Central Excise Tariff Act, 1985: Chapter 86, Tariff Item No. 8608 and Chapter 85 Tariff Item No.8536.90 – “Relays” manufactured by the assessee, used as Railway signaling equipment – Taxability of – Classification of, under Tariff Item No. 8608 or 8536.90 – Held: Relays manufactured by the assessee are used solely as part of the railway signaling/traffic control equipment – On the basis of the ‘predominant use’ or ‘sole/principal use’ test acknowledged by the General Rules for the Interpretation of the Schedule, ‘relays’ are classifiable as parts of ‘railway signalling equipment’, under Heading 8608 – Thus, the invocation of Note 2(f) in Section XVII, overlooking the “sole or principal user test” indicated in Note 3, not justified –These goods were previously classified (before 1993) under Sub--heading 8536.90, but a revised classification list, classifying them under sub-heading 8608, submitted by the assessee, was approved by the competent Authority on 27.08.1993 – After such specific approval of the classification list, it was not proper on the part of the Authorities to invoke Note 2(f) of Section XVII – Furthermore, the show cause-cum-demand notices issued by the Department during 1995-1998 were partly time barred u/s. 11-A – Despite the fact that some of the individual notices were issued within the period of limitation, the very invocation of s. 11-A, cannot be said to be within time – Central Excise Act, 1944 – s. 11-A.
Allowing the appeal, the Court
HELD: 1.1 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.”Rule 1 of these Rules makes it clear that “the titles of Sections, Chapters and Sub-Chapters 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”. 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. Rule 3 deals with cases where goods are classifiable under two or more sub-headings. But Rule 3 begins with a reference to Rule 2(b). Therefore, it is necessary to extract Rule 2(b) and Rule 3 together.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”. [Para 25-29][631-G-H; 632-A-D; 633-D]
1.2 In the instant case, 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 sub-Heading 8536.90 and that, therefore, General Rule 3(a) will apply. But in invoking General Rule 3(a), the Authorities omitted to take note of 2 things. They are that the General Rules of Interpretation would 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 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, it is not known 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 would apply, especially after they had found that ‘relays’ are not classifiable under Chapter Heading 8608, on account of Note 2(f) of Section XVII. [Paras 30, 31][633-E-H; 634-A]
Central Excise vs. Simplex Mills Co. Ltd. (2005) 3 SCC
51 : [2005] 2 SCR 441 – relied on.
1.3 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) 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. [Para 32, 33][634-B, E-F]
1.4 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. [Para 36][635-B]
1.5 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. 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. [Para 37, 38][635-C, G]
1.6 The Commissioner (Appeals), pointed out that the goods were previously classified (before 1993) under Sub-heading 8536.90, but a revised classification list, classifying them under sub-heading 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. [Para 39] [635-G-H; 636-A-B]
2.1 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 sub-heading 8536.90 till the year 1993, specifically filed a classification list on 27.08.1993, reclassifying them under sub-heading 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 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 11-A. [Para 41][636-D-F]
2.2 The Appellate Authority held without any discussion, that the show cause notices were issued within the time limit envisaged in Section 11-A 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 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. [Para 43][637-A-C]
2.3 The normal period of limitation for invoking Section 11-A 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. 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 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. [Paras 44, 45] [637-C-D; 638-A-B]
2.4 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, applicable to the product manufactured during the entire period after 27.08.1993. The dispute was not invoice-centric. 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. 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 11-A, in the facts and circumstances of the case, cannot be said to be within time. [Para 46][638-B-E]
3. The Orders-in-Original, the Order of the Appellate Authority and the Order of the CESTAT are set aside. Consequently, the show cause-cum-demand notices are also set aside. [Para 47][638-E]
A. Nagaraju Bros Vs. State of A.P. 1994 Supp (3) SCC
122 : [1994] 1 Suppl. SCR 784 – referred to.
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