2016 (11) TMI 504 - HC - Central Excise

Defective fans received under rule 173-H - assembly of dismantled parts or fan/new part amounts to manufacture? - replacement of defective fan - Held that - it is not disputed that defective fans were received for the purpose of service or repair. They were dismantled and parts were kept in heap. Dismantled parts independently can not be identified as fan - decided in favor of assessee. When defective fans which had been dismantled, are reassembled, after removal of defective parts, repaired and replaced as new one by reusing remaining workable parts, it is a case of mere repairs and service and same can not be said to be manufacture as defined under Section 2 (f) of Central Excise Act, 1944. Learned counsel for Revenue could not place any authority before us to persuade us to take a different view. - service or repair by replacement of new parts while using other parts for reassembling, will not amount to manufacture . Appeal allowed - decided in favor of assessee.

Summary

Issues:
1. Identification of defective fans when dismantled and stored separately.
2. Whether reassembling dismantled parts amounts to manufacturing under Central Excise Act.
3. Allegations of duty evasion by replacing defective fans with new ones.
4. Responsibility of factory officials in the omission or commission of acts.

Analysis:

Identification of Defective Fans:
The Tribunal referred four questions of law to the High Court regarding the identification of defective fans when dismantled and stored separately. The counsel for Revenue argued that once an item is dismantled and converted into different parts, its identity as the original item disappears. In this case, defective fans were received for service or repair, dismantled, and the parts were stored separately. The High Court agreed with the assessee, stating that dismantled parts cannot be identified independently as a fan. Therefore, the first question was answered in favor of the assessee and against Revenue.

Manufacture under Central Excise Act:
Regarding the second question, the High Court held that reassembling defective fans after removing faulty parts and replacing them with new ones does not amount to 'manufacture' under Section 2(f) of the Central Excise Act, 1944. The court emphasized that such activities constitute mere repairs and services, and using remaining workable parts for reassembly does not meet the definition of 'manufacture.' The counsel for Revenue failed to provide any persuasive authority to support a different view. Consequently, the second question was answered, stating that service or repair by replacing parts while reassembling does not constitute 'manufacture.'

Allegations of Duty Evasion:
Given the answers to the first and second questions, the third question automatically favored the assessee. The High Court ruled in favor of the assessee, stating that the replacement of defective fans with new ones through repair and service did not establish the evasion of duty by passing off excisable goods as repaired items. Therefore, the third question was answered in favor of the assessee and against Revenue.

Responsibility of Factory Officials:
Regarding the fourth question, which pertained to the responsibility of factory officials in the omission or commission of acts, the High Court sided with the assessee. The court held that since there was no case of 'manufacture' resulting in the creation of new fans, the officials could not be held responsible for any wrongdoing. Consequently, the fourth question was answered in favor of the assessee and against Revenue. The reference was answered accordingly and disposed of by the High Court.