Full Judgment Text
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CASE NO.:
Appeal (civil) 275-276 of 2001
PETITIONER:
O.K. Play (India) Ltd.
RESPONDENT:
Commissioner of Central Excise-II, New Delhi
DATE OF JUDGMENT: 04/02/2005
BENCH:
S.N. Variava & Dr. AR. Lakshmanan & S.H. Kapadia
JUDGMENT:
JUDGMENT
KAPADIA, J.
The short question which arises for determination in these civil appeals
filed under section 35L (b) of the Central Excise Act, 1944 is - whether
powdering of Low Density Polyethylene (LDPE) and High Density Polyethylene
(HDPE) granules into moulding powder amounts to "manufacture".
Assessee manufactures plastic water storage tanks and toys. On 24.4.1997
the factory of assessee was visited by Officers of Anti Evasion Branch of
Central Excise Commissionerate Delhi. During this visit, it was noticed
that the assessee had installed the injection, moulding, extruding and
pulverizing machines operated with electric power to handle plastic inputs
and produce moulded shapes for manufacturing toys, water storage tanks,
desks, tables etc. On enquiry, the process revealed that the moulding
machine accepted the plastic input only and since the inputs, consisting of
LDPE and plastic colouring material, were procured in the granular form,
the same was first required to be intermixed in specified proportion and
then pulverized to produce the moulding powder. This was done with
extruders and pulverizers. After receiving the two inputs, the extruder
through hoopers melted and mixed them in the melting and mixing chambers to
produce filaments which after being cooled were chipped into small pieces.
These small pieces produced with the extruder were later placed in the
pulverizers which grinded them into powder.
Accordingly two show-cause notices dated 1.5.1997 demanding duty for the
period October, 1996 to March, 1997 and dated 4.11.1997 for the period May
1993 to September 1996 were issued to assessee calling upon them to show-
cause as to why the above process was not "manufacture" in view of note
6(b) to Chapter 39 of the Central Excise Tariff Act. 1985 (hereinafter
referred to for the sake of brevity as "the 1985 Act"). According to the
show-cause notices, the aforestated process constituted "manufacture" and
the moulding powder constituted "excisable goods" as defined under section
2(d) of the Central Excise Rules 1944 (hereinafter referred to for the sake
of brevity as "the 1944 Rules") resulting in escapement of duty from
assessment. Consequently, the department issued the above two show-cause
notices under rule 9 read with section 11A of the 1944 Act.
In reply, the assessee contended that conversion of granules into moulding
powder did not amount to "manufacture", in terms of section 2(f) of the
1944 Act; that the said moulding powder was prepared as per specifications
and requirement depending on the end product being water tanks or toys and
consequently no other manufacturer besides the assessee could use the said
powder prepared by the assessee. It was further contended that the said
powder was not marketable and, therefore, it did not constitute "excisable
goods" as defined under section 2(d) of the said 1944 Act.
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By order dated 18.11.1997 and 29.12.1998, the Commissioner (Adjudication)
held that conversion of granules into moulding powder constituted
"manufacture" in terms of note 6(b) to Chapter 39; that both granules and
the moulding powder forms fell under Tariff Heading 39.01; that while using
the said powder in the manufacture of plastic water tanks and toys, the
assessee should have paid duty on the basis of deemed clearances, since the
powder was captively consumed; that the assessee had started the above
conversion process from 10.5.1993; that the assessee was aware that the
said powder was excisable and yet wilfully omitted to file the requisite
classification list; that the manufacturing expenses did not include the
profit margins; that even the quantity produced did not tally with the
records maintained by the assessee; and consequently the Adjudicating
Authority confirmed the show-cause notices under rule 9 read with section
11A of the 1944 Act. By the aforestated orders the Commissioner
(Adjudication) upheld the invocation of extended period of limitation under
show-cause notice dated 4.11.1997. The Commissioner (Adjudication) also
found from Form-IV register that the assessee has been buying the moulding
powder at times from the market.
By the impugned judgment, the Tribunal has upheld the orders of the
Commissioner (Adjudication).
Mr. S. Ganesh, learned senior counsel appearing on behalf of the assessee,
submitted that the process of pulverizing moulded powder did not constitute
"manufacture". He contended that powdering of LDPE and HDPE granules into
moulding powder did not amount to "manufacture". He submitted that the
assessee is a manufacture of plastic water storage tanks, toys, chairs for
children etc; that one of the raw-materials was LDPE and HDPE granules,
which in turn were mixed with colouring agents/additives; that the moulding
powder was made depending upon specifications of the end product and that
no other manufacturer could use the moulding powder prepared by the
assessee and, therefore, it was not a marketable product and hence cannot
be considered as "excisable goods" in terms of section 2(d) of the 1944
Act. It was urged that since the said powder was not a marketable product,
there could be no manufacture under section 2(f) of the said 1944 Act. It
was further contended that no evidence was led by the department to show
that the said powder was a marketable product. It was submitted that note
6(b) of Chapter 39 was not applicable as both granules and powder were of
the same primary forms. It was urged that the department had only relied on
stray purchases of powder for manufacture of tanks which was meant for
exclusive use only by the assessee and , therefore, such instances did not
prove marketability of the said product. It was further urged that the
Commissioner had failed to deduct depreciation from the profit margin and
accordingly, it was contended that the matter should be remitted to the
Commissioner (Adjudication) for fresh determination on the question of
valuation of the said powder. On the question of limitation, it was urged,
that the assessee had maintained stock registers during the entire period;
that these were audited; that they indicated pulverization and ,therefore,
the department was not entitled to invoke the proviso to section 11A(1) of
the 1944 Act vide show-cause notice dated 4.11.1997.
Shri Rajiv Dutta, learned senior counsel appearing on behalf of the
department, submitted, that the above enumerated process of conversion of
granules into moulding powder was a manufacturing process in terms of note
6(b) of Chapter 39 of the 1985 Act; that the purchase of the said
pulverized powder on few occasions by the assessee from the market as
evidenced by the registers produced by the assessee indicated that the said
product was marketable; and that it constituted "excisable goods" as
defined under section 2(d) of the 1944 Act. Learned senior counsel further
submitted that the assessee was in the business of manufacturing of plastic
water storage tanks since 1990; that from 1992, they are in the business of
manufacturing of ‘toys’; that they were aware that the above process
constituted "manufacture"; that they were aware that the said powder was
marketable and yet they cleared the goods as non-excisable and without
filing the classification list, in breach of the said 1944 Rules, solely
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with the intent to evade payment of duty and, therefore, the department was
right in invoking the extended period vide show-cause notice dated
4.11.1997.
Two questions arise for determination in these appeals. Firstly, whether
process of conversion of granules into moulding powder constituted
"manufacture" in terms of section 2(f) of the 1944 Act read with note 6(b)
of Chapter 39 of the 1985 Act and whether the said powder was an "excisable
product" in terms of section 2(d) of the 1944 Act? Secondly, whether on the
facts and circumstances of this case, the department was right in invoking
the extended period of limitation vide show-cause notice dated 4.11.1997?
In order to answer the first question, we quote sections 2(d) and 2(f) of
the 1944 Act, which read as under :
"2. Definitions. - In this Act, unless there is anything repugnant in the
subject or context, -
(d) "excisable goods" means goods specified in the First Schedule and the
Second Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) as being
subject to a duty of excise and includes salt;
(f) "manufacture" includes any process-
(i) incidental or ancillary to the completion of a manufactured
product;
(ii) which is specified in relation to any goods in the section or
Chapter notes of The First Schedule to the Central Excise Tariff Act. 1985
(5 of 1986) as amounting to manufacture.
and the word "manufacturer" shall be construed accordingly and
shall include not only a person who employs hired labour in the
production or manufacture of excisable goods, but also any person
who engages in their production or manufacture on his own account."
Section 2(f) contains two clauses and instead of setting out the activities
in respect of different tariff items, clause (ii) simply states that any
process, which is specified in section/chapter notes of the Schedule to the
Tariff Act, shall amount to "manufacture". Under clause (ii), the
Legislature intended to levy excise duty on activities that do not result
in any new commodity. In other words, if a process is declared as amounting
to "manufacture" in the section or chapter notes, it would come within the
definition of "manufacture" under section 2(f) and such process would
become liable to excise duty. The effect of this definition is that excise
duty can be levied on activities which do not result in the production of a
new commodity or where the raw-material does not undergo such a
transformation as to loose its original identity.
As this stage, we quote note 6 to Chapter 39 of the 1985 Act, which reads
as under :
"6. (a) In heading Nos.39.01 to 39.14, the expression "primary forms"
applies only to the following forms :-
(i) Liquids and pastes, including dispersions (emulsions and
suspensions) and solutions;
(ii) Blocks of irregular shape, lumps, powders (including moulding
powders), granules, flakes and similar bulk forms.
(b) Notwithstanding anything contained in Note 3 to this Chapter, heading
Nos. 39.01 to 39.14 shall also include primary forms obtained from
conversion of another primary form, falling under the same heading, and
such conversion shall amount to "manufacture"." Reading note 6(b), it is
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clear that blocks and powders are two different "primary forms" and if the
block is pulverized into powder the activity would amount to "manufacture"
in terms of clause (ii) of section 2(f). By the very language of note 6,
conversion from granules into moulding powder would result in
"manufacture". Therefore, as a consequence of the new definition of
"manufacture" in terms of section 2(f), the activities which otherwise do
not amount to "manufacture" can now be treated as "manufacture" and made
liable to duty.
On the question of marketability, we find from the register in Form-IV
maintained by the assessee that on several occasions, the assessee had
bought the moulding powder from the market, which circumstance by itself
indicates that moulding powder is marketable commodity and, therefore,
excisable in terms of section 2(d) of the 1944 Act. The Tribunal was,
therefore, right in holding that the said powder was classifiable under
Heading 39.01 of the 1985 Act.
Now on the question of valuation of the moulding powder, the Commissioner
(Adjudication) found that the manufacturing expenses of the assessee did
not include the profit margins and accordingly, the Adjudicating Authority
worked out the profit margins on the basis of the ratio of gross profit :
Sales for the year ending 31.3.1996. According to the assessee, the
Commissioner (Adjudication) had erred in taking into account the gross
profit of the previous year while calculating the profit margin. In this
connection, reliance was placed by the assessee on Circular No. 258/92/96-
CX dated 30.10.1996 issued by Central Board of Excise & Customs, New Delhi,
which prescribes the formulae for calculating the value of the captively
consumed goods under rule 6(b)(ii) of the Central Excise (Valuation) Rules,
1975.
The short point which arises for determination is - whether calculation of
the profit margin, includible in the manufacturing expenses, should be on
‘gross profit’ or ‘net profit’ of the previous year. We do not wish to
express any opinion. Suffice it to state that this issue will have to be
decided by the Commissioner (Adjudication) afresh. Accordingly, we remit
the matter back to the Commissioner (Adjudication) for a fresh
determination in the light of the circulars no. 26/88 dated 4.4.1998 no.
258/92/96-CX dated 30.10.1996 no. 692/8/2003-CX dated 13.12.2003 as also
any other circular which might have been issued by the Central Board of
Excise & Customs during the relevant period.
Now coming to the second question of limitation, the facts enumerated above
show that the department had issued two notices dated 1.5.1997 and dated
4.11.1997. Show-cause notice dated 1.5.1997 demanded duty from the assessee
for the period October, 1996 to March, 1997 whereas the show-cause notice
dated 4.11.1997 demanded duty for the period May, 1993 to September, 1996.
As regards the show-cause Notice dated 4.11.1997, we find that from time to
time, the assessee has maintained its record as per rule 173G in Form-IV.
The said register indicated on daily basis the opening and closing
balances; it indicated the stock of polyethylene raw-materials as well as
the stock of pulverized powder; it also indicated use of pulverized process
and lastly the said registers were certified from time to time by the
officers of the department. A detailed summary was also given on the last
page of the register indicating description of granules and the moulding
powder with the quantity of additives. The factory of assessee was visited
by the officers of the department from time to time. The assessee had
assigned on several occasions their activity to job workers with the
permission of the department. No objection was ever taken by the department
during the aforestated period of about four years. No evidence has been
brought on record to show as to on what basis the department has sought to
invoke the extended period of limitation, particularly, when the department
was fully aware of the process undertaken by the assessee for converting
the granules into the powder. In the circumstances the Tribunal was right
in directing the proceedings against the assessee to be dropped pursuant to
show-cause Notice dated 4.11.1997.
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Now coming to the validity of the show-cause notice dated 1.5.1997
demanding duty for the period October, 1996 to March 1997, it was urged on
behalf of the assessee that the impugned show-cause notice was issued on
1.5.1997; that it was issued prior to the Amending Act 10 of 2000; that the
law as it stood on 1.5.1997 authorized the department to demand duty only
for six months which period now stands increased to one year in view of
Amending Act 10 of 2000 with effect from 12.5.2000; hence, it was submitted
that the department was not entitled to demand duty for the entire period
commencing from October, 1996 to March, 1997 vide show-cause notice dated
1.5.1997. Relying on the judgment of this Court in the case of ITW Signode
India Ltd. v. Collector of Central Excise, reported in [2004] 3 SCC 48. It
was submitted that the object of the Amending Act 10 of 2000 was to
eliminate the basis of the judgment of this Court in the case of Collector
of Central Excise, Baroda v. Cotspun Limited, reported in (1999) 113 ELT
353 and, therefore, the said amendment did not extend the period beyond six
months for notices given prior to 12.5.2000.
On behalf of the department, it was submitted that in view of the Amending
Act 10 of 2000, the period of limitation has been extended by the
Legislature from six months to one year and consequently, the demand fell
within section 11A(1) as amended with effect from 12.5.2000. In this
connection, reliance was placed by the department on the Circular No.
588/25/2001-CX dated 19.9.2001 issued by the Central Board of Excise &
Customs, which reads as under :
"Recovery of duties not levied or not paid or short levied or short paid or
erroneously refunded - Retrospective validation by Finance Act, 2000 of
action taken under Section 11A of Central Excise Act, 1944.
Subject : Retrospective validation of action taken under section 11A
of Central Excise Act, 1944, under Finance Act, 2000.
Attention is invited to the provisions contained in Sections 97 and
110 of the Finance Act, 2000.
2. Queries have been raised from field formations about the exact
scope and amplitude of these changes. The matter has been examined
in consultation with Additional Solicitor General. A copy of the
opinion of ASG dated 20.4.2001 is enclosed. The Board has accepted
the opinion given by the Learned Additional Solicitor General. You
are requested to take follow up action in accordance with the
advice of the ASG.
3. This may be brought to the notice of field formations.
4. Receipt of this circular may please be acknowledged.
5. Hindi version will follow.
OFFICE OF SHRI KIRIT N. RAVAL
ADDITIONAL SOLICITOR GENERAL
SUPREME COURT
NEW DELHI
1. My opinion is sought on the question of the scope and amplitude of the
retrospective amendment to Section 11A of the Central Excise Act
specifically enacted to protect the Revenue’s interest after the judgment
of the Hon’ble Supreme Court in the case of Collector of Central Excise,
Baroda v. Cotspun Limited, reported in (1999) 113 ELT 353. My attention is
drawn to the fact that by virtue of Section 110 of the Finance Act, 2000,
any action taken under Section 11A of the Central Excise Act, demanding
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duty on account of non-payment, short-payment, non-levy, short-levy etc.
within a period of six months or five years, as the case may be, from the
relevant date as defined in clause (ii) of sub-section (3) of said section,
shall be deemed to be and to always have been for all purposes validity and
effectively issued or served under that section notwithstanding any
approval, expense or assessment relating to the rate of duties on or value
of the excisable good by any Central Excise Officer under any other
provision of the Central Excise Act or the Rules made thereunder. Sub-
section (2) of the said section also provides that any action taken
anything done under Section 11A at any time during the said period shall be
deemed to be and to have always been, for all purposes, as validity and
effectively taken or done as if sub-section (1) had been in force in all
material times, notwithstanding anything contained in any judgment, decree
or order of any court, tribunal or other authority.
2. Thus it can be seen from Section 110 of the Finance Act, 2000 that the
section seeks to grant legitimacy to all the actions taken for the recovery
of the duty from the period 17.11.1980 and that any action initiated in
respect of any case after such date shall be deemed to have been validly
taken and any judgment, decree or order of any court, tribunal or other
authority shall not be an impediment to such an action.
3. In this background, my opinion is sought on the following queries:-
(1) Whether it is correct to hold that the amendments would only cover
demands for a period of six months prior to issue of SCN?
(2) Whether demands for the extended period where such demands were
held as time barred on the ground that there was approved classification
list/price list etc. would be covered by the amendments?
(3) Whether these provisions would apply to proceedings that have
attained finality and where appeal periods have expired?
(4) Could recoveries be made in such cases, and what would be the
period up to which such proceedings could be reopened and recoveries made?
(5) What would be the time limit, if any, for initiating proceedings
under the amended provisions?
(6) What is the kind of notice/order that should be issued for
recoveries of dues in respect of proceedings which have attained finality?
(7) How should the Department proceed in respect of matters which are
pending in appeal in Tribunal and Courts?
4. My answer to the queries as under :-
QUERY NO. 1 :
In the "Negative" - in view of the fact that the word "one year"
has been substituted by the word "six months" by section 97B of the
Finance Act. Further, the amendment has been stated to be effected
from 17th November, 1980.
QUERY NO. 2 :
In the "Affirmative" - such demands which were earlier held to be
time barred because of the approval of the classification list
would also be covered by the amendment as the amendment has been
made retrospective w.e.f. 17th November, 1980. The factum of
approval after that date will not come in the way of recovering the
amounts which would be covered by such amendment.
QUERY NO. 3 :
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Under Section 110 of the Finance Act, any notice issued after the
17th of November, 1980 will be protected by the validating Act. The
necessity for the amendment arose to over-come the judgment of the
Hon’ble Supreme Court in the Cotspun Ltd. case. Further, the power
to amend the law retrospectively has been recognized judicially in
a number of pronouncements [for example, Prithvi Cotton Mills Ltd.
v. Broach, [1969] 2 SCC 284]. The said judgment in para 4, clearly
provides "If the legislature has the power over the subject matter
and competence to make a valid law, it can at any time, make such a
valid law and make it retrospectively so as to bind even past
transactions." Therefore, where notices have already been issued,
the judgments rendered in the context of the earlier provision
would cease to be of relevance. In fact, in the case of Cotspun
itself, where the judgment of the Supreme Court was rendered, in
view of the validating provisions, recovery could be made
notwithstanding the Cotspun judgment. Under these circumstances, if
the SCNs have been issued then even in respect of past proceedings
which even judgments have been rendered it will be open to the
Department to make recoveries.
QUERY NO. 4 :
Recoveries can be made in such cases for the period subsequent to
17th November, 1980 when the retrospective operation of the amended
provisions has come into play. However, this is subject to the SCNs
having been issued in time. It is also worth noting that if SCNs
have not been issued so far, now it will not be open to issue SCNs
for the past period unless it is within the period of limitation as
prescribed under the amended provisions.
QUERY NO. 5 :
The time limit for initiating proceedings under the amended
provisions would be one year for issuance of fresh notices.
However, as far as recoveries pursuant to notices already issued or
subject matter of pending proceedings are concerned the same are
covered by answer to the previous queries.
QUERY NO. 6 :
In respect of matters which have received finality, the demand
notices should be issued referring to the amendment carried out and
pointing out that in view of the amended provision, it is necessary
for the assessee to make the payment, as demanded. Reliance should
be placed on the amendments for the purpose of making recoveries.
QUERY NO. 7 :
As far as the pending matters are concerned, the Department should
file an affidavit indicating the amendment having been carried out
and the request that the controversy be decided in the context of
the amended provisions."
We cannot allow the assessee to raise the above contentions for the first
time before this Court. In the present case, the show-cause notice dated
1.5.1997 was issued by the department in terms of rule 9(2) of the 1944
Rules read with section 11A of 1944 Act. Rule 9(2) applies to cases of
clandestine removal of goods without assessment. According to the counter
affidavit filed on behalf of the department, the quantity of moulded
powder, cleared during October, 1996 to March, 1997 as indicated in the
worksheet produced before the Commissioner, was 1,17,442 Kgs., whereas
according to RG-1 Register, the quantity was 1,18,484 Kgs. Further, the
assessee has not challenged the demand raised under the said show-cause
notice dated 1.5.1997 as time barred even under the law as it then stood.
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The contention on limitation was not argued by the assessee before the
Tribunal which disposed-of the matter on 18.7.2000 (which is after
12.5.2000 when the Amending Act 10 of 2000 came into force). Rule 9(2) has
been deleted with effect from 12.5.2000. In the circumstances, the matter
needs to be looked into afresh by the Adjudication Authority. Since, we
have remitted the matter to the Commissioner on the question of valuation,
we direct him to decide also the question of limitation arising out of
show-cause notice dated 1.5.1997 afresh in the light of section 11A(1), as
amended and in the light of deletion of Rule 9(2) with effect from
12.5.2000.
For the aforestated reasons, we hold that the process of pulverization
under which granules are converted into moulding powder constitutes
"manufacture" that the moulding powder produced by the aforestated process
was marketable; that the show-cause notice dated 4.11.1997 was beyond
limitation; that the Commissioner (Adjudication) will decide the question
of valuation under rule 6(b)(ii) of the Central Excise (Valuation) Rules,
1975, in the light of Circulars dated 4.4.1988, 30.10.1996 and 13.2.2003
issued by the Central Board of Excise & Customs; and lastly, the
Commissioner (Adjudication) will also decide the question of limitation for
the duty demanded under the show-cause notice dated 1.5.1997 in the light
of the Circular dated 19.9.2001 issued by the Central Board of Excise &
Customs as well as in the light of Amending Act 10 of 2000 under which
section 11A(1) stood amended.
Accordingly, these appeals are disposed-off with no order as to costs.