and also under Heading 72.08 with effect from 28-2-1986. 20. With effect from 1-3-1988, Chapters 72 and 73 of CETA, 1985 were fully aligned to HSN and accordingly from 1-3-1988 onwards, the classification should have been determined in the light of HSN Explanatory Notes on the basis of narrow restricted and specialised scope of Heading 72.07 and by application of the concept of blanks and semi-finished article under Rule 2(a) of the Rules of Interpretation. Forgings and forged products not covered under Heading 72.07 would be classifiable under Chapters 73, 84, 85, 86 etc. as blanks or semi-finished articles having essential character of machinery parts etc. 21. On careful consideration of the material placed before us, we find that in classification list No. 67/88, dated 14-10-1988, the assessees have claimed classification of their product under Chapter sub-heading 7207.90 in classification list dated 1-3-1989 classification of the product has been claimed by the assessees under Chapter sub-heading 7224.00 in the classification list dated 8....
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.... from blocks or ingots by the action of power hammers of forging presses. They may take the form of crude recognisable shape in order that the final article can be fabricated without excessive waste, but the heading covers those pieces which require considerable further shaping in the forge, press, lathe, etc. The heading would, for example, cover an ingot roughly hammered into the shape of a flatted zig-zag and requiring further shaping to produce a marine crankshaft, but it would not cover a crankshaft forging ready for final mach- ining. The heading similarly excludes drop forgings and pressings produced by forging between matrices since the articles produced by the operations are ready for final machining". 24. Examining this definition given in the HSN notes which were fully aligned with the Central Excise Tariff from 1-3-1988, we observe that forgings were not machined and the only operation that was required to be done with the forgings, was machining. In the HSN Notes it has been very clearly provided that Heading 72.07 will not cover a product which is ready [for] final machining. The products manufactured by the appellant were ready for final machining as is evide....
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.... Member (T) 6-6-1995 [Order per : S.L. Peeran, Member (J)]. - With all due respect to my ld. brother, my findings in this matter are as follows : 26. The question before us is as to whether these "Forgings & Forged products of Steel" merit classification under Chapter Heading 8708.00 of CET, 1985 by application of the Rule 2(a) of the Rules of Interpretation of the Excise Tariff Act. 27. The appellants had contended before the lower authority that the gears and pinions for which they were manufacturing forgings are not for engine application. The process of manufacture noted by ld. Asstt. Collector is that "The process of manufacture involves cutting of iron bars, billets into requisite quantity in accordance with the specifications, heating of cut pieces to the required temperature and getting forged in the die forge hammer in the hot stage. Such hot forgings are taken out of the die hammer, will have excess material projecting on the sides. These forgings are then subjected to air cooling and thereafter the excess material is removed by grinding without causing any change in the form of the product. It is seen that no othe....
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....d as complete or finished by virtue of this rule), removed unassembled or disassembled". In this case there is Chapter 73 which deals about "Articles of Iron or Steel". This Chapter 73 falls under Section XV, which refers to `Base Metals and Articles of Base Metal'. Note 2 of Section XV inter alia states that "In Chapters 73 or 76 and 78 to 82 (but not in Heading No. 73.15) references to parts of goods do not include references to parts of general use as defined above" It further reads "Subject to the preceding paragraph and Note 1 to Chapter 83, the Articles of Chapter 82 (but not in Heading No. 73.15) references to parts of goods do not include reference to parts of general use as defined above". Section XVII applies to Chapter 86 to 89 Note 2 of Section XVII reads : "The expression `Parts' and `accessories' do not apply to the following articles, whether or not they are identifiable as per the goods of this Section :- (a)   Parts of general use, as defined in Note 2 of Section 2 of Section XV, of base metal (Section XV), or similar goods of plastics (Chapter 39), (e)   Machines and apparatus of Heading Nos. 84.01 to 84.79, and parts thereo....
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.... impugned goods are straight from forging without any processes undertaken on it except the chipping of excess material around it. (b) The explanatory Notes to Chapter 73.26 at pages 1037 & 1038 are extracted hereinbelow : "This heading covers all iron or steel articles obtained by forging or punching, by cutting or stamping or by other processes such as folding, assembling, welding, turning, miling or perforating other than articles included in the preceding headings of this chapter or covered by Note 1 to Section XV or included in Chapter 82 or 83 or more specifically covered elsewhere in the Nomenclature. The heading includes : (1) Horseshoes : boot or shoe protectors whether or not incorporating affixing points; tree climbing irons; non-mechanical ventilators; Venetian blinds; binding hoops for casks; iron or steel fittings for electric wiring (e.g. stays, clips, brackets); suspension or connecting devices for insulator chains (suspension rods, shackles, extensions, eyes or rings with stud connections, ball sockets, suspension clamps, dead-end clamps etc.), non-calibrated steel balls (see Note 6 to Chapter 84); fencing posts, tent pegs, stakes for tethering livestoc....
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.... Large scale shelving for permanent installation [in] shops, workshops, storehouses, etc. (Heading 73.06) and shelved furniture of Heading 94.03. (g) Skeleton wire frames for making textile or paper lampshades (Heading 94.05)". As can be seen from the above reading, only those "forgings which are products falling in other headings of the Nomenclature (e.g. recognisable part of machinery or mechanical appliances) or unfinished forging which require further working but have the essential character of such finished products" not covered in the heading. In this case admittedly, the goods are just in forged stage without undergoing any process or processes to acquire essential character. The term "Essential character" has not been defined anywhere, but the understanding arrived in several judgments referred to before us, is that the product should have crossed the stages of processes delineated in the Notification No. 223/88. Further, the above HSN Explanatory Notes states that the heading covers all iron or steel articles obtained by Forging or Punching by cutting or stamping or by other processes such as folding, assembling, welding, turning, milling or perforating, but ex....
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....to said article or the same is marketable without any further process. It will differ from product to product. There can be no hard and fast rules. The nature and extent of processing may vary from one case to another. In a given case, even a small change may lead to a new article having distinct name, character and use being made. In yet another case it may not be so. To become a new commercial article, the product must cease to be the goods of the taxable description and become that of a different taxable description". This ruling was approved by Hon'ble Supreme Court as in the case of Tata Iron & Steel Co. Ltd. v. Union of India 1988 (35) E.L.T. 605 at para 4 at pages 608/609. The same is extracted herein below :- ****** 32. The Collectorate and CBE & C had been issuing circulars to express their understanding when a product would acquire essential character. Trade Notice No. 31/87 dated 4-3-1987 issued by Vadodara Collectorate, has clarified that merely because the following operations (as noted below) are carried on, the goods would not acquire essential character of the castings and would not be enough to merit classification of such castings as machinery parts ....
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....jected to the processes of normalising, shot blasting, blank turning, gear cutting, etc. (4) During the course of audit in September, 1989, it was mentioned by the Department that the goods were classifiable as other products of iron and steel forged, and were not semi-finished product of iron and steel (refer letter No. CERA/Jaypee/Tal-1/89, dated 13-10-1989 from the Superintendent of Central Excise, Indal, Range-Taloja-1, Panvel Division). 36. Heading No. 73.26 of the Schedule to the Central Excise Tariff Act, 1985 (the Tariff) covers other articles of iron or steel. Various products covered by the different sub-headings under Heading No. 73.26 have been described as under :- Forged or stamped but not further worked :  7326.11 Grinding balls and similar articles for mills  [7326.19] Other 7326.20 Articles of iron or steel wire 7326.90 Other Under Heading No. 87.08 parts and accessories of the motor vehicles such as tractors, public transport type passenger motor vehicles, motor cars, motor vehicles for the transport of goods and other specia....