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REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.6561 OF 2004

M/S. ESCORTS LTD.          …APPELLANT               

VERSUS

COMMISSIONER OF CENTRAL  EXCISE, FARIDABAD        ...RESPONDENT

WITH

CIVIL APPEAL NO.457 OF 2006

WITH

CIVIL APPEAL NOS.9469-9470 OF 2010

J U D G M E N T

R.F. Nariman, J.

C.A. NO.6561 OF 2004

1. The  present  case  raises  an  interesting  question  as  to

whether  excise  duty  is  payable  on  an  intermediate  product,

namely,  Transmission  Assembly  which  comes  into  existence

during the manufacture of tractors made by the appellant. The

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period involved is January 1996 to May 1998.  The tractors that

are manufactured have engines that are below 1800 CC and

are covered by an exemption notification 162/1986.  We are

informed, however, that after 1.6.1998 this exemption has gone

and even tractors of an engine capacity of less than 1800 CC

now have to bear excise duty.  

2. By a show cause notice dated 31.1.2001, the Department

for  the  period  aforesaid  relied upon evidence  in  the form of

statements made by various officers of the appellant and other

documentary evidence to show that Transmission Assemblies

of tractors was a commodity known to the market as such and,

therefore,  came  into  the  category  of  excisable  goods.   The

respondent by their reply dated 1.10.2001 denied this stating

that  no separate product known as Transmission Assemblies

came  into  existence  which  is  known  to  the  commercial

community  as  such  and,  therefore,  there  was  neither

manufacture  nor  marketability  of  the  same.  In  the  reply,

however, various statements were made which, in fact, amount

to  admissions, that Transmission Assembly of a tractor is, in

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fact, known to the market as such.  These admissions are set

out hereinbelow:

“16. It  is  submitted  that  transmission  assemblies are  in  fact  interchangeable.   The  Transmission Assembly can be used in both dutiable as well as exempt  tractors,  for  example  in  Model  No.325 (exempt  tractor)  and  Model  No.335  (dutiable tractor).  Therefore, it serves as a common input for both tractors.  Therefore, in terms of provisions of Rule  57CC  MODVAT credit  is  admissible  on  the common  inputs  which  form  part  of  transmission assemblies in turn used in the manufacture of both types of Tractors.

47.1. The  department  has  relied  upon  the case of M/s International Tractors Ltd., Hoshiarpur who are supplying transmission assemblies.

(a) The Notice contends that M/s. Mahindra & Mahindra have not purchased any transmission assemblies for use in tractors from any other unit. Further, they have not supplied or transferred any transmission  assemblies  to  any  other  person. However,  they  have  been  supplying  the transmission assembly to their own units at Nagpur and Rudhrapur for manufacturing tractors.  

(b) It is submitted that this letter can at most lead to a conclusion that the transmission assembly  made by M & M is marketable.  

50. The show cause notice has placed reliance on certain other web site to contend that the Hoovers on-line web site and Carraro web site shows that transmission assemblies are marketed and sold.  It is  submitted  that  while  there  might  be  mass production of transmission assemblies marketed by Hoovers  Carraro,  etc.,  the  product  specific transmission  assemblies  of  the  noticees  never

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come  to  the  market  and  have  never  been  sold. Hence, there can be no question of demanding duty on  the  transmission  assemblies  made  on  the assembly line and used for assembling the tractors in the noticees factory.  These are not marketable and hence, are not goods and there is no removal under Rule 9 and 49.”

3. The Commissioner by an order dated 4.10.2002 held as

follows:-

“41. I find that the issue has been well examined in the  notice.  Noticee's  plea  that  the  impugned transmission  assemblies  are  not  goods  as transmission assemblies do not have independent existence  is  without  merit.  Noticee  in  fact  itself clears  such  goods  on  payment  of  duty  to  ECEL, Transmission  assemblies  are  well  known  in  the commercial world and are very much dealt with as a commercial commodity. The end use as put forth in the notice amply proves it. To reiterate transmission assemblies  are  cleared  by  the  noticee  to  ECEL; noticee  company's  sister  concern  (Farmtrac Division)  imported  transmission  assemblies  from Carraro  Spa  of   Italy  and  also  purchased transmission assemblies from Carraro India Limited, Pune;  M/s  TAFE,  Chennai,  International  Tractors Ltd.,  Hoshiarpur, Mahindra & Mahindra all  deal  in transmission  assemblies  and  further  information regarding  transmission  assembly  availability  as such is also available on internet.  

42.  Noticee's  submission  that  no  identifiable transmission assembly emerges in their production of Tractors is also incorrect. They are manufacturing transmission assemblies for their tractors as well as for  ECEL.  Of  course  transmission  assemblies

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meant for different models of machines/vehicles will be of slightly different specifications from each other but  as  a  whole  transmission  assemblies  are  one identifiable  commercial  product  as  already discussed. I also note that the concerned persons of the noticee company themselves have admitted that transmission assemblies do emerge as identifiable goods. Statements of  Sh.  K.K.  Kachroo,  Manager Excise, Shri Vinod Ahuja, Plant Head, Sh. Ramesh Kumar  Khurana,  Chief   Manager  Production  all admit this fact. Even otherwise manufacturing of the tractors in the noticee's factory cannot be accepted as  such  a  continuous  process  in  which  raw materials  are fed in  the machine at  one end and final  product  emerges  at  another. Only  in  such  a case, can it be believed that there is no independent identifiable  intermediate  stage  of  goods.   The procedure  as  adopted  by  the  noticee  is  basically assembly  of  various  parts  &  components  and  of course all  these parts  and accessories which are manufactured  by  the  noticee  in  their  factory  as identifiable  goods  are  excisable  themselves. Therefore,  the  emergence  of  I.C.  Engines  is excisable  and  so  also  the  emergence  of  the transmission assembly is also excisable. In fact in the case of Pratap Rajashtan Copper Foils Vs. CCE -1999(109)  ELT 288  (T)  it  was  held  that  duty  is payable  on  intermediate  products  even  if  some minor  processes  were  not  carried  to  make  the product marketable.  

43. I also find that the noticee in their reply has laid great emphasis on their argument that their tractors are  manufactured  as  a  result  of  integrated manufacturing  process  on  the  assembly  line  and therefore there is no removal of intermediate goods, if  any, in  terms  of  Rule  9  or  Rule  49.  I  have  to reiterate that noticee's plea is inadmissible. In terms of   Rule  9  and  49,  intermediate  goods  emerging during  such  integrated  assembly  line  production

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would  be  deemed  to  have  been  cleared  for production  and  therefore  liable  to  Central  Excise duty. Besides facts of the case are entirely different as  has  been  stated  by  the  noticee  company's concerned persons in their statements. Assembly of a  vehicle  or  machine  on  line  or  otherwise  still remains  assembly  i.e.  various  parts  and components  are  either  manufactured  first  by  the assessee himself or procured from outside and then assembled  to  produce  the  resulting  machine.  All excisable goods emerging during such assembly or production  are  themselves  excisable  as intermediate goods meant for captive consumption unless  or  until  specifically  exempt.  Transmission assembly  is  one  such  excisable  intermediate product  and  therefore  its  duty  liability  is  obvious. Therefore,  I  hold  that  these  are  independent, identifiable,  commercial  goods  capable  of  being bought and sold in the market and, therefore, are excisable  goods  leviable  to  Central  Excise  duty under  Section 3  of  the Central  Excise  Act,  1944. That impugned transmission assemblies have been used captively in production of Tractors cleared at Nil  rate of  duty is not denied by the noticee. The captive  consumption  exemption  Notification  No. 67/95-C E dated 16.3.95, as amended, debars such intermediate products used in production of exempt final  products,  from the duty exemption under the notification.  As the final  product i.e.  Tractors were exempt, the impugned transmission assemblies did attract  Central  Excise  duty.  I  hold  that  all  the observations  in  the  show  cause  notice  regarding excisability  of  the  impugned  goods  are  correct.  I also  note  that  as  far  as  the  classification  of  the product  is  concerned,  the  same  has  not  been challenged by the noticee.”

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4. By  the  impugned  judgment  dated  27.5.2004,  CESTAT

dismissed the appeal holding:

“6. We have considered the submissions of both the sides.  The  Central  Excise  duty  is  leviable  on goods manufactured in India. "Manufacture" as per the judgment of the Supreme Court  in the case of Union of  India vs. Delhi Cloth and General Mills, 1977  (1)  ELT (J  199)  "implies  a  change  ....  and there must be transformation; a new and different article  must  emerge  having  a  distinctive  name, character or use."  

The  Supreme  Court,  after  referring  to  various judgments on the concept of the manufacture, has laid down a two fold test for deciding whether the process is that of "manufacture" in Union of India vs.  J. G. Glass, 1998 (97) ELT 5(S.C.) as follows, "First,  whether  by  the  said  process  a  different commercial  commodity  comes  into  existence  or whether  the  identity  of  the  original  commodity ceases to exist;  secondly, whether the commodity which  was  already  in  existence  will  serve  no purpose but for the said purpose.”  We find that this two fold tests laid down by the Supreme Court is satisfied  in  respect  of  the  transmission  assembly coming  into  existence  during  the  course  of manufacture  of  tractors  by  the  Appellants.  After assembly of various parts and components a new and  different  article  known  as  transmission assembly  emerges  having  a  distinctive  name, character  and   use  and  but  for  the  manipulation undertaken  by  the   Appellants,  the  parts  and components  would  not  have  served  the  purpose which  a  transmission  assembly  performs.   The impugned product is also marketable as the learned Senior Departmental Representative has mentioned the  fact  of  its  being  imported  by  the  Appellants themselves (Farmtrac Division); the clearance of the

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transmission  assembly  by  the  Appellants  to  their subsidiary  company  M/s.  Escorts  Construction Equipment  Ltd.  and  the  removal  of  transmission assembly  by  M/s.  Tractors  and  Farm  Equipment Ltd.  The  mere  fact  that  the  impugned  product  is meant only for the tractors manufactured by them will  not  mean  that  the  impugned  product  is  not capable  of  being brought  to  the market  for  being bought and sold. The Supreme Court in the case of A.P. State  Electricity  Board  vs.  CCE,  Hyderabad, 1994  (70)  ELT  3  (S.C.)  has  held  that  the marketability is essentially a question of fact to be decided in the facts of each case. The fact that the goods are not, in fact, marketed is of no relevance. So long the goods arc marketable, they are goods for the purpose of Section 3 of the Central Excise Act.  It  is  not  necessary that  the goods should be generally  available  in  the  market.  We,  therefore, uphold the finding in the impugned order that  the transmission  assembly  is  an  excisable  goods exigible to Central Excise duty.”

5. Shri Lakshmikumaran, learned advocate for the appellant

argued that the tractors manufactured by the appellant (having

engines of a capacity of less than 1800 CC) had no such thing

as  a  Transmission  Assembly.  The  so-called  Transmission

Assembly  was  only  an  aggregate  of  various  items  which

connected the engine of the tractor with its wheels. Further, the

so-called Transmission Assembly was specifically designed for

the appellant’s tractor and was not saleable in the market. Also,

not a single instance of sale in the market had ever taken place. 8

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In fact, the so-called Transmission Assembly was not something

which came into existence at all but was part of a continuous

process  on  the  assembly  line  in  the  appellant’s  factory  of

manufacture at the end of which a complete tractor came into

existence.  He further submitted that post 1.6.1998 in any case,

the appellant  had been paying 8% under Rule 57 CC on the

value of the said Transmission Assembly as required.  It is only

for the period upto August 1996 that would be in dispute. Even

for  this  period,  he contends that  ultimately  the figures would

show  that  it  was  revenue  neutral  in  that  MODVAT  credit

reversed for this period would amount to 1.71 crores, the duty

demand being approximately 2.43 crores out of a total of 9.66

crores for this period of 8 months.  He also argued that the duty

demand was absurd in that the Transmission Assembly of TAFE

which is said to be the same as that of the petitioner’s was only

13,000 rupees per piece as opposed to the highly inflated figure

of Rs.53,790/-. If the figure of Rs.13,000/- is to be taken, it is

clear that the reversal of MODVAT credit would amount to much

more than the duty demand itself.  He further argued that in any

case since there was no fraud or willful suppression of facts,

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invoking the extended period of limitation was not in order and

that in any case the show cause notice being beyond one year

of the stated period would have to be quashed on this ground

alone.  

6. Shri  Jaideep  Gupta,  learned  senior  counsel  for  the

revenue contended that the Transmission Assembly was very

much excisable goods known to the market as such from the

statements of the appellants themselves.  Further, the revenue

had discharged its burden by oral and documentary evidence

which  showed  beyond  doubt  that  Transmission  Assembly  of

tractors were excisable goods in that a new commodity came

into existence known to the market as such.  It is completely

irrelevant  that  no  sale  actually  took  place  of  any  such

Transmission  Assembly.  It  is  enough to  show that  the  said

goods  were  capable  of  being  sold  which,  undoubtedly,  they

were.  He very fairly stated that on valuation, if necessary, the

matter could be remanded.  He also stated that the extended

period of  limitation was available in  the present  case as the

appellants  on  their  own  showing  knew that  the  intermediate

product of Transmission Assemblies was marketable as such

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and  had  suppressed  this  fact  while  claiming  exemption  of

excise duty on the finished product, namely, the tractor.  

We have heard learned counsel  for  the parties.   It  is

important in matters like this to begin at the beginning. Entry 84

List I of the 7th Schedule of the Constitution of India reads as

follows:

“SEVENTH SCHEDULE

[Article 246]

List I — Union List

84.  Duties of  excise on tobacco and other  goods manufactured or produced in India except—

(a) alcoholic liquors for human consumption;

(b)  opium,  Indian  hemp and  other  narcotic  drugs and narcotics,

but  including  medicinal  and  toilet  preparations containing  alcohol  or  any  substance  included  in sub-paragraph (b) of this entry.”

7. It is clear on a reading of this Entry that a duty of excise is

only  leviable  on  “goods”  manufactured  or  produced in  India.

“Goods” has been defined under Article 366 (12) as follows:

“366. Definitions.—In this Constitution, unless the context  otherwise  requires,  the  following

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expressions have the meanings hereby respectively assigned to them, that is to say—

(12) “goods” includes all materials, commodities and articles;”

8. Each of these three expressions has been defined in the

Shorter Oxford English Dictionary as follows:-

“Materials” – the matter of which a thing is or may be made;  the

constituent parts of something.

“Commodities”  –  a  thing  of  use  or  value;  a  thing  that  is  an

object of trade; a thing one deals in or makes use of.

“Articles” - a particular item of business.

9. Although the definition of “goods” is an inclusive one, it is

clear that materials, commodities and articles spoken of in the

definition take colour from one another.  In order to be “goods” it

is clear that they should be known to the market as materials,

commodities and articles that are capable of being sold.  

10. In the basic judgment which has been referred to in every

excise case for conceptual clarity, namely,  Union of India v.

Delhi  Cloth.  & General  Mills  Co.  Ltd.,  1963 Suppl.  1  SCR

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586, this Court held that for excise duty to be chargeable under

the  constitutional  entry  read  with  Section  3  of  the  Central

Excise and Salt  Act,  two pre-requisites are necessary.  First,

there must be “manufacture” which is understood to mean the

bringing into existence of a new substance.  And secondly, the

word “goods” necessarily means that such manufacture must

bring into existence a new substance known to the market as

such which brings in the concept of marketability in addition to

manufacture.   A large  number  of  judgments  have  explained

what is meant by marketability in this context.   In  A.P. State

Electricity Board v. Collector of Central Excise, Hyderabad,

(1994)  2 SCC 428,  this  Court  referred to a large number of

previous judgments.  Firstly, it referred to Union v. Delhi Cloth

and General Mills.  It then referred to South Bihar Sugar Mills

Limited V. Union of India, (1968) 3 SCR 21, in which kiln gas

which was a mixture of gases generated during a process of

burning limestone with coke in a lime kiln was held not to be a

marketable commodity.  Since it was a mixture of gases and not

only carbon dioxide, it was clear that it was not known to the

market as such. Carbon dioxide was only a component of kiln

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gas, the content of which ranged from 27 to 36.5%. The Court

also referred to the decision in Union Carbide India Limited v.

the Union of India, (1986) 2 SCC 547, in which aluminum cans

in  crude  form  used  as  a  torch  bodies  were  held  to  be  not

capable of  sale to a consumer in their  crude and unfinished

form.  To be made saleable, such cans would have to undergo

various processes such as, trimming, threading and re-drawing.

The Court also referred to Bhor Industries Ltd. v. Collector of

Central Excise, Bombay, (1989) 1 SCC 602.  In that case, it

was held that crude PVC films manufactured as an intermediate

product and used in captive consumption of other goods was

not marketable, not being known to the market as such.  The

Court also referred to CCE v. Ambalal Sarabhai, (1989) 4 SCC

112  in  which  an  intermediate  product,  namely,  starch

hydrolysate was not marketable in that it was highly unstable

and fragmented quickly losing its character in a couple of days.

After referring to all these judgments, the Court held:

“10. It would be evident from the facts and ratio of the above decisions that  the goods in  each case were  found  to  be  not  marketable.  Whether  it  is refined  oil  (non-deodorised)  concerned  in Delhi Cloth and General  Mills [1963 Supp 1 SCR 586 :

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AIR 1963 SC 791] or kiln gas in South Bihar Sugar Mills [(1968)  3  SCR  21  :  AIR  1968  SC  922]  or aluminium cans with rough uneven surface in Union Carbide [(1986) 2 SCC 547 : 1986 SCC (Tax) 443 : (1986)  2  SCR  162]  or  PVC  films  in Bhor Industries[(1989) 1 SCC 602 : 1989 SCC (Tax) 98 : (1989)  1  SCR  382]  or  hydrolysate  in  Ambalal Sarabhai [(1989) 4 SCC 112 : 1989 SCC (Tax) 584 : (1989) 3 SCR 784] the finding in each case on the basis of the material before the Court was that the articles in  question were not marketable and were not known to the market as such. The ‘marketability’ is thus essentially a question of fact to be decided on  the  facts  of  each  case.  There  can  be  no generalisation.  The fact  that  the goods are not  in fact  marketed is  of  no relevance. So long as the goods  are  marketable,  they  are  goods  for  the purposes of Section 3. It is also not necessary that the goods in question should be generally available in the market. Even if the goods are available from only  one  source  or  from  a  specified  market,  it makes no difference so long as they are available for purchasers. Now, in the appeals before us, the fact that in Kerala these poles are manufactured by independent  contractors  who  sell  them  to  Kerala State Electricity Board itself shows that such poles do  have  a  market.  Even  if  there  is  only  one purchaser of these articles, it must still be said that there  is  a  market  for  these  articles.  The marketability of articles does not depend upon the number of purchasers nor is the market confined to the territorial  limits of this country. The appellant's own  case  before  the  excise  authorities  and  the CEGAT was that these poles are manufactured by independent  contractors  from  whom  it  purchased them. This plea itself — though not pressed before us  —  is  adequate  to  demolish  the  case  of  the appellant. In our opinion, therefore, the conclusion arrived at by the Tribunal is unobjectionable.”

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11. In Indian Cable Co. Ltd. v. Collector of Central Excise,

Calcutta & Ors., (1994) 6 SCC 610, this Court held:-

“10. We are of the view that the provisions of the Act mandate  that  a  finding  that  the  goods  are marketable is a prerequisite or sine qua non for the levy of  duty. Section 3 of the Act is the charging section:

“3. Duties, specified in the Schedule to the Central Excise Tariff Act, 1985 to be levied.— There shall be levied  and  collected  in  such  manner  as  may  be prescribed  duties  of  excise  on all  excisable goods other  than  salt  which  are  produced  or manufactured  in  India  and  a  duty  on  salt manufactured in, or imported by land into, any part of  India  as,  and  at  the  rates,  set  forth  in  the Schedule to the Central Excise Tariff Act, 1985 ….”

Section  2(d)  defines  “excisable  goods”.  We have quoted  the  definition  in  para  5  supra.  The  word ‘goods’ is not defined in the Act.

11. After  adverting  to  the  aforesaid  definition  of “excisable  goods”  and  the  meaning  of  the  word ‘goods’, a Constitution Bench of the Supreme Court in Union  of  India v.Delhi  Cloth  and  General Mills [AIR 1963 SC 791 : 1963 Supp (1) SCR 586] stated in paragraph 17 thus:

“These  definitions  make  it  clear  that  to  become ‘goods’  an  article  must  be  something  which can ordinarily come to the market to be bought and sold.”                                        (emphasis supplied)

12. In a series of decisions, this Court has held that ‘marketability’ is an essential ingredient, to hold that an article is dutiable or exigible to duty of excise. The important  decisions of  this  Court  which have laid down the law on this aspect are the following:

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(1) Union of India v. Delhi  Cloth and General  Mills Co. Ltd. [AIR 1963 SC 791 :  1963 Supp (1)  SCR 586]  (2) South  Bihar  Sugar  Mills  Ltd. v. Union  of India [AIR 1968 SC 922 : (1968) 3 SCR 21] (3) Bhor Industries  Ltd. v. CCE [(1989)  1  SCC  602  :  1989 SCC  (Tax)  98]  (4) Hindustan Polymers v. CCE [(1989)  4  SCC 323  :  1990  SCC (Tax) 118 : (1989) 43 ELT 165] (5) CCE v. Ambalal Sarabhai Enterprises (P) Ltd. [(1989) 4 SCC 112 : 1989  SCC  (Tax)  584  :  (1989)  43  ELT 214  :  JT (1989)  3  SC  341]  (6) Union  Carbide  India Ltd. v. Union  of  India [(1986)  2  SCC  547  :  1986 SCC (Tax) 443 : (1986) 24 ELT 169 : JT 1986 SC 453] (7) A.P. State Electricity Board v. CCE [(1994) 2 SCC 428 : JT (1994) 1 SC 545] .

13. In  the  latest  decision  in A.P. State  Electricity Board v. CCE, Hyderabad [(1994) 2 SCC 428 : JT (1994) 1 SC 545] , one of us (B.P. Jeevan Reddy, J.) speaking for the Bench succinctly stated the law thus at pages 549 and 550:

“Marketability is an essential ingredient in order to be dutiable under the Schedule to the Act …. The ‘marketability’ is thus essentially a question of fact to be decided in the facts of each case. There can be no generalisation. The fact that the goods are not in fact  marketed is  of  no relevance.  So long as the goods  were  marketable,  they  are  goods  for  the purposes of Section 3. It is not also necessary that the goods in question should be generally available in the market. Even if the goods are available from only  one  source  or  from  a  specified  market,  it makes no difference so long as they are available for purchasers…. The marketability of articles does not depend upon the number of purchasers nor is the market  confined to  the territorial  limits  of  this country.”

(emphasis supplied)

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‘Marketability’ is a decisive test for dutiability. It only means ‘saleable’, or “suitable for sale”. It need not be in fact ‘marketed’. The article should be capable of  being  sold  or  being  sold,  to  consumers  in  the market,  as  it  is  —  without  anything  more.  The Appellate  Tribunal  has not  adverted to  the above vital  aspects nor has it  entered a finding that  the PVC compound (granules)is a “marketable product” as understood in  law. The Appellate Tribunal  was swayed by the fact that the conversion of PVC resin into PVC compound by the process employed by the appellants amounts to ‘manufacture’ within the meaning of Section 2(f) of the Act and that by itself will  justify  the  levy  of  duty. In  our  view, this  is  a palpable  error  committed  by  the  Tribunal.  In  the absence  of  a  finding,  that  the  goods  are ‘marketable’  i.e.  saleable  or  suitable  for  sale,  we hold that the order of the Appellate Tribunal is infirm. It  should be set  aside and we hereby do so.  We order a remit of the matter to the Appellate Tribunal to  consider  the appeal  afresh and dispose of  the same in  accordance  with  law. There  shall  be  no order as to costs in this appeal.”

12. In Moti Laminates (P) Ltd. v. Collector Central Excise,

Ahmadabad,  (1995) 3 SCC page 23, this Court held that an

intermediate  product,  namely,  resols,  not  being  marketable

would not be exigible to duty.  After referring to several earlier

judgments, this Court held:

“11. Although the duty of excise is on manufacture or production of the goods, but the entire concept of bringing  out  new  commodity  etc.  is  linked  with marketability. An article does not become goods in

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common  parlance  unless  by  production  or manufacture something new and different is brought out  which  can  be  bought  and  sold.  In Union  of India v. Delhi  Cloth  &  General  Mills  Co.  Ltd. [AIR 1963 SC 791] , a Constitution Bench of this Court while construing the word ‘goods’ held as under:

“These  definitions  make  it  clear  that  to  become ‘goods’  an  article  must  be  something  which  can ordinarily  come  to  the  market  to  be  bought  and sold.”

Therefore,  any  goods  to  attract  excise  duty  must satisfy the test of marketability. The Tariff Schedule by  placing  the  goods  in  specific  and  general category  does  not  alter  the  basic  character  of leviability.  The  duty  is  attracted  not  because  an article is covered in any of  the items or it  falls in residuary  category  but  it  must  further  have  been produced or manufactured and it is capable of being bought and sold.”  

13. A large part of the arguments ranged around the decision

in Union of India (UOI) & Ors. v. Sonic Electrochem (P) Ltd.

& Anr., 2002 (145) E.L.T. 274.  In this judgment the question

that arose for decision was whether the plastic body of electro

mosquito repellent was excisable goods.  This Court held:

“7…..The  germane  question  is  whether  it  has marketability.  The  plastic  body  is  being manufactured to suit the requirements of the EMR of  the  respondents  and  is  not  available  in  the market  for  being  bought  and  sold.  It  is  not  a standardised  item  or  goods  known  and  generally

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dealt with in the market. It is being manufactured by the respondents for its captive consumption. It is not a product known in the market with any commercial name.

9. It may be noticed that in the cases referred to in the passage, quoted above, the reasons for holding the articles 'not marketable' are different,  however they are not exhaustive. It is difficult to lay down a precise  test  to  determine  marketability  of  articles. Marketability  of  goods  has  certain  attributes.  The essence of marketability is neither in the form nor in the shape or condition in which the manufactured articles are to be found, it is the commercial identity of the articles known to the market for being bought and sold.  The fact  that  the product  in  question is generally  not  being  bought  and  sold  or  has  no demand  in  the  market  would  be  irrelevant.  The plastic  body  of  EMR  does  not  satisfy  the aforementioned criteria. There are some competing manufacturers of  EMR. Each is having a different plastic  body to suit  its  design and requirement.  If one goes to the market to purchase plastic body of EMR of the respondents either for replacement or otherwise one cannot get it in the market because at present it is not a commercially known product. For these reasons, the plastic body, which is a part of the EMR of the respondents, is not 'goods' so as to be liable to duty as parts of EMR under para 5(d) of the said exemption notification.”

14. From  this  judgment,  Shri  Lakshmikumaran  wished  to

emphasise  that,  as  in  the  said  judgment,  Transmission

Assemblies were not available in the market for being bought

and sold, they were not excisable goods not being marketable.

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As has correctly been pointed out by Mr. Gupta, learned senior

counsel appearing on behalf of the Revenue, what was held in

this judgment is that the product should not be known in the

market with any commercial name.  The moment a product is

commercially known in the sense of fulfilling the practical test of

being known to persons in the market who buy and sell, the test

is satisfied. The fact that the product is generally not bought or

sold or has no demand in the market is irrelevant.  It was held

in the said judgment that the plastic body is not known as a

commercially distinct product in the market and, therefore, if a

manufacturer is asked to replace such body, it  would not  be

replaceable not being a commercially known product.  

15. The  facts  in  the  present  case  show that  Transmission

Assemblies of tractors are commercially known products as has

been pointed out above.  The fact that not a single sale of such

Assembly has been made by the appellants is irrelevant.  This

being  the  case,  we  are  of  the  view  that  the  Transmission

Assembly  of  the  tractor  on  the facts  before  us is  clearly  an

intermediate product which is a distinct product commercially

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known to the market as such.  On this ground therefore, the

appellants are not liable to succeed.  

16. However, the appellants are on firm ground when they

say that the extended period of limitation could not have been

invoked in the present case.  In their reply to the show cause

notice, the appellants stated:

“20.2  It  is  submitted that  the noticees have been manufacturing tractors right from 1965 onwards till date. The manufacturing process undertaken by the noticees has been made known to the Department innumerable  number  of  times.  Consequent1y  the proposal to invoke the extended period of limitation in  the  present  case  is  incorrect  and  the  same is liable to be set aside.  

20.3  The  Noticee  points  out  that  just  like  the department raised the issue with regard to the IC engines  in  the  year  1994-95,  similarly  the department   is  raising  the  issue  in  regard  to  the transmission assembly by the present Show Cause Notice.  Therefore  the  dept.  cannot  allege  any suppression or fraud on the part of  Noticee.  

20.4 However, that is not to say that there has been any  contumacious  conduct  or  an  intent  to  evade duty on the part  of  the noticees.  In  regard to the transmission  assemblies  which  arise  on  the assembly  line,  if  they  are  used  in  the  dutiable tractors,  they  would  be  exempt  under  Captive Consumption  Exemption  Notification  No.67/95-CE dated 16.3.95.  

20.5 In regard to transmission assembly going into the  exempted  tractor,  the  department  has  now

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raised the issue that they are dutiable and there is no  exemption  notification  for  such  transmission assemblies.  Further,  that  the  Noticee  had  not claimed NIL rate of duty for transmission assemblies used within the factory for manufacture of tractors.  

20.6  The  Noticee  submits  that  they  never entertained a belief that the transmission assembly would  be  dutiable  and  consequently,  when  such transmission  assemblies  arose  on  the  assembly line, whether they go into the exempted tractor or dutiable tractor, Transmission Assembly as an item was not mentioned separately in the classification list. This shows their bona fides and does not lead to an inference that there was non-mention of the transmission assemblies in the classification list with ulterior motive.  

20.7  The Noticees submit that declarations of the term  "Transmission"  appearing  under  Heading No.87.08 showing that the rate of duty applicable is 15%  and  the  department  knowing  fully  well  that tractors  have  been  manufactured,  should  have raised  the  issue  regarding  the  transmission assembly  at  the  earliest  and  not  by  invoking  the extended  period  as  done  in  the  present  Show Cause Notice. The number of Transmission cleared on payment of duty to ECEL over the entire period from  Jan.1996  to  May,  1998  is  very  meagre  as compared  to  the  total  number  of  tractors  (both dutiable and exempted) cleared during the period. It is  clear  that  only  one  Transmission  Assembly  is used in one tractor. Consequently, the Department knew  that  duty  was  not  being  paid  on  captively consumed  Transmission  Assemblies.  Hence, extended  period  is  not  invocable.  Thus,  the department was fully aware that the tractors have been manufactured  and a transmission assembly is made at the intermediate stage. Nothing prevented the  department  from  raising  demands  within  the

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permissible  shorter  period  of  limitation  under Section 11A.  

21.  The department  Cll11Wl  plead  ignorance  that they were not aware that in a tractor a transmission assembly  arises  at  the  intermediate  stage.  Thus, the noticee entertained a bona fide belief that since the  transmission   assembly  formed  a  part  of  the integrated assembly line for manufacturing tractors, there was no  removal or exigibility of Transmission Assembly. Nothing prevented the department from raising  a  similar  issue  as  to  dutiability  of Transmission Assemblies as they raised in regard to I.C. Engines arising at the intermediate stage, which was done in 1995.  

22. That in fact, the Show Cause Notice itself terms the issue of manufacture and captive consumption of transmission assemblies for tractors is the same as that for I.C. Engines. However, knowing fully well that Transmission Assembly comes into existence at the intermediate stage, the department never raised the  issue.  This  implies  that  in  the  present proceedings,  assuming  without  admitting  duty  is payable  on  the  transmission  assembly, the  same was not being paid due to a bona fide error. The same  belief  was  entertained  on  the  part  of  the Noticees  as  well  as  the  Department  during  the relevant period that transmission assemblies going into the exempted tractor do not attract duty.”  

17. Added to this, the appellants have also clearly stated that

not a single Transmission Assembly has in fact been sold by

them in the market.  On these facts, we are of the opinion that

the  appellants  would  fall  within  the  test  laid  down  in  two

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judgments of this Court.  In Padmini Products v. Collector of

Central  Excise, Bangalore,  1989 (43) E.L.T. 195, this Court

held:

“8. Shri  V. Lakshmi  Kumaran,  learned counsel  for the appellant drew our attention to the observations of  this  Court  in CCE v. Chemphar  Drugs  and Liniments,  Hyderabad [(1989)  2  SCC  127  :  1989 SCC (Tax) 245] where at p. 131 of the report, this Court observed that in order to sustain an order of the Tribunal beyond a period of six months and up to a period of five years in view of the proviso to sub-section (1) of Section 11-A of the Act, it had to be established that the duty of excise had not been levied  or  paid  or  short-levied  or  short-paid,  or erroneously refunded by reasons of either fraud or collusion or willful  misstatement or suppression of facts or contravention of any provision of the Act or Rules  made  thereunder,  with  intent  to  evade payment of duty. It was observed by this Court that something  positive  other  than  mere  inaction  or failure on the part of the manufacturer or producer of conscious or deliberate withholding of information when the manufacturer knew otherwise, is required to  be  established  before  it  is  saddled  with  any liability beyond the period of six months. Whether in a  particular  set  of  facts  and  circumstances  there was any fraud or collusion or wilful misstatement or suppression or contravention of any provision of any Act, is a question of fact depending upon the facts and circumstances of a particular case.

…….As  mentioned  hereinbefore,  mere  failure  or negligence  on  the  part  of  the  producer  or manufacturer either not to take out a licence in case where  there  was  scope  for  doubt  as  to  whether licence was required to be taken out or where there was scope for doubt whether goods were dutiable

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or not, would not attract Section 11-A of the Act. In the facts and circumstances of this case, there were materials,  as  indicated  to  suggest  that  there  was scope for confusion and the appellant believing that the goods came within the purview of the concept of handicrafts and as such were exempt. If there was scope for such a belief or opinion, then failure either to take out a licence or to pay duty on that behalf, when  there  was  no  contrary  evidence  that  the producer  or  the  manufacturer  knew  these  were excisable  or  required  to  be  licensed,  would  not attract the penal provisions of Section 11-A of the Act.  If  the  facts  are  otherwise,  then  the  position would be different.”

18. Similarly  in  Continental  Foundation  Joint  Venture

Holding v. Collector of Central Excise, Chandigarh- I, (2007)

10 SCC 337, this Court  held:

“14. As far as fraud and collusion are concerned, it is evident that the intent to evade duty is built into these  very  words.  So  far  as  misstatement  or suppression of facts are concerned, they are clearly qualified by the word “wilful”,  preceding the words “misstatement or suppression of facts” which means with  intent  to  evade  duty.The  next  set  of  words “contravention of any of the provisions of this Act or Rules”  are  again  qualified  by  the  immediately following  words  “with  intent  to  evade  payment  of duty”.  Therefore,  there  cannot  be  suppression  or misstatement  of  fact,  which  is  not  wilful  and  yet constitute a permissible ground for the purpose of the  proviso  to  Section  11-A.  Misstatement  of  fact must be wilful.

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13. Factual position goes to show that the Revenue relied  on  the  Circulars  dated  23-5-1997  and 19-12-1997. The Circular dated 6-1-1998 is the one on  which  the  appellant  places  reliance. Undisputedly,  view  expressed by CEGAT in Continental  Foundation  Joint  Venture case [Continental Foundation Joint Venture v. CCE, (2002) 150 ELT 216 (Tri-Del)]  was held to be not correct in a subsequent larger Bench judgment. It is, therefore,  clear  that  there  was  scope  for entertaining doubt about the view to be taken. The Tribunal  apparently  has  not  considered  these aspects  correctly.  Contrary  to  the  factual position, CEGAT has  held  that  no  plea  was  taken about there being no intention to evade payment of duty  as  the  same  was  to  be  reimbursed  by  the buyer. In fact  such a plea was clearly taken. The factual scenario clearly goes to show that there was scope for entertaining doubt, and taking a particular stand which rules out application of Section 11-A of the Act.

12. The expression “suppression” has been used in the proviso to Section 11-A of the Act accompanied by very strong words as “fraud” or “collusion” and, therefore,  has  to  be  construed  strictly.  Mere omission  to  give  correct  information  is  not suppression of facts unless it was deliberate to stop (sic evade)  the  payment  of  duty.  Suppression means failure  to  disclose full  information with  the intent to evade payment of duty. When the facts are known to both the parties, omission by one party to do what  he might  have done would  not  render  it suppression. When  the  Revenue  invokes  the extended period of limitation under Section 11-A the burden is cast upon it to prove suppression of fact. An  incorrect  statement  cannot  be  equated with  a wilful misstatement. The latter implies making of an incorrect  statement  with  the  knowledge  that  the statement was not correct.”

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19. Judged by this test, it is clear that on facts in the present

case there was no suppression on the part of the appellants nor

was there any willful attempt to evade duty.  As stated by the

appellant, the appellant has been manufacturing tractors from

1965  onwards.   There  has  never  been  any  change  in  the

manufacturing process.  In the year 1994-95, IC engines were

stated by the department to contain Transmission Assemblies,

which were dutiable.  On receiving a reply from the appellant,

the  department  did  not  levy  any  excise  duty  on  such

Transmission Assemblies.  The show-cause notice itself stated

that  the  issue  of  manufacture  and  captive  consumption  of

Transmission Assemblies for tractors is the same as that for IC

engines.  These facts, coupled with the fact that not a single

Transmission  Assembly  of  tractors  manufactured  by  the

appellant  had  been  sold  makes  it  clear  that  there  was  no

suppression or any intent to evade excise duty in the present

case. We feel that the show cause notice needs to be quashed

on this ground alone.  Accordingly, the appeal is allowed, and

the judgment dated 27.5.2004 passed by CESTAT is set aside.  

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Civil Appeal Nos.9469-9470 of 2010

20. This case has similar facts.  We are concerned with the

period 1.4.1997 to 31.5.1998.  The show cause notice in this

case was issued on 1.5.2002, in which the extended period of

limitation was invoked as follows:-

“M/s.  TAFE have filed  the declaration under  Rule 173B of Central Excise Rules, 1944, during the year 2000-2001,  for  the  manufacture  of  product  viz., Transmission  Assembly  falling  under  Chapter Sub-heading  No.8708.00,  and  cleared  the  said product  on  payment  of  duty  under  Invoice No.1120969 dated 21.6.2000.  Never before in the past  M/s.  TAFE have declared this  product  along with other factory finished products for which duty was paid by them.  Hence, necessary verification was conducted in order to know whether any such sub-assemblies were manufactured and cleared by the assessee for use in the exempted tractors.  

4. M/s.  TAFE  have  manufactured  the sub-assemblies  as  listed  in  the  Annexure-I  and Annexure-II for the tractors Model No. TAFE 25 and TAFE 30 inside the factory for  captive use in  the production  of  tractors.   The  details  of  process  of manufacture of such sub-assemblies are explained in  Annexure-III.   As  per  Clause  (ii)  to  Notification No.67/95  dated  16-3-1995  all  inputs  specified  in column 1 of the Table in the said Notification which also includes inputs falling under Chapter Heading 87 of Central Excise Tariff Act, 1985, manufactured in a factory and used within the factory of production

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in  or  in  relation  to  the  manufacture  of  the  final products are exempt from the whole of the excise duty  due  thereon,  provided  the  final  product  is chargeable  to  duty.   As  per  this  notification,  M/s TAFE have paid duty on all the goods falling under Chapter  Sub-Heading  87.08,  used  in  the manufacture  of  Tractors  of  engine  capacity  less than  1800cc  which  are  exempted,  except  the sub-assemblies  manufactured  and  used  in  the exempted tractors.  Therefore, it  appears that M/s TAFE  are  liable  to  pay  duty  on  all  the sub-assemblies  manufactured  (as  per  Annexure-I and II), and used in the Tractors which are exempt for the period from April, 1997 to May, 1998.  

5. M/s. TAFE have not brought to the notice of the  manufacture  of  sub-assemblies  to  the Department with the intention to evade payment of excise duty.  They have willfully suppressed the fact of the manufacture of the sub-assemblies from the knowledge of the Department and cleared the same without payment of duty for use in the manufacture of Tractors,  which are exempted.  It  can be seen from the process of manufacture that the making of the independent,  sub-assemblies  are  inevitable  in the Tractor build.  But, M/s TAFE chose to declare only the parts constituting these sub-assemblies as factory  finished  items  and  not  sub-assembly. Whether  these  factory  finished  items  and  bought out,  items,  when  assembled  will  form  a sub-assembly has not been declared by them.  M/s. TAFE  have  chosen  not  to  declare  the sub-assemblies willfully in order to evade payment of duty.”

21. In the reply to the show cause notice,  the respondents

stated that they had never sold transmission assemblies in the

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market and that their price list does not carry a list price for this

item.  The only removal ever made was during the warranty

period of one tractor and this one removal does not justify the

fact that transmission assemblies have a market.  It was further

stated  that  had  the  respondents  known  that  transmission

assemblies were excisable, they would have claimed exemption

as  the  finished  product  was  exempt.   Further,  Transmission

Assembly is only recognized as an Assembly line intermediate

product  and  not  as  a  product  in  itself  which  is  separately

identifiable  as in  the case of  other  Assemblies  such as axel

shaft,  engine,  gear  parts,  instrument  panels,  etc.   The

difference in this case is that vide an order dated 30.4.2004 the

authorities found in favour of the respondents on merits holding

that  there  was  neither  manufacture  nor  marketability  of  the

Transmission Assemblies in question.  This was confirmed in

appeal  by  CESTAT  by  the  impugned  judgment  dated

12.11.2009.  

22. In view of what is stated in Civil Appeal No.6561 of 2004,

the part of the order in original and the CESTAT order on merits

have to be set aside.  However, for the self-same reasons as

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are contained in Civil Appeal No.6561 of 2004, we hold that the

extended period of limitation is not available as we are satisfied

that the reply extracted above of the respondent shows that the

respondent  bona fide  believed  that  Transmission  Assemblies

were not  dutiable.   In  the circumstances,  the appeals of  the

revenue shall stand dismissed on this ground.   

C.A. No.457 of 2006  

23. The  facts  in  this  appeal  are  as  follows.  The  period

involved is April, 1996 to May, 1998 and the show cause notice

is dated 1.5.2001.  As the impugned judgment in this case by

CESTAT  merely  follows  the  Escorts  case  i.e.  Civil  Appeal

No.6561 of 2004, we hold that the finding of the authorities on

merits  is  correct.   However,  in  this  case  also  the  extended

period of limitation is not available to the revenue.  

24. In the order dated 26.12.2001, the Commissioner stated:-

“In the present inquiry which was undertaken by the proper  officer,  it  was  found  that  the  transmission assembly or chassis assembly which is classifiable under Sub-heading 87.08 of the 1st Schedule to the Central Excise Act was not declared by the noticee in the classification list.   Therefore, their  plea that they  have  declared  the  chassis  thereof  does  not

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cover transmission assembly or chassis assembly. They themselves in their  reply have admitted that the chassis is the main frame that supports the body and the engine has to be so framed as to receive, hold and fasten an engine and other components of the  tractors  (Para  14  of  the  reply).   Thus, transmission assembly is not the chassis and since the noticee have failed to declare the transmission assembly/  chassis  assembly,  the  suppression  of fact is clear.  

The intention to evade duty is clear from the statement of Shri P.C. Kale dated 12.04.2001 as the noticee was knowing that duty is required to be paid on  the  goods  which  go  into  the  assembly  of  the tractor of engine capacity less than 1800 CC.  As such  tractors  were  exempt  from  duty  during  the relevant period.  Knowing this fact very well and not declaring  the  transmission  assembly  or  chassis assembly  in  the  classification  declaration  and clearing  such  transmission  assembly/  chassis assembly without payment of duty without recording their production in the statutory records and without filing  the  RT-12  returns  for  the  production  and clearance of  such transmission assembly/  chassis assembly clearly established that this was done with an intention to evade payment of duty.”

25. We  find  that  in  successive  declarations  made  by  the

assessee in this case starting from 16.3.1995 the assessee had

declared not merely the tractor but the chassis therefor.  The

assessee bonafide believed that the declaration of the chassis

would suffice as according to them Transmission Assemblies

were  not  taxable  goods.   The  intention  to  evade  duty  is

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according  to  the  Commissioner  made  out  from  a  statement

made by Shri P.C. Kale dated 12.4.2001.  It is pointed out by

learned counsel appearing on behalf of the appellant that in the

memorandum of appeal filed against the order in original, Shri

P.C. Kale was never in the employment of the appellant during

the relevant period as he joined the appellant only in July, 2000.

Apart  from this,  it  is  also pointed out  that  the appellant  is  a

public  sector  company  governed  by  a  Board  of  Directors

consisting of IAS Officers.  Be that as it may, we are satisfied

that there was no attempt to evade excise duty and in this case

also  the  show  cause  notice  being  beyond  the  period  of

limitation of one year would have to be quashed on this ground.

On this ground alone, therefore, the impugned judgment dated

3.10.2005 is set aside.  The appeal is allowed accordingly.  

……………………….J. (A.K. Sikri)

……………………….J. (R.F. Nariman)

New Delhi; April 29, 2015.

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