M/S. ESCORTS LTD. vs. COMMNR. OF CENTRAL EXCISE, FARIDABAD

REPORTABLE IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO.6561 OF 2004 M/S. ESCORTS LTD. …APPELLANT VERSUS COMMISSIONER OF CENTRAL EXCISE, FARIDABAD ...RESPONDENT WITH CIVIL APPEAL NO.457 OF 2006 WITH CIVIL APPEAL NOS.9469-9470 OF 2010 JUDGMENT J U D G M E N T R.F. Nariman, J. C.A. NO.6561 OF 2004 1. The present case raises an interesting question as to whether excise duty is payable on an intermediate product, namely, Transmission Assembly which comes into existence during the manufacture of tractors made by the appellant. The 1 Page 1 period involved is January 1996 to May 1998. The tractors that are manufactured have engines that are below 1800 CC and are covered by an exemption notification 162/1986. We are

and even tractors of an engine capacity of less than 1800 CC now have to bear excise duty. 2. By a show cause notice dated 31.1.2001, the Department for the period aforesaid relied upon evidence in the form of statements made by various officers of the appellant and other documentary evidence to show that Transmission Assemblies of tractors was a commodity known to the market as such and, therefore, came into the category of excisable goods. The respondent by their reply dated 1.10.2001 denied this stating JUDGMENT that no separate product known as Transmission Assemblies came into existence which is known to the commercial community as such and, therefore, there was neither manufacture nor marketability of the same. In the reply, however, various statements were made which, in fact, amount to admissions, that Transmission Assembly of a tractor is, in 2 Page 2 fact, known to the market as such. These admissions are set out hereinbelow:

47.1. The department has relied upon the case of M/s International Tractors Ltd., Hoshiarpur who are supplying transmission assemblies. (a) The Notice contends that M/s. Mahindra & Mahindra have not purchased any transmission assemblies for use in tractors from any other unit. Further, they have not supplied or transferred any transmission assemblies to any other person. However, they have been supplying the transmission assembly to their own units at Nagpur and Rudhrapur for manufacturing tractors. JUDGMENT (b) It is submitted that this letter can at most lead to a conclusion that the transmission assembly made by M & M is marketable. 50. The show cause notice has placed reliance on certain other web site to contend that the Hoovers on-line web site and Carraro web site shows that transmission assemblies are marketed and sold. It is submitted that while there might be mass production of transmission assemblies marketed by Hoovers Carraro, etc., the product specific transmission assemblies of the noticees never 3 Page 3

3. The Commissioner by an order dated 4.10.2002 held as follows:- “41. I find that the issue has been well examined in the notice. Noticee's plea that the impugned transmission assemblies are not goods as transmission assemblies do not have independent existence is without merit. Noticee in fact itself clears such goods on payment of duty to ECEL, Transmission assemblies are well known in the commercial world and are very much dealt with as a commercial commodity. The end use as put forth in the notice amply proves it. To reiterate transmission assemblies are cleared by the noticee to ECEL; noticee company's sister concern (Farmtrac Division) imported transmission assemblies from Carraro Spa of Italy and also purchased transmission assemblies from Carraro India Limited, Pune; M/s TAFE, Chennai, International Tractors Ltd., Hoshiarpur, Mahindra & Mahindra all deal in transmission assemblies and further information regarding transmission assembly availability as such is also available on internet. JUDGMENT 42. Noticee's submission that no identifiable transmission assembly emerges in their production of Tractors is also incorrect. They are manufacturing transmission assemblies for their tractors as well as for ECEL. Of course transmission assemblies 4 Page 4

JUDGMENT 43. I also find that the noticee in their reply has laid great emphasis on their argument that their tractors are manufactured as a result of integrated manufacturing process on the assembly line and therefore there is no removal of intermediate goods, if any, in terms of Rule 9 or Rule 49. I have to reiterate that noticee's plea is inadmissible. In terms of Rule 9 and 49, intermediate goods emerging during such integrated assembly line production 5 Page 5

JUDGMENT 6 Page 6 4. By the impugned judgment dated 27.5.2004, CESTAT dismissed the appeal holding:

The Supreme Court, after referring to various judgments on the concept of the manufacture, has laid down a two fold test for deciding whether the process is that of "manufacture" in Union of India vs. J. G. Glass, 1998 (97) ELT 5(S.C.) as follows, "First, whether by the said process a different commercial commodity comes into existence or whether the identity of the original commodity ceases to exist; secondly, whether the commodity which was already in existence will serve no purpose but for the said purpose.” We find that this two fold tests laid down by the Supreme Court is satisfied in respect of the transmission assembly coming into existence during the course of manufacture of tractors by the Appellants. After assembly of various parts and components a new and different article known as transmission assembly emerges having a distinctive name, character and use and but for the manipulation undertaken by the Appellants, the parts and components would not have served the purpose which a transmission assembly performs. The impugned product is also marketable as the learned Senior Departmental Representative has mentioned the fact of its being imported by the Appellants themselves (Farmtrac Division); the clearance of the JUDGMENT 7 Page 7

5. Shri Lakshmikumaran, learned advocate for the appellant argued that the tractors manufactured by the appellant (having JUDGMENT engines of a capacity of less than 1800 CC) had no such thing as a Transmission Assembly. The so-called Transmission Assembly was only an aggregate of various items which connected the engine of the tractor with its wheels. Further, the so-called Transmission Assembly was specifically designed for the appellant’s tractor and was not saleable in the market. Also, not a single instance of sale in the market had ever taken place. 8 Page 8 In fact, the so-called Transmission Assembly was not something which came into existence at all but was part of a continuous process on the assembly line in the appellant’s factory of

existence. He further submitted that post 1.6.1998 in any case, the appellant had been paying 8% under Rule 57 CC on the value of the said Transmission Assembly as required. It is only for the period upto August 1996 that would be in dispute. Even for this period, he contends that ultimately the figures would show that it was revenue neutral in that MODVAT credit reversed for this period would amount to 1.71 crores, the duty demand being approximately 2.43 crores out of a total of 9.66 crores for this period of 8 months. He also argued that the duty JUDGMENT demand was absurd in that the Transmission Assembly of TAFE which is said to be the same as that of the petitioner’s was only 13,000 rupees per piece as opposed to the highly inflated figure of Rs.53,790/-. If the figure of Rs.13,000/- is to be taken, it is clear that the reversal of MODVAT credit would amount to much more than the duty demand itself. He further argued that in any case since there was no fraud or willful suppression of facts, 9 Page 9 invoking the extended period of limitation was not in order and that in any case the show cause notice being beyond one year of the stated period would have to be quashed on this ground alone. 6. Shri Jaideep Gupta, learned senior counsel for the revenue contended that the Transmission Assembly was very much excisable goods known to the market as such from the statements of the appellants themselves. Further, the revenue had discharged its burden by oral and documentary evidence which showed beyond doubt that Transmission Assembly of tractors were excisable goods in that a new commodity came into existence known to the market as such. It is completely irrelevant that no sale actually took place of any such JUDGMENT Transmission Assembly. It is enough to show that the said goods were capable of being sold which, undoubtedly, they were. He very fairly stated that on valuation, if necessary, the matter could be remanded. He also stated that the extended period of limitation was available in the present case as the appellants on their own showing knew that the intermediate product of Transmission Assemblies was marketable as such 10 Page 10 and had suppressed this fact while claiming exemption of excise duty on the finished product, namely, the tractor.

th List I of the 7 Schedule of the Constitution of India reads as follows: “SEVENTH SCHEDULE [Article 246] List I — Union List 84. Duties of excise on tobacco and other goods manufactured or produced in India except— (a) alcoholic liquors for human consumption; (b) opium, Indian hemp and other narcotic drugs and narcotics, but including medicinal and toilet preparations containing alcohol or any substance included in sub-paragraph (b) of this entry.” JUDGMENT 7. It is clear on a reading of this Entry that a duty of excise is only leviable on “goods” manufactured or produced in India. “Goods” has been defined under Article 366 (12) as follows:

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Shorter Oxford English Dictionary as follows:- “Materials” – the matter of which a thing is or may be made; the constituent parts of something. “Commodities” – a thing of use or value; a thing that is an object of trade; a thing one deals in or makes use of. “Articles” - a particular item of business. 9. Although the definition of “goods” is an inclusive one, it is JUDGMENT clear that materials, commodities and articles spoken of in the definition take colour from one another. In order to be “goods” it is clear that they should be known to the market as materials, commodities and articles that are capable of being sold. 10. In the basic judgment which has been referred to in every excise case for conceptual clarity, namely, Union of India v. Delhi Cloth. & General Mills Co. Ltd. , 1963 Suppl. 1 SCR 12 Page 12 586, this Court held that for excise duty to be chargeable under the constitutional entry read with Section 3 of the Central Excise and Salt Act, two pre-requisites are necessary. First,

bringing into existence of a new substance. And secondly, the word “goods” necessarily means that such manufacture must

JUDGMENT and General Mills. It then referred to South Bihar Sugar Mills Limited V. Union of India, (1968) 3 SCR 21, in which kiln gas which was a mixture of gases generated during a process of burning limestone with coke in a lime kiln was held not to be a marketable commodity. Since it was a mixture of gases and not only carbon dioxide, it was clear that it was not known to the market as such. Carbon dioxide was only a component of kiln 13 Page 13 gas, the content of which ranged from 27 to 36.5%. The Court also referred to the decision in Union Carbide India Limited v. the Union of India, (1986) 2 SCC 547, in which aluminum cans

capable of sale to a consumer in their crude and unfinished form. To be made saleable, such cans would have to undergo various processes such as, trimming, threading and re-drawing. The Court also referred to Bhor Industries Ltd. v. Collector of Central Excise, Bombay, (1989) 1 SCC 602. In that case, it was held that crude PVC films manufactured as an intermediate product and used in captive consumption of other goods was not marketable, not being known to the market as such. The Court also referred to CCE v. Ambalal Sarabhai, (1989) 4 SCC JUDGMENT 112 in which an intermediate product, namely, starch hydrolysate was not marketable in that it was highly unstable and fragmented quickly losing its character in a couple of days. After referring to all these judgments, the Court held: “10. It would be evident from the facts and ratio of the above decisions that the goods in each case were found to be not marketable. Whether it is refined oil (non-deodorised) concerned in Delhi Cloth and General Mills [1963 Supp 1 SCR 586 : 14 Page 14

JUDGMENT 15 Page 15 11. In Indian Cable Co. Ltd. v. Collector of Central Excise, Calcutta & Ors. , (1994) 6 SCC 610, this Court held:-

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12. In Moti Laminates (P) Ltd. v. Collector Central Excise, JUDGMENT Ahmadabad , (1995) 3 SCC page 23, this Court held that an intermediate product, namely, resols, not being marketable would not be exigible to duty. After referring to several earlier judgments, this Court held: “11. Although the duty of excise is on manufacture or production of the goods, but the entire concept of bringing out new commodity etc. is linked with marketability. An article does not become goods in 18 Page 18 common parlance unless by production or manufacture something new and different is brought out which can be bought and sold. In Union of India v. Delhi Cloth & General Mills Co. Ltd. [AIR 1963 SC 791] , a Constitution Bench of this Court while construing the word ‘goods’ held as under: “These definitions make it clear that to become ‘goods’ an article must be something which can ordinarily come to the market to be bought and sold.” Therefore, any goods to attract excise duty must satisfy the test of marketability. The Tariff Schedule by placing the goods in specific and general category does not alter the basic character of leviability. The duty is attracted not because an article is covered in any of the items or it falls in residuary category but it must further have been produced or manufactured and it is capable of being bought and sold.” 13. A large part of the arguments ranged around the decision in Union of India (UOI) & Ors. v. Sonic Electrochem (P) Ltd. JUDGMENT & Anr., 2002 (145) E.L.T. 274. In this judgment the question that arose for decision was whether the plastic body of electro mosquito repellent was excisable goods. This Court held:

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JUDGMENT 14. From this judgment, Shri Lakshmikumaran wished to emphasise that, as in the said judgment, Transmission Assemblies were not available in the market for being bought and sold, they were not excisable goods not being marketable. 20 Page 20 As has correctly been pointed out by Mr. Gupta, learned senior counsel appearing on behalf of the Revenue, what was held in this judgment is that the product should not be known in the

commercially known in the sense of fulfilling the practical test of being known to persons in the market who buy and sell, the test is satisfied. The fact that the product is generally not bought or sold or has no demand in the market is irrelevant. It was held in the said judgment that the plastic body is not known as a commercially distinct product in the market and, therefore, if a manufacturer is asked to replace such body, it would not be replaceable not being a commercially known product. 15. The facts in the present case show that Transmission JUDGMENT Assemblies of tractors are commercially known products as has been pointed out above. The fact that not a single sale of such Assembly has been made by the appellants is irrelevant. This being the case, we are of the view that the Transmission Assembly of the tractor on the facts before us is clearly an intermediate product which is a distinct product commercially 21 Page 21 known to the market as such. On this ground therefore, the appellants are not liable to succeed.

invoked in the present case. In their reply to the show cause notice, the appellants stated: “20.2 It is submitted that the noticees have been manufacturing tractors right from 1965 onwards till date. The manufacturing process undertaken by the noticees has been made known to the Department innumerable number of times. Consequent1y the proposal to invoke the extended period of limitation in the present case is incorrect and the same is liable to be set aside. 20.3 The Noticee points out that just like the department raised the issue with regard to the IC engines in the year 1994-95, similarly the department is raising the issue in regard to the transmission assembly by the present Show Cause Notice. Therefore the dept. cannot allege any suppression or fraud on the part of Noticee. JUDGMENT 20.4 However, that is not to say that there has been any contumacious conduct or an intent to evade duty on the part of the noticees. In regard to the transmission assemblies which arise on the assembly line, if they are used in the dutiable tractors, they would be exempt under Captive Consumption Exemption Notification No.67/95-CE dated 16.3.95. 20.5 In regard to transmission assembly going into the exempted tractor, the department has now 22 Page 22 raised the issue that they are dutiable and there is no exemption notification for such transmission assemblies. Further, that the Noticee had not claimed NIL rate of duty for transmission assemblies used within the factory for manufacture of tractors.

20.7 The Noticees submit that declarations of the term "Transmission" appearing under Heading No.87.08 showing that the rate of duty applicable is 15% and the department knowing fully well that tractors have been manufactured, should have raised the issue regarding the transmission assembly at the earliest and not by invoking the extended period as done in the present Show Cause Notice. The number of Transmission cleared on payment of duty to ECEL over the entire period from Jan.1996 to May, 1998 is very meagre as compared to the total number of tractors (both dutiable and exempted) cleared during the period. It is clear that only one Transmission Assembly is used in one tractor. Consequently, the Department knew that duty was not being paid on captively consumed Transmission Assemblies. Hence, extended period is not invocable. Thus, the department was fully aware that the tractors have been manufactured and a transmission assembly is made at the intermediate stage. Nothing prevented the department from raising demands within the JUDGMENT 23 Page 23 permissible shorter period of limitation under Section 11A.

22. That in fact, the Show Cause Notice itself terms the issue of manufacture and captive consumption of transmission assemblies for tractors is the same as that for I.C. Engines. However, knowing fully well that Transmission Assembly comes into existence at the intermediate stage, the department never raised the issue. This implies that in the present proceedings, assuming without admitting duty is payable on the transmission assembly, the same was not being paid due to a bona fide error. The same belief was entertained on the part of the Noticees as well as the Department during the relevant period that transmission assemblies going into the exempted tractor do not attract duty.” JUDGMENT 17. Added to this, the appellants have also clearly stated that not a single Transmission Assembly has in fact been sold by them in the market. On these facts, we are of the opinion that the appellants would fall within the test laid down in two 24 Page 24 judgments of this Court. In Padmini Products v. Collector of Central Excise, Bangalore , 1989 (43) E.L.T. 195, this Court held:

25 Page 25 or not, would not attract Section 11-A of the Act. In the facts and circumstances of this case, there were materials, as indicated to suggest that there was scope for confusion and the appellant believing that the goods came within the purview of the concept of handicrafts and as such were exempt. If there was scope for such a belief or opinion, then failure either to take out a licence or to pay duty on that behalf, when there was no contrary evidence that the producer or the manufacturer knew these were excisable or required to be licensed, would not attract the penal provisions of Section 11-A of the Act. If the facts are otherwise, then the position would be different.” 18. Similarly in Continental Foundation Joint Venture Holding v. Collector of Central Excise, Chandigarh- I , (2007) 10 SCC 337, this Court held: “14. As far as fraud and collusion are concerned, it is evident that the intent to evade duty is built into these very words. So far as misstatement or suppression of facts are concerned, they are clearly qualified by the word “wilful”, preceding the words “misstatement or suppression of facts” which means with intent to evade duty.The next set of words “contravention of any of the provisions of this Act or Rules” are again qualified by the immediately following words “with intent to evade payment of duty”. Therefore, there cannot be suppression or misstatement of fact, which is not wilful and yet constitute a permissible ground for the purpose of the proviso to Section 11-A. Misstatement of fact must be wilful. JUDGMENT 26 Page 26

27 Page 27 19. Judged by this test, it is clear that on facts in the present case there was no suppression on the part of the appellants nor

1965 onwards. There has never been any change in the manufacturing process. In the year 1994-95, IC engines were stated by the department to contain Transmission Assemblies, which were dutiable. On receiving a reply from the appellant, the department did not levy any excise duty on such Transmission Assemblies. The show-cause notice itself stated that the issue of manufacture and captive consumption of Transmission Assemblies for tractors is the same as that for IC engines. These facts, coupled with the fact that not a single JUDGMENT Transmission Assembly of tractors manufactured by the appellant had been sold makes it clear that there was no suppression or any intent to evade excise duty in the present case. We feel that the show cause notice needs to be quashed on this ground alone. Accordingly, the appeal is allowed, and the judgment dated 27.5.2004 passed by CESTAT is set aside. 28 Page 28 Civil Appeal Nos.9469-9470 of 2010

case was issued on 1.5.2002, in which the extended period of limitation was invoked as follows:- “M/s. TAFE have filed the declaration under Rule 173B of Central Excise Rules, 1944, during the year 2000-2001, for the manufacture of product viz., Transmission Assembly falling under Chapter Sub-heading No.8708.00, and cleared the said product on payment of duty under Invoice No.1120969 dated 21.6.2000. Never before in the past M/s. TAFE have declared this product along with other factory finished products for which duty was paid by them. Hence, necessary verification was conducted in order to know whether any such sub-assemblies were manufactured and cleared by the assessee for use in the exempted tractors. JUDGMENT 4. M/s. TAFE have manufactured the sub-assemblies as listed in the Annexure-I and Annexure-II for the tractors Model No. TAFE 25 and TAFE 30 inside the factory for captive use in the production of tractors. The details of process of manufacture of such sub-assemblies are explained in Annexure-III. As per Clause (ii) to Notification No.67/95 dated 16-3-1995 all inputs specified in column 1 of the Table in the said Notification which also includes inputs falling under Chapter Heading 87 of Central Excise Tariff Act, 1985, manufactured in a factory and used within the factory of production 29 Page 29

5. M/s. TAFE have not brought to the notice of the manufacture of sub-assemblies to the Department with the intention to evade payment of excise duty. They have willfully suppressed the fact of the manufacture of the sub-assemblies from the knowledge of the Department and cleared the same without payment of duty for use in the manufacture of Tractors, which are exempted. It can be seen from the process of manufacture that the making of the independent, sub-assemblies are inevitable in the Tractor build. But, M/s TAFE chose to declare only the parts constituting these sub-assemblies as factory finished items and not sub-assembly. Whether these factory finished items and bought out, items, when assembled will form a sub-assembly has not been declared by them. M/s. TAFE have chosen not to declare the sub-assemblies willfully in order to evade payment of duty.” JUDGMENT 21. In the reply to the show cause notice, the respondents stated that they had never sold transmission assemblies in the 30 Page 30 market and that their price list does not carry a list price for this item. The only removal ever made was during the warranty period of one tractor and this one removal does not justify the

stated that had the respondents known that transmission assemblies were excisable, they would have claimed exemption as the finished product was exempt. Further, Transmission Assembly is only recognized as an Assembly line intermediate product and not as a product in itself which is separately identifiable as in the case of other Assemblies such as axel shaft, engine, gear parts, instrument panels, etc. The difference in this case is that vide an order dated 30.4.2004 the authorities found in favour of the respondents on merits holding JUDGMENT that there was neither manufacture nor marketability of the Transmission Assemblies in question. This was confirmed in appeal by CESTAT by the impugned judgment dated 12.11.2009. 22. In view of what is stated in Civil Appeal No.6561 of 2004, the part of the order in original and the CESTAT order on merits have to be set aside. However, for the self-same reasons as 31 Page 31 are contained in Civil Appeal No.6561 of 2004, we hold that the extended period of limitation is not available as we are satisfied that the reply extracted above of the respondent shows that the

were not dutiable. In the circumstances, the appeals of the revenue shall stand dismissed on this ground. C.A. No.457 of 2006 23. The facts in this appeal are as follows. The period involved is April, 1996 to May, 1998 and the show cause notice is dated 1.5.2001. As the impugned judgment in this case by CESTAT merely follows the Escorts case i.e. Civil Appeal No.6561 of 2004, we hold that the finding of the authorities on merits is correct. However, in this case also the extended JUDGMENT period of limitation is not available to the revenue. 24. In the order dated 26.12.2001, the Commissioner stated:- “In the present inquiry which was undertaken by the proper officer, it was found that the transmission assembly or chassis assembly which is classifiable st under Sub-heading 87.08 of the 1 Schedule to the Central Excise Act was not declared by the noticee in the classification list. Therefore, their plea that they have declared the chassis thereof does not 32 Page 32

The intention to evade duty is clear from the statement of Shri P.C. Kale dated 12.04.2001 as the noticee was knowing that duty is required to be paid on the goods which go into the assembly of the tractor of engine capacity less than 1800 CC. As such tractors were exempt from duty during the relevant period. Knowing this fact very well and not declaring the transmission assembly or chassis assembly in the classification declaration and clearing such transmission assembly/ chassis assembly without payment of duty without recording their production in the statutory records and without filing the RT-12 returns for the production and clearance of such transmission assembly/ chassis assembly clearly established that this was done with an intention to evade payment of duty.” JUDGMENT 25. We find that in successive declarations made by the assessee in this case starting from 16.3.1995 the assessee had declared not merely the tractor but the chassis therefor. The assessee bonafide believed that the declaration of the chassis would suffice as according to them Transmission Assemblies were not taxable goods. The intention to evade duty is 33 Page 33 according to the Commissioner made out from a statement made by Shri P.C. Kale dated 12.4.2001. It is pointed out by learned counsel appearing on behalf of the appellant that in the

P.C. Kale was never in the employment of the appellant during the relevant period as he joined the appellant only in July, 2000. Apart from this, it is also pointed out that the appellant is a public sector company governed by a Board of Directors consisting of IAS Officers. Be that as it may, we are satisfied that there was no attempt to evade excise duty and in this case also the show cause notice being beyond the period of limitation of one year would have to be quashed on this ground. On this ground alone, therefore, the impugned judgment dated JUDGMENT 3.10.2005 is set aside. The appeal is allowed accordingly. ……………………….J. (A.K. Sikri) ……………………….J. (R.F. Nariman) New Delhi; April 29, 2015. 34 Page 34