ORDER
R.K. Abichandani, J. (President)
1. These appeals are placed before the Larger Bench because of a conflict of opinion on the question whether photocopiers are capital goods or consumer goods and whether the import of old and used (second-hand) photocopiers are allowed freely. The said question has been referred by order dated 15.4.2005 in view of divergent views of various Benches of this Tribunal.
2. The appellant of all these appeals were importing various models of used photocopiers. The goods were examined and found to be as per the declarations. Show cause notices come to be issued under Section 124 of the Customs Act on these appellants on the basis that in view of the clarifications issued in the Circular mentioned in the show cause notices, used photocopiers were not importable under paragraph 2.33 of the Hand Book of Procedure to Foreign Trade Policy and they were restricted under para 2.17. It was alleged that since the goods were so restricted for import and the importers did not produce valid import licences, they ere liable to be confiscated under Section 111(d) of the said Act read with para 2.17 of the Foreign Trade Policy and that the importers were liable to penalty under Section 112 of the said Act.
3. In all thee appeals, the concerned Commissioners, applying the Policy Circular No. 16(RE-2003)/2002-07 dated 29.9.2003, Policy Circular No. 19(RE-2003)/2002-07 dated 11.11.2003, and Policy Circular No. 20(2004-2009) dated 23.2.2005, came to the conclusion that used photocopying machines cannot be imported without licence under para 2.33 of the hand book and confiscated the second-hand photocopying machines covered under various Bills of Entry under Section 111(d) of the said Act, declared the assessable value after taking into consideration the contemporary import price available and gave an option to redeem the same on payment of fine and also imposed penalty under the orders impugned.
4. Before we embark upon the discussion whether the second-hand photocopiers were capital goods and not consumer goods and whether they were allowed to be imported freely, we would reproduce the relevant provisions of Foreign Trade Policy and the Hand-book which will have a bearing on the present controversy.
5. Relevant provisions of Foreign Trade Policy of the relevant period i.e. 2004-2009 :
2.1 Exports and Imports free unless regulated
Exports and Imports shall be free, except in cases where they are regulated by the provisions of this Policy or any other law for the time being in force. The item wise export and import policy shall be, as specified in ITC (HS) published and notified by Director General of Foreign Trade, as amended from time to time.
2.7. Restricted Goods
Any goods, the export or import of which is restricted under ITC (HS) may be exported or imported only in accordance with a licencse/certificate/permission or a public notice issued in this behalf.
2.16 Actual User Condition
Capital goods, raw material, intermediates, components, consumables, spares, parts, accessories, instruments and other goods, which are importable, without any restriction, may be imported by any person.
However, if such imports require a license/certificate/permissions, the actual user alone may import such goods unless the actual user condition is specifically dispensed with the licensing authority.
2.17 Second-hand Goods
All second-hand goods, excepting second-hand capital goods, shall be restricted for imports and may be imported only in accordance with the provisions of this Policy, ITC (HS), Handbook (Vol.I), Public Notice or a license/certificate/permission issued in this behalf. (emphasis added)
9.12 “Capital Goods” means any plant, machinery, equipment or accessories required for manufacture or production, either directly or indirectly, of goods or for rendering services, including those required for replacement, modernisation, technological upgradation or expansion. Capital goods also include packing machinery and equipments, refractories for initial lining, refrigeration equipment, power generating sets, machine tools, catalysts for initial charge, equipment and instruments for testing, research and development, quality and pollution control. Capital goods may be for use in manufacturing, mining, agriculture, aquaculture, animal husbandry, floriculture, horticulture, aquaculture, animal husbandry, floriculture, horticulture, piscicullture, poultry, sericulture and viticulture as well as for use in the service sector.
9.16 “Consumer Goods” means any consumption goods, which can directly satisfy human needs without further processing and includes consumer durables and accessories thereof.
5.1 Relevant provisions of the Hand-book of Procedures issued under Section 5 of the Foreign Trade and Development by the Central Government.
2.33 Import of second Hand Capital Goods
Import of second-hand capital goods including refurbished/reconditioned spares, shall be allowed freely, subject to conditions for the following categories :
The import of second-hand computers including personal computers and laptops are restricted for imports.
The import of refurbished/reconditioned spares will be allowed production of a Chartered Engineering certificate that such spares have a residual life not less than 80% of the life of the original spare.
Relevant provisions of ITC (HS) Classification of Export and Import Items of the relevant period : (emphasis added)
Col. 3 of the EX-IM Policy :
Two types of restrictions have been indicated in this column, namely, ‘Prohibited’ and ‘Restricted’.
Items which do not require any licence under the EXIM Policy have been denoted as ‘Free’ subject to the Licencing Notes contained in the relevant chapter/heading/sub-heading or as may have been indicated under column 4 mentioning conditions relating to the policy and is also subject to any other law for the time being in force.
EXIM Code 9009 : Photocopying apparatus incorporating an optical system or of the contract-type and thermo-copying apparatus :
Electrostatic photocopying apparatus : Policy
9009 11 00 Operating by reproducing the original image directly onto the copy (direct-process) : Free
9009 12 00 Operating by reproducing the original image via an intermediate on to the copy (in-direct) : Free
9009 21 00 Incorporating an optical system : Free
9009 22 00 Of the contract type : Free
9009 30 00 Thermo-copying apparatus : Free
9009 92 00 Paper feeders : Free
9009 93 00 Sorters : Free
9009 99 00 Other : Free
6. The question whether used photocopiers are capital goods or consumer goods was dealt with by different Benches of this Tribunal reaching opposite conclusions in the following cases.
6.1 (a) In Be-Office Automation P. Ltd. and Anr. v. Commissioner of Customs, Mumbai reported in 2004 (63) RLT 125, the Bench of this Tribunal held that the second-hand photocopying machines cannot be considered as consumer goods at all and they any capital goods whether for production or service were eligible for unrestricted import. In short, the second-hand photocopiers were considered to be capital goods.
(b) In Colour Chem Ltd. v. Collector of Customs, Bombay reported in 1986 (25) ELT 549 (T), the Bench of this Tribunal held that a photocopying machine costing about a lakh of Rupees, could not certainly be an item of domestic use and that an item of this type is employed in large offices or institutions. It was held that the model of photocopier in question can be classified as “other than consumer goods”.
(c) In SKD Commercial v. Commissioner of Customs, Nhava Sheva reported in 2005 (180) ELT 84 (Tri-Mum), the Tribunal relying upon the earlier decision in 2004 (171) ELT 460 wherein it was held that photocopying machines were not consumer goods, gave benefit of doubt to the importer.
(d) In Competent Business Machines v. Commissioner of Customs, Trichirapalli reported in 2005 (182) ELT 426, the Tribunal laid down that the photocopying machines were capital goods and not consumer goods and since there was no prohibition against the import of these goods, there could be no confiscation.
(e) In an unreported decision in S.S. International, New Delhi v. Commissioner of Central Excise, Hydrabad, in Final Order No. 266/2005 dated 22.2.2005 rendered by the Bengalore Bench of the Tribunal, it was held that the findings of the authorities that the photocopiers required licence was not correct. The Tribunal followed the earlier decisions in which it was held that the photocopying machine were capital goods and permitted to be imported under the EXIM Policy.
(f) In Kangra Overseas v. Commissioner of Central Excise, Mumbai reported in 2005 (182) ELT 190 (Tribunal-Del), the Tribunal held that second-hand photocopiers are to be regarded as capital goods and that it did not require specific licence for import.
6.2. The decisions in which opposite view was taken are as under :
a) In Final Order No. 347-352/05-NB(A) dated 15.3.2005 in appeals No. C/136-138 & 156-158/2005-NB(A) in the case of M/s. Vijay Traders and Others, decided on 15.3.2005, the Bench of this Tribunal in paragraph 3 upheld the confiscation on the basis of the DGFT Policy Circular No. 20(2004-2009) dated 23.2.2005, holding that the second-hand photocopiers were in the nature of consumer goods.
b) In Final Order No. 264/2005 dated 1.3.2005 in the case of Shri Venkatesh Enterprises v. Commissioner of Customs, Chennai, The Zonal Bench at Chennai by detailed order came to the conclusion that the second-hand photocopiers were only office equipments and not capital goods. It will be noted from this decision that the Tribunal recorded that the appellant had not even claimed in the appeal that the import was not under the EPCG scheme or that the DGFT’s Policy Circular was not applicable to the period of the subject import. Their only grievance was that DGFT’s clarification was not correct but they had not challenged the circular. The Bench did not follow the decision in BE office Automation wherein second hand photocopiers imported by the party wee held to be capital goods and to be eligible for unrestricted import on the ground that it was not discernible from the order as to whether the import was during the same Policy period and also on the ground that the DGFT circular was not before that Bench the Tribunal relied on the earlier decision on Vaijay Traders (Final Order Dated 15.3.2005) which was rendered on the basis of the DGFT Policy Circular dated 22.3.2005 holding that second-hand photocopiers are in the nature of consumer goods.
c) In Champion Photostate Industries Corporation v. Commissioner of Customs, Visakhapatnam (Appeals No. C/738/04-NB(A) by Final Order No. 562/05/NB(A) dated 23.3.2005, the Tribunal held that the second-hand photocopiers were in the nature of consumer goods and imported in violation of the EXIM Policy and, therefore dismissed the appeal.
7. There is no dispute about the fact that the goods imported by the appellant were in fact second-hand goods and that they were second-hand photocopiers. All second-hand goods excepting second-hand capital goods were restricted for import as provided in paragraph 2.17 of the FTP, which emphasised that, the import of second-hand capital goods including refurbished/reconditioned spares shall be allowed freely. Therefore, if the photo-copiers are considered to be second-hand capital goods, their import was free. However, there is a strong disagreement on the question whether the photocopiers are capital goods or consumer goods. On one hand, it is sought to be contended that the photo-copiers are used by the service sector and their import is not for any direct consumption while on the other, it is argued that since they directly serve the human needs without any further process, they are consumer goods even if they are consumer durables.
8. The learned Senior Advocate for the appellant referred to the past EXIM Policies to point out that whenever restricted items of consumer goods were enumerated, photocopiers did not find place in the list and that they occasionally appeared as capital goods. Sine the EXIM Policy for each relevant period stands on its own, it would not be open to straight away rely upon the past treatment given to such items. Whether to allow free import of an item or to lay down the requirement of a licence or permission are matters that fall within the Policy domain and there can be variations from time to time.
9. In classical economics, capital is one of the three factors of production, the others being land and labour. The goods with the following features are capital goods :
(i) Goods that can be used in the production of other goods (this is what makes them a factor of production);
(ii) goods that are man-made, in contrast to “land” which refers to naturally occurring resources such as geographical locations and mineral;
(iii) goods that are not used up immediately in the process of production unlike raw materials and intermediate goods.
10. In classical economic theory, investment or capital accumulation is the act of producing increased capital. In order to invest, the goods must be produced which are not to be immediately consumed, but instead used to produce other goods as a means of production.
11. “Producer goods” are any goods that are used to produce other goods or services. Within this category, it is also possible to distinguish between “capital goods” and “intermediate goods”. The latter includes what are commonly referred to as basis goods. The capital goods are goods that provide service without losing their essential functional characteristic, though they may wear out or depreciate. Capital goods are, therefore, also goods which are “finished” in the sense that they will not go through any further transformation in a production process. “intermediate goods” on the other hand are goods that are transformed in some way in the process of being used for production into some other form or shape. Therefore intermediate goods are not “finished’ or final as they can and will be used by a producer to produce other intermediate goods, or capital goods or consumer goods. Both capital and intermediate goods are used in the production of other goods and are, therefore, called producer goods. The tariff rates on both are, in general equally important in determining the effective protection of use industries. The fact that the capital goods are “finished” is, therefore, not directly relevant to the appropriate structure of tariff rates.
12. In contract to producer goods, the consumer goods are used by individuals only for their consumption. Consumed goods have to be “finished” goods in the sense that they are ready for use without undergoing any further production process. If any such process is still required then they are not classified as consumer goods, but as intermediate goods. Though both consumer goods and capital goods are “finished” goods the latter are an input into the production of services while the former are not.
13. Economists divided the products of all economic activity into two broad categories, goods and services. Industries that produce goods i.e. tangible objects, include agriculture, mining, manufacturing and construction. Service industries include everything else – banking, communications, wholesale and retail trade, all professional services such an engineering and medical, all consumer services, and all Government services.
14. The services sector i.e. tertiary sector of industry or service industry is one of the three main industrial categories of a developed economy, the others being the secondary industry (manufacturing and primary goods production such as agriculture) and primary industry (extraction such as mining and fishing). The tertiary sector of industry involves the provisions of services to other businesses as well as to final consumers. Services may involve the transport, distribution and sale of goods from producer to a consumer as may happen in wholesaling and retailing or may involve the provision of a service, such as in tourism or entertainment. In service sector, the focus is on people interacting with people and serving the customers rather then transforming physical goods. There has been a substantial shift from the other industry sectors to the tertiary sector in the industrialised countries in the last two decades.
15. Keeping in view the concepts of capital goods and consumer goods in the context of their definitions in paragraph 9.12 and 9.16 respectively, of the FTP, there is no manner of doubt that the second-hand photocopiers which are imported through not for the use for the importers themselves are clearly meant for the service sector. Even the activity of importing such goods for providing them to the service sector is itself a service generated by the trading activity. The photocopiers having regard to the nature of their potential use are clearly meant to be supplied to the people who by their use would render service to their customers or in offices. These photocopiers would, therefore, be used for production of services though not for production of goods. They have great significance in the tertiary sector where they would produce services without losing their functional characteristics. These photocopiers are clearly an input for production of services and they would not get consumer themselves by their users. We are, therefore, clearly of the view that the second hand photocopiers are “capital goods” within the meaning of paragraph 9.12 and freely importable under paragraph 2.17, and are not “consumer goods”.
16. It appears from the impugned order that the Commissioner has placed reliance on the Policy Circulars which have been issued in the context of imports under the EPCG Scheme. The present imports are admittedly not under the EPCG Scheme and none of those Circulars on which reliance is placed for holding that second-hand photocopiers are “consumer goods” and require licence, would be applicable to these imports. In the circular dated 29.9.2003, which refers to import of second hand personal computers and lap-tops, a clarification was issued that these are covered under the definition of “second-hand goods” and that their import was governed by paragraph 2.17 of the EXIM Policy and not covered under the definition of “capital goods”. It was stated that in view of this, the second-hand personal computers/lap-tops can also not be permitted for import under the EPCG Scheme under the provisions of para 5.1 of the EXIM Policy “even for service providers”. The Circular dated 11.11.2003 which was issued in the context of second-hand photocopiers, air-conditioners, etc. by way of clarification, also refers to the EPCG Scheme in respect of which the clarification was given, that the import of new personal computers/lap-tops, photocopiers etc. may be permitted under the EPCG scheme provided these were required for the manufacture of goods or rendering the services. Even the Circular dated 23.2.05 clearly mentioned in para 3 that second hand photocopiers, air conditioners etc, were covered under the definition of second-hand goods and their import was governed by paragraph 2.17 of the Policy and that they shall not be permitted to be imported under paragraph 5.1 of the Policy. Chapter 5 of the Policy relates to Export Promotion of Capital Goods Scheme (EPCGS). In paragraph 5.1 it was provided that the scheme allowed the import of capital goods for pre-production, production and post production (including CKD and SKD) as well as computer software systems at 5% Customs duty subject to export obligation equivalent to 8 times of duty saved on capital goods imported under EPCG scheme to be fulfilled over a period of 8 years reckoned from the date of issuance of the licence. In paragraph 5.3 It was laid down that the import of capital goods shall be subject to actual user condition till the export obligation is completed. These three circulars which were issued in the context of imports made under EPCG scheme were concerned with the “actual user” condition which was attached to the import of capital goods under the said scheme and they could have no application to the general imports of the nature made by the appellants.
The Commissioner, therefore, grossly erred in relying upon these circulars holding that he second-hand photocopiers imported by the appellant were covered under the said Circulars and required a licence.
17. The aforesaid decisions of the Tribunal which hold that such second-hand photocopiers are not capital goods but are consumer goods, therefore, do not lay down the correct legal position, and to the extent they are inconsistent with what we have held hereinabove, stand overruled.
18. All these appeal shall not be placed before the regular bench for disposal in accordance with law.