Westinghouse Saxby Farmer Ltd. vs Commr.Of Central Excise Calcutta on 8 March, 2021


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Supreme Court of India

Westinghouse Saxby Farmer Ltd. vs Commr.Of Central Excise Calcutta on 8 March, 2021

Author: V. Ramasubramanian

Bench: Hon’Ble The Justice, A.S. Bopanna, V. Ramasubramanian

                                                                REPORTABLE


                                 IN THE SUPREME COURT OF INDIA
                                  CIVIL APPELLATE JURISDICTION

                                    CIVIL APPEAL NO.37 OF 2009




                 WESTINGHOUSE SAXBY FARMER LTD.                     …Appellant(s)


                                          Versus


               COMMR. OF CENTRAL EXCISE CALCUTTA                  …Respondent(s)



                                          JUDGMENT

V. RAMASUBRAMANIAN, J.

1. Aggrieved by the dismissal of their appeal by the Customs

Excise and Service Tax Appellate Tribunal (for short “CESTAT”), the

Signature Not Verified

Digitally signed by
Madhu Bala
Date: 2021.03.08
15:47:26 IST
Reason:

1
assessee has come up with the present appeal under Section 35

L(b) of the Central Excise Act, 1944.

2. We have heard Shri Kunal Chatterji, learned counsel for the

appellant/assessee and Ms. Nisha Bagchi, learned standing counsel

for the respondent.

3. The appellant is a company wholly owned by the State

Government of West Bengal. It is engaged in the manufacture of

“Relays” which is used as part of the Railway signaling system.

4. A ‘Relay’ is generally an electrically operated switch, used to

control a circuit. They may also be used where several circuits must

be controlled by one signal.

5. Though essentially relays are electrical equipment, they may

also form part of Railway signaling equipment.

6. While the normal electrical relays fall under Tariff Item No.

8536.90, ‘Railways and Railways signaling equipment’ fall under

No. 8608.

2

7. It appears that from 01.03.1986 till February­1993, the

effective rate of excise duty charged under both sub­headings was

15% and hence the appellant had no problem with the classification

of their goods under sub­heading No.8536.90. But with effect from

28.02.1993, the effective rate of excise duty for the goods under

sub­heading No.8536.90 became much higher than the effective

rate of duty for the goods under sub­heading 8608.

8. On 27.08.1993, the appellant submitted a classification list for

the approval of the Assistant Collector, Central Excise. This list

provided details of the products manufactured by the appellant as

Railway signaling equipment, including relays and claimed that

they should be classified under sub­heading 8608 and not under

8536 in the First Schedule to the Central Excise Tariff Act.

Admittedly this classification list was approved by the competent

authority.

9. On 23.04.1996 the Central Board of Excise and Customs

issued a circular indicating that ‘plug­in type relays’ merited

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classification under the Chapter Heading 85.36. Thereafter, the

Assistant Commissioner of Central Excise issued nine different

show cause­cum­demand notices calling upon the appellant to

show cause as to why the goods should not be classified under the

Sub­Heading 8536.90 and why the differential duty should not be

collected together with the interest and penalty.

10. The appellant gave reply to the show cause notices,

contending that what was manufactured by them was supplied only

to Railways as part of the signaling equipment and that, therefore,

the show cause notices required to be dropped.

11. However, the Assistant Commissioner passed 9 separate

Orders­in­original on 20/21.12.2001 confirming the demand. The

dates of the show cause notices, the period to which each one of

them related to, the differential excise duty arrived at by the

Adjudicating Authority and the penalty imposed by the Adjudicating

Authority are provided in a tabular column for easy appreciation as

follows:­

4
Show Cause Period Involved Differential Penalty
Notice Date Duty

30.08.1995 01.02.1995 to 31.07.1995 Rs. 3,04,662 Rs. 5000

05.02.1997 27.10.1995 to 09.01.1996 Rs. 66,311 1. Rs.
2000
09.02.1996 01.08.1995 to 31.01.1996 Rs. 95,978 2. Rs.
2000
06.08.1996 01.02.1996 to 31.07.1996 Rs. 1,63,843.25 1. Rs.
5000
06.02.1998 01.08.1996 to 31.01.1997 Rs. 2,69,842 2. Rs.
5000
07.08.1997 01.02.1997 to 31.07.1997 Rs. 1,53,441.583. Rs.
5000
04.09.1998 February 1998 Rs. 41,509.204. Rs.
2000
05.09.1998 01.03.1998 to 31.08.1998 Rs. 3,71,922.575. Rs.
5000
05.03.1999 01.09.1998 to 28.02.1999 Rs. 1,99,180 6. Rs.
5000
Total Duty Imposed/ Total Penalty Rs.16,67,109/­ 7.

Imposed                                                            Rs.36,000/­



12.   Aggrieved   by    the   Orders­in­original,    the    appellant      filed

statutory appeals. All the nine appeals were partly allowed by the

Commissioner (Appeals) by an Order dated 29.08.2003. By this

Order, the Appellate Authority confirmed the classification made by

the Adjudicating Authority and the consequential differential duty

demanded by the Adjudicating Authority. However, the penalty

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imposed by the Original Authority was set aside by the

Commissioner (Appeals).

13. Challenging that portion of the order of the Commissioner

(Appeals) upholding the proposed classification and demanding

differential duty, the appellant filed an appeal before CESTAT. The

CESTAT dismissed the appeal by a final order dated 26.03.2008. It

is against the said order that the appellant has come up with the

present appeal under Section 35L(b) of the Central Excise Act, 1944.

14. The questions that arise for our consideration in this appeal

are:

(i) Whether the “Relays” manufactured by the
appellant used only as Railway signaling equipment
would fall under Chapter 86, Tariff Item 8608 as
claimed by the appellant or under Chapter 85 Tariff
Item No.8536.90 as claimed by the Department ?

(ii) Whether the show cause­cum­demand notices
issued by the Department on various dates during
the period 1995­1998 were not barred by time
under Section 11­A of the Central Excise Act,1944,

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in the absence of any fraud, collusion, willful
misstatement or suppression of facts, especially
since the classification list submitted by the
appellant have been approved on 27.08.1993?

Question No.1

15. For finding an answer to question No.1, it is necessary first to

see the description of the goods that fall under Chapter 85 and

Chapter 86 with particular reference to the relevant Tariff Items

thereunder. Chapter 85 covers goods, described as “Electrical

machinery and equipment and parts thereof; sound recorders and

reproducers, television image and sound recorders and reproducers,

and parts and accessories of such articles.”

16. Chapter Heading 8536 covers “Electrical apparatus for

switching or protecting electrical circuits, or for making connections to

or in electrical circuits (for example, switches, relays, fuses, surge

suppressors, plugs sockets, lamp­holders and other connectors,

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junction boxes), for a voltage not exceeding 1,000 volts; connectors

for optical fibres, optical fibre bundles or cables.”

17. Sub­heading 8536.90 covers “other apparatus”. This includes

(i) Motor starters for AC motors under sub­heading 8536.90.10;

(ii) Motor starters for DC motors under sub­heading 8536.90.20;

(iii) Junction boxes under sub­heading 8536.90.30; and (iv) others

under sub­heading 8536.90.90.

18. Chapter 86 covers “Railway or tramway locomotives, rolling­

stock and parts thereof; railway or tramway track fixtures and

fittings and parts thereof; mechanical (including electro­mechanical)

traffic signaling equipment of all kinds.”

19. Chapter Heading 8608 covers “Railway or tramway track

fixtures and fittings; mechanical (including electro­mechanical)

signaling safety or traffic control equipment for railway, tramways,

roads, inland waterways, parking facilities, port installation or air­

fields; parts of the foregoing”.

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20. There are five sub­headings under Chapter Heading 8608

which are as follows:

8608 00 10 ­Railway and tramway track fixtures and
fittings………………..

8608 00 20 ­Mechanical equipment, not electrically powered for
signaling to, or controlling, road rail or other
vehicles, ships or aircraft

8608 00 30 ­Other traffic control equipment for
railways……………………

8608 00 40 ­Other traffic control equipment for roads or inland
waterways including automatic traffic control
equipment for use at ports and airports

8608 00 90 ­Other ……………………………………

9

21. The Assistant Commissioner who passed the Orders­in­

Original felt that the ‘Relays’ manufactured by the appellant fell

only under the category of ‘Electrical machinery’ covered by Chapter

85 and that in view of Note 2(f) of Section XVII, the expressions

“parts” and “parts and accessories” appearing in Chapter 86 do not

apply to electrical machinery or equipment, covered by Chapter 85.

The Assistant Commissioner also relied upon Rule 3(a) of the

“General Rules for Interpretation of the First Schedule” to the

Central Excise Tariff Act, 1985 to hold that the Heading which

provides the most specific description shall be preferred to the

Heading providing a more general description. Therefore, the

Original Authority held that since “Relays” do not find a mention in

Chapter 86, but finds a specific mention in Chapter Heading 8536,

the same has to be classified only under sub­Heading 8536.90.

10

22. The Appellate Authority agreed with the assessee that the

Relays manufactured by them are used solely as part of the Railway

signaling equipment, but held that in view of Note 2(f) of Section

XVII, the Orders of the Original Authority did not call for any

interference. However, the Appellate Authority set aside that portion

of the Orders of the Original Authority by which penalty was

imposed. This was on the ground that the classification list

submitted by the appellant on 27.08.1993 was approved by the

competent Authority and that, therefore, the appellant could not be

taken to have violated the provisions of the law.

23. CESTAT, by the Order impugned in the present appeal, merely

concurred with the reasoning given by the Appellate Authority and

dismissed the appeal.

11

24. As could be seen from the Orders of the Original Authority and

the first Appellate Authority, the answer to question No.1 revolves

around the description of goods found in Chapters 85 and 86, as

well as the Notes in Section XVII and the General Rules for

Interpretation of the First Schedule. We have already extracted the

description of goods in Chapters 85 and 86. Therefore, let us now

take note of the relevant Notes in Section XVII and the relevant Rule

of the General Rules for interpretation of the First Schedule.

25. Section 2 of the Central Excise Tariff Act, 1985 provides that

the rates at which duties of excise shall be levied under the Central

Excise Act, 1944 are specified in the First Schedule and the Second

Schedule. The First Schedule contains a set of Rules known as

“General Rules for the Interpretation of this Schedule”. These Rules

begin with a mandate that the “classification of goods in this

Schedule shall be governed by the principles laid thereunder.”

12

26. Rule 1 of these Rules makes it clear that “the titles of Sections,

Chapters and Sub­Chapters are provided for ease of reference only

and that for legal purposes, classification shall be determined

according to the terms of the Headings and any relative Section or

Chapter Notes and provided such headings or Notes do not otherwise

require, according to the provisions of the rules that follow”.

27. Rule 2 deals with (i) incomplete or unfinished articles; and (ii)

mixtures or combinations of material or substance. While Rule 2(a)

deals with incomplete or unfinished Articles, Rule 2(b) deals with

mixtures or combinations of a material or substance.

28. Rule 3 deals with cases where goods are classifiable under two

or more sub­headings. But Rule 3 begins with a reference to Rule

2(b). Therefore, it is necessary to extract Rule 2(b) and Rule 3

together. They read as follows:

“2. (a) xxxx

13

(b) Any reference in a heading to a material or substance shall be
taken to include a reference to mixtures or combinations of that
material or substance with other materials or substances. Any
reference to goods of a given material or substance shall be taken to
include a reference to goods consisting wholly or partly of such
material or substance. The classification of goods consisting of more
than one material or substance shall be according to the principles
of Rule 3.

3. When by application of rule 2(b) or for any other reason, goods
are, prima facie, classifiable under two or more headings,
classification shall be effected as follows:

(a) the heading which provides the most specific
description shall be preferred to headings providing a
more general description. However, when two or more
headings each refer to part only of the materials or
substances contained in mixed or composite goods or to
part only of the items in a set put up for retail sale,
those headings are to be regarded as equally specific in
relation to those goods, even if one of them gives a more
complete or precise description of the goods.

(b) mixtures, composite goods consisting of different
materials or made up of different components, and
goods put up in sets for retail sale, which cannot be
classified by reference to (a), shall be classified as if
they consisted of the material or component which gives
them their essential character, insofar as this criterion
is applicable.

(c) when goods cannot be classified by reference to (a) or

(b), they shall be classified under the heading which
occurs last in numerical order among those which
equally merit consideration.”

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29. Interestingly Rule 2(a) speaks about “Article”, Rule 2(b) speaks

about “material or substance” as well as “goods of a given material

or substance” and Rule 3 speaks about “goods”.

30. In the case on hand, the claim of the assessee was that the

relays manufactured by them were part of the railway signaling

equipment. But all the Authorities were of the unanimous view that

this product is referable to goods of a specific description in

Chapter sub­Heading 8536.90 and that, therefore, General Rule

3(a) will apply.

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31. But in invoking General Rule 3(a), the Authorities have

omitted to take note of 2 things. They are : (i) that as laid down by

this Court in Commissioner of Central Excise Vs. Simplex Mills

Co. Ltd1 the General Rules of Interpretation will come into play, as

mandated in Rule 1 itself, only when no clear picture emerges from

the terms of the Headings and the relevant section or chapter notes;

and (ii) that in any case, Rule 3 of the General Rules can be

invoked only when a particular good is classifiable under two or

more Headings, either by application of Rule 2(b) or for any other

reason. Once the authorities have concluded that by virtue of Note

2(f) of Section XVII, ‘relays’ manufactured by the appellant are not

even classifiable under Chapter Heading 8608, we do not know how

the Authorities could fall back upon Rule 3(a) of the General Rules.

There is a fundamental fallacy in the reasoning of the Authorities,

that Rule 3(a) of the General Rules will apply, especially after they

1 (2005) 3 SCC 51

16
had found that ‘relays’ are not classifiable under Chapter Heading

8608, on account of Note 2(f) of Section XVII.

32. Coming to Section XVII, which precedes Chapter 86, the same

contains a few notes, one of which is Note 2, which lists out certain

articles to which the expressions “parts” and “parts and

accessories” mentioned in Chapter 86 do not apply. Note 2 (f) reads

as follows:­

“1. xxxx

2. xxx

(a) xxxx

(b) xxxx

(c) xxxx

(d) xxxx
(e xxxx

(f) electrical machinery or equipment (Chapter 85)”

17

33. Note 2(f) is relied upon by the Revenue, in view of the fact that

Chapter Heading 8608 uses the words “parts of the foregoing” after

the words “Railway or tramway track fixtures and fittings” etc.

Chapter Heading 8608 does not specifically mention “electrical

relays”. The assessee’s contention is that “it is part of the railway

signaling safety or traffic control equipment” and that, therefore,

Relays manufactured by them would fall under Chapter Heading

8608 due to the usage of the word “parts”. It is this contention that

is sought to be repelled by the Authorities by relying upon Note 2(f)

of Section XVII.

34. Though at first blush, Note 2(f) seems to apply to the case on

hand, it may not, upon a deeper scrutiny.

35. Note 3 of Section XVII reads as follows:

“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.”

18

36. What is recognized in Note 3 can be called the “suitability for

use test” or ‘the user test’. While the exclusion under Note 2(f) may

be of goods which are capable of being marketed independently as

electrical machinery or equipment, for use otherwise than in or as

Railway signaling equipment, those parts which are suitable for

use solely or principally with an article in Chapter 86 cannot be

taken to a different Chapter as the same would negate the very

object of group classification. This is made clear by Note 3.

37. It is conceded by the Revenue that the relays manufactured by

the appellant are used solely as part of the railway signaling/ traffic

control equipment. Therefore, the invocation of Note 2(f) in Section

XVII, overlooking the “sole or principal user test” indicated in Note

3, is not justified.

38. On the question as to what test would be appropriate in a given

case, this court pointed out in A. Nagaraju Bros Vs. State of A.P.2,

as follows:

2 1994 Supp( 3) SCC 122

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“…..there is no one single universal test in these matters. The
several decided cases drive home this truth quite eloquently. It is
for this reason probably that the common parlance test or
commercial usage test, as it is called, is treated as the more
appropriate test, though not the only one. There may be cases,
particularly in the case of new products, where this test may not
be appropriate. In such cases, other tests like the test of
predominance, either by weight of value or on some other basis
may have to be applied. It is indeed not possible, nor desirable, to
lay down any hard and fast rules of universal application

Therefore, the respondents ought not to have overlooked the

‘predominant use’ or ‘sole/principal use’ test acknowledged by the

General Rules for the Interpretation of the Schedule.

39. As pointed out by the Commissioner (Appeals), the goods were

previously classified (before 1993) under Sub­heading 8536.90, but

a revised classification list, classifying them under sub­heading

8608, submitted by the appellant, was approved by the competent

Authority on 27.08.1993. After such specific approval of the

classification list, it is not proper on the part of the Authorities to

invoke Note 2(f) of Section XVII. Hence question No.1 is answered in

favour of the appellant and against the Revenue.

Question No.2

20

40. The second question that arises for consideration is as to

whether the show cause­cum­demand notices issued by the

Department on various dates during the period 1995­1998 were not

barred by time under Section 11­A of the Central Excise Act, 1944,

in the absence of any fraud, collusion, willful misstatement or

suppression of facts, especially since the classification list

submitted by the appellant have been approved on 27.08.1993.

41. At the outset we should point out that this is not a case where

the extended period of limitation would apply, especially in the light

of the admitted position that the assessee who had his product

classified under sub­heading 8536.90 till the year 1993, specifically

filed a classification list on 27.08.1993, reclassifying them under

sub­heading 8608 and the same was also approved by the

competent authority. Therefore, there is no question of any fraud or

collusion or any willful misstatement or suppression of facts or

contravention of any of the provisions of this Act or of the rules

made there under with intent to evade payment of duty. It is not

21
even the case of the Department that the appellant was guilty of

any of these things, warranting the invocation of the extended

period of limitation. Therefore, the conclusion is inescapable that

the Revenue had only the normal period of limitation available to

them to invoke the power under Section 11­A.

42. As a matter of fact the first Appellate Authority held in the

penultimate paragraph of its Order as follows:

“I find that the subject goods were previously classified under sub­
heading No.8536.90 and then the appellant asked for
reclassification of the goods under sub­heading No.8608.00. The
new classification was approved by the proper authority and the
appellant paid duty according to the approved classification. Hence
there is no violation of any provisions of law on the part of the
appellant and therefore penalty is not imposable under rule 173Q.

43. The Appellate Authority also held without any discussion, that

the show cause notices were issued within the time limit envisaged

in Section 11­A and that “any discussion on the jurisdiction of

invocation of extended period is not at all required”. Therefore, it is

obvious that none of the Authorities chose to invoke the extended

period of limitation, but proceeded on the footing that all show

22
cause notices were issued within the normal period of limitation. If

only any of the Authorities had taken care to look at the dates of the

show cause notices, the period covered by those notices and the

normal period of limitation that prevailed at that time, they could

have easily found that the show cause notices were at least partly

time barred.

44. The normal period of limitation for invoking Section 11­A was

six months until 11.05.2000 and the same was modified as one

year by Act 10 of 2000 with effect from 12.05.2000. This period of

one year was modified as two years by Act 28 of 2016 with effect

from 14.05.2016. Keeping this in mind let us now have a look at the

dates of issue of show cause notices and the period covered by the

show cause notices. They are as follows:

S.No. Date of Show Cause Period covered by the Show
Notice Cause Notice

1 30.08.1995 01.02.1995 to 31.07.1995

2 09.02.1996 01.08.1995 to 31.01.1996

3 05.02.1997 01.08.1996 to 31.01.1997

4 07.08.1997 01.02.1997 to 31.07.1997

23
5 06.08.1996 01.02.1996 to 31.07.1996

6 06.02.1998 01.08.1996 to 31.01.1997

7 04.09.1998 February 1998

8 05.09.1998 01.03.1998 to 31.08.1998

9 05.03.1999 01.09.1998 to 28.02.1999

45. It could be seen from the above table (i) that all show cause

notices were of a date prior to 12.05.2000 and hence the normal

period of limitation was only six months; and (ii) that at least a

couple of show cause notices were issued in respect of a period

partly or fully beyond the period of limitation. Unfortunately neither

the Appellate Authority nor CESTAT took care to analyze the show

cause notices individually with reference to the period covered by

them.

46. In any case all the show cause notices were issued only on

and after 30.08.1995, raising a classification dispute, after having

approved the classification list submitted on 27.08.1993. The

dispute in the case on hand was one of classification alone,

24
applicable to the product manufactured during the entire period

after 27.08.1993. The dispute was not invoice­centric. Therefore,

what was sought to be done by the Original Authority was actually

to review the approval of the classification list submitted on

27.08.1993 by cleverly issuing separate notices covering certain

specific periods. What is to be seen here is that the attempt to undo

the effect of the approval of the classification done on 27.08.1993,

was actually time barred. Therefore, despite the fact that some of

the individual notices were issued within the period of limitation

either in respect of the part of the period or in respect of the whole

of the period covered by them, the very invocation of Section 11­A,

in the facts and circumstances of the case, cannot be said to be

within time.

47. Therefore, both questions of law are answered in favour of the

appellant and the appeal is allowed. The Orders­in­Original, the

Order of the Appellate Authority and the Order of the CESTAT are

25
set aside. Consequently, the show cause­cum­demand notices are

also set aside. There will be no order as to costs.

…………………………..CJI.

(S. A. Bobde)

….…………………………..J.

(A. S. Bopanna)

…..………………………….J.

(V. Ramasubramanian)

March 08, 2021
New Delhi

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