2026 (1) TMI 261 - AT - Central Excise

Processing bought-out parts into couplings-painting, assembly, bolts, bore/keyways-held 'manufacture' u/s2(f)(ii); demands time-barred, penalty dropped.

Processes undertaken on bought-out items to make couplings under Chapter 84-painting, assembly, fitting, fixing bolts/nuts, and making bore/keyways ... Process amounting to manufacture - activity of assembling the bought out items into a coupling and labelling - time limitation - penalty - HELD THAT:- It is observed that the goods assembled by the appellant in the present case fall under the Sub-Heading no. 84836010, which is not covered under Section 2(f)(iii) of the Central Excise Act, 1944 and accordingly, the process of labelling undertaken by the appellant did not amount to manufacture. In the present case, it is found that the goods in question fall under Chapter 84. The appellant has undertaken processes such as painting, assembly, fixing of bolts & nuts, making bore & key way, etc. Some of these activities were undertaken by the appellant by engaging ‘job workers’. In terms of the aforementioned Section Note 6, read with Section 2 (f)(ii) of the Central Excise Act, 1944, it is observed that the processes undertaken makes the product complete and marketable as per the requirement of the customers. Therefore, by virtue of Section 2(f)(ii) of the Central Excise Act, 1944 read with Note 6 reproduced above, we hold that the processes of assembling, painting, fitting, fixing bolts nuts, making of bore and key ways etc., undertaken by the appellant to complete the Couplings of various kinds falling under Chapter 84 of the Central Excise Tariff Act, 1985, amounted to ‘manufacture’. Thus, on merits, the appellant is liable to pay central excise duty on the said goods manufactured by them. Extended period of limitation - suppression of facts or not - HELD THAT:- The appellant have not suppressed any information from the Department. The Department was in fact well aware of the activities undertaken by the appellant from 2006 itself. It is observed that the entire demand raised on the basis of first audit memo was raised and confirmed in the impugned order by invoking extended period limitation. As the appellant has not suppressed any information, it is held that the entire demand confirmed on the basis of the first Audit Memo is not sustainable - the appellant have not suppressed any information from the Department. Accordingly, the demand of central excise duty confirmed in the impugned order, on the basis of second audit objection, by invoking extended period of limitation is not sustainable. Levy of penalty - HELD THAT:- As there was no suppression of fact with intention to evade the tax established in this case, no penalty is imposable on the appellant. Accordingly, the penalty imposed on the appellant in the impugned order stands set aside. The processes of assembling, painting, fitting, fixing bolts nuts, making of bore and key ways etc., undertaken by the appellant to complete the Couplings of various kinds falling under Chapter 84 of the Central Excise Tariff Act, 1985, amounts to ‘manufacture’ - the entire demand confirmed on the basis of the first Audit Memo, for the period 2005-06, is not sustainable on the ground of limitation and hence, the same is set aside - penalty imposed on the appellant stands set aside. Appeal disposed off. Issues: (i) Whether assembling, painting, fitting, fixing bolts & nuts, making bore and key ways on bought-out coupling components amounts to 'manufacture' under Section 2(f) of the Central Excise Act, 1944; (ii) Whether the demand confirmed on the basis of the first audit memo (period 2005-06) is barred by limitation; (iii) Whether penalty imposed under Rule 25(1) read with Section 11AC is sustainable where no suppression is proved.Issue (i): Whether the processes of assembling and related operations on bought-out components convert the goods into manufactured goods under the Central Excise law.Analysis: The goods fall under Chapter 84. Section 2(f)(iii) treats labelling/packing as manufacture only for goods in the Third Schedule; that provision does not cover the goods in question. Note 6 to Section XVI and Section 2(f)(ii) address conversion of an incomplete/unfinished article having the essential character of the finished article into a complete finished article. The processes undertaken (assembly, painting, fitting, fixing bolts and nuts, making bore and key ways), including work through job workers, rendered the products complete and marketable to customer specification.Conclusion: In favour of Revenue.Issue (ii): Whether the demand for duty based on the first audit memo (2005-06) is time-barred because the Department was aware of the facts from 2006 and did not promptly raise demand.Analysis: The audit memo raising the issue was communicated in August 2006 and the assessee responded and paid part of the duty. The Department did not raise a demand immediately and raised the same issue again only during the second audit in 2009. There is no finding of suppression of facts by the assessee. The extended period of limitation invoked to confirm the entire demand arising from the first audit memo is therefore not sustainable.Conclusion: In favour of Assessee.Issue (iii): Whether penalty under Rule 25(1) read with Section 11AC can be sustained where no suppression or intention to evade tax is established.Analysis: The record shows disclosure to audit and partial voluntary payment; there is no finding of suppression or evasion. Penalty requires culpable suppression or similar mens rea which is not made out on the facts.Conclusion: In favour of Assessee.Final Conclusion: The processes undertaken constitute 'manufacture' for central excise liability purposes, but the demand based on the first audit memo is time-barred and the penalty is set aside; certain amounts were admitted by the assessee and remain payable with interest while other portions of the demand are disallowed on limitation grounds, resulting in a partly favourable outcome to Revenue.Ratio Decidendi: Where bought-out components are subjected to operations that convert an incomplete or unfinished article having the essential character of the finished article into a complete or finished article (per Note 6 to Section XVI and Section 2(f)(ii) of the Central Excise Act, 1944), those operations amount to 'manufacture' for central excise purposes; absence of suppression precludes invocation of extended limitation and the imposition of penalty.