2015 (6) TMI 334 - AT - Central Excise

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

The Tribunal held that making pencil slats from timber logs amounts to manufacture, attracting Central Excise duty. The principle of res-judicata does not ... Manufacture for Central Excise / excisability - marketability as test of goods - transformation / new and distinct commercial identity test - Harmonised System of Nomenclature (HSN) as indicium of marketability - res judicata / estoppel against law - limitation - suppression and extended limitation - remand for quantification within normal limitationManufacture for Central Excise / excisability - transformation / new and distinct commercial identity test - marketability as test of goods - Harmonised System of Nomenclature (HSN) as indicium of marketability - Making pencil slats from timber logs amounts to manufacture and the slats are excisable goods. - HELD THAT: - Applying the tests in the precedents of the Apex Court, the Tribunal found that the process described - cutting timber into blocks, boiling to soften, slicing into slats, and subjecting slats to heat, pressure and chemical/colour treatment - effects a transformation that imparts distinct properties and a new commercial identity suitable exclusively for pencil manufacture. Pencil slats are specifically listed under the HSN/sub-heading and evidence of an active market (suppliers and industry reports) supports marketability. On these bases the processes bring into existence a new and marketable article and thus amount to manufacture for the purpose of levy of Central Excise. [Paras 6, 10, 11, 13]The processes undertaken result in a new, marketable article (pencil slats) distinct from timber and therefore constitute manufacture attracting excise duty.Res judicata / estoppel against law - The Department is not precluded from changing its earlier view that pencil slats were not excisable; res judicata/estoppel cannot be invoked to prevent correction of a view contrary to law. - HELD THAT: - The Tribunal relied on binding precedents holding that administrative authorities may correct earlier orders if those orders are contrary to law and there is no estoppel against law. Earlier departmental communications or an Assistant Commissioner s order holding the product non-excisable do not bar the Department from revising its position when found erroneous. [Paras 14]The plea of res judicata/estoppel is rejected and the Department may revise its earlier stand.Limitation - suppression and extended limitation - penalty - requirement of mens rea / suppression - remand for quantification within normal limitation - Extended limitation and penalties are not justified; no suppression of facts proved - matter remanded to original adjudicating authority for quantification within normal limitation period. - HELD THAT: - The Tribunal accepted that both appellants initially paid duty (and one availed the exemption scheme) and that departmental officers had earlier informed them the product was not excisable. Given these circumstances and the lack of evidence of intentional suppression to evade duty, the Tribunal held the longer limitation period and penalties were not attracted. However, since the Tribunal has held the processes amount to manufacture, quantification of duty within the normal limitation period must be done by the original adjudicating authority; accordingly the matter is remanded for that limited purpose. [Paras 15, 16]Only normal limitation is available to the Department; penalties/unjustified extended limitation are set aside and the matter is remanded for quantification within normal limitation.Final Conclusion: The Tribunal held that the processes of converting timber into treated pencil slats effect a transformation giving the slats a distinct commercial identity and marketability and therefore constitute manufacture liable to excise; departmental change of view was permissible; extended limitation and penalties were not sustainable on the facts; the matters are remanded to the original adjudicating authority for quantification of demand within the normal limitation period. 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.