Manufacture from SKD assembly upheld, while part of the demand was time-barred and penalty reduced for lack of suppression.

Assembling imported SKD motor cycle components into a complete motor cycle was treated as manufacture because the process converted incomplete parts into a distinct commercial product with a new name, character and use; the finding was upheld against the assessee. The demand was partly time-barred because the department had prior knowledge of the assembly activity, so the extended period under limitation could not be invoked for the earlier part of the period. Penalty under section 11AC was unsustainable in the imposed amount in the absence of established suppression and was reduced. The Additional Commissioner was held competent to adjudicate the matter within the applicable monetary limits.

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Issues: (i) whether assembling motor cycle parts imported in SKD condition amounts to manufacture under Section 2(f) of the Central Excise Act, 1944; (ii) whether the demand was barred in part by limitation under Section 11A of the Central Excise Act, 1944; (iii) whether penalty under Section 11AC of the Central Excise Act, 1944 was imposable; and (iv) whether the Additional Commissioner lacked competence to adjudicate the matter.

Issue (i): whether assembling motor cycle parts imported in SKD condition amounts to manufacture under Section 2(f) of the Central Excise Act, 1944.

Analysis: The imported goods were only component parts, and the assembly activity in the factory brought into existence a distinct commercial product having a new name, character and use. Note 6 to Section XVII of the Central Excise Tariff Act, 1985 treats conversion of an incomplete or unfinished article having the essential character of the complete article into a complete or finished article as manufacture. The fact that the goods were treated as complete motor cycles for customs purposes did not alter their physical character as components for central excise purposes.

Conclusion: The assembly amounted to manufacture; this issue was decided against the assessee.

Issue (ii): whether the demand was barred in part by limitation under Section 11A of the Central Excise Act, 1944.

Analysis: The correspondence on record showed that the department was aware that the imported SKD motor cycle components were being assembled and sold. In such circumstances, the extended period was not available. Since the show cause notice was issued on 19-12-1997 for the period July 1996 to November 1997, the demand for the earlier part of the period was beyond limitation.

Conclusion: The demand was partly time-barred; this issue was decided in favour of the assessee.

Issue (iii): whether penalty under Section 11AC of the Central Excise Act, 1944 was imposable.

Analysis: As the department was already aware of the relevant facts, suppression was not established. In the absence of suppression, the statutory basis for penalty under Section 11AC was not made out. The penalty already imposed was also considered excessive in the facts of the case.

Conclusion: Penalty under Section 11AC was not sustainable in the amount imposed and was reduced; this issue was decided in favour of the assessee.

Issue (iv): whether the Additional Commissioner lacked competence to adjudicate the matter.

Analysis: The monetary limit for adjudication was to be examined case-wise, and the show cause notice decided by the Additional Commissioner fell within his competence under the Board's circular. Clubbing of notices was not accepted as a ground to invalidate jurisdiction.

Conclusion: The adjudicating authority was competent; this issue was decided against the assessee.

Final Conclusion: The appeal succeeded only to the extent of limitation and penalty, while the finding that assembly of SKD kits amounted to manufacture was upheld.

Ratio Decidendi: Assembly of imported SKD components into a complete article amounts to manufacture where the process converts an incomplete or unfinished article having the essential character of the finished article into a commercially distinct finished product, and the extended limitation period cannot be invoked without suppression of facts.

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