2006 (3) TMI 2 - SC - Central Excise

Supreme Court: Welding pipes not 'manufacture' under Central Excises Act

The Supreme Court held that the process of welding electric resistant pipes/tubes to create Stepped Transmission Poles did not amount to 'manufacture' ... Manufacture - transformation - distinctive name, character or use - residuary tariff entry - burden of proof on Revenue - interpretation of tariff entriesManufacture - transformation - distinctive name, character or use - Whether the process of joining and welding duty-paid pipes to produce stepped transmission poles amounts to manufacture under Section 2(f) of the Central Excise Act, 1944. - HELD THAT: - The Court applied settled authorities requiring that manufacture involves more than mere change or processing and that there must be a transformation resulting in a new and different article having a distinctive name, character or use. Examining the material facts, the Court found that the activity undertaken - joining three welded M.S. pipes of different diameters by reduction, insertion, swaging and welding to obtain poles of desired length - does not change the basic identity or original character of the M.S. welded pipes. The end product remains pipes/poles that retain the physical properties and end-uses of the original pipes and cannot be said to have acquired a new commercial identity such as would satisfy Section 2(f). The Court relied on precedents holding that mere application of processes which do not yield a new and distinct article does not amount to manufacture. [Paras 37, 38]The process does not amount to manufacture under Section 2(f); the pipes retain their original identity and no new excisable article comes into existence.Burden of proof on Revenue - residuary tariff entry - interpretation of tariff entries - Whether the Revenue discharged the burden of proving manufacture and whether resort to the residuary tariff entry (Tariff Item 7308/erstwhile Item 68) was permissible. - HELD THAT: - The Court reiterated the settled rule that the burden to prove manufacture rests on the Revenue. It held that the Revenue failed to establish that the activity could not conceivably be classified under the specified tariff entries for pipes/tubes and therefore could not legitimately invoke the residuary entry. The residuary entry is only available for goods that fall outside the ambit of specified entries; it cannot be invoked where the product can reasonably be brought within a specific tariff description. [Paras 37]The Revenue failed to prove manufacture and could not properly resort to the residuary tariff entry; therefore classification under the residuary entry was impermissible.Final Conclusion: The appeals are allowed; the show cause notices are quashed and the orders of the Tribunal and Commissioner of Central Excise are set aside. Parties shall bear their own costs. Issues Involved:1. Whether the process undertaken by the appellants for bringing into existence the resultant Stepped Transmission Poles amounts to manufacture under Section 2(f) of the Central Excises Act, 1944.2. The burden of proof for establishing whether an activity amounts to manufacture.3. Applicability of the residuary entry in the Central Excise Tariff.Detailed Analysis:1. Whether the process undertaken by the appellants amounts to manufacture under Section 2(f) of the Central Excises Act, 1944:The core issue in these appeals is whether the process of welding electric resistant pipes/tubes of different diameters to create Stepped Transmission Poles constitutes 'manufacture' as defined under Section 2(f) of the Central Excises Act, 1944. Section 2(f) includes any process incidental or ancillary to the completion of a manufactured product or specified in the section or Chapter notes of the Central Excise Tariff Act, 1985.The appellants argued that the process carried out is merely joining three pipes of different diameters by welding to obtain the desired length, and this does not change the original character of the pipes. They contended that the pipes retain their character as pipes and do not transform into a new or different product with a distinctive name, character, or use. Therefore, no process of manufacture as per Section 2(f) is carried out.The Collector of Central Excise, Calcutta-I, and the CEGAT held that the process resulted in a new product with a distinct name, character, and use, thus amounting to manufacture. However, the Supreme Court referred to several judgments, including Indian Metals and Ferro Alloys v. CCE and Bharat Forge and Press Industries v. CCE, which emphasized that the essence of manufacture is the transformation of one item into another for marketable purposes. The Court concluded that the process carried out by the appellants does not change the basic identity or original character of M.S. Welded Pipes to make it a new marketable product leading to manufacture as defined under Section 2(f).2. The burden of proof for establishing whether an activity amounts to manufacture:The appellants argued that the burden to prove manufacture is always on the Revenue, as held in a series of cases, including Shyam Oil Cake Ltd. v. Collector of Central Excise, Jaipur. The Supreme Court reiterated that the burden to prove that an activity amounts to manufacture is on the Revenue. In this case, the Revenue failed to prove that the activity carried out by the appellants amounts to manufacturing.3. Applicability of the residuary entry in the Central Excise Tariff:The respondent Department sought to classify the poles manufactured by the appellants under Tariff Item 7308.90, a Residuary Entry under Heading 73.08 pertaining to Structures. The Supreme Court observed that the residuary entry is meant only for those categories of goods which clearly fall outside the ambit of specified entries. Unless the Department can establish that the goods in question can by no conceivable process of welding be brought under any of the tariff items, resort cannot be had to the residuary item.The Court referred to several judgments, including Union of India v. Delhi Cloth and General Mill Co. Ltd., which held that 'manufacture' must bring into existence a new substance known to the market. The Court concluded that the activity of merely joining three pipes of different dimensions to obtain a desired length does not constitute manufacture.Conclusion:The Supreme Court allowed the appeals, quashed the show cause notices, and set aside the impugned judgment of the Tribunal and Commissioner of Central Excise. The Court directed the parties to bear their own costs and emphasized that the Revenue must carefully consider the settled law before issuing show cause notices to avoid unnecessary litigation and harassment.