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NON-REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NOS. 5784-5788 OF 2007

M/S GUJARAT INDUSTRIES & ORS. .....APPELLANT(S)

VERSUS

COMMISSIONER OF CENTRAL EXCISE-I,  AHMEDABAD

.....RESPONDENT(S)

W I T H

CIVIL APPEAL NOS. 9196-9202 OF 2012

J U D G M E N T

A.K. SIKRI, J.

The  assessee/manufacturer  in  the  instant  appeals,  has  

commended this Court to decide the following questions of law  

which arise for consideration in these appeals:

(a)  Whether the process of cold-rolling undertaken by the  

assessee on the hot-rolled stainless steel patta/pattis amount to  

'manufacture' within the meaning of Section 2(f)(i) of the Central  

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Excise Act, 1944?

(b)  Whether the Custom Excise & Service Tax Appellate  

Tribunal  (CESTAT)  was correct  in  holding  that  the  process  of  

cold-rolling of stainless steel patta/pattis amounts to manufacture  

in view of Chapter No.4 of Chapter No.72 of the Central Excise  

Tariff  Act,  1985,  when  the  said  Chapter  Note  was  not  even  

referred to or relied upon in the show cause notice?

(c)  Whether in the facts and circumstances of the case,  

extended period of limitation under proviso to Section 11A of the  

Act was invokable for demanding duty from the assessee and for  

imposing penalty on the assessee?

2. The  factual  background  under  which  the  appeals  have  been  

preferred by the appellants can be captured by taking note of the  

following salient features:

The assessee is engaged in the process of cold-rolling of hot-

rolled stainless steel patta/patti  on job work basis.  As per the  

assessee, for  this  purpose, it  receives hot-rolled SS patta/patti  

from other manufacturers and thereafter undertakes the process  

of cold-rolling in the cold-rolling mill.  The purpose of cold-rolling  

is  only  to  reduce  the  gauge  of  the  SS  patta/patti.   After  so  

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reducing  the  gauge  by  the  process  of  cold-rolling,  the  SS  

patta/patti are sent back to the suppliers.  For this purpose, the  

assessee  receives  job  charges  from  the  suppliers  of  the  

materials.  The assessee claims that apart from cold-rolling, no  

other  process  was  undertaken  by  the  assessee  on  the  SS  

patta/patti.  The assessee had undertaken this activity during the  

period between November 1995 and March 1997.  It is also the  

case of the assessee that by the process of cold-rolling, only the  

gauge  of  the  SS  patta/patti  gets  reduced  and  no  new  

commercially identifiable commodity comes into existence, and  

the appellants were under the bona fide belief that the process of  

cold-rolling does not amount to manufacture under the Central  

Excise  Act  and  accordingly  did  not  take  out  central  excise  

registration and did not discharge any central excise duty liability.

3. After  conducting  some  investigation,  Commissioner  of  Central  

Excise,  Ahmedabad  issued  a  show  cause  notice  dated  

15.05.2000 to the assessee contending that the process of cold-

rolling  undertaken  by  the  assessee  amounts  to  manufacture  

within the meaning of Section 2(f) of the Act and accordingly, the  

show cause notice sought to demand duty of Rs.24,06,310/- from  

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the assessee for the period from 1995-96 to 1996-97 by invoking  

the extended period of limitation under proviso to Section 11A of  

the  Act.   

4. After considering the reply of the assessee, the Commissioner of  

Central Excise, Ahmedabad passed Order-in-Original confirming  

the duty demand of Rs.12,20,563/- after extending the benefit of  

small scale exemption and imposing penalty of Rs.12,32,563/- on  

the assessee.  The Commissioner held the process of cold-rolling  

to be amounting to manufacture, in terms of Chapter Note 4 to  

Chapter 72.  The Commissioner also imposed penalties on the  

suppliers of the materials.   

On the appeals filed by the assessee and the suppliers of the  

cold rolled SS patta/patti, the Tribunal by a 2-1 majority held that  

the process  of  cold-rolling  amounts  to  manufacture  in  view of  

Chapter  Note 4 to  Chapter  72.   The majority  of  the Tribunal  

further held that the extended period of limitation under proviso to  

Section 11A of the Act is invokable and accordingly confirmed the  

duty demands and the penalties imposed by the Commissioner.   

5.  It  is  in  the  aforesaid  backdrop  the  questions  of  law  

formulated/raised by the appellants need to be decided.   

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6. We first advert to the central and crucial issue, namely, whether  

the  gauge  reduction  of  the  hot  rolled  SS patta/pattis  by  cold-

rolling  process  will  amount  to  manufacture  of  a  new  product  

attracting further central excise duty.  As we have already pointed  

out above, the Department seeks to include the said item of the  

assessee  under  Chapter  Heading  7220.20.   Chapter  72.20  

including the entry in which Department claims the product falls,  

is as under:

72.20 Flat-rolled products of stainless steel, of  a width of less than 60mm

7220.10 - Not further worked than hot-rolled, whether  or not in coils

15%

7220.20 - Not  further  worked  than  cold-rolled  (cold- reduced)

15%

7220.90 - Other 15%

7. We find that in the Order-in-Original passed by the Adjudicating  

Authority  on  the  question  as  to  whether  cold-rolled  pattas  are  

distinct marketable commodities, he relied upon the Harmonised  

Commodity Description and Coding System (HSN) published by  

World Custom Organisation to facilitate uniform classification of  

goods traded in the world classifies cold rolled strips and the hot  

rolled strips under two separate headings.  As per him, this itself  

shows that all over the world these products are considered as  

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separate identifiable products.  As per general explanatory notes  

given  in  part  (IV)(B)  to  Chapter  72  of  HSN on  which  Central  

Excise  Tariff  Act,  1985  is  based,  cold  rolled  products  can  be  

distinguished from hot rolled products by the following criteria:-

(a)  The surface of cold rolled products has a better appearance than of  

products of hot rolled and never has a layer of scale.

(b)  The dimensional tolerances are smaller for cold rolled products.

(c)  Thin-Flat products are usually produced by cooled rolling.

(d)  Microscopic examination of cold-worked products reveals a marked  

deformation  of  the  grains  and  grain  orientation  parallel  to  the  

direction  of  working.   By  contrast,  products  obtained  by  hot  

process show almost regular grains owing to recrystallisation;

(e)   He also opined that  cold rolling in the true sense, changes the  

crystalline structure of the work piece by considerably reducing its  

cross section.   

Thus  what  emerges  after  cold  rolling  of  hot  rolled  strips  is  

altogether  a  different  product  which  has  different  physical  

properties.   And,  in  the  explanatory  Note  to  Chapter  Heading  

72.09 of HSN, it is further elaborated that because of their special  

properties  (better  surface  finished,  better  aptitude  to  cold  –  

forming, stricter tolerances, generally reduced thickness, higher  

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mechanical  strength,  etc.),  the products  of  this  heading are  in  

general use for purposes different from those of their hot rolled  

counterparts, which they increasingly tend to replace.  They are  

used,  in  particular,  in  the  manufacture  of  automobile  bodies,  

metal furniture, domestic appliance, and central heating radiators  

and for producing angles, shapes and sections by cold process  

(either forming or profiling).  They are easy to coat (by tinplating,  

electroplating,  varnishing,  enamelling,  lacquering,  painting,  

coating  with  plastics,  etc.).   They  are  often  delivered  after  

annealing, normalizing or other heat treatment.   

8. From the above, he concluded that the explanatory notes to HSN  

also lends support to the fact that hot rolled products and cold-

rolled products are two distinct products having their own identity,  

name, character and use.  Cold-rolled strips are used for making  

cycle/auto-parts etc., whereas hot rolled strips cannot be used for  

this purpose.  The order, thus, proceeded to hold that cold-rolled  

strips are entirely different than hot-rolled strips which forms the  

principle  raw  material  for  the  manufacture  of  CR  strips.   A  

categorical  finding was given by the Adjudicating Authority that  

goods are of different use and have a distinct identity of their own  

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in the market which was sufficient to hold that the new commodity  

has come into existence as for a product to be marketable it is not  

necessary that the products should be actually marketed but they  

should  be  capable  of  marketing  since  cold  reducing  is  being  

independently  by  multiple  number  of  units  either  on  job  work  

basis or for use in their other factories it is certainly capable of  

being marketed.   

9.  When the matter was taken in appeal before the Tribunal by the  

assessee,  Judicial  Member  took  the  view  favourable  to  the  

assessee whereas Technical  Member  affirmed the  view of  the  

Commissioner.  The Technical Member in his brief order pointed  

out that  the Commissioner had given detailed findings that the  

process  of  cold-rolling  imparts  quality  of  hardening  to  the  

products  in  question  and  this  process  entails  changes  in  the  

characteristics.  The Judicial Member also passed a brief order  

holding that the case was covered by the judgment of this Court  

in Steel Strips Ltd.  wherein it was held that cold-rolling of steel  

strips reduced out of the duty paid hot-rolled steel strips do not  

undergo a process of manufacture.  The Judicial Member also  

observed that there was nothing on record to show that the mere  

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passing of hot-rolled SS patta/pattis between the two rollers, so  

as to reduce the thickness of the same, amounts to process of  

hardening or tempering being undertaken.   

10. With this difference of opinion, when the matter came up before  

the Third Member, he undertook a very detailed discussion and  

ultimately concurred with the opinion of  the Technical Member.  

Not  only  he  relied  upon  the  HSN  explanatory  notes  which  

corresponds to the Chapter sub-heading of the Schedule to the  

Tariff Act but also took note of the entire process and discuss the  

same with reference to the technical literature.   

11. After going through the said order, we are inclined to concur with  

the reasons and rationale given by the Third Member holding the  

entire process to be 'manufacture' within the meaning of Section  

2(f) of the Act.  Since, we are agreeing with the said reasoning, it  

would be apt to reproduce the relevant portion thereof:

“5.  In this context, the Harmonized System of  Nomenclature  known  as  HSN  Explanatory  Notes was referred to by both the sides.  These  notes correspond to the Chapter sub-headings  of the Schedule to the Tariff Act.  The HSN throw  considerable light on the process of production  in iron and steel industries.  To begin with, in the  present  context,  semi-finished products  and in  certain cases ingots are converted into finished  products  which  are  generally  sub-divided  into  

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flat  products  (“wide  flats”  including  universal  plates,  wide coil,  sheets,  plates and strip) and  long  products  (bars  and  rods,  hot-rolled,  in  irregularly  would  coils,  other  bars  and  rods,  angles,  shapes,  sections  and  wire).   These  products  are  obtained  by  plastic  deformation,  either hot, directly from ingots or semi-finished  products (by hot-rolling, forging or hot-drawing);  or cold, indirectly from hot finished products (by  cold  rolling,  extrusion,  wire,  drawing,  bright- drawing),  followed in  some cases  by  finishing  operations (e.g., cold-finished bars obtained by  centreless grinding or by precision turning).  In  the  category  of  hot  plastic  deformation,  “hot-  rolling” means rolling at a temperature between  the point of rapid recrystallization and that of the  beginning  of  fusion.   The  temperature  range  depends  on  various  factors  such  as  the  composition  of  the  steel.   As  a  rule,  the  final  temperature  of  the  work-piece  in  hot-rolling  is  about  900ºC.   In  the  category  of  cold  plastic  deformation,  “cold-rolling”  is  carried  out  at  ambient  temperature,  i.e.,  below  the  recrystallization  temperature.   Thus,  the  most  significant  operational  distinction  between  the  hot-rolling and cold-rolling is that, hot-rolling is a  rolling done at a temperature between the point  of  rapid  recrystallization  and  that  of  the  beginning of fusion, while cold rolling is carried  out  at  ambient  or  room temperatures which is  below the recrystallization temperature.   

5.1 The  cold-rolled  strips  have  the  following  properties which may be shared by certain hot- rolled products:-

(a)  because of the strain or work hardening they  have undergone, cold-worked products are very  hard and possess great tensile strength, though  these properties may diminish appreciably with  heat treatment;

(b)   elongation  of  fracture  is  very  low  in  cold  worked  products;  it  is  higher  in  products  that  

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have undergone suitable heat treatment.

Cold-rolling in the true sense also includes cold  reduction  changing  the  crystalline  structure  of  the  work-piece  by  considerably  reducing  its  cross-section.   The  HSN  Notes,  therefore,  clearly indicate that in the cold-rolling processes  because  of  the  strain  or  work  hardening,  the  cold-worked  product  becomes  very  hard.  Therefore, when hot-rolled strips, which are flat- rolled  products,  are  subjected  to  cold  rolling,  such cold-worked product  would be very  hard  and would possess great tensile strength.  The  process  of  cold-rolling  on  such  flat  products  would  harden  them  and,  therefore,  it  is  a  process of hardening.  The fact that hardening  can  be  achieved  by  heat  treatment  of  steel  cannot lead to a conclusion that no hardening  can  take  place  by  cold-rolling.   Hardening  or  tempering of  a matter  by heat  treatment  does  not  negate  the  existence  of  process  of  hardening  or  tempering  by  cold-rolling.   The  reference  to  the  literature  on  hardening  or  tempering  from  a  'Dictionary  of  Metal  Heat  Treatment',  'Hand  book  of  Heat  Treatment  Steels',  'Heat  Treatment  Principles  and  Techniques',  would give a lop sided picture of  the  concept  of  hardening  or  tempering.   If  by  heat treatment hardening or tempering of metal  can be achieved, equally so by a cold-reducing  or cold-rolling or cold-working, hardening of the  flat rolled product/strips can be achieved.  Heat  treatment  for  hardening  or  tempering  may  be  suited for particular products while cold-rolling or  cold-working  may  be  suited  for  hardening  or  tempering other kinds of  products.   Therefore,  by merely referring to hardening or tempering by  process of heat treatment, one cannot shut out  the entire cold-rolling or cold-working processes  which bring about hardening or tempering.  In  the  midst  of  technical  literature  produced  on  behalf  of  the  appellant,  there  are  certain  excerpts from 'Material Science and Metallurgy',  Chapter  57  of  which  deals  with  mechanical  

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working  processes.   Mechanical  working  of  metals may either by (i) Hot working, or (ii)  Cold  working.  Plastic deformation of a metal above  the recrystallization temperature, but below the  melting  or  burning  point  is  called  hot  working  whereas plastic deformation of a metal below its  recrystallization  temperature  is  known  as  cold  working.   In  that  chapter,  there is  an analysis  done on principles of  hot  and cold working of  metals  and  their  effects  on  mechanical  properties.  The purposes of hot working and its  advantages  as  well  as  purposes  and  advantages of cold working are narrated.  While  stating the principles  of  hot  and cold  working,  the  very  first  distinction  drawn  is  that  in  hot  working, metal working is performed on a metal  held at such a temperature that the metal does  not  work-harden,  while  in  cold  working  it  is  stated that it is a plastic deformation of a metal  which  results  in  strain  hardening.   It  usually  involves working at ordinary (room) temperature,  but  for  high  melting  point  metals  cold-working  may be carried out at a red heat.  Hot working  processes  are:  forging,  rolling,  pipe  welding,  extrusion, spinning and hot piercing and rolling  (tubes)  etc.,  while  cold  rolling  processes  commonly  employed  are  :  rolling,  extrusion,  pressing  and  deep  drawing,  stamping,  squeezing, bending, shearing etc.

5.2 Cold  rolling  is  a  process  by  which  the  sheet metal or strip is introduced between rollers  and  then  compressed  and  squeezed.   The  amount  of  strain  introduced  determines  the  hardness  and  other  material  properties  of  the  finished  product.   Cold  rolled  sheet  can  be  produced  in  various  conditions  such  as  skin- rolled, quarter hard, full hard depending on how  much cold work has been performed.  This cold  working  (hardness)  is  often  called  temper,  although  this  has  nothing  to  do  with  heat  treatment temper.  Cold-rolled metal is given a  “temper”  rating  based  on  the  degree  it  was  compressed.  Temper is the state or a condition  

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of  a  metal  as  to  its  hardness  or  toughness  produced  by  either  thermal  treatment  or  heat  treatment  and  quench  or  cold  working  or  a  combination of same in order to bring the metal  to  its  specified  consistency.   As  per  Steel  dictionary, cold rolling means rolling metal at a  temperature  below  the  softening  point  of  the  metal  to  create  strain  hardening  (work- hardening).   It  is  the same as cold  reduction,  except  that  the  working  method  is  limited  to  rolling.   Cold  rolling  changes  the  mechanical  properties of  strip and produces certain useful  combinations  of  hardness,  strength,  stiffness,  ductility  and  other  characteristics  known  as  tempers.

5.3 It  is  not  disputed  that  cold-rolled  sheet  products  are  used  in  a  wide  variety  of  end  applications  such  as  appliances-refrigerators,  washers,  dryers,  and  other  small  appliances,  automobiles-exposed  as  well  as  unexposed  parts, electric motors, and bathtubs.  Cold-rolled  sheet  products  are  used  in  these  and  many  other  areas  of  manufacturing.   To  meet  the  various end use requirements, cold-rolled sheet  products are metallurgically designed to provide  specific attributes such as high formability, deep  drawabiliity, high strength, high dent resistance,  good  magnetic  properties,  enamelability  and  paintability.   The  primary  feature  of  cold  reduction is to reduce the thickness of hot-rolled  coils  into  thinner  thicknesses  that  are  not  generally attainable in the hot rolled state.  Cold  reduction  operation  induces  very  high  strains  (work hardening) into the sheet.  Thus, the sheet  not  only  becomes  thinner,  but  also  becomes  much harder,  less  ductile,  and very  difficult  to  form.  However, after the cold-reduced product  is  annealed  (heated  to  high  temperature),  it  becomes very soft and formable.  Tempering is  a  form  of  cold  rolling  that  gives  the  steel  a  precise amount of hardness on the outer surface  of the steel.  Cold rolling is undertaken to reduce  the  thickness,  improve  the  surface  finish,  

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improve  the  thickness  tolerances,  to  offer  a  range  of  tempers  and  as  a  preparation  for  surface  coating.   Thus,  cold-rolling  process  is  also a process of hardening or tempering which  is  applied  to  flat  rolled  products,  namely  hot  rolled strips so as to attract Chapter Note 4 of  Chapter 72 of the Schedule to the Tariff Act.  In  the present case, there is no dispute over the  fact  that  the  appellant-assessee  was  undertaking  cold-rolling  process  on  its  cold- rolling mills on the hot-rolled strips which were  sent to it for the job work of reducing the gauge.  The  process  of  reducing  the  gauge  by  cold- rolling  was  also  a  process  of  hardening  or  tempering because cold-rolled products become  hard and possess a very high tensile strength by  the  process  of  cold-rolling.   The  fact  that  a  degree  of  hardness  can  be  achieved  will  not  dilute  the  applicability  of  the  Chapter  Note  4  because every degree of  hardening or type of  tempering resulting from cold-rolling of flat-rolled  products would amount to manufacturing within  the meaning of Chapter Note 4 of Chapter 72.  The fact that annealing and pickling was done  earlier  by  the party  sending the goods for  job  work,  will  not  make  any  difference  because  hardening  or  tempering  of  such  flat-rolled  products  comes  about  only  after  cold-rolling.  Having  regard  to  the  variety  of  flat-rolled  products, which are cold-rolled, it cannot be said  that the goods are not marketable.  Admittedly,  none of  the parties  sending the goods for  job  work  to  the  appellant-assessee  adopted  the  procedure of sending the goods for job work, as  contemplated by Rule 57F of the Central Excise  Rules, 1944 and, therefore, there can arise no  question of the goods having been sent for job  work under Rule 57F.  It was not the case of any  of these appellants that the goods were sent in  accordance with the provisions of Rule 57F of  the said Rules.

12. The other question raised in the appeals pertains to the extended  

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period of limitation.  The case set up by the assessee is that, in  

any case, there was no willful mis-declaration, mis-statement or  

suppression on the part of the assessee and, on the other hand,  

the facts gave rise to a bona fide belief that the process did not  

amount to manufacture and, therefore, show case notice dated  

15.05.2000 was beyond the normal period of limitation and, thus,  

time barred.  As pointed out above, the assessee had not been  

paying any excise duty on the aforesaid process as according to  

it, this process did not amount to manufacture and no excise duty  

was  paid.   It  is  only  on  the  basis  of  intelligence  report  that  

assessee was evading central excise duty that the matter came  

to the notice of the Revenue which led to the exercise of issuing  

of notice.  It so happened that on the basis of intelligence, the  

Officers of Central Excise Department visited and searched the  

said  factory  premises  on  25.03.1999  in  the  presence  of  two  

independent  panchas  and  Shri  Rajnibhai  Veljibhai  Katharia,  

partner  of  assessee  and  seized  certain  records  for  which  

panchnama  dated  25.03.1999  was  prepared.   Officers  in  the  

panchnama observed that  the two housing of  cold-rolling mills  

fitted with debapti  and gearbox were found installed and other  

parts were not found in the said rolling mills.  During the course of  

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panchnama itself, it was stated by Shri Rajnibhai in presence of  

panchas:

(a)   That the said factory was engaged in the reduction of gauge  

(15 gauge to 20 gauge) of hot-rolled SS patta, received from various  

parties on two cold-rolling installed in the factory from November, 1995  

to March, 1997;

(b)  That hot-rolled SS pattas after annealing and picking  

process were received from various units in his factory and after  

reducing the gauge from (15 to 20 gauge) in his factory, the same  

was sent back to senders on job charges of Rs.1.50 per KG for  

the said process;

(c)  That they closed the said two rolling mills in April, 1977  

and sold out the parts other than housing, debapti and gearbox.

Statements of the responsible persons for the said unit were  

recorded  and  after  conducting  some  investigation,  the  

Commissioner of Central Excise, issued the show cause notice  

dated 15.05.2000 to the assessee contending that the process of  

cold-rolling  undertaken  by  the  assessee  amounts  to  the  

manufacture within the meaning of Section 2(f) of the Act.  

13. Once, we keep the aforesaid facts in mind, it is difficult to accept  

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that the assessee was under bona fide belief that excise duty was  

not payable and that it was not permissible for the Department to  

avail the larger period of limitation by invoking proviso to Section  

11A of  the  Act.   All  the  Authorities  below  have  rejected  this  

argument of the assessee.  The Tribunal while upholding the view  

of  the  Commissioner  agreed  with  the  reasons  given  by  the  

Commissioner in the following manner:

“The  Commissioner  has  also  for  valid  reasons  held that  the extended period of  limitation was  applicable and that the Department's record did  not  show  the  receipt  of  any  letter  allegedly  written  on  28.09.1996.   The assessee,  dealing  with several similar manufacturing units who paid  excise duty on identical processes, and doing job  work on their behalf would have obviously known  that excise registration was required for the cold  rolling  mills  in  its  factory  for  the  purpose  of  manufacturing  cold-rolled  pattas/pattis.   The  partner  of  the  assessee  was  fully  aware  that  such activity was dutiable, in view of the fact that  four out of six units from which the goods were  received by M/s. Gujarat Industries were paying  duty on similar manufacturing activity.  Thus, the  Commissioner is right in issuing the show cause  notice  by  invoking  the  extended  period  of  limitation and also holding that the assessee had  connived and deliberately acted in a manner to  defraud the Revenue.  The Division Bench of this  Tribunal  in  Indian Strips  v.  CCE, Ahmedabad  2004  (173)  ELT 265  took  note  of  the  Chapter  Note 4 of Chapter 72 for holding that cold rolling  process on flat  rolled product  would amount  to  manufacture.  This decision was rendered after  considering the decision of Hon. Supreme Court  in  Steel  Strips  Ltd. 1995  (77)  ELT 248  (SC),  which was rendered prior to the enactment of the  

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said  Chapter  Note  4  which  had  the  effect  of  including the process of hardening or tempering  in relation to flat-rolled products in the definition  of  'manufacture'.   The  subsequent  decision  in  Lalit Engineering Works  v.  CCE, Ahmedabad  could  not  have  taken  a  view  contrary  to  the  earlier binding decision in Indian Strips v. CCE,  Aurangabad (supra) is required to be followed in  a  subsequent  decision  of  the  Division  Bench.  The assessee M/s.  Gujarat  Industries  removed  the goods without any cover of  excise invoices  and  the  other  assessees  received  the  cold- worked  goods  without  cover  of  such  excise  invoices.”

14. We,  thus,  reject  the  plea  of  the  assessee  that  the  impugned  

notice was time barred.

15. We do not find any merit in these appeals, which are accordingly  

dismissed.

.............................................J. (A.K. SIKRI)

.............................................J. (ROHINTON FALI NARIMAN)

NEW DELHI; DECEMBER 14, 2015.

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