2005 (7) TMI 386 - AT - Customs

Summary

Issues Involved:

1. Correct classification of "Kernel" imported by the parties.
2. Applicability of Section Note 4 to Section XVI of the Customs Tariff.
3. Interpretation of Rule 2(a) of HSN Explanatory Notes.
4. Clarification provided by the Department of Electronics and Ministry of Finance.
5. Classification of additional items imported with the kernel.
6. Legality of the additional duty demand.

Detailed Analysis:

1. Correct Classification of "Kernel":
The primary issue in both appeals is the correct classification of the "Kernel" imported by the parties. The appellants claim classification under Chapter sub-heading 8473.30 as parts and accessories of goods falling under CH 84.71, while the Revenue contends it should be classified under 8471.91 as a "Digital Processing Unit."

2. Applicability of Section Note 4 to Section XVI:
The Commissioner based his conclusion on Section Note 4 to Section XVI of the Customs Tariff, which pertains to machines presented as a unit for assessment. The appellants argued that the kernel, consisting only of a power supply unit, motherboard, and connectors, does not perform the well-defined function of an Automatic Data Processing Machine without additional components like RAM, FDD, and HDD.

3. Interpretation of Rule 2(a) of HSN Explanatory Notes:
The Commissioner also relied on the test of essential character contained in Rule 2(a) of HSN Explanatory Notes. The appellants contended that resorting to interpretative Rule 2(a) is incorrect when the classification can be determined based on section and chapter notes. They cited several case laws, including *Rajasthan Synthetic Industries Ltd. v. CC* and *Hindustan Packaging Co. Ltd. v. CCE*, to support their argument.

4. Clarification by Department of Electronics and Ministry of Finance:
The Department of Electronics, in a letter dated 16-6-1994, clarified that the kernel assembly is classifiable under 84.73 and not 84.71. Similarly, the Ministry of Finance reiterated in a letter dated 15-10-1998 that computer kernels without microprocessor chips on the motherboard are classifiable under Sub-heading 8473.30.

5. Classification of Additional Items:
The Commissioner had 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. The appellants argued that this classification is beyond the order of the Tribunal and illegal. The Tribunal held that these items should be classified on merits, as done in the original order of the Commissioner dated 25-6-1997.

6. Legality of Additional Duty Demand:
The demand for additional duty of Rs. 1,39,284/- was contested by the appellants as it was beyond the order of the Tribunal. The Tribunal concluded that there is no need to include the value of these items to the value of the kernels, and the clearance already made on payment of duty on merits is regularized.

Conclusion:
The Tribunal concluded that the kernel should be classified under 8473.30 as parts and accessories of goods falling under CH 8471. The opinion of the Department of Electronics and the clarification given by the Ministry of Finance were upheld. The appeal by the appellants was allowed, and the Revenue's appeal was dismissed, as the Tribunal found no reason to interfere with the Commissioner (Appeals) order. The judgment was pronounced in open court on 5-7-2005.