V.K. Agrawal, Member (T)
1. The issue involved in this appeal filed by M/s. Majestic Auto Ltd. is whether the assembly of motor cycle parts imported in SKD condition amounts to manufacture under Section 2(f) of the Central Excise Act.
2. Shri S.V. Arya, learned Advocate submitted that the Appellants imported BMW 650 cc Motor Cycles in SKD condition from Italy; that these imported SKD motor cycles were 100% complete in all respects as not a single component/part/accessory was to be added by the Appellants; that motor cycles in SKD condition were classified under Heading 87.11 as complete motor cycle for the purpose of levying customs duty as well as additional customs duty; that in addition CESS was also charged which is levied on motor cycles; that after assembling the motor cycle they started selling the same; that a show cause notice dated 29-11-96 was issued by the Asstt. Commissioner for demanding duty amounting to Rs. 29,47,738.69 in respect of 26 BMW motor cycles cleared by them; that another show cause notice dated 19-12-97 was issued by the Additional Commissioner for demanding duty amounting to Rs. 10,16,307/- in respect of 18 BMW motor cycles cleared during the period from July, 1996 to November, 1997; that the Additional Commissioner under the Adjudication order dated 27-3-98 confirmed the demand and imposed penalty under Section 11 AC and separate penalty under Section 9(2) of the Central Excise [Act] on them holding that the activity of assembling the motor cycle from SKD kits amounts to manufacture in terms of Note 6 to Section XVII of the Tariff; that the Commissioner (Appeals) under the impugned order rejected their appeal. The learned Advocate further submitted that motor cycles imported in SKD condition were assessed to duty as complete motor cycles in accordance with Rule 2(a) of the Interpretative Rules which provides that incomplete goods having essential character of the complete goods are to be classified as complete goods; that after assembly of a SKD motor cycle, essential character as motor cycle will not get changed; that, therefore, assembly of a SKD motor cycle does not bring into existence a new product having character different than the SKD motor cycle and as such an assembly is not manufacture as held by the Supreme Court in the case of Gramophone Co. of India Ltd., 1999 (114) E.L.T. 770 (S.C.). He further submitted that Note 6 to Section XVII of the Tariff provides for conversion of an article which is incomplete and unfinished and not assembly; that the term ‘conversion’ is different from assembly; that term ‘conversion’ is in respect of completion or finishing of an article which is incomplete or unfinished; that it is not in respect of assembly of the goods which are in disassembled or unassembled condition; that the terms unassembled and disassembled are different from the term incomplete or unfinished. He also referred to the Circular No. 55/95-Cus., dated 30-5-1995 issued by the Ministry of Finance wherein it was clarified that incomplete, unassembled articles should be assessed as complete article provided that without assembly the incomplete article has essential character of a complete article. He, therefore, contended that as product has already been suffered the customs duty as complete motor cycle and no new product has emerged as a result of assembly no excise duty is chargeable. Reliance was placed on the decision in the case of Indian Xerographic System Ltd. v. Collector of Customs, Bombay, 1995 (80) E.L.T. 337 wherein it was held that assembly of photocopying machine imported in unassembled condition does not amount to manufacture as no new product has emerged. He also relied upon the decision in the case of Walchand Nagar Industries v. C.C.E., Pune, 1995 (79) E.L.T. 485 (Tribunal).
3. Learned Advocate further submitted that as the show cause notice is dated 19-12-97 and covers the period from July, 1996 to November, 1997 part of the demand is hit by the time-limit specified in Section 11A of the Central Excise Act; that right from the date of receipt of imported SKD motor cycles the full facts were brought to the notice of the department; that under their letter dated 11-10-95 addressed to the Asstt. Commissioner, Div. III, Ghaziabad, the Appellants had informed him that they had received 50 BMW motor cycles in SKD condition under Bill of Entry dated 29-9-95 on payment of customs duty; that they would sell the aforesaid motor cycle after final assembly and as the goods had already assessed to duty/Cess as motor cycle they would not be paying again the excise duty on their sale; that this letter was duly received by the Assistant Commissioner’s office which is apparant from the acknowledgement on the letter itself; that a copy of the said letter was also sent to the Range Suptd., who under letter dated 16-10-95 enquired from them as to why no permission had been taken under Rule 51A of the Central Excise Rules to bring duty paid goods into factory premises; that under their letter dated 19-10-95 they provided necessary information to the queries raised by the Supdt. and also furnished the documents desired by him; that again under letter dated 26-10-95 they mentioned that since assembly did not bring into existence any new commodity, no excise duty would be chargeable and they also referred to the decision in Walchand Nagar Industries case; that on query made from Supdt. under letter dated 4-12-95 about Bill of Entry not indicating import of 100% components, the Appellants under their letter dated 6-12-95 informed the Assistant Commissioner that in their earlier letter they had clearly mentioned that SKD motor cycles were complete in all respects and they did not require anything further to be added for assembling SKD parts into motor cycle and no indigenous raw material was to be used. Learned Advocate also mentioned that the very fact that a show cause notice dated 29-11-96 has already been issued to them for the period from 11-3-96 to 15-6-96 shows the knowledge of the department; that accordingly the demand is partly time-barred. Learned Advocate also submitted that both the show cause notices taken together the Additional Commissioner was not competent to adjudicate the matter as total demand of duty exceeded Rs. 20 lakhs, up to which the Additional Commissioner can adjudicate the matter as per the instructions issued by the CBEC. Finally, he submitted that no penalty under Section 11AC of the Central Excise Act is imposable as there was no suppression of fact on their part; that they had acted on the bonafide belief that in view of the Tribunal’s decision in the cases of Walchand Nagar and Indian Xerographic and that the provisions of Section 11 AC came into effect from 28-9-96 whereas part of demand of the duty pertains to the period prior to that date. He relied upon the decision in the case otMaruti Udyot Ltd. v. C.C.E., 1998 (101) E.L.T. 675.
4. Countering the arguments Shri R.K. Sharma, learned SDR submitted that for the purpose of levying of customs duty the SKD kits of motor cycle imported by the appellants were considered to be motor cycle for the purpose of classification; that, however, the physical condition of the goods imported remain SKD only and as such when the appellants assemble the components/parts into a motor cycle a new product has emerged which is leviable to excise duty; that there is no provision in Customs Tariff Act providing that once the duty has been paid no duty can be charged under Central Excise Act, if the process undertaken by the Assessee amounts to manufacture. He, further, submitted that the finished goods are those goods which can be put to use immediately as it is; that the motor cycles imported by them were not finished motor cycles as they were in SKD condition; that only after the process of assembly undertaken by the Assessee they become complete/finished motor cycles. The learned SDR also referred to the terms of Cooperation Agreement entered into between the Appellants and BMW and submitted that the tenure of agreement support the view of the department that motor cycles were to be manufactured by the Appellants. He specifically referred to paragraphs 1.1,2.2 and 9.8 which are extracted below :-
1.1 BMW shall supply and MAL shall purchase, import and assemble SKD/CKD-kits of F650 motorcycle in accordance with the provisions of this Agreement, the Importer Contract attached as Appendix 1 and the terms of the separate orders for the SKD/CKD-kits placed by MAL and accepted by BMW.
A minimum of 300 F650 motorcycles shall be delivered as SKD-kit to MAL in the period from September 1,1995 to December 31,1995.100 of such SKD-kits shall be produced in July, 1995, 100 in September, 1995 and 100 in October, 1995, provided that the necessary letter of credit stipulated in Article 3.2 of this Agreement is confirmed to BMW not later than May 31, 1995 for the production in July, 1995, not later than July 31,1995 for the production in September, 1995 and not later than August 31,1995 for the production in October, 1995.
9.8 Should BMW be held responsible by third parties for deficiencies of the F650 motorcycle that are due to the assembly process, the storage or transportation of the F650 SKD/CKD-kits or motorcycles or parts that have not been supplied by BMW, MAL shall hold BMW free and harmless from any and all such claims.”
5. Learned SDR also mentioned that if no production was involved no technical assistance is required by the Appellants whereas Clause 6 of the Agreement refers to the technical assistance to be given by the BMW free of charge up to a total maximum of 250 men days; that further Clause 8 deals with the ‘Assembly Process and Quality Standards’; that Clause 8.2 speaks of the responsibility of the Appellants to provide the premises, equipment, machines and tools required for the production operations in India and Clause 8.3 provides that both the production operations and the standard of the assembled motorcyle shall comply in full with BMW’s requirement The learned SDR also submitted that Note 6 to Section XVII of the Tariff is applicable to the present matter as conversion of an article is carried out only through a process; that conversion by itself is not a process. In the present matter the conversion has been carried out through the process carried out by the Appellants which amounts to manufacture. He relied upon the decision in the case of C.C., Bombay v. Maruti Udyog Ltd., 1996 (16) RLT 646, wherein it was held that for the purpose of Customs Tariff Classification Rule 2(a) is relevant Rule. It was further held therein that for customs assessment purpose though the goods have been deemed to be cars as a result of legal fiction the imported goods, however, remain to be components, assemblies or sub-assemblies. On the question of time-limit, the learned SDR mentioned that simply intimation that they intend to sell is no intimation of the production and sale; that the moment they started selling the goods, they should have intimated the fact to the department which they have not done and as such the fact of assembly and sale was not disclosed to the Department. He relied upon the decision in the case of Muzzafarnagar Pipes (P) Ltd. v. C.C.E., Meerut, 2000 (36) RLT 867 wherein it was held that extended time-limit is in-vokable as the appellants had wrongly claimed exemption by suppressing the fact of manufacture. He also referred to the decision in the case of Hindustan Playcards v. C.C.E., 1993 (68) E.L.T. 906 (T). Regarding competence of the Additional Commissioner the learned SDR submitted that he was competant to adjudicate the cases up to Rs. 20 lakhs and as in the show cause notice adjudicated by him the demand of duty is less than Rs. 20 lakhs. It cannot be said that if this show cause notice is clubbed with the earlier show cause notice the Additional Commissioner would not be competent to adjudicate the matter; that in the earlier show cause notice no extended period of limitation was invoked and as such issue involved in both the show cause notices were not the same.
6. In reply learned Advocate submitted that the word ‘production’ in the Agreement has been used in the commercial sense only; that assembly of parts does not amount to manufacture; that in Maruti Udyog case, adjudicating authority had treated the cars imported in CKD condition as motor car in terms of Rule 2(a) of the Interpretative Rules. He finally submitted that at least on 29-11-96 when the first show cause notice was issued the department was aware about the sale of the motor cycle by them and from that date they cannot claim that they were not aware of the fact.
7.1 We have considered the submissions of both the sides. The appellants are importing components of motor cycle in SKD condition. No doubt the entire motor cycle can be assembled out of the components imported by them. However, the fact remains that what is imported by them are component parts only and not motor cycle as such. The process of assembly undertaken by them in their factory premises amounts to manufacture as out of the components imported by them a distinct commercial product with a new name, character and use emerges. The fact that they were classified as motor cycles by the Customs for the purpose of levy of duty will not take away the fact that these were only components and the process of assembly has been undertaken by the Appellants for bringing into existence motor cycles. The product has been classified for the purpose of levy of customs duty as motor cycle by virtue of Rule 2(a) of the Interpretative Rules. As far as the provision of Central Excise Act and Rules are concerned a manufacturing activity has been undertaken by the Appellants and a new commercially known product has come into existence. The Revenue has rightly relied upon Note 6 to Section XVII which reads as under :-
“6. In respect of goods covered by this Section, conversion of an article which is incomplete or unfinished but having the essential character of the complete or finished article (including ‘blank’, that is, an article, not ready for direct use, having the approximate shape or outline of the finished article or part, and which can only be used, other than in exceptional cases, for completion into the finished article or part), into complete or finished article shall amount to ‘manufacture’.”
7.2 It is apparent from the wordings of this Note that if a product which is incomplete or unfinished is completed or finished, the process for making it complete or finished will amount to manufacture. According to Webster IXth New College Dictionary, conversion means “something converted from one use to another.” The Appellants are converting SKD kits into motor cycle so that the components could be used as a motor cycle. The decision relied upon by them are not applicable to the facts of the present case. The decision in the case of Indian Xerographic System was in respect of Item No. 33D of the erstwhile Central Excise Tariff which did not contain any Note like Note 6 to Section XVII. As per Section 2(f) of the Central Excise Act, manufacture includes any process which is specified in relation to any goods in the Section or Chapter Note of the Schedule to the Central Excise Tariff Act as amounting to manufacture. Such a definition was not in existence at the relevant time for deciding the matter in the case of Indian Xerographic System Ltd. Similar was the situation in the case of Walchand Nagar Industries as the goods were manufactured and cleared during the period August, 1984 to January, 1986 when the definition of manufacture under Section 2(f) of the Central Excise Act did not provide that the process mentioned in Section or Chapter Note would amount to manufacture. Further, our views are strengthened by the decision of the Appellate Tribunal in the case of C.C., Mumbai v. Maruti Udyog Ltd., 1996 (16) RLT 646 wherein it was held that for customs assessment purpose the goods have been deemed to be cars as a result of legal fiction. The imported goods, however, remain to be components assemblies or sub-assemblies. Similar views were also held by the Tribunal in the case of Wipro G.E. Medical Systems Ltd. v. C.C., Bangalore, 1999 (106) E.L.T. 169. In that case the Appellants therein had imported two sets of CAT Scan System in SKD/CKD condition and the Tribunal observed that Central Excise Department has correctly levied duty on the System after they are fully manufactured as what was imported was merely deemed to be a system though for “practical purpose” were component parts. The Tribunal also observed that the Appellants therein had to establish a utility costing over rupees one crore to put the components together. Learned SDR has rightly referred to the Cooperation Agreement between the Appellants and BMW, Germany in which it is specifically mentioned that Appellants and BMW wish to cooperate in the production and distribution of the F650 motor cycles and of the Cl (Scooter) in India, including establishing two joint venture companies for parts sourcing manufacturing, marketing and distribution of motor cycles. The agreement also provided that the Appellants shall conduct production operations namely pre and final assembly, finishing, testing and final work for shipment of motor cycle or direct delivery to customers. The Agreement also provided that the Appellants shall at their own risk and expenses provide premises, facilities, equipments, machines and tools required for the production operations in India and both the production operations and standard of the assembly motor cycle shall comply in full with BMW requirements. We, therefore, uphold that the process of assembly undertaken by the Appellants amounts to manufacture within the meaning of Section 2(f) of the Central Excise Act.
8. We also do not find any substance in the submissions of the Advocate for the appellants that Additional Commissioner was not competent to adjudicate the present matter. According to Circular No. 328/44/97-CX, dated 13-8-1997 the Additional Commissioner were competent to decide the cases involving fraud, suppression, etc., in which amount of duty involved is up to Rs. 20 lakhs. Similarly, the Additional Commissioner is competent to decide cases other than involving fraud, suppression, etc., in which amount of duty involved is more than 2 lakhs. The competence of the Additional Commissioner is on each case basis and as the show cause notice decided by him was in respect of less than Rs. 20 lakhs we cannot agree with the learned Advocate that he has exceeded his monetary limit. Even if the Additional Commissioner had decided both the show cause notices it cannot be said that he has exceeded his monetary limit as in the show cause notice dated 26-11-96 the amount of duty involved is more than Rs. 2 lakhs which he is competent to decide as per Board’s circular. For determining the competence the duty involved in different show cause notice has not to be clubbed as the competence is on case to case basis. We, however, find substance in the submissions of the learned Advocate for the appellants that part of the demand is time-barred. The various correspondence exchanged between department and the appellants clearly reveals that the department was aware that the appellants imported components of motor cycle in SKD condition which are being assembled and sold without payment of central excise duty. In view of this extended period of limitation is not invokable in the present matter. As the show cause notice has been issued on 19-12-1997 for demanding duty for the period July, 1996 to November, 1997, the demand for the period from July, 1996 to May, 1997 is hit by time-limit specified in Section 11A(1) of the Central Excise Act. The Adjudicating authority will re-determine the amount of duty and intimate the same to the appellants for deposit. As there is no suppression on the part of the appellants penalty under Section 11AC of the Central Excise Act cannot be imposed. Taking into consideration all the facts and circumstances of the matter we are of the view that the penalty imposed is on the higher side. The interest of justice will be met, if they are asked to pay penalty of Rs. 50,000/- only instead of Rs. 5 lakhs. We order accordingly.
9. The appeal is disposed of in the above terms.