2004 (11) TMI 107 - SC - Central Excise

Duty demand upheld as cutting jumbo rolls constituted manufacture; records showed duty-inclusive pricing and fraud claims rejected

SC upheld the duty demand, finding the activity produced a distinct commercial product and therefore constituted manufacture. The Court affirmed the ... Manufacture - processing - commercial transformation into a new and distinct commodity - suppression of facts attracting extended period of limitation - Rule 9(2) read with proviso to Section 11A - extended limitation for contravention with intent to evadeManufacture - processing - commercial transformation into a new and distinct commodity - Cutting jumbo rolls of typewriter/telex ribbon into standard lengths and spooling them amounts to manufacture attracting excise duty - HELD THAT: - The Collector and the Tribunal found that jumbo rolls supplied to the assessee were fed into cutting and spooling machines to produce ribbons of standard lengths wound on metal spools; the resultant spooled ribbons have a distinct name, function, use and market and are not interchangeable with the original jumbo rolls. The Court applied the established test that manufacture occurs when processing effects a transformation so that commercially the product is recognized as a new and distinct article. The factual findings that the smaller spooled ribbons acquired a different commercial identity, were produced in a separate unit with distinct machinery and workforce, and that the jumbo rolls could not be used for the same purpose after cutting, were held to be on terra firma and not susceptible to interference. Reliance on precedents emphasising that not every change is manufacture was considered, but the cumulative effect of the processing here was held to produce a commercially distinct commodity and therefore constitute manufacture. [Paras 15, 16]The cutting and spooling process constituted manufacture and excise duty was payable on the spooled ribbons; the Collector's and CEGAT's findings on this point are affirmed.Suppression of facts attracting extended period of limitation - Rule 9(2) read with proviso to Section 11A - extended limitation for contravention with intent to evade - Extended period of limitation under the proviso to Section 11A (invoked via Rule 9(2)) was correctly applied on finding of suppression/contravention with intent to evade - HELD THAT: - CEGAT and the Collector concluded there was contravention of Rule 9(1) and deliberate non-disclosure of manufacturing activity at the Madras unit, supported by seized price lists, gate passes and invoices showing knowledge that identical goods were manufactured elsewhere and that prices were quoted inclusive of excise duty. The Court reiterated that to invoke the proviso to Section 11A there must be positive conduct such as suppression or contravention with intent to evade; the Collector's factual determination that the assessee deliberately withheld material facts and did not seek departmental clarification despite available government orders was held to establish the requisite suppression and intent. On these findings the extended limitation was held to be invocable and not displaced by assertions of bona fide doubt. [Paras 17, 19, 20, 21]The invocation of the extended period of limitation for assessment was upheld on the factual finding of suppression and contravention with intent to evade.Final Conclusion: Civil Appeal No. 4322 of 1999 is dismissed (Collector's demand and CEGAT's affirmance sustained). The connected appeals (challenging the divergent New Delhi Bench view) are allowed. No order as to costs. Issues Involved:1. Legality of the duty demand on typewriter/telex ribbons.2. Whether the process of cutting and spooling ribbons amounts to manufacturing.3. Applicability of extended period of limitation under Section 11A of the Central Excises and Salt Act, 1944.4. Entitlement to Modvat credit.5. Allegations of suppression of facts and intention to evade duty.Detailed Analysis:1. Legality of the Duty Demand on Typewriter/Telex Ribbons:The Tribunal held that the demand for duty raised in respect of typewriter/telex ribbons was in order. The Collector of Central Excise, Chennai, issued a show cause notice proposing the levy of duty on typewriter ribbons cleared by the assessee during the period 1-3-1988 to 30-9-1992. The duty was affirmed under Rule 9(2) of the Central Excise Rules, 1944, read with the proviso to sub-section (1) of Section 11A of the Act. The CEGAT upheld the Collector's findings, concluding that the process of cutting and spooling ribbons amounted to manufacture, making the ribbons liable for excise duty.2. Whether the Process of Cutting and Spooling Ribbons Amounts to Manufacturing:The Tribunal and the Collector concluded that the process of cutting ribbons into smaller sizes and spooling them on automatic spooling machines amounts to manufacturing. The conversion is done as per consumer requirements, and the product becomes a saleable commodity only after spooling. The resultant product is distinct, identifiable, and has a separate market. The process results in a new and distinct identity, making the ribbons commercially distinct from the jumbo rolls received. The Supreme Court affirmed this view, citing various precedents that define manufacturing as a transformation of an article into a new commodity with a distinct name, use, and character.3. Applicability of Extended Period of Limitation under Section 11A of the Central Excises and Salt Act, 1944:The Tribunal concluded that there was a clear contravention of Rule 9(1) with the intention to evade duty, justifying the application of the extended period of limitation. The Collector observed that the assessee had clear knowledge of the excisability of the goods and deliberately suppressed material facts to evade payment of duty. The Supreme Court upheld this finding, noting that the extended period of limitation was applicable due to the suppression of facts and the intention to evade duty.4. Entitlement to Modvat Credit:The assessee contended that the inputs/raw materials used had suffered excise duty and sought Modvat credit. However, the Collector rejected this plea as the required documentary evidence was not produced. The Tribunal accepted that the manufacturers might have operated under exemption available to SSI Units, resulting in 'nil' duty. The Supreme Court noted that once the jumbo rolls are cut into smaller sizes, they lose their earlier identity, and the factual findings supported the conclusion that the process resulted in a new commercial product.5. Allegations of Suppression of Facts and Intention to Evade Duty:The Collector and the Tribunal found that the assessee had suppressed facts relating to manufacturing and removal of goods with the intention to evade duty. The Supreme Court upheld this finding, noting that the assessee did not inform the Department about the manufacturing activity at their Madras unit and deliberately avoided paying excise duty. The conduct of the assessee indicated a lack of bona fides, and the extended period of limitation was rightly invoked.Conclusion:The Supreme Court dismissed Civil Appeal No. 4322/1999, upholding the Tribunal's decision that the process of cutting and spooling ribbons amounts to manufacturing, making the ribbons liable for excise duty. The extended period of limitation was applicable due to the suppression of facts and intention to evade duty. The connected appeals were allowed, and the duty demand was reinstated. No order as to costs was made in these appeals.