M/S. MARUTI SUZUKI INDIA LTD. Vs. COMMNR. OF CENTRAL EXCISE, NEW DELHI
Supreme Court of India (Division Bench (DB)- Two Judge)
Appeal (Civil), 8190 of 2003, Judgment Date: Mar 12, 2015
'REPORTABLE'
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 8190 OF 2003
M/S. MARUTI SUZUKI INDIA LTD. ...Appellant
VERSUS
COMMNR. OF CENTRAL EXCISE, NEW DELHI ...Respondent
J U D G M E N T
R. F. NARIMAN, J.
Vide a show cause notice dated 30.08.2001 that was served upon
the appellant M/s. Maruti Suzuki India Limited (then known as M/s Maruti
Udyog Limited), the Department gathered, by way of intelligence, that the
appellant had cleared inputs/ spares after processing, but duty was only
paid equivalent to the MODVAT credit taken on these inputs before
processing, and hence a substantial increase in the value of these inputs
has escaped payment of duty on account of value addition in such inputs
after processing. More specifically, what was alleged was that various
spare parts relatable to motor vehicles that were manufactured by the
appellant and were procured by it in the form of bumpers, grills, etc., on
which the process of Electro Deposition Coating, namely, EDC took place
(which was in the nature of anti-rust so that the shelf life of the said
bumpers, grills, etc., would be generally increased) have escaped duty on
account of the value addition of EDC.
The show cause demanded by way of differential duty a sum of
Rs.2,00,20,310.14/-. Since the period covered relates to August, 1996, to
March, 2001, we need to see the provisions of Rule 57F of the Central
Excise Rules, 1944 (hereinafter referred to as 'Rules') as it existed in
three different periods. For the purposes of this appeal, however, there
is no material change made post 20.02.1997 or post 31.03.2000 when this
rule was twice amended. For the period in question, the said rule together
with its amendments is set as hereinbelow: -
Rule for the period August 1996 to 28.2.1997
"57F(1) The inputs in respect of which a credit of duty has been
allowed under rule 57A-
(i) may be used in or in relation to the manufacture of final products for
which such inputs have been brought into the factory; or
(ii) shall be removed, after intimating the Assistant Commissioner of
Central Excise having jurisdiction over factory and obtaining a dated
acknowledgment of the same, from the factory for home consumption or for
export under bond.
Provided that where the inputs are removed from the factory for home
consumption on payment of duty of excise, such duty of excise shall be the
amount of credit that has been availed in respect of such inputs under rule
57A."
Rule for the period 1.3.97 to 31.3.2000
"57F(1) The inputs on which credit has been taken may be used in or in
relation to the manufacture of final products.
(2) The inputs may be removed, after intimating the Assistant
Commissioner of Central Excise concerned, in writing, for home consumption
or for export under bond.
(3) All removals of inputs for home consumption shall be made -
(a) on payment of duty equal to the amount of credit availed in respect
of such inputs; and
(b) under the cover of invoice prescribed under rule 52A."
Rules for the period 1.4.2000 to 28.2.2001
"Explanation - When inputs or capital goods are removed from the factory,
the manufacturer of the final products shall pay the appropriate duty of
excise leviable thereon as if such inputs or capital goods have been
manufactured in the said factory, and such removal shall be made under the
cover of an invoice prescribed under rule 52A."
By their reply to the show cause notice, the appellant stated
that there was no manufacture as understood in law, but only the process of
ED coating which did not, in any manner, bring into being a new marketable
commodity as such. The bumpers, grills, etc., continued to be bumpers,
grills, etc., even after the process of ED Coating.
The learned Commissioner of Central Excise by its order dated
28.02.2002 set out the show cause notice and the reply in some detail and
ultimately came to the conclusion that on account of certain deductions,
the duty that was evaded by the appellants herein was Rs.1,68,07,499/-
instead of Rs.2,00,20,310/- as stated in the show cause notice. As a
result, it proceeded to state in its order that the duty evaded was
Rs.1,68,07,499/- and proceeded also to impose an equivalent penalty of the
same amount with the caveat that 25 per cent of the penalty amount would be
payable if it is paid within 30 days of the date of communication of the
order.
The appeal filed before Customs, Excise & Gold (Control)
Appellate Tribunal (hereinafter referred to as 'CEGAT') was unsuccessful.
The CEGAT after referring to the arguments of both sides found as follows:
-
5.1 We have considered the submissions of both the sides. The facts
which are not in dispute are that the Appellants purchase inputs, avail
MODVAT Credit of duty paid thereon subject them to the process of E.D.
Coating and remove the same on payment of duty equivalent to the amount of
MODVAT Credit availed by them initially at the time of receipt of the
inputs. It is thus apparent that the inputs are removed from the factory
after undertaking the process of E.D. Coating. In view of this the ratio
of the decision of the Larger Bench in the case of Commissioner of Central
Excise, Vadodra v. Aisa Brown Boveri Ltd., 2000 (120) ELT 228 is not
applicable as the facts are different in as much as the inputs were cleared
as such in the said matter. It has been emphasized by the learned counsel
for the appellants that words "as such" were not mentioned in Rule 57-F at
the relevant time. In our view the absence of these words does not make
any difference as Rule 57-F of the Central Excise Rules deals with the
"Manner of Utilization of Inputs and the Credit". The said Rules provides
for the manner of use of inputs as under:
(i) In or in relation to the manufacture of final products for which such
inputs have been brought into the factory; or
(ii) Removed from the factory for home consumption or for export under
bond.
5.2 Proviso to Rule 57-F(1) or subsequently Sub-rule (3) of Rule 57-
F provided that where the inputs are removed for home consumption on
payment of duty, such duty of excise shall be the amount of credit that has
been availed in respect of such inputs. It is thus apparent that the Rule
57-F is in respect of "such inputs" only. Further Rule 57 AB of the
Central Excise Rule provides for the removal of inputs as such. We,
therefore, hold that as the Appellants have removed the inputs after
subjecting them to the process of E.D. Coating, mere reversal of the MODVAT
Credit availed in respect of those inputs would not be payment of
appropriate amount of duty. The duty of excise has to be discharged on the
intrinsic value of the goods as held by the Supreme Court in the case of
Sidhartha Tubes Ltd., Supra. Accordingly, the Appellants have to discharge
the duty liability after including the cost of E.D. Coating in the value of
the goods. The Appellants, however, would be eligible to take the MODVAT
Credit of duty paid on coating material subject to the satisfaction of the
jurisdictional Excise Authority. In view of the facts and circumstances of
the present matter, no penalty is imposable on the Appellants. We
accordingly, set aside the penalty imposed on the Appellants."
Shri V. Lakshmikumaran, learned counsel appearing for the
appellant, argued before us that CEGAT has lost sight of the most
fundamental aspect of the reply to the show cause notice, namely, that ED
coating did not lead to "manufacture". It is only after there is
"manufacture" that the input that is mentioned in Rule 57F(1) ceases to be
an input covered by the proviso to sub-rule (ii) thereof. It is his short
submission that the "inputs" being bumpers, grills, etc., continued to be
the same inputs for the purpose of the proviso despite the fact that there
may be value addition on account of ED coating. He cited various judgments
in support of his submissions which will be adverted to a little later in
this judgment.
On the other hand, Shri Guru Krishna Kumar, learned senior
counsel appearing for the Department, referred us to the show cause notice
and to various judgments in order to show that the process of ED coating
which led to value addition, would, in fact, amount to "manufacture" and
that therefore, the "input" would not be the same input so as to qualify
under sub-rule(ii) on a mere reversal of MODVAT duty. The duty on the
value addition would also therefore have to be paid. In support of this
proposition, he cited a number of judgments which will also be adverted to
a little later in this judgment.
In addition, he referred us to Rule 57F (3) and Rule 57F(3A)
which, according to him, would show that whenever there is a value addition
to an input, the said value addition would also be liable to duty.
We have heard learned counsel for the parties. In our view, on
the true construction of Rule 57F(1), it would be clear that the "input"
that is removed from the factory for home consumption is bumpers, grills,
etc., being spare parts of motor vehicles procured by the appellant before
us. According to us, ED coating which would increase the shelf life of the
spare parts and provide anti-rust treatment to the same would not convert
these bumpers, etc., into a new commodity known to the market as such
merely on account of value addition.
In one of the very first important judgments on the Central
Excises and Salt Act, 1944, namely Union of India v. Delhi Cloth and
General Mills Co. Ltd. [1977 (1) E.L.T. 199], an important distinction was
made between manufacture and processing. It was held that processing and
manufacture are distinct concepts in law and only such processing as
results in a transformation, namely, that a new and different article
emerges having a distinct name, character or use, that excise duty, which
is only on manufacture, can be levied. The relevant portion of the
judgment is as hereunder: -
"14. The other branch of Mr. Pathak's argument is that even if it be held
that the respondents do not manufacture "refined oil", as is known to the
market they must be held to manufacture some kind of "non-essential
vegetable oil" by applying to the raw material purchased by them, the
processes of neutralization by alkali and bleaching by activated earth
and/or carbon. According to the learned Counsel "manufacture" is complete
as soon as by the application of one or more processes, the raw material
undergoes some change. To say this is to equate "processing to
manufacture" and for this we can find no warrant in law. The word
"manufacture" used as a verb is generally understood to mean as "bringing
into existence a new substance" and does not mean merely "to produce some
change in a substance," however minor in consequence the change may be.
This distinction is well brought about in a passage thus quoted in
Permanent Edition of Words and Phrases, Vol. 26, from an American judgment.
The passage runs thus:-
"Manufacture implies a change, but every change is not manufacture
and yet every change of an article is the result of treatment, labour and
manipulation. But something more is necessary and there must be
transformation; a new and different article must emerge having a
distinctive name, character or use."
18. These considerations of the meaning of the word "goods" provides strong
support for the view that "manufacture" which is liable to exercise duty
under the Central Excises and Salt Act, 1944 must be the "bringing into
existence of a new substance known to the market". "But", says the learned
Counsel, look at the definition of "manufacture" in the definition clause
of the Act and you will find that "manufacture" is defined thus:
Manufacture includes any process incidental or ancillary to the
completion of a manufactured product." S.2(f)
19. We are unable to agree with the learned Counsel that by inserting this
definition of the word "manufacture" in S.2 (f) the legislature intended to
equate "processing" to "manufacture" and intended to make mere "processing"
as distinct from "manufacture" in the sense of bringing into existence of a
new substance known to the market liable to duty. The sole purpose of
inserting this definition is to make it clear that at certain places in the
Act the word 'manufacture' has been used to mean a process incidental to
the manufacture of the article. Thus in the very Item under which the
excise duty is claimed in these cases, we find the words "in or in relation
to the manufacture of which any process is ordinarily carried on with the
aid of power". The definition of 'manufacture' as in S.2(f) puts is beyond
any possibility of controversy that if power is used for any of the
numerous processes that are required to turn the raw material into a
finished article known to the market the clause will be applicable; and an
argument that power is not used in the whole process of manufacture using
the word in its ordinary sense, will not be available. It is only with
this limited purpose that the legislature, in our opinion, inserted this
definition of the word 'manufacture' in the definition section and not
with a view to make the mere "processing" of goods as liable to excise
duty."
However, to buttress his submission Shri Guru Krishna Kumar,
learned senior counsel, referred us to various judgments laid down by this
Court. First, he referred us to 'Sidhartha Tubes Limited v. Collector of
Central Excise' [2000 (10) SCC 194]. Since this judgment was also the only
judgment relied upon by CEGAT in the impugned order, it is a little
important to understand what exactly was held therein. In this case, the
appellant manufactured mild steel pipes and tubes. At this stage, the
product was known as "black pipe". Part of the production of the black
pipe was then taken to a separate shed in the appellant's factory premises
and galvanised. On facts in that case, the appellants had themselves in
their classification list separately declared black pipes and galvanised
pipes as their products. In such a situation, this Court held that while
the process of galvanisation by itself may not amount to manufacture, yet
since it added to the intrinsic value of the product declared by the
appellants themselves separately as galvanised pipes, the value of
galvanised pipes would include the element of the cost of galvanisation.
From this judgment, Shri Guru Krishna Kumar, learned senior
counsel, wanted us to accept as the ratio of the judgment that duty must be
paid on value addition despite the fact that the process of galvanisation
would not amount to manufacture. Not only is this not the ratio of the
judgment as we see it but it would, in fact, conflict with other judgments
directly on the point.
In Commissioner of Central Excise, New Delhi v. S.R. Tissues
Pvt. Ltd. [2005 (186) E.L.T. 385], the question before this Court was
whether on cutting and slitting of jumbo rolls, several new products
emerged, namely, table napkins, toilet rolls, etc., and there being a value
addition of 180 per cent of the new products over the jumbo roll would by
itself lead to the irresistible conclusion that there is "manufacture" and
not mere "processing". This was turned down by this Court stating that
jumbo rolls cannot conveniently be used as such for household or sanitary
purposes. If therefore, for the sake of convenience, they are required to
be cut into various shapes and sizes so that they can conveniently be used
as table napkins, etc., this would not mean that the table napkins, etc.,
would be a new product distinct from the jumbo roll. The end use of both
jumbo rolls and toilet rolls, etc., would remain the same, namely, for
household or sanitary use.
It was then held following Union of India v. J.G. Glass
Industries Ltd.[ 1998 (97) E.L.T. 5] that there is a fundamental
distinction between manufacture and processing. On an aspect not adverted
to in the Delhi Cloth and General Mills Co. Ltd. case supra, this court
held that where the commodity already in existence is of no commercial use
but for a super added process, then on facts, there may be manufacture.
In the present case, it is clear that bumpers and grills are
most certainly of commercial use in themselves whether the process of ED
coating is applied or not.
Importantly, this Court laid down that value addition without
any change in name, character or end use of goods cannot possibly
constitute criteria to decide as to what is manufacture.
This court said in this behalf: -
"21. Lastly, in the instant case, the Commissioner as an
adjudicating authority has held that there was a value addition of 180%.
He found that jumbo rolls of tissue papers were purchased by the assessee @
Rs.30/- to Rs.70/- per kg. and the final product i.e. the toilet tissue
paper was sold by the assessee @Rs.85/- to Rs.100/- per kg. And, therefore,
there was a value addition of around 180% i.e. between the range of Rs.30/-
to Rs.85/- per kg. This finding of the Commissioner is erroneous. Under
the Excise law, Value addition based on a process is certainly a relevant
criteria to decide as to what constitutes "manufacture". Such value
addition should be on account of change in the nature or characteristics of
the product. In the present case, as stated above, there is no change in
the nature or characteristics of the tissue paper in the jumbo roll and the
nature and characteristics of the tissue paper in the table napkin, facial
tissues etc. Therefore, without such change in the nature or
characteristics of the tissue paper, value addition on account of transport
charges, sales tax, distribution and selling expenses and trading margin
cannot be an indicia to decide what is manufacture. Thus, value addition
without any change in the name, character or end-use by mere cutting or
slitting of jumbo rolls cannot constitute criteria to decide what is
"manufacture".
22. In the case of Decorative Laminates (India) Pvt. Ltd. v. Collector of
Central Excise, Bangalore reported in 1996 (86) E.L.T. 186, this Court
held that the process of application of phenol resin on duty paid plywood
under 100% heat amounts to manufacture and in that connection observed that
value addition and separate use are also relevant factors which the Courts
should consider in deciding the applicability of Section 2(f) of the Act.
Therefore, value addition based on price difference only without any change
in the name, character or end-use is a dangerous criteria to be applied in
judging what constitutes "manufacture". Lastly, the end-use in both the
entries 4803 & 4818.90 is the same, namely, for sanitary or household
purposes. In the circumstances, value addition criteria as applied by the
Commissioner is erroneous."
Shri Guru Krishna Kumar, learned senior counsel, also cited two
other decisions in support of the proposition that, in fact, manufacture
had taken place on the facts of the present case. One such decision,
namely, Brakes India Limited v. Superintendent of Central Excise and others
[1997 (10) SCC 717] dealt with brake lining blanks. It was found on facts
that these brake lining blanks purchased by the appellant could not be used
as brake linings by themselves without the process of drilling, trimming
and chamfering. This judgment has been distinguished in para 13 of the
judgment which has been cited above, namely, Commissioner of Central
Excise, New Delhi v. S.R. Tissues Pvt. Ltd. [2005 (186) E.L.T. 385].
Unlike the facts in the Brakes India Limited judgment, on the facts here,
bumpers, grills, etc., are of commercial use and liable to duty as such,
even without any ED coating.
Shri Guru Krishna Kumar, learned senior counsel, then cited
Siddhartha Tubes Ltd. v. Commissioner of Customs & Central Excise, Indore
(M.P.)[(2005) 13 SCC 559]. This case again concerned manufacture of
galvanised pipes. This court, in a very significant passage, stated:
"At the outset, we may state that value is the function of price
under section 4(4)(d)(i) of the Act. The concept of "valuation" is
different from the concept of "manufacture". Under section 3 of the Act,
the levy is on the manufacture of the goods. However, the measure of the
levy is the normal price, as defined under section 4(1)(a) of the Act. It
is not disputed that galvanization as a process does not amount to
manufacture. However, on facts, it has been found by the commissioner that
the process of galvanization has taken place before the product is cleared
from the place of removal, as defined under section 4(4)(b). Further, on
facts, the commissioner has found that galvanization has added to the
quality of the product. It has increased the value of the pipes. Hence, the
costs incurred by the assessee for galvanization had to be loaded on to the
sale price of the pipes. Therefore, the cost had to be included in the
assessable value of MS galvanized pipes. We do not find any error in the
reasoning of the adjudicating authority."
It is clear, as is apparent from the opening words of Section 4
of the Central Excise Act, 1944, that there must first be manufacture in
order to attract the charging section, namely Section 3 of the Central
Excise Act, 1944 before one comes to valuation of goods under Section 4.
On the facts of the present case, we have first, therefore, to
arrive at whether there is "manufacture" at all and only subsequently does
the question arise as to if this is so, what is the valuation of the
processed goods and whether duty is payable upon them. We have found on
facts that for the purposes of the proviso to Rule 57F(ii), the inputs that
were not ultimately used in the final product but were removed from the
factory for home consumption remain the same despite ED coating and
consequent value addition. We follow the law laid down in S.R. Tissues
Pvt. Ltd.'s case and state that on account of mere value addition without
more it would be hazardous to say that manufacture has taken place, when in
fact, it has not. It is clear, therefore, that the inputs procured by the
appellants in the present case, continue to be the same inputs even after
ED coating and that Rule 57F(ii) proviso would therefore apply when such
inputs are removed from the factory for home consumption, the duty of
excise payable being the amount of credit that has been availed in respect
of such inputs under Rule 57A.
We now, come to the second argument made by Shri Guru Krishna
Kumar, learned senior counsel, namely, that from a reading of Rule 57F (3)
and 57F(3A), that Rule 57F(1) should be construed in such a way that the
moment an input which falls under the said Rule has a value addition on
account of processing it will cease to be an input covered by the Rule. To
appreciate this argument, we set out rule 57F(3) and Rule 57F(3A) which are
as follows: -
(3) [Subject to sub-rule (3A) and notwithstanding] anything contained in
sub-rule(1), manufacturer may after intimating the [Assistant Commissioner
of Central Excise] having jurisdiction over the factory and obtaining dated
acknowledgment of the same, remove the inputs as such, or after the inputs
have been partially processed during the course of manufacture of final
products, to a place outside the factory,-
(a) For the purposes of test, repairs, refining, re-conditioning or
carrying out any other operation necessary for the manufacture of the final
products and return the same to his factory, for,-
(i) further use in the manufacture of the final product; or
(ii) removing the same without payment of duty under bond for export; or
(iii) removing the same after payment of duty for home consumption.
Provided that the waste, if any, arising in the course of such
operation is also returned to the said factory;
(b) for the purposes of manufacture of intermediate products necessary for
the manufacture of the final products and return the said intermediate
products to his factory, for,-
(i) further use in the manufacture of the final product; or
(ii) removing the same without payment of duty under bond for export; or
(iii) removing the same after payment of duty for home consumption.
Provided that the waste, if any, arising in the course of such
operation is also returned to the said factory:
Provided further that the said waste need not be returned to the said
factory after the appropriate duty of excise leviable thereon has been
paid.
(3A) Where a manufacturer intends to remove the inputs as such, or
after the inputs have been partially processed during the course of
manufacture of final products to a place outside the factory for the
purposes specified in sub-rule(3), the manufacturer shall do so after
debiting an amount equivalent to the amount of credit of duty attributable
to such inputs or the inputs contained in such partially processed inputs;
Provided that, notwithstanding anything contained in rule 57A,
the manufacturer shall be eligible to avail of the credit of an equivalent
amount after the inputs or the processed goods, as the case may be, have
been received back in the factory of the manufacturer;
Provided further that the manufacturer shall not take credit
under this sub-rule unless the inputs or the processed goods, as the case
may be, are received in the factory under the cover of the document on
which such inputs or partially processed goods were removed from the
factory.
It was conceded by Shri Guru Krishna Kumar, learned senior
counsel, that for several reasons, the said Rules would not apply to the
facts here but that the drift of these rules shows that where inputs are
removed to a place outside the factory when they are only partially
processed, then when they come back after the process, the value addition
made on account of such processing would be chargeable to duty under sub-
Rule 3A.
This argument cannot be accepted for two basic reasons. First,
we would be adding words to Rule 57F(1) to the effect that value additions
made to inputs covered by sub-rule (ii) would also suffer duty even if
there is no manufacture. Second, sub-rule (3) and (3A) apply to an
entirely different factual scenario, as has been conceded by learned
counsel for Revenue, and it is only after all the conditions under the said
sub-rules are met that duty attributable to inputs contained in partially
processed inputs would then become dutiable.
In view there of, we allow this appeal, set aside the judgment
of CEGAT and resultantly, the demand made in the show cause notice as
reduced by the Commissioner. We hasten to add that the penalty imposed on
the appellant has already been set aside by CEGAT's order which part of
CEGAT's order will stand.
The appeal stands disposed of in the aforesaid terms.
..........................., J.
[ A.K. SIKRI ]
..........................., J.
[ ROHINTON FALI NARIMAN ]
New Delhi;
March 12, 2015.
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