1995 (2) TMI 67 - SC - Central Excise

Excise duty applies only to marketable goods, not items merely listed in Tariff Schedule under Item 15A

The SC held that excise duty applies only to goods that are marketable or capable of being marketed, not merely to items listed in the Excise Tariff ... Test of marketability - excisable goods - production or manufacture - captively consumed goods - chemical description in tariff not determinative of exigibility - resols (A-stage phenol formaldehyde resin)Test of marketability - excisable goods - production or manufacture - Whether goods specified in the Tariff Schedule attract excise duty irrespective of marketability - HELD THAT: - The Court held that inclusion of an article in the Tariff Schedule does not by itself attract excise duty; levy under the Act requires that the article be produced or manufactured and that such product satisfy the ordinary test of marketability or be capable of being marketed. The expression 'excisable goods' refers to goods specified in the Schedule, but levy under Section 3 is dependent on the goods being produced or manufactured by the person and meeting the marketability test. Prior decisions of this Court establish that a transformation must result in a distinct article known to the market or capable of being sold; actual sale or captive consumption is not determinative. Consequently, the statutory scheme and established precedents require marketability as a precondition to exigibility of duty even for items specifically described in the Schedule. [Paras 6, 7, 9]Goods mentioned in the Tariff Schedule are exigible to duty only if, having been produced or manufactured, they are marketable or capable of being marketed.Captively consumed goods - test of marketability - chemical description in tariff not determinative of exigibility - Whether the amendment treating captively consumed goods as dutiable eliminates the requirement of marketability or creates an irrebuttable presumption of marketability - HELD THAT: - The Court explained that amendments to the Rules rendered captively consumed articles prima facie exigible by creating a statutory fiction, but this presumption is rebuttable. The burden remains on the Department to show that the article produced and captively consumed is a 'good' within the meaning of the Act - i.e., it has a distinctive name, is known as such, and is marketable or capable of being marketed. If it is shown that the article is not marketable or cannot be marketed, the presumption falls away and excise cannot be levied despite captive consumption. [Paras 10]The statutory fiction as to captive consumption does not abolish the marketability requirement; the presumption of marketability may be rebutted by proof that the article is not marketable or capable of being marketed.Resols (A-stage phenol formaldehyde resin) - test of marketability - Whether the A stage resin ('resols') produced by the appellants and captively consumed are exigible to excise duty - HELD THAT: - Applying the marketability test to the facts, the Court found that the resols produced by the appellants existed as an unstable reacting solution at A stage which could not be used as such without addition of stabilisers or further processing and whose usable life was very short and temperature sensitive. On the findings of the subordinate authorities (that the solution was unstable and unusable without stabiliser, and survival even for a limited period depended on controlled conditions), the Court held that the intermediate product did not qualify as goods known to or capable of being marketed. Thus the Tribunal's conclusion that answering a chemical description in the tariff sufficed for exigibility even when the product was non marketable was unsound. [Paras 5, 11, 12]The A stage resin ('resols') produced and captively consumed by the appellants are not exigible to excise duty because they are not marketable or capable of being marketed.Final Conclusion: Allowed. The appeals succeed: the Court holds that excise duty cannot be levied on A stage phenol formaldehyde resin ('resols') captively consumed by the appellants because such intermediate product is not marketable or capable of being marketed; the statutory presumption as to captive consumption is rebuttable and a mere chemical description in the tariff does not dispense with the marketability requirement. The core legal question considered in this judgment is whether various goods specified in the Schedule of the Central Excise Tariff are dutiable as such, or whether they qualify as 'excisable goods' under the Central Excises & Salt Act, 1944 only when they are marketable or capable of being marketed. This issue arises particularly in the context of intermediate products produced during a continuous manufacturing process, which are captively consumed and not sold in the market.The principal issue can be broken down as follows:Whether intermediate products, specifically phenol-formaldehyde resin solutions (referred to as 'resols' at the A-stage of manufacture), are 'goods' liable to excise duty under the Act.Whether the test of marketability or capability of being marketed applies to such intermediate goods, especially when they are captively consumed and not sold in the open market.The impact of amendments to the Central Excise Rules in 1979, which made captively consumed goods dutiable, on the requirement of marketability for excise liability.The interpretation of the tariff schedule entries, particularly Item 15A relating to plastics and resins, and whether chemical nomenclature alone suffices to impose excise duty irrespective of marketability.Issue-wise Detailed Analysis:1. Whether Intermediate Products (Resols) Constitute 'Goods' for Excise Duty:The legal framework centers on Section 2(d) of the Central Excises & Salt Act, defining 'excisable goods' as those specified in the Schedule, and Section 3, which levies duty on goods produced or manufactured. The Act does not define 'goods', but the Court referred to prior authoritative decisions interpreting 'goods' in the context of excise law.Precedents such as Union of India v. Delhi Cloth & General Mills Co. Ltd. and South Bihar Sugar Mills Ltd. v. Union of India emphasize that to be 'goods', an article must be capable of being bought and sold in the market - i.e., marketable. Manufacture implies transformation resulting in a new and distinct article known to the market.The appellants produced phenol-formaldehyde resin solutions (resols) at the A-stage, which were unstable, had a short shelf life, and were used in a semi-processed state without further treatment or stabilizers. The Assistant Collector found the solutions unstable and not marketable in their existing form. The Collector (Appeals) and the Tribunal had differing views: the Collector (Appeals) held that intermediate products must be marketable or known to the commercial community to be excisable; the Tribunal held that since the product answered the chemical description in the tariff schedule, it was liable to duty regardless of marketability.The Court examined chemical literature confirming that resols at the A-stage are fluid, soluble, and unstable, requiring stabilizers to be marketable. The appellants' product lacked such stabilization and had a limited usable life, dependent on controlled conditions. Therefore, the Court found it doubtful that these intermediate products were 'goods' in the ordinary commercial sense.2. Application of the Test of Marketability to Intermediate and Captively Consumed Goods:The Court reiterated that excise duty is levied on manufacture or production of goods that are useable, moveable, saleable, and marketable. The rationale is that excise duty is linked to goods entering the market for sale. Mere production of an intermediate product that is not marketable does not attract excise duty.Prior to 1979, captively consumed goods were not dutiable because they were not marketed. Amendments to Rules 9, 49, and 173(1) of the Central Excise Rules in 1979 extended duty to captively consumed goods by creating a statutory presumption that such goods satisfy the test of marketability. However, this presumption is rebuttable by proving that the goods are neither marketable nor capable of being marketed.The Court relied on precedents such as Bhor Industries Ltd. v. Collector of Central Excise and Collector of Central Excise v. Ambalal Sarabhai Enterprises, which emphasized that the test of marketability or capability to be marketed applies equally to captively consumed goods. In Bhor Industries, crude PVC films used as intermediates and captively consumed were held not to be excisable goods due to lack of marketability.Applying this principle, the Court held that the appellants' resin solutions, despite being captively consumed, were not marketable or capable of being marketed in their unstable form, and thus not liable to excise duty.3. Interpretation of Tariff Schedule Item 15A and Chemical Nomenclature:The Department argued that since 'resols' are specifically mentioned under Item 15A of the Tariff Schedule, the intermediate resin produced by the appellants was liable to duty once it was established chemically as resols, regardless of marketability. The Department contended that the test of marketability should not apply to chemical goods known by their chemical nomenclature.The Court rejected this argument, emphasizing that the tariff schedule's classification into specific and general categories does not override the fundamental requirement that goods must be marketable or capable of being marketed to attract excise duty. The Court noted that the Department's submission was contrary to established precedents, including Bhor Industries, which had already rejected the notion that mere chemical classification suffices to attract duty without marketability.The Court observed that the purpose of specifying goods in the Schedule is twofold: to fix the rate of duty and to identify goods liable to duty. However, even specified goods must meet the marketability test. The Court held that the Tribunal's finding that the product was liable to duty solely because it answered the chemical description under Item 15A was not well-founded.4. Application of Law to Facts and Treatment of Competing Arguments:The appellants demonstrated that the resin solutions were unstable, had a short shelf life, were used in a semi-processed state without further treatment, and were not marketed. The Department's evidence and arguments failed to establish that the products were marketable or capable of being marketed in their intermediate form.The Court gave weight to the chemical expert's opinion and the findings of the Assistant Collector and Collector (Appeals) regarding instability and non-marketable nature of the resin solutions. The Department's reliance on chemical nomenclature and tariff classification was held insufficient to override the fundamental test of marketability.The Court also considered the statutory amendments relating to captively consumed goods and clarified that the presumption of marketability created by the amendments is rebuttable. The appellants successfully rebutted this presumption by showing the resin solutions were not marketable.Conclusions:The Court concluded that the resin solutions at the A-stage (resols) produced by the appellants were not 'goods' liable to excise duty because they were not marketable or capable of being marketed in their intermediate, unstable form. The mere fact that these products answer the chemical description in the tariff schedule does not suffice to attract duty without satisfying the marketability test.The Court allowed the appeals, held that the resin at the A-stage could not be subjected to excise duty, and directed that the appellants were entitled to costs.Significant Holdings:'The provisions of the Act mandate that a finding that the goods are marketable is a prerequisite or 'sine qua non' for the levy of duty.''To become 'goods' an article must be something which can ordinarily come to the market to be bought and sold.''The duty is levied on goods. As the Act does not define goods, the legislature must be taken to have used that word in its ordinary, dictionary meaning. The dictionary meaning is that to become goods it must be something which can ordinarily come to the market to be bought and sold and is known to the market.''The test of marketability or capable of being marketed applies even to those goods which are mentioned in the tariff item.''The submission of learned counsel for the Department, therefore, that merely because the intermediate product manufactured by the appellants was resols and it is one of the items mentioned under Item 15A it was exigible to duty ignores the basic and primary test for exigibility of duty.''Even in respect of specified goods it could be established that it was not marketable or capable of being marketed, therefore, no duty was leviable on it.''The Tribunal's finding that once the product manufactured by the appellants answered the chemical description of the product under Tariff Item 15A it was assessable to duty whether it was marketable or not was thus not well founded.'