Commissioner of Customs (Appeals), Bangalore Versus Elgi Tread India Ltd.>2005(12)LCX0388

2005(12)LCX0388

IN THE CESTAT, SOUTH ZONAL BENCH, BANGALORE

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

Commissioner of Customs (Appeals), Bangalore

Versus

Elgi Tread India Ltd.

Final Order No. 2035/2005, dated 1-12-2005 in Appeal No. C/210/2001

Cases Quoted -

Collector v. Indo-Swiss Synthetic Gem Manufacturing Company Ltd. 1995(11)LCX0098 Eq 2003 (162) ELT 0121 (Mad.) - Relied on[Para 5]

Commissioner v. Acer India Ltd. - 2004(09)LCX0014 Eq 2004 (172) ELT 0289 (S.C.) - Referred[Para 5]

Grasim Industries v. Commissioner - 2003(06)LCX0103 Eq 2003 (157) ELT 0123 (Tribunal) - Referred[Para 5]

Moorco (India) Ltd. v. Collector -1994(09)LCX0102 Eq 1994 (074) ELT 0005 (S.C.) - Referred[Para 2]

Pentafour Software and Exports Ltd. v. Commissioner - 2000(08)LCX0032 Eq 2001 (130) ELT 0110 (Tribunal)- Referred[Para 5]

Union of India v. Solar Pesticides Pvt. Ltd. - 2000(02)LCX0147 Eq 2000 (116) ELT 0401 (S.C.) - Referred[Para 5]

Advocated By -

Shri K.S. Reddy, JDR, for the Appellant.
Shri Shivadass, Advocate, for the Respondent.

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

- This is an appeal filed by the Revenue against Order-in-Appeal dated 3rd September, 2001 passed by the Commissioner of Customs Central Excise (Appeals), Bangalore.

2. The brief facts are as follows :

The respondent imported a Tyre Scanner K2 type separation and Tread Porosity System and software for Scanner K2. They classified the system under CTH 9027.80 of the Customs Tariff Act and the software under 8524.99. Revenue classified the goods under CTH 9031.80 along with the software under the same heading. The respondent cleared the goods on payment of duty under protest. Subsequently, they filed refund claim on the ground that the goods are appropriately classifiable as measuring or checking instrument under CTH 9027.80 and the software would be covered under CTH 8524.99. The Deputy Commissioner held that the system apart from checking the porosity of the tyre has got various other features like line separations, belt edge, ply, under cure, inconsistent rubber mix, zipper side wall, etc., and hence, it was classifiable under 9031.80. Therefore, he rejected the refund claim. Further, he held that the imported software was technical in nature and the same attracts duty. The respondents approached the Commissioner (Appeals) relying on the decision of the Supreme Court in the case of Moorco (India) Ltd. v. CCE reported in 1994(09)LCX0102 Eq 1994 (074) ELT 0005 (S.C). The Commissioner (Appeals) accepted the submission of the respondents and allowed their appeal. Revenue is aggrieved over the Order-in-Appeal on the following grounds.

(i). The Respondents have highlighted the thread porosity function and requested Commissioner (Appeals) to apply the Supreme Court decision in the case of Moorco (India) Limited. The system imported is multi-functional and not meant only for checking porosity, hence, the decision of the Supreme Court is wrongly applied. As the system is an inspection system to detect any defects in their files classifying the same under heading which is specific to measure porosity does not appear to be correct and not as per Rule 3(A) of the Interpretative Rules.

(ii) Rule 3(B) of the Interpretative Rules mentions that in the case of composite goods covering the material component giving the essential character has to be preferred. Applying this Rule, it appears that Chapter Heading 90.31 appears to be more appropriate, as no other heading in Chapter gives any specific reference to measure or checking appliances for detection of defects in the system.

(iii) A software imported is a technical software and the K2 system cannot be functioned unless this software is installed. Hence, adding the value of the software to the assessable value of the appliance applies to be correct. In addition, SI. No. 261 of Customs Notification 16/2000 provides duty exemption to information technology software falling under Chapter Heading 49 or 85.24 only. By no stretch of imagination it appears that the software supplied along with K2 system falls under the heading of information technology.

(iv) In the Order-in-Appeal there is no reference to unjust enrichment aspect.

3. Shri K.S. Reddy, learned JDR appeared for the revenue and Shri Shivadass, learned Advocate appeared for the Respondent.

4. The learned JDR referred to the technical literature and said that the system imported is useful for checking the various defects of retreaded tyres and not meant only for checking the porosity. He brought out attention to HSN Explanatory Notes SI. No. 27 under 90.39. Referring to the technical literature, the learned JDR said that the imported equipment uses ultrasonic waves. This is specifically covered under 90.31 in view of the Explanatory Note in SI. No. 27. He also drew our attention to SI. No. 18 under Heading 90.27 in HSN, which deals with apparatus for the determination of porosity or permeability. He said from the technical literature, it is very clear that the imported item has very many function and it is not a system to determine porosity of materials like sand, paper, etc. He strongly contended that the Respondents mis-represented the facts to get undue benefit. Further, he reiterated all the grounds of appeal.

5. The leaned Advocate made the following submissions,
(i) Heading 90.27 reads as follows :

(ii) Instruments and apparatus for physical or chemical analysis (For Example, Polarimeters, refractometers, spectrometers, gas or smoke analysis apparatus); instruments and apparatus for measuring or checking viscosity, porosity, expansion, surface tension or the like; instruments and apparatus for measuring or checking quantities of heat, sound or light (including exposure meters); microtomes.

The reading of the heading shows that the heading refers to apparatus for measuring or checking viscosity, porosity, expansion, surface tension or the like. Hence, if the imported item has extra features it cannot come out of the purview of 90.27, so long as the same is used for checking porosity.

(ii) The imported item is mainly used by the Respondent for checking the porosity. When there is a specific heading for apparatus for checking porosity, there is no need to go to classification 90.31, which is a residuary item.

(iii) Referring to the HSN Explanatory Note SI. No. 27 under heading 90.31, the learned advocate contended that the instruments referred therein are mainly used to detect the defects in machinery parts such as bars, tubes, profiles, machined articles such as screws, needles, etc. He further stated that there is no cathode-ray screen in the system imported. Therefore, he said the impugned goods would not be covered under 90.31.
(iv) The Original Authority stated that the software imported is a technical software used for type scanner K2 and rightly attracts duty and therefore the question of refund does not arise. The dispute was, therefore, relating to classification of the software and not on the valuation. The Respondent had claimed classification of the software under 8524.99 whereas the Department wanted to classify it along with machines under CTH 9032.80. The Department cannot now turn around to state that the value of the software is to be added to the value of the imported goods, when that was not the original dispute. In any case, the value of software cannot be added to the value of the machines in view of the decision of the Supreme Court in the case of CCE v. Acer India Limited reported in 2004(09)LCX0014 Eq 2004 (172) ELT 0289 (S.C.).

(v) The software is to be classifiable Chapter Heading 85.24. Once the software is classified under Chapter Heading 85.24, it is exempted in terms of SI. No. 261 of Notification No. 17/2001-Cus., dated 1-3-2001 as amended. The explanation to the earlier Notification, which excluded from the purview of the exemption the software required for the operation of any machine has been amended with effect from 28-2-99. This change has been taken note in the decision of the Tribunal in the case of Pentafour Software & Exports Ltd. v. CC reported in 2001 (130) ELT 110.

(vi) The doctrine of unjust enrichment would not be applicable to capital goods, as held by the Hon'ble High Court of Madras in the case of CC & Others v. The Indo-Swiss Synthetic Gem Manufacturing Company Ltd. 1995(11)LCX0098 Eq 2003 (162) ELT 0121 (Mad.). The above decision of the High Court has been followed by the Tribunal in the case of Grasim Industries, v. CCE reported in 2003(06)LCX0103 Eq 2003 (157) ELT 0123 (T.) = 2003 (057) RLT 791. The decision of the Apex Court in the case of Union of India v. Solar Pesticide Pvt. Ltd. reported in 2000(02)LCX0147 Eq 2000 (116) ELT 0401 (S.C.) is applicable only to captively consumed goods and consequently, the decision of the Madras High Court still holds the filed and cannot be considered as over ruled by the decision of the Apex Court.

6. We have gone through the records of the case carefully. The technical write-up by the Respondent shows that the tyre porosity and thread separation are the most common defects in new tyres and retreaded tyres. The imported K2 system is capable of detecting the thread porosity and thread separation. Even the technical literature supplied by the manufacturer indicates that the K2 system is meant for checking the defects in tyres. No doubt, it is capable of checking various defects including porosity. The question is whether the system can be called as an instrument or apparatus for measuring or checking porosity and classifiable under 90.27. The main objection of the Revenue in classifying the system under 90.27 is that the system is not exclusively used for measuring porosity. It is capable of many other uses. The HSN Explanatory Notes indicates various instruments like polarimeters, saccharameters, refractometers, etc., which measure the physical and chemical properties and also various instrument which measure or check viscosity, porosity, expansion, surface tension etc. The question to be asked is whether the impugned item measures or checks porosity. The answer to this question is yes. It has also been stated that the porosity limit is a very important factor in the tyres and when porosity is beyond the normal limit, serious accidents are caused. It is very clear that the importer has purchased this system mainly for checking the porosity of retreaded tyres. Even though, the impugned system can check many other defects enumerated in the technical literature, it can be called as an apparatus for checking porosity. The presence of additional features cannot exclude the item from the purview of Heading 90.27. In our view SI. No. 27 under 90.31 would be applicable to machine parts and not to retreaded tyres. Hence, the decision of the Commissioner (Appeals) appears to be correct. As far as the software is concerned, the same is classifiable under Chapter Heading 85.24 and is exempted in terms of SI. No. 261 of Notification No. 17/2001-Cus., 1-3-2001 as amended. As regards unjust enrichment following the ratio of decision of Madras High Court cited by the learned Advocate, we hold that unjust enrichment would not be applicable to the case of Capital goods imported for manufacturer of end products. In these circumstances, we reject the Revenue's appeal and uphold the Order-in-Appeal.
(Pronounced in open Court on 1-12-2005)

Equivalent 2006 (199) ELT 0486 (Tri. - Bang.)