Processes carried on imported gensets resulting into creation of functional and more operational product Power Pack would constitute manufacture

[Arising out of OIO-10/COMMISSIONER/RKS/AHD-II/2009, dt.28.04.2009, OIO-01- /COMMR/RAJU/AHD-II/2012, dt.29.03.2012, passed by Commissioner of Central Excise & Customs, Ahmedabad-II and OIA-143/2009-AHD-II-CE/ID/COMMR-A-/AHD, dt. 27/03/2009 passed by the Commissioner (Appeals-I), Central Excise, Ahmedabad]

 Brief of the case:

The CESTAT Ahmedabad in the case of M/s Quippo Energy Private Ltd. vs. Commissioner of CE & ST held that the activities carried on by the assessee on imported gensets results into existence of a more functional & operational product catering the needs of industrial consumers which has different use and commercial identity from the imported gensets, would amount to manufacture within the definition of Sec 2(f) of the Central Excise Act, 1944.

 Facts of the case:

• M/s Quippo Energy Pvt.Ltd. the assessee (appellant), started business of leasing of power pack on rental basis to their clients. They were importing the Gas Generating Sets comprising of engine coupled with Alternator on common base frame and were paying customs duty under sub-heading 8502.2090 of Customs Tariff Act.
• Assessee after undertaking certain processes cleared the imported goods as Containerized Gensets also termed as Power Pack. They were supplying Power Pack on lease basis to the customers and also providing manpower to operate and maintain the power pack in the customer’s premises.
• On 17.07.2008, the officers of Central Excise (Preventive), Ahmedabad-II visited the assessee’s factory and examined the process undertaken by them. The Assistant Commissioner (Ahmedabad-II) informed the assessee that its activities, would amount to manufacture by virtue of Note 4 and 6 of Section XVI of the Schedule to Central Excise Tariff Act, 1985.
• A Show Cause Notice dated 19.11.2008, was issued by the Commissioner , proposing demand of duty along with interest and to impose penalty on the power pack cleared during the period from November 2006 to July 2008, classifiable under sub-heading 8502.2090 of the First Schedule to the Central Excise Tariff Act, 1985. Similarly, six other show cause notices were issued proposing demand of duty along with interest, to impose penalty and confiscation of goods as already cleared during the said period, on the identical issue, for the period from August 2008 to March 2011.
• Adjudicating the show cause notices , Commissioner raised demands of Rs. 7,08,99,886/- and Rs.3,45,34,494/- and also imposed equivalent penalties under Sec AC of Central Excise Act. Further, penalties   of Rs. 2 crore and 1 crore was levied under Rule 25 of Central Excise Rules. Even further, fines in lieu of confiscation of Rs. 4.50 crores and 22lacs were imposed along with a personal penalty of Rs.50,00,000.00 was imposed on Shri Montu Patwa, General Manager (Finance & Accounts ) of the company under Rule 26(1).
• Against such orders of Commissioner, assessee approached before CESTAT, Ahmedabad.

Contention of the Assessee:

• The learned counsel for the assessee challenged the adjudication order raising demand along with interest and penalty on merits as well as on invocation of extended period of limitation.
• It was submitted that Appellants had undertaken certain activities in their premises by using few components for the purpose of transportation from the assessee’s premises to customer’s premises and for proper maintenance of supplied equipment.
• The Genset would remain Genset even after processes undertaken on them. It is therefore, there was no change in identity, character and use of Gensets and as such the activities undertaken would not amount to manufacture in terms of Section Notes 4 & 6 of Section XVI of Central Excise Tariff Act, 1985.
• It was also contended that the imported Gensets are complete in themselves and fully functional and classifiable under sub-heading No.8502.2090 under Customs Tariff Act, as electricity generator and therefore, the same goods would not come under sub-heading No.8502.2091 of Central Excise Tariff Act,1985.
• Further, the invocation of extended period of limitation was not valid because assessee by its letter dated 17.07.2008 itself informed the Department about their activity and it acted on bonafide belief all the way.

 Contention of the Revenue:

• The process undertaken by the assessee would amount to manufacture, as it brings into existence, a new product having distinct name Power Pack along with its distinct character and use from the imported gensets.
• It was submitted that goods in question namely Power Pack, would be covered under the Heading 8502 of Central Excise Tariff Act 1985 as it covers simple combination of engines and alternator and reliance was placed upon the decision of Hon’ble Supreme Court in the case of Laminated Packings Pvt.Ltd. Vs CCE 1990 (49) ELT 326 (SC).
• It was next to impossible that without the assembling of components/parts with the imported machinery, a complete operational Generator Set termed as Power Pack could come into existence. Therefore, the activities carried out are squarely covered under the Chapter Note No.4 & 6 of Section XVI of the First Schedule to the Central Excise Tariff Act, 1985.
• Further, demand of duty for the period upto September 2007 was not barred by limitation, as the assessee had not informed the Department prior to that period. It is a case of suppression of fact with intent to evade payment of duty and demand of duty for extended period of limitation could be invoked.

Held by CESTAT Ahmedabad:

• As per statement of Shri Divyesh Shah (General Manager), the Gensets imported was incomplete machine and can be used into complete form only after assembly of various accessories & components.
• Section 2(f) of Central Excise Act, 1944, the definition of manufacture includes the process incidental to the completion of a manufactured product. Heading 85.02 covers Electric Generating Sets and Rotary Connectors. Sub-heading 8502.2090 covers Generating sets.
• In the present case, the activities of fixing of anti-vibrating mounting pad, radiator, Lube Oil Tank, Ventilation, fans, silencers, Cable Trays, Control Panel and other electrical items, hydraulic test processing etc., are mounted together as one unit on a common base, known as Power Pack and also Containerized Gensets. Such activities were infact incidental to the completion of manufacture of Power Pack, and without such activities Power Pack cannot be used by the customers.
• Further, the contention of assessee that the Gensets imported by them were capable of generating electricity, and the Gensets itself could be marketed. But the process was undertaken by the on the imported Gensets so as to cater the needs of industrial customers who would prefer to buy Power Pack rather than Gensets.

• However, the plea of assessee that that the extended period of limitation cannot be invoked is valid because the assessee by its letter dated 22.11.2007, informed the Assistant Commissioner of Central Excise for a clarification on any possible liability of Central Excise duty relating to the process undertaken by it on imported genset. There is no material on record of suppression of facts with intent to evade payment of duty.
• On the basis of above observations, the process undertaken by the assessee would constitute manufacture as a new product with different commercial identity   got emerged as result of the process.
• Tribunal relied on the decision of Hon’ble Supreme Court in the case of Anand Nishikawa Company Ltd Vs CCE Meerut 2005 (185) ELT 149 wherein the court held that when there was full disclosure of facts by the assessee beforehand then no claim as to suppression of facts could be entertained for the purpose of invoking extended period of limitation within the meaning of proviso to Section 11A (1) of the Act.
• Keeping all these things into consideration, CESTAT held that the demand of duty along with interest for the normal period is confirmed. The demand of duty with interest for the extended period of limitation and confiscation and imposition of redemption fine and penalties are set aside.
• Further, the adjudicating authority was directed to extend CENVAT Credit benefit, while quantifying duty, subject to verification of necessary records.