The New Delhi Principal Bench of the Customs Excise and Service Tax Appellate Tribunal (CESTAT) has held that integrated drive generator and starter generator imported for use in conjunction with turboprop/turbofan aircraft engines are classifiable under Heading 8501, and not under Heading 8511, because Heading 8511 is confined to generators used in conjunction with spark-ignition or compression-ignition internal combustion engines, whereas turboprop/turbofan engines are gas turbine engines falling under Heading 8411. Accordingly, the CESTAT held the integrated drive generator as classifiable under Tariff Item 8501 62 00 and the starter generator under Tariff Item 8501 32 20.
The Tribunal further held that when reassessment is opened by the department, the importer is entitled to claim a correct alternative classification different from that originally declared, and mere misclassification in the bills of entry, in a dispute purely relating to tariff classification, does not justify invocation of the extended period of limitation under section 28(4). Consequently, penalty under section 114A also fails.
The Tribunal also held that penalty under section 117 cannot be imposed on the customs house agent in these facts, because the agent’s role is confined to filing entries on the basis of documents and instructions supplied by the importer, and no independent contravention warranting residuary penalty was established against it.
The Division Bench comprising Justice Dilip Gupta (President) and P.V. Subba Rao (Accountant Member) noted that Heading 8501 covers electric motors and generators, excluding generating sets, and that the goods in question were undisputedly electrical generators. It further noted that the imported goods were not generating sets under Heading 8502 because they were imported without prime movers, i.e., without the turboprop/turbofan engines.
The Tribunal observed that Heading 8511 applies only to generators used in conjunction with spark-ignition or compression-ignition internal combustion engines. Although turboprop/ turbofan engines may broadly be internal combustion engines, they are gas turbine engines and are distinct from spark-ignition and compression-ignition engines. Since the goods were used with gas turbine engines classifiable under Heading 8411, they could not be brought under Heading 8511.
The Tribunal specifically rejected the Principal Commissioner’s interpretation that the words “IC engines of any kind” in the HSN Notes to Heading 8511 were wide enough to include turboprop/turbofan engines for this purpose. It held that the expression “any kind” referred to internal design, namely piston type or other types, and could not override the statutory limitation in Heading 8511 to spark-ignition or compression-ignition internal combustion engines.
The Tribunal also observed that once reassessment proceedings were opened by the department, the appellant was entitled to claim a classification different from what had been declared at the time of import. The earlier classification under Heading 8502 in some bills of entry did not bar the appellant from asserting the correct classification under Heading 8501, particularly when the change was revenue neutral because the IGST rate under both 8501 and 8502 was 18% during the relevant period.
On limitation, the Tribunal observed that the dispute was one of classification and not of misdescription of goods in the bills of entry. Mere misclassification by the importer, even if assumed, would not by itself justify invocation of the extended period under section 28(4). The Tribunal held that self-assessment by the importer does not automatically establish intention to evade duty, and in the present case the department’s classification itself was found incorrect.
The Tribunal further observed that penalty under section 114A could not survive once the extended period was held to be wrongly invoked, because such penalty is attracted only where non-payment or short-payment is by reason of collusion, wilful misstatement or suppression of facts. It also held that penalty on C.G. Logistics under section 117 was unsustainable since a customs-house-agent acts on the basis of documents and instructions furnished by the importer, and mere lack of uniformity in classification in bills of entry could not justify penalty on the agent.
Briefly, the appellant is a scheduled airline operator engaged in carriage of passengers and goods by air, and C.G. Logistics Ltd. is a licensed Customs House Agent which acted for clearance of the imported goods. The dispute related to integrated drive generator and starter generator imported for use in conjunction with turboprop/turbofan engines fitted in aircraft.
The integrated drive generator was described as a component installed on the engine gearbox pad, incorporating a brushless three-phase AC generator and a constant speed drive, and providing primary electrical power to aircraft systems such as GCU, EGIU, lighting and air-conditioning. The starter generator was described as a dual-function unit attached to the engine gearbox, operating first as a motor to start the engine and thereafter as a DC generator supplying 30V power of 12 kW to aircraft components.
The appellant had been importing the goods under Heading 8501 and, in some cases, under Heading 8502, while availing the applicable exemption and paying IGST at 18%. An audit letter alleged misclassification and asserted that the correct classification was under Tariff Item 8511 40 00 attracting IGST at 28%. In response, the appellant stated that classification under Heading 8502 in some bills of entry was inadvertent, that the correct heading was 8501, and that Heading 8511 was inapplicable.
Thereafter, two show cause notices were issued, invoking section 28(4) and proposing demand of Rs. 26.48 crores and penalties, which later culminated in confirmation of Rs. 14.99 crores with penalty on Interglobe under section 114A and on C.G. Logistics under section 117, while dropping the demand relating to Heat Sink Assembly. The second notice invoked section 28(1) and resulted in confirmation of Rs. 2.91 crores without penalties.
The Principal Commissioner held that turboprop/turbofan engines are internal combustion engines and, relying on the HSN Explanatory Notes to Heading 8511 and Chapter Note 2 to Chapter 85, classified the integrated drive generator under 8511 40 00 / 8511 50 00 and the starter generator under 8511 50 00 / 8511 40 00 as recorded in the impugned order, rejecting the appellant’s claim under Heading 8501.
Appearances:
B.L. Narasimhan, Anjali Singh and Kruti Parashar, Advocates for the Appellant/ Taxpayer
Nikhil Mohan Goyal, Authorized Representative for the Respondent/ Department
