Supreme Court settles classification of electric fans under Central Excise Act: Khaitan Electrical Ltd. vs. Collector of Central Excise (06 August 2003)

Introduction

Date of the Judgment: 06 August 2003

Citation: 2003 Supp(2) SCR 268

Judges: S. Rajendra Babu, B.N. Srikrishna, G.P. Mathur

Are ‘multi-purpose’ electric fans, capable of being used as both table and cabin fans, to be classified based on their primary design and intended use? The Supreme Court of India addressed this question in a case involving Khaitan Electrical Ltd., which contested the classification of its ‘Mini’, ‘Tini’, ‘Chiki’, and ‘Miki’ fan models for central excise duty purposes. The court had to determine whether these fans should be classified as table fans, attracting a lower duty rate, or as cabin fans, which would attract a higher rate. The judgment was delivered by a bench comprising Justices S. Rajendra Babu, B.N. Srikrishna, and G.P. Mathur, with Justice Srikrishna authoring the decision.

Case Background

Khaitan Electrical Ltd. is a manufacturer of various types of electric fans. The company submitted a classification list for approval, seeking to classify its ‘Mini’, ‘Tini’, ‘Chiki’, and ‘Miki’ models of fans under Tariff Item (T.I.) No. 33(1) and claimed a concessional duty rate of 5% ad valorem under Notification No. 46/1984, dated March 1, 1984.

The Assistant Collector of Central Excise issued a show-cause notice on March 23, 1984, questioning why these fan models should not be classified under Item No. 33(3) and Item No. 1(1)(b) of Notification No. 46/84.

Timeline:

Course of Proceedings

By an order dated January 19, 1985, the Assistant Collector, Central Excise, Faridabad, classified the fan models under T.I. No. 33(1)(b) for the purpose of availing benefit of Notification No. 46/84.

On appeal, the Collector of Customs and Central Excise (Appeals) overturned this decision, taking the view that the fans were primarily used as table fans based on their design, manufacture, and descriptive literature. The Collector (Appeals) noted that while the fans had clamps for wall or ceiling mounting, their design differed significantly from regular cabin fans. Consequently, the Collector (Appeals) classified all four models as table fans, attracting a 5% ad valorem duty under T.I.No. 33(1)(a).

Further appeals to the Customs, Excise, Gold (Control) Appellate Tribunal (CEGAT) resulted in a difference of opinion between the two Members. The Judicial Member agreed with classifying the fans under T.I. No. 33(1) as table fans for both classification and exemption notification purposes. However, the Vice President disagreed and supported the Assistant Collector’s view. The matter was then referred to a third Member, who sided with the Vice President, leading to a majority judgment that the fans would fall under sub-item 3(b) of serial no. 2 for both duty and exemption under the notification. As a result, the CEGAT set aside the order passed by the Collector (Appeals) and upheld the order of the Assistant Collector.

Legal Framework

The case revolves around the interpretation and application of Item No. 33 of the Central Excise Tariff and Notification No. 46/1984, which provide the framework for levying excise duty on electric fans.

Item No. 33 of the Central Excise Tariff provides the following details:

“Item No.33 – ELECTRIC FANS
Electric fans including regulators for electric fans, all sorts-
1 Table, cabin, carriage, pedestal circulator fans, of a diameter not Fifteen percent ad
40.6 centimetres and regulators therefor. valorem
2 Electric fans, designed for use in Fifteen percent ad an industrial system as parts valorem
indispensable for its operation and have been given for that purpose some special shape or quality which would
not be essential for their use for any other purpose, and regulators therefor.
3 Electric fans, not otherwise specified, Twenty percent
and regulators therefor. ad valorem”

Notification No. 46/1984, dated March 1, 1984, specifies the effective rates of excise duty on specified sizes of ceiling fans and table fans:

“EXEMPTION NOTIFICATIONS
ELECTRIC FANS 46/84 – CE, Dt. 1.3.1984
Effective rates of excise duty on specified sizes of ceiling fans and table
fans have been prescribed.
GSR- In exercise of the powers conferred by sub-rule (1) of rule 8 of the
Central Excise Rules, 1994, the Central Government hereby exempts goods of
the description specified in column (3) of the Table annexed hereto and
falling under the sub-items specified in the corresponding entry in column
(2) of the said Table of item No.33 of the First schedule to the Central
Excises and Salt Act, 1944 (1 of 1944), from so much of the duty of excise
leviable thereon under the said Act at the rate specified in the said First
Schedule, as is in excess of the amount calculated at the rate specified in
the corresponding entry in column (4) of the said Table.”

The notification further provides a table specifying the rates:

“TABLE
S.NO. Sub-Item. Description Rate
(1) (2) (3) (4)
1 (1) Electric fans of a diameter
(blade sweep) not exceeding 40.6 centimetres and regulators therefor-
(a) Table fans Five per cent ad
valorem
(b) Cabin carriage, pedestal Ten percent ad and air circulator fans valorem
and regulators therefor
2 (3) Electric fans not otherwise
specified-
(a) Ceiling fans of a diameter (blade sweep) not
exceeding 107 centimetres Seven and a half
per cent ad valorem
(b) Others Fifteen per cent
ad valorem
3 (3) Regulators for electric Fifteen per cent
fans ad valorem”

Arguments

Arguments by Khaitan Electrical Ltd.:

• The appellant contended that the fans should be classified under T.I. No. 33(1) and be eligible for the concessional rate of duty at 5% ad valorem under Notification No. 46/1984.
• Khaitan argued that the fans are ‘multi-purpose’ and can be used as both table and cabin/carriage fans. They claimed that considering the fans’ usage for different purposes, they cannot be exclusively termed as table fans.

Arguments by the Collector of Central Excise:

• The Department argued that the fans are designed primarily as table fans, even though they can be hung from a wall or ceiling.
• The Collector (Appeals) emphasized that the fans’ design and manufacture are entirely different from regular cabin fans, which cannot be adapted as table fans.
• The Department relied on the literature distributed by Khaitan, which predominantly describes the fans as table fans, though capable of being fixed on the wall or ceiling.

Issues Framed by the Supreme Court

1. The primary issue is whether the ‘Mini’, ‘Tini’, ‘Chiki’, and ‘Miki’ models of electric fans manufactured by Khaitan Electrical Ltd. should be classified as table fans or cabin fans for the purpose of levying central excise duty.
2. A sub-issue is whether the design and intended use of the fans determine their classification, especially when they are capable of being used for multiple purposes (i.e., as both table and cabin fans).

Treatment of the Issue by the Court: “The following table demonstrates as to how the Court decided the issues”

Authorities

The Court considered the following:

• Tariff Item No. 33 of the Central Excise Tariff: This item provides the classification and duty rates for electric fans, distinguishing between table fans, cabin fans, and other types of fans.
• Notification No. 46/1984: This notification specifies the effective rates of excise duty on specified sizes of ceiling fans and table fans.

Judgment

How each authority was viewed by the Court:

• Tariff Item No. 33: The court used this item to classify the fans based on their characteristics and intended use.
• Notification No. 46/1984: The court applied this notification to determine the appropriate excise duty rate based on the classification of the fans.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the design and intended use of the fans, as well as the company’s own marketing literature. The court emphasized that even though the fans could be mounted on walls or ceilings, their primary design was for table use. This differentiation from regular cabin fans played a significant role in the court’s reasoning.

Fact:Law Ratio

The court’s reasoning was heavily based on the factual aspects of the case, particularly the design and intended use of the fans, as well as the company’s own marketing materials. While legal considerations were also important, the factual elements played a more significant role in the court’s decision.

Logical Reasoning:

ISSUE: Classification of Electric Fans

The court considered the arguments and evidence presented by both parties and concluded that the fans should be classified as table fans based on their primary design and intended use. The court also noted that the company’s own literature described the fans predominantly as table fans, further supporting this classification.

The Supreme Court allowed the appeal, set aside the order of the CEGAT dated 12.8.1996, and restored the decision of the Collector (Appeals) New Delhi dated 22.7.1986. The court held that the concerned models of fans should be classified as table fans both under the Tariff item and the exemption notification.

Key Takeaways

• The classification of electric fans for excise duty purposes depends on their primary design and intended use.
• Even if a fan can be used for multiple purposes, its primary design will determine its classification.
• Marketing literature and company descriptions of products can be used to determine their intended use and classification.

Conclusion

The Supreme Court’s judgment in the Khaitan Electrical case clarifies that the classification of electric fans for excise duty purposes hinges on their primary design and intended use. The court emphasized that even if a fan can be used for multiple purposes, its primary design will determine its classification. This decision provides valuable guidance for manufacturers and excise authorities in classifying similar products.

Category

• Central Excise Act, 1944
  • Tariff Item No. 33, Central Excise Act, 1944
  • Notification No. 46/1984, Central Excise Act, 1944
  • Excise Duty
  • Classification of Goods
  • Electric Fans
  • Table Fans
  • Cabin Fans
• Tax Law
  • Indirect Tax
  • Taxation

FAQ

1. Q: How are electric fans classified for excise duty purposes?
   
   A: Electric fans are classified based on their primary design and intended use, as determined by the Supreme Court in the Khaitan Electrical case.
2. Q: What factors determine the classification of electric fans?
   
   A: The primary factors include the design of the fan and its intended use, as well as any marketing literature or company descriptions of the product.
3. Q: What if a fan can be used for multiple purposes?
   
   A: Even if a fan can be used for multiple purposes, its primary design will determine its classification for excise duty purposes.