Whether working on the raw materials involved were mere cutting to sizes, drilling holes revetting, welding, bending etc., which are only physical and mechanical processes which do not transform the raw materials into any new identifiable goods known as s

Case:- COMMISSIONER OF C. EX., AHEMDABAD VERSUS RICHARDSON & CRUDDAS LTD.
Citation: - 2012 (280) E.L.T. 249 (Tri-Ahmd)
Issue: -Whether working on the raw materials involved were mere cutting to sizes, drilling holes revetting, welding, bending etc., which are only physical and mechanical processes which do not transform the raw materials into any new identifiable goods known as such to the market?

Brief fact: - The brief fact of the case are that M/s. Richardson and Cruddas (1972) Limited, Byculla Iron Woks, Sir J J Road, Mumbai and M/s. Ahmedabad Electricity Company Limited of Ahmedabad (AEC) had entered into a works contract. As per the contract the said assessee had to carry out the fabrication work of Iron or Steel and its erection at the site of "F" project unit stationed at Sabarmati, Ahmedabad for which raw materials viz. M.S. Round, M.S. Channels, M.S. Plates, Beams, Angles, M.S. Flat Bar, M.S. Steels, M.S. Pipes were supplied by AEC free of cost. According to the contract the said assessee first manufactured different structures at the site provided by AEC near Ramnagar, Sabarmati, Ahmedabad. The structural items broadly named as columns, beams, bracing, purling, reftors, ties and scanteling, structures for roof trusses, girders, roof girders, crane girders, (hereinafter referred to as structures) were covered under sub-heading 7308.90 of the Central Excise Tariff Act, 1985. The above mentioned products had been classified as per the Order No. 367/88-BI dated 25-8-88 of CEGAT, New Delhi. The assessee had manufactured goods valued at Rs. 4,44,93,482/- (Rs. 3,19,44,644/- raw material value + Rs. 1,24,48,834/- job charges). It appeared the assessee had knowingly and willfully evaded payment of Central Excise duty of Rs. 69,91,973.40 on the said structures classifiable under S.H. No. 7308.90. Thus, a notice to show cause was issued to the assessee on 11-12-89 demanding duty of Rs. 69,91,973.40 under Section 11A of the Central Excises & Salt Act, 1944 read with Rule 2(2) of the erstwhile Central Excise Rules, 1944 and also proposing imposition of penalty on the said assessee as well as AEC. The Commissioner while deciding the case (i.e. SCN dated 11-12- 1989) observed that the contract entered into between the assessee and AEC was for manufacture, erection, testing and commissioning of a Power Plant as per agreement arrived between the two as a turnkey project for power plant. For doing so, various structures such as angles, slabs, beams, bars, billets etc. were fabricated and were erected after assembly, installation, interconnectivity and foundation i.e. the work of Civil Structure nature at site. Thus, the Commissioner observed that there were no grounds for confirming the demand and imposing penalty. He placed reliance on the various case laws referred by the said assessee through their communication dated 28-2-2005 as very much apt and appropriate to the facts and circumstances of this case. He also observed that the Board's Circular No. 154/26/99-CX.4, dated 15-1-2002 clearly laid down that for power plant nothing manufactured at site would be liable for excise duty as everything was embedded to earth to-wards entire life of the plant. The committee of Chief Commissioners reviewed the above OIO passed by the Commissioner, Central Excise, Ahmedabad-II and as per the grounds of appeal mentioned in Review Order No. R-18/2006 dated 17-2-2006 issued from F. No. V /15-42/CCO/RC/05, the appeal before CESTAT was filed by the Revenue. Subsequent to filing the said appeal, the said assessee being Govt. Company the department has sought for the permission from COD (Committee on Disputes) vide letter dated 12-3- 2010/6-4-2010 but the same is not received so far. As the permission from COD has not been produced before the CESTAT, the appeal filed by the Revenue has been closed for want of same vide Final Order No. A/236/WZB/AHD/2011 dated 2-2-2011.

Appellant Contention :- The Appellant contended that they were manufacturing these items like trusses, purlins, bracings, crane girders and others mentioned in the contract and were transporting it to a site for which they were charging transportation/delivery charges. Though in the statement of Ivon Jacob (site-in-charge., recorded on 18-10-89) he states that no new items come into existence after the fabrication and prior to erection as the process involved does not change the basic character of the raw materials though some process is carried out by way of cutting, drilling etc. The items like purlins, bracings, girders become known as purlins, trusses, girders etc. only when they are erected at site in the building. However, he admits that the basic raw materials supplied does undergo a change after the process of labour is supplied and what comes out is basically the same item in a different shape having distinct names for which they have to perform the function i.e. purlins, bracings, girders etc. The statement of Shri Ivon Jacob therefore gives a clear idea of the process being undertaken of converting the basic raw materials to identifiable manufactured goods with distinct names and these items are marketable also.
If the facts are being so this is a clear case whereas the supply of raw materials and manufacture of certain excisable items have been proved beyond doubt. The marketability of that also is not in doubt. Otherwise why these finished excisable goods should be transported to a different site and purportedly used for the 'F' project by the M/s. Ahmedabad Electricity Company Limited. It also proves that there was a process of manufacture and clearance of excisable goods from the place of manufacture to a site where it was erected. The argument of the respondent proves to be porous.

Respondent Contention:- The Contention of M/s. Richardson & Cruddas Ltd. was that they had entered into works contract with M/s. Ahmedabad Electric Company for fabrication and erection at the premises at Ahmedabad. M/s. Ahmedabad Electric Company supplied the raw material namely steel products such as M.S. Round, M.S. Channels, M.S. Plates, Beams, Angles, M.S. Flat Bar, M.S. Steels, M.S. Pipes etc. at the work site at cost price to M/s. Richardson & Cruddas Ltd. They were required to cut these to the sizes, drill holes, bend where necessary, weld, bolt etc., and erect the structure, permanent fabrication fixed to the earth, thus erecting an immovable property for AEC. The said works, being in the open yard of the premises of AEC and further being in the nature of a works contract, they believed genuinely and bonafide based on various case laws on the subject that the said works did not attract excise duties. This view is strengthened and is also borne out by the various pronouncements of the Hon'ble CEGAT, the Board of Customs and Excise and lower adjudicating or appellate authorities.
The processes carried out by them are more mechanical process and in their view these do not bring out any new substance product or article known as such to the market and there is no physical transformation to give rise to new identifiable and marketable goods. In this connection they referred to the following case laws to support their view.
1. Union Carbide v. U.O.I. - 1986 (24) E.L.T. 169 (S.C.)
2. Bhor Industries v. C.Ex - 1989 (40) E.L.T. 280
It has been held therein that marketability is an essential ingredient for levy of excise duty and unless an article is known to the market by its name, character or use, no excise duty would be chargeable. It is their submission that at the works site at Ahmedabad, they do not produce any marketable goods. The working on the raw materials involved as stated above were mere cutting to sizes, drilling holes revetting, welding, bending etc., which are only physical and mechanical processes which do not transform the raw materials into any new identifiable goods known as such to the market. In this connection they referred to the following case laws, namely:
1. Aruna Industries v. CoIlr. - 1985 (25) E.L.T. 580
2. Collr. v. Dodsal Pvt. Ltd. - 1987 (28) E.L.T. 352
In this case, this was a works contract that is they are creating a permanent structure fixed to the earth, that is to say not goods but immovable property which is outside the scope of the excise levy. As the principle of assessment has to be uniform throughout the Union of India, it was felt that the ratio thereof would be equally applicable to their case. It is submitted that this view has not been rebutted by the excise authority so far and not also in the show cause notice under reply. It is further submitted that the said show cause notice is bad in law and is legally untenable, biased and prejudiced, without authority of law, contrary to law and in excess of jurisdiction and therefore deserves to be withdrawn.
It was argued by them that having a working contract is for making a permanent immovable property for AEC. It is accepted law that anything fixed to the earth is immovable property and is not goods and therefore does not attract any excise levy. It has been so held in Gujarat Machinery v. Collr. C.Ex. - 1983 (12) E.L.T. 825 and J.K. Exports v. Collr. C.Ex. - 1983 (14) E.L.T. 2390
The activities, namely cutting to sizes, drilling holes, riveting, welding and bolting etc., are not such processes as to transform the articles, namely, plates, bars, angles, joints etc. into new articles known as such to the market. The name, mentioned in para 3 of the notices are those of structures and these are so referred by virtue of their functions in the framework and are not independently known as such in the market or on commercial parlance. As has been observed in the case of M/s. Aruna Industries by the Hon'ble Tribunal, the rafter’s purlins etc., are not known as such to those dealing in such goods in the market. These are no marketable articles produced by us at the aforesaid site and we submit that no excise duty is chargeable and hence the question of following excise procedures does not arise. In view of this no penalty is leviable. As they had acted in the bona fide belief that the activities at site are not excisable, there is no case for levy of any penalty as has been held in the following cases, namely :
1. Hindustan Steel v. State of Orissa - 1978 (2) E.L.T. J159 (S.C.)
2. Garden Reach Shipbuilders v. Collr. C.Ex. - 1985 (5) SIR 157 1985 (19) E.L.T. 447 (Tn. - Cal.)
3. Hindustan Lever Ltd. v. Collr. C.Ex. - 1989 (43) E.L.T. 568.
It was also submitted that the tariff item under which the articles are proposed to be classified has not been spelt out. They relied upon the judgment of the Hon'ble Supreme Court of India in the case of Bhor Industries (supra) stating that marketability is an essential condition for excisable goods and mere mention of an item in the schedule to the tariff does not by itself make an article excisable. They also argued that the department has not adduced any evidence to show that the articles are marketable as such especially the observations in the case of Aruna Industries (supra). Amongst with the above points, it was argued that M/s. Richardson & Cruddas Ltd. that the allegations are merely based on presumptions and there was no mens rea since the contractive parties where Government of India under-taking there is no scope for willful intention to evade payment of duty as has been held by the Tribunal in the case of Garden Reach Shipbuilders (supra). It was contended by them that the duty was demanded for the duty paid materials procured by M/s. Ahmedabad Electricity Company Limited and given to them at cost price for job work. It was also requested by them that in the event of demanding duty they should be allowed the benefit of Modvat and the duty demanded should be correspondingly reduced to that extent.

Reasoning of Judgment: The Tribunal referred the Larger Bench decision in the case Mahindra & Mahindra Ltd. v. CCE, Aurangabad, Chandigarh, Kanpur & Chennai reported in 2005 (190) E.L.T. 301 (Tn. - LB) which has gone into the details in the very similar case to the concept of excisability manufactured structures, marketability of parts of steel structures falling under Heading 7308 of the Tariff. The above reproduced order of the Tribunal covers the entire gamut of issues covered in this case. They have also gone through the circular issued by the Board vide No. 5811/2002-CX., dated 15-1-2002.
A close reading of this circular will make it clear. Para 4.2 which is as follows :
4. The plethora of such judgments appear to have created some confusion with the assessing officers. The matter has been examined by the Board in consultation with the Solicitor General of India and the matter is clarified as under :- For goods manufactured at site to be dutiable they should have a new identity, character and use, distinct from the inputs/components that have gone into its production. Further, such resultant goods should be specified in the Central Excise Tariff as excisable goods besides being marketable i.e. they can be taken to the market and sold (even if they are not actually sold). The goods should not be immovable. (ii) Where processing of inputs results in a new product with a distinct commercial name, identity and use (prior to such product being assimilated in a structure which would render them as a part of immovable property), excise duty would be chargeable on such goods immediately upon their change of identity and prior to their assimilation in the structure or other immovable property. (iii) Where change of identity takes place in the course of construction or erection of a structure which is an immovable property, then there would be no manufacture of "goods" involved and no levy of excise duty. (iv) Integrated plants/machines, as a whole, may or may not be 'goods'. For example, plants for transportation of material (such as handling plants) are actually a system or a network of machines. The system comes into being upon assembly of its component. In such a situation there is no manufacture of "goods" as it is only a case of assembly of manufactured goods into a system. This cannot be compared to a fabrication where a group of machines themselves may be combined to constitute a new machine which has its own identity/marketability and is dutiable (e.g. a paper making machine assembled at site and fixed to the earth only for the purpose of ensuring vibration free movement). (v) If items assembled or erected at site and attached by foundation to earth cannot be dismantled without substantial damage to its components and thus cannot be reassembled, then the items would not be considered as movable and will, therefore, not be excisable goods. (vi) If any goods installed at site (example paper making machine) are capable of being sold or shifted as such after removal from the base and without dismantling into its components/parts, the goods would be considered to be movable and thus excisable. The mere fact that the goods, though being capable of being sold or shifted without dismantling, are actually dismantled into their components/parts for ease of transportation etc., they will not cease to be dutiable merely because they are transported in dismantled condition. Rule 2(a) of the Rules for the Interpretation of Central Excise Tariff will be attracted as the guiding factor is capability of being marketed in the original form and not whether it is actually dismantled or not, into its components. Each case will therefore have to be decided keeping in view the facts and circumstances, particularly whether it is practically possible (considering the size and nature of the goods, the existence of appropriate transport by air, water, land for such size, capability of goods to move on self propulsion-ships-etc.) to re-move and sell the goods as they are, without dismantling into their components. If the goods are incapable of being sold, shifted and marketed without first being dismantled into component parts, the goods would be considered as immovable and therefore not excisable to duty. (vii) When the final product is considered as immovable and hence not excisable goods, the same product in CKD or unassembled form will also not be dutiable as a whole by applying Rule 2(a) of the Rules of Interpretation of the Central Excise Tariff. However, components, in-puts and parts which are specified excisable products will remain dutiable as such identifiable goods at the time of their clearance from the factory or warehouse. (viii) The intention of the party is also a factor to be taken into consideration to ascertain whether the embedment of machinery in the earth was to be temporary or permanent. This, in case of doubt, may help determine whether the goods are movable or immovable.
In the case of turnkey projects like steel plants, cement plants, power plants etc. the clarification is as follows:
5. Keeping the above factors in mind the position is clarified further in respect of specific instances which have been brought to the notice of the Board.
Turnkey projects like steel plants, cement plants, power plants etc. involving supply of large number of components, machinery, equipments, pipes and tubes etc. for their assembly/installation/erection/integration/inter-connectivity on foundation/civil structure etc. at site, will not be considered as excisable goods for imposition of central excise duty - the components, however, would be dutiable in the normal course. Therefore it is very clear that the goods manufactured by the assessee it is excisable and duty is leviable. Since this circular is issued in exercise of powers under Section 37B of the Act is binding and the legality and clarity is visible
In view of the above, Tribunal do not have an iota of doubt to hold that there was a manufacture of excisable goods by M/s. Richardson & Cruddas Ltd. to out of the raw materials supplied by the M/s. Ahmedabad Electricity Company Limited, The Board's circular clearly clarifies the excisability and marketability and removes the doubt regarding the excisability or dutiability of immovable properties in terms of Rule 2(a) of Rules of Interpretation of Central Excise Tariff. It also makes a clear distinction though the inputs, parts or components which are specified excisable products will remain dutiable and identifiable at the time of their clearance from the factory or place of manufacture.
Tribunal also considers the basic principles of interpretation and the rule applies to fiscal and penal statutes as well irrespective of conclusions. Lord Cairns said "if the person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be". (Partington v. Attorney-General, (1869) LR 4 HL 100, p. 122; referred to in IRC v. Duke of Westminster, (1936) AC 1, p. 24 (HL); Bank of Chettinad Ltd. v. CIT. Madras, AIR 1940 PC 183, p. 185; A. V. Fernandez v. State of Kerala, AIR 1957 SC 657; 1957 SCR 837).
In view of the discussions above, Tribunal set aside the Order-in-Original of the Commissioner of Central Excise, Ahmedabad dropping the entire proceedings. The appeal filed by Commissioner of Central Excise, Ahmedabad - II is allowed in toto.

Decision: -Appeal allowed

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