1988 (11) TMI 106 - SC - Central Excise

India's Appeals Allowed, Processors' Appeals Dismissed: Key Rulings on Excise Duties

The appeals by the Union of India were allowed, setting aside the judgment of the Gujarat High Court. The appeals by the processors against the Bombay ... Manufacture (processing as manufacture) - assessable value - factory gate valuation - exclusion of post-manufacturing profit from assessable value - expanded definition of manufacture in Section 2(f) - legislative competence under Entry 84 List I - residuary power under Entry 97 List I - application of Central Excise Act valuation and procedural rules to Additional Duties Act via Section 3(3) - retrospective validation of levy - classification declaration under Rule 173BManufacture (processing as manufacture) - expanded definition of manufacture in Section 2(f) - Processing operations such as bleaching, dyeing, printing, sizing, mercerising and similar processes carried out on grey cotton and man-made fabrics amount to 'manufacture' for the purposes of the Central Excise Act. - HELD THAT: - The Court affirmed the view taken in Empire Industries that the processes in question transform grey-fabric into a commercially different commodity having its own price-structure and commercial incidents, and that this change is sufficient to constitute 'manufacture' even under the pre-amendment conception. The Referring Bench's reservations did not persuade the Court to re-open that conclusion; the amended statutory definition in Section 2(f) only renders the point academic but in any event the Court rejected the contention that processing falls outside 'manufacture.' [Paras 8, 10, 16]Processing of the kind in these cases is manufacture and the contention that it is not manufacture is rejected.Legislative competence under Entry 84 List I - residuary power under Entry 97 List I - The Amending Act's expansion of the concept of 'manufacture' is within Parliament's legislative competence; and, in any event, the impost can be supported under the residuary Entry 97, List I. - HELD THAT: - Entries in the Union List are to be given a liberal construction; the Court held the expanded concept of 'manufacture' was not an impermissible artificial extension beyond Entry 84. Even if Entry 84 were thought insufficient, the levy could be sustained under Entry 97. The charging section and the scheme of the Central Excise Act provide an adequate basis for the levy whether the matter is characterised under Entry 84 or supported as taxation under Entry 97. [Paras 17, 18, 19, 20, 21]The amendment is intra vires; alternatively the levy is supportable under Entry 97.Application of Central Excise Act valuation and procedural rules to Additional Duties Act via Section 3(3) - assessable value - factory gate valuation - Additional duties under the Additional Duties Act are supportable and the valuation and relevant definitions from the Central Excise Act apply to the Additional Duties Act by virtue of Section 3(3) and amendments to the Schedule. - HELD THAT: - The Court examined the interaction between the two statutes and held that Section 3(3) of the Additional Duties Act and the amended Schedule import the necessary concepts (including 'manufacture' and 'assessable value') from the Central Excise Act. The Schedule is part of the statute and the procedural and substantive provisions of the Central Excise Act must be read into the Additional Duties Act so as to render the latter workable; consequently the levy of additional duties is not invalid for lack of an appropriate definition or charging machinery. [Paras 22, 23, 24, 44, 50]The levy under the Additional Duties Act is sustainable and the Central Excise Act's valuation/definitions apply.Retrospective validation of levy - Article 19(1)(g) - reasonable restriction - The retrospective operation of the Amending Act and its validating provisions do not unreasonably restrict the processors' rights under Article 19(1)(g). - HELD THAT: - The Court held that retrospective validating legislation curing defects in taxing statutes is permissible and not ipso facto violative of Article 19(1)(g). The factors relevant to assessment of permissibility-context of validation, period of retroactivity, and foreseeability of burden-did not render the Amending Act unconstitutional; the Court followed the reasoning in Empire Industries that the retrospective effect was not so harsh as to violate fundamental rights. [Paras 8, 25]Retrospective validation is constitutional and Article 19(1)(g) challenge fails.Assessable value - factory gate valuation - exclusion of post-manufacturing profit from assessable value - classification declaration under Rule 173B - Assessable value of processed fabric is the factory-gate value comprising the value of the grey cloth in the hands of the processor, the jobwork charges, manufacturing profit and manufacturing expenses; declared selling price cannot import postmanufacturing profits of subsequent traders. - HELD THAT: - The Court reaffirmed Empire Industries and Atic Industries principles: valuation under Section 4 is to be determined by reference to the wholesale cash price at the factory gate when the goods first enter the wholesale market. The assessable value therefore includes the intrinsic value of the processed fabric (which naturally includes the value of the grey cloth and job-work) together with manufacturing profit and manufacturing expenses, but excludes post-manufacturing selling costs or profits of subsequent traders. Declarations filed under Rule 173B may be used by authorities, but any declared price must be confined to the factorygate value (i.e., grey cloth + job-work + manufacturing profit/expenses) and not include subsequent traders' profits. [Paras 26, 28, 29, 31]Assessable value = value of grey cloth (in processor's hands) + job-work charges + manufacturing profit and manufacturing expenses; postmanufacturing profits excluded.Classification declaration under Rule 173B - Processors who filed classification lists under Rule 173B are not estopped from challenging the legal correctness of the valuation principles applied to their classifications. - HELD THAT: - The Court noted processors filed classification lists as they had no alternative; nevertheless they remain entitled to challenge whether the correct legal principles of assessablevalue have been applied. The true principle (factorygate valuation excluding postmanufacturing profit) governs determination irrespective of prior classification filings. [Paras 26, 33]Filing classification lists does not preclude processors from contesting valuation on legal grounds.Final Conclusion: The Court upheld Empire Industries: processing of grey cotton and manmade fabrics is 'manufacture'; the Amending Act and the levy are intra vires (alternatively sustainable under Entry 97); additional duties validly apply with Central Excise valuation rules; retrospective validation is constitutional; assessable value is the factorygate price (grey cloth + jobwork + manufacturing profit/expenses) excluding postmanufacturing profits. The Gujarat High Court's judgment is set aside; appeals by processors dismissed; Union entitled to recover arrears and enforce guarantees. Issues Involved:1. Whether the processes of bleaching, dyeing, printing, sizing, shrink-proofing, etc., amount to 'manufacture' under Section 2(f) of the Central Excises and Salt Act, 1944, prior to its amendment.2. Whether the amendment to Section 2(f) and Tariff Items 19 and 22 by the Amending Act of 1980 is ultra vires Entry 84 List I.3. Whether the levy of additional duties under the Additional Duties of Excise Act, 1957, is valid without a corresponding amendment to the definition of 'manufacture' in that Act.4. Whether the retrospective operation of the Amending Act is an unreasonable restriction on the fundamental rights under Article 19(1)(g) of the Constitution.5. Whether the computation of the assessable value of processed grey fabric based on the wholesale cash selling price declared under Rule 173B is justified and legal.Detailed Analysis:Issue 1: Manufacture under Section 2(f) Prior to AmendmentThe processors contended that the processes like bleaching, dyeing, and printing do not amount to 'manufacture' as they do not bring into existence a new article with a distinctive character and use. However, the court held that the processes of bleaching, dyeing, printing, etc., carried out by the processors on job-work basis amount to 'manufacture' within the meaning of Section 2(f) of the Central Excises and Salt Act, 1944, even prior to its amendment. The court emphasized that the processed fabric emerges as a commercially different commodity with its own price-structure and commercial incidents, thus constituting 'manufacture.'Issue 2: Validity of the Amending Act under Entry 84 List IThe court held that the amendment to Section 2(f) and Tariff Items 19 and 22 by the Amending Act of 1980 is valid. The processes referred to by the amendment are not so alien to the concept of 'manufacture' that they could not come within that concept. The court further stated that even if the expanded concept of manufacture introduced by the amendment is beyond the scope of Entry 84 List I, the impost can still be supported by Entry 97 of List I, which allows for the imposition of taxes not enumerated in any other entry.Issue 3: Levy of Additional Duties under the Additional Duties of Excise Act, 1957The court rejected the contention that the levy of additional duties under the Additional Duties of Excise Act, 1957, is invalid without a corresponding amendment to the definition of 'manufacture' in that Act. The court held that Section 3(3) of the Additional Duties Act, which provides that the provisions of the Central Excise Act and the rules made thereunder shall apply in relation to the levy and collection of the additional duties, is sufficient to attract the definition of 'manufacture' under Section 2(f) of the Central Excise Act as amended.Issue 4: Retrospective Operation of the Amending ActThe court found no merit in the contention that the retrospective operation of the Amending Act is an unreasonable restriction on the fundamental rights under Article 19(1)(g) of the Constitution. The court held that a competent legislature can always validate what has been declared invalid by courts, provided the infirmities are removed or cured. Such a validating law can also be made retrospective. The court emphasized that the retroactivity of the Amending provisions was not such as to incur any infirmity under Article 19(1)(g).Issue 5: Computation of Assessable ValueThe court held that the assessable value of the processed fabric should include the value of the grey cloth in the hands of the processors plus the value of the job-work done plus manufacturing profit and manufacturing expenses. The court rejected the contention that the assessable value should be limited to the processing charges alone. The court emphasized that the correct assessable value must be the value at which the manufactured goods leave the factory and enter the mainstream.Conclusion:The appeals preferred by the Union of India were allowed, and the judgment of the Gujarat High Court was set aside. The appeals preferred by the processors against the judgment of the Bombay High Court and the writ petitions filed by the processors directly in this court were dismissed. The court clarified that the assessable value of the processed fabric would include the value of the grey cloth, the job-work done, and the manufacturing profit and expenses. The Union of India and its authorities were entitled to recover the amounts due by way of arrears of excise duty and to enforce the bank guarantees for the recovery of the arrears.