ORDER
K. Sreedharan, J. (President)
1. The fight in this case is between two wings of the Central Government. Excise Department tried to realise a sum of Rs. 33,80,27,960.00 being the duty amount payable by the Railways by way of duty on the components manufactured by their Diesel Component Works, Patiala, which went into the repair of diesel locomotives. An equal sum has also been imposed as penalty on the Railways, namely, Diesel Component Works, Patiala invoking the provisions under Section 11 AC of the Central Excise Act, 1944 read with Rule 173Q of the Central Excise Rules, 1944. Interest on the above amount at the rate of 20% under Section 11AB of the Act has also been levied.
2. The short facts necessary for the disposal of these appeals are as follows.
3. Diesel Component Works, Patiala, under the Ministry of Railways, is engaged in the activity of reconditioning diesel locomotives falling under Chapter 87 of the Schedule to the Central Excise Tariff Act, 1985. Apart from reconditioning of diesel locomotives, they were manufacturing parts of compression – ignition, internal combustion piston engines, which, according to the Excise Department, fall under sub-headings 8409.00 and 8483.00. The goods manufactured were captively consumed in reconditioning the diesel locomotives to be used by Zonal Railways. The appellant did not obtain Central Excise registration. Twelve show cause notices were issued to the Diesel Component Works, Patiala, hereinafter referred to as the company, requiring them to show cause why the produce manufactured by them should not be classified under various sub-headings in Chapters 84 and 85 of the Central Excise Tariff Act. They were also asked to show cause why scrap generated in the factory should not be subjected to assessment of duty. Detailed objections were filed disputing claims raised in the show cause notices. The main contention was that the component parts manufactured by the appellant company were of Railway locomotives falling under Tariff Heading 86.07 and consequently, eligible to exemption from duty as per Notification No. 197/87-CE dated 28-8-1987. Regarding the scrap, it was contended that the major portion of the scrap generated in the factory was of the unusable parts removed from old and worn out locomotives and are not liable to any duty. All these contentions raised by the company were negatived by the Commissioner in the order-in-original No. 176-187/CE/98 dated 5-3-1999.
4. The main argument advanced by the learned counsel representing the company was that the goods manufactured by the company were classifiable under Chapter 86 of the Central Excise Tariff Act and hence, completely exempt from payment of duty under Notification No. 197/87 dated 28-8-1987 and that the scrap which was now found liable to duty was worn out and damaged parts of locomotives which were being repaired. Consequently, it is argued that the dismantled or removed, damaged parts of the old locomotives can, under no circumstance, be considered as waste and liable to duty under the Central Excise Act, 1944.
5. Section XVI of the Central Excise Tariff Act deals, inter alia, with machinery and mechanical appliances. It deals with the general category of machinery and mechanical appliances. Note 1 to Section XVI specifically takes out articles of Section XVII outside the purview of this Section, by Clause (k). Section XVII deals with special items like vehicles, aircraft, vessels and associated transport equipment. Chapter 86 coming under this Section deals with Railway or Tramway Locomotives, rolling stock and parts thereof; Railway or Tramway track, fixtures and fittings and parts thereof. This Chapter is dealing with specific goods relating to Railway, Tramway.
6. It is common case that the goods manufactured by the company are of Railway Locomotives. It is nobody’s case that any parts manufactured by the appellant company, with which we are concerned in these appeals are usable in a manner unconnected with Railway Locomotive. Even in such a situation, the Excise Department took the stand that the goods manufactured by the appellant company are not parts of locomotives but they are parts of machines and apparatuses falling under Chapter Heading 84 or 85. This approach was made on the basis of Note 2(e). For a proper understanding of that Note, we read the same:
“2. The expressions “parts” and “parts and accessories” do not apply to the following articles, whether or not they are identifiable as for the goods of this Section:-
(e) Machines and apparatus of heading Nos. 84.01 to 84.79, and parts thereof; articles of heading No. 84.81 or 84.82 and provided they constitute integral parts of engines or motors, articles of heading No. 84.83.”
The department’s view is that the various parts found dutiable in this proceeding are parts of internal combustion engines. Internal combustion engines are independent of locomotive. Consequently, those parts of machines fall under Heading 84 or 85.
6. The Commissioner in the impugned order took note of the meaning or locomotive given in the Explanatory Notes to HSN. He quoted the following from page 1414 of first edition of HSN:-
“Diesel locomotives are of three types, namely, diesel electric locomotive, diesel hydraulic locomotive and diesel mechanical locomotives. Diesel electric locomotive (which is relevant in this case) has been defined as locomotive in which diesel engine drives a generator to produce electricity which in turn powers traction motors driving the wheels.”
He further noted the meaning of locomotive from Encyclopaedia Britannica as a vehicle containing the power unit used on rail roads. From the HSN and Encyclopaedia Britannica referred to by the Commissioner, it is evident that locomotive is an engine which drives the generator to produce electricity, which in turn powers traction motors. The engine, in other words, is main part of the locomotive. The engine is the main part which gives locomation. After analysing this position, the Commissioner came to the following conclusion :-
“Apparently, from the above it envisages that engine and locomotive are two distinct and different commodities and also have different uses. Hence locomotive is something more than the engine as is evident from the definition of the diesel electric locomotives given under heading No. 86.02 of the Explanatory Notes of HSN. Even I find from the explanatory notes of HSN given under heading 84.08 as detailed above that engines of heading 84.08 are suitable for use, of locomotives and other vehicles. This shows that the engine used in the locomotives is classifiable under heading No. 84.08 of the said schedule. Once it is so, then the parts of such engines would also be classifiable under heading 84.09 by virtue of section note 2(e) of the Section XVII. In wake of this I am of the opinion that the parts manufactured by the noticee have to be held classifiable under Chapter 84 and become chargeable to duty as not covered under notification No. 197/87-CE dated 28-8-87.”
Even after coming to this conclusion, he found the parts of the engine to fall under Chapter Headings 84 and 85 because of Section Note 2(e) to Section XVII. After referring to Note 2, learned Commissioner failed to read Note 3 to that Section. That Note reads: –
“3. 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.”
In relation to Chapter Note 3, what HSN states is:
“(B) Criterion of sole or principal use.
(1) Parts and accessories classifiable both in Section XVII and in another Section.
Under Section Note 3, parts and accessories which are not suitable for use solely or principally with the articles of Chapters 86 to 88 are excluded from those Chapters.
The effect of Note 3 is therefore that when a part or accessory can fall in one or more other Sections as well as in Section XVII, its final classification is determined by its principal use. Thus the steering gear, braking systems, roadwheels, mudguards, etc. used on many of the mobile machines falling in Chapter 84 are virtually identical with those used on the lorries of Chapter 87, and since their principal use is with lorries, such parts and accessories are classified in this Section.”
So, this Section Note of HSN makes it clear that final classification is determined by its principal use. The principal use of the components manufactured by the appellant company is admittedly as parts of locomotive.
7. As stated earlier, all assessable parts now found dutiable by the Commissioner in the impugned order are essential parts of machine used in the locomotive. Are not those parts to be described as parts of locomotive? A similar issue came up for consideration before this Tribunal in the decision reported in Bajaj Auto Ltd. v. Collector of Central Excise, Pune, 1994 (74) E.L.T. 599 where the question, unspecific parts of IC engines used in motor vehicles are parts of motor vehicles came up for consideration. The Tribunal gave the answer in the affirmative. These parts of 1C engines which were the main parts in the locomotive should also be termed as part of the locomotive and not as IC engines coming under the general category. Central Board of Excise and Customs had to consider the issue as to whether a radiator assembly supplied to Indian Railways is to be classified under sub-heading 8607.00 or otherwise. The Board observed that product radiator assembly is designed according to the specifications of the Indian Railways and is for use solely and principally with locomotives of Heading 8601 and 8602. It is clarified that the radiator assembly is not to be classified as parts of IC engines under Heading 8409. This understanding of the Central Board of Excise and Customs is discernible from circular No. 16/90 dated 11-6-1990, which still holds good. If radiator assembly manufactured for Railways for being fitted in locomotives is to be classified under Heading 8607, we do not find any justification in the department taking a view that integral parts of IC engines which form locomotive are outside Chapter Heading 86.
8. In the light of the above discussion, we come to the conclusion that the various components manufactured by the appellant company are classifiable solely under Chapter Heading 86. The contrary view taken by the Commissioner is clearly erroneous. The Notification No. 197/87-CE gives complete exemption to the goods manufactured by the appellant company. So, the Excise Department clearly mistook itself in imposing duty on the goods manufactured. The duty demand and the penalty imposed are quashed.
9. Coming to the question of duty liability on the scrap, two types of scraps are generated in the factory of the appellant. The first category belongs to metal waste and scrap generated from the manufacture or mechanical working of metal and metal goods used in the factory. It is conceded before us that such scrap is liable to duty. Major quantity of the scrap and waste is generated in the course of dismantling of old and damaged locomotives. In the impugned order, Commissioner observed:
“No dispute is involved in respect of the scrap and waste originated during the course of manufacture of parts but the dispute only restricts to the scrap and waste originated in the course of the dismantling of the locomotives. Admittedly, the scrap and waste originated during the course of dismantling of the locomotives is different and distinct item from the locomotives. Such scrap of iron and steel are classifiable under heading No. 72.04 of said Schedule and that of aluminium is classifiable under heading No. 76.02. In view of this I am of the opinion that the waste originated during the course of dismantling of the locomotive is also excisable goods and the process of dismantling amounts to manufacture.”
The Commissioner proceeded to levy duty on such quantity of scrap and waste relying on the decision of the Calcutta High Court in M/s. S.S. Jain & Co. reported in 1986 (25) E.L.T. 14. Commissioner has erred in placing reliance on the decision of the Calcutta High Court to support his stand that the scrap and waste generated during the dismantling of old locomotives is also liable to duty. The Calcutta High Court was relying on the provisions contained in Heading 72 onwards of the Central Excise Tariff Act which stood at that time in relation to waste and scrap generated by breaking of ships and boats and other floating structures. So the said decision by the Calcutta High Court cannot have any application to the waste generated in the appellant’s factory. Consequently, the said decision of the Calcutta High Court or Note 7 to Section XV of the Central Excise Tariff Act cannot have any application to the facts on hand. Chapter Note 7 deals with waste and scrap generated in the process of breaking of ships and boats and other floating structures. Breaking of locomotives will not fall under any of these categories covered by Chapter Note 7 to Chapter XV. So, the duty imposed on scrap requires modification. The entire scrap and waste originated in the course of dismantling of the locomotives must be excluded from the purview of assessable waste. That much quantity of waste which is generated from the manufacture or mechanical working metals or metals goods can be subjected to payment of duty. The Commissioner is directed to assess the quantity of waste generated in the process of manufacture and to levy duty on that quantity in accordance with law.
10. Order-in-original dated 5-3-1999 impugned in these appeals is quashed in its entirety and the matter is remitted back to the Commissioner to find out the duty leviable on the actual quantity of scrap and waste generated in the course of manufacture, of mechanical working of metals or metals goods.
11. The appeals are disposed of in the above terms.