Court rules friction cloth not subject to Central Excise Duty

The court ruled in favor of the petitioners, holding that the intermediate product, friction cloth, produced during the manufacturing process of Transmission Rubber Belting, V-shaped Belts, and Conveyor Belts, was not exigible to Central Excise Duty as it was not marketed or sold. The court quashed the demands for excise duty on the friction cloth, stating that it did not qualify as "goods" under the relevant statutory provisions. The respondents were directed to pay costs to the petitioners.

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Issues Involved:
1. Whether friction cloth/rubberised cloth produced at an intermediate stage in the production of Transmission Rubber Belting, V-shaped Belts, and Conveyor Belts is exigible to Central Excise Duty.

Issue-wise Detailed Analysis:

1. Exigibility of Friction Cloth/Rubberised Cloth to Central Excise Duty:

The core issue is whether the intermediate product, friction cloth/rubberised cloth, produced during the continuous process of manufacturing Transmission Rubber Belting, V-shaped Belts, and Conveyor Belts, is subject to Central Excise Duty. The petitioners, manufacturers of these belts, argued that the intermediate product is not sold or marketed and is used solely within the manufacturing process.

The Union of India issued a trade notice on October 25, 1980, classifying friction cloth under Item 19-1(b) of the Central Excise Tariff, leading to demands for excise duty on this intermediate product. The petitioners challenged these demands, resulting in a Division Bench ruling on September 2, 1981, which held that the manufacturing process was composite, integrated, and uninterrupted. The court determined that if friction cloth emerged at an intermediary stage, it was not subject to excise duty, especially since it was not marketed or sold.

Subsequently, the Central Government amended the Central Excise Rules, 1944, adding explanations to Rules 9 and 49, which deemed excisable goods produced and consumed within the manufacturing process as removed for excise duty purposes. The petitioners contended that these amendments did not change the nature of friction cloth as a non-excisable intermediate product.

The respondents admitted the manufacturing process but maintained that the rubberisation of canvas cloth fell under Tariff Item 19-1(b) and was excisable, regardless of marketability. They argued that under Section 3 of the Act, excise duty is levied on all excisable goods produced in India, including those for captive consumption.

The court examined the statutory provisions, including Section 2(d) and Section 3 of the Act, and Item 19-1(b) of the Central Excise Tariff. It noted that excise duty applies to goods that ordinarily come to the market to be bought and sold. The court referenced previous rulings, including the Supreme Court's decision in Union of India v. Delhi Cloth and General Mills Co. Ltd., which defined "goods" as marketable items.

The court concluded that friction cloth, as an intermediate product used solely within the manufacturing process and not marketed, did not qualify as "goods" under Section 3 of the Act. The amendments to Rules 9 and 49 did not alter this conclusion, as they only applied to intermediary articles that independently fell within the First Schedule's definitions.

Judgment:

The court allowed the writ petitions, quashing the impugned notices requiring the petitioners to obtain L-4 Licenses and pay excise duty on friction cloth. The respondents were ordered to pay costs to the petitioners. The court held that the intermediate product, friction cloth, was not an excisable good as it was not marketed or sold and did not fall within the statutory definition of goods subject to excise duty.

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