Pioneer Embroideries Ltd. v. Commissioner Of Customs, Mumbai

[Order per : C. Satapathy, Member (T)]. - These appeals were heard on two days on 6-5-2004 and 20-5-2004 when the learned Advocates Shri V.S. Nankani and Shri Naresh Thakkar respectively appeared on behalf of the appellants on these days. Shri K.M. Mondal, learned Consultant appeared on both dates on behalf of the Revenue. We place on record our appreciation for the painstaking efforts by both the learned Advocates and the learned Consultant in taking us through all aspects of the case and bringing to our notice several case laws having a bearing on these appeals.

2. The main issue in these appeals is whether the impugned imported goods can be classified as ‘computerized embroidery machine’ and therefore, can be extended the exemption under Notification No. 11/97-Cus., dated 1-3-1997.

3. Before we deal with the issue of classification and eligibility to duty exemption, we first take up the plea advanced by the learned Advocates for remand of the case back to the adjudicating Commissioner on the ground that he has taken into account only the minority report by two members of the panel of experts ignoring the majority report of four members of the panel of experts. The learned Consultant Shri Mondal opposes the plea of remand on the ground that it would serve no purpose except causing delay.

4. We have given our due consideration to the request for remand. We find it very strange that different members of the panel of experts constituted to examine the machinery under import have given two separate reports on two different dates. We also find it strange that the adjudicating Commissioner has dealt with the minority report but has not mentioned the majority report in his adjudication order. However, we find that there is essentially no difference in both the reports in so far as they relate to physical examination of various machinery items under import. The main difference is in the opinion given in the two reports regarding classification of the imported machinery and eligibility to exemption. It is well settled that the question of classification and the question of entitlement to a particular exemption are questions of law, which was in the jurisdiction of the adjudicating Commissioner to decide upon and which, this Tribunal is fully competent to further hear on appeal. It was not for the members of the panel of the experts to pronounce on such legal questions. It was the job of the members of panel of experts to identify the goods under import and to provide a proper description of the same and assist the adjudicating Commissioner on such other questions of facts relating to the imported machinery. We find that there is no difference as regards the facts of the import and the identification of various machinery items in the two reports. As regards the questions of law relating to classification and entitlement to exemption, the adjudicating Commissioner was fully competent to take a view on the same and in appeal, we can decide whether the view taken by him is correct or not. It is, therefore, our considered opinion that no purpose will be served by remanding the matter to the adjudicating Commissioner merely on the ground that he has not considered the majority report in his adjudication order since we are of the opinion that difference in the two reports is merely on the legal questions of classification and grant of exemption, which was not in the domain of the panel of experts to opine on and that there is no difference in both the reports as far as identification of the goods and all other questions of facts are considered.

5. We now proceed to deal with the main question as to whether the goods under import can be considered as ‘computerized embroidery machine’ or not. Grant of exemption under Notification No. 11/97-Cus., dated 1-3-1997 is automatic if the goods are held to be computerized embroidery machine and hence the second question is clearly dependent on resolution of the question of classification.

6. We have perused the related import documents including the Bills of Entry, invoices, packing list as well as physical examination reports by the panel of experts and the statements recorded. There is no dispute that the appellants entered into a contract with M/s. Texchemie, Hong Kong for purchase of 12 sets of second hand embroidery machines along with the essential auxiliary machines. The said machines were exported by M/s. Moojin International Corporation, Korea. M/s. Moojin agreed to additionally ship 12 Jacquard Control Device Reading System, one Reading System and one Card Pressed System. These goods were imported in several containers and packed separately for which a Bill of Entry was filed describing the goods as used/second-hand computerized embroidery machines in dismantled condition for shipment claiming benefit of exemption under Notification No. 11/97-Cus., dated 1-3-1997. It is also not in dispute that after import, the impugned textile machines have been fitted with the Jacquard Control Devices in the premises of the appellants and are functioning as computerized embroidery machines. The adjudicating Commissioner has determined that at the point of import, the impugned machines were not computerized and that the appellants are not therefore eligible to claim exemption applicable to computerized embroidery machines. It is the claim of the appellants that even at the point of import, the imported machines are to be considered as computerized embroidery machines eligible for the exemption under the said Notification No. 11/97-Cus. In support of their argument, the learned Advocates for the appellants have cited the following case laws :-

(1)     Tata Mills Ltd. v. The Union of India - (Bom.) :-

If the petitioner has produced reports and opinions of technical experts and consultants in support of his claim, which were not only relevant to the issue involved but the correctness of which had not been disputed by the Department, it is obligatory on the revisionary authority to state the reasons as to why he ignored them for taking a decision on the revision petition.

(2)     A.K. Impex v. Union of India - (Mad.) :-

It is to be noted that the horticulturist who gave the opinion was not the person who was consulted by the importer; but it was only the Customs Department which consulted him. Having consulted the horticulturist and having obtained the opinion that the goods were ‘seeds’, the Revenue is estopped from claiming that the goods were not ‘seeds’. But they were bound by the opinion of the horticulturist who was an expert.

(3)     Inter Continental (India) v. Union of India - (Guj.) :-

Expert opinion - Technical opinion tendered by technically qualified person - Contrary stand not to be taken unless and until such technical opinion is displaced by specific and cogent evidence in the form of another technical opinion.

(4) Flat Products Equipments (I) Ltd. v. C.C.E., Mumbai-III - (Tribunal) :-

Parts of machine - Erection at site - Parts classifiable as complete machine if it can be established that parts are removed as such so as to constitute a complete machine even if such parts are not removed or unassembled together - Parts of rolling mills and galvanising lines removed for erection at site into rolling mills and galvanising lines assessable to duty under sub-headings 8455.10 and 8479.10 of Central Excise Tariff Act, 1985 as complete machine and not under sub-heading for parts.

(5)     Vinar Systems Ltd. v. CC, Calcutta-II - (Tri. - Kolkata) :-

Material Handling Equipments (machines) - Cleared in CKD condition because of impossibility and impracticability to clear complete machines in fully finished form - Parts cleared to form a complete machine in CKD condition - Classifiable under Heading 84.28 of Customs Tariff Act, 1975 as complete machines and not as parts of the machine under Heading 84.31 ibid.

The learned consultant appearing for the Revenue, on the other hand, relies on the following decisions :-

(1)     New India Industries Ltd. v. CC, Bombay - (Tri.) :-

Classification of goods (Customs) - Goods to be assessed in the condition in which they are imported.

(2)     Rajasthan Spg. and Wvg. Mills Ltd. v. C.C.E., Jaipur - (S.C.) :-

Exemption notification construable strictly - Liberal construction which enlarges the term and scope of the notification not permissible nor extended meaning assignable to exempted item.

(3)     Paramount Centrispun Castings Ltd. v. C.C.E., Nagpur - (Tribunal) :-

It is well settled that goods have to be assessed on the basis of their form at the time of their clearance.

(4)     C.C.E., Nagpur v. Paramount Centrispun Castings Ltd. - (S.C.) :-

The Supreme Court Bench comprising of Hon’ble Mr. Justice J.S. Verma, Hon’ble Mrs. Justice Sujata V. Manohar and Hon’ble Justice G.B. Pattanaik on 3-4-1996 has dismissed the Civil Appeal Nos. 8215-16 of 1995 [ (S.C.)] filed by Collector of Central Excise, Nagpur against the CEGAT Order No. E/133-34/95-B, dated 24-3-1995 and reported in (Tribunal) (Paramount Centrispun Casting Ltd. v. Collector) referred to above.

(5)     Hindusthan Motors Ltd. v. C.C.E., Calcutta-II - (Tri. - Kolkata) :-

Classification of goods - Condition of goods in which they leave manufacturer’s factory decides the classification and not the condition if they would have been completed at assessee’s factory.

(6)     Vardhman Acrylics Ltd. v. CC, Mumbai - (Tri. -Del.) :-

Classification of goods - Product is normally classified in the form it is presented for clearance - Use of the goods is not determinant for classification.

(7) C.C.E., Hyderabad-III v. Sanghi Polyesters Limited - (Tri. - Bang.) :-

Classification of goods - Goods to be dealt with as they are at the time of classification and not what they could become after further processing.

(8)     B.R. Industrial Trading Co. v. CC, Mumbai - (Tri.- Mumbai) :-

Material in running length not treatable as parts - Wave guide to be assessed in the form in which it is presented for assessment i.e. running length of 20 metres and not as component/part.

(9)     Goodwill Electronics v. CC, Mumbai - (Tri.-Mumbai) :-

Magnet, ceramic magnet materials - Misdeclaration of weight and country of origin alleged - Revenue contended that such goods, imported in a de-magnetized condition for easy transportation and storage, are magnets - Goods not magnetized, hence, not hard ferrite ring magnet - Anti-dumping duty not leviable.

7. In Queensland Alumina Limited v. Chief Executive Officer of Customs - 2003 (AATA 290), Dr. E.K. Christie, Member of the Australian Administrative Appeals Tribunal has succinctly described how classification is to be done under a harmonized system based Tariff. We reproduce his observations below :-

”It is well-established in common law that classifying goods involves a two stage process. The first task is to identify the goods for what they are, as an objective wharfside task. The second task, once the goods have been objectively identified, is to then classify the said goods by deciding which tariff headings describe the goods and applying the relevant interpretative rules and notes - see Chinese Food and Wine Supplies Pty. Ltd. v. Collector of Customs (Vic) (1987) 72 ALR 591 ; Re. Gissing and Collector of Customs (1977) 14 ALR 555. In addition, the authorities make it clear that, in determining what is the essential character of goods, it is the state or condition of the goods at the time of importation that is the determining factor and that it is wrong to classify goods - or to determine their essential character, by reference to the purpose of the importer or of the purchaser. Regard must be had to the characteristics of the goods themselves, as they would present themselves to an informed observer : see Times Consultants Pty. Ltd. v. Collector of Customs (Qld) (1987) 76 ALR 313 at 327.”

We also re-produce below the General Interpretative Rule (GIR) 2(a) which has been referred to by both sides in the course of their arguments :-

“Any reference in a heading to an article shall be taken to include a reference to that article incomplete or unfinished, provided that, as presented, the incomplete or unfinished article has the essential character of the complete or finished article. It shall also be taken to include a reference to that article complete or finished (or falling to be classified as complete or finished by virtue of this rule), presented unassembled or disassembled.”

8. It is clear from the facts of the case that old and used textile embroidery machines of 1976/1977 make have been procured from one source and new Jacquard Control Devices have been procured from another source and then these have been shipped together in one consignment but separately packed. It is not any one’s case that these Jacquard Control Devices were ever installed on the old textile embroidery machines before importation or that they have been dis-mantled after such installation. The facts are clear that the Jacquard Control Devices have been installed on the textile machines after importation and customs clearance at the premises of the appellants and only thereafter, the said machines have become computerized textile machines.

9. Based on these facts, it is not difficult to identify the goods for what they are. As noted in the aforecited decision of the Australian Tribunal, the classification of the goods has to be done with reference to the state or condition of the goods at the time of importation and not by reference to the purpose of the importer or of the purchaser. The Australian Tribunal further goes on to say that regard must be had to the characteristics of the goods themselves as they would present themselves to an informed observer. The learned Consultant for Revenue has also emphasized the word ‘as presented’ in GIR 2(a). We have no doubt in our mind that as presented the goods were a collection of old and used textile embroidery machines which were yet to be computerized along with new Jacquard Control Devices. As such, the machines were not computerized as presented at the time of importation but they have been subsequently computerized after importation at the premises of the appellants. The classification and essential character of the goods under import has to be determined with reference to the state or condition of the goods at the time of importation and not with reference to the purpose for which the goods have been imported or the use to which such goods are put to after importation.

10. The 12 embroidery machines were old and were used as mechanical embroidery machines for more than 20 years by the supplier M/s. Moojin and these machines were not fitted with any computer devices till the time of importation. The 12 brand new Jacquard Control Devices were on the other hand manufactured and supplied by M/s. Micro Engineering Co. Ltd. These have been fitted only subsequent to import and clearance from the customs to make the mechanical embroidery machines computerized. It is significant that Shri A. K. Kulkarni, Chief Engineer working with the appellants has in his statement before the customs has categorically stated that he had seen the imported machines prior to import in Korea and that these were mechanical machines and were not re-conditioned. He has also stated that these machines have been imported with 5,000 pieces/rolls of design cards which are used only in mechanical machines, not in computerized machines.

11. At the time of import, the consignment is thus seen to be consisting of the 12 old and used mechanical embroidery machines along with 12 brand new Jacquard Control Devices. At no point of time before the importation, the new Jacquard Control Devices have been installed on the old mechanical embroidery machines. As such, these goods can not be called computerized embroidery machines in dis-assembled condition as declared. A plea has been made on behalf of the appellants in the course of hearing to consider the goods as computerized embroidery machines in unassembled condition. In this context we have examined the text of GIR 2(a). The first part of this rule says that any reference in a heading to an article shall be taken to include a reference to that article incomplete or unfinished, provided that, as presented, the incomplete or finished article has the essential character of the complete or finished article. The second part of the rule says that it shall also be taken to include a reference to that article complete or finished, presented unassembled or disassembled. We are concerned in this case with the second part of this rule. We have already ruled out the possibility of classifying the imported goods as disassembled computerized embroidery machines as there was no prior assembly or disassembly before import. Next point to be considered is whether the goods as presented can be considered as computerized embroidery machines, unassembled. The H.S. Explanatory Note to Rule 2(a) reads as follows :-

“1.     The second part of Rule 2(a) provides that complete or finished articles presented unassembled or disassembled are to be classified in the same headings as the assembled article. When goods are so presented, it is usually for reasons such as requirements or convenience of packing, handling or transport.

2.        This Rule also applies to incomplete or unfinished articles presented unassembled or disassembled provided that they are to be treated as complete or finished articles by virtue of the first part of this Rule.

3.        For the purposes of this Rule, “articles presented unassembled or disassembled’’ means articles the components of which are to be assembled either by means of fixing devices (screws, nuts, bolts, etc.) or by riveting or welding, for example, provided only assembly operations are involved.

No account is to be taken in that regard of the complexity of the assembly method. However, the components shall not be subjected to any further working operation for completion into the finished state.

Unassembled components of an article which are in excess of the number required for that article when complete are to be classified separately.

4         Cases covered by this Rule are cited in the General Explanatory Notes to Sections or Chapters (e.g. Section XVI and Chapters 44, 86, 87 and 89).

5.        In view of the scope of the headings of Sections I to VI, this part of the Rule does not normally apply to goods of these Sections.”

The General Explanatory Note to Section XVI reads as under :-

“For convenience of transport many machines and apparatus are transported in an unassembled state. Although in effect the goods are then a collection of parts, they are classified as being the machine in question and not in any separate heading for parts. The same applies to an incomplete machine having the features of the complete machine, presented unassembled (see also in this connection the General Explanatory Notes to Chapters 84 and 85). However, unassembled components in excess of the number required for a complete machine or for an incomplete machine having the characteristics of a complete machine, are classified in their own appropriate heading.”

A perusal of GIR 2(a) and the related Explanatory Notes makes it clear that when a complete or finished article is presented unassembled, the same has to be classified in the heading as applicable to the assembled article. It also further indicates that the article must be complete or finished but presentation in unassembled condition is only for reasons such as requirements or convenience of packing, handling or transport. It is also clear that articles presented unassembled or disassembled means articles the components of which are to be assembled either by means of fixing devices (screws, nuts, bolts, etc.) or by riveting or welding and further that the components shall not be subjected to any further working operation for completion into the finished state.

12. By the very nature of things, in the instant case, we have the old and used mechanical embroidery machines with 5,000 pieces/rolls of design cards which are only used in mechanical machines and not in computerized machines and then we have the brand new Jacquard Control Devices manufactured and supplied from another source merely shipped along with the old machines in separate packings. It is not as if complete computerized embroidery machines were manufactured and it was shipped in unassembled condition for convenience of packing, handling or transport. What has been shipped is a set of over twenty years old and used mechanical embroidery machines along with brand new Jacquard Control Devices. Hence, as presented, in our view, they do not merit to be classified as complete computerized embroidery machines. It is not material that subsequently after importation and clearance to the appellants premises some of the un-usable parts required for mechanical working of the old embroidery machines have been removed and the brand new Jacquard Control Devices have been integrated to produce new entities namely computerized embroidery machines. Such integration, of the imported items obtained from different sources, after importation and subsequent use can not have a bearing on the classification which has to be done at the point of import looking at the goods as presented at that time. The items under import have to be, therefore, classified separately and not as computerized embroidery machines.

13. In view of our findings as above, we are of the view that the appellants are not entitled to exemption under Notification No. 11/97, dated 1-3-1997 which applies to only computerized embroidery machines.

14. Had the appellants succeeded in getting the imported goods classified as computerized embroidery machines under a single heading, then the issue of valuation would not have been relevant since the total value declared by them has not been disputed. However, in view of our finding that the old mechanical embroidery machines and the new Jacquard Control Devices etc. are to be separately classified, we are of the view that the break-up of valuation adopted by the Adjudicating Commissioner on the basis of the documents submitted by the appellants themselves requires to be upheld for the purpose of charging duty separately on different goods. We order accordingly.

15. As regards the penalty, we are of the view that in the circumstances of the case including the fact of detailed examination by the panel of experts before allowing provisional clearance, the same is not justified. No doubt, the appellants had not declared the Jacquard Control Devices in the import documents but then, they were of the impression that the entire set of goods merited classification as a single article i.e. computerized embroidery machines. Even the majority of the panel of experts entertained such a view, though incorrectly as held by us. Considering the complexity of the classification issue involved, we think it is a fit case to set aside the penalties, by extending the benefit of doubt to the appellants.

16. The appeals are thus rejected as far as the classification and valuation issues are concerned but are partly allowed by setting aside the penalties.