Whether process of grinding and buffing of semi finished valve seats amount to manufacture?

PJ/CASE LAW/2015-16/2765

Case:-FRIENDS AUTO INDUSTRIES [REGD.] VERSUS CESTAT, NEW DELHI

Citation:-2014(310) E.L.T. 630 (P & H)

Brief Facts:-This appeal has been preferred by the assessee under Section 35G of the Central Excise Act, 1944 (in short, “the Act”) against the order dated 26-6-2013 [2014 (310) E.L.T. 169 (Tribunal)], Annexure A.4 in Appeal No. 3737/2005 passed by the Customs, Excise and Service Tax Appellate Tribunal, New Delhi (in short, “the Tribunal”), claiming following substantial questions of law :-
a)    Whether the Hon’ble CESTAT erred in holding that process carried out by appellant amounts to ‘manufacture’. The appellant undertook only the process of polishing through buffing processes?
b)    Whether Hon’ble CESTAT erred in rejecting the contention of the appellant that there are no change in name, use and characteristics before and after employing the processes by them and process employed by them does not amount to manufacture as per section 2(f) of the Central Excise Act, 1944?
c)    Whether Hon’ble CESTAT was justified in demanding duty involving extended period under Section 11A of the Central Excise Act, 1944 when issue relates to interpretation of law and technicality of examination?
d)    Whether demand of Central Excise duty under extended period is justified when penalty has been set aside?
A few facts relevant for the decision of the controversy, as narrated in the appeal may be noticed. The appellant-assessee is engaged in the manufacture of valve guides falling under Heading 8409 of the Central Excise Tariff Act, 1985. It is holding Central Excise registration. During the years 1998-99 to 2000-01, the assessee purchased valve seats in manufactured condition and carried out only minor processes of polishing through buffing process. The appellant after employing the processes of polishing and packing cleared the same valued at Rs. 7,75,499/- without payment of duty. The assessee did not pay the duty on the said goods as it did not employ any processes which tantamount to manufacture as per Section 2(f) of the Act. Show Cause Notice dated 11-12-2002, Annexure A.1 was issued to the assessee alleging that it purchased valve seats from M/s. Davindra Engg. Works, Village Atta, PO Goraya in a semi finished condition and sold the same after processing without payment of duty amounting to Rs. 1,01,183/-. The assessee submitted reply to the notice dated 13-1-2003. The Assistant Commissioner, Central Excise Division, Phagwara vide order dated 13-2-2004, Anenxure A.2 dropped the show cause notice proceedings. It was held that semi finished goods was a complete item in itself and could be used as it was. It was further held that the processes carried out by the assessee did not amount to manufacture. The revenue filed appeal before the Commissioner (Appeals) Jalandhar. Vide order dated 28-4-2005, Annexure A.3, the Commissioner (Appeals) allowed the appeal and demand of duty of Rs. 1,01,183/- alongwith interest was raised against the assessee. The penalty of equal amount was also imposed under section 11AC of the Act. Aggrieved by the order, the assessee filed appeal before the Tribunal vide order dated 26-6-2013, Annexure A.4. The Tribunal dismissed the appeal, upholding the order passed by the Commissioner (Appeals). Hence the instant appeal by the assessee.

Reasoning of Judgment:- High Court has considered the submission from both side and finding fact as below:
The primary issue that arises for consideration in this case is whether the activity of grinding/buffing/polishing and packing of valve seats which was undertaken by the assessee amounted to manufacture or not. If it amounted to manufacture, the assessee was liable to pay Central excise duty during the relevant period.
The Hon’ble Apex Court in CIT v. N.C. Budhiraja and Co. and Another, (1993) 204 ITR 412 examining the scope of manufacture or production of article had noticed as under :-
“The words “manufacture” and “production” have received extensive judicial attention both under this Act as well as the Central Excises Act and the various sales tax laws. The word “production” has a wider connotation than the word “manufacture”. While every manufacture can be characterised as production, every production need not amount to manufacture. The meaning of the expression “manufacture” was considered by this court in Deputy CST v. Pio Food Packers - [1980] 46 STC 63, among other decisions. In the said decision, the test evolved for determining whether manufacture can be said to have taken place is, whether the commodity which is subjected to the process of manufacture can no longer be regarded as the original commodity but is recognised in the trade as a new and distinct commodity.
xx xx xx xx xx xx xx xx xx
The word “production” or “produce” when used in juxtaposition with the word “manufacture’’ takes in bringing into existence new goods by a process which may or may not amount to manufacture. It also takes in all the byproducts, intermediate products and residual products which emerge in the course of manufacture of goods....”
Further, the Commissioner (Appeals) vide order dated 28-4-2005, Annexure A.3 while holding that the activity undertaken by the assessee amounted to manufacture noticed as under :-
“As per facts of the case, Shri Davinder Engg Works, Village Atta, Goraya, in his statement dated 30-4-2001 tendered before the Superintendent (Prev.), Central Excise Division, Jalandhar has categorically stated that they had supplied semi-finished value seats to the respondents because they did not have grinding and buffing machines which were required to carry out further processes to make these goods fully finished and render the same marketable. These processes were obviously carried out in the factory premises of the respondent’s firm. Further, I observe that on an earlier occasion Shri Dev Raj Sharma, Manager, Excise of the respondent’s firm in a letter dated 12-7-2000 addressed to Superintendent, Central Excise Range II Phagwara had admitted having purchased valve seats in semi finished stage and selling the same after giving a finished cut according to size and specification required by the customers. Similarly, Shri S.K. Malhotra, Managing Partner of the respondent’s firm in a letter dated 28-9-2000 addressed to the Superintendent, Central Excise Range II Phagwara had also stated that they were purchasing semi finished valve sheets from outside. However, before the adjudicating authority, they have taken an entirely different plea that they purchased valve seats from M/s. Davinder Engg. Works in fully manufactured condition. The appellants have invited reference to Notification No. 6 of the Section XVI of the Central Excise Tariff Act, 1985 (6 of 1986) according to which conversion of an incomplete or unfinished article in respect of goods covered by this Section into complete or finished article shall amount to ‘manufacture’. In the present case, process of grinding and buffing of semi finished valve seats into finished and complete valve seats would amount to manufacture in terms of said Notification 6 of the Section XVI of the Central Excise Tariff Act, as it existed at the material times. I find that the adjudicating authority had vacated the demand against the respondents by holding that the semi finished goods purchased by the respondents were complete items in themselves and the process carried out on them did not amount to manufacture. I observe that the adjudicating authority in his order has placed reliance on the samples of semi finished as well as finished items produced before him. This reliance appears to be misplaced as at adjudication stage or even at this stage when the samples have been produced for visual examination, it cannot be confirmed and established with authenticity that in what condition the products were sent by the supplier and in what condition the goods were actually dispatched by the respondents to their customers during the material time. Representative samples of ‘valve seats’ received from M/s. Davinder Engg. Works and those supplied by the respondents. If drawn at relevant times, would have thrown light on the processes actually undertaken by the respondents. The plea of the respondents that they undertook polishing and buffing on already manufactured valve seats and the retraction of the statement of Shri Davinder Singh dated 30-4-2001 vide their letter dated 3-5-2001 appears to be an after thought just to evade the payment of Central Excise duty on goods manufactured by them in the garb of trading activity. I also do not agree with the contention of the respondents that on the basis of rate difference in the invoices, the ‘valve seats’ received prior to 31-3-99 were without polish and those received after 31-3-1999 were duly polished. The rates may vary on various accounts like price revision etc. Thus, this plea of the respondent is not tenable. The invoices issued by M/s. Davinder Engg. Works before 31-3-99 and after 31-3-99 do not indicate this fact nor any evidence has been placed before me regarding purchase of necessary machinery by M/s. Davinder Engg. Works so as to undertake the process of grinding, buffing and polishing.”
On further appeal by the assessee, the finding recorded by the Commissioner (Appeals) was affirmed by the Tribunal vide order dated 26-6-2013, Annexure A.4 as under :-
“2. By an apparent look, the raw material suggests that without undertaking processing thereof no finished goods can be produced since finished goods exhibit altogether a different look quite distinct from raw material which is visible to naked eye. It may be stated that there was structural change by touch when finished goods derived from the raw material is examined. It is also established that the appellant did not prefer to sell the raw material but sold finished goods undertaking process to make the raw material marketable in a different form to fetch better price and to make that useful for the purpose that is meant.
3. On the above circumstances raw material shown to us today gave rise to finished goods with distinct identity and marketability. Finished goods having been covered by Chapter 84 it is difficult to agree with the appellant that there was no manufacture done.
4. Revenue has succeeded bringing out its case in view of the above stated peculiar features noticed physically when presented before the Bench. For the above established fact, the activity carried out by the appellant amounts to manufacture which gave rise to the finished goods which was liable to excise duty. Accordingly, duty shall be payable at appropriate rate prevailing at the relevant period and interest to follow.”
In view of the above, it cannot be said that the assessee was not manufacturing the goods. Further, no plea regarding extended period of limitation was raised before the Tribunal and therefore, the said substantial question does not arise for consideration before this Court.
No substantial question of law arises in this appeal. Consequently, finding no merit in the appeal, the same is hereby dismissed. Since the appeal has been dismissed on merits, no order is required to be passed on the application for condonation of delay under Section 5 of the Limitation Act, 1963.

Decision:-Appeal dismissed.

Comment:-The crux of this case is that process carried out by way of grinding and buffing of semi finished valve seats into finished and complete valve seats amounts to manufacture. It was observed that the valve seats after polishing differed from the valve seats without the process of buffing and polishing. Moreover, as the contention that extended period of limitation is not invocable was not taken before the Tribunal, the High Court refuse to admit the same and dismissed the appeal filed by the appellant.

Prepared by: Hushen Ganodwala

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PJ/CASE LAW/2015-16/2765

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