2025 (11) TMI 500 - AT - Central Excise

Cut-to-size finger jointed panels supplied to job workers not treated as semi-finished furniture under Chapter 9403; excise demand quashed

CESTAT held that the appellant's supply of cut-to-size Finger Jointed Edge Glued Panel boards and laminated beams to job workers did not constitute supply ... Supply of semifinished furniture to the job worker for completing the manufacture of furniture - Finger Jointed Edge Glued Panel (FJEGP) boards and laminated beams cut into specified sizes supplied along with the components/ hardware to the job workers for the manufacture of furniture - activity of lacquering, finishing and packing after affixation of brand name of 'Rubco' can be considered as the hired labourer of the Appellant or not - liability to pay Central Excise Duty under Central Excise Tariff Heading 9403 6000 of the Central Excise Tariff Act, 1985. HELD THAT:- In this case the appellant is supplying the Finger Jointed Edge Glued Panel (FJEGP) boards and laminated beams cut into specified sizes along with the components/ hardware to the 9 (nine) job workers and getting the furniture manufactured and the furniture lacquering, finishing and packing after affixation of the brand name 'Rubco' is undertaken by M/s. Pattiyan Social Service Society and thereafter the manufactured furniture is sold through the branch offices of the appellant. The appellant contends that they are not manufacturing furniture and there are only trading the furniture manufactured by the job workers and finished and labelled by M/s. Pattiam Social Service Society. It is found that prior to 01.08.2007 the appellant was manufacturing the furniture in their factory and post 01.08.2007 they were supplying the cut to size Jointed Edge Glued Panel (FJEGP) boards and laminated beams to the job workers for the manufacture of furniture as per their design/specifications. The department contends that the cutting of Jointed Edge Glued Panel (FJEGP) boards and laminated beams to the required sizes amounts to manufacture and that the appellant is supplying semi-finished furniture to the job workers and therefore they are liable for payment of applicable central excise duty. It is found that the appellant has been maintaining different accounts with respect to the furniture manufactured in their factory and the furniture sold through their branch offices manufactured by the job workers and finished and packed by M/s. Pattiam Social Service Society. The show cause notices were issued to the appellant after they have adopted the system of getting the furniture manufactured by the job workers. The adjudicating authority after examining the issue in detail has dropped the show cause notices issued by the department. The findings of the adjudicating authority are detailed at Para 3 & 4, supra. However department has appealed against the order of the adjudicating authority dropping the show cause notices and also issued periodical notices for the subsequent periods. It is found that the subsequent periodical show cause notices were also adjudicated and the adjudicating authority confirmed the duty demand along with interest and imposed penalties. The contentions raised by the appellant that the furniture is manufactured out of the material supplied by them to the job workers and that the job workers are eligible for the SSI exemption vide N/N. 8/2003CE dated 01.03.2003 and M/s. Pattiam Social Service Society is also eligible for exemption since they are located in a rural area are tenable, since it is found that the supply of cut to size Finger Jointed Edge glued Panel (FJEGP) boards and laminated beams to the job workers cannot be considered as supply of semi-finished furniture therefore the appellant is not manufacturing furniture to attract levy of central excise duty. The impugned orders of the Commissioner (Appeals) confirming the demand along with interest and penalty are not tenable and are liable to be set aside - Appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether boards and laminated beams, manufactured as Finger Jointed Edge Glued Panels (FJEGP) and cut-to-size, supplied along with components/hardware to independent job-workers amount to supply of semi-finished furniture so as to attract central excise duty on finished furniture under Chapter Heading 9403. 2. Whether the entity performing lacquering, finishing, labelling and packing after affixation of the brand name constitutes hired labour of the supplier (thereby making the supplier the manufacturer) or is an independent job-worker/manufacturer liable for duty. 3. Whether job-workers who manufacture and clear furniture under their own or another's brand name qualify for Small Scale Industry (SSI) exemption under Notification No. 8/2003-CE (including applicability of sub-clause (4)(c) for units situated in rural areas). 4. Whether demands of duty, interest and imposition of penalties founded on the view that the supplier was the manufacturer are sustainable where records show separate treatment of factory-manufactured goods and goods made by job-workers. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Characterisation of cut-to-size FJEGP boards and laminated beams: manufacture versus raw material/supply Legal framework: Central Excise law distinguishes manufacture of excisable goods from supply of raw or component materials; liability to pay duty depends on whether activity or treatment results in a new excisable product. Rules concerning accountal, invoicing and removal from factory (Central Excise Rules) are relevant for record-keeping and enforcement. Precedent treatment: Authorities and Tribunals have held that whether a job-worker or principal is the manufacturer depends on the degree and locus of processing and control; cited precedents (Motor Industries, Hindustan Zinc, Pennar Industries, Birla Corporation, and Ujjagar Prints) establish that use of job-worker's own capital and workforce and independent operation support treating the job-worker as manufacturer rather than hired labour. Interpretation and reasoning: The Tribunal found that cutting FJEGP boards and beams to specified sizes, even when done prior to job-worker processing, does not convert those panels/beams into furniture or semi-finished furniture for excise purposes. The material supplied continued to be identifiable as FJEGP boards and laminated beams. The supplier maintained separate accounts and invoice series for factory-manufactured items and for goods sold through branch/depot (i.e., trading stock). The factual matrix showed that the job-workers performed the manufacturing processes using their own facilities and labour, and that finishing tasks performed by third parties occurred after assembly by the job-workers. Ratio vs. Obiter: Ratio - cutting to size of panels/beams does not per se amount to manufacture of furniture; supply of such cut-to-size panels with components to independent job-workers is supply of raw/input material and not semi-finished excisable furniture. Obiter - observations on business reasons for outsourcing cutting/finishing and on general record-keeping practices. Conclusions: The Tribunal concluded that the supplies of cut-to-size FJEGP boards and laminated beams cannot be considered semi-finished furniture liable to central excise duty as manufactured goods of the supplier. Issue 2 - Status of the entity performing lacquering, finishing, labelling and packing (hired labour v. independent job-worker/manufacturer) Legal framework: Determination of 'manufacturer' versus 'hired labour' hinges on independence of the entity (own capital, workforce, registration), contractual relationships, control over process and locus of manufacturing operations. The distinction affects on whom duty liability falls. Precedent treatment: The Tribunal relied on established principles from cited authorities (Motor Industries; Hindustan Zinc; Pennar Industries; Birla Corporation), which hold that an entity employing its own machinery and workforce, operating independently and undertaking processing for multiple clients, qualifies as a manufacturer/job-worker and not as hired labour. Interpretation and reasoning: The Tribunal found that the finishing and lacquering societies (the entities performing lacquering/finishing/packing/branding) were independent social service societies registered as micro manufacturing units, possessing certification/permission from the Department of Industries to undertake lacquering. They had independent registrations and were doing work for multiple clients, entered into contractual arrangements with furniture manufacturers, and carried out processes at their own premises. There was no evidence of employer-employee relationship or total control by the supplier. The processing by these societies occurred after the job-workers had manufactured the furniture. Ratio vs. Obiter: Ratio - the entities undertaking lacquering, finishing, labelling and packing are independent job-workers/manufacturers and not hired labour of the supplier; therefore duty liability does not attach to the supplier on that ground. Obiter - specific factual details about timing of processing relative to outsourcing and prior in-house activity. Conclusions: The Tribunal concluded the finishing/lacquering entities are independent job-workers (manufacturers in respect of the goods they process) and not hired labour, so the supplier cannot be treated as the manufacturer on that basis. Issue 3 - Applicability of SSI exemption (Notification No. 8/2003-CE) including sub-clause (4)(c) for rural units Legal framework: Notification No. 8/2003-CE grants SSI exemption subject to specified conditions, including a general bar on exemption where goods bear another person's brand/trade name, but sub-clause (4)(c) carves out an exception for goods manufactured by units situated in rural areas. Precedent treatment: The Tribunal applied the Notification's text and accepted the appellant's position that units located in rural areas qualify for the sub-clause (4)(c) exception even if the goods bear another's brand name. Interpretation and reasoning: The Tribunal examined factual findings that several job-workers (including the finishing societies) were located in rural areas and were registered micro manufacturing units. Where goods cleared by those units bore the supplier's brand but the units were situated in rural areas, sub-clause (4)(c) enabled SSI exemption to apply. The Tribunal accepted that the job-workers were the manufacturers and therefore eligible for the exemption where the statutory conditions were met. Ratio vs. Obiter: Ratio - SSI exemption under Notification No. 8/2003-CE, including the rural-area exception in sub-clause (4)(c), applies to the job-workers whose units are situated in rural areas even when goods bear another's brand name, relieving those units (and accordingly not the supplier) from duty liability for such clearances. Obiter - policy observations on the scope of the exemption. Conclusions: The Tribunal held the SSI exemption was tenable for the job-workers situated in rural areas and therefore the supplier could not be fastened with duty on that ground. Issue 4 - Sustenance of demands for duty, interest and penalty where records and factual matrix show separate accounts and independent job-worker manufacture Legal framework: Provisions imposing duty, interest and penalties require proof of manufacture by the assessee or contravention of record-keeping obligations; penalty provisions presuppose mens rea or culpable violation of statutory obligations. Precedent treatment: Prior decisions cited by the appellant support the proposition that where the job-worker is an independent manufacturer and proper records are maintained for excisable and trading activities, duty and penalty cannot be fastened on the principal merely because manufacturing is outsourced. Interpretation and reasoning: The Tribunal reviewed the adjudicating authority's orders and found that the supplier maintained separate records and invoice series for goods manufactured in-house and goods sold as trading goods (manufactured by job-workers). There was no evidence of suppression, intent to evade duty, or contravention of relevant Central Excise Rules in the treatment of job-worker manufactured goods. Given the factual findings that the supplier did not perform the manufacturing steps that create excisable finished furniture, the demands of duty, interest and penalties against the supplier were unsustainable. Ratio vs. Obiter: Ratio - demands of duty, interest and penalty against the supplier were not tenable where independent job-workers manufactured the furniture, SSI exemption applied to those manufacturers where applicable, and the supplier maintained proper and separate records. Obiter - comments on the inapplicability of certain procedural rule allegations absent evidence of deliberate concealment. Conclusions: The Tribunal set aside the impugned orders upholding demands and penalties against the supplier, allowed the appeals and granted consequential relief as per law, holding that duty, interest and penalty as confirmed by the lower appellate authority were not tenable on the facts and law before the Tribunal.