Process of cutting, stitching and eyeletting of Tarpaulin Fabrics

PJ/Case Study/2011-12/08

CASE STUDY

Prepared By:
CA Pradeep Jain and
Sukhvinder Kaur, LLB [FYIC]

Introduction: -

Excise duty is levied on the manufacture process when two or more products undergo a process and a new product emerges with a new and distinctive identity which is marketable. However, if no new product emerges after undergoing a process then no excise duty can be levied on such a process.

Relevant Legal Provisions:-

Definition of Manufacture under Section 2(f) of the Central Excise Act, 1944:-

“(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; or]

[(iii) which, in relation to the goods specified in the Third Schedule, involves packing or repacking of such goods in a unit container or labelling or re-labelling of containers including the declaration or alteration of retail sale price on it or adoption of any other treatment on the goods to render the product marketable to the consumer,]

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]

M/s Mohan Sales Corporation v/s CCE, Ahmedabad-I
[Final Order no. A/742/WZB/AHD/2011, dated: 05.05.2011]

Brief facts of the case: -

- Appellant are engaged in the activity of cutting, stitching, eyeleting and packing of Tarpaulin. During the search conducted of the appellant’s factory, goods found in the premises were seized. Statements of the employees were recorded.

- Department issued show cause notice to the appellant on the ground that they were clandestinely removing finished goods without payment of duty. Confiscation of goods was proposed. Demand of duty with interest was raised and penalty was sought to be imposed in terms of Rule 25 of the Central Excise Rules, 2002 readwith Section 11AC of the Central Excise Act, 1944.

- The Adjudicating Authority passed the order to confiscate the seized goods and imposed penalty. Demand of duty with interest was confirmed.

- Against the impugned order, appellant filed appeal before the Commissioner (Appeal). The Commissioner(Appeal) upheld the order in original.

- Hence, the appellant filed further appeal before the Tribunal.

Appellant’s Contentions: -

- Appellant contended that the impugned order was passed by the Commissioner (Appeal) without grant of personal hearing to them. It was contended that the hearing was fixed for compliance of the pre-deposit on which the matter was finally heard and decided.

- It was contended that the processundertaken by the appellant did not amount to manufacture. It was contended that the onus was on the Department to prove that the process undertaken by the appellant amounted to manufacture. It is submitted that the onus was not discharged by the Department.

- It was submitted that the Hon’ble Supreme Court have delivered a judgment in the case of Commissioner of Central Excise, Chennai-II v/s Tarpaulin International [2010-TIOL-58-SC-CX] wherein it has been held that conversion of Tarpaulin into Tarpaulin made-ups would not amount to manufacture. It was held therein that:

Central Excise – Manufacture – process of converting ‘Tarpaulin Fabrics’ into ‘Tarpaulin made-ups’ would not amount to manufacture: The original material used i.e., the tarpaulin, is still called tarpaulin made-ups even after undergoing the said process. Hence, it cannot be said that the process is a manufacturing process. Therefore, there can be no levy of Central Excise duty on the tarpaulin made-ups. The process of stitching and fixing eyelets would not amount to manufacturing process, since tarpaulin after stitching and eyeleting continues to be only cotton fabrics. The purpose of fixing eyelets is not to change the fabrics. Therefore, even if there is value addition the same is the minimum. To attract duty there should be a manufacture to result in different Goods and the Goods sought to be subject to duty should be known in the market as such.

Manufacture implies a change but every change is not manufacture and yet every change of an article is the result of treatment, labour and manipulation. But something more is necessary and there must be transformation, anew and different article must emerge having a distinct name, character or use.”

Thus, hon’ble Apex court has held that the activity of cutting, stitching and eyeleting of the tarpaulins does not amount to manufacture and no excise duty is payable on the same.

- Appellant submitted that the afore-mentioned judgment of the Hon’ble Supreme Court covers the issue involved in their appeal. The process undertaken by the appellant is the cutting, stitching and eye-letting of the tarpaulins. This is the same process that was involved in the case of Tarpaulin International. As this judgment is delivered in context of the same process and under same facts and circumstances; the ratio of this judgment is undoubtedly extendable to them.

- It was submitted that the judgment of the Supreme Court in the case of Tarpaulin Internationalhas settled the issue that the cutting, stitching and eye-letting of the tarpaulins do not amount to manufacture.

- It was submitted that in the panchnama drawn during the search, the machinery found in the premises could only be used for the cutting, slitting, etc. No machinery was found for the purpose other than for afore-mentioned process. Even in the show cause notice, it was noted that the appellant had Cutting machine, Heat sealing machines, Riveting machines and Bale packing machine. It was also noted therein that the appellant were receiving HDPE Laminated Fabrics and were making HDPE Tarpaulins. Thus, it was ample clear that raw material received by them was the HDPE laminated fabric and the machines found there were cutting, heat sealing, riveting and bale packing machineries which could be used only for cutting, slitting and eye letting of the tarpaulins. No other machinery was found. Thus, it is crystal clear that the show cause notice also supports the contention of the appellant that the process undertaken by them was only cutting, stitching and eye letting. No other process could be carried on in the factory as no other machinery was found therein.

- It was submitted that the statements recorded of the employees and the proprietor of the appellant have also affirmed the above facts relating to raw material and machinery installed in the factory of the appellant. Appellant referred to the statement of the employees and submitted that the analysis of this part of statement makes it clear that with the raw material and machinery found in the factory; only cutting, stitching and eyeletting of the tarpaulins can be done. No other process can be carried out. This facts is also affirmed by the statement of proprietor. It was submitted that the said statements relied upon makes it clear that the raw material used by the appellant were HDPE laminated fabrics, ropes, plastic corners and eyelets. The machinery installed in their factory were Cutting Machine, Centre Sealing Machine, Side Sealing Machine and Packing Machine. With the help of these machines and by using the aforesaid raw material, only cutting, stitching and eyeletting of the tarpaulins can be done. It is therefore clear that the appellant was engaged in the cutting, slitting and eye letting of tarpaulins which does not amount to manufacture in the light of aforesaid decision of Supreme Court. Hence the benefit of above decision is extendable to the appellant.

- It was further submitted that the tarpaulins comes in the roll form with the width of 6, 8, 7, 12 and in the long rolls. Many times the rolls are sold as such and mostly cut in the different sizes. Tarpaulin fabric remains tarpaulins even after it is cut into different sizes and stitched and eyelet is fitted to it. The purpose of the cutting, stitching and fitting eyetlet is only to make the tarpaulin easy to use. The cutting is done as per customer specification and thereafter it is stitched so as to secure the end portions of the fabric so that is saved from being torned. The eyelit is fitted so that it is easy to tie up the different ends of tarpaulins to cover up the area which a customer wants to cover from rain, heat, etc. But the tarpaulin remains the tarpaulin after the said process and these processes are done to ensure the ease of use. Hence, it is ample clear that there is no change in basic character and use of the tarpaulins even after carrying the said processes. Thus, the manufacture is not done and hence no excise duty is payable.

- Appellant further submit that the Board has issued circular no. 254/88/96-CX dated 18.10.1996 wherein it is observed that “it is seen from I.S. standard is : 2089-1977 for water proofed fabrics and paulines, that for manufacture of tarpaulin, firstly canvas/duck fabrics are water proofed (which are covered by chapter 52); and later these are converted into tarpaulins by stitching and putting eyelets.” It will kindly be appreciated that it is not the case of the department that the appellant s are purchasing canvas/duck fabrics and are undertaking the process of water proofing on it.

- It was submitted that Even though the appellant do not go with the said circular so far as the classification of tarpaulin is concerned, this circular is referred only for the purpose of showing how the tarpaulin is made out of grey fabrics is formed. So far as the tarpaulin alleged to have been manufactured by the appellant is concerned, it is HDPE laminated fabric. The process of manufacturing the tarpaulins made out of HDPE granules is as follows:- “The HDPE granules are converted to flat yarn in an extruder machine and the yarn is then converted into fabric on flat looms which is coated/ laminated with LDPE on one side. Thereafter, the coated fibre is cut into required sizes, the sides of which are stitched and eyelits are fitted. As is the admitted position, the appellant s are purchasing the HDPE coated fabric or the “coated fabric” and the remaining process of cutting, stitching and eyeletting is carried on the fabric. Thus, it is ample clear that the process carried on by the appellant does not amount to manufacture and hence the demand was not sustainable.

- Referring to the definition of manufacture in Section 2(f) of the Central Excise Act, 1944 it was submitted that the analysis of this definition makes it clear that no direct meaning of the word “manufacture” is being given in the Central Excise law, the term has been defined with reference to the process which are covered in the definition of the term “manufacture”, so therefore, one has to refer to the dictionary for finding out the synonyms of the word “manufacture”. The dictionary meaning of the term manufacture is to make, fabricate, produce, create, construct, assemble, invent, etc. All these words are individually giving a reference to the sense of something being created, something new coming into existence. It would kindly be observed that there was no allegation in the show cause notice and nothing was contained in the order in original or order in appeal which say that something new has come into existence, merely changing the description of goods bought and sold in the market, does not mean that the some process has been carried out. But the resultant product emerging out of that particular process should be something different, with distinct name, character and use. In absence of it the fact of manufacture under section 2(f) is not established and no excise duty is payable. This contention is supported by the following case laws:-

METLEX (I) PVT. LTD. Versus COMMISSIONER OF C. EX., NEW DELHI [2004 (165) E.L.T. 129 (S.C.)]

Manufacture - Film - Laminating/metallising of duty paid film not amounts to manufacture - Product is a film to start with and remains a film after lamination or metallisation and no new and distinct product comes into existence - Tribunal’s order set aside - Heading 39.20 of Central Excise Tariff - Section 2(f) of Central Excise Act, 1944. [paras 15, 18, 19]

Thus, there is no new distinct product which has come into existence and it would have to be concluded that there is no manufacture.

In another case, where the manufacturer was coating bare plastic films, the process was treated as not amounting to manufacture. The Tribunal in the case of ELLORA MECHANICAL PRODUCTS PVT. LTD. Versus COMMR. OF C. EX., NOIDA [2005 (186) E.L.T. 234 (Tri. - Del.)] has held so.

In the case of GARWARE PLASTICS & POLYESTER LTD. Versus UNION OF INDIA [1991 (52) E.L.T. 506 (Bom.)] it is held that “Process of lacquering/metallising of polyester film not amounting to ‘manufacture’, there being no new distinct commercial commodity having a different identity or name - Duty not leviable under Item 15A(2) of Central Excise Tariff - Section 2(f) of Central Excises and Salt Act, 1944.”

In the above cases it is held that no material fact is being placed which show that such metalized films has any special properties or is known differently in the market or has used different from the uses of polyster film. Thus, it is clear that process carried on by the assessees does not amount to manufacture.

In respect of certain other products like timber wood which is sawn into small pieces of different sized by sawing, certain judicial pronouncements have been made as follows:-

SURMAVALLEYSAW MILLS PVT. LTD. Versus COLLECTOR OF CENTRAL EXCISE, SHILLONG [1985 (21)E.L.T 478 (Tribunal)]

“- Sawing only reduces the thickness and/or length and with of timber pieces. But just after sawing it remains timber only. Therefore, sawn timber being non-excisable the value of its clearances is not includible in the total value of clearances in the stipulated ceiling limit of Rs. 25 lakhs for the year 1983-84.”

Y. MOIDEEN KUNHI AND OTHERS Versus COLLECTOR OF CENTRAL EXCISE, BANGALORE & OTHERS [1986 (23) E.L.T. 293 (Kar.)]

Timber - Sawn Timber - Conversion of timber logs into smaller sizes, planks, rafters, beams etc. continue to be ‘timber’ and is not different commercial commodity - Hence, not “manufactured goods” not liable to duty under Item 68 of the Central Excise Tariff-Sections 2(f) and 3 of the Central Excises Act.-

UTTAR PRADESH FOREST CORPORATION Versus UNION OF INDIA AND OTHERS [1988 (34) E.L.T. 627 (All.)]

Timber - “Round” and “Swan” timber - Conversion of timber logs into planks, beams etc. does not amount to manufacture but they continued to remain timber - Section 2(f) of the Central Excises and Salt Act, 1944 Item 68 of the Central Excise Tariff.

The word ‘Manufacture’ is generally understood to mean coming into existence of a new substance. In the instant case, the petitioner to whom the standing timber was allotted by the State Government, felled the trees and obtained timber logs and fuel wood from them. The timber log is commercially described as round timber. Sawing of logs did not amount to manufacture, as the timber even after continued to be timber and no new commodity came into existence. The conversion of logs into planks, beams etc. did not amount to manufacture as envisaged by Section 2(f) of the Central Excises and Salt Act. The departmental authorities were, therefore, not justified in demanding duty on ‘round or sawed timber’. [1986 (23) E.L.T. 293; A.I.R. 1985 S.C. 1293 relied upon]. [para 3]

COLLECTOR OF CENTRAL EXCISE, MADRAS Versus KUTTY FLUSH DOORS & FURNITURE CO. (P) LTD. [1988 (35) E.L.T. 6 (S.C.)]

“- It is well settled that Excise duty becomes chargeable only when a new and different articles emerges having a distinct name, character and use. This principle is well settled and is a question of fact depending upon the relevant material whether as a result of activity a new and different article has emerged having a distinct name, character and use [1977 (1) E.L.T. (J 199) (S.C.) and 1978 (2) E.L.T. (J 336) (S.C.) referred].[para 4]”

On the same analogy, for different commodity viz iron and steel, hon’ble Delhi high Court in the case of Faridabad Iron & Steel Traders Association reported in 2004 (178) ELT 1099 (Del.)] held that “Manufacture - Process of cutting or slitting of steel sheet in coil form to specific sizes not amounts to ‘manufacture’, since no new, different and distinct article having distinct name, character and use having emerged from the process”.

Thus, it is ample clear that in order to levy excise duty, the process of the assessee should amount to manufacture. In the instant case, this prime condition is not satisfied and hence the impugned order in appeal is not sustainable.

- Alternatively, it was submitted that even if it is assumed for the sake of argument that the stand of department is correct, then too the production alleged by the department is not possible to be achieved by the appellant. As per certificate given by Shri M.M. Engineer, Chartered Engineers & valuers, competent person (Gujarat State), the maximum production of the machines installed in the appellant’s factory is 450 kgs. to 500 kgs. Per day, if simple multiplication is done with the no. of days the factory was working in a year, the resultant figure arrived would be very low. It was submitted that the onus lies with the department to discharge its burden by proving beyond doubt that the quantity being alleged is actually manufactured by the appellants in their factory.

- Appellant also stated that they were undertaking the trading activity where HDPE laminated fabric is cleared as such to their customers. The value of such clearances is required to be deducted from the assessable value ascertained by the department if unfortunately the demand is confirmed against the appellant. They have already given worksheet to show that the delivery challans shown at particular serial numbers of the worksheet prepared by the department were delivery challans whereunder the tarpaulins in rolls were cleared as such. Hence, the value as mentioned in those specified delivery challans will be needed to be deducted from the total value as ascertained by the impugned order in appeal.

- The appellant also re-iterated the contentions made before the Commissioner (Appeal) during the hearing for stay application that that factory was closed due to heavy losses being incurred by the proprietor as evident from the Profit and Loss Account and Balance Sheet for the year ending on 31.3.2008. But it was not agreed and as such, the appellant had deposited Rs. 4.50 lacs to get stay. This deposit is in addition to Rs. 3 lacs that were deposited during the investigation. As such, in the present position, Rs. 7.50 lacs stands paid to the credit of Government.

- Without prejudice it was also stated that the investigating officers have not followed the procedure laid down for drawl of panchnama and recording of statements. The first panchnama was drawn on 22.11.2005 wherein no details were made as to what was detained by the officers, no details in the panchnama and no annexures were prepared for showing the details of raw material detained. During panchnama it was not asked whether the person introducing himself as the supervisor to state whether they were manufacturing the tarpaulins. Thus, the entire basis on which panchnama was drawn is questionable. Further, the officers recorded that Shri Narayan Prasad had invested Rs. 5 lacs in the firms – where is the evidence? It is only based upon assumptions and presumptions of the officers drawing the panchnama. No evidence was drawn about the documents lying in the premises that these are treated as incriminating documents. There is no discussion on the clearance from the factory, the manufacturing and clandestine removal is not proved and hence the entire case is based upon vague foundation. Further during the statement of Shri Pankajkumar Kanchanbhai Patel, Supervisor-cum-clerk of the appellant factory, samples of slips which are affixed on the finished goods and packing material, etc. were withdrawn which were in fact to be withdrawn under panchnama. Further, while recording the statements of Shri Narayan Prasad on 23.11.2005, it is said that the delivery slips recovered from the office premises are said to contain the tarpaulin which was manufactured and cleared from factory without accounting the same. But there is no mention of the plastic granules without which the tarpaulin cannot be manufactured. Thus, there is no sustainability of the panchnama drawn on 24.11.2005. Further it is said that Shri Narayan Prasad is drawing a commission of Rs. 65000/- in a year but there is no evidence in this regard on which basis this fact is taken. Another panchnama was drawn on 1.12.2005 to seize the goods which were said to have detained on 22.11.2005. But the detention was made on 1.12.2005 on the belief that these were liable for confiscation as these were excisable goods and registration was not obtained after crossing the limit of Rs. 1 crore. Further, the goods seized included 45 defective tarpaulin bundles of 1170 kgs. Which was in fact defective tarpaulin which is not the excisable goods and hence not liable for seizure.

- Appellant had further submitted that the impugned Order in Appeal is confirming the duty demand by saying that there are confessional statements of various buyers and other related parties which were not retracted till the date of issue of show cause notice. In this respect it is submitted that mere confessional statements cannot be a basis of confirming the duty demand. Even such statements are required to be proved by cogent and corroborative evidences before raising any demand. This has been held by various appellate authorities that even the confessional statements of the assessee is required to be proven by the department and the demand cannot be raised entirely on the basis of such statements. This view was taken by Apex Court in the case of Haricharan Kurmi vs State of Bihar [AIR 1964 (SC) 1184] wherein it was held that confessional statement must be corroborated by solid evidences. Similar view was taken by the Gujarat High Court in the case of Commissioner of Central Excise & Customs vs Banco Aluminium Ltd. [2007 (218) ELT 184 (Guj.)]. This case was affirmed by Supreme Court which was reported at 2008 (222) ELT A133 (SC)]. In the light of these decisions, the impugned order is not sustainable and is liable to be set aside and the appeal should be allowed.

- Appellant submitted that the impugned Order in Appeal it was alleged that the process undertaken by the appellant amounts to manufacture as the onus is already decided by the department that the process carried out by the appellant is amounting to manufacture. But the same is decided/proved no where in the entire order in appeal. There is not a single statement except as stated above which proves that the process employed by the appellant amount to manufacture. As such, the onus to establish that the process employed by the appellant does not amount to manufacture is proved by the department by a simple statement that “the onus is already decided by the department that the process carried out by the appellant is amounting to manufacture”. But how the same is decided is stated nowhere in the entire order in appeal. Neither the submissions made by appellant in their appeal memorandum have been discussed nor taken care of while passing the impugned order in appeal. Whereas the appellants have already proved in the appeal memorandum that the process employed by them does not amount to manufacture. In this respect, they submit that even the order in appeal is unable to show how the department has proved that their process amounts to manufacture where as the onus lies on the department to prove the same. In other words, while passing the impugned order, learned Commissioner (Appeal) has not considered the reliability of following decisions as stated in the appeal memorandum by the appellant:-

CCE, Chandigarh Vs Markfed Vanaspati and Allied Industries [2003 (153) E.L.T. 491 (S.C.)]
Chowbey Sugandhit Tambaku Co. Vs CCE, Patna [2001 (131) E.L.T. 222 (Tri- Kolkata)]

In the above stated decisions as cited in the appeal memorandum it was held that the onus to establish manufacture lies on the department. Where this fact is not proved by the department demand cannot be confirmed.

- It was submitted that the impugned order is not accepting their submission regarding production of 500-550 kgs. per day contending that the stock was checked in the presence of supervisor cum clerk of the appellant. This contention of impugned order is not sustainable on the grounds that during the process of search and seizure is going on, the appellant is not given the sufficient time to verify the correctness of the figures calculated by the officers of department. There is implied stress on the staff to authenticate the reports prepared by the officers even if these are found strange by them. It is only after this time the assessee is able to compare their analysis with those derived by the department. As such, the contention of the impugned order is not viable and is liable to be set aside. As already stated by us in the appeal memorandum placed before learned Commissioner (Appeal), we reiterate that duty liability on 384507 kgs of tarpaulins is not justified as this much quantity is impossible to be produced in around 13 months as the capacity of one unit is 500 to 550 kgs. per day and normal working days are around 230. Thus, the order in appeal is based on improper findings and wrong basis and as such it should be quashed and the appeal should be allowed.

- It was submitted that in the impugned order-in-appeal it was held that the certificate of chartered engineer is not available to the appellant as the appellant has not specified as to which process is amounting to manufacture. This allegation is not sustainable on the grounds that the certificate of chartered engineer was submitted so as to approve their contention that their capacity per day is 500-550 kgs per day. This certificate has its own validity and has no correlation with the stand taken by the learned Commissioner (Appeal). The appellant reiterate that the onus to establish manufacture is on the department and since it is not established vague stands are being taken so as to confirm the duty demand on the appellant. Such an order is not tenable and is liable to be set aside and the appeal should be allowed.

- It was further submitted that the impugned order is alleging that their contention of selling the tarpaulins after cutting into small pieces is not sustainable as no bills were found which evidenced their contention. It is also contended that this matter has been discussed in the order in original and the submission of chart later on is an after thought story. However, in this respect it is submitted that nothing was discussed in the order in original in this regard. They have submitted the charts showing the quantum of tarpaulins after cutting only. The charts were prepared on the basis of the delivery challans and this fact was clearly mentioned in their reply to show cause notice. The demand has also been raised on the basis of these delivery challans. This means the details mentioned in the delivery challans are accepted by the department. It is further submitted that the charts have been prepared by the appellant on the basis of these challans only. When the department has taken support of certain documents then why the other sphere of those documents is not acceptable to it. All this discussion makes it clear that any order based on one aspect of certain documents is not sustainable. The situation is to be looked from both the sides. However, the learned adjudicating officer did not consider the same while passing the order in original. This fact was also mentioned in their appeal memorandum but it was also not considered while passing the impugned order in appeal. Now even if we consider the contention of department for the sake of argument also, the set-off of these much quantum of goods would have been allowed by the department. But this is not done as such the impugned order is not sustainable and is liable to be set aside.

- Appellant further submitted that the impugned order in appeal is contending that the valuation done for the purpose of determining the duty liability is correct and it was done as per the say of panchas which was agreed by the representative of the appellant. This contention is not acceptable on the grounds that the valuation of the goods has to be done on the basis of Valuation Rules. It cannot be done on the basis of statement of some person. As far as the contention that the valuation is agreed by the authorized person of appellant, is concerned it is submitted that at the time of investigation process, they were not aware about the valuation rules. It was only after this when they approached a consultant to file the reply to show cause notice issued to them. Then, they come to know that the valuation of goods is to be done as per these rules. Further, the appellant have produced the bills of the various parties during the relevant period which shows that the price prevailing during the relevant period was around Rs. 50-62 per kg. As such the valuation should have to be done on the basis of these prices rather than as told by the panchas. But their submission was not considered by the adjudicating authority while passing the order in original. These submissions were also given in the appeal memorandum but these were also not considered by learned Commissioner (Appeal) while passing the impugned order in appeal.

- It was alleged that the impugned order is alleging that the benefit of cum duty price cannot be extended to them because this is the case of evasion and the appellant has availed the benefit of SSI exemption under notification no. 8/2003-CE dated 1.3.2003. In this respect it is submitted that it is mentioned neither in the Central Excise Act, 1944 or rules framed thereunder nor in the Notification no. 8/2003-CE dated 1.3.2003 that the benefit of cum duty price would not be allowed if SSI exemption is claimed. Further, learned Commissioner Appeal has also not cited any case law in this respect in support of his contention. Moreover, benefit of cum duty price can be claimed only after crossing the exemption limit under notification no. 8/2003 as no duty is charged in the exemption. It is further submitted that the appellant have quoted the verdicts of hon’ble Supreme Court in the case of Commissioner of Central Excise, Delhi vs Maruti Udyog Ltd. [2002 (141) ELT 3 (SC)].

The analysis of above paras makes it clear that the verdicts of Supreme Court are clear and unambiguous in stating that where assessee has not charged any sum in addition to the price obtained by it from the purchaser, the price so realized will be treated as cum duty price. This decision was further maintained by the hon’ble Apex Court in the case of Commissioner vs Maruti Udyog Ltd. 2005 (179) ELT A102 (SC)]. As such, since the Highest Court of India has allowed the benefit of cum duty price, its decisions are binding on all the lower formations. This was held in the following cases:-
* Rubber Products Ltd. vs Union of India [2003 (206) ELT 1153 (Bom.)].
* Commissioner of Central Excise, Madras vs Union Carbide India Ltd. [1999 (111) ELT 577 (Tribunal)].

Since the decision of hon’ble Apex Court in the case of Maruti Udyog Ltd. cited here above; has not been followed by the learned Commissioner (Appeal) while passing the impugned Order in Appeal, the order is liable to be quashed and the appeal should be allowed.

- It was submitted that that the learned Commissioner (Appeal) has contended that in his opinion their product falls under Chapter 39 of the Central Excise Tariff Act, 1985. But this opinion is not being substantiated by the reasons for saying so. The impugned order is merely an order simplicitor which contains mere statements which have no basis at all. In the instant case also, the learned Commissioner (Appeal) has merely stated that the product of appellant is HDPE tarpaulin and therefore it has correctly been classified under Chapter 39. However, no reasons for classifying it under this chapter have been stated. Whereas the appellant have proved their bonafides by stating the process undertaken by them. They are purchasing the HDPE laminated fabrics also known as Tarpaulin fabrics. It is being cut into sheets of various sizes and is eyeleted afterwards. This simple process of cutting, slitting and eyeleting is doing not tantamount to manufacture. This was clearly held in the case of M/s Bharat Textile & Proofing Inds. Vs. CCE Chennai [2006 (202) ELT 278(Tri.-Chennai)]. This decision was also cited in the reply to show cause notice but was not considered while passing the order in original saying that this case is not yet final as an appeal has been filed before the Supreme Court, which is pending for final decision. It was further alleged that the case will not be applicable in the instant case as the product involved in aforesaid case was Tarpaulin made-ups whereas the final product in this case is HDPE Tarpaulin. In the appeal memorandum, the appellant have cited the decision of hon’ble Supreme Court in the case of Kamalakshi Finance Corporation Ltd [1991 (055) ELT 0433 SC] wherein it was held that the decisions of higher authority are binding on all the lower formations and mere filing of appeal against any order is no ground for not following it. As regards the contention of different final products was considered it was submitted that can’t be accepted as while interpreting any case law, the intention of law is to be seen. The processes employed are same. It hardly make any difference whether the fabrics is cotton or made of plastic. The issue is to be decided whether the process employed by the appellant is manufacture or not. When the processes undertaken in both the cases are same then it cannot be termed that one will amount to manufacture and other will not be termed as manufacture. The products in these cases will not make any difference. This analysis was already done by the appellant in their appeal memorandum. But it was not considered while passing the impugned order in appeal. Such an order is not sustainable and is liable to be quashed and the appeal should be allowed.

- It was submitted that the learned Commissioner Appeal has alleged that their contention that the onus to establish the manufacture is on department is not sustainable on the grounds that the case has been booked only after deciding the issue that the product is amounting to the manufacture or not in as much as the appellant has stated in his appeal memorandum that the issue is not decided whether the product is marketable or not. In this respect it is submitted that the learned Commissioner Appeal has not stated how the process of appellant amounts to manufacture. The learned Appellate authority has not substantiated their words by corroborative evidences. Whereas the appellant have proved that their process does not amount to manufacture by describing their process and citing the judicial pronouncements in their favour. This is already been reiterated here above. But the learned Commissioner Appeal has not taken care of this submission made in their appeal memorandum and has merely stated that “….the argument that onus to establish the manufacture is on the department is not correct”. However, there are decisions which clearly state that onus to establish manufacture is on the department and two of these decisions are cited as follows:-

CCE, Chandigarh Vs Markfed Vanaspati and Allied Industries [2003 (153) E.L.T. 491 (S.C.)]
Chowbey Sugandhit Tambaku Co. Vs CCE, Patna [2001 (131) E.L.T. 222 (Tri- Kolkata)]

These decisions were stated in their appeal memorandum but were not considered by the learned Commissioner Appeal while passing the impugned order. Such an order passed without considering the available evidences is not tenable and is liable to be set aside.

- The appellant submit that the contention of the impugned order in appeal that the area of factory or machine is no criteria for deciding the production is not sustainable on the grounds that the duty is on the manufacture of excisable goods and is required to be paid by the person manufacturing those goods. A manufacturer requires the adequate machinery and space in the factory so as to produce and store the goods. However, no other machinery owned by the appellant has been found other than at their factory. This means that the goods found there should have to be manufactured by the appellant with the help of machinery in their possession. Since the production of a factory is linked with the capacity of machinery, the demand imposed without considering the capacity of machinery is not viable and is liable to be quashed.

- The appellant submit that the learned Commissioner Appeal has upheld that impugned order in original by saying that the buyers have not filed any appeal against the order as penalty was also imposed on them. This cannot be a basis of confirming the duty demand as the buyers were small traders which might have frightened by the investigations and summons issued by the department. In this respect it is worthwhile to mention here that even if one person is summoned three or four times, he has to write that he has read the Section 14. He has to write his father name and address on every occasion. This is not done when the statement is taken in a normal course. This shows that the statements are taken in typical departmental way. This shows that the statements are written as told by the department. Secondly, there was complete absence of cogent and corroborative evidence. Even these are required when there are confessional statements. However, no cogent and corroborative evidences have been submitted by the department in this regard. On the other hand the appellant have already proved their case by various submissions made by them in this connection. They have established their bonafides from the fact that they do not have capacity to process such a huge quantity in short span of time of thirteen months. They do not have huge stock of raw material which is essential for processing a huge quantity. They do not have any finished goods lying at their factory but this is essential when the unit is clearing huge quantity of finished goods from the factory. They have not found any under hand transaction or huge cash in the factory which is compulsory when you are undertaking the activities at a huge volume. But the learned officer has once again relied upon the statements recorded. How the material has been procured, how it is processed and how it is dispatched, no supplier is interrogated, how the other material other than basic raw material i.e. eyelets, ropes, etc. has been procured? All these questions are still unanswered and the huge duty demand of Rs. 14 lacs with interest and penalty separate have been imposed on the appellants. Such an order passed without considering the submissions of appellant

Reasoning of Judgment:-

- The Tribunal disposed off the appeal on the basic and prime issue of manufacture.

- The Tribunal noted the activities done by the appellant as detailed in their reply to the show cause notice and did not favour the observations made by the Adjudicating Authority. It was held that merely because an appeal stand filed by the revenue against the order of the Tribunal and stand admittedly by the Supreme Court, by itself cannot be made the reason for holding the Tribunal’s order as redundant, in the absence of any stay of operation of the said order.

- The Tribunal further noted that Commissioner (A), while rejecting the appeal, has observed the appellant’s argument that the responsibility to establish the manufacture is on the department is not correct as the case has been booked against the appellant only after deciding the issue whether the product is amounting to manufacture or not inasmuch as the appellant has stated in his appeal memorandum that the issue is not decided whether the product is marketable or not. The Tribunal did not agree to this discussion.

- It was held that the Commissioner (A) has not given any finding to support their decision.

- It was held by the Tribunal that the issue is no more res-integra and the stand settled by the latest decision of the Tribunal in the case of CCE, Chennai versus Tarpaulin International. In that case it was held that

“…it does not change basic characteristic of the raw material and end product. The process does not bring into existence a new and distinct product with total transformation in the original commodity. The original material used i.e. the tarpaulin, is still called tarpaulin made-ups even after undergoing the said process. Hence, it cannot be said that the process is a manufacturing process. Therefore, there can be no levy of Central Excise duty on the tarpaulin madeups. The process of stitching and fixing eyelet would not amount to manufacturing process, since tarpaulin after stitching and eyeleting continues to be only cotton fabrics. The purpose of fixing eyelets is not to change the fabrics. Therefore, even if there is value addition the same is minimum. To attract duty there should be a manufacture to result in different goods and the goods sought to be subject to duty should be known in the market as such.”

- The Tribunal further held that as the process being considered by the Supreme Court is identical to the processing of this case. It was held that it stands concluded by the Apex Court that the process of stitching and fixing eyelets in the tarpaulin sheets would not amount to manufacture. As such, , in view of the above declaration of law, the tribunal hold that no manufacturing activity was being undertaken by the appellant, thus requiring them to pay an duty of Excise. Consequently no duty is required to be confirmed against them and no penalty is required to be imposed. The confiscation of the goods is not called for.

- Accordingly, the Tribunal set aside the impugned order.

Decision:-

Appeal allowed.

Conclusion:-

The Tribunal rightfully held that the process of stitching, cutting and eyeletting undertaken the appellant did not amount to manufacture. And when there was no manufacturing involved the no excise duty can be imposed on the said product. No new product had emerged with a new distinct and marketable identity.

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PJ/CASE STUDY/2010-11/08
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