Rule 3 can be invoked when a good is classifiable under two Headings by application of Rule 2(b)

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. (Para 31)

WESTINGHOUSE SAXBY FARMER LTD. V/S COMMR. OF CENTRAL EXCISE CALCUTTA

CIVIL APPEAL NO.37 OF 2009

On 08 MARCH 2021

The Hon’ble Supreme Court consisting of Chief Justice of India S. A. Bobde, Justice A. S. Bopanna, and Justice V. Ramasubramanian held in this case that, with reference to the case of A. Nagaraju Bros Vs. State of A.P., 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. A detailed note of the statement is made after hearing the arguments of both the parties.

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. 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. Though essentially relays are electrical equipment, they may also form part of Railway signaling equipment. While the normal electrical relays fall under Tariff Item No. 8536.90, ‘Railways and Railways signaling equipment’ fall under No. 8608. 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.

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. And it was found that, the Assistant Commissioner passed 9 separate Orders­in­original on 20/21.12.2001 confirming the demand. Aggrieved by the Orders ­in original, 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 imposed by the Original Authority was set aside by the Commissioner (Appeals).

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 the consideration in this appeal were:

(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? (Para 13)

For 1st question, a steady explanation was given and it was outcome was that, 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 was answered in favor of the appellant and against the Revenue.

The second question that arises for consideration was to whether to 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. The answer of this question was founded to be that there was 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.

After hearing Shri Kunal Chatterji, learned counsel for the appellant/assessee and Ms. Nisha Bagchi, learned standing counsel for the respondent, it was held by the court that, 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 sub-heading 8536.90 and that, therefore, General Rule 3(a) will apply. (Para 30)

With regard to General Rule 3 it was noted that; (i) that as laid down by this Court in Commissioner of Central Excise Vs. Simplex Mills Co. Ltd, 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 had found that ‘relays’ are not classifiable under Chapter Heading 8608, on account of Note 2(f) of Section XVII.

In above regard the court held with refer to 1st question that, 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:

“…. 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.” (Para 38)

With refer to the 2nd question the court held that as a matter of fact the first Appellate Authority held in the penultimate paragraph of its Order as follows:

“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”. (Para 42 and 43)

Concluding the court held: -

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 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. 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 Orders ­in­ Original, the Order of the Appellate Authority and the Order of the CESTAT are 25 set aside. Consequently, the show cause-­cum­-demand notices are also set aside. (Para 46 and 47)

Therefore, there will be no order as to costs.

Aaron Varughese