Whether duty is payable on the intermediate product i.e. Rolling bars of chapter sub-heading 72141090 which come into existence during the process of manufacture of crow bars exempted under notification no. 23/2004-C.E. dated 09.07.2004?

PJ/Case Study/2012-13/29

CASE STUDY

Prepared By:CA Neetu Sukhwani and
Shreena Anchaliya

Introduction:- M/s Indra Alloys (P) Ltd. received a show cause notice wherein it was alleged that they have contravened the provisions of Rule 4, 6, 8, 9, 10, 11 of the Central Excise Rules, 2002 and Rule 8 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 and section 6 of the Central Excise Act, 1944 by evading the payment of Central Excise Duty in respect of manufacture of intermediate product i.e. Rolling Bars manufactured during the course of manufacturing of Crow Bars which is exempt from Central Excise Duty. On submission of the manufacturing process by the appellant, it was held that the intermediate product was not liable for Central Excise Duty as the same was not marketable thereby not satisfying the twin conditions of ‘manufacture and marketability’ for levy of excise duty.

M/s Indra Alloys v/s Deputy Commissioner, Central Excise Division, Jodhpur
[Order-In-Appeal no. 28(RDN) CE/JPR-II/2012 dated: 07.09.2012]

Relevant Legal Provisions: The relevant provisions are detailed as follows:

1)   Penalty under Rule 25(1) (a), (b) ,(c), (d) of Central Excise Rules, 2002
Confiscation and penalty. — (1) Subject to the provisions of section 11AC of the Act, if any producer, manufacturer, registered person of a warehouse or a registered dealer, -
(a)  Removes any excisable goods in contravention of any of the provisions of these rules or the notification issued under these rules; or
(b)  Does not account for any excisable goods produced or manufactured or stored by him; or
(c)  Engages in the manufacture, production or storage of any excisable goods without having applied for the registration certificate required under section 6 of the Act; or
(d)  Contravenes any of the provisions of these rules or the notifications issued under these rules with intent to evade payment of duty,
then, all such goods shall be liable to confiscation and the producer or manufacturer or registered person of the warehouse or a registered dealer, as the case may be, shall be liable to a penalty not exceeding the duty on the excisable goods in respect of which any contravention of the nature referred to in clause (a) or clause (b) or clause (c) or clause (d) has been committed, or [rupees two thousand], whichever is greater.

2)   Rule 4,6,8,9,10,11 of Central Excise Rules:
·         Rule 4: Duty payable on removal.
·         Rule 6: Assessment of duty.
·         Rule 8: Duty payable by 5th or 6th of the following month in which the goods are cleared
·         Rule 9: Registration of the manufacturer
·         Rule 10: Maintenance of Daily Stock Account
·         Rule 11: Goods to be removed on invoice.

3)    Rule 8 of Central Excise Valuation Rules: Valuation of captively consumed goods
Where the excisable goods are not sold by the assessee but are used for consumption by him or on his behalf in the production or manufacture of other articles, the value shall be one hundred and ten per cent of the cost of production or manufacture of such goods.
4)    Section 6 of Central Excise Act, 1944:Registration of certain persons.

Brief Facts:-

The appellants are engaged in the manufacture of Ingot, MS Angle and Crow Bars falling under Chapter Heading no. 7206, 7216 and 8201 of first schedule to the Central Excise Tariff Act, 1985. It has been alleged that the appellant have not paid Central Excise duty amounting to Rs. 28280/- on the intermediate product i.e. Rolling Bars of chapter heading 72141090 manufactured during the course of manufacturing process of Crow Bars because the crow bars are exempted from Central Excise Duty vide notification no. 23/2004-CE dated 09.07.2004(serial no. 291). It is also alleged that the assessee is liable for penal action under Rule 25(1)(a), (b), (c) & (d) of the Central Excise Rules, 2002 for contravening the provisions of Rule 4,6,8,9,10 & 11 of the Central Excise Rules, 2002 & Rule 8 of Central Excise Valuation (Determination of Price of Excisable Goods) Rules,2000 and section 6 of the Central Excise Act, 1944. It was alleged that since the final product, i.e. crow bars of the appellant was exempted from payment of excise duty, the appellant was required to pay excise duty on its intermediate product, i.e. rolling bars which was captively consumed in the manufacture of exempted final product, crow bars by valuing the intermediate product under Rule 8 of the Central Excise Valuation Rules. Therefore, the appellant was also liable for penalty under Rule 25 of the Central Excise Rules, 2002.

Assessee’s Contentions:-

Assessee made following submissions before the Commissioner (Appeal):-

v The appellant submitted that their intermediate product, Rolling bars was actually the unfinished crow bars and the same were not liable for excise duty as the same was not marketable in the condition it was further processed to final product. They further submitted that it is necessary to understand their complete manufacturing process to come to conclusion whether the said intermediate product is liable to excise duty or not. It was submitted that they were manufacturing Crow Bars for which they were using the re-rollable bars as inputs. The re rollable bars are then heated in the furnace and in red hot condition, it is passed through to the next process for shaping. The dies are fixed in these machines and the material takes the shape of finished goods. The crow bars have eight sides and these sides are obtained in this process. The unfinished crow bars are obtained from this process. Thereafter this unfinished crow bar is cut and taken to next process of hammering. This hammering is also done while it is hot. If the material is allowed to cool down and then hammering is done then the material will not take the shape and it will break. The whole process is a continuous process as uninterruptedly the re rollable bar is thrown to the next machine so that the final product crow bar can be obtained. From the second machine, the unfinished crow bar is obtained which after hammering becomes crow bars.

v The appellant further submitted that after the first process of heating, during the second process, an unfinished crow bar is obtained which is also a crow bar. The crow bar is in the shape of octagon which in fact is a crow bar but in a rough condition. The normal flat rolled products are round in shape but crow bars have eight sides. Thus, when they have put die of eight sides, it implies that crow bar is to be manufactured. They submit that the above product is unmanufactured crow bar only and nothing else. Hence, it is also exempt from excise duty and there is no duty liability on them.

v The appellant also submitted that they have purchased the rolled products only and not the scrap as alleged in SCN. They have maintained the separate inventory for the same. The separate raw material register and finished good register of this product has been maintained by them. Hence, the separate inventory was maintained and no Cenvat credit was also taken on inputs of this product.

v It was further submitted that the roll bars on which duty is demanded by the Department are in actual the unfinished crow bars which are not marketable as such. Thus, the duty is not payable on the same. The unfinished crow bars emerged during the process of making the crow bars when the inputs, i.e. the re-rollable bars are heated, mould and hammered. The duty demanded is on the roll bars that emerge when the re-rollable bars are fully heated and become red hot and also in unfinished condition. In the same red hot condition, it is immediately, uninterruptedly and continuously fed for hammering in machine for being coiled while it is still hot. In other words, what they call the unfinished crow bars – are in the hot condition. In such, a condition, these cannot even be touched. The goods which are hot in condition surely are not marketable in that same condition. The product is not let to cool down and further the process is applied on the same then material will not change its shape. Thus, the product on which the department is demanding the duty is not marketable as such. It has been held in the case of INDIAN CABLE CO. LTD. Versus COLLECTOR C. EX., CALCUTTA [1994 (74) E.L.T. 22 (S.C.)] that the product is termed as marketable only if it is saleable AS SUCH, without carrying on any further process.

v It was also submitted that the product on which duty is being demanded from the appellant emerge during the process of manufacture of crow bars in red hot condition. The product is not marketable as such in the same red hot condition. Further the shelf life of that product in the same red hot condition is only few minutes till it is fed into next machine for the process of hammering.
The appellant further submitted that before Central excise Duty can be imposed on any article, it must satisfy two basic conditions-
1.    The article should be “goods that are marketable” , and
2.    It should have come into existence as a result of “manufacture”
The above contention by the appellant was supported by a number of cases.
Further, the department contended that the tariff headings of both the products are classified under different chapter heads and hence, the intermediate goods produced for the exempted final product are liable to duty but the appellant contended that merely because the product is mentioned in the tariff head does not mean that the product is marketable. The departmental authorities have to satisfy this contention that the intermediate goods that are produced are marketable which was supported by number of cases cited by the appellant.
It was also alleged that as the goods are captively consumed and are liable to duty. The valuation of these goods will be done according to Rule 8 of the Valuation Rules. This means that the assessable value applicable will be 110% i.e. Cost of production +10%. In this regard, it was submitted that when there is no duty liability then there is no question of valuation. They once again submitted that their product is not marketable, hence they are not goods. When these are not goods then there is no duty liability on them. Further to support their contention they produced the verdicts of some Apex Court decisions:
·         COLLECTOR OF CENTRAL EXCISE Versus AMBALAL SARABHAI ENTERPRISES [1989 (43) E.L.T. 214 (S.C.)]
·         MOTI LAMINATES PVT. LTD. Versus COLLECTOR OF CENTRAL EX., AHMEDABAD [1995 (76) E.L.T. 241 (S.C.)]
·         WHITE MACHINES Versus COMMISSIONER OF C. EX., DELHI [2008 (224)E.L.T. 347 (S.C.)]
v The appellant also submitted that all the allegations regarding provisions of Rule 4, 6, 8, 9, 10 and 11 of central Excise Rules, 2002 and section 6 of the Central Excise Act, 1944 alleged are not tenable as these are applicable to the EXCISABLE GOODS. Whereas in the present case the unfinished crow bars are not excisable as the essential condition for excisability i.e. marketability has not fulfilled here. As such the above mentioned provisions are not applicable. Since the unfinished crow bars cannot be sold in the condition when these are procured from the heating process then these cannot be said as marketable and consequently these also are not the excisable goods.
v The appellant also submitted that it has been proposed to recover interest under section 11 AB of Central Excise Act, 1944 and to impose penalty under Rule 25 of the Central Excise Rules, 2002. The abovementioned penalty is relating to non compliance of legal provisions regarding Excisable goods. As per the nature of continuous procedure applied on the unfinished crow bars, they are not able to sell as such in hot condition when these come out from the machine. When the product is not marketable then it cannot be said as excisable product. As such the abovementioned penalty cannot be imposed on them as the unfinished crow bars are not the excisable product. Since the unfinished crow bar is not an excisable product so they need not to comply with the legal provisions which are made for excisable products. When demand against the assessee is not sustainable then no interest and penalty can be imposed on the assessee.

Reasoning of the Commissioner (Appeals):-

The Commissioner (Appeals) understood the complete the process thoroughly. It was found that it is very imperative that the whole process continues uninterruptedly for manufacture of crow bars. All the processes from heating to hammering are for manufacture of crow bars. The octagon bars emerge but in red hot condition which cannot be said to be marketable product. Until and unless a product is in a position to be marketed, it cannot attain the very status of goods. It relied on the Dharmpal Satyapal Case [2005(183) E.L.T. 241(SC)], regarding the test of marketability that the product which is made liable to duty must be marketable in the condition in which it emerges. Therefore, it was held that the intermediate product was not marketable as such and hence was not liable to excise duty.

Decision:-

The appeal is allowed.

Conclusion:- The above case study confirms the well settled position of law that the twin tests of manufacture and marketability are mandatorily to be assured for levy of Central Excise Duty on any product, be it an intermediate product liable to excise duty due to exemption of final product.

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27 October 2012

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PJ/CASE STUDY/ 2012-13/29
27 October 2012