Supreme Court Classifies Modified Vapour Absorption Chillers: Thermax Ltd. vs. Commissioner of Central Excise (2022)

Date of the Judgment: October 13, 2022
Citation: [Not Available in Source]
Judges: K.M. Joseph, J., Hrishikesh Roy, J.
Can a product marketed as a heat pump, but primarily used for cooling, be classified as a heat pump for excise duty purposes? The Supreme Court of India addressed this question in a case concerning the classification of Modified Vapour Absorption Chillers (MVAC). The court had to determine whether these chillers, which have an incidental heating capability, should be classified as heat pumps, which enjoy a limited exemption from excise duty, or as refrigerating equipment. The judgment was delivered by a two-judge bench comprising Justice K.M. Joseph and Justice Hrishikesh Roy, with Justice Hrishikesh Roy authoring the opinion.

Case Background

M/s Thermax Ltd., the appellant, manufactures Modified Vapour Absorption Chillers (MVAC). These machines were sold and described by the company as heat pumps. The appellant claimed that MVACs should be classified under heading 84.18 of the Central Excise Tariff Act, 1985, which covers heat pumps and attracts a lower rate of excise duty under notification 155/86-CE dated 1.3.1986. The Assistant Commissioner of Central Excise disagreed with this classification. However, the Commissioner of Central Excise (Appeals) sided with the manufacturer. The Customs, Excise and Service Tax Appellate Tribunal (CESTAT) reversed the Commissioner’s decision, holding that the product was not a heat pump and therefore not eligible for the concessional duty rate. The CESTAT also held that the value of Lithium Bromide should not be included in the assessable value of the machine. The matter was remanded to the adjudicating authority to compute the payable duty. The appellant then filed a writ petition before the Bombay High Court, which was dismissed on 26.3.2009, as the statutory remedy of appeal to the Supreme Court was available. This led to the present appeal before the Supreme Court.

Timeline:

Course of Proceedings

The Assistant Commissioner of Central Excise initially rejected the appellant’s classification of their product as heat pumps. On appeal, the Commissioner of Central Excise (Appeals) sided with the manufacturer. However, the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) reversed this decision, concluding that the product did not qualify as a heat pump and was therefore ineligible for the concessional excise duty rate. The CESTAT also remanded the matter to the adjudicating authority to compute the payable duty. The appellant then filed a writ petition before the Bombay High Court, which was dismissed as they could appeal to the Supreme Court, leading to the present appeal.

Legal Framework

The core legal issue revolves around the classification of the appellant’s product under the Central Excise Tariff Act, 1985. Specifically, the court considered whether the product should be classified under heading 84.18, which includes heat pumps, or under another sub-heading as refrigerating equipment. The relevant notification is 155/86-CE dated 1.3.1986, which provides a limited exemption from excise duty for heat pumps falling under Chapter 8418. The court also examined Chapter Note 7 to Chapter 84 of the Central Excise Tariff Act, 1985, which deals with machines capable of performing multiple functions. The court also referred to the Harmonized System of Nomenclature (HSN) Explanatory Notes for the definition of a heat pump.

The Central Excise Act, 1944, Section 35L, provides for appeals to the Supreme Court in matters related to excise duty. The Central Excise Tariff Act, 1985, and its various headings and sub-headings, are central to the classification dispute.

Arguments

Appellant’s Arguments:

• The appellant, M/s Thermax Ltd., argued that their Modified Vapour Absorption Chillers (MVAC) should be classified as heat pumps under Heading 8418 of the Central Excise Tariff Act, 1985.
• They contended that MVACs are sold, described, and invoiced as heat pumps.
• The manufacturing process of MVACs is distinct from ordinary chillers, involving the installation of additional components such as:
  • Sensors to sense temperature.
  • Selector switches to control panels for heating/cooling modes.
  • Additional wiring to carry signals from sensors.
• MVACs have the capability to provide both chilled and hot water as output.
• The appellant relied on a technical book, “Heat Pumps” by R.D. Heap, and a self-prepared chart describing the functioning of a heat pump.
• They argued that heat pumps are classified with refrigerators and freezers under Heading 8418, not as boilers under Heading 8402.
• The appellant referred to the Harmonious System of Nomenclature (HSN) Explanatory Notes, arguing that heat pumps function by adding heat plus energy to create a source of more intense heat.
• They contended that the substantial modification of chillers into MVACs, including the four-way reversing valve, allows for both heating and cooling.
• The classification should be based on the machine as a whole, considering its ability to produce hot water.
• Some customers purchase MVACs for both hot and cold water.
• The appellant argued that the Revenue’s argument that MVACs only marginally heat water is flawed, as the same logic would disqualify the machine as a chiller since it only marginally cools water.
• The appellant contended that Chapter Note 7 to Chapter 84 of the Central Excise Tariff Act, 1985, was wrongly relied upon by CESTAT as it was not part of the show cause notice.
• They argued that even under Chapter Note 7, the machine should be classified as suggested by the manufacturer.
• The appellant argued that Note 7 cannot be applied to products falling under Chapter 84.01 to 84.24, citing Note 2 of the HSN explanatory notes.
• The appellant cited the cases of Commissioner of Central Excise, Mumbai Vs. Blue Star Ltd. and Commissioner of Customs and Central Excise Vs. Voltas Ltd., arguing that their products, similar to MVAC, were treated as heat pumps.
• They argued that since similar products were taxed at 15%, a higher duty on their product would be discriminatory.

Respondent’s Arguments:

• The Revenue did not dispute the classification of the product under Chapter 8418 but argued that MVACs do not qualify as heat pumps for the benefit of limited exemption under Notification 155/86-CE dated 1.3.1986.
• They argued that MVACs do not satisfy the definition of a heat pump in the HSN, which states:
  “A heat pump is a device which draws heat from a suitable heat source (principally underground or surface water, the soil or the air) and converts it with the assistance of a supplementary energy source (e.g. gas or electricity) into a source of more intense heat.”
• The final output of MVACs is chilled water, not a source of more intense heat.
• The production of hot water is only an incidental purpose of the machine.
• Customers primarily purchase MVACs for cooling/chilling purposes, not for heating.
• MVACs are recognized in the market as Vapour Absorption Chillers, not heat pumps.
• The definition of heat pumps in the HSN should be the basis for classification, as per the rulings in Collector of Central Excise, Shillong Vs. Wood Craft Products Ltd. and Commissioner of Customs and Central Excise, Amritsar (Punjab) Vs. D.L. Steels etc.
• The primary function of MVACs is to produce chilled water; the production of hot water is incidental.
• The appellant’s website markets heat pumps and Vapour Absorption Chillers separately, with no mention of heating capability for chillers or cooling for heat pumps.
• Modifications to Vapour Absorption Chillers do not alter the device’s primary function as a chiller for refrigeration and cooling.
• The judgments in Blue Star and Voltas cases are distinguishable and should not apply to the classification of MVACs.
• Chapter Note 7 to Chapter 84 supports the argument that the primary purpose of MVACs is to produce chilled water, not to function as a heat pump.

Submissions Table:

Issues Framed by the Supreme Court

The primary issue before the Supreme Court was:

1. Whether the product manufactured by the appellant is classifiable as a heat pump under heading 84.18 of the Schedule to the Central Excise Tariff Act, 1985.

Treatment of the Issue by the Court

Authorities

Cases Relied Upon:

Legal Provisions Considered:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

The Court analyzed the authorities as follows:

• Commissioner of Central Excise, Mumbai Vs. Blue Star Ltd. [198) ELT 454]: The court distinguished this case, stating that it involved rival entries, while the present case involves a single entry.
• Commissioner of Customs and Central Excise Vs. Voltas Ltd. [2005 (180) ELT 57]: The court distinguished this case, noting that the Tribunal did not decide whether the product was a heat pump.
• Collector of Central Excise, Shillong Vs. Wood Craft Products Ltd. [(1995) 3 SCC 454]: The court relied on this case to emphasize that the HSN definition should prevail for the purpose of classification.
• Commissioner of Customs and Central Excise, Amritsar (Punjab) Vs. D.L. Steels etc. [2022 SCC OnLine SC 863]: The court relied on this case to emphasize that the HSN definition should prevail for the purpose of classification.
• Commissioner of Central Excise, Delhi Vs. Carrier Aircon Ltd. [(2006) 5 SCC 596]: The CESTAT relied on this case to conclude that the function of the machine is to chill water or bring it to a very low temperature.
• Xerox India Ltd. Vs. Commissioner of Customs [(2010) 14 SCC 430]: The court relied on this case to support the view that in case of multi-functional machines, the classification should be based on its principal function.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the definition of a heat pump in the Harmonized System of Nomenclature (HSN) and the principal purpose of the machine. The court emphasized that the HSN definition should be the guiding factor in classifying products for excise duty purposes. The court also considered the market perception of the product and the appellant’s own marketing materials, which treated Vapour Absorption Chillers and heat pumps separately. The court noted that the primary function of the MVAC is to produce chilled water, and the incidental production of hot water does not qualify it as a heat pump. The court also relied on Chapter Note 7 to Chapter 84 of the Central Excise Tariff Act, 1985, which states that the principal purpose of a machine should be considered for classification when it is capable of multiple functions.

Fact:Law Ratio

Logical Reasoning

The court considered alternative interpretations but rejected them. The court rejected the argument that since the MVAC can produce hot water, it should be classified as a heat pump. The court emphasized that the primary function of the machine is to produce chilled water, and the incidental production of hot water does not change this primary function. The court also rejected the appellant’s argument that the product should be classified similarly to the products of Blue Star and Voltas, as those cases involved different issues. The court concluded that the MVAC should be classified as refrigerating equipment under Sub-heading 8418.10 of the Central Excise Tariff Act, 1985.

The decision was reached based on the HSN definition, the principal purpose of the machine, market perception, and the appellant’s own marketing practices. The court held that the MVAC does not fit the definition of a heat pump, as its primary output is chilled water, and the production of hot water is only incidental.

The court quoted from the judgment:

“A heat pump is a device which draws heat from a suitable heat source (principally underground or surface water, the soil or the air) and converts it with the assistance of a supplementary energy source (e.g. gas or electricity) into a source of more intense heat.”

“The final output of MVAC is cold/chilled water, the MVAC obviously does not fit into the given definition.”

“The principal purpose of the machine is undoubtedly to produce chilled water.”

There were no dissenting opinions in this case. The judgment was delivered by a two-judge bench, and both judges agreed on the final decision.

The implications of this judgment are that manufacturers cannot claim concessional excise duty benefits by merely adding incidental functions to their products. The primary function and the HSN definition will be the key factors in determining the classification of a product for excise duty purposes. This decision reinforces the importance of adhering to the HSN definitions for tariff classification and ensures that manufacturers cannot circumvent tax liabilities by claiming their products have incidental functions that qualify them for lower duty rates.

The court did not introduce any new doctrines or legal principles. The court simply applied existing principles of statutory interpretation and classification to the facts of the case.

The court analyzed the arguments for and against classifying the MVAC as a heat pump. The court rejected the arguments made by the appellant that the MVAC should be classified as a heat pump based on its ability to produce hot water. The court accepted the arguments made by the respondent that the primary function of the MVAC is to produce chilled water and that the HSN definition should be the basis for classification.

Key Takeaways

• The primary function of a machine is crucial for its classification under the Central Excise Tariff Act, 1985.
• The Harmonized System of Nomenclature (HSN) definition of a product is the primary guide for its classification.
• Incidental functions of a product do not change its primary classification.
• Market perception and the manufacturer’s own marketing materials are relevant in determining the classification of a product.
• Manufacturers cannot claim concessional excise duty benefits by merely adding incidental functions to their products.
• The principal purpose test, as outlined in Chapter Note 7 to Chapter 84 of the Central Excise Tariff Act, 1985, is applicable in resolving classification disputes.

Directions

The Supreme Court dismissed the appeals, affirming the view of the CESTAT. The parties were left to bear their own costs.

Development of Law

The ratio decidendi of this case is that the classification of a product for excise duty purposes must be based on its primary function and the Harmonized System of Nomenclature (HSN) definition. The court emphasized that incidental functions do not alter the primary classification. This decision reinforces the importance of adhering to the HSN definitions for tariff classification and ensures that manufacturers cannot circumvent tax liabilities by claiming their products have incidental functions that qualify them for lower duty rates. There is no change in the previous positions of law, but the court has clarified the application of existing principles to a specific factual scenario.

Conclusion

The Supreme Court held that the Modified Vapour Absorption Chillers (MVAC) manufactured by M/s Thermax Ltd. are not classifiable as heat pumps under heading 84.18 of the Central Excise Tariff Act, 1985. The court emphasized that the primary function of the MVAC is to produce chilled water, and the incidental production of hot water does not qualify it as a heat pump according to the HSN definition. The court’s decision was based on the HSN definition, the principal purpose of the machine, market perception, and the appellant’s own marketing practices. The court dismissed the appeals, affirming the view of the CESTAT.

Category

Parent Category: Central Excise Tariff Act, 1985
Child Category: Heading 84.18, Central Excise Tariff Act, 1985
Child Category: Heat Pumps, Central Excise Tariff Act, 1985
Child Category: Refrigerating Equipment, Central Excise Tariff Act, 1985
Child Category: Excise Duty, Central Excise Tariff Act, 1985
Parent Category: Harmonized System of Nomenclature (HSN)
Child Category: HSN Definition, Harmonized System of Nomenclature (HSN)

FAQ

Q: What was the main issue in the Thermax Ltd. vs. Commissioner of Central Excise case?
A: The main issue was whether Modified Vapour Absorption Chillers (MVAC) should be classified as heat pumps for excise duty purposes, which would have allowed the manufacturer to claim a limited exemption from excise duty.

Q: What is a heat pump according to the Harmonized System of Nomenclature (HSN)?
A: According to the HSN, a heat pump is a device that draws heat from a source and converts it with the assistance of a supplementary energy source into a source of more intense heat.

Q: Why did the Supreme Court rule that MVACs are not heat pumps?
A: The Supreme Court ruled that MVACs are not heat pumps because their primary function is to produce chilled water, not a source of more intense heat. The production of hot water is only incidental to the cooling process.

Q: What is the significance of the HSN definition in this case?
A: The HSN definition was the primary guide for the Supreme Court in classifying the product. The court emphasized that the HSN definition should prevail in matters of tariff classification.

Q: What is the “principal purpose test” used by the court?
A: The “principal purpose test,” derived from Chapter Note 7 to Chapter 84 of the Central Excise Tariff Act, 1985, states that when a machine can perform multiple functions, the classification should be based on its primary or sole purpose. In this case, the primary purpose of the MVAC was to produce chilled water.

Q: Can manufacturers claim concessional excise duty benefits by adding incidental functions to their products?
A: No, the Supreme Court’s decision clarifies that manufacturers cannot claim concessional excise duty benefits by merely adding incidental functions to their products. The primary function and the HSN definition will be the key factors in determining the classification of a product.

Q: What is the practical implication of this judgment?
A: The practical implication is that manufacturers must accurately classify their products based on their primary function and the HSN definition to avoid disputes over excise duty. This decision reinforces the importance of adhering to the HSN definitions for tariff classification.