2005(07)LCX0018

IN THE CESTAT, SOUTH ZONAL BENCH, BANGALORE

Dr. S.L. Peeran, Member (J) and Shri T .K. Jayaraman, Member (T)

Digital Globalsoft Ltd.

Versus

Commissioner of Customs, Bangalore

Final Order Nos. 1081-1082/2005, dated 5-7-2005 in Appeal Nos. C/167 & 47/2003

Cases Quoted -

Hindustan Packaging Co. Ltd. v. Collector -1995 (075)ELT 0313 (Tribunal) - Referred [Para 4]
Netlon India Ltd. v. Commissioner- 2000(08)LCX0307 Eq 2000 (121) ELT 0675 (Tribunal) -Referred [Para 4]
Rajasthan Synthetic Industries Ltd. v. Collector -1989(03)LCX0012 Eq 1989 (042) ELT 0024 (Tribunal) - Referred [Para 4]
DEPARTMENTAL CLARIFICATION CITED
C.B.E. & C. Circular No. 528/132/98-Cus. (TU), dated 15-10-1998 [Paras 4, 5]

Advocated By -

S/Shri G. Shivadass, Anilkumar and R.N. Viswanath, SDR, for the Appellant.
S/Shri R.N. Viswanath, SDR and B. Venugopal, Advocate, for the Respondent.

[Order per: T.K. Jayaraman, Member (T)]. -

In Appeal No. C/167/03, M/s. Digital Globalsoft Ltd. has appealed against OIO dated 31-3-2003/8-4-2003 passed by the Commissioner of Customs, Bangalore. The Appeal No. C/47/03 is filed against OIA No. 125/2002, dated 18-12-2002. The issue in both the appeals are common. The question to be decided is correct classification of "Kernel" imported by parties. The parties claim classification of the product under Chapter sub heading 8473.30 of the Customs Tariff as parts and accessories of goods falling under CH 84.71. But, the Revenue holds that the correct classification would be under 8471.91 as a "Digital Processing Unit".
2. The kernel consists of a power supply unit, motherboard and other connectors housed inside a metal box. In order to make it a full-fledged computer other items like RAM (Random Access Memory), Floppy disk drive (FDD) or other storage units (Hard Disk Drive) are required. There is value addition to the extent of 42% to 92% between the kernel and the automatic data processing machine. It is seen that the department is not very consistent with regard to the classification to this item. In the past the department classified the item under 84.73 only. However, when there was a change in rate of duty in March 1994, the department sought to re-classify the kernel under 84.71. In appeal No. C/167/03, the proceedings against the party culminated in the Order-in-Original dated 25- 6-1997 passed by the Commissioner of Customs, Bangalore. He classified the item under Chapter 84.71. The party appealed to the Tribunal. The Tribunal in its Final Order No. 380/2002, dated 15-3-2002, remanded the matter for de novo consideration inter alia to consider whether the kernel without RAM memory storage could not be a unit covered and classified under CH 84.71. The Tribunal also held that the interpretative rules cannot be applied in this case. In pursuance of the Final Order of the Tribunal, the impugned order has been passed. In the impugned order the Commissioner has held that the kernel is classifiable under 8471.91 as Digital Processing Unit and has also held that the other items imported with kernel are also classifiable under Chapter Heading 84.71. The appellants have strongly challenged the impugned order.
3. S/Shri G. Shivadass, Anilkumar and B. Venugopal, learned Advocates appeared for M/s. Digital Globalsoft Ltd. and Shri R.N. Viswanath, the learned SDR appeared on behalf of the Revenue.
4. The learned Advocates adduced the following arguments;
(i) The Commissioner based his conclusion on the following basis: (a) Section Note 4 to Section XVI of the Customs Tariff;
(b) The test of essential character contained in Rule 2(a) of HSN Explanatory Notes;
(c) The opinion dated 6-12-1994 given by the Joint Director, STPI;
(d) The statements of the officials of the appellants;
(e) The dictionary meanings of Central Processing Unit and Mother Board.
(ii) The Advocate explained that each of the conclusions reached by the Commissioner is incorrect. Section Note 4 to Section XVI would come into play only if a machine consisting of individual components whether interconnected or not is presented as a unit for assessment. In this case the kernel merely consists of a power Supply unit, motherboard and other connectors. All these do not contribute to the well-defined function of the Automatic Data Processing Machine. Only when RAM, FDD and HDD are added the well defined functions can be performed. Resort to interpretative Rule 2(a) is incorrect. When the classification of the product can be determined on the basis of section and Chapter notes then resort to interpretative Rule 2(a) is not warranted. He relied on the following case laws:
. Rajasthan Synthetic Industries Ltd. v. CC -1989 (042) ELT 24
. Hindustan Packaging Co. Ltd. v. CCE -1995 (075) ELT 313
. Netlon India Ltd. v. CCE, Vadodra - 2000 (121) ELT 675
(iii) In terms of note 5(B) and to Chapter 84 the kernel in the absence of memory modules and storage units cannot be called as an 'Unit'.
(iv) The Department of Electronics vide letter dated 16-6-1994 has provided a clarification that the kernel assembly is classifiable under 84.73 and not 84.71.
(v) Similar product is classified under Chapter Heading 84.73 in the United Kingdom.
(vi) According to departmental circular No. 528/132/98-Cus(TU) dated 15-10-98, computer kernels are classifiable under 8473.30 Then the opinion of MAlT on the issue supports stand of the appellants.
(vii) Classification of Populated PCBs (memory modules), Floppy: Drives, mouse and key board; software and printed matter imported vide Bill of Entry No. 1163 dated 24-10-1994 as part and parcel of the kernels/system boxes on the ground that they came along with the said kernels/system boxes, is prima facie illegal in as much as the revision in classification of these items is beyond the order of the Tribunal and in the light of the fact that the Revenue had not filed any appeal against the classification held by the Commissioner of Customs in the original proceedings. The demand to the extent of Rs. 1,39,284/- is the additional liability fastened on the appellants which is beyond the order of the Tribunal and therefore illegal.
5. We have gone through the records of the case carefully. It is seen that originally Revenue was classifying the item under 8473.30 only. When the rat duty changed, the department switched over to 84.71.91. However, the Department of Electronics, in its communication dated 16-6-1994 have clarified that the kernels are classifiable under 8473.30. The extract of the department's letter is reproduced below:

Governmentof India

Departmentof Electronics, Electronics Niketan,

6,C.G.D. Complex, New Delhi

No.22(1)/94-EXP.                        Dated: 16-6-1994 M/s. Digital Equipment (India) Ltd.,

6thFloor, Tolstoy House,

15/17,Tolstoy Marg, New Delhi - 110001

Subject :- Import of Sub-assembly of computer systems.
Dear Sir,
Kindly refer your letter dated 7-6-1994 regarding the clarification on import of sub-assemblies for computer systems. The kernel assembly consists of the following parts :-
1. CPU board without memory
2. Power supply
3. Pedestal assembly
4. Packing box
5. Clamp screws, etc.
The pedestal assembly basically is an electronic assembly which is used for connecting the input output devices and peripherals. The sub- assembly is to be used for assembling computer system VAX 5500. Therefore, basically it consist of three electronic assemblies, namely, motherboard, power supply and pedestal assembly. There is no input and output device assembly built in or attached to the above-mentioned three assemblies and the CPU motherboard does not have memory board. It is a socket for adding memory modules.
Heading 84.71 of CTA provides for digital automatic processing machines/digital processing units/input-output units and storage units. It makes. it mandatory that these machines in the same housing should have an input/output unit, in addition to central processing unit or memory unit.
Section 84.73 provides for parts and accessories (other than covers carrying cases) suitable for use solely or principally with the machines heading No. 84.71.
The above three sub-assemblies though put in a single box are parts and accessories of the main computer system. Therefore, in our opinion the three sub-assemblies can be classified under Chapter 8473.30 of CTA.
This issues with the approval of Shri K. Roy Paul, Joint Secretary, Department of Electronics.

   Yours faithfully,

                                                                                                                                                                   Sd/-

(R.C.Sachdeva)

The Ministry of Finance letter, dated 15-10-1998 is reproduced below:

F.No. 528/132/98-CUS(TU)

GOVERNMENTOF INDIA

MINISTRYOF FINANCE

DEPARTMENTOF REVENUE

(TARIFFUNIT)

NEWDELHI, THE 15th Oct., 1998

To,
All Chief Commissioners of Customs & Central Excise,
All Commissioners of Customs,
Sub :- Classification of Kernels without Microprocessor chips on the motherboard whenever the motherboard is built in and applicability of exemption notifications - regarding
Reference have been received from Commissioner of Customs, Bangalore and Air Cargo Complex, Delhi in which they have expressed difficulty in classifying computer kernels - computer inner and outer shell consisting of motherboard without C.P.U., base memory, power supply, floppy disk drive, all assembled in the Housing and computer body outer shell and inner shell without any other item. The point of dispute was that whether the assembly would be given benefit of notification No. 23/98-Cus. Sl. No. 188, when it contains populated P.C.Bs and the notification excluded populated PCBs.
2. The issue had previously been discussed at Point No.2 in the conference of Commissioners of Customs, held at Chennai in December, 1997, which inter alia decided that, "computer inner and outer cabinets consisting of mother board, base memory, power supply unit, floppy disc drive, all assembled in the housing are classifiable as parts of computer under Sub- heading 8473.30".
3. The matter has been re-examined by the Board and it is reiterated that the goods in question will still be classifiable as parts of computer only under Sub-heading 8473.30 and will be eligible for exemption under notification No. 11/97-Cus., dated 1-3-1997 and notification No. 23/98-Cus., dated 23-6-1998, as the case may be, as the populated PCBs fitted in the inner shell loses its identity as PPCB.

Yoursfaithfully,

Sd/-

(O.P. Khanduja)  

SR.Technical Officer  

(TariffUnit)

6. We also hold the view that one should not jump to interpretative Rules 2(a) when the classification can be done in terms of Section and Chapter Notes. Moreover, without RA.M, memory module and storage devices, the impugned goods cannot be considered as 'Units' under Chapter 8471. The opinion of the Department of Electronics and also the clarification given by the Ministry cannot be easily brushed aside. In view of the above, we have no hesitation in classifying the items under 8473.30 as parts and accessories of goods falling under CH 8471.
7. In the impugned order, the Commissioner has classified the kernel under Chapter Heading 84.71 and further included the value of populated PCBs, software and printed matters cleared under B/E 1163 dated 24-10-1994 as part and parcel of the kernels. Since, we have classified the kernels under 8473.30, these items have to be classified on merits. This has been done in the original order of the Commissioner dated 25-6-1997 as indicated below:

8. It is also seen that the duty liability has also been discharged on them. In view of the above, there is no need to include the value of the items to the value of the kernels. In other words, the clearance already made on payment of duty on merits is regularised. Hence, the appeal is allowed in the above terms. Revenue's Appeal:
9. In the impugned order, the Commissioner (Appeals) has classified the kernel under 8473.30 as 'parts of computer'. He has also held that they would
not be classifiable under 8471. However, the Revenue has appealed against Commissioner's order on the ground that the goods would be classifiable under 8473.30. In view of our finding in the Party's appeal, we are not inclined to interfere with the order of the Commissioner (Appeals) order. The same is upheld and therefore the Revenue's appeal is dismissed.
(Pronounced in open Court on 5-7-2005)

Equivalent 2005 (187) ELT 0322 (Tri. - Bang.)

Equivalent 2005 (102) ECC 0292 (Tri)