M/S THERMAX LTD. THROUGH ITS DIRECTOR versus COMMISSIONER OF CENTRAL EXCISE, PUNE-1 on 13 October 2022

M/S THERMAX LTD. THROUGH ITS DIRECTOR

v.

COMMISSIONER OF CENTRAL EXCISE, PUNE-1

(Civil Appeal Nos. 6048-6050 of 2009)

OCTOBER 13, 2022

[K. M. JOSEPH AND HRISHIKESH ROY, JJ.]

Central Excise Tariff Act, 1985: Heading 8418 – ModifiedVapour Absorption Chiller (MVAC) manufactured by assessee andsold and described in their invoices and catalogue as Heat Pumps– Classification – Intra-heading dispute – Held: The definition of aproduct given in the Harmonious System of Nomenclature (HSN)should be given due weightage in the classification of a productfor purpose of levying excise duty – Guided by the definition ofheat pump as given in the HSN, it is clear that MVAC manufacturedby assessee do not satisfy the definition of heat pump as given inHSN – The heat pumps by utilizing energy as per HSN becomes asource of more intense heat, however, since the final output of MVACis cold/chilled water, the MVAC does not fit into given definition ofheat pump – The manner of operation of the device and its outputmakes it abundantly clear that the primary purpose of the MVAC isto produce chilled water and the production of hot water in itsoperation is only incidental – Also, in the description of the producton the appellant’s website, Vapour Absorption Chillers do notmention about its heating capability – It is quite apparent that theproduct MVAC is intended to produce chilled water – Even if theoption of availing hot water is available, significantly, the productionof chilled water never ceases, while the machine is operating – Theadditional purpose does not alter the primary character/functionalityof the product which is to function as a Vapour Absorption Chiller,this is how the product is recognized in the market – Thus, MVACcannot be categorised as Heat Pump and is classifiable under Sub-Heading 8418.10 as refrigerating equipment.

Dismissing the appeals, the Court

HELD: 1. Guided by the definition of heat pump as given inthe HSN, the Modified Vapour Absorption Chillers (MVAC)manufactured by the appellant do not satisfy the definition of heat

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Apump as given in the HSN. The heat pumps by utilizing energy, asper HSN becomes a source of more intense heat. However, sincethe final output of MVAC is cold/chilled water, the MVACobviously does not fit into the given definition. The hot water,that is produced for generating chilled condition/ refrigeration,is only an incidental purpose of the MVAC and thereforeBclassification of the appellant’s product as a heat pump on thisbasis, would, be irrational. It cannot also be overlooked thatcustomers do not purchase MVAC because it produces hot waterand in commercial parlance the manufactured product of theappellant is known as a Vapour Absorption Chiller used for airCconditioning and refrigeration and not at all for heating purpose.The manner of operation of the device and its output makes itabundantly clear that the primary purpose of the MVAC is toproduce chilled water and the incidental production of hot waterin its operation is only incidental and cannot therefore be a groundfor classification of the product under Chapter 8418. [Paras 8-10,D12][176-E-H; 177-A-B, E]

2. When the market/common parlance test is applied forthe manufactured product, it is seen that the appellant in theirwebsite have identified Vapour Absorption Chillers and heat pumpsseparately. Significantly in the description of the product on theEappellant’s website, Vapour Absorption Chillers do not mentionabout its heating capability. Likewise, heat pumps do not mentionabout the cooling function. This would suggest that the appellantsdo not themselves recognize the incidental hot water generatingcapacity of the Vapour Absorption Chillers, to treat it as a heat

Fpump. The additional purpose does not alter the primary character/functionality of the product which is to function as a vapourabsorption chiller, used to produce chilled water for the purposeof refrigeration and air conditioning. This is how the product isrecognized in the market. The incidental output from the machine cannot therefore justify classification of the product in theGcategory of heat pump. [Para 13][177-F-G; 178-A-B]

3. In a situation like this, Chapter Note 7 can act as a tie-breaker mechanism. The resolution can be achieved by lookingat the Principal Purpose Test, which if applied, can also resolve H

the intra-heading dispute. Such mode of interpretation will aid insettling, the classification dispute by adhering to the HSN Code.Applying the Principal Purpose Test for the machine manufacturedby the appellant, it is quite apparent that the product MVAC isintended to produce chilled water. Moreover, even if the optionof availing hot water is available, significantly, the production ofchilled water never ceases, while the machine is operating.Therefore, the principal purpose of the machine is to producechilled water. Therefore, taking help from Chapter Note 7,producing chilled water is to be taken as the sole purpose of theMVAC manufactured by the appellants.[ Paras 17 and 18][1749-D-G]

4. The end use of MVAC is to produce Chilled Water. Theuse of heat as one of the sources in the air-conditioning systemwould not take away the primary or basic function of the MVAC,which is to cool and not heat water. The additional heatingcapability of the machine thus raises a peculiar dilemma, but thenone can be guided by the market parlance test which shows thatthe machine is perceived and purchased only as a cooling device.[Para 21][180-E]

Commissioner of Central Excise, Mumbai v. Blue Star Ltd.(198) ELT 454; Commissioner of Customs and Central Excisev. Voltas Ltd. 2005 (180) ELT 57 – distinguished.

Collector of Central Excise, Shillong v. Wood Craft ProductsLtd. (1995) 3 SCC 454 : [1995] 2 SCR 797; Commissionerof Customs and Central Excise, Amritsar (Punjab) v. D. L.Steels Etc. 2022 SCC OnLine SC 863; Xerox India Ltd. v.Commissioner of Customs (2010) 14 SCC 430 : [2010] 14SCR 199 – relied on.

Commissioner of Central Excise, Delhi v. Carrier Aircon Ltd.(2006) 5 SCC 596 : [2006] 3 Suppl. SCR 254 – referred to.

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CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 6048-6050 of 2009.

From the Judgment and Order no.A/35-37/09/EB/C-II dated22.01.2009 of the Customs, Excise and Service Tax Appellate Tribunal,BWest Zonal Bench, Mumbai in Excise Appeal Nos.E/819/2000, E/1482/2000 and E/1731/2000.

V. Sridharan, Sr. Adv., R. Nambirajan, Aditya Bhattacharya,Ms. Mounica Kasturi, Ms. Apeksha Mehta, Sahil Parghi, Ms. CharanyaLakshmikumaran, Advs. for the Appellant.

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N. Venkataraman, ASG, V. Chandra Shekara Bharathi, RupeshKumar, Ms. Vishakha, B. K. Satija, Anirudh Sharma, Ms. AmrithaChandramouli, S. Ramnarayan, Mukesh Kumar Maroria, B. KrishnaPrasad, Advs. for the Respondent.

DThe Judgment of the Court was delivered byHRISHIKESH ROY, J.

1. Heard Mr. V. Sridharan, the learned Senior Counsel representingthe appellant. Also heard Mr. V. Chandra Shekara Bharathi, learnedcounsel representing the Revenue.

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2. This appeal is filed under Section 35L of the Central ExciseAct, 1944 and the issue to be considered here is whether the productmanufactured by the appellant is classifiable as heat pump under theheading 84.18 of the Schedule to the Central Excise Tariff Act, 1985.The question is important for the appellant because under notificationF155/86-CE dated 1.3.1986, heat pumps falling under Chapter 8418,enjoyed a limited exemption from the levy of excise duty.

3. The appellant had sold their manufactured product by describingthem as heat pumps but the Assistant Commissioner of Central Excisenegated such description. On appeal by the assessee, the CommissionerGof Central Excise (Appeals) however agreed with the manufacturer’sclaim. But in the appeal by the Revenue, the Customs, Excise and ServiceTax Appellate Tribunal, Mumbai (for short “CESTAT”) has reversedthe decision. The conclusion in the impugned order dated 22.1.2009, isthat the product is not heat pump and therefore, ineligible for concessionalrate of duty under Sl. No. 2 of Notification No. 155/86-CE dated 1.3.1986.

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It was also held that the product is a complete machine and cannot betreated as part of a machine. It was accordingly declared that themanufacturer is disentitled to the concessional rate of duty in terms ofthe notification, for their product. Incidentally, the CESTAT also heldthat the value of Lithium Bromide is not to be calculated in the assessablevalue of the machine. However, to facilitate computation of the payablesum of duty by the manufacturer, the matter has been remanded to theadjudicating authority. Earlier, the appellant had preferred a writ petitionbefore the Bombay High Court to challenge the decision of the CESTATbut because the statutory remedy of appeal to this Court is available, theHigh Court dismissed the writ petition on 26.3.2009 resulting in the presentappeal.

APPELLANTS CONTENTION

4.1 Mr. V. Sridharan, the learned Senior Counsel submits thatappellant manufactures Modified Vapour Absorption Chillers (for short“MVAC”) and this product was presented for assessment as heat pumpsclassifiable under Heading 8418, attracting lower rate of excise duty ascompared to chillers. The appellant asserts that MVAC is bought, soldand described in their invoices and catalogues as heat pumps. It is theirfurther contention that the process of manufacturing their product (MVAC)is distinct from manufacturing ordinary chillers as they are installingadditional components in the Vapour Absorption Chillers (for short“VAC”) such as, (I) Sensor to sense the temperature, (II) Selector Switchto control panel which can select heating/cooling mode, and (III)Additional Wiring to carry the signals from the sensors and these featureswarrant recognition of the machine as “heat pumps”.

4.2 The learned Senior Counsel emphasizes that MVAC has inbuiltcapability whereby the customer can obtain both chilled and also hotwater as output for further use by the end user. The Counsel relied upona technical book “Heat Pumps” authored by R.D. Heap and a self-prepared chart describing the functioning of the Heat Pump. Based uponthe aforesaid, the counsel contended that since the subject machine canprovide both chilled and hot water using refrigerator circle, theinterpretation against the appellant, ignoring technical features of theproduct, would be unjustified. Pointing out that heat pumps are classifiedwith refrigerators, freezers and other freezing equipments under Heading8418 and not as boilers under Heading 8402, it is argued that merelybecause heat pumps are inherently capable of producing cold water AB

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4.3 The appellants Counsel then refers to the Harmonious Systemof Nomenclature (HSN) Explanatory Notes to argue that therein thefunctioning of the heat pumps is shown as heat plus energy, resulting inBa source of more intense heat. Because substantial modification is carriedout by the manufacturer to transform chillers into MVAC and the four-

way reversing Valve, a key component in MVAC can provide heatingand cooling from the system to the air condition space by reversing theflow direction of refrigerant and thereby an air conditioner can fit intothe description of heat pumps. It is argued that classification of theCproduct should be based on the machine, as altered by the additionalcomponents and the product presented should be seen as a whole forthe purpose of classification by taking into account its inbuilt functionalityto produce hot water. The senior counsel would rely on the recognitionof few customers of the product who say that the product is purchasedDfor getting both hot and cold water.

4.4 To blunt the Revenue’s projection that the product is capableof heating water by mere 5 degree celsius or so and the same should nottherefore be classified as heat pumps, the appellant’s Counsel submitsthat the MVAC is similarly capable of marginally cooling the water alsoEby around 5 degree celcius only and if the theory propounded by theRevenue is to be applied, the product - if it cannot be a heat pump,cannot also be a chiller for the same reasoning.

4.5 Assailing the legality of the impugned decision by the CESTAT,the appellant submits that Chapter Note 7 to Chapter 84 of the CentralFExcise Tariff Act, 1985 was wrongly relied upon in the impugned orderas the said aspect was neither counted upon in the show cause noticenor was considered in the Order-in-Original and also in the furtherproceedings by the Revenue. It is the further submission of the appellantthat even as per Chapter Note 7, the machine which is based upongeneration of heat in order to achieve cooling, should be classified in theGmanner suggested by the manufacturer.

4.6 Explaining the scope of Note 2 and Note 7 in the HSNexplanatory notes, Mr. V. Sridharan the learned Senior Counsel submitsthat Note 7 cannot be made applicable to products falling under Chapter84.01 to 84.24 by referring to the following extract from Note 2:-H

“Machines, which fall in two or more headings, none of whichis within headings 84.01 to 84.24, are classified in thatheading which provides the most specific description of thegoods, or according to the principal use of the machine.Multipurpose machines which are used equally for a numberof different purposes or industries (e.g. eyeleting machinesused equally well in the paper, textile, leather, plastics, etc.,industries) are classified in heading 84.79,”

4.7 The Senior Counsel has referred to the industry related decisionin the cases of Commissioner of Central Excise, Mumbai Vs. BlueStar Ltd.[1] and Commissioner of Customs and Central Excise Vs. VoltasLtd.[2] who are the principal competitors of the appellant in the same fieldto point out that the product manufactured by the said two companiesare identical to MVAC manufactured by the appellant, and in theproceedings pertaining to those two companies, the productsmanufactured by them were treated as heat pumps, falling under Heading84.18. What is more, the issue has attained finality as the Revenue’sappeal against the order of CIT(A) favouring the manufacturer, wasdismissed by the CESTAT and further appeal against the order of theCESTAT was thereafter dismissed by this Court. Accordingly, it is arguedby the appellant that since similar products as theirs were taxed at therate of 15 per cent, higher duty should not be levied for the appellant’ssimilar machine, as the same would be discriminatory, accordingly MVACmust also be treated as Heat Pump.

RESPONDENTS CONTENTION

RESPONDENTS CONTENTION

5.1 On the other hand, Mr. V. Chandra Shekara Bharathi, thelearned counsel, at the outset, submits that the Revenue does not disputethe classification of the product under Chapter 8418 since there are norival entries. Notwithstanding such a stand, it is argued that the MVACmanufactured by the appellant does not qualify as heat pump to securethe benefit of limited exemption, under the Notification 155/86-CE dated1.3.1986.It is specifically contended that MVAC does not satisfy thedefinition of heat pump given in the HSN where heat pump is definedas under:- “A heat pump is a device which draws heat from a suitable heatsource (principally underground or surface water, the soil or the 1 (198) ELT 454

2 2005 (180) ELT 57

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Aair) and converts it with the assistance of a supplementary energysource (e.g. gas or electricity) into a source of more intense heat.”

5.2 Taking a cue on the functional description of the device in theHSN, the respondent submits that the definition of the heat pumps isthrough a process of heat plus energy resulting in a source of moreBintense heat, but for the appellant’s device, the final output is chilledwater and therefore, MVAC would not qualify as heat pump. Theproduction of hot water from MVAC is only an incidental purpose of themachine and this by itself, the respondents argue, would not justifyclassification of the product as no customer has purchased MVAC forthe incidental purpose that it also produces hot water, and the primaryCuse of the product is only for cooling/chilling purpose. It is also pointedout that the product is understood and recognized in market parlance asa Vapour Absorption Chiller, used exclusively for air conditioning orrefrigeration purpose and the device is not known as a heat pump.

5.3 Since an exhaustive definition of heat pump is given in HSN,DMr. Bharathi argues that the said definition should be the basis forclassification of the MVAC and deviation from the HSN definition toclassify product as heat pump, would be contrary to the ratio in Collectorof Central Excise, Shillong Vs. Wood Craft Products Ltd.[3]andCommissioner of Customs and Central Excise, Amritsar (Punjab)EVs. D.L. Steels etc.[4]. In these two decisions, it has been held that whena definition is contained in the HSN, that definition should prevail for thepurpose of classification of the product and accordingly, it is argued thatany interpretation of heat pump, beyond the scope of definition providedin the HSN, would not be justified.

F5.4 According to the respondent, the primary function of MVACis to produce chilled water and since production of hot water is onlyincidental, the same cannot provide an acceptable justification forclassification of the product as heat pump. It is also pointed out by Mr.Bharathi on behalf of the Revenue that the website of the appellantshows that both heat pumps and Vapour Absorption Chillers areGmarketed separately by the appellant and in the description of the productVapour Absorpotion Chillers, the appellant does not mention about itsheating capability. Likewise in the description of heat pumps, the cooling 3 (1995) 3 SCC 454H4 2022 SCC OnLine SC 863

capability is not mentioned. According to the respondent, the modificationof the Vapour Absorption Chillers (VAC) as Modified VapourAbsorption Chillers (MVAC) does not in any way alter the primarycharacter/purpose of the device which is intended to function as VapourAbsorption Chillers used exclusively for refrigeration and cooling. Theincidental production of hot water through modification of VAC is notgermane to warrant classification of VAC in the category of heat pumps.

5.5 The learned counsel for the Revenue next contends that thejudgment of the Tribunal in Blue Star (supra) and Voltas (supra) aredistinguishable and should have no application in determining theclassification of the MVAC manufactured by the appellant.

5.6 Adverting to Chapter Note 7 to Chapter 84, it is also arguedthat production of chilled water is the sole purpose of the MVAC andthe product does not qualify as heat pump, if the HSN definition isapplied as is necessary.

DISCUSSION

6. The definition of a product given in the HSN should be givendue weightage in the classification of a product for the purpose of levyingexcise duty. This is because in the Statement of Objects and Reasons ofthe Bill leading to enactment of Central Excise Tariff Act, 1985, it wasclearly stated that the pattern of tariff classification is broadly based onthe system of classification derived from the International Conventionon the Harmonised Commodity Description and Coding System(Harmonised System) with such contraction or modification thereto asare necessary, to fall within the scope of the levy of central excise duty.The tariff so suggested for the levy under the Indian Tariff Act is basedon an internationally accepted nomenclature, in the formulation of which,all considerations, technical and legal, have been taken into account.This was done to reduce avoidable disputes on tariff classification.Besides, the tariff would be on the lines of the harmonized system. Itwas also borne in mind that the tariff on the lines of the harmonizedsystem would bring about considerable alignment, between the customsand central excise tariffs, which in turn, would facilitate charging ofadditional customs duty on imports, equivalent of excise duty. It wastherefore expressly stated in the Statement of Objects and Reasons thatthe central excise tariff are based on the HSN and the internationallyaccepted nomenclature was as such taken into account, to reduce tariff C

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Aclassification disputes. Thus, it was suggested that a safe guide forclassification is the internationally accepted nomenclature emerging fromthe HSN and in case of doubt, the HSN should be chosen advisory forascertaining the true meaning of any expression used in the Tariff Act.In Wood Craft (supra), in the opinion written by Justice J.S. Verma, thefollowing was pertinently opined in this context:

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“12. ….. Accordingly, for resolving any dispute relating to tariffclassification, a safe guide is the internationally acceptednomenclature emerging from the HSN. This being the expresslyacknowledged basis of the structure of Central excise tariff in theAct and the tariff classification made therein, in case of any doubtthe HSN is a safe guide for ascertaining the true meaning of anyexpression used in the Act. The ISI Glossary of Terms has adifferent purpose and, therefore, the specific purpose of tariffclassification for which the internationally accepted nomenclaturein HSN has been adopted, for enacting the Central Excise TariffAct, 1985, must be preferred, in case of any difference betweenthe meaning of the expression given in the HSN and the meaningof that term given in the Glossary of Terms of the ISI.

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18. We are of the view that the Tribunal as well as the HighCourt fell into the error of overlooking the fact that the structureof the Central excise tariff is based on the internationally acceptednomenclature found in the HSN and, therefore, any dispute relatingto tariff classification must, as far as possible, be resolved withreference to the nomenclature indicated by the HSN unless therebe an express different intention indicated by the Central ExciseTariff Act, 1985 itself. The definition of a term in the ISI Glossary,which has a different purpose, cannot, in case of a conflict, overridethe clear indication of the meaning of an identical expression inthe same context in the HSN. In the HSN, block board is includedwithin the meaning of the expression “similar laminated wood” inthe same context of classification of block board. Since the CentralExcise Tariff Act, 1985 is enacted on the basis and pattern of theHSN, the same expression used in the Act must, as far aspracticable, be construed to have the meaning which is expressly F

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given to it in the HSN when there is no indication in the Indiantariff of a different intention.”

7. Commenting on the importance of taking guidance from HSNClassification and how a taxing statute should be construed in consonancewith their commonly accepted meanings in the trade and popular sense,Justice Sanjiv Khanna in D.L. Steels (supra) also so correctly observedas follows:- “9. The Harmonised System of Nomenclature[9], developedby the World Customs Organisation, has been adopted in India byway of the Customs Tariff Act, 1975, though there are certainentries in the Schedules to this Act which have not been assignedHSN codes. The Harmonised System is governed bythe International Convention on Harmonised CommodityDescription and Coding System, which was adopted in 1983,and enforced in January, 1988. This multipurpose internationalproduct nomenclature harmonises description, classification, andcoding of goods. While the primary objective of the HSN is tofacilitate and aid trade, the Code is also extensively used bygovernments, international organisations, and the private sectorfor other diverse purposes like internal taxes, monitoring importtariffs, quota controls, rules of origin, transport statistics, freighttariffs, compilation of national accounts, and economic researchand analysis. In the present times, given the widespread adoptionof the Harmonised System by over 200 countries, it would beextremely difficult to deal with an international trade issue involvingcommodities, without adverting to the Harmonised System. TheCode is the bedrock of custom controls and procedures. The HSNconsists of over 5000 commodities groups, which are structuredinto 21 Sections and 97 Chapters, which are further divided intofour and six digit subheadings. Many custom administrations, likeIndia, use an eight or more digit commodity coding system, withthe first six digits being the HSN code.

10. Classification under the Harmonised System is doneby placing the good under the most apt and fitting sub-heading.This is done by choosing the appropriate Chapter, Heading, andsub-heading respectively. To facilitate interpretation andclassification, each of the 97 Chapters in the HSN containcorresponding Chapter Notes, General Notes, and Explanatory AB

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Notes applicable to the Headings and sub-headings within thatChapter. In addition, there are six General Rules ofInterpretation[10] applicable to the Harmonised System as a whole.

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12. We would, at this stage, take on record the well-settledprinciple that words in a taxing statute must be construed inconsonance with their commonly accepted meaning in the tradeand their popular meaning. When a word is not explicitly defined,or there is ambiguity as to its meaning, it must be interpreted forthe purpose of classification in the popular sense, which is thesense attributed to it by those people who are conversant with thesubject matter that the statute is dealing with. This principle shouldcommend to the authorities as it is a good fiscal policy not to putpeople in doubt or quandary about their tax liability. The commonparlance test is an extension of the general principle ofinterpretation of statutes for deciphering the mind of the law-maker.However, the above rule is subject to certain exceptions, forexample, when there is an artificial definition or special meaningattached to the word in a statute, then the ordinary sense approachwould not be applicable.[”]

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8. Guided by the definition of heat pump as given in the HSN, it isclearly discernible that the Modified Vapour Absorption Chillers(MVAC) manufactured by the appellant do not satisfy the definition ofheat pump as given in the HSN. According to the appellant, the functioningof the MVAC involved - a) Lithium Bromide in a lower concentration isFmade to react with water to form what is commonly known as the ‘weaksolution’ containing both water and Lithium Bromide; b) To this weaksolution, heat is applied. When heat is applied, the concentration of LithiumBromide increase which results in the separation of the water fromLithium Bromide. The separated water is in the form of Vapour; c) ThisGVapour travels to the condenser and then to the cooling tower to producechilled water; d) The waste heat if any can be used to produce hotwater. The heat can also be wasted.

9. The heat pumps by utilizing energy, as per HSN becomes asource of more intense heat. However, since the final output of MVACis cold/chilled water, the MVAC obviously does not fit into the given H

definition. The hot water, that is produced for generating chilled condition/refrigeration, is only an incidental purpose of the MVAC and thereforeclassification of the appellant’s product as a heat pump on this basis,would in our view, be irrational.

10. Moreover, it cannot also be overlooked that customers do notpurchase MVAC because it produces hot water and in commercialparlance the manufactured product of the appellant is known as a VapourAbsorption Chiller used for air conditioning and refrigeration and notat all for heating purpose.

11. The appellant however argued that their machine can produceboth chilled and hot water as output using refrigeration cycle and theproduct user has the option of availing either hot or chilled water. On thisaspect, it is acknowledged by the learned counsel for the appellant thatthe production of cold water never stops when the MVAC is operating.Of course, with the option of a switch, the hot water can also be obtained.However, the customer does not have the option of choosing either hotor chilled water and he has to compulsorily use chilled water or use bothchilled water and hot water.

12. As it is not possible for the user to obtain only hot water fromthe MVAC, we find it difficult to relate the product to the definition ofheat pump given in the HSN. The manner of operation of the deviceand its output makes it abundantly clear that the primary purpose of theMVAC is to produce chilled water and the incidental production of hotwater in its operation is only incidental and cannot therefore be a groundfor classification of the product under Chapter 8418.

13. When the market/common parlance test is applied for themanufactured product, it is seen that the appellant in their website haveidentified Vapour Absorption Chillers and heat pumps separately.Significantly in the description of the product on the appellant’s website,Vapour Absorption Chillers do not mention about its heating capability.Likewise, heat pumps do not mention about the cooling function. Thiswould suggest that the appellants do not themselves recognize theincidental hot water generating capacity of the Vapour AbsorptionChillers, to treat it as a heat pump. The modification of VapourAbsorption Chillers by adding a sensor to gauze the temperature andincorporating a selector switch in the control panel to select heating/cooling mode with added wiring to carry the signal from the censors A

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Awould simply mean that a vapour absorption chiller can also producehot water. However, what is important to keep in mind is that the additionalpurpose does not alter the primary character/functionality of the productwhich is to function as a vapour absorption chiller, used to producechilled water for the purpose of refrigeration and air conditioning. This ishow the product is recognized in the market. The incidental output fromBthe machine cannot therefore justify classification of the product in thecategory of heat pump.

14. Insofar as the submission of Mr. V. Sridharan, the learnedSenior Counsel that the product manufactured by the appellant must besimilarly classified as the products manufactured by the two rivalCcompanies i.e. M/s. Blue Star and M/s. Voltas, as was decided in therelated proceedings, it must be said at the outset that the concerneddecisions of the Tribunal related to classification of the product undertwo rival entries but in the present case, the adjudication relates to asingle entry. Additionally, in the present matter, the Tribunal held in favourDof the Revenue whereas in the case of Blue Star (supra) and Voltas(supra), the manufacturers succeeded with their contention before theTribunal. Therefore, the decision cited by the learned senior counsel forthe appellant do not persuade us to hold in favour of the appellant.

15. That apart, it must be kept in mind that the Revenue in theEcase of Voltas (supra), classified their Vapour Absorption Unit as an airconditioning equipment falling under Chapter 8415 and not as arefrigeration equipment falling under Chapter 8418. Significantly, whiledeclaring that the product is a refrigeration equipment falling underChapter 8418, the Tribunal had no occasion to decide whether the productis a heat pump or not. Therefore, in the present matter where the issueFto be decided is whether MVAC is a heat pump or not, the decision inthe case of Voltas (supra) can be of no assistance for such determination.

16. Likewise, in the case of Blue Star, in order to classify theproduct beyond the scope of heat pump, the Revenue placed it underChapter 8415. In that proceeding, the product in question was not testedGto determine whether it would be covered in the definition of heat pumpgiven in the HSN. The onus to be discharged by M/s. Blue Star, in theircase, was to prove that their product did not fall under Chapter 8415 andthey had no occasion to satisfy the definition under HSN, for their product.Moreover, as earlier said, unlike the case of M/s. Blue Star, we are notHrequired to deal with two rival entries in the present matter as the contention of the Revenue before us is that despite the product fallingunder Chapter 8418, the MVAC is not a heat pump.

Arguments

17. Proceeding next to examine whether Chapter Note 7 to Chapter84 can have a bearing in the present matter, what is stated therein is thata machine is capable of additional function, for the purpose ofclassification, its principal purpose is to be understood as the machine’ssole purpose. On this, the learned counsel for the Revenue has arguedthat Chapter note 7 forms part of the HSN which has been adopted inthe Central Excise Tariff Act and the same being an Act of Parliament,the reliance on the chapter note in the HSN is a legal contention which,given the circumstances, can be applied in the present matter. We cannotalso be unmindful of the fact that Chapter Note 7 comes into play onlywhen there are two or more headings, and in those situations when,none of those headings fall under Chapter 84.01 to 84.24. According toHSN, the headings 84.01 to 84.24 cover an apparatus by referring totheir definition which can be used in different industries. The presentcase pertains to heading 84.18 and the expression and phrases musttherefore be literally construed to include two commercial classificationswithin the same heading. For example, a product under heading 84.18can either be a refrigerator or a freezer or a refrigeration equipment ora heat pump not falling under Chapter 8415. In a situation like this, if weapply Chapter Note 7, the same can act as a tie-breaker mechanism.The resolution can be achieved by looking at the Principal Purpose Test,which if applied, can also resolve the intra-heading dispute. Such modeof interpretation in our understanding will aid in settling, the classificationdispute by adhering to the HSN Code.

18. If the Principal Purpose Test is applied for the machinemanufactured by the appellant, it is quite apparent that the product MVACis intended to produce chilled water. Moreover, even if the option ofavailing hot water is available, significantly, the production of chilled waternever ceases, while the machine is operating. Therefore, the principalpurpose of the machine is undoubtedly to produce chilled water.Therefore, taking help from Chapter Note 7, producing chilled water isto be taken as the sole purpose of the Modified Vapour AbsorptionChillers manufactured by the appellants. The CESTAT by applying theratio laid down in Commissioner of Central Excise, Delhi Vs. Carrier AB

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AAircon Ltd.[5]has therefore concluded that the function of the machine isonly to chill water or bring it to a very low temperature.

19. The above conclusion is supported by the ratio in Xerox IndiaLtd. Vs. Commissioner of Customs[6], where Justice H.L. Dattu whileadverting to functional classification of multi-functional machines opinedBthat in case of machines capable of performing two or moresupplementary/alternative functions, the appropriate classification shouldbe in reference to its principal function.

20. The principles enunciated in DL Steels (Supra) quasignificance of HSN and the manner in which the appellant’s productChave been treated on the earlier occasions by the Revenue, togetherwith the fact that it had been treated as a chiller and the customers havebeen purchasing MVAC primarily for the purpose of chilling, should havea definite bearing on the classification issue under consideration. TheMVAC manufactured by the Appellant should normally be not classifiedas a heat pump, notwithstanding the fact that the manufacturer hasDmodified the vapour absorption chiller, using additional components.Moreover, the definition provided in the HSN must have an overridinginfluence over any other definition for the purpose of Classification ofthe product.

21. The end use of MVAC is to produce Chilled Water. The useEof heat as one of the sources in the air-conditioning system would nottake away the primary or basic function of the MVAC, which is to cooland not heat water. The additional heating capability of the machine thusraises a peculiar dilemma, but then one can be guided by the marketparlance test which shows that the machine is perceived and purchasedFonly as a cooling device. The circumstances here remind us of thesomewhat similar predicament of Lord Illingworth, the character in AWomen of No Importance. In this classic play of Oscar Wilde[7], in thecontext of observing all kinds of human capabilities, the dramatis personaemade that classic remark on those, “who do the improbable.” Theuncharacteristic capability of the cooling machine to also produce hotGwater, should not however deflect us and it would be appropriate toobserve in this case that a chiller machine is attempting to masqueradeas a heat pump, to gain concessional tariff benefits. The conclusion 6 (2010) 14 SCC 430H7 Oscar Wilde - A Women of No Importance.: Act 3.

therefore is inevitable that the MVAC machine must not be categorizedas a Heat Pump. Consequently, it is declared that the productmanufactured by the appellants merit classification under Sub-heading8418.10 of the central excise Tariff Act, 1985, in the category ofrefrigerating equipment. The view of the CESTAT is thus affirmed. Theappeals are accordingly dismissed leaving the parties to bear their owncost.

Devika Gujral(Assisted by : Preetam Bharti, LCRA)

Appeals dismissed.

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