A case in Madras High Court determined what a cycle meant in commercial sense

In the pre-Independence era, bicycle dealers in India would import cycles in a ‘complete knocked down’ (CKD) condition. That is, all components of a cycle, including the rims, the freewheels, the frame, the handle bar and the tubes, would be packed in cases of six and 12 sets and despatched. Dealers would assemble these parts into cycles.

In later years, Indian cycle manufactures adopted the same practice and despatched the knockdown cycles to wholesalers and retailers. One of the country’s leading cycle manufacturers — T I Cycles of India — based out of Ambattur in Madras too adopted this business practice.

Till the beginning of March 1975, both cycles and cycle parts were listed under Item 35 in the First Schedule to the Central Excise and Salt Act, 1944. Under the Act, there was an excise duty only on two cycle parts: freewheels (₹2 each) and rims (₹4 each).

On March 1, 1975, by way of the Finance Act, 1975, Item 68 was introduced in the First Schedule, wherein “all other goods, not elsewhere specified, manufactured in a factory” were mentioned. The following year, while Item 68 was retained, in Item 35, ‘cycle’, was removed and only ‘cycle parts’ (freewheels and rims) were retained.

No excise duty on assembled cycles

Before these changes were introduced, there was no levy of excise duty on fully assembled cycles cleared from the factory, or cycles cleared unassembled, known to the trade as completely knocked down. However, after the introduction of the residuary Item 68, the Excise Department took the stand that in respect of cycles cleared from the factory completely knocked down, freewheels and rims would be charged excise duty under Item 35, and the other parts under the residuary Item 68.

The manufacturers represented to the government that in respect of cycles cleared completely knocked down, only freewheels and rims (listed in Item 35) were liable to excise duty and not the other parts. They argued that there was no scope for invoking the residuary Item 68 to levy excise duty on the other parts. In February 1976, the government rejected their representation. It took the stand that supplies of cycles in an unassembled condition was basically supplies of different parts of a cycle.

The T I Cycles challenged this in court. Its legal challenge initially failed. Thereafter, it moved an appeal before the Madras High Court. The company argued that traditionally cycles had been sold by the manufacturer/importer and bought by wholesaler/retailer only in a complete knocked down condition and the word, ‘cycle’, had been understood by the trade as ‘cycle in CKD condition’. A cycle despatched completely knocked down was nevertheless a cycle and Item 68 could not be applied to such cycles.

The company said it was a manufacturer of cycles and not cycle parts, and if the cycles were cleared unassembled, they would still fall only under Item 35 of the Central Excise and Salt Act. It also pointed out that the Brussels Trade Nomenclature treated the goods manufactured and despatched completely knocked down as if they were finished articles.

T I Cycles also pointed out that the Central Excise and Salt Act did not define the term, ‘cycle’, and in the absence of any definition, the term had to be understood in the popular and commercial parlance in which a cycle completely knocked down was a cycle.

‘Convenient to pack’

Justice J. Venugopal, who heard the case, said that in the absence of any definition given in the Act, “we have to see how the term, ‘cycle’, is understood by those dealing with it”. “What then is the meaning given to the term, ‘cycle’, by those engaged in trade and commerce? From the affidavit filed in support of the writ petition, it is seen that when the cycles were imported in this country, they came in CKD condition...The age-old practice of despatching cycles in CKD condition to wholesaler or retailer was followed by the appellant-writ petitioner as it is convenient to pack the cycles in CKD condition and the package consumes less space and it is easy to transport and considerably reduces the chances of any part of the cycle being bent or damaged during transit and the paint work is preserved,” the court pointed out.

Assembling the cycle and then despatching it would increase the cost of packing, freight and transport and it was not, therefore, the practice in the trade to despatch the cycles fully assembled. Taking into account these exigencies, “a cycle despatched in CKD condition is also a cycle falling within the ambit of Item 35 of the First Schedule to the Act,” the judge held.

Directive to government

Citing the Brussels Trade Nomenclature, the court held that a cycle in an unassembled condition could be equated to a cycle in an assembled condition. Consequently, it ruled that cycles despatched by T I Cycles to dealers in CKD condition would also fall within the ambit of Item 35. It allowed the appeal and restrained the government from levying excise duty. This remains one of the landmark rulings in interpreting fiscal laws in alignment with the established trade practices.