TMI Blog1986 (8) TMI 166X X X X Extracts X X X X X X X X Extracts X X X X ..... er, the Collector has held that in the guise of bringing the defective compressors to their factory and clearing them after repairs/reconditioning/ remaking in terms of Rule 173H of the Central Excise Rules, 1944, the appellants used the returned compressors merely for salvaging a few serviceable parts therefrom which they utilised in the manufacture of new compressors and that they cleared those new compressors without payment of duty by engraving on the new compressors the serial number of the old compressors, thus throwing dust into the eyes of the departmental officers and in the process evading the heavy Central Excise Duty (100%) on the new compressors. The Collector has demanded under Rule 9(2) Central Excise Duty of Rs. 3,07,35,200/- on 29.4.1994 compressors so removed during the period from 1-4-1974 to 31.12. 1976 and has imposed penalty of an equal amount on the appellants under Rule 173Q. 3. During the hearing before us, the learned Joint Chief Departmental Representative reiterated the charge as held to have been established by the Collector and argued that merely by embossing the serial number of the old defective compressors on fresh compressors, the appellants co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to the Appellate Collector in the following terms: 2. The case, according to the appellants, is that 15 compressors were originally cleared from their godown without payment of duty on their internal gate passes for assembly into water coolers but after finding them defective, they were returned to the repair shop on 14-9-1976 for rectification and were duly entered in Form V Register, that during the later part of 1976 they had an export order of 4000 water coolers and therefore, the water cooler department in their anxiety to get back the 15 compressors returned by them on 14.9.76, did not wait to dismantle or repair them but instead picked up 15 other compressor which were already dismantled and reassembled and they were supplied to the water cooler department after assigning the same serial numbers to them. They have contended that such compressors were only reassembled ones and not new and therefore, there should be no question of being entered in the R.G.I but they were duly accounted for in the Form V Register." On consideration of the matter, the Appellate Collector concluded as under: The appellants appear to have issued 15 other compressors of the same type whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the factory or warehouse without payment of duty subject to such conditions as may be specified by the Collector." (The portions underlined above were added by the amendment dated 26.6.1976). We do not agree with the appellants that irrespective of whether the activity amounted to manufacture or not, so long as the activity was one of repair/reconditioning/ remaking, the benefit of the Rule would be available. On a perusal and harmonious construction of the clauses of Rule 173(H), it would appear that to avail of the benefit of the said rule the process of remaking" should be such that it falls short of re-manufacture. A contention to the contrary ignores Clause (2) of the said Rule altogether" [1983 E.L.T. 1927 (CEGAT) - Sriram Pistons and Rings Ltd., Ghaziabad v. Collector of Central Excise, Meerut, paragraph 16(a)]. Though the stipulation that the activity of repair/reconditioning/remaking should not amount to manufacture was specifically put in sub-rule (2) of Rule 173(H) with effect from 26.6.1976, the said stipulation was implied even earlier when Rule 173(H) is read together with the charging provision in Section 3 of the Act and the two are interpreted harmoniously ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s applicable in the Central Excises Act. The first of these two judgments [(1973) 2 S.C.R. 257 - Allenburry Engineers Private Ltd. v. Ramakrishna Dalmia others] was by a Bench of five Supreme Court judges. In this case, certain premises were used for storage, reconditioning and resale of army disposal vehicles. The reconditioning activity was quite of an extensive nature and involved replacement of parts, including bodies of the vehicles. Some of the new spare parts required were manufactured in the premises. Applying the same popular meaning of manufacture as applied to the Central Excises Act - bringing into existence a commercially distinct article - the Supreme Court held that the premises were not used for manufacturing purposes and that the reconditioning process, including manufacture of new spare parts, carried on in the premises was one of repairs which itself was incidental to the dominant activity of storage and resale of vehicles undertaken in the premises. We quote certain relevant portions from this Constitution Bench judgment of the Supreme Court: In South Bihar Sugar Mills v. Union of India the Act with which the Court was concerned was the Central Excises an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and not for manufacturing purposes. Manufacturing of spare parts would then be merely incidental to the main purpose of disposal of these vehicles as without repairing or reconditioning them, such disposal could hardly have been possible. In our opinion, the appellants failed to establish that the dominant purpose of the lease was manufacturing purpose........................................................................" The second judgment [1979 E.L.T. (J 593) - P.C. Cheriyan v. Mst. Barfi Devi] was by a Bench of three Supreme Court judges. Reiterating that The broad test for determining whether a process is a manufacturing process, is whether it brings out a complete transformation for the old components so as to produce a commercially different article or commodity , the Supreme Court held that the premises used for retreading of tyres could not be held to have been used for manufacturing purposes. However, in paragraph 11 of this judgment, the Supreme Court added :- In some enactments, for instance in the Excise Act, the term manufacture" has been given an extended meaning by including in it repairs , also". 8. It is apparent that when the Government of India and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommon, because of the batch operation, that original components of one defective compressor would go into the re-assembly of another defective compressor, of course, of the same model and specification. On the accounting side, the appellants used to send an intimation to the authorities when defective compressors were received in their factory. They maintained a register of repairs in Form V prescribed by the department. At the time of re-issuing, separate series of gate passes were made out for clearance of the reassembled compressors. In the monthly RT 12 returns sent to the authorities, a separate note was made about the repaired compressors cleared in the factory. 10. The above procedure had been evolved between the appellants and the department over the years since the inception of the appellants factory in 1964. During 1969, the Collector proposed certain amendments in the procedure. Inter alia, he wanted to amend the proforma of the register in Form V making provision for noting the particulars of parts required at the time of receipt of the compressors instead of filling in this information after servicing was completed. He also wanted to prescribe a job card for eac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g of the compressors was nothing short of the manufacturing of compressors by assembling salvaged parts from the defective compressors received from places outside the factory of the assessee, with certain other parts, which (other parts) could be new or the salvaged ones . Let us examine each of these two grounds. 12. Taking the point of identity first, the Collector has relied on the following sentence occurring in the appellants letter dated 29.12.1976:- The defective compressors received for repairs cannot be identified after they are dismantled. Before dismantled, section, however, records the particulars of the defective compressors received for repairs. This section also maintains records of the defective components sent to component shops for reconditioning . From this, the Collector concluded as under:- It has to be held in view of the foregoing that S.R.I, had in fact manufactured the aforesaid 29,494, compressors, and that they had not merely repaired the said compressors. It has also to be held that defective compressors, brought back into the factory were utilised by S.R.I. solely for the purpose of salvaging the serviceable parts out of the defective comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d be cleared in the same form in which it had been received into the factory. In other words, the question of identity or that of the same form is relevant only at the time of re-issuing of the repaired article. 13. That brings us now to the question as to what is the meaning of the same form . To put it in more precise terms, in the context of the case before us, if the parts taken out of one defective compressor go into the reassembly of another defective compressor of the same model and specification, because of the large scale batch operation, can it be said that identity of both the defective compressors has been destroyed and the reassembled unit ceased to be in the same form as the defective compressors received into the factory. On this issue of identity and form, guidance is available from a judgment of the Bombay High Court reported at 1981 E.L.T. 676 (Bom.) - Century Spinning and Manufacture Company Ltd. v. Union of India. In this judgment Customs Notification No.58/61 was in focus. This notification provided for concessional duty for articles which were re-imported into India after having been exported for repairs. The petitioners in that case exported old unservicea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss of identity. Two compressors of identical model and specification would be having identical parts. It is hardly material if serviceable parts of one, on reassembly, go into the other and vice versa. We saw in paragraph 6 above that the definition of repair contemplated renovating or mending by replacement or refixing parts. If there is no loss of identity when the original defective parts of a compressor are replaced by new spare parts, how could there be loss of identity if serviceable parts of one defective compressor went into reassembly of the other identical defective compressor and vice versa. We would go even further and say that even if it could be said that a repaired compressor has lost its identity because of addition of new part(s) or inter-mixing of old parts, as in this case, so long as the activity remains one of repair and no commercially different article comes into existence, rule 173H would still be admissible. 14. We have no doubt in our mind that this is also what the Government of India and the Collector meant when they said that if the returned goods are re-issued in the same form , it would not amount to manufacture . Whether there is manufacture or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt case. We do not agree with him. In Sriram Pistons case, the Tribunal held that the returned pistons were nothing but scrap, that they were, in fact, scrapped and new pistons made therefrom and that, therefore, it was a case of conversion of scrap into a different and distinct commodity known as pistons. In the case before us, as we have already stated, there is no evidence to show that the returned compressors are just scrap or that they are, in fact, scrapped. In the Lathia s case, the Tribunal held that the metal roller without coating of rubber, which came in could not be said to be the same goods as a rubber coated roller which went out and hence the activity of rubber coating brought into existence a commercially new product. The Calcutta High Court case related to dismantling of ships. In that case, a ship was dismantled into scraps of various types and, therefore, the Hon ble High Court held that one commodity was converted into another commodity amounting to manufacture. Unlike these three cases, what happens in the case before us is that defective compressors come in and equal number of repaired compressors of the same model and specification go out. Hence, the cases a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 540 550 400 It appears from the above that the repair charges are invariably more than 5096 of the value of fresh compressor, and in some cases even exceeding the value of fresh compressor and such charges can hardly be called repair charges. The repair charges appear to be actual value of fresh compressors with a suitable reduction in consideration of this old, serviceable components salvaged from the returned compressors and used in the assembly." 18. In their reply to the show cause notice, the appellants explained the above two grounds to the Collector as under:- In paragraph (3) of the show cause notice, it has been stated that the officers observed from scrap transfer notes that rejected components were more in quantity than those found to be usable. Reliance has been placed on two components viz., motor housings and bottom shells. 8. It has been stated that whereas the rejections of motor housing and bottom shells were 6423 and 6075 respectively the number of compressors received for repairs was 10,977. At this stage, we beg to submit that the department itself has specified in the SRP Handbook that the principal raw materials which go into the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the so called high repair charges fixed by the company in comparison with the value of compressors of fresh manufacture. We submit that 60% of the compressors received by us for repairs are within the warranty period and no charges are realised for repairing these compressors (Annexure-IV). The repairs in these cases are done free of cost. It is only in respect of the remaining 40% which form a negligible percentage of the total market population of compressors manufactured by us, that the repair charges mentioned in paragraph 4 of the show cause notice have been fixed. It will be appreciated that compressors are hermetically sealed and are known in the market as sealed units. Each of these has to be out open irrespective of the value of the compressor or of size or model. Thereafter each part has to be checked, rectified or replaced. The amount of labour involved, besides the cost of repairs and replacements, is almost the same in all cases. The charges for repairs, which appear to be more than the value of the compressor in one or two cases, have been deliberately kept high as the models in question are slow moving. Another reason for the higher charges is to discourage the rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellants say that there is nothing at all in these letters to warrant the conclusion arrived at by the Collector. The only specific portion quoted by the Collector is from the appellants letter dated 29-12-76 where they have stated that the defective compressors received for repairs cannot be identified after they are dismantled . This particular portion has already been discussed by us in detail in paragraph 12 above and we have held that there was nothing objectionable in it for the simple reason that after dismantling what is visible are various parts of the compressor only and not the compressor itself and that the material thing is that after repairs the parts can be put back in the form of the original compressor. On the available evidence, we have, therefore, to agree with the appellants, so far as the substantive issue is concerned, that their activity was one of repair/reconditioning/remaking which did not amount to manufacture of any new article and hence they were entitled to the benefit of Rule 173H. If the authorities have a feeling that what is really happening is not what is made out to be, they would have to investigate the matter thoroughly and substantiate ..... X X X X Extracts X X X X X X X X Extracts X X X X
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