2006 (7) TMI 8 - SC - Central Excise

Whether the chillers manufactured by M/ s. Carrier Aircon Limited are classifiable under Chapter Heading 84.18 of the Schedule to the Central Tariff Act or under Chapter Heading 84.15? Held that - 'Chillers' manufactured by the respondent are cleared as separate elements and not as air- conditioning machine, therefore, for same have to be classified under tariff entry 84.18 as refrigerating or freezing equipments as the basic function of the chillers is to chill the water or liquid. Chillers manufactured by the respondent cannot be classified under heading 84.15 simply because 90% of the chillers manufactured by the respondent were being used in the commissioning of central air-conditioning plant. End use to which the product manufactured is put to, cannot determine the classification of the product when the product manufactured falls under a specific heading. Heading 84.18 covers refrigerators, freezers and other refrigerating or freezing equipment. Accordingly, the chillers in question shall fall under specific heading 84.18 of the Tariff Act. This view is supported by the explanatory notes of H.S.N. below heading 84.15. Chillers in the domestic and international trade parlance are known as refrigerating equipment. The trade identifies chillers as refrigerating machinery on the basis of its function of chilling water using refrigerating circuit. Even by testing it from the commercial parlance test as well the chillers would not be classifiable under Chapter Heading 84.15. Appeal dismissed.

Issues Involved:
1. Classification of chillers under the Central Excise Tariff Act.
2. Invocation of extended period of limitation under Section 11A.
3. Imposition of penalty under Section 11AC.
4. Charging of interest under Section 11AB.

Issue-wise Detailed Analysis:

1. Classification of Chillers:
The primary issue was whether the chillers manufactured by M/s. Carrier Aircon Limited should be classified under Chapter Heading 84.18 (refrigerating and freezing equipment) or Chapter Heading 84.15 (air-conditioning machines) of the Central Excise Tariff Act. The respondent classified chillers under sub-heading 8418.10, which was initially accepted by the Department. However, the Department later issued a show cause notice proposing classification under Chapter Heading 84.15, arguing that chillers are integral parts of central air-conditioning systems. The respondent contended that chillers are primarily refrigerating equipment used in various industrial applications, not limited to air-conditioning.

The Supreme Court concluded that the primary function of chillers is to refrigerate or chill water/liquid, irrespective of its application, including air-conditioning. The end use of chillers in air-conditioning systems does not alter their primary function. Therefore, chillers should be classified under Chapter Heading 84.18 as refrigerating or freezing equipment. The Court emphasized that end use alone cannot determine the classification of a product, aligning with the principles established in Indian Aluminium Cables Ltd. vs. Union of India.

2. Invocation of Extended Period of Limitation:
The Department invoked the extended period of limitation under Section 11A, alleging suppression of facts by the respondent. The respondent argued that the extended period was without jurisdiction as the classification list was accepted by the Department, and the use of chillers in air-conditioning was common knowledge.

Since the Tribunal decided the case on merits, it did not address the issue of the extended period of limitation. The Supreme Court, agreeing with the Tribunal's decision on merits, also found no need to address this issue.

3. Imposition of Penalty under Section 11AC:
The Department imposed a penalty of Rs. 1,84,62,136 under Section 11AC, alleging willful suppression of facts by the respondent to evade duty. The respondent countered that the classification list was accepted by the Department and there was no suppression of facts.

Given the Supreme Court's decision that chillers should be classified under Chapter Heading 84.18, the basis for the penalty under Section 11AC was undermined. Therefore, the imposition of the penalty was not upheld.

4. Charging of Interest under Section 11AB:
The Department also ordered the charging of interest under Section 11AB. The respondent's arguments against the imposition of interest were similar to those against the penalty and the invocation of the extended period.

With the Supreme Court's ruling on the correct classification of chillers, the grounds for charging interest under Section 11AB were also invalidated.

Conclusion:
The Supreme Court dismissed the Department's appeals, upholding the Tribunal's decision that chillers should be classified under Chapter Heading 84.18. The Court emphasized that the primary function of chillers is to refrigerate or chill water/liquid, and their use in air-conditioning does not change their classification. The issues of extended limitation, penalty, and interest were rendered moot by the decision on the primary issue of classification. The appeals were dismissed, with parties bearing their own costs.

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