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THE Kersi Kapadia case is an interesting one. He is an architect who designed furniture for M&M, and who unfortunately became the target of the taxman, as one learns from a recent issue of Excise Law Times.

"Mahindra & Mahindra manufactures tough motor vehicles which are good for rough roads but not so good for decent roads," begins Moheb Ali of the Mumbai tribunal. "This appeal has got nothing to do with cars tough or otherwise," he clarifies, though.

It seems M&M needed `some doing up' for its administrative office in Kandivali. "They engaged one architect, a few carpenters and some workers," and the renovation job included making furniture.

M&M was to pay for the materials and labour, and Kersi was to supervise the making of furniture. "Nobody gets paid without the architect saying so. In course of time, the work was done, everyone got paid and the furniture was put to use."

About a year later, the Intelligence Wing of Central Excise Department came to M&M on a tip off "that an event amounting to manufacture of furniture had taken place in the office building". They "found the offending furniture and detained it under whatever powers vested with them."

A few days later, the officials came back and "seized the furniture, which ranged from the sublime to the mundane, such as Director's sofa (sofas go by the name of the officials, who sit on them), discussion table, disc for computer wire, Belgian mirror frame in the toilet and so on." Why? Because, no duty had been paid on the furniture, though wooden furniture of the office type falls under tariff heading 9403.30.

"These wrongs, unspeakable, past patience, or more than any living man could bear," reads a line in Titus Andronicus.

"More than any living taxman could bear," is how the Department would have viewed, unaware perhaps of how their action would ultimately end.

"There is this general impression that goods have to be first seized before they are confiscated. Detention is not enough," explains the reader-friendly verdict of Ali. "Having seized the furniture, the officers left it with the officials of M&M under supatnama (with instructions not to part with it) so that the director could sit, the staff could endlessly discuss sitting round the discussion table and use the toilet which has a Belgian mirror frame."

The Department began investigating, to find out who made the furniture, and how. "The officers of M&M were reluctant to disclose the name of the architect for some reason. After a lot of persuasion they however gave the name but incorrect address. The Central Excise Officers found their man all the same and recorded his statement."

What did the Department want of Kersi? "The Commissioner held Kapadia as the person who manufactured the furniture without Central Excise registration and also the one who cleared it without payment of duty (20 per cent ad valorem on the furniture)." Accordingly, Kersi was demanded `the duty evaded by him', and also penalty. He was told that he should redeem the furniture on payment of fine of Rs 6 lakh.

Kersi's advocate R. Nambirajan told the tribunal that Kersi was only an architect and that he had not become a manufacturer yet. And that the fact he'd supervised the making of furniture didn't make him a manufacturer.

"Behind every furniture manufacturer an architect or an interior decorator would be lurking and for that reason of lurking he or she cannot be called manufacturer of furniture," argued Nambirajan. He produced a copy of the agreement between M&M and Kersi, delineating the nature of work.

Ali heard both the sides and observed: "Theoretical economists say that there are four factors of production — land, labour, capital and organisation — without which goods cannot be produced. That holds good for furniture too. All the above factors were provided by M&M and not Kapadia."

The tribunal noted that Kersi, as the architect, had planned and successfully got the work executed for a fee; he'd provided a service. "The relationship between M&M and Kapadia is not the one between a principal and a job worker. Just as a construction engineer who supervises construction of a building cannot be accused of being a builder, Kapadia cannot be called a manufacturer," said Ali, and added, for good effect, "He would, perhaps, some day become one. Till then the Department can wait."

To the tribunal it was clear that the furniture in question belonged to M&M. "It is highly debatable whether an order of confiscation itself gets vitiated when a wrong person is asked to redeem the confiscated goods," noted Ali.

"In the present case it is not merely a question of wrong person being asked to redeem the goods, it is a case where the demand for duty itself is made on a wrong person. Such proceedings in their entirety have to be quashed."

Returning to the Bard's play Titus Andronicus, another line that catches the eye is: "Dishonour'd thus, and challenged of wrongs?" Apt, because the hot chase of the architect around office furniture ended as a damp squib.

Do fans need regulators?

AN AIRY case that had reached the portals of the apex court was North West Switchgear Ltd vs Commissioner of Central Excise, New Delhi, decided on February 14 by Justices Ashok Bhan and Arun Kumar.

North West was a company "engaged in the manufacture of switches, fan regulators and distribution board and so on". It classified `fan regulators' under sub-heading 8414.20 of the Central Excise Tariff Act.

This entry covered electric fans; and the company reasoned that there is no other use of regulators, which are used principally and solely with electric fans.

Heading 8414, as cited in the judgment, reads: "Air or vacuum pumps, air or other gas compressors and fans; ventilating or recycling hoods incorporating a fan, whether or not fitted with filters."

It was a shock to North West when the Excise officials slapped it with a demand asking for "the differential duty amounting to Rs 2,02,506.88 and Rs 93,514.38."

According to the Department, `fan regulators' were nothing but `accessories' of electric fans, and therefore classifiable under sub-heading 8414.99 of the Tariff Act, which attracts duty at 15 per cent ad valorem instead of the 10 per cent duty already paid by North West.

The company placed reliance on the Board's Circular No. 7/87 dated June 24, 1997, where it had been clarified that resistance type and choke type fan regulators came under 8414.20 along with the fans. When the dispute was at the tribunal, the ruling was that `fan regulators' fell under 8414.20, if cleared along with fans; if the same were cleared only as regulators (not along with fan), the classification was to be under 8414.99.

Thus, the issue at stake was whether `fan regulators' fell under 8414.20 along with fans or under 8414.99 as `parts and accessories'. The apex court studied CBEC Circular No. 192/26/96-CX dated March 27, 1996, where it had been stated: "Doubts have been expressed regarding the classification when the fan regulators are manufactured and cleared separately, not in combination with fans. It is seen that though the electric fans can function without the regulators, the regulators are needed as they limit and control the flow of the electricity and consequently control the speed of electric fans."

The Circular clarified, "When 2 regulators are cleared along with fans as a whole, they are classifiable as electric fans under sub-heading 8414.20. When fan regulators are cleared separately not in combination with fans, they are classifiable as `Parts and accessories of electric fan' under sub-heading 8414.99."

The Supreme Court found that this clarification gelled with General Notes to Section XVI of HSN under heading `Accessory Apparatus'. There, it was explained, "Accessory instrument e.g. regulators, presented with machine or apparatus to which they normally belongs are classified with that machine or apparatus, if they are designed to measure check, control or regulate one specific machine or apparatus."

Accordingly, fan regulators cleared as such and not along with fan, were classifiable under 8414.99, ruled the court. "If the contention of the appellants is accepted that the regulators have to be classified under `electric fans', whether sold with the fan or separately, then no `part or accessory' will be covered by heading 8414.99," pointed out the judges.

Tailpiece

Patient: "Please check my BP, doctor!"

Doctor: "Budget pressure?"

Detaxification@TheHindu.co.in

D. Murali

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