2001 (3) TMI 638 - Commissioner - Central Excise

Supreme Court: Charges for gas cylinder services not part of manufacturing, penalties unjustified

The Supreme Court held that charges for inspection, testing, and cleaning of gas cylinders are not part of the assessable value of gases and do not amount ... Manufacture - Valuation Issues Involved:1. Whether inspection, testing, and cleaning charges of gas cylinders are part of the assessable value of gases.2. Whether these activities amount to manufacture under Section 2(f) of the Central Excise Act, 1944.3. Whether the penalty imposed under Section 11AC and Rule 173Q of Central Excise Rules, 1944, is justified.Detailed Analysis:1. Whether inspection, testing, and cleaning charges of gas cylinders are part of the assessable value of gases:The case revolves around the inclusion of charges for inspection, testing, and cleaning of gas cylinders in the assessable value of gases manufactured by the appellants. The Department argued that these activities are essential and ancillary to the manufacturing process, thereby making the charges part of the assessable value. However, the appellants contended that these charges are separate from the manufacturing process and should not be included in the assessable value.The judgment references several case laws and a Board's circular to support the appellants' position. The Supreme Court in Vijayawada Bottling Co. Ltd. v. C.C.E. held that service charges for cleaning and examining bottles are not includible in the assessable value of aerated water. Similarly, in C.C.E., Bombay-II v. Century Spg. & Manufacturing Co. Ltd., it was held that service and maintenance charges of cylinders are not includible in the assessable value.The Board's Circular No. 7/89 dated 7-7-1989 clarified that charges for maintenance and service of durable and returnable containers are not to be included in the assessable value. Therefore, the judgment concludes that inspection, testing, and cleaning charges of gas cylinders do not form part of the assessable value of gases.2. Whether these activities amount to manufacture under Section 2(f) of the Central Excise Act, 1944:The Adjudicating Authority initially found that inspection, testing, and cleaning of gas cylinders amount to manufacture under Section 2(f) of the Central Excise Act, 1944, as these processes are mandatory and ancillary to the completion of the manufactured product. However, the judgment refutes this by stating that these activities are not directly related to the manufacturing process of gases but are rather preparatory steps to make the cylinders usable for filling gases.The judgment emphasizes that there is no direct or indirect link between the inspected, tested, and cleaned cylinders and the manufacturing process of gases. The cylinders are merely packing materials and their preparation does not constitute a manufacturing activity. The decision in C.C.E. v. Rajasthan State Chemical Works, which defines manufacturing as any essential activity related to the end result, was misinterpreted in this case.3. Whether the penalty imposed under Section 11AC and Rule 173Q of Central Excise Rules, 1944, is justified:Given that the inspection, testing, and cleaning charges are not part of the assessable value and do not amount to manufacture, the penalty imposed under Section 11AC and Rule 173Q is deemed unjustified. The judgment highlights that the appellants did not suppress any material facts and had their price list approved by the Department after proper verification.The Adjudicating Authority failed to justify how these charges form part of the manufacturing cost and profit of gases. The judgment concludes that the penalty imposed is legally incorrect and should be set aside.Conclusion:The judgment sets aside the Order-in-Original dated 9-5-2000, confirming that inspection, testing, and cleaning charges of gas cylinders do not form part of the assessable value of gases and do not amount to manufacture. Consequently, the penalties imposed are also unjustified. The appeal is allowed.