1. The above appeals arise out of the order dated 24-4-1991 of the Collector of Central Excise, Pune, confirming demand of duty of Rs. 14,69,880/- on 4 milling machines viz. 2 Nos. HB 630 and 2 Nos. VA 50 imported by the appellants in terms of Phased Manufacturing Programme with agreement with M/s. Hitachi Seiki Company of Japan and imposing penalties of Rs. 5 lakhs upon the appellants and Rs. 10,000/- upon Shri Chokor L. Doshi, Managing Director of the company and Rs. 5,000/- upon Shri M. Mohan Das, General Manager of the Cooper Division of the company.
2. The facts leading up to the filing of the appeals are briefly as follows: The appellants are a DGTD Unit who obtained approval for a Phased Manufacturing Programme (hereinafter referred to PMP) for the manufacture of machining centres in collaboration with M/s. Hitachi Seiki of Japan. Under Phase-1 of approved PMP, the appellants were permitted to import 10 machining centres (2 pieces each of 5 models proposed to be manufactured VA 40, VA 50, HB 630, HB 800 and VA 35) from Hitachi Seiki in CKD condition to give the appellants the opportunity of familiarising themselves with the assembly operations. 7 machining centres were imported in CKD condition in the form of 100% components under OGL on the basis of the lists attested by DGTD and assembly by the appellants and sold to end users/purchasers as imported machines manufactured by Hitachi Seiki.
Clearance of all the first 3 machining centres (one VA 40, 2 HB 800) under OGL as 100% components was denied by the Customs authorities vide orders dated 28-6-1984 and 3-9-1984 on the ground that the complete machining centres in CKD condition i.e. capital goods had been imported in the form of 100% components. The appellants obtained a clarification dated 18-7-1984 from the DGTD that the import of the machining centres in CKD condition in the form of 100% components in Phase I of the PMP was permissible under OGL on the basis of lists attested by the DGTD. However, the DGTD recommended issue of supplementary licence in respect of certain components falling in Appendix 3A and 4A. The appellants also preferred appeals to the Tribunal against the orders dated 28-6-1984 and 3-9-1984 which were disposed of by Order No. dated 13-6-1991, holding that as the DGTD had attested lists of 100% components constituting a complete machine in CKD condition as part of Phase I of the PMP, Customs could not refuse clearance on the ground that a complete machine in CKD condition had been imported in the form of 100% component.
3. On arrival of the 4th and 5th shipment of machining centres (2 HB 630 meant for sale to Larson & Toubro and Mahindra and Mahindra) the Customs authorities again issued a show cause notice on 6-3-1985 stating that clearance under OGL was not permissible as appellants had imported complete machine in CKD condition. By order dated 8-10-1985 of the Additional Collector of Customs, Bombay, it was confirmed that the shipment was identical to the prior 3 shipments i.e. it comprised a complete machining centre in CKD condition in the form of 100% components; however, in view of the DGTD clarification, clearance of the shipment as 100% components under OGL and under the supplementary licence was permitted. In the case of 6th and 7th machining centres (2 VA 50) clearance of 100% components was allowed under OGL on the basis of the earlier order dated 9-10-1985 (covering 4th and 5th shipment).
4. On 24-10-1986 a show cause notice was issued by the Collector of Central Excise, Pune alleging that the applicants had imported components/assemblies and sub-assemblies in the guise of complete machines and had manufactured 7 machining centres during the period August 1984 to January 1986 and proposing to recover duty of Rs. 24,66,540/- and further proposing levy of penalty for contravention of the relevant rules. The charge of the Department was that the following operations carried out at the appellant's factory premises amounted to manufacture : 2. Machining of Taper Wedges to required size and its fitting by scraping 3. Scraping of location faces to bring the alignment as per test chart The Department invoked the extended period of limitation alleging that the appellants had suppressed the fact that they were carrying out manufacture on the imported components. A detailed reply was submitted on 19-1-1987 denying all the allegations contained therein and contending that all the imports were of complete machines in CKD form and that the assembly of the same by the processes No. 1 to 5 set out in the show cause notice did not amount to manufacture and that no new commercial product having a separate name, character and identity emerged as a result of the assembly operations, and on 27-1-1987 the Managing Director and General Manager of the appellant company also filed their respective replies. The personal hearing took place on 2-12-1987 and pursuant thereto, the appellants submitted detailed written submissions on 24-12-1987. Due to change in the adjudicating authority a fresh hearing was granted on 11-4-1991 and by letter dated 16-4-1991 fresh detailed written submissions were forwarded to the Collector of Central Excise, Pune, who passed the impugned order in respect of 4th to 7th consignments, holding that these were components from which machines were manufactured in the appellant's factory. The duty demand confirmed in respect of these 4 machining centres Rs. 14,69,880/- and penalties were imposed on the appellant company and its Managing Director and General Manager as set out in paragraph 1. In respect of the first 3 shipments, the adjudicating authority reserved orders as the appeal to the Tribunal against the order dated 9-10-1985 of the Additional Collector of Customs, Bombay was pending. Hence, these appeals.
5. Shri A. Chinoy, learned Counsel appearing along with Shri N.A. Dalvi and Ms. Millwala, Advocates for the appellants submitted that all 7 machining centres were imported as machines in CKD form in terms of Phase I of the approved PMP and that none of the operations carried out in the appellants factory result in manufacture of the machines as the operations are only manual operations for assembly of the said machines which were already fully manufactured in Japan, tested and run by M/s.
Hitachi Seiki before the same were dismantled and supplied in CKD condition. In this connection he cites the judgment of the Madras High Court in the case of T.I. Cycles -1983 (12) E.L.T. 681, of the Hon'ble Patna High Court in the case of TISCO - 1988 (33) E.L.T. 297 and the order of the Tribunal in the case of BPL -1990 (50) E.L.T. 567. He submits that not even a single component in the said machines which was sold by them to their customers was of Indian origin. He further submits that the two pieces of HB 630 and VA 50 which are the subject matter of dispute in these appeals are identical to the earlier 3 imports which have been confirmed to be complete machines in CKD condition, and that the only ground for holding that the disputed items were components and not complete machines is the description of the same in the bills of entry as "component parts of machining centre" whereas the first 3 machines had been described as "machines in CKD condition". He submits that the change in the description arose only in view of the DGTD clarification dated 18-7-1984 that the CKD machines in the form of 100% components were entitled to be imported under OGL. In support of this argument, he draws our attention to the agreement dated 25-6-1982 executed between the appellants and M/s. Hitachi Seiki Company Ltd. and in particular to clauses 1.6, 1.7 and 10 thereof. He takes us through the relevant sale documents between M/s. Hitachi Seiki and the appellants, such as the quotations, purchase order and confirmation, invoice, bill of entry, etc., in which the two types of machining centres have been clearly described as complete machines. He refers to the documents exchanged between the appellants and the end users/purchasers of the machines to establish that what was supplied in each case was an imported Hitachi Seiki machine in CKD form and that no excise duty had been charged on these machines which had discharged the incidence of countervailing duty under T.I. 68, as such machines had already been fully manufactured in Japan and were only assembled by the appellants. He further invites our attention to the order dated 28-6-1984 of the Additional Collector of Customs, holding that a complete machining centre had been imported in CKD condition thereby requiring a specific licence for capital goods, to the appellant's letter dated 16-7-1984 to the DGTD, DGTD clarification dated 18-7-1984, the Additional Collector's order dated 3-9-1984, holding that the imported HB 800 was a fully manufactured machine viz. horizontal machining centre of Japanese origin (Hitachi Seiki) and the CEGAT orders dated 13-6-1991 and 21-4-1993.
6. Shri Chinoy next contends that the demand is time barred as the show cause notice was issued in October 1986 proposing recovery of duty on machining centres purported to have been manufactured and cleared during the period August 1984 to January 1986, and the extended period is not available to the Department in view of the bona fide belief of the appellants that no excise duty was payable on the assembly of the machines which belief was based upon the opinion dated 5-12-1983 of their Excise Consultant Shri Phatak Sonalkar and the clarification dated 21-5-1984 of the Assistant Collector of Central Excise, Pune to the effect that permission under Rule 51A was not required for bringing machining centre in CKD condition on payment of appropriate duty into the factory. He contends that the stand of the appellants all along that what they imported were complete machines in CKD form which fact was never suppressed from the excise authorities. Lastly, he submits that the penalty on the Managing Director, and the General Manager cannot be sustained as neither the show cause notice nor the impugned order attribute any definite role to these persons in the alleged offence of evasion of excise duty which is an essential pre-requisite as held by the Bombay High Court in the case of B.R. Sule, Managing Director, Mahindra and Mahindra and Ors. v. Union of India in the order dated 9-2-1990 in W.P. No. 3327 of 1989. He, therefore, prays for setting aside of the duty demand and the penalties.
7. Shri Somesh Arora commences his reply by referring to the appellant's import licence dated 22-1-1985 for import of components (sub-assemblies/assemblies) for manufacture of vertical machining centre model VA 50 and horizontal machining centre model HB 630 and contends that the appellants' claim all along before the Customs authorities had been that what they imported were components and not complete machines in CKD form and the changed stand before the excise authorities is nothing but an after-thought, in order to escape liability to excise duty. He submits that the components of certain machines in CKD condition arrived from Japan, and complex operations such as interfacing, machining, scraping, etc., admittedly took place in the appellant's factory and, as a result of manufacture by the appellants, a complete machine was sold by the appellants to various end users/purchasers. The test of manufacture has been satisfied in this case as a new commercial commodity having a different name, character and identity emerged as a result of the processes carried out by the appellants. Learned DR submits that the machining centre becomes marketable only on assembly and the item as imported was not in a marketable status. He submits that the DGTD clarification is only in respect of the components of sub-units in CKD condition as evident from the appellant's letter dated 16-7-1984 and the DGTD reply dated 18-7-1984 and that from the orders dated June 1984 and September 1984 of the Additional Collector of Customs and the Tribunal Orders (supra) it is clearly revealed that the appellants had consistently maintained that what they imported was components. He cites the following case law in support of his contention that the assembly of components by the appellants result in the manufacture of complete machines : 1989 (40) E.L.T. 214 (SC) - Jayshree Engineering 1992 (57) E.L.T. 336 (T) - Richardson Cruddas According to the learned DR, the suppression in this case arises from the fact that the appellants did not intimate the Department that they were going to undertake manufacturing activities at their factory and, therefore, the permission sought from the Department to bring in duty paid milling machines (which actually were only components of milling machine) cannot be pressed into service by them. The opinion of the Excise Consultant is no substitute for proper and complete disclosure to the Department of the factum of manufacture. For this reason, he justifies the applicability of the extended period of limitation. In these circumstances, he supports the demand of duty and the imposition of penalty.
7A. We have carefully considered the rival submissions and perused the records. According to the agreement entered into between the appellants herein and M/s. Hitachi Seiki Company Ltd., technical know-how relating to design, construction and manufacture of horizontal machining centres, models HB 630, HB 800 and vertical machining centres, model VA 35, VA 40 and VA 50 was to be transferred within three months from the date of the agreement, subject to the appellants paying the first instalment of the consideration amount in accordance with the Article 3(A) thereof as well as the right to use the distinctive Seiki labels upon the said machining centres. The label on the machining centres was to read as "manufactured under technical collaboration with M/s.
Hitachi Seiki Company Ltd., Japan" (Article 1.6 of the agreement). As per Article 1.7, the net sales price was defined as the "gross amount invoiced for the machining centres sold or used for its own purpose by WIL together with the price of the spare parts sold, along with the machines, less the landed cost of components purchased from SEIKI, packing freight, commission, purchase tax, and other Government charges, duties or levies". In terms of Article 10.1, WIL was to place the order with SEIKI sufficiently in advance in respect of its requirements of CKD machines, its sub-assemblies including CNC controls and manufactured or bought out components, and parts, according to WIL's Phased Manufacturing Programme. The agreement was submitted to the Government of India for approval on 24-9-1982 in terms of Article 18 and the Government by letter dated 26-2-1983 indicated certain modifications which were incorporated in the main agreement. Article 1.7 was modified to read as "the net sales price shall mean the net ex-factory sale price of the machining centres exclusive of excise duties minus cost of the standard bought out components and the landed cost of imported components, irrespective of the source of procurement including ocean freight, insurance, customs duties etc.".
8. The two letters of the DGTD regarding attestation of list of components of machining centres are reproduced below: "Utter No. DT-l/5(17)/83/163 dated 3rd February 1984 from the Development Officer, DGTD, New Delhi addressed to M/s. WIL, Pune Subject: Attestation of list of components of machining centres, in terms of Chapter 20, Para 219 of Import and Export Policy 1983-84.
With reference to your letter No. HD/0961/AM 84/619, dated 6-1-1984 please find enclosed two lists of components of machining centres, duly attested in terms of provisions of Chapter 20, para 219 of Imports & Export Policy 1983-84, for import under OGL. It may please be noted that import of components under OGL will be subject to the Policy at Appendix 10 in the current Import and Export Policy." "Letter No. DT-l/5(17)/83/188, dated 8-8-1984 from DGTD, New Delhi to WIL, Pune" Subject : Attestation of list of components under provision at para 219 of Chapter 20, Import and Export Policy 1984-85 - components of Machining Centres for Phase I Please refer to your letter No. MD/IMP/0961/Am-1350 dated 23-6-1984 on the above noted subject. On preliminary scrutiny of the list of components applied for attestation it is observed that the list covers import of 2 machines each in model HB 800, HB 630, VA 35, VA 40 and VA 50 in CKD along with optional accessories and toolings and auxiliary equipment. It is noted that as per the approved phased manufacturing programme you were permitted to import 2 machines in each of the 5 models in CKD in the 1st year of production. You have already been permitted attestation of list of components under provisions at Chapter 20 for manufacture of 2 machines each in 2 models i.e. HB 800 and VA 40 for the 1st year of production. In this context your present request for list attestation can be considered only for import of 2 machines each in model HB 630, VA 50 and VA 35 in CKD in 1st year. Since the value of optional accessories and toolings included in the list of goods is very high, attestation of the list for these items can be considered only after you have secured orders for supply of the machines and you have identified the accessories and toolings that will be required for importing the machine. Import of Tool/Resetting Device and Tape Preparation System cannot be allowed as these items are not parts of machining centres.
The list of components duly attested under provisions of Chapter 20 of Import and Export Policy 1984-85 is enclosed. Eligibility for import of the items will be as per the Policy in force." 9. The appellants contracted to sell the HB 630 machining centres and VA 50 machining centres to Mahindra and Mahindra Ltd., and in the letter dated 18-3-1984 to Mahindra and Mahindra Ltd., it was set out that complete machine would be supplied to the appellants by their principals viz. M/s. Hitachi Seiki Company Ltd., Japan in CKD condition and would be supplied to Mahindra and Mahindra Ltd. after reassembly and running/trial at the appellant's works at Chinchiwad (pages 88 to 92 of the paper book). The appellants' order acceptance dated 24-3-1984 describes the machine as "Horizontal Machining Centre - Model HB 630 - imported" (page 93). The quotation of 30-3-1984 (page 98) shows Mahindra and Mahindra as the end users and describes the goods as "component part such as assemblies/sub-as semblies for manufacture of Horizontal Machining Centre - Model HB 630 -1 -set". The same description is contained in the appellants' purchase order dated 10-7-1984 and the invoice dated 25-10-1984 (pages 100 to 107). The bill of lading describes the item as "Hitachi Seiki Model HB 630 Machining Centre (page 110); while the bill of entry describes them as component parts of Horizontal Machining Centre Type HB 630 (page 108-109). The same is in the case of the sale documents between the appellants and M/s. Larson and Toubro to whom the second HB 630 model was sold (pages 139-152 quotation dated 19-1-1984). The order acceptance dated 16-3-1985 (page 157). Larson & Toubro invoice dated 31-8-1985, despatch advice dated 31-8-1985). The appellants have reiterated in their letter dated 16-8-1985 to M/s. Larson and Toubro Ltd. that the machine is completely imported in CKD condition and excise duty on the imported machine, accessories and tooling is not applicable (pages 153-155). The vertical machining centre Model VA 50 has been described in the quotation of 7-6-1984 as "components for Vertical Machining Centre Model VA 50" complete in CKD condition (page 127). A similar description is found in the invoice dated 15-2-1985 (page 129). The bill of entry description is "components for Vertical Machining Centre Model VA 50". The second Vertical Machining Centre Model VA 50 was sold to M/s. Shreno Ltd., Vadodara and in the appellants' letter dated 21-3-1984, the appellants have informed M/s. Shreno Ltd. that they are offering them the Model VA 50 from the CKD batch and the letter dated 11-5-1984 makes it abundantly clear that VA 50 machine will be imported in 100% CKD and that since the machine will be reinspected and only trial run conducted at the appellants' works, excise duty may not be applicable at the time of despatch in which case, the appellants would not charge excise duty (pages 161-164).
10. In the meanwhile, due to difficulty being faced by the appellants in clearing the consignments containing 100% components for manufacture of machining centres, the appellants wrote to the DGTD for clarification to the effect that components which had been imported by them are covered under the approved PMP and that, being items appearing under OGL list, no separate import licence would be required. The DGTD clarified that the import of components of sub-units in CKD condition of Vertical Machining Centre Model VA 40 and Horizontal Machining Centre Model HB 800 was covered by Entry 99 Part I List 8 of the Appendix of the Import Policy 1984-85. The appellants' letter dated 16-7-1984 (page 212) and the DGTD reply dated 18-7-1984 (page 214) are reproduced below for convenience of reference : "Letter No. WI/D dated July 16,1984 from Walchandnagar Industries Ltd. to the DGTD, New Delhi Sub: Clarification on Import Policy vide para 244 of Import and Export Policy Vol.AM85 We draw your kind attention to our letter No. MD/0901/AM-15/440 dated 7th July 1984 and the subsequent discussions the undersigned had with you this morning when he had explained the difficulty being faced in clearing the consignment containing 100% components for manufacture of Machining Centres.
We brought to your kind notice that the components being imported are for the manufacture of Machining Centres. We are holding the Industrial licence for the manufacture of Machining Centres and the same was duly endorsed on our industrial licence. However, subsequently, as per the liberalised policy announced by the Government the items machine tools has been categorised in the broad category of metal cutting machines and the manufacturer has the flexibility to take up the manufacture of any item covered in this broad category within the total licensed capacity. As per its phased manufacturing programme approved by the Government we will be manufacturing both horizontal and Vertical five machining centres.
We also explained to your goodself that as per the approval given by the first phase of our manufacturing programme will be importing two numbers of each model of machining centres and accordingly the order was released for the first 3 machines (one vertical and 2 horizontal). DGTD (Tool Directorate) was kind enough to test the list of goods as per Chapter 20 para 219 of Import and Export Policy 1983-84 for import under OGL vide their letter No. DT- 1/5(17)83/163 dated 3rd February 1984. Two of the said list is enclosed for your ready perusal.
It was explained to you that the customs authorities in Bombay while clearing One vertical machining centre have imposed penalty of 50% of CIF value on the plea that the import of 100% components in CKD form would amount to import of built-in machine and therefore, an import licence was to be obtained as per the provisions of policy applicable to capital goods. We have already . made our submissions that in our case these machines are for regular sale and not for our own use. The machines are made for sales against orders and deliveries have already committed to the parties.
We like to request you to kindly issue necessary clarification to the effect that the components which have been imported by us are covered under the phased manufacturing programme already approved by DGTD and that being items appearing under OGL list it will not require any separate import licence.
While one machine has been cleared after paying penalty, the two horizontal type machining centres are presently lying in Bombay customs awaiting clearance. We are incurring very heavy demurrage charges every day. Therefore, it is solicited our early clarification as requested above be given to enable us to approach the customs authorities and clear the consignment." "Letter No. l(2)/84-I&EP/CLA-201 dated 18th July 1984 from DGTD, New Delhi to M/s. WIL, Bombay Subject: Interpretation and clarification of the Import Policy 1984-85 With reference to your letter dated the 16th July 1984 on the above subject, I write to clarify that in terms of the current import policy, import of components of the sub-units in CKD condition of Vertical Machining Centre Model VA 40 and Horizontal Machining Centre Model HB 800, Model VA 40 as per enclosed attested list of Model VA 40 and Model HB 800, with all standard accessories and electricals shall be covered by Entry No. 99, Part I, List 8 of Appendix of the Import Policy 1984-85 subject to the List Attestation procedure as per Chapter 20 of the current Import Policy and other conditions as laid down in the policy." 11. It is significant to note that the appellants were issued a show cause notice dated 8-3-1985 (page 235) alleging import of complete machine "Hitachi Seiki Model HB 630" in CKD condition with 100% components and standard and additional accessories in single consignment and further alleging that the imported machine tools are capital goods requiring specific licence for import. This notice was adjudicated by the Additional Collector of Customs, Bombay. By his order dated 9-10-1985 the importers had contended before the adjudicating authority that what they had imported was a complete machine but subsequently in view of the order of the Customs Department in respect of other models of machining centres, the DGTD treated the import as a component part and not as that of complete machines.
The adjudication order proceeds on the basis that a complete machine in CKD condition was imported and this, in our view, strongly supports the appellants' claim that what they had imported were complete machines in CKD condition. In the light of the documentary evidence discussed above we are satisfied that the 4 machining centres in dispute viz. 2 Nos. of HB 630 and 2 Nos. VA 50 imported by the appellants are complete machines in CKD condition.
12. The next aspect to be considered is whether the operations carried out on these machines in the appellants factory result in manufacture and consequent liability to duty. The appellants have submitted a technical write up on the process involved in the reassembly of the CKD machines which is as follows : In a machine, there are certain fixed components like Bed, Column, and there are some moving items like Head Stock and Cross Slide. In order to get the desired performance of the machine as per the standards, mating faces of sliding members which are coated with antifriction bearing material are required to be hand scrapped with reference to its mating components i.e. Bed and column. This facilitates easy movement of sliding members and to provide exact alignment of the guided parts in all positions, under the effect of the operational forces.
2 Machining of taper wedges to required size and its fitting by scraping: It is already explained in Point 1 above that scraping of mating surfaces of the moving parts with respect to fixed parts is an essential operation. After this, the gap between the two parts is wedged by the component called Taper Wedge. This component is generally with plus metal condition as a standard practice. The bearing area is independent of the positional adjustment and with the taper 1:50/1:100, fine adjustments are possible by introduction of Taper Wedge cut to appropriate size and with the use of wedge adjustment screw. While doing this adjustment, we have to take care that the heavy mechanical advantage provided by wedge effect does not create considerable lateral stressing.
3. Scraping of location faces to bring the alignments as per test chart: After the individual units like column unit with Head Stock, Bed Unit with Table and Cross Slide and Auto Tool Changer Unit, Auto Pallet Changer Unit, and Feed Units are assembled. They are put together to form a machine and accuracies of the machine are checked. In order to get the performance results of the machine as per the requirements of test charts, machining is required to be done on the mating surface of individual assemblies after doing partial dismantling of the machine.
In addition to this machining, hand scraping is required to be carried out on these faces to get necessary accuracies as per test chart - - Switching on the CNC, Servo drives and spindle drive in the proper sequence and ensure that the axes move in the commanded direction.
- Tuning of servo and spindle drives for high speed operation and optimisation servo amplifier gain to machine dynamics.
- Checking of all limit switches, proximity switches, push buttons, solenoids, contactors and motors for proper operation.
- Checking of operation sequence of Auto Tool Changer, Auto Pallet Changer and other accessories for proper operation.
- Checking of mechanical and electrical interlocks to ensure that all operations are done in correct sequence and any malfunction of electrical or mechanical items does not result in faulty operation.
- Modifications of machine software to include additional functions required by the customer." The appellants' stand all along, as reflected in the reply to the show cause notice and during the personal hearing before the adjudicating authority has been that what was imported were complete machines in CKD condition and what was sold after reassembly were the same imported machines and that the process of assembly did not change the character or use of the imported product. The categorical averment in paras 9, 10 and 11 of the appellants reply dated 19-1-1987 that no excise duty has been recovered from the customers to whom the machines covered by Phase-1 of the PMP (including the 4 machines in dispute) has nowhere been rebutted by the Department, as it is a matter of fact that Countervailing duty was paid on all the components of the machining centre imported in CKD condition at the rate equivalent to what would otherwise have been payable on the complete/assembled machines, if the same had been imported.
12.1 We agree with the learned Counsel that the processes carried out by the appellants upon the complete machining centres imported in CKD condition do not amount to manufacture, as no new product bearing a new or different character or use emerges as a result thereof. In arriving at this conclusion, we draw support from the case of T.I. Cycles of India v. Union of India reported in 1983 (12) E.L.T. 681 in which the Hon'ble Madras High Court held that assembling of parts of complete cycles imported in CKD condition does not amount to manufacture as envisaged by Section 2(f) of the CESA as no new marketable commodity is thereby produced or brought into existence. Our view is further fortified by the order of the Tribunal in the case of BPL v. Collector of Customs reported in 1990 (50) E.L.T. 567 holding that assembly does not amount to manufacture. The relevant paragraphs of the order are reproduced below: "7. The appellants were given an Industrial licence for the manufacture of Video Tape Recorder Systems with Monitors with an annual capacity of 500 Nos. In pursuance of this Licence, the appellants started manufacturing Video Tape Recorder System with Monitors, from February 1982. The Import Licence issued to the appellants included in the list attached thereto 420 numbers of Video Cassettes falling under entry at Sl. No. 689 (26) in Appendix III of Licensing Policy April 1981 - March 1982). After introduction into the market of the VCR, produced by the appellants, it was realised that for successful marketing of the VCRs, it was necessary to have as ready stock about 20 numbers of Video Cassette Tapes per VCR. This amounted to additional imports of Video Cassette Tapes.
This was taken up with the DGTD & Import Licensing Authority and as per the advice received from them, the appellants obtained an additional list attached to the aforesaid Import Licence for importation of 5000 sets of Video Magnetic Tapes against Entry No. 580 (35) Appendix V and video cassettes without tape against Entry 580(36) of Appendix V of the Import Policy for April 1981 - March 1982. According to the advice received and according to the additional list that was attached to the licence, the appellants had to import their requirements of video cassette tapes in a disassembled form i.e. video magnetic tape as one constituent and the video cassettes without tape being the other constituent respectively, falling under Entry 580 (35) and 580 (36) in Appendix V of the Import Policy April 1981 -March 1982. As the appellants were not engaged in the manufacture of video cassette tapes in pursuance of the licensing policy according to which the additional list attached to their licence, required import of video cassette tapes in two constituents in disassembled form, the appellants accordingly negotiated with the foreign suppliers for the supply of the requisite number of video cassette tapes after disassembly individual video cassette tapes into two constituents, one the Video magnetic tape as for an individual cassette and the other as the video cassette without tape i.e. the empty case, the requisite number of screws for bringing the two constituents together being also supplied. The assembly of video cassette tape takes place merely putting the magnetic tape and plastic case together and fixing the screws supplied by the foreign supplier.
8. The law on the point as to what constitutes manufacture is well settled. In the case of Union Carbide Co. Ltd. v. Union of India 1978 (2) E.L.T. 1180 the Calcutta High Court held that "Manufacture implies a change but every change in the raw material is not manufacture eligible to duty. To be manufacture exigible to duty there must be such transformation that a new and different article which can ordinarily come to the market to be bought and sold and known to the market having a distinctive name, character and use must emerge.Union of India v. Delhi Cloth and General Mills - [1977 (1) E.L.T. 1199] the Supreme Court defined manufacture thus "The word 'manufacture' used as a verb is generally understood to mean as 'bringing into existence a new substance' and does not mean merely 'to produce some change in a substance". However, minor in consequences the change may be. This distinctive is well brought about in a passage thus quoted in permanent Edition of Words and Phrases Vol. 26 from an American Judgment, The passage runs thus: "Manufacture implies a change but every change is not manufacture and yet every change of an article is the result of treatment, labour and manipulation. But something more is necessary and there must be transformation, a new and different article must emerge having a distinctive name, character or use." 9A. Our attention has been drawn by the appellants' counsel to the decision of the Madras High Court in the case of T.I. Cycles of India v. UOI reported in 1983 E.L.T. 681 wherein it was held that assembling of cycle parts does not amount to manufacture as envisaged by Section 2(f) of the CESA as no new marketable commodity is produced or brought into existence when cycle parts are assembled by the buyer, who imports cycles in CKD condition. At this juncture, the learned JCDR sought to distinguish the facts of the case (supra) from those of the present appeals. She contended that the High Court considered trade practice in cycles which is the reverse of that in video cassette tapes, as the practice in trade relating to cycles was to import them in CKD condition which practice was not established in the present case. We do not see how this would make any difference, as the test of manufacture has not been satisfied in this case. We fail to see how assembly of magnetic tape and plastic covers amounts to manufacture. The arguments advanced by the learned JCDR do not clinch the issue." 12.2 The case law cited by the learned DR is distinguishable on facts.
In the case of Tata Iron and Steel Co. Ltd. v. Union of India reported in 1988 (33) E.L.T. 297 (Patna), the main issues for consideration before the Hon'ble Patna High Court were (a) whether the crane was assembled and manufactured at Adityapur Unit of Tatas or was it manufactured in the factory of the petitioners and (b) whether the crane was utilised for maintenance of the existing plant of the petitioners or was it a part of the new plant in the modernisation project to augment for the purpose of excise duty. The contention of the assessee was that Adityapur Unit did not produce any crane but it only produced components and assemblies of crane and on that footing it was contended that only components and assemblies were liable to duty.
The Court held that the "petitioner ordered for complete assembly of the crane. Complete assembly was to be effected in the shop of the Adityapur Unit. After they had been completely assembled the cranes would be put on trial run in the factory at Adityapur in the presence of the Chief Engineer - Modernisation.... The entire crane was assembled in the factory at Adityapur.... I have not the least doubt that the whole crane was assembled at Adityapur." Para 12 of the judgment is very relevant and is reproduced below : "It is true that the entire assembly could not have been transported from the Adityapur unit to the plant of the petitioner, but that does not derogate from the fact that the whole thing was assembled at Adtiyapur. Thereafter, it was shifted/transported to the petitioner's plant. That could be done only in knocked down condition. The Collector was, therefore, amply justified in his conclusion that the cranes were assembled at the Adityapur factory and were then transported to the petitioner at knocked down condition. There is material on record to show that the petitioner had bought overhead cranes from other companies also. They also were supplied to the petitioner in knocked down condition. Large equipments are always supplied to buyers in knocked down condition.
The supply in that condition does not mean that no excisable article has come into existence. Can the petitioner take up the position that it did not buy anything from Calcutta or Bangalore which it had described in its orders as supply of crane. The submission that cranes were not purchased but only parts were purchased is too simplistic and cannot be sustained. Can a buyer purchasing a motor car say that he has not purchased a motor car but he has only purchased tyres, wheels, distributors, etc." The Court also held in para 23 of the judgment that a new plant had been set up and rejected the submission of the assessee that the acquisition and induction of the cranes were only a part of the programme for revamping the old plant that it was not a new plant. In the present case, however, what was imported by the appellants were complete machining centres in CKD form, cleared on payment of appropriate customs duty as complete machines and not as parts or components of machining centres.
12.3 The judgment of the Hon'ble Supreme Court in the case of Name Tulaman -1988 (38) E.L.T. 566 (SC), does not come to the aid of the respondents as the Court was seized of the issue whether assembling of duty paid components of weigh bridge amounts to manufacture when both the parts and the final product were separately and specifically dutiable, and answered this issue in the affirmative and the issue whether assembling of complete machine imported in CKD condition amounts to manufacture was never before the Supreme Court in that case.
12.4 The judgment of the Hon'ble Bombay High Court in the case of Koron Business Systems Ltd. v. Union of India - 1992 (58) E.L.T. 48 (Bom.) is also distinguishable as what was decided by the Court was that the process of assembling of components for copier machine purchased from the market amounts to manufacture of copier machine.
12.5 The decision of the Hon'ble Calcutta High Court in the case of HCL Ltd. v. Union of India -1992 (59) E.L.T. 507 (Cal.) also does not advance the case of the Department - in that case, HCL had imported 1400 Photo Copying Machines in SKD condition minus the Selenium drum (a consumable part). The Court held that this was not a case of import of the whole machine although substantially all the parts were imported.
The Court also noted that even the Collector had not found that the whole machines usable as such crossed the Indian frontiers and also that admittedly HCL paid excise duty for the manufacturing activity of making the machines complete and marketable and further that the HCL never even claimed before the Excise authorities that they were not undertaking any manufacturing activity as they had imported the whole machines. In the present case, however, we have arrived at a finding on the basis inter alia upon the Customs authorities findings, that the entire machining centres had been imported.
In the above circumstances, we hold that the operations carried out on the machining centres in the appellants' factory do not result in manufacture and hence the appellants are not liable to pay any excise duty thereon. Hence, the duty demand and the penalty imposed upon the appellant company are set aside.
13. We have recorded our findings on the merits of the matter. We shall now consider whether the demand is barred by limitation. The appellants had written to the Department on 20-3-1984 seeking permission to enter and store imported duty paid goods in their factory premises. The letter is as follows : "Letter No. Excise/51/1118 dated 20-3-1984 from Walchandnagar Industries Ltd. to the Collector of Central Excise and Customs, Pune.
Sub: Permission for entry and storage of imported goods (after payment of CV duty) in our factory premises, under Rule 51-A of the Central Excise Rules, 1944.
We would like to inform you that we intend to import one Vertical Machining Centre in CKD condition (Machine Tool Model VA-40 on payment of appropriate CV. duty and bring the same in CKD condition in our factory, at Chinchwad. Pune 411019. This machine is being purchased from M/s. Seiki International Company, Tokyo - 100, Japan under our purchase order No. 965010 dt. 9-2-1984 and we have to re-sell the said machine to the prospective buyer in due course.
After arrival/entry of the abovesaid machine in our factory the same will undergo full running trial at our end to the satisfaction of the prospective buyer, before it is finally despatched to him.
In view of the above, we would request your honour to extend your kind permission to bring and store the abovesaid machine in our factory, under Rule 51-A of the Central Excise Rules, 1944, as we are holding the licence to manufacture such type of identical machines falling under TI of 68.
The tentative date/period of arrival of this machine is the last week of March 1984." In response thereto, the Assistant Collector had replied on 21-5-1984, permission was not necessary as the appellants were bringing imported machine to which the Central Excise Rules were not applicable. From the reading of the above mentioned letters we are satisfied that there was a complete disclosure of all the facts to the Department and read together with the finding that what was imported were complete machines in CKD condition, the appellants cannot be held guilty of suppression so as to warrant the extended period of limitation being invoked by the Department.
14. We also agree with the learned Counsel for the appellants that, in the absence of any definite role assigned and established by the Department, as far as Managing Director and General Manager are concerned, the penalty imposed upon them is not sustainable and accordingly set aside the same.
15. In the light of the above discussion, we set aside the impugned order and allow the appeals with consequential relief to the appellants.