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Reportable

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.       9730 OF 2003

Commissioner of Central Excise,  Delhi-IV ... Appellant

                               Versus

M/s. Sandan Vikas (I) Ltd. ...Respondent

J U D G M E N T

Dipak Misra, J.

The  present  appeal  calls  in  question  the  legal

substantiality of the judgment and order dated 23.04.2003

passed by the Customs, Excise and Gold (Control) Appellate

Tribunal, New Delhi (for short, ‘the Tribunal’) in Appeal No.

E/577/2001-B whereby the  Tribunal,  placing  reliance  on

the  decision  Sanden Vikas  (India)  Ltd.  v.  C.C.E.,  New

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Delhi1,  opined  that  the  issue  raised  by  the  revenue  is

covered by the said decision and, therefore, the appeal was

sans merit and did not warrant any interference.  

2. At the outset, it is apt to note that when the matter

was  listed  before  a  two-Judge  Bench  on  25.3.2015,  the

following order came to be passed:-

“From the reading of the impugned order passed by  the  Customs,  Excise  and  Gold  (Control) Appellate  Tribunal,  New  Delhi  (for  short,  ‘the Tribunal’), it transpires that the Tribunal followed decision  of  this  Court  in  the  case  of  this  very respondent-assessee  titled  Sanden Vikas  (India) Ltd. v. Collector of Central Excise, New Delhi, 2003 (153) E.L.T. 3 (S.C.) and on that basis, the appeal of the respondent was allowed.  

The Revenue challenging the aforesaid order in  the  present  appeal,  contended  that  the judgment of  this Court in  Sanden Vikas (India) Ltd. (supra)  requires  re-consideration.   This  is specifically stated in the synopsis and the list of dates.  We further find that on 08.12.2003, an order  was  passed  by  this  Court  admitting  the present appeal, after condoning the delay in filing the appeal.  In view thereof, we are of the opinion that  the  matter  needs  to  be  heard  by  a three-Judge Bench.  Ordered accordingly.

The Registry is directed to obtain necessary instruction in this regard from Hon’ble the Chief Justice of India for listing of this matter before a three-Judge Bench.”

1  2003 (153) ELT 3 (SC)

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In  view  of  the  aforesaid  order,  the  matter  has  been

placed before us.

3. Be it noted, the decision in Sanden Vikas (India) Ltd.

(supra) was the pronouncement between the same parties

for  a  different  period  i.e.  20.3.1990  to  25.7.1991.   The

present  appeal  is  primarily  concerned  with  the  period

1.8.1991  to  28.2.1993,  during  which  notification  no.

166/86-CE was applicable.  Before we proceed to deal with

the  postulates  in  the  notification,  it  is  obligatory  to

understand  what  was  decided  in  Sanden  Vikas  (India)

Ltd. (supra).   The  facts  in  the  said  case  were  that  the

appellant-assessee therein,  the respondent in the present

appeal,  is a manufacturer of  car air-conditioning kits.   It

classified the said goods under Item No. 5 of Heading 8415

of the Schedule to the Central Excise Tariff Act, 1985 (for

short,  ‘the Act’)  for  the purpose of  availing the benefit  of

exemption as given under Notification No. 166/86-CE dated

March  1,  1986  (as  amended  from  time  to  time).   The

appellant therein contended that it was only manufacturing

parts of the air-conditioning kit and, therefore, the kit could

not  be  treated  as  an  air-conditioner.   The  Assistant

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Collector,  disagreed  with  the  stance  of  the  assessee  and

treated the same as air-conditioning system falling under

Item No.  3  of  the  Heading  8415 of  the  Notification.   On

March 20, 1990, a new Entry, Item No.8, was added to the

table  of  the  Notification  and  thereafter  the  assessee

classified the air-conditioning kits under the said Entry for

the purpose of levy of excise duty.  On October 1, 1990, the

Assistant  Collector,  Central  Excise,  Division-I,  Faridabad

issued a notice to the assessee stating that under the said

Entry  i.e.  serial  no.  8,  the  sub-heading  relating  to

compressor had not been included in the second column of

the  table  and  as  the  car  air-conditioning  kits  include

compressor they fall under Item No.3 (Heading No. 8415.00)

of the Notification and accordingly the assessee was asked

to  show  cause  why  the  excise  duty  amounting  to

Rs.2,20,74,021.30 should not be demanded from it.   The

assessee replied to the said show cause notice and other

show cause notices asserting that car air-conditioning kits,

including compressor, manufactured by it, is a machinery

especially designed to be used for air-conditioning of motor

vehicle and as it is not usable as room air-conditioner, split

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unit  air-conditioner  or  package  type  air-conditioner,  it

cannot be classified in that group; the components of the

car  air-conditioner  kit  are  nothing  but  parts  of  the  car

air-conditioner and the air-conditioning kit was shown as

such in common parlance and, therefore, it was classifiable

under serial no. 8 of the said Notification.  The Assistant

Collector, vide order dated January 24, 1992 rejected the

stand put forth by the assessee and confirmed the demand

which was affirmed by the Collector (Appeals) by his order

dated  July  13,  1992.   On  appeal  being  filed  before  the

Tribunal, it dismissed the same.  The two-Judge Bench of

this Court referred to the column 3 of the table annexed

with the notification and posed the question whether the

car air-conditioning kit is classifiable under Item No. 3 or

under Item no. 8 of the table of the said Notification.  After

reproducing the Item No. 3 of the said Notification, to which

we shall refer to in detail at a later point of time, analysed

the description of goods given against Item No.3 in  column

(3),  referred to the amendment made on March 20, 1990

whereby in column (3), following words were added against

Item No.5:-

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“other than the parts and accessories of car air- conditioner including car air-conditioning kit.”

The Court observed that what is excluded from Item

No.5 is  mentioned against  Item No.8,  as  per  the  portion

quoted above.  Thereafter, the two-Judge Bench referred to

the Memorandum explaining the provisions in the Finance

Bill, 1990 insofar as it relates to Chapter 84 and observed

thus:-

“13.  A  careful  reading  of  the  items afore-mentioned,  in  the  light  of  the  note  under Chapter 84 in the Memorandum, leaves no doubt in  our  minds  that  exclusion  of  the afore-mentioned  goods  from  the  description  of goods against Item No. 5 and their specification against  Item No.  8,  with effect  from March 20, 1990, was with the intention of creating a specific entry  in  regard  to  car  air-conditioners  –  both parts  and  accessories  thereof  as  well  as  car air-conditioning kits.

14. As  the  air-conditioning  kit  is  meant  for providing  air-conditioning  in  car  and  as  the description of the goods first mentioned against column (3) which notes air-conditioners, we are inclined  to  take  the  view  that  the  car air-conditioning kit fell within the meaning of the air-conditioners against Item No. 3 before March 20, 1990.  This position continued till Item No. 5 was amended and Item No. 8 was inserted in the said Notification where specific entry with regard to  parts  and  accessories  of  car  air-conditioner and car air-conditioning kit was provided.”

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Thereafter,  the  Court  opined  that  a  specific  Entry

prevails over the general Entry and, therefore, w.e.f. March

20,  1990  till  July  25,  1991,  air-conditioning  kits  which

comprises of various parts are classifiable under Item No. 8

of the said Notification.  The Division Bench reproduced the

Explanation (2)  that  was added on July 25,  1991, which

reads as under:-

“Explanation  (2)  –  For  the  purposes  of  this notification,  the term ‘car air-conditioner kit’  or ‘car air-conditioning kit’ shall exclude the kit or assembly of parts which contains automotive gas compressor with or without magnetic clutch.”

While interpreting Explanation (2), the Court noted the

submissions  of  the  learned  counsel  and  eventually  held

thus:-

“18. To resolve the controversy, we shall revert to the wording of the said Explanation.  It provides that for the purposes of the Notification, the term “car  air-conditioner  kit”  or  “car  air-conditioning kit”  shall  exclude  the  kit  or  assembly  of  parts which contains automotive gas compressor with or  without  magnetic  clutch.   In  our  view,  the Explanation  has  the  effect  of  taking  away  the automotive  gas  compressor  (with  or  without magnetic  clutch)  from  out  of  the  car air-conditioning kit.  The car air-conditioning kit which comprises  of  parts  of  car  air-conditioner remains as part of Item No. 8 of the notification. The  Explanation  cannot  be  so  construed  as  to

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remove  the  term  “car  air-conditioner  kit”  or “air-conditioning kit” itself from Item No. 8 of the Notification.   What  follows  is  that  ‘car air-conditioning  kit  minus  automotive  gas compressor with or without magnetic clutch’ will remain in the description of goods against Item No. 8 of  the Notification and that the excluded part  of  the  kit,  namely,  automotive  gas compressor with or without magnetic clutch, will cease to be part of Item No. 8 and will be liable to duty separately.”

4. It is submitted by Ms. Nisha Bagchi, learned counsel

appearing for the appellant that the view expressed by the

Division Bench in paragraph 18 wherein it has been held

that  car  air-conditioning  kit  minus  automotive  gas

compressor with or without magnetic clutch will remain in

the  description  of  goods  against  Item  No.  8  and  that

excluded  part  of  the  kit,  namely,  ‘automotive  gas

compressor’ will cease to be a part of Item No.8 and would

be liable to duty separately  is  not  the correct conclusion

and it requires to be reconsidered.  It is urged by her that in

view of the express language of the Explanation (2) which

excluded  car  air-conditioning  kits  which  contained

automotive  gas  compressor,  with  or  without  magnetic

clutch, from the purview of Item No.8 of the Notification, the

entire kit would stand excluded from the scope of Item No.8

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and thereby as a logical corollary the said air-conditioning

kit  which  continues  to  be  meant  for  providing  air

conditioning in cars would then revert to Item No. 3 which

has been expressly held to cover car air-conditioning kits.

Learned  counsel  has  referred  to  Rule  2(a)  of  Rules  of

Interpretation and Section note 4 to Section XVI to highlight

that  while  interpreting  the  section  notes,  the  respondent

would be disentitled to the benefit of the Notification since

in the manner in which the goods came to be cleared, the

compressor  remained  part  of  the  air-conditioning  kit.

Elaborating the same, it is contended by her that the car

air-conditioning  kit  cleared  by  the  respondent  was  also

having  a  corresponding  clearance  of  gas  compressor  and

the same constitute an air-conditioning unit and would be

chargeable to duty as per serial no.3 of the Notification as

held by this Court in paragraph 14 of the earlier judgment.

Learned  counsel  has  referred  to  certain  facts  how  the

respondent was able to supply the order during the period

August, 1991 to February, 1993 to avail the benefit under

serial no.8 of the said Notification.  She has placed reliance

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on  Collector of Customs v.  Maestro Motors2,  for  in the

said decision, as per the learned counsel, it has been held

that when in a Notification exemption is with reference to

an Item in the First  Schedule  to the Customs Tariff  Act,

then the interpretative rules would equally apply to such

Notification.  Learned counsel has also submitted that the

reliance  by  the  respondent  on  Board’s  Circular  No.

479/45/99  CX  dated  17.8.1999  is  irrelevant  since  the

present dispute relates to period from 1991 to 1993 much

prior to the issuance of the Board’s circular.   

5. In  oppugnation  of  the  aforesaid  submissions,  it  is

propounded by Mr. V. Lakshmi Kumaran, learned counsel

for the respondent that there is no cavil over the fact that

the  respondent  is  a  manufacturer  of  car  air-conditioning

kits and it is also not in dispute that classification of the kit

falls  under  Chapter  8415.00  (which  reads  as

air-conditioning  machines,  comprising  a  motor-driven fan

and elements for changing the temperature and humidity,

including those machines in which the humidity cannot be

separately  regulated)  of  the  Central  Excise  Tariff  Act.

2  (2005) 9 SCC 412

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Learned counsel  would  contend that  during the  disputed

period  i.e.  1.8.1991  to  28.2.1993,  the  respondent  was

clearing  the  automotive  gas  compressors  and  the

air-conditioning  kits  (without  gas  compressors)  under

different gate passes, which were supplied separately, and

at different point of time and on that basis the respondent

was discharging excise duty at the rate mentioned in serial

no.1  of  Notification  No.  166/86-CE  whenever  automotive

gas compressors were cleared and the rate  mentioned in

serial  no.8  of  Notification  No.  166/86-CE,  whenever  car

air-conditioning  kits  (without  the  gas  compressors)  were

cleared. He has referred to relevant part of the Notification

No. 166/86-CE, as it  stood during the period of  dispute,

which we shall refer to at a later stage, and placed heavy

reliance on the two-Judge Bench in Sanden Vikas (India)

Ltd. (supra), especially, on paragraphs 16, 17 and 18 and

supported it  in entirety.   It  is  put forth by him that  the

Explanation (2) to the Notification is not applicable where

the  car  air-conditioning  kit  was  cleared  without  the

automotive gas compressor.  According to him, Explanation

(2)  to  Notification  applies  only  in  a  situation  where  the

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air-conditioning  kit  or  assembly  of  parts  contains

automotive  gas  compressor  (with  or  without  magnetic

clutch).   Commenting  on  the  Explanation  (2),  learned

counsel  would  contend that  the  said  Explanation  means

that where a car air-conditioning kit or assembly of parts

contains  an  automotive  gas  compressor  (with  or  without

magnetic  clutch)  then  such  a  car  air-conditioning  kit  or

assembly  of  parts  stands  excluded  from  the  term  “car

air-conditioner kit” or “car air-conditioning kit” and hence,

the said Explanation has no bearing if a car air-conditioning

kit  is  cleared  without  the  automotive  gas  compressor.

Learned counsel has submitted that as the respondent had

cleared  the  automotive  gas  compressor  separately  on

payment of duty in serial no.1 and the car air-conditioning

kit  without  the  automotive  gas  compressor  was  cleared

separately in serial no.8, it is not liable to pay any further

excise duty.  Elaborating further, it is urged by Mr. Lakshmi

Kumaran that as the items were cleared independently they

attract duty as given in serial no.1 of Notification.   It is his

stand that the respondent during the relevant period was

not clearing the car air-conditioning kit with the automotive

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gas  compressor  and  any  decision  on  this  plea  of  the

appellant,  as far  as the respondent is  concerned,  is  only

academic.     

6. Learned  counsel  would  further  submit  that  the  car

air-conditioning  kit  consisting  of  the  automotive  gas

compressor  will  be  an  air-conditioning  machinery  falling

under Chapter 8415 of the Central Excise Tariff Act but not

an  ‘air  conditioner’  itself  falling  under  serial  no.3  of  the

Notification. In that context, he has invited our attention to

Circular  No.  479/45/99-CX,  which  is  urged  to  be

clarificatory in nature.  It is put forth by him that the stand

of  the  revenue  that  the  said  Circular  would  not  be

applicable  to  the  past  transactions  is  unacceptable

inasmuch as it really clarifies the position.  Rebutting the

submissions  of  the  revenue  that  the  presence  of  the

automotive gas compressor in a kit will remove the kit away

from  serial  no.8  of  Notification  No.  166/86-CE,  it  is

canvassed  by  him  that  assuming  the  contention  of  the

revenue  is  correct,  the  car  air-conditioning  kit  with  the

automotive gas compressor will rightly fall under serial no.5

of the said Notification, for Explanation 2 begins by saying

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“For  the  purposes  of  this  notification,  the  term  “car

air-conditioner  kit”  or  “car  air-conditioning  kit”  shall

exclude  the  kit  or  assembly  of  parts  which  contains

automotive  gas  compressor  with or  without  the magnetic

clutch.   In  this  context,  it  is  his  submission  that  car

air-conditioning kit is mentioned in serial no.5 and serial

no.8 and serial no.5 would exclude car air-conditioning kit

only when the automotive gas compressor is not part of the

kit and if the automotive gas compressor is a part of the car

air  conditioning  kit,  according  to  the  contention  of  the

revenue,  it  will  not  be  “parts  and  accessories  of  the  car

air-conditioning  including  car  air-conditioning  kit”  under

serial no.8 and in that event, it will have to be under serial

no.5.  Elucidating the submission, learned counsel would

contend,  the  exclusion  under  serial  no.5,  namely,  “other

than  the  parts  and  accessories  of  car  air-conditioner

including car air-conditioning kit” will  therefore not apply

for such air-conditioning kits comprising the automotive gas

compressor  and  as  far  as  car  air-conditioning  kits  are

concerned,  serial  no.5  and  serial  no.8  are  mutually

exclusive, for if kit cannot be covered under serial no.8, and

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it has to be covered under serial no.5 and vice-versa.  

7. Replying to the submissions of Rule of Interpretation

to Central Excise Tariff Act, it is submitted by the learned

counsel  for  the  respondent  that  they  are  not  applicable

while interpreting the present Notification No. 168/86-CE

since the said Notification has not borrowed its terms from

the  Tariff.   In  this  context,  the  learned  counsel  has

commended us to the decision in  CCE, Jaipur v. Mewar

Bartan Nirman Udyog3.  It is also urged by him that the

decision in Maestro Motors (supra) is not applicable to the

facts and circumstances of the present case since in that

case the words used in the Excise Tariff and the Notification

were  identical,  whereas  in  the  present  matter,  the

Explanation 2 has re-defined the term “car air-conditioner

kit”  or  “car  air-conditioning kit”  and these terms are not

part  of  the  Excise  Tariff,  therefore,  the  principles  of  the

Rules of Interpretation of the Tariff are inapplicable for the

purpose  of  interpretation  of  the  present  Notification  No.

166/86-CE.  

8. On  the  basis  of  the  aforesaid  submissions,  learned

3  (2010) 13 SCC 753

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counsel for the respondent would contend that there is no

requirement for reconsideration of the judgment passed in

Sanden Vikas (India) Ltd. (supra).

9. At the outset, it is imperative to appositely scrutinise

the Notification No. 166/86-CE dated 1.3.1986 (as amended

from time to time).  In the case at hand, we are concerned

with  the  amendment  made  in  the  said  Notification  vide

Notification  Nos.  75/90-CE  dated  20.03.1990  and

68/91-CE dated 25.07.1991

10. As the period in question relates to the period after the

amendment  took  place,  it  is  apposite  to  reproduce  the

relevant part of the Notification No. 166/86-CE as it stood

during the period of dispute.  It reads as follows:-

S.N. Heading or sub heading no.

Description of goods Rate Condition

01 8414.10 (i) Gas compressors of the kind  used  in air-conditioners  including room  air  conditioners (window  type),  split  unit air  conditioners  and package  type  air conditioners  of  capacity less  not  exceeding  7.5 tonnes

(ii) Other gas compressors

Rs.6000/- per compressor

Forty  per cent  ad valorem  

-

03 8415.00 Air-conditioners  including -

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room  air  conditioners (window  type),  split  unit air  conditioners,  and package  type  air conditioners, -  

(a)  of  capacity  not exceeding 1.5 tonnes

(b)  of  capacity  exceeding 1.5  tonnes  but  not exceeding 3 tonnes  

(c) of capacity exceeding 3 tonnes  but  not  exceeding 7.5 tonnes

(d)  of  capacity  exceeding 7.5  tonnes  but  exceeding 10 tonnes

(e)  of  capacity  exceeding 10  tonnes  but  not exceeding 15 tonnes

Rs.12,000 per  air conditioner

Rs.15,000 per  air conditioner

Rs.33,000 per  air conditioner

Rs.70,000 per  air conditioner

Rs.74,000 per  air conditioner

05 84.15,  84.18, 84.19,  84.76.91, 8481.10, 8481.91, 8536.10, 9032.11  or 9032.91

Parts  and  accessories  of refrigerating  and  air conditioning   appliances and  machinery,  all  sorts, other  than  the  parts  and accessories  of  car  air conditioner  including  car air-conditioning kit

Forty  per cent  ad valorem

-

08 84.15,  84.18, 84.19 84.76.91, 8481.10, 8481.91, 8536.10, 9032.11 or 9032.91

Parts  and  accessories  of car  air  conditioner including  car air-conditioning kit

Sixty  five percent  ad valorem

-

11. Be  it  stated  that  air  conditioners  including  car

air-conditioning kits fall under Chapter 8415.00 of Central

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Excise Tariff Act, 1985.  The Explanation to the Notification

was inserted on 25.07.1991.  During the period in dispute,

as the factual matrix would unveil, the respondent-assessee

had  cleared  the  car  air-conditioning  kits  without  gas

compressors  under  serial  no.8  and  automotive  gas

compressors under serial no. 1.  To put in other words, the

respondent has paid ad valorem excise duty at 65% on the

car air-conditioning unit without gas compressors and 40%

ad valorem duty on the gas compressors.  The stand of the

revenue is that in terms of Explanation 2 read with Rule

2(a)  and  Section  Note  4  to  Section  XVI,  the  goods

manufactured  would  be  covered  by  serial  no.3  of  the

aforesaid Notification and they were chargeable under the

same.   Similar issue had arisen and this Court has dealt

with it in paragraph 18.  Before we proceed to scrutinise the

correctness of the said authority, we have to clear the maze,

whether interpretation as per Rule 2(a) would be applicable

to the Notification.  Rule 2(a) of Rules for the Interpretation

of Schedule reads as follows:-

“2. (a) Any reference in a heading to goods shall be taken to  include a  reference to  those  goods incomplete  or  unfinished,  provided  that,  the

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incomplete or unfinished goods have the essential character of  the complete or finished goods.  It shall also be taken to include a reference to those goods  complete  or  finished  (or  falling  to  be classified as complete or finished by virtue of this rule), removed unassembled or disassembled.”

12. Learned counsel for the appellant has also referred to

Section Note 4 to Section XVI, which reads as follows:-

“4. Where a machine (including a combination of machines)  consists  of  individual  components (whether separate or interconnected by piping, by transmission  devices,  by  electric  cables  or  by other devices) intended to contribute together to a clearly function covered by one of the headings in Chapter 84 or Chapter 85, then the whole falls to be classified in the heading appropriate to that function.”  

13. The  question  is  whether  the  Rules  of  Interpretation

would apply.  Learned counsel for the appellant has heavily

relied on  Maestro Motors (supra).  In the said case, after

reproducing  Rule  2(a),  the  two-Judge  Bench  has  opined

thus:  

“Thus,  as  per  this  interpretative  rule,  even though  an  article  is  incomplete  or  unfinished when it is presented for clearance, if that article has the essential character of the complete article and/or even though the complete or finished arti- cle is presented in an unassembled or dissembled form the classification must be as a complete ar- ticle. In this case, it is fairly not being denied that the  components  were  imported  in  CKD  packs.

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Thus  what  was  imported  was  completely knocked-down  cars.  The  components  imported had  the  essential  character  of  a  complete  car even though presented in unassembled form. As per  interpretative  Rule  2(a)  even  though  pre- sented unassembled they have to be classified as a complete article.”

14. Learned  counsel  for  the  respondent  has  drawn

inspiration from Mewar Bartan Nirman Udyog (supra).  In

the said case,  the Court  posed the question whether  the

respondent-assessee  was  entitled  to  claim  benefit  of

exemption  Notification  No.  3/2001-C.E  dated  1.3.2001.

The assessee in the said case had claimed exemption under

serial no. 200 of the said Notification which was denied by

the department on the ground that trimmed or untrimmed

circles of brass cannot fall under serial no. 200 but they fall

under serial no. 201.  The Court noted the fact that if the

produce in question falls under serial no. 200, then the rate

of duty is nil.  The Court extracted the relevant part of the

notification and held that serial no. 200 would apply and

assessee would be entitled to claim nil rate of duty under

the said notification.   At  that juncture,  the Court opined

that:-

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“5. We may also point out at this stage that it is well  settled  position  in  law  that  exemption Notification has to be read strictly.  A notification of exemption has to be interpreted in terms of its language.  Where the language is plain and clear, effect must be given to it.  While interpreting the exemption notification, one cannot go by rules of interpretation applicable to cases of classification under the Tariff.  Tariff items in certain cases are required  to  be  interpreted  in  cases  of classification disputes in terms of HSN, which is the basis of the Tariff.  In this case, we are not concerned with interpretation of Tariff.   In fact, as  stated  above,  the  product  in  question  falls under  Chapter  Heading  74.09.   It  is  the dichotomy which is introduced by the exemption Notification which needs to be interpreted.  Items made  from  copper  attract  duty  at  the  rate  of Rs.3500 PMT whereas  circles  made from brass attract nil rate of duty.  As stated above, in this case, the Department has not disputed the fact that  the  circles  were  manufactured  by  the assessee from brass.  This is expressly recorded in the findings given by the Tribunal.”     

15. The  aforesaid  two  decisions  are  to  be  understood

regard being had to the context in which they are delivered.

In Maestro Motors (supra), it is elucidated that one has to

examine the notification and then refer to serial number of

the notification and the item number in the first schedule of

the Act and if they are identical and  pari materia, rules of

interpretation will apply. Rules of interpretation may not be

applicable  if  the  notification  commands  and  require  a

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different understanding.  It  needs no special emphasis to

state  that  rules or principles  of  interpretation are always

subject to context and not binding commands on iron cost

imperatives.   Therefore,  we  do  not  perceive  any  conflict

between  the  two  decisions  which  deal  with  rules  of

interpretation.  It has to be understood in the context.   

16. We  have  already  reproduced  Rule  2(a)  and  Section

Note 4 to Section XVI.  Rule 2(a) of Rules of Interpretation

consists of two parts.  First part stipulates that incomplete

or  unfinished goods would fall  in heading relating to the

completed  goods  provided  the  incomplete  or  unfinished

good  bears  the  essential  character  of  the  complete  or

finished  goods.   Second  part  predicates  unassembled  or

assembled  goods  can  be  treated  as  goods  complete  or

finished goods.   In  this  context  we may usefully  refer  to

Rule 1 of the Rules of Interpretation, which is as follows:-

“1. The  titles  of  Sections  and  Chapters  are provided  for  ease  of  reference  only;  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  hereinafter contained.”

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17. Thus, Rule 1 of the Rules of Interpretation lays down

that for legal purpose classification shall be determined in

accordance  with  the  terms  of  headings  and  any  relative

section or Chapter Notes, provided such headings or Notes

do not otherwise require a different interpretation.   

18. Keeping the aforesaid in view and the context, we are

required to interpret the serial numbers of the notification.

On a scanning of the Notification, it is perceptible that the

gas compressors are specified and taxable on the heading

serial  no.1.   Serial  no.3  deals  with  air  conditioners

including room air-conditioners.  Needless to say that the

air-conditioner is  a distinct and separate  commodity sold

and  purchased  and  is  distinguishable  from  the  gas

compressors  or  kits.   Serial  no.5  deals  with  parts  and

accessories of  refrigerator and air conditioning appliances

and machinery of all sorts.  Thus, serial no.5 would cover

air-conditioner kits, but would not include compressors, for

they are specifically covered under serial no.1.  It is apt to

note here that parts and accessories of a car air-conditioner

including air-conditioning kit, are expressly excluded from

serial  no.5.   The  reason  for  exclusion  is  that  car

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air-conditioners  and  car  air-conditioning  kits  have  been

included  in  serial  no.8.   Car  air-conditioner  or  car

air-conditioning  kits  cannot  per  se  perform  essential

functions of  an air-conditioner  until  and unless they  are

fixed in a car.  A car air-conditioning is obtained by fitting

part by part, compressor is fitted above engine, condenser is

fitted in front of the radiator, cooling coil is fitted inside the

car, fan is fitted in front of cooling coils and then all theses

parts are connected by copper pipes to complete the cycle. If

this exercise is  not carried out,  they would be parts and

accessories  of  car  air-conditioners  and  not  a  car

air-conditioner itself.  The assembly is possible when the kit

and the compressor are installed and attached to the car.   

19. In this context, one is required to x-ray the language

used  in  Explanation  (2)  and  understand the  same.   The

Explanation states that for the purpose of Notification, “car

air-conditioning  unit”  or  “car  air-conditioning  kit”  shall

exclude  the  kit  or  assembly  of  parts  which  contains

automotive  gas  compressor  with or  without  the magnetic

clutch.   The  two-Judge  Bench  in  Sanden Vikas  (India)

Ltd. (supra) has understood the said Explanation to mean

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that  it  has  the  effect  of  taking  away  the  automotive  gas

compressor (with or without magnetic clutch) from out of

the car air-conditioning kit.  It is further held that the car

air-conditioning  kit  which  comprises  of  parts  of

air-conditioner  remains  as  part  of  item  no.8  of  the

Notification and the Explanation cannot be so construed as

to  remove  the  term  “car  air-conditioner  kit”  or  “car

air-conditioning kit” itself from item no.8 of the notification.

What has been further opined is that the air-conditioning

kit  minus  automotive  gas  compressor  with  or  without

magnetic  clutch  will  remain  in  the  description  of  goods

against item no.8 of the notification and that the excluded

part of the kit, namely, automotive gas compressor with or

without magnetic clutch will cease to be a part of item no. 8

and will be liable to duty separately.  

20. Ms. Nisha Bagchi, learned counsel appearing for the

department  would  contend  that  in  view  of  the  express

language employed in Explanation (2) which excludes car

air-conditioning  kit  which  contain  automotive  gas

compressor  with  or  without  magnetic  clutch  from  the

purview of item no.8 of the Notification, the entire kit would

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stand excluded from the scope of item no.8 and the said car

air-conditioning  kit  which  continues  to  be  meant  for

providing air-conditioning in cars would revert to item no. 3,

which has been expressly held to cover car air-conditioning

kits.  It is urged by her that the interpretation placed by the

two-Judge  Bench  causes  violence  to  the  plain  and

unequivocal  language expressed in the Explanation (2) to

the  Notification.   To  appreciate  the  said  submission,  it

requires  a  careful  scrutiny  of  the  language  used  in  the

Notification.  The Notification consciously and deliberately

treats a complete or finished air-conditioner as a dutiable

entity under serial no.3, but kit of the same air-conditioner

is not treated at par and similar to a complete or finished

air-conditioner  dutiable  under  serial  no.3.   The

air-conditioners’  parts  and  the  accessories  including

air-conditioner  kits  are  dutiable  under  serial  no.5,  if  it

relates to a window, split or packaged air-conditioner.  The

compressor,  however,  is  liable  to  duty  as  per  the  rates

specified  in  serial  no.1.   Car  air-conditioning  kits  are

dutiable  under  serial  no.  8  and  after  insertion  of

Explanation  2,  the  car  air-conditioning  kits  without  the

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compressor  would  be  dutiable  in  serial  no.8  and  the

compressor itself would be dutiable separately under serial

no.1.  This is the intention of the notification.  Regard being

had to the notification, which we have already spelt out in

the context of notification, it can safely be stated that the

accessories and parts including kits, compressors and the

finished  or  complete  air-conditioners  having  treated

separately  under  different  serial  numbers  and  the

notification  intended  to  maintain  the  said  distinction

between a completed and a finished produce and the kits

and compressors which can be assembled and installed in a

car  to  function  as  a  car  air-conditioner  after  necessary

efforts and working including gas charging.   Under these

circumstances,  the submission of  the learned counsel  for

the revenue is that while interpreting the notification, Rule

2(a) and Section Note 4 to Section XVI would be applicable

does not commend acceptance.  In our considered opinion,

applying  Rule  2(a)  of  the  Rules  of  Interpretation  to  the

Notification in question, would be contrary to the legislative

intent.   

21. Mr.  Lakshmi  Kumaran,  learned  counsel  for  the

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respondent,  as  we have  indicated earlier,  has  drawn our

attention to Circular No. 479/45/99 CX dated 17.8.1999.

The relevant part of the said circular reads as follows:

“Doubts  have  been  expressed  as  to  whether fitting of duty paid parts and components of an air-conditioner in a car amounts to manufacture of car air conditioner.  

......

2. The matter has again been examined by the Board.  It is observed that in the course of the activity of fitting the parts and components of an air-conditioner in a car,  they are fitted part  by part  at  different  places  in  a  car  engine  and elsewhere in the car.  Though by virtue of such fitments  an  ordinary  car  is  converted  into  an air-conditioned  car,  but  at  no  point  of  time  & car-conditioner  as  a  separate  and  distinct commodity  comes  into  existence.   It  is  thus clarified that the activity of acquiring duty paid parts  and  components  of  a  car  air-conditioner from  the  market  and  fitting  the  same  at appropriate positions in a car does not result into manufacture of a new excisable item such as car air-conditioner”

Relying  on  the  same,  learned  counsel  for  the

respondent  submitted  that  though  the  said  circular  has

been  brought  at  a  later  stage,  but  it  really  exposits  the

intention of the notification.  The question of retrospective

applicability  or  not  does  not  arise,  for  the  simon  pure

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reason is it really clarifies the position.   

22. Having  regard  to  the  analysis  we  have  made,  the

purport  and impact  of  the  Notification,  the question that

would  arise  for  consideration  is  whether  Sanden  Vikas

(India) Ltd. (supra) lays down any incorrect proposition of

law.  In the said decision, in paragraph 18, which we have

already reproduced, the two-Judge Bench, construing the

Explanation, has laid down that the expression cannot be

so construed as to remove the term “car air-conditioner kit”

or  “car  air-conditioning  kit”  itself  from  item  no.8  of  the

Notification.   What follows is that car air-conditioning kit

minus automotive gas compressor with or without magnetic

clutch will remain in the description of goods against item

no.8 of  the Notification and the excluded part  of  the kit,

namely,  automotive  gas  compressor  with  or  without

magnetic clutch will cease to be a part of item no.8 and will

be liable to duty separately.   As we understand from the

said conclusion, a car air-conditioning kit, if it contains an

automotive  gas  compressor  with  or  without  magnetic

clutch,  the  kit  part  will  meet  the  description  of  goods

against item no.8 of the Notification and the automotive gas

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compressor with or without magnetic clutch will be liable to

duty separately and it will go away from description of Item

no.8.  To elaborate, if a car air-conditioning kit has both,

there has to be two sets of duty; one for the kit and the

other  for  the  automotive  gas  compressor  with or  without

magnetic clutch.  Learned counsel for the Revenue would

submit  that  such  an  interpretation  is  contrary  to  the

Explanation (2) as it clearly lays the postulate that the car

air-conditioner kit or car air-conditioning kit shall exclude

the kit or assembly or parts which contains automotive gas

compressor with or without magnetic clutch and when there

is total exclusion of the kit, and hence, it gets out of item

no.8 of the Notification.  In a sense, the submission is if the

kit contains the automotive gas compressor, it shall stand

excluded  and  will  be  liable  to  duty  separately.   Learned

counsel  for  the  respondent  has  submitted  that  in  that

event, it would not fall under serial no.8, for if kit cannot be

covered under serial no.8, it has to be covered under serial

no.5 and vice versa.  Expatriating the said submission, it is

urged by him that serial no.8 lays duty i.e. 65% ad valorem

as  compared  to  serial  no.5  40%  ad  valorem,  and  the

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respondent has paid duty as per serial no.8 at the rate of

65% and would be entitled to refund as it has paid higher

duty under serial no.8 of the notification.  We have noted

the submission for the sake of completeness though we do

not intend to address the same.   

23. According to us, if a manufacturer sells the kit and the

automotive  gas compressor  as one unit  of  transaction,  it

will get out of serial no.8.  If a manufacturer sells the kit

and the automotive gas compressor separately by different

invoice or by separate pricing, we do not see any reason for

exclusion  of  the  air-conditioning  kit  from the  serial  no.8

because there are two transactions and the kit is charged as

per  serial  no.8  and  compressor  is  charged  as  per  serial

no.1.  There is no dispute over the fact that one can buy the

automotive gas compressor with or without magnetic clutch

with the  kit,  and both can also  be purchased separately

from different manufacturers.  What the two-Judge Bench

has said is that an air-conditioning kit minus automotive

gas compressor with or without magnetic clutch will remain

in  the  description  of  goods  against  item  no.8  of  the

Notification and that the excluded part of the kit, namely,

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automotive gas compressor with or without magnetic clutch

will cease to be a part of item no.8 and will be liable to duty

separately.   Thus,  the  Division  Bench  has  quite

categorically stated that if the air-conditioning kit does not

contain  automotive  gas  compressor  with  or  without

magnetic  clutch,  duty  is  paid  as  per  item no.8  and if  it

contains  the  automotive  gas  compressor  with  or  without

magnetic clutch, it will not come under item no.8.   

24. In our view, the ratio laid down in the said decision

cannot  be  found  to  be  erroneous  but  as  a  matter  of

clarification, we say that if a kit and compressor are sold in

a singular invoice or in one pricing, it will go out of item

no.8 and duty will be paid separately, but if there are two

invoices for separate pricing, the air-conditioning kit would

come under serial no.8 and the automotive gas compressor

with  or  without  magnetic  clutch  will  be  liable  to  duty

separately.   We  may  hasten  to  clarify  that  if  there  is  a

combined  sale,  which  serial  item  it  will  fall,  being  not

necessary in this case, we are not inclined to dwell upon the

same.  We have only clarified the two-Judge Bench decision

in Sanden Vikas (India) Ltd. (supra) to the above effect.

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25. Coming  to  the  case  at  hand,  it  is  the  case  of  the

appellant that the respondent-assessee has sold the kit and

compressor  separately  and  that  position  having  been

accepted by the tribunal, we do not find any error in the

order passed by the authorities and the Tribunal.  

26. Resultantly,  the civil  appeal  stands disposed of  with

the clarification of  the decision in  Sanden Vikas (India)

Ltd. (supra) as per paragraph 24.  There shall be no order

as to costs.  

.............................J. [Dipak Misra]

.............................J.       [R.K. Agrawal]

..........................., J. [Prafulla C. Pant]

New Delhi July 1, 2015