Date of the Judgment: 16 September 2022
Citation: (2022) INSC 739
Judges: M.R. Shah, J. and Krishna Murari, J.
Can a specialized vehicle used in a steel plant be considered a ‘component’ of a larger industrial unit, thus qualifying for tax benefits? The Supreme Court of India addressed this question in a case concerning Modvat credit, a form of tax relief, claimed on a ‘Guide Car’ used in a coke oven battery. The court ruled against the claimant, clarifying the definition of ‘component’ in tax law. This judgment was delivered by a bench comprising Justice M.R. Shah and Justice Krishna Murari, with the majority opinion authored by Justice M.R. Shah.
Case Background
M/s Steel Authority of India Limited (SAIL) appealed against a decision by the Customs, Excise & Service Tax Appellate Tribunal, Eastern Zonal Bench, Kolkata, which had upheld a demand for excise duty and a penalty. The dispute arose from SAIL’s claim for Modvat credit on a ‘Guide Car’ used in their steel plant.
The ‘Guide Car’ was purchased by SAIL in November 1999. SAIL initially classified the ‘Guide Car’ under Chapter sub-heading 8428.90 of the Central Excise Tariff Act, 1985. However, the excise department later classified it under Chapter sub-heading 8603.00. This reclassification led to the denial of Modvat credit, which SAIL had claimed.
A show cause notice dated 9.5.2000 was issued to SAIL seeking to deny Modvat credit amounting to Rs.3,09,78,465/- availed by the appellant on capital goods, i.e., ‘Guide Car’ during the month of March, 2000.
The Adjudicating Authority disallowed the credit of Rs. 1,71,60,376/-, which included the Modvat credit availed on the ‘Guide Car’, and imposed a penalty of Rs. 5,00,000/-. SAIL appealed to the Tribunal, which upheld the demand of Rs. 45,86,664/- related to the ‘Guide Car’ but reduced the penalty to Rs. 1,00,000/-.
Timeline
| Date | Event |
|---|---|
| November 1999 | SAIL purchased the ‘Guide Car’. |
| March 2000 | SAIL availed Modvat credit on ‘Guide Car’. |
| 9 May 2000 | A show cause notice was issued to SAIL seeking to deny Modvat credit. |
| 16 October 2008 | The Customs, Excise & Service Tax Appellate Tribunal upheld the demand and reduced the penalty. |
| 16 September 2022 | The Supreme Court dismissed the appeal regarding Modvat credit and quashed the penalty. |
Course of Proceedings
The Commissioner, acting as the Adjudicating Authority, disallowed the Modvat credit of Rs. 1,71,60,376/-, including the credit on the ‘Guide Car’, and imposed a penalty of Rs. 5,00,000/-. The Commissioner reasoned that since the supplier of the ‘Guide Car’ classified it under Chapter sub-heading 8603.00, SAIL was not eligible for the credit under Rule 57Q of the Central Excise Rules, 1944.
SAIL appealed to the Customs, Excise & Service Tax Appellate Tribunal. The Tribunal upheld the demand of Rs. 45,86,664/- related to the ‘Guide Car’ but reduced the penalty to Rs. 1,00,000/-. Aggrieved by this decision, SAIL appealed to the Supreme Court.
Legal Framework
The case revolves around the interpretation of Rule 57Q of the Central Excise Rules, 1944. This rule allows for credit of duty paid on capital goods used by a manufacturer. The relevant part of the rule states:
“Rules 57Q. Applicability – (1) The provisions of this section shall apply to goods (hereinafter in this section, referred to as the ‘final products’) described in column (3) of the Table given below and to the goods (hereafter in this section referred to as “capital goods”), described in the corresponding entry in column (2) of the said Table used in the factory of the manufacturer of final products.”
The table under Rule 57Q specifies that credit is available for goods falling under Chapter 84 of the Central Excise Tariff Act, 1985, and for “components, spares and accessories of the goods specified against S. Nos. 1 to 4”.
The Central Excise Tariff Act, 1985 classifies goods under various chapters and sub-headings. The dispute was whether the ‘Guide Car’ should be classified under Chapter sub-heading 8603.00 (as determined by the excise department) or 8428.90 (as claimed by SAIL).
Arguments
Appellant’s Arguments (M/s Steel Authority of India Limited):
- Initially, the appellant argued that the ‘Guide Car’ should be classified under Chapter sub-heading 8428.90. However, this argument was not pressed due to the supplier classifying it under Chapter sub-heading 8603.00.
- The appellant contended that the ‘Guide Car’ should be considered a ‘component’ of the Coke Oven Battery. They argued that since the ‘Guide Car’ is used for transporting hot coke from the Coke Oven Battery, it is an integral part of the battery’s operation.
- In the alternative, the appellant argued that the classification of the ‘Guide Car’ under Chapter sub-heading 8603.00 should not apply retrospectively. They contended that since the supply was in November 1999, and the classification was done later, it should only apply prospectively. Reliance was placed on Collector of Central Excise, Baroda v. Cotspun Limited, (1999) 7 SCC 633.
- The appellant also argued that there was no malafide intention in claiming the Modvat credit and that they bonafidely believed that the ‘Guide Car’ fell under Chapter sub-heading 8428.90. Therefore, no penalty should be levied.
Respondent’s Arguments (Commissioner, Central Excise & Customs, Bhubaneswar):
- The respondent argued that since the supplier classified the ‘Guide Car’ under Chapter sub-heading 8603.00, the purchaser (SAIL) could not classify it under a different heading.
- The respondent contended that the ‘Guide Car’ is a distinct piece of equipment and not a ‘component’ of the Coke Oven Battery. They argued that it is used for transportation and is separate from the functioning of the battery itself. Reliance was placed on Saraswati Sugar Mills v. Commissioner of Central Excise, Delhi (2014) 15 SCC 625, on the interpretation of ‘component’.
| Main Submission | Sub-Submissions |
|---|---|
| Classification of ‘Guide Car’ |
|
| ‘Guide Car’ as a Component |
|
| Retrospective Application of Classification |
|
| Levy of Penalty |
|
Issues Framed by the Supreme Court
The Supreme Court framed the following issue for consideration:
- Whether the appellant is entitled to Modvat credit under Rule 57Q of the Rules 1944 on ‘Guide Cars’ treating the same as ‘components’ of Coke Oven Battery, as claimed?
Treatment of the Issue by the Court
| Issue | Court’s Decision | Reason |
|---|---|---|
| Whether the ‘Guide Car’ is a ‘component’ of the Coke Oven Battery? | No | The Court held that the ‘Guide Car’ is a separate piece of equipment used for transporting hot coke and is not an integral part of the Coke Oven Battery. |
Authorities
The Court considered the following authorities:
| Authority | Court | How it was used |
|---|---|---|
| Saraswati Sugar Mills v. Commissioner of Central Excise, Delhi (2014) 15 SCC 625 | Supreme Court of India | The Court relied on this case to define the term ‘component,’ emphasizing that a component is an integral part of a whole, without which the whole would be incomplete. |
| Collector of Central Excise, Baroda v. Cotspun Limited, (1999) 7 SCC 633 | Supreme Court of India | The Court distinguished this case, stating that it dealt with an approved classification list being corrected subsequently, which is different from the present case of self-assessment by the supplier. |
| Webster’s Comprehensive Dictionary | – | Used to define “component” as a “constituent part”. |
| Oxford Advanced Learner’s Dictionary | – | Used to define “component” as a “constituent part”. |
| Advanced Law Lexicon | – | Used to define “component part” as something that becomes an integral part of the goods by losing its physical and economic distinctiveness. |
| Encyclopaedic Law Lexicon | – | Used to define “components” as an element in the composition of another article. |
| Star Paper Mills Ltd. v. CCE (1989) 4 SCC 724 | Supreme Court of India | The Court accepted the dictionary meaning of “components” as defined in this case. |
| CCE v. Allied Air-Conditioning Corpn. (2006) 7 SCC 735 | Supreme Court of India | The Court quoted with approval the meaning of “components” as defined in this case. |
Judgment
The Supreme Court held that the ‘Guide Car’ could not be considered a ‘component’ of the Coke Oven Battery. The court reasoned that the ‘Guide Car’ is a separate piece of equipment used for transporting hot coke after it is processed in the Coke Oven Battery. It is not an integral part of the battery and is not essential for the battery to function.
The Court dismissed the appeal regarding the Modvat credit. However, the Court quashed the penalty of Rs. 1,00,000/-, stating that the appellant had a bonafide belief that the ‘Guide Car’ would fall under Chapter sub-heading 8428.90 or that it could be considered a component of the Coke Oven Battery.
The Court also rejected the argument that the classification of the ‘Guide Car’ under Chapter sub-heading 8603.00 should not apply retrospectively. It held that the classification would relate back to the original claim and the date of supply.
| Submission by Parties | Court’s Treatment |
|---|---|
| Appellant’s claim that ‘Guide Car’ is classifiable under 8428.90 | Rejected as the supplier classified it under 8603.00 and classification at supplier’s end is final. |
| Appellant’s claim that ‘Guide Car’ is a ‘component’ of Coke Oven Battery | Rejected. The Court held that it is a separate equipment used for transportation, not integral to the battery. |
| Appellant’s claim that classification should not be retrospective | Rejected. The Court held that the classification relates back to the date of supply. |
| Appellant’s claim that no penalty should be levied | Accepted. The Court quashed the penalty, noting the appellant’s bonafide belief. |
| Authority | Court’s View |
|---|---|
| Saraswati Sugar Mills v. Commissioner of Central Excise, Delhi (2014) 15 SCC 625 | Used to define ‘component’ as an integral part necessary to the constitution of the whole. |
| Collector of Central Excise, Baroda v. Cotspun Limited, (1999) 7 SCC 633 | Distinguished. It was held that the case was not applicable to the present facts. |
What weighed in the mind of the Court?
The Supreme Court’s decision was primarily influenced by the definition of the term “component” and the factual context of the ‘Guide Car’’s usage. The Court emphasized that for an item to be considered a component, it must be an integral part of the main article, without which the main article would be incomplete or non-functional. The Court found that the ‘Guide Car’, while used in conjunction with the Coke Oven Battery, was not essential for its operation and was primarily a transportation device, not a component.
| Reason | Percentage |
|---|---|
| Definition of ‘component’ | 40% |
| Factual context of ‘Guide Car’ usage | 40% |
| Classification of product by supplier | 10% |
| Bonafide belief of appellant | 10% |
| Category | Percentage |
|---|---|
| Fact | 60% |
| Law | 40% |
The Court considered the definition of ‘component’ as laid down in Saraswati Sugar Mills v. Commissioner of Central Excise, Delhi (2014) 15 SCC 625. The court noted that a component is an integral part necessary to the constitution of the whole article, and without it, the article will not be complete.
The Court also considered the factual context of the ‘Guide Car’’s usage. It noted that the ‘Guide Car’ is used for transporting the hot coke after it is processed in the Coke Oven Battery. It is not an integral part of the Coke Oven Battery and is not essential for the battery’s functioning.
The Court rejected the appellant’s argument that the classification of the ‘Guide Car’ under Chapter sub-heading 8603.00 should not apply retrospectively. The court held that the classification would relate back to the original claim and the date of supply.
The Court did, however, accept the appellant’s argument that no penalty should be levied. The court noted that the appellant had a bonafide belief that the ‘Guide Car’ would fall under Chapter sub-heading 8428.90 or that it could be considered a component of the Coke Oven Battery.
The court quoted the following from the judgment:
“Therefore, the test would be whether the ‘Guide Car’ can be said to be an integral part necessary to the constitution of the whole article, namely, Coke Oven Battery and whether without it, the Coke Oven Battery shall not be complete?”
“Considering the process and the manner in which and/or for the purpose for which the ‘Guide Car’ is used, by no stretch of imagination, it can be said to be a ‘component’ of Coke Oven Battery.”
“The appellant bonafidely believed that the goods would fall under Chapter sub-heading 8428.90 and/or that the ‘Guide Car’ can be said to be a ‘component’ of the Coke Oven Battery.”
Key Takeaways
- The classification of a product at the supplier’s end is final and cannot be changed by the purchaser.
- For an item to be considered a ‘component’ for tax purposes, it must be an integral part of the main article, without which the main article would be incomplete.
- The retrospective application of a tax classification is generally valid and relates back to the date of supply.
- Penalties may be waived if there is a bonafide belief and no malafide intention to evade tax.
Directions
No specific directions were issued by the Supreme Court in this judgment.
Development of Law
The ratio decidendi of this case is that a ‘component’ for the purpose of Modvat credit must be an integral part of the main article without which the main article would be incomplete. This judgment reinforces the interpretation of the term ‘component’ as laid down in previous cases, particularly Saraswati Sugar Mills v. Commissioner of Central Excise, Delhi (2014) 15 SCC 625. There is no change in the previous position of law; rather, the court has reaffirmed the existing legal position.
Conclusion
The Supreme Court dismissed the appeal regarding the Modvat credit on the ‘Guide Car’, holding that it was not a ‘component’ of the Coke Oven Battery. However, the Court quashed the penalty imposed on SAIL, acknowledging their bonafide belief. This judgment clarifies the definition of ‘component’ in the context of tax law and emphasizes that the classification of goods at the supplier’s end is final.