2015 (6) TMI 334 - AT - Central Excise

Manufacturing pencil slats from timber logs attracts Central Excise duty; penalties unjustified. Res-judicata doesn't apply.

M/s Hindustan Pencils (P) Ltd., M/s Sanghvi Woods (P) Ltd. Versus CCE, Jammu & Kashmir

The Tribunal held that making pencil slats from timber logs amounts to manufacture, attracting Central Excise duty. The principle of res-judicata does not ... Manufacturing activity or not - whether making pencil slats from wooden logs (timber) would amount to manufacture and whether such pencil slats would attract Central Excise duty - Exemption Notification No. 56/02-CE dated 14/11/02 - Held that:- Timber logs are cut into blocks, which are further cut into smaller blocks and, thereafter, these smaller blocks are subjected to the process of boiling to soften the wood and it is the softened wooden blocks which are sliced into the slats. The slats, thereafter, are subjected to further processing in the pressure vessel where they are subjected to pressure at high temperature and also treated with the colouring material and into termite chemicals. The slats obtained by this process are stained slats while the slats obtained by slicing the boiled wooden blocks are called un-stain slats. There is no dispute that these slats are meant only for manufacture of pencils. From the manufacturing process described in the appeal memo and also in the order of the Assistant Commissioner it is clear that there is transformation of timber block into a new commodity in course of making of pencil slats from timber logs/wood blocks in as much as (a) boiling of wooden blocks results in certain changes in the wood which makes it soft and (b) subjecting the un-stained slats to pressure at high temperature in the pressure vessel and treating them with certain chemicals and colouring matter gives the pencil slats changes their properties which makes them suitable for use in the manufacture of pencil. The pencil slats obtained by the above process have no other use except in the manufacture of pencil. Pencil slats are specifically covered by HSN sub-heading 44219040. Harmonised commodity description and coding system, generally referred to as harmonised system of nomenclature (HSN), is a multi purpose international product nomenclature developed by the world customs organisation and it harmonises customs and trade procedure and thus reduces the cost relating to international trade. Moreover when the manufacturing units of both the appellants were located in the areas notified under Notification 56/02-CE and HPPL was in fact availing of this exemption, there would be absolutely no incentive, in fact, negative incentive, for them to avoid the payment of duty, as (a) as per the scheme of Notification 56/02-CE, whatever duty is payable through PLA after availing the Cenvat credit available at the end of the month to the extent possible, is exempt and is available as refund in form of credit in PLA, and (b) while the assessee availing of 56/02-CE exemption gets refund of the duty paid through PLA, in terms of Rule 12 of the Cenvat Credit Rules, 2004, the manufacturing units (customers) receiving the goods from him would be eligible for full Cenvat credit as if no part of duty payable on the goods was exempt and for this reason the tendency of the units availing of exemption under Notification No. 56/02-CE would be to pay as much duty as possible rather than avoid the payment of duty. In view of this position, we hold that in both the cases, the appellants cannot be accused suppressing of any material fact from the Department with intent to evade the duty. Only the normal limitation period would be available to the Department for recovery of duty and for the same reason, no penalty under Section 11AC of Central Excise Act, 1944 or Rule 25 (1) of the Central Excise Rules, 2002 would be justified. However, for quantification of the demand within normal limitation period, the matter would have to be remanded to the original Adjudicating Authority. In the case of HPPL, since they were initially paying the duty and availing of exemption under Notification No. 56/02-CE and since it is only on the orders of the Assistant Commissioner rejecting their refund claims under Notification No. 56/02-CE holding that the process undertaken by them does not amount to manufacture, they stopped payment of duty, if they claim the exemption under Notification No. 56/02-CE, the same would have to be allowed. - Decided partly in favour of assessee. Issues Involved:1. Whether making pencil slats from timber logs amounts to manufacture.2. Whether pencil slats attract Central Excise duty.3. Applicability of the principle of res-judicata in the context of Central Excise.4. Validity of invoking the extended limitation period for demand of duty.5. Justification for imposing penalties under Rule 25 of the Central Excise Rules, 2002.Issue-Wise Detailed Analysis:1. Whether making pencil slats from timber logs amounts to manufacture:The main point of dispute is whether the process of making pencil slats from timber logs constitutes manufacture. The process involves cutting timber logs into blocks, boiling them to soften the wood, slicing them into slats, and treating them with chemicals and coloring materials under high pressure and temperature. The Tribunal held that this process results in the transformation of timber into a new product with distinct properties and uses, thus amounting to manufacture. This conclusion is supported by the Tribunal's earlier judgment in the case of Lion Pencils Pvt. Ltd. vs. CCE, Bombay, where similar processes were deemed to constitute manufacture.2. Whether pencil slats attract Central Excise duty:Pencil slats are specifically covered by sub-heading 44219040 of the Central Excise Tariff, which is based on the harmonized system of nomenclature (HSN). The HSN categorizes pencil slats as articles of wood, indicating their marketability. The Tribunal found evidence of the market for pencil slats, including internet listings and newspaper articles, confirming their commercial identity and marketability. Therefore, pencil slats are subject to Central Excise duty as they are a distinct product resulting from a manufacturing process.3. Applicability of the principle of res-judicata in the context of Central Excise:The appellants argued that the Department's earlier decision that the process does not amount to manufacture should bar the Department from changing its stand. However, the Tribunal rejected this plea, citing the Supreme Court's rulings that there is no estoppel against law. The Assistant Collector is competent to modify an earlier order if it was contrary to the law, as held in the case of Madras Fertilizers Ltd. vs. Assistant Collector of Central Excise, Madras.4. Validity of invoking the extended limitation period for demand of duty:The Tribunal held that the extended limitation period under the proviso to Section 11A(1) cannot be invoked in this case. The appellants had initially paid duty based on the Department's instructions and stopped only after being advised by the Department that their process did not amount to manufacture. Given that the appellants had no incentive to evade duty and acted based on the Department's guidance, there was no suppression of facts. Therefore, only the normal limitation period applies.5. Justification for imposing penalties under Rule 25 of the Central Excise Rules, 2002:The Tribunal found no justification for imposing penalties on the appellants. Since the appellants acted based on the Department's instructions and there was no intent to evade duty, penalties under Section 11AC of the Central Excise Act, 1944, or Rule 25(1) of the Central Excise Rules, 2002, were not warranted. The matter was remanded to the original adjudicating authority for quantification of the demand within the normal limitation period and to allow exemptions under Notification No. 56/02-CE if claimed by the appellants.Conclusion:The appeals were disposed of with the Tribunal holding that the process of making pencil slats amounts to manufacture, attracting Central Excise duty. The principle of res-judicata does not apply, and the extended limitation period cannot be invoked. Penalties were deemed unjustified, and the matter was remanded for further proceedings in line with the Tribunal's findings.