WESTINGHOUSE SAXBY FARMER LTD. vs. COMMR.OF CENTRAL EXCISE CALCUTTA

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C.A. No.-000037-000037 - 2009Supreme Court2021 INSC 15808 March 2021Bench: HON'BLE MR. JUSTICE V. RAMASUBRAMANIAN26 pages
For Petitioner: KUNAL CHATTERJI
AI SummaryAllowed

What did the Supreme Court hold?

The Supreme Court held that the 'Relays' should be classified under Chapter Heading 8608 as railway signaling equipment, as the initial classification list was approved. Furthermore, the show cause notices were time-barred as they were issued after the normal period of limitation without any evidence of fraud or suppression of facts.

What were the facts?

The appellant manufactured 'Relays' used in railway signaling. Initially classified under 8536.90, they sought reclassification under 8608 due to duty rate changes, which was approved. Later, the department issued show cause notices for differential duty, interest, and penalty, claiming the goods should be under 8536.90.

What were the issues?

Whether the relays manufactured by the appellant fall under Chapter 8608 or 8536.90, and whether the show cause notices were barred by limitation under Section 11A of the Central Excise Act, 1944.

Which sections of the Income-tax Act were involved?

Section 35L(b),Section 11A

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REPORTABLE IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO.37 OF 2009 WESTINGHOUSE SAXBY FARMER LTD. …Appellant(s) Versus COMMR. OF CENTRAL EXCISE CALCUTTA          …Respondent(s) J U D G M E N T V. RAMASUBRAMANIAN, J. 1. Aggrieved by the dismissal of their appeal by the  Customs Excise and Service Tax Appellate Tribunal (for short “CESTAT”), the 1 Digitally signed by Madhu Bala Date: 2021.03.08 15:47:26 IST Reason: Signature Not Verified

assessee has come up with the present appeal under Section 35 L(b) of the Central Excise Act, 1944. 2. We have heard Shri Kunal Chatterji, learned counsel for the appellant/assessee and Ms. Nisha Bagchi, learned standing counsel for the respondent. 3. The   appellant   is   a   company   wholly   owned   by   the   State Government of West Bengal. It is engaged in the manufacture of “Relays” which is used as part of the Railway signaling system. 4. A ‘Relay’ is generally an electrically operated switch, used to control a circuit. They may also be used where several circuits must be controlled by one signal. 5. Though essentially relays are electrical equipment, they may also form part of Railway signaling equipment. 6. While the normal electrical relays fall under Tariff Item No. 8536.90, ‘Railways and Railways signaling equipment’ fall under No. 8608. 2

7.

It   appears   that   from   01.03.1986   till   February­1993,   the effective rate of excise duty charged under both sub­headings was 15% and hence the appellant had no problem with the classification of their goods under sub­heading No.8536.90. But with effect from 28.02.1993, the effective rate of excise duty for the goods under sub­heading  No.8536.90  became much higher  than the  effective rate of duty for the goods under sub­heading 8608. 8. On 27.08.1993, the appellant submitted a classification list for the approval of the Assistant Collector, Central Excise. This list provided details of the products manufactured by the appellant as Railway   signaling   equipment,   including   relays   and   claimed   that they should be classified under sub­heading 8608 and not under 8536   in   the   First   Schedule   to   the   Central   Excise   Tariff   Act. Admittedly this classification list was approved by the competent authority. 9. On   23.04.1996   the   Central   Board   of   Excise   and   Customs issued   a   circular   indicating   that   ‘plug­in   type   relays’   merited 3

classification   under   the   Chapter   Heading   85.36.   Thereafter,   the Assistant   Commissioner   of   Central   Excise   issued   nine   different show   cause­cum­demand   notices   calling   upon   the   appellant   to show cause as to why the goods should not be classified under the Sub­Heading 8536.90 and why the differential duty should not be collected together with the interest and penalty. 10. The   appellant   gave   reply   to   the   show   cause   notices, contending that what was manufactured by them was supplied only to Railways as part of the signaling equipment and that, therefore, the show cause notices required to be dropped. 11. However,   the   Assistant   Commissioner   passed   9   separate Orders­in­original on 20/21.12.2001 confirming the demand.  The dates of the show cause notices, the period to which each one of them   related   to,   the   differential   excise   duty   arrived   at   by   the Adjudicating Authority and the penalty imposed by the Adjudicating Authority are provided in a tabular column for easy appreciation as follows:­ 4

Show Cause Notice Date Period Involved Differential Duty Penalty 30.08.1995 01.02.1995 to 31.07.1995 Rs. 3,04,662 Rs. 5000 05.02.1997 27.10.1995 to 09.01.1996 Rs.    66,311 1. Rs. 2000 09.02.1996 01.08.1995 to 31.01.1996 Rs.    95,978 2. Rs. 2000 06.08.1996 01.02.1996 to 31.07.1996 Rs. 1,63,843.25 1. Rs. 5000 06.02.1998 01.08.1996 to 31.01.1997 Rs.  2,69,842 2. Rs. 5000 07.08.1997 01.02.1997 to 31.07.1997 Rs.  1,53,441.583. Rs. 5000 04.09.1998 February 1998 Rs.     41,509.204. Rs. 2000 05.09.1998 01.03.1998 to 31.08.1998 Rs.  3,71,922.575. Rs. 5000 05.03.1999 01.09.1998 to 28.02.1999 Rs.  1,99,180 6. Rs. 5000 Total Duty Imposed/ Total Penalty Imposed Rs.16,67,109/­ 7.

Rs.36,000/­ 12. Aggrieved   by   the   Orders­in­original,   the   appellant   filed statutory appeals. All the nine appeals were partly allowed by the Commissioner   (Appeals)  by   an  Order   dated   29.08.2003.   By  this Order, the Appellate Authority confirmed the classification made by the Adjudicating Authority and the consequential differential duty demanded   by   the   Adjudicating   Authority.   However,   the   penalty 5

imposed   by   the   Original   Authority   was   set   aside   by   the Commissioner (Appeals). 13. Challenging   that   portion   of   the   order   of   the   Commissioner (Appeals)   upholding   the   proposed   classification   and   demanding differential duty, the appellant filed an appeal before CESTAT.  The CESTAT dismissed the appeal by a final order dated 26.03.2008. It is against the said order that the appellant has come up with the present appeal under Section 35L(b) of the Central Excise Act, 1944. 14. The questions that arise for our consideration in this appeal are: (i) Whether   the   “Relays”   manufactured   by   the appellant used only as Railway signaling equipment would fall under Chapter   86, Tariff Item 8608 as claimed by the appellant or under Chapter 85 Tariff Item No.8536.90 as claimed by the Department ? (ii) Whether   the   show   cause­cum­demand   notices issued by the Department on various dates during the   period   1995­1998   were   not   barred   by   time under Section 11­A  of the Central Excise Act,1944, 6

in   the   absence   of   any   fraud,   collusion,   willful misstatement   or   suppression   of   facts,   especially since   the   classification   list   submitted   by   the appellant have been approved on 27.08.1993? Question No.1 15.  For finding an answer to question No.1, it is necessary first to see the description of the goods that fall under Chapter 85 and Chapter 86 with particular reference to the relevant Tariff Items thereunder.   Chapter   85   covers   goods,   described   as  “Electrical machinery and equipment and parts thereof; sound recorders and reproducers, television image and sound recorders and reproducers, and parts and accessories of such articles.” 16. Chapter   Heading   8536   covers  “Electrical   apparatus   for switching or protecting electrical circuits, or for making connections to or in electrical circuits (for example, switches, relays, fuses, surge suppressors,   plugs   sockets,   lamp­holders   and   other   connectors, 7

junction boxes), for a voltage not exceeding 1,000 volts; connectors for optical fibres, optical fibre bundles or cables.” 17. Sub­heading 8536.90 covers “other apparatus”. This includes (i)  Motor starters for AC motors under sub­heading 8536.90.10; (ii)  Motor starters for DC motors under sub­heading 8536.90.20; (iii) Junction boxes under sub­heading 8536.90.30; and (iv) others under sub­heading 8536.90.90. 18. Chapter 86 covers “Railway or tramway locomotives, rolling­ stock   and   parts   thereof;   railway   or   tramway   track   fixtures   and fittings and parts thereof; mechanical (including electro­mechanical) traffic signaling equipment of all kinds.” 19. Chapter   Heading   8608   covers  “Railway   or   tramway   track fixtures   and   fittings;   mechanical   (including   electro­mechanical) signaling safety or traffic control equipment for railway, tramways, roads, inland waterways, parking facilities, port installation or air­ fields; parts of the foregoing”. 8

20.

There   are   five   sub­headings   under   Chapter   Heading   8608 which are as follows: 8608 00 10 8608 00 20 8608 00 30 8608 00 40 8608 00 90 ­Railway   and   tramway   track   fixtures   and fittings……………….. ­Mechanical equipment, not electrically powered for signaling   to,   or   controlling,   road   rail   or   other vehicles, ships or aircraft ­Other

traffic

control

equipment

for railways…………………… ­Other traffic control equipment for roads or inland waterways   including   automatic   traffic   control equipment for use at ports and airports ­Other …………………………………… 9

21.

The   Assistant   Commissioner   who   passed   the   Orders­in­ Original felt that the ‘Relays’ manufactured by the appellant fell only under the category of ‘Electrical machinery’ covered by Chapter 85 and that in view of Note 2(f) of Section XVII, the expressions “parts” and “parts and accessories” appearing in Chapter 86 do not apply to electrical machinery or equipment, covered by Chapter 85. The   Assistant   Commissioner   also   relied   upon   Rule   3(a)   of   the “General   Rules   for   Interpretation   of   the   First   Schedule”   to   the Central Excise Tariff  Act, 1985  to hold  that the  Heading  which provides   the   most   specific   description   shall   be   preferred   to   the Heading   providing   a   more   general   description.   Therefore,   the Original Authority held that since “Relays” do not find a mention in Chapter 86, but finds a specific mention in Chapter Heading 8536, the same has to be classified only under sub­Heading 8536.90. 10

22.

The   Appellate   Authority   agreed   with   the   assessee   that   the Relays manufactured by them are used solely as part of the Railway signaling equipment, but held that in view of Note 2(f) of Section XVII,   the   Orders   of   the   Original   Authority   did   not   call   for   any interference. However, the Appellate Authority set aside that portion of   the   Orders   of   the   Original   Authority   by   which   penalty   was imposed.   This   was   on   the   ground   that   the   classification   list submitted by the appellant on 27.08.1993 was approved by the competent Authority and that, therefore, the appellant could not be taken to have violated the provisions of the law. 23. CESTAT, by the Order impugned in the present appeal, merely concurred with the reasoning given by the Appellate Authority and dismissed the appeal. 11

24.

As could be seen from the Orders of the Original Authority and the first Appellate Authority, the answer to question No.1 revolves around the description of goods found in Chapters 85 and 86, as well   as   the   Notes   in   Section   XVII   and   the   General   Rules   for Interpretation of the First Schedule. We have already extracted the description of goods in Chapters 85 and 86. Therefore, let us now take note of the relevant Notes in Section XVII and the relevant Rule of the General Rules for interpretation of the First Schedule. 25. Section 2 of the Central Excise Tariff Act, 1985 provides that the rates at which duties of excise shall be levied under the Central Excise Act, 1944 are specified in the First Schedule and the Second Schedule.   The First Schedule contains a set of Rules known as “General Rules for the Interpretation of this Schedule”.  These Rules begin   with   a   mandate   that   the  “classification   of   goods   in   this Schedule shall be governed by the principles laid thereunder.” 12

26.

Rule 1 of these Rules makes it clear that “the titles of Sections, Chapters and Sub­Chapters are provided for ease of reference only and   that   for   legal   purposes,   classification   shall   be   determined according to the terms of the Headings and any relative Section or Chapter Notes and provided such headings or Notes do not otherwise require, according to the provisions of the rules that follow”. 27. Rule 2 deals with (i) incomplete or unfinished articles; and (ii) mixtures or combinations of material or substance. While Rule 2(a) deals with incomplete or unfinished Articles, Rule 2(b) deals with mixtures or combinations of a material or substance. 28. Rule 3 deals with cases where goods are classifiable under two or more sub­headings. But Rule 3 begins with a reference to Rule 2(b).  Therefore,   it   is   necessary   to   extract   Rule   2(b)  and   Rule  3 together. They read as follows: “2. (a) xxxx 13

(b) Any reference in a heading to a material or substance shall be taken to include a reference to mixtures or combinations of that material   or   substance   with   other   materials   or   substances.   Any reference to goods of a given material or substance shall be taken to include a reference to goods consisting wholly or partly of such material or substance. The classification of goods consisting of more than one material or substance shall be according to the principles of Rule 3.  3. When by application of rule 2(b) or for any other reason, goods are,   prima   facie,   classifiable   under   two   or   more   headings, classification shall be effected as follows:  (a)  the   heading   which   provides   the   most   specific description shall be preferred to headings providing a more general description. However, when two or more headings  each refer to part only of the  materials or substances contained in mixed or composite goods or to part only of the items in a set put up for retail sale, those headings are to be regarded as equally specific in relation to those goods, even if one of them gives a more complete or precise description of the goods.  (b)  mixtures,   composite   goods   consisting   of   different materials   or   made   up   of   different   components,   and goods put up in sets for retail sale, which cannot be classified by reference to (a), shall be classified as if they consisted of the material or component which gives them their essential character, insofar as this criterion is applicable.  (c)  when goods cannot be classified by reference to (a) or (b), they shall be classified under the heading which occurs   last   in   numerical   order   among   those   which equally merit consideration.”  14

29.

Interestingly Rule 2(a) speaks about “Article”, Rule 2(b) speaks about “material or substance” as well as “goods of a given material or substance” and Rule 3 speaks about “goods”. 30. In the case on hand, the claim of the assessee was that the relays manufactured by them were part of the railway signaling equipment. But all the Authorities were of the unanimous view that this   product   is   referable   to   goods   of   a   specific   description   in Chapter  sub­Heading  8536.90  and  that,  therefore,  General  Rule 3(a) will apply. 15

31.

But   in   invoking   General   Rule   3(a),   the   Authorities   have omitted to take note of 2 things. They are : (i) that as laid down by this Court in Commissioner of Central Excise Vs. Simplex Mills Co. Ltd1 the General Rules of Interpretation will come into play, as mandated in Rule 1 itself, only when no clear picture emerges from the terms of the Headings and the relevant section or chapter notes; and  (ii)  that   in   any   case,   Rule   3   of   the   General   Rules   can   be invoked only when a particular good is classifiable under two or more Headings, either by application of Rule 2(b) or for any other reason. Once the authorities have concluded that by virtue of Note 2(f) of Section XVII, ‘relays’ manufactured by the appellant are not even classifiable under Chapter Heading 8608, we do not know how the Authorities could fall back upon Rule 3(a) of the General Rules. There is a fundamental fallacy in the reasoning of the Authorities, that Rule 3(a) of the General Rules will apply, especially after they 1  (2005) 3 SCC 51 16

had found that ‘relays’ are not classifiable under Chapter Heading 8608, on account of Note 2(f) of Section XVII. 32. Coming to Section XVII, which precedes Chapter 86, the same contains a few notes, one of which is Note 2, which lists out certain articles   to   which   the   expressions  “parts”  and   “parts   and accessories” mentioned in Chapter 86 do not apply. Note 2 (f) reads as follows:­ “1. xxxx 2. xxx (a) xxxx (b) xxxx (c) xxxx (d) xxxx (e xxxx (f) electrical machinery or equipment (Chapter 85)” 17

33.

Note 2(f) is relied upon by the Revenue, in view of the fact that Chapter Heading 8608 uses the words “parts of the foregoing” after the   words   “Railway   or   tramway   track   fixtures   and   fittings”   etc. Chapter   Heading   8608   does   not   specifically   mention  “electrical relays”. The assessee’s contention is that “it is part of the railway signaling  safety or traffic control equipment”  and   that,  therefore, Relays manufactured by them would fall under Chapter Heading 8608 due to the usage of the word “parts”. It is this contention that is sought to be repelled by the Authorities by relying upon Note 2(f) of Section XVII. 34. Though at first blush, Note 2(f) seems to apply to the case on hand, it may not, upon a deeper scrutiny. 35. Note 3 of Section XVII reads as follows: “References in Chapters 86 to 88 to “parts” or “accessories” do not apply to parts or accessories which are not suitable for use solely or principally with the articles of those Chapters. A part or accessory which answers to a description in two or more of the headings of those   Chapters   is   to   be   classified   under   that   heading   which corresponds to the principal use of that part or accessory.” 18

36.

What is recognized in Note 3 can be called the “suitability for use test” or ‘the user test’. While the exclusion under Note 2(f) may be of goods which are capable of being marketed independently as electrical machinery or equipment, for use otherwise than in or as Railway signaling equipment,  those parts which are suitable for use solely or principally with an article in Chapter 86 cannot be taken to a different Chapter as the same would negate the very object of group classification. This is made clear by Note 3. 37. It is conceded by the Revenue that the relays manufactured by the appellant are used solely as part of the railway signaling/ traffic control equipment. Therefore, the invocation of Note 2(f) in Section XVII, overlooking the “sole or principal user test” indicated in Note 3, is not justified. 38. On the question as to what test would be appropriate in a given case, this court pointed out in A. Nagaraju Bros Vs. State of A.P.2, as follows: 2   1994 Supp( 3) SCC 122 19

“…..there is no one single universal test in these matters. The several decided cases drive home this truth quite eloquently. It is for   this   reason   probably   that   the   common   parlance   test   or commercial usage test, as it is called, is treated as the more appropriate test, though not the only one. There may be cases, particularly in the case of new products, where this test may not be   appropriate.   In   such   cases,   other   tests   like   the   test   of predominance, either by weight of value or on some other basis may have to be applied. It is indeed not possible, nor desirable, to lay down any hard and fast rules of universal application Therefore,   the   respondents   ought   not   to   have   overlooked   the ‘predominant use’  or ‘sole/principal use’ test acknowledged by the General Rules for the Interpretation of the Schedule. 39. As pointed out by the Commissioner (Appeals), the goods were previously classified (before 1993) under Sub­heading 8536.90, but a   revised   classification   list,   classifying   them   under   sub­heading 8608, submitted by the appellant, was approved by the competent Authority   on   27.08.1993.   After   such   specific   approval   of   the classification list, it is not proper on the part of the Authorities to invoke Note 2(f) of Section XVII. Hence question No.1 is answered in favour of the appellant and against the Revenue. Question No.2 20

40.

The second question that arises for consideration is as to whether   the   show   cause­cum­demand   notices   issued   by   the Department on various dates during the period 1995­1998 were not barred by time under Section 11­A of the Central Excise Act, 1944, in   the   absence   of   any   fraud,   collusion,   willful   misstatement   or suppression   of   facts,   especially   since   the   classification   list submitted by the appellant have been approved on 27.08.1993. 41. At the outset we should point out that this is not a case where the extended period of limitation would apply, especially in the light of the admitted position that the assessee who had his product classified under sub­heading 8536.90 till the year 1993, specifically filed a classification list on 27.08.1993, reclassifying them under sub­heading   8608   and   the   same   was   also   approved   by   the competent authority. Therefore, there is no question of any fraud or collusion or any willful misstatement or suppression of facts or contravention of any of the provisions of this Act or of the rules made there under with intent to evade payment of duty.  It is not 21

even the case of the Department that the appellant was guilty of any   of   these   things,   warranting   the   invocation   of   the   extended period of limitation. Therefore, the conclusion is inescapable that the Revenue had only the normal period of limitation available to them to invoke the power under Section 11­A. 42. As a matter of fact the first Appellate Authority held in the penultimate paragraph of its Order as follows: “I find that the subject goods were previously classified under sub­ heading   No.8536.90   and   then   the   appellant   asked   for reclassification of the goods under sub­heading No.8608.00.   The new classification was approved by the proper authority and the appellant paid duty according to the approved classification.  Hence there is no violation of any provisions of law on the part of the appellant and therefore penalty is not imposable under rule 173Q. 43. The Appellate Authority also held without any discussion, that the show cause notices were issued within the time limit envisaged in   Section   11­A   and   that  “any   discussion   on   the   jurisdiction   of invocation of extended period is not at all required”.  Therefore, it is obvious that none of the Authorities chose to invoke the extended period of limitation, but proceeded on the footing that all show 22

cause notices were issued within the normal period of limitation. If only any of the Authorities had taken care to look at the dates of the show cause notices, the period covered by those notices and the normal period of limitation that prevailed at that time, they could have easily found that the show cause notices were at least partly time barred. 44. The normal period of limitation for invoking Section 11­A was six months until 11.05.2000 and the same was modified as one year by Act 10 of 2000 with effect from 12.05.2000. This period of one year was modified as two years by Act 28 of 2016 with effect from 14.05.2016. Keeping this in mind let us now have a look at the dates of issue of show cause notices and the period covered by the show cause notices. They are as follows: S.No. Date of Show Cause Notice Period covered by the Show Cause Notice 1 30.08.1995 01.02.1995 to 31.07.1995 2 09.02.1996 01.08.1995 to 31.01.1996 3 05.02.1997 01.08.1996 to 31.01.1997 4 07.08.1997 01.02.1997 to 31.07.1997 23

5 06.08.1996 01.02.1996 to 31.07.1996 6 06.02.1998 01.08.1996 to 31.01.1997 7 04.09.1998 February 1998 8 05.09.1998 01.03.1998 to 31.08.1998 9 05.03.1999 01.09.1998 to 28.02.1999 45. It could be seen from the above table (i) that all show cause notices were of a date prior to 12.05.2000 and hence the normal period of limitation was only six months; and  (ii)  that at least a couple of show cause notices were issued in respect of a period partly or fully beyond the period of limitation. Unfortunately neither the Appellate Authority nor CESTAT took care to analyze the show cause notices individually with reference to the period covered by them. 46. In any case all the show cause notices were issued only on and after 30.08.1995, raising a classification dispute, after having approved   the   classification   list   submitted   on   27.08.1993.     The dispute   in   the   case   on   hand   was   one   of   classification   alone, 24

applicable to the product manufactured during the entire period after 27.08.1993. The dispute was not invoice­centric. Therefore, what was sought to be done by the Original Authority was actually to   review   the   approval   of   the   classification   list   submitted   on 27.08.1993   by   cleverly   issuing   separate   notices   covering   certain specific periods. What is to be seen here is that the attempt to undo the effect of the approval of the classification done on 27.08.1993, was actually time barred. Therefore, despite the fact that some of the individual notices were issued within the period of limitation either in respect of the part of the period or in respect of the whole of the period covered by them, the very invocation of Section 11­A, in the facts and circumstances of the case, cannot be said to be within time. 47. Therefore, both questions of law are answered in favour of the appellant and the appeal is allowed. The Orders­in­Original, the Order of the Appellate Authority and the Order of the CESTAT are 25

set aside. Consequently, the show cause­cum­demand notices are also set aside. There will be no order as to costs. …………....................CJI. (S. A. Bobde) ....…………....................J. (A. S. Bopanna) …..………......................J. (V. Ramasubramanian) March 08, 2021 New Delhi 26

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