Modified Vapour Absorption Chiller Machine Cannot Be Categorized As 'Heat Pump' To Avail Concessional Excise Tariff Benefit : Supreme Court Upholds CESTAT Judgment

The Supreme Court observed that a Modified Vapour Absorption Chillers cannot be categorized as a Heat Pump to avail concessional tariff benefits under Central Excise Tariff Act, 1985.

Customers do not purchase MVAC because it produces hot water and in commercial parlance it is used for air conditioning and refrigeration and not at all for heating purpose, the bench of Justices KM Joseph and Hrishikesh Roy noted.

The court further observed that the definition of a product given in the HSN should be given due weightage in the classification of a product for the purpose of levying excise duty.

The bench observed thus while dismissing the appeal filed by Thermax Ltd against the judgment passed by the Customs, Excise and Service Tax Appellate Tribunal, Mumbai (CESTAT). The issue raised in this appeal was whether the Modified Vapour Absorption Chillers manufactured by Thermax Ltd is classifiable as heat pump under the heading 84.18 of the Schedule to the Central Excise Tariff Act, 1985, attracting lower rate of excise duty as compared to chillers. ?

The appellant's contention was that the MVAC has inbuilt capability whereby the customer can obtain both chilled and also hot water as output for further use by the end user.  On the other hand, the Revenue contended that the production of hot water from MVAC is only an incidental purpose of the machine and this by itself would not justify classification of the product as heat pump.

The bench noted that, while using the MVAC, the customer does not have the option of choosing either hot or chilled water and he has to compulsorily use chilled water or use both chilled water and hot water.

"As it is not possible for the user to obtain only hot water from the MVAC, we find it difficult to relate the product to the definition of heat pump given in the HSN. The manner of operation of the device and its output makes it abundantly clear that the primary purpose of the MVAC is to produce chilled water and the incidental production of hot water in its operation is only incidental and cannot therefore be a ground for classification of the product under Chapter 84.18.", the court observed.

The court then applied the Principal Purpose Test and observed:

"Moreover, even if the option of availing hot water is available, significantly, the production of chilled water never ceases, while the machine is operating. Therefore, the principal purpose of the machine is undoubtedly to produce chilled water."

While dismissing the appeal, the court observed:

"The end use of MVAC is to produce Chilled Water. The use of heat as one of the sources in the airconditioning system would not take away the primary or basic function of the MVAC, which is to cool and not heat water. The additional heating capability of the machine thus raises a peculiar dilemma, but then one can be guided by the market parlance test which shows that the machine is perceived and purchased only as a cooling device. The circumstances here remind us of the somewhat similar predicament of Lord Illingworth, the character in A Women of No Importance. In this classic play of Oscar Wilde, in the context of observing all kinds of human capabilities, the dramatis personae made that classic remark on those, "who do the improbable." The uncharacteristic capability of the cooling machine to also produce hot water, should not however deflect us and it would be appropriate to observe in this case that a chiller machine is attempting to masquerade as a heat pump, to gain concessional tariff benefits. The conclusion therefore is inevitable that the MVAC machine must not be categorized as a Heat Pump. Consequently, it is declared that the product manufactured by the appellants merit classification under Sub-heading 84.18.10 of the central excise Tariff Act, 1985, in the category of refrigerating equipment."

Case details

Thermax Ltd vs Commissioner of Central Excise, Pune-1 | 2022 LiveLaw (SC) 881 | CA 6048-6050_OF 2009 | 13 October 2022 | Justices KM Joseph and Hrishikesh Roy

Headnotes

Central Excise Tariff Act, 1988 -  Modified Vapour Absorption Chiller Machines cannot be categorized as a Heat Pump to avail concessional tariff benefits - The end use of MVAC is to produce Chilled Water. The use of heat as one of the sources in the airconditioning system would not take away the primary or basic function of the MVAC, which is to cool and not heat water - Definition of a product given in the HSN should be given due weightage in the classification of a product for the purpose of levying excise duty.

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