Excise duty on unstable intermediate goods stored during manufacturing-marketability test applied; extended limitation u/s11A proviso rejected.

Intermediate products arising during manufacture were alleged to attract excise duty and the revenue invoked the proviso to s.11A on the basis of suppression due to non-filing of a classification list and incomplete disclosure about temporary storage. The SC held that excisability requires manufacture and marketability, and crude/unstable intermediates requiring further processing are not marketable merely because they fall in the tariff. On limitation, the SC found no fraud, collusion, wilful misstatement or suppression: the department had inspected the premises, knew intermediates were being stored, and similar goods of a sister concern were not being assessed, supporting bona fide belief. The extended period was therefore unavailable, and the demand failed.

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Issues Involved:
1. Whether excise duty is payable on intermediate products.
2. Whether the extended period under Section 11A of the Central Excise and Salt Act, 1944, is applicable.

Issue-wise Detailed Analysis:

1. Whether excise duty is payable on intermediate products:

The appellants manufacture various drugs, and during this process, intermediate products come into existence. The primary question is whether these intermediate products are subject to excise duty. The appellants argued that the intermediate products are in a crude and unstable form, with a shelf-life of only a few hours unless further processed and purified. They also submitted affidavits from traders to show that these products are not marketable.

The court reviewed several precedents to establish the law on excisability and marketability of intermediate products:

- Union Carbide India Limited v. Union of India and Others: It was held that excise duty is applicable only if the article is manufactured and capable of being sold to a consumer. The burden of proving marketability lies with the department.

- Bhor Industries Ltd. v. Collector of Central Excise: It was determined that goods must be known in the market and capable of being sold to be excisable. The department must provide proof of marketability.

- Collector of Central Excise, Baroda v. M/s. Ambalal Sarabhai Enterprises (P) Ltd.: The court held that goods with unstable character that are not practically marketable are not excisable.

- Union of India v. Delhi Cloth & General Mills Co. Ltd.: The rationale for levying excise duty is that the goods must be a distinct commodity known in common parlance for buying and selling.

- Collector of Central Excise, Baroda v. United Phosphorus Ltd.: The court reiterated that the burden of proving marketability is on the department.

The court concluded that the law requires goods to be manufactured and marketable to be excisable. Goods in a crude or unstable form requiring further processing before being marketable are not considered marketable goods merely because they fall within the Excise Act's schedule.

The court found that the department did not make efforts to ascertain whether the intermediate products were available in the market or if they were the same as those produced by the appellants. The chemical analyser's report was based on a write-up provided by the appellant and lacked independent verification. The court held that the department failed to discharge its burden of proving marketability, and the intermediate products manufactured by the appellants were not established as marketable.

2. Whether the extended period under Section 11A of the Central Excise and Salt Act, 1944, is applicable:

The appellants contended that the extended period under Section 11A was not available to the Revenue. The court reviewed the law on the subject:

- Collector of Central Excise, Hyderabad v. M/s. Chemphar Drugs and Liniments: The court held that the extended period requires a deliberate act of fraud, collusion, misstatement, suppression, or contravention of the Act. Mere inaction or failure is insufficient.

- M/s. Padmini Products v. Collector of Central Excise, Bangalore: It was held that mere failure to pay duty or take out a license does not amount to fraud, collusion, misstatement, suppression, or contravention of the Act.

- Tamil Nadu Housing Board v. Collector of Central Excise, Madras: The court held that the onus is on the department to prove a deliberate act of fraud, collusion, misstatement, suppression, or contravention of the Act.

- Collector of Central Excise v. H.M.M. Limited: The court held that a show cause notice must specifically state the default committed by the assessee.

The appellants argued that they were under a bona fide belief that the intermediate products were not excisable, supported by the fact that a sister concern manufacturing identical products was not issued a show cause notice. The court found that the department did not provide sufficient grounds to invoke the extended period of limitation. The mere non-filing of the classification list was not sufficient to invoke the extended period.

The court concluded that the extended period of limitation under the proviso to Section 11A was not available. Consequently, both appeals were allowed, and the demands made in the show cause notices were set aside. There was no order as to costs.

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