Customs, Excise and Gold Tribunal - Mumbai
Indian Rayon And Industries Ltd. vs Commissioner Of Central Excise on 4 February, 2005
Equivalent citations: 2005(101)ECC155, 2004(172)ELT131(TRI-MUMBAI)
ORDER S.S. Sekhon, Member (T)
1. The appellants are aggrieved from the order passed by the Commissioner of Central Excise, Bangalore wherein he demanded duty and imposed penalty:
(a) Duty was demanded under the proviso to Section 11A (1) of the Central Excise Act, 1944 amounting to Rs. 2,08,47,542/- towards A, Central Excise duty, allegedly payable on the Ready Made Garments (RMG for short) during the period from 1.5.2001 to 31.1.2003;
(b) penalty imposed of Rs. 2,08,47,542/- under Section 11AC of Central Excise Act, 1944;
(c) penalty imposed of Rs. 21,00,000/- under Rule 25 of the Central excise (No 2) Rules 200 I/Central Excise Rules, 2002, and
(d) it was ordered to pay interest under Section 11AB of the Central Excise Act, 1944, on the ground that the imported RMG were subjected to 'refinishing work' which would amount to manufacture as per Chapter Note. Since they were not cleared on payment of Central Excise duty, demands were confirmed by invoking the larger period of limitation.
2. Brief facts of the case, relevant for detennining the issues herein are,
i) the appellants are manufacturers of RMG falling under Chapter 6201.00 of the CETA 1985 and have taken Central Excise Registration and are complying with the provisions under the same. Apart from the activity of manufacturing RMG, they are also engaged in the activity of importing RMG from different countries like Bangladesh, Indonesia etc and after the import, they sell the same in India. The dispute herein is with reference to RMG imported and sold.
ii) For this imported RMG, they place purchase orders on foreign suppliers to manufacture and supply different brands such as Louis Phillippe, Van Heusen and Peter England. They ensure that the fabric is sourced/supplied and used by the exporter, as per the orders and all raw material namely fabric, trims etc are as per the specifications and approval for fabrication of KMG is conducted on orders placed. Every garment is branded at the production site itself with either embroidering the brand name or affixing the brand labels at the collar. After completion of the stitching , exporters put the 'swing tags' which contain the name of the collection/brand of the shirts and one part of the bar code sticker is affixed on the swing tag and the other portion is discarded. Such a shirt is thereafter packed in a polypack which is then sealed. Six such polypacks of single shirts are placed in a carton and four such cartons are put in a bigger carton for safe transportation. They are then exported to India from the country of origin. After paying basic customs duty and additional duty and special additional duty as applicable, such cartons are cleared. The RMG imported being fully stiched, folded, ironed with all the trims including the back support, butterfly and collar support with the brand name affixed and swing tag also attached giving details of the size, style, MRP, bar code, etc and brought and stored separately in the assessees premises at Bangalore.
iii) The imported goods are sent to job workers from their premises sometimes directly they are sent from the place of import to job workers. At the job workers premises and sometime even at the assessee's premises the imported cartons arc opened. The imported cartons are termed by the Revenue as "bulk packs" and the shirts are removed, thereafter they are placed in a paper carton which bears the brand name and also "swatched" which is affixation of a textile patch indicating colour of the shirt inside the carton and a bar code giving all the particulars available on the bar code attached in the "swatch tag". The job workers undertake the following procedures:
Page 15(a) to (j)
iv) These procedures are also conducted in the assessee's premises. Revenue considers the above said activities as "refinishing of the ready made garments" and holds that they amount to manufacture as per Note 4 to Chapter 62 of the Central Excise Tariff Act, 1985 and the longer period of limitation under the proviso to Section 11A (1) of the Central Excise Act, 1944 could be invoked for duty demand on the ground that the appellant suppressed the fact of refinishing of the ready made garments with the sole intention of evading payment of Central Excise duty and thereby contravened the provisions of Rules 4, 5, 6, 8 10, 11 and 12 of the Central Excise Rules.
3. (i)Note 4 to Chapter 62 of the Central Excise Tariff Act, 1985 reads as under:
"4. In relation to products of this Chapter, affixing a brand name on the product, labelling or relabelling of its containers and repacking from bulk packs to retail packs or the adoption of any other treatment to render the product marketable to the consumer, shall amount to 'manufacture'."
This Note is an artificial definition, relating to levy of duty and therefore it has to be construed strictly. This is more so when such artificial definition is in the nature of a charging provision relating to imposition of tax. Therefore, the submission that the artificial definition of manufacture as per Chapter Note is to be strictly incorporated and following case laws has been relied upon:
(a) Commissioner of Income Tax v. Manilal Dhanji (1962) 044 ITR 876 (SC).
(b) Commissioner of Income tax v. Keshavlal Lallubhai Patel (1965)55 ITR 637 (SC).
(c) Commissioner of Income Tax v. Prem Bhai Prarekh (1970) 77 ITR 27B (SC)
(d) Commissioner of Income Tax v. Sarathy Mudaliar (CP) (1972) 83 ITR 170W(SC) has force and is to be upheld.
(ii) In the light of the above settled law and examining the issues herein, we find that the following submissions are made:
1.1 The show cause notice considers the activities of putting the imported shirts, which are already in a packed condition, into the product box and affixing the sticker containing certain details with barcode, either carried out by the Appellants themselves or by their job workers, as amounting to manufacture in terms of Note 4 to Chapter 62 of the Central Excise Tariff Act, 1985.
1.2 Section 2(f) of the Central Excise Act 1944, as substituted with effect from 28.2.86 and as it stood up to 11.5.2002 reads as under:
(f) "manufacture" includes any process,-
(i) incidental or ancillary to the completion of a manufactured product; and
(ii) which is specified in relation to any goods in the Section or Chapter notes of the Scliedule to the Cential Excise Tariff Act, 1985 as amounting to manufacture;".
1.3 During the period 11.5.2002 to 28.2.2003 Section 2(f) as amended was as follows:-
(f) "manufacture" includes any process,-
(i) incidental or ancillary to the completion of a manufactured product; and
(ii) which is specified in relation to any goods in the Section or Chapter notes of the Schedule to the Central Excise Tariff Act, 1985 as amounting to manufacture; or
(iii) which is specified in relation to any goods by the Central Government, by notification in the Official Gazette, as Amounting to manufacture.."
1.4 The above sub-clause (iii) has been substituted with the following sub-clause with effect from 1.3.2003:
"(iii) which, in relation to the goods specified in the Third Schedule, involved packing or repacking of such goods in a unit container or labelling or re-labelling of containers including the declaration or alteration of retail sale price on it or adoption of any other treatment on the goods to render the product marketable to the consumer."
1.5 It may be noted that the period covered in the present proceedings is prior to March 2003 and therefore Sub-clause (iii) in the definition of "manufacture" as it stands with effect from 1.3.2003 is irrelevant in these proceedings. Similarly, sub-clause (iii) as it stood during the period from 11.5.2002 to 28.2.2003 is also irrelevant for the present proceedings inasmuch as the Central Government has not issued any notification specifying any particular process as amounting to manufacture.
1.6 Thus, what is left for consideration is the definition of "manufacture" as defined in Section 2(f) (i) and (ii) only.
1.7. Thus, in order to treat a process as amounting to manufacture, it should be incidental or ancillary to the completion of a manufactured product and it should be specified in relation to any goods in Section or Chapter Note of the Schedule to Central Excise Tariff Act as amounting to manufacture.
1.8 In other words, it is not enough that the process should be specified in relation to a product in the Chapter Note of Central Excise Tariff Act, but it must also be a process incidental or ancillary to the completion of a manufactured product. The word "and" appearing in between clause (i) and clause (ii) of Section 2(f) would only mean that the process referred to in this section, should satisfy both the criteria specified in clauses (i) and (ii).
1.9. The provisions of Section 2(f) as it stood prior to 28.2.86 makes the aforesaid position very clear. The relevant portion of Section 2(f) as it stood prior to 28.2.86 reads as under:
(f) "manufacture" includes any process incidental or ancillary to the completion of a manufactured product; and
(i)............
(ia) in relation to manufactured tobacco, includes the labelling or relabelling of containers and repacking from bulk packs to retail packs or the adoption of any other treatment to render the product marketable to the consumer.
iii.....
1.10 Thus, prior to 28.2.1986, the word "and" appearing in main Section 2(f) is clearly disjoint in the sense that apart from the process incidental or auxiliary to the completion of the manufacture of a product, the term "manufacture" includes those processes specified in clause (ia), (iia) etc. 1.11 In other words, under section 2(f) as it stood prior to 28.2.86, the process incidental or ancillary to the completion of a manufactured product, was included within the term "manufacture". Apart from the above, in relation to the various products specified under clause (i), (ia), (ii) etc. various other processes were separately included within the meaning of the term "manufacture".
1.12 The definition of "manufacture" as it stands now and which is relevant for the present case, is distinct from the definition as it stood Prior to 28.2.86. In the present case, is distinct from the definition, the process that is included within the term "manufacture" has to be qualified by the criteria laid down in clause (i) and clause (ii) simultaneously.
1.13 The aforesaid submission is also fortified when one compares the definition of "salt factory" as given in section 2(j) with the definition given in section 2(f). Section 2(j) of the Central Excise Act, as it stood earlier, reads as under:
(j) "salt factory" includes-
(i) a place used or intended to be used in the manufacture of salt and all embankments, reservoirs, condensing and evaporating pans, buildings and waste places situated within the limits of such place as defined from time to time by the Collector of Central Excise;
(ii) all drying grounds and storage platforms and storehouses appertaining to any such place;
(iii) land on which salt is spontaneously produced."
1.14 In the aforesaid definition of salt factory, there is no word "and" connecting clause (i), Clause (ii) and Clause (iii). Therefore, each of the places specified in clause (i), clause (ii) or Clause (iii), would separately be included within the definition of salt factory. However, in the definition of "manufacture", Clause (i) and clause (ii) are joined by the word "and" and, therefore, the process which is included within the term "manufacture" should satisfy both Clause (i) and Clause(ii).
1.15 This submission is fortified by the amendment made by Section 126 of the Finance Act, 2002 by which the word 'manufacture' appearing at the end Clause (i) of Section 2(f) was substituted by the words 'manufacture' "or" and by Section 127 of the Finance Act 2002 by which clause (iii) was inserted in the Section 2(f) of the Central Excise Act, 1944.
1.16 The Commissioner has observed in para 42 of the impugned order that Chapter Note 4 under Chapter 62 has been incorporated in tenns of the definition of manufacture under Section 2(f) and therefore the said Note is attracted and the activities undertaken by the appellants amount to manufacture.
1.17 It is submitted that only if the processes are incidental or ancillary. To the completion of a manufactured product, they can be covered by the definition of the term "manufacture".
1.18 The activity undertaken by the Appellants cannot be treated as incidental or ancillary to the completion of the manufacture of a product. The ready made garments imported by the Appellants are fully manufactured. In other words, the said garments do not require any process to be undertaken for completion of manufacturing of the same. In fact, the Appellants have not carried out any process ferments in question. The only activity carried out by the Appellants is putting the already individually packed shirts in the product box and affixing the counterfoil of the sticker containing the barcode etc., which is already present in the shirt put into the polythene cover, on the product box. This process is not a process incidental or ancillary to the completion of manufacture, production etc. Therefore, the activity undertaken by the Appellants cannot be covered by the definition of manufacture under Section 2(f). Therefore, no duty liability can arise in respect of the activity undertaken by the Appellants.
PROCESS INCIDENTAL OR ANCILLARY TO The COMPLETION OF A PRODUCT CANNOT PER SE BE TREATED AS J.1 In terms of the definition of Section 2(f), the term "manufacture" May include a process incidental or ancillary to the completion of a manufactured produce. However, if a person undertakes only the process which is incidental or ancillary to the completion of a manufactured product, such process cannot be treated as manufacturing process within the meaning of Section 2 (f) of the Act. In other words, the incidental or ancillary process cannot be independently treated as manufacturing process.
J.2 The aforesaid submission is fully supported by the decision of the Tribunal in the case of CCE v. Popular Cotton Covering Works, 1989 (43) ELT 742 (Tri). In that case, the respondents were merely covering the bare wire conductors with cotton or fiberglass or paper. In other words, The only process carried out by them on the duty paid bare wire conductors was coating/covering the same with cotton or fibreglass or paper. The Central Excise Department took the view that this process undertaken by them would amount to manufacture. The Assistant Collector who passed the order relied upon the definition of Section 2 (f) and held that the process undertaken by the respondents was incidental or ancillary to the completion of manufactured product and therefore, the process undertaken by them would amount to manufacture. The Tribunal Rejected this view of the Assistant Collector and held in paras 9 and 10, as under:
"9.....The Assistant Collector has not understood the meaning of the section and what it refers to. The section speaks of any process incidental or ancillary to the completion of a manufactured product. It does not give independent status and character to any process which might appear to be incidental or ancillary. Indeed, the Assistant Collector does not say what these processes are incidental or ancillary to - if they are ancillary or incidental to the manufacturing of a product, he does not tell us what is the product he has in mind. It is not the intention of the section to turn every "incidental" and "ancillary" process into a manufacturing process in its own right, and it does not allow the Assistant Collector to collect duty, because he discovers an "Incidental" and "ancillary" process. This sub section enables the assessing officer to include the "incidental" or "ancillary" processes for the purpose of assessment of the manufactured product, the product being known as a subject of assessment. Anything that is done to the subject of assessment to complete it whether by polishing it or grinding it, or cutting it or coating it or insulating it, is a process "incidental" or 'ancillary' to the completion of that product. It is after these processes are completed that the subject commodity is ready for assessment.
10. But it is an unmitigated fallacy to say that the subject commodity after having been assessed once and levied to duty, must pay that duty again if any process, incidental or ancillary, is carried out on it. It is in the nature of the law that when a process incidental or ancillary, is carried out on it. It is in the nature of the law that when a process incidental or ancillary to the completion of a product is carried out, the product remains the same product, a completed product. No process incidental or ancillary to the completion of a product brings into existence a new manufactured product; if it does, it is not incidental or ancillary, but main. This is what the Assistant Collector failed to distinguish and he is clearly wrong; his action cannot be supported."
J.3 Thus, the Tribunal held that the incidental and ancillary process by itself cannot be treated as manufacturing process as per the definition of Section 2 (f). This decision of the CEGAT was upheld by the Supreme Court in CCE v. Popular Cotton Covering Works 1994 (73) ELT 264.
J.4. The aforesaid definition would apply equally to the process specified in relation to any goods in Section or Chapter Notes of the schedule to Central Excise Tariff Act, 1985. Manufacture includes any process incidental or ancillary to the completion of a manufactured product. It such a situation, the Tribunal held that the incidental or ancillary process will not per se be treated as manufacturing process.
J.5 After 28.2.86, manufacture included any process which is specified in relation to any goods in the Schedule or Chapter Notes of Schedule to the Central Excise Tariff Act, 1985, as amounting to manufacture. Therefore the process specified in relation to any goods in the Section or Chapter Note of Central Excise Tariff Act, per se cannot be treated as manufacturing process by applying the ratio of the aforesaid decision of the Tribunal as upheld by the Apex Court.
(ii) We find that in the order impugned before us there is no finding arrived at by the Commissioner on this aspect. These submissions have to be considered by the Commissioner as it would be in the interest of justice that Revenue gets some opportunity to give their findings, on these submissions which go to the root of the levy by interpreting Chapter Note 4. Therefore, the matter is required to be remitted back to the Commissioner to arrive at a finding on these submissions, as recorded hereinabove in the de novo proceedings which we propose to order after setting aside the order impugned.
(iii) We find that it is an admitted position that in majority of the cases the alleged processes amounting to manufacture as per Chapter Note 4 have been conducted at the job workers premises, a job worker in fact in his statement stated so the same has been relied upon. This would go to indicate that the place where the 'swig tag' is put/not put and the position in that is not clear. There are other factual aspects on the actual processes being undertaken in the assessee's premises, which are also required to be redetermined. It is hite law that that job worker would be a manufacturer and has to discharge the duty. The position has been well settled by the catena of decisions. The present issues of duty demand after establishing manufacture is therefore to be determined. "Raw material supplier and trader in this case of ready made garments to be resulting at job worker's premises therefore cannot be held liabvle to a levy or demand of duty. The appellant before us would le liable for duty only on such RMG which are processed within his premises, if at all on facts and in law, the activity is arrived at to be a manufacturer, once again of RMG from imported RMG by application of Chapter Note
4. Since the basic issue of applicability of Chapter Note 4 and the quantification of consequent demands, which could be effected on the present appellants are to be redetermined, in the remand in de nova proceedings now being proposed, we would leave the issue of suppression of facts and imposition of penalties and other issues open for both sides to redetermine in the de novo proceedings if demands if any are arrived at.
5. Keeping in view the findings hereinabove, we would set aside the order impugned and allow the appeals as remand for determining the duty, if any and other consequent penalty if any on the assessee. It is made clear that the demands, if any, on the goods manufactured if so by the job workers cannot be confirmed on the assessee pursuant to these proceedings.
6. Appeals disposed of in above terms.
(Pronounced in Court on 4/2/2005)