Customs, Excise and Gold Tribunal - Mumbai
Indian Strips And Ors. vs Commissioner Of Customs And Central ... on 25 March, 2004
Equivalent citations: 2004(96)ECC52, 2004(173)ELT265(TRI-MUMBAI)
JUDGMENT Moheb Ali M., Member (T)
1. The facts briefly are that M/s. Indian Strips (I.S.) were manufacturing cold rolled strips on two cold rolled mills and were clearing excisable goods without payment of duty. Shri Jignesh Shah was the person who was looking after the said factory owned by one Shri Hiralal Baktavermal Shah. Shri Jignesh Shah stated that the factory was engaged in reducing the gauge of stainless steel hot rolled pattas, on power operated cold rolling mills, received from various units on job work. The reduction of gauge, according to him, was done by cold rolling process. They received hot rolled S.S. pattas from M/s. Bhoomika Strips Pvt. Ltd., M/s. Dhanlaxmi Metals Pvt. Ltd. and M/s. Bhagyodaya Metals Pvt. Ltd. and M/s. Navkar Metals for the purpose of reducing the gauge of the pattas so received. All the units are interrelated in the sense that they are owned by persons who are related to each other. It is like a family affair. After collecting job work charges, they returned the goods under delivery slips. M/s. I.S. have not got themselves registered under Central Excise Law nor filed any declaration as per the provisions of Central Excise Law. It is an admitted fact that the mills in the premises of M/s. I.S. were working with the aid of power. Certain records were seized from the premises. The allegation was that M/s. I.S. manufactured stainless steel pattas classifiable under Chapter 72 of the schedule to the Central Excise Tariff Act, 1985; that such manufacture was done with cold rolled machines; that the said goods were excluded from the scope of exemption for small scale industries vide Notification No. 8/95-CE; that in respect of this, they failed to obtain a registration and M/s. I.S. contravened the provisions of the Central Excise Act and Rules. The officers seized the two rolling mills, fully manufactured S.S. pattas and handed over the same for safe custody to M/s. I.S.
2. Shri Jignesh Shah, the authorised signatory, in his statement before the officers, stated that with the help of the two power operated cold rolled mills they used to reduce the gauge of strips received by them from 15 to 20 gauge. The officers searched the premises of M/s. Bhoomika Strip Pvt. Ltd. and seized various documents and records as annexed to the show cause notice. During the course of the search, the officers found that two cold rolling mills were also functioning in the said premises. M/s. Bhoomika Strips were paying compounded levy under the Central Excise law for the activities carried out by them in their premises. The said factory was purchasing S.S. flats and was directly sending them to various parties for hot rolled process on job work. They received back the hot rolled stainless patta/patti and again sent for gauge reduction process to M/s. I.S. After the said reduction, the goods were received back in their factory on payment of Rs. 1.50 per kg. as job work charges. It also turned out that the two rolling mills found in M/s. I.S. were once owned by M/s. Bhoomika Strips Pvt. Ltd. The latter had informed the department that two of the machines Were transferred to some other unit and so they would be effectively working with only two cold rolled machines. Shri Sheshmal Shah, Director of M/s. Bhoomika Strips Pvt. Ltd., in his statement, stated that M/s. I.S. used to reduce the gauge from 15 to 20 on two cold rolling mills and that the said process was called as roughing process. He also stated that except the two cold rolling mills, no other machine was found available in M/s. I.S.
3. Statement of the Director of M/s. Dhanlaxmi Metals Pvt. Ltd. was recorded in which he inter alia stated that they used to send S.S. flats for hot rolling process on job work basis; that the hot rolled patta/patties were thereafter sent for annealing to M/s. Bhoomika Strips Pvt. Ltd. on job work; that after process of annealing and pickling, they used to send the same to M/s. I.S. for roughing process and that M/s. I.S. used to reduce the gauge from 15 to 20, and further that such patties after gauge reduction were sent back to M/s. Bhoomika Strips for cold rolling process. After this process is done, M/s. Dhanlaxmi Metals received back the goods for manufacture of stainless steel utensils. It is also further brought out in the statement that out of the two mills situated in M/s. I.S., one was a back-up drive mill containing two back-up rolls, four work rolls and that gauge of excess patta was reduced by passing the hot rolled pattas through the work rolls and that the second rolling mill was on work drive mill. The work roll function was carried out by the said mill and the gauge of excess pattas was being reduced on the same. He further stated that the two rolling mills situated in M/s. I.S. were gauge reduction mills. The said mills were without any furnace.
4. Shri Jignesh Shah in his further statement stated that except gauge reduction, no other process was being carried out in the premises of M/s. I.S. He thereupon gave details as to the quantity produced in the factory of M/s. I.S. for three years commencing from 1996 to 1999.
5. The conclusions drawn from the above facts are that hot rolled patta/pa tties are pickled in dilute hydrochloric acid for removal of rust and scales and then they were cold rolled between plain rolls to obtain a bright surface, closely controlled gauge, thinner gauge and a variety of tempers by passing previously hot rolled patties through the set of rolls often many times until the final size is obtained. The department's contention is that cold rolling is a generic term applied to the operation of passing unheated metal through rolls for the purpose of reducing its thickness, producing a smooth dense surface and with or without subsequent heating treatment developing controlled mechanical properties. Any single one or combination of the above three effects are the reasons for cold rolling a particular product. The department relied upon the book of "Steels Metallurgy and Applications, 3rd Edition by D.T. Lewellyn and R.C." wherein it is said, "The cold rolling is usually carried out using a tandem mill containing five stands, with controlled front and back tension. Each stand usually contains four rolls consisting of two work rolls and two back-up rolls but six high stands each containing four back-up rolls may be used in one or more positions if a particularly high cold reduction is required." The department's contention is that the cold rolling mills installed in the said factory were of the same kind. An oxide free surface is required for cold reduction and this is achieved by passing the steel through a pickle line. Traditionally the acid used was sulphuric acid but most pickle lines now used as hydrochloric acid. This activity was carried out by M/s. Bhoomika and thereafter the strips were sent for gauge reduction to M/s. I.S. Cold rolling causes the steel to become hard and strong and very little ductibility.
6. As per the book "Practical Metallurgy", hot rolled sheet is cleaned with an acid dip cold basically followed by dip in lime water. The sheet is then cold rolled under very heavy pressure after which it is wound into coils. Some of these sheets are used to produce household-appliances while a vast tonnage of it is used for auto bodies. By annealing, it is understood that the metal is heated and then cooled usually for softening and making the metal less brittle and by cold rolling, one understands that the cross section of a metal bar is reduced in a rolling mill below the recrystallisation temperature usually at room temperature.
7. The department contends that the final product after cold rolling has different qualities, characteristics and uses than the hot rolled product. It is also contended by the department that a process of manufacture is undertaken to manufacture cold rolled products from hot rolled products. The hot rolled pattas are classified under chapter heading 7220.10 and the cold rolled pattas are classified under heading 7220.20 of CETA during the year 1996-97, 1997-98 and 1998-99. Central Excise duty is leviable under this heading at the rate of 15% ad valorem. The department's further contention is that the process of reduction of gauge on cold rolling mills carried out by the said factory is also covered under cold rolling process.
8. The Commissioner while adjudicating the case held that the process of gauge reduction comes within the purview of cold rolling a product and, therefore, duty has to be discharged on a cold rolled product. He discussed the process of manufacture, cited the various authoritative books on the subject and came to this conclusion. He demanded duty on the cold rolled products manufactured by M/s. I.S., confiscated the finished cold rolled patties which have been manufactured without the factory having been registered imposed penalties on M/s. I.S., confiscated the cold rolling mills and imposed penalties under Section 209A on Shri Jignesh Shah, Shri Sheshmal Shah, Director of M/s. Bhoomika Strips Pvt. Ltd., M/s. Bhoomika Strips Pvt. Ltd., M/s. Dhanlaxmi Metals Pvt. Ltd., M/s. Navkar Metals Pvt. Ltd. and M/s. Bhagyhodaya Metals Pvt. Ltd. and also demanded interest on Central Excise duty of Rs. 1,33,87,791 from M/s. I.S. for the clearances effected without payment of duty during the period 1.12.1996 to 23.2.1999 under Section 11AB of the Central Excise Act.
9. The appellants contend that a process amounting to manufacture within the meaning of the said term as defined under the provisions of Section 2(f) has to be undergone for levying duty on the cold rolled products. The adjudicating authority relied on chapter note 4 of Chapter 72 of the Schedule to CETA which reads, "In relation to flat rolled products of this chapter, the process of hardening or tempering shall amount to manufacture." It is contended that this chapter note was not relied upon or referred to in the show cause notice and, therefore, the adjudicating authority went beyond the scope of the show cause notice. It is also contended that the adjudicating authority has not taken into consideration the appellants' contention that reduction of gauge does not amount to manufacture as in this process no superior surface emerges on the product nor does this activity impart the desired mechanical properties to the product. The show cause notice alleges that a superior surface and desired mechanical properties do emerge during the process of cold rolling. Thus, the Commissioner's finding that gauge reduction is nothing but cold rolling is devoid of any merit. In addition for cold rolling, a pickle line was also required whereas it is clearly brought out in the show cause notice that apart from the two alleged rolling mills no other line was available in the factory. Further, a furnace was required for the purpose of annealing which is also not found as has come out in the statement of one of the appellants. The activity undertaken by the appellants was not cold rolling process but was an activity of roughing hot rolled S.S. pattas in which the gauge of the same was being reduced to a certain extent. The appellants did not possess any equipment for straightening and shearing of pattas/patties received for the purpose of undertaking gauge reduction. In the absence of any facilities with the appellants for the purpose of undertaking the process of cold rolling stated in the literature referred to in the show-cause notice, the finding of the adjudicating authority to the effect that the process undertaken by the appellants was process of cold rolling, is erroneous. The evidence tendered by a chartered engineer, K.J. Patel, has also not been considered, wherein he stated that the process being undertaken by the appellants was not cold rolling process. No process resulting in hardening pattas took place during the process of reduction of gauge. It is contended that the appellants did not undertake any activity which amounted to process of manufacture and, therefore, the product emerging out of reducing the gauge is not a new product. In various judgments, it was held that for the purpose of levying excise duty a process or an activity must amount to manufacture. In the case of CCE, Meerut v. Rishabh Velveteen Pvt. Ltd., 1999 (114) ELT 839, it was held that unless a process of manufacture takes place, duty cannot be levied on the goods. The reliance on Chapter Note 4 of Chapter 72 is totally erroneous. The appellants relied upon the following case law. Venkat Durga Aluminising Works v. CCE, 1990 (50) ELT 294, Jyoti Engineering Works v. CCE, 1989 (42) ELT 100, Trade Notice No. 80/91 dated 26.8.1991 issued by Indore Collectorate, 1991 (55) ELT 163. It was also further contended that the goods as produced by the appellants are not marketable. Marketability as per the settled legal position is a relevant and important criteria for the purpose of deciding the liability to excise duty. In the case of CCE v. Steel Strips Ltd., 1995 (50) ECC 164 (SC) : 1995 (77) ELT 248, the Supreme Court held that cold rolling of trimming undertaken by an assessee of hot rolled untrimmed sheet did not amount to manufacture. 10. It was further contended that the goods as produced by the appellants fell under tariff sub-heading 7220.90, 7220.30 and 7220.30 in the years 1996-97, 1997-98 and 1998-1999 which attracted nil rate of duty. Since what they have produced by reducing the gauge of a hot rolled S.S. patti qualifies for classification under the above headings, no duty should have been demanded. Contending that the extended period of limitation cannot be invoked against them, the appellants stated that there was no suppression of facts with an intent to evade payment of duty during the relevant period. In addition, one other unit, i.e. Crystal Industries adjacent to the appellants, had written a letter to the Superintendent of Central Excise within whose jurisdiction the unit of the appellants falls, seeking assistance from the said officer to decide whether the similar process as is being undertaken by the appellants amounts to manufacture and, therefore, liable to duty. This letter clearly shows that there is no suppression of facts in their cases well and, therefore, the extended period of five years cannot be invoked in their case. Invocation of Rule 173Q(1) is not justified as there was no contravention of the provisions of the Act and Rules on the part of the appellants nor are the goods liable for confiscation. No penalties can also be imposed on the appellants as they have not done any act of commission or omission which attracted the provisions of Rule 209A.
11. Heard both sides.
12. There are several pronouncements by the Tribunal on the subject whether cold rolling of duty paid hot rolled strips amounts to manufacture. Most of these decisions are based on the Supreme Court's decision in CCE v. Steel Strips Ltd., 1995 (50) ECC 164 (SC) : 1995 (77) ELT 248 (SC), The Apex Court held that the department has to prove that process of manufacture had resulted in emergence of a commercially distinct commodity. If the department cannot lead evidence, it can ask the assessee in writing the process undertaken by him. Requirement of evidence cannot be substituted by reference to authoritative publications. Assessee to be put to notice by department about technical literature to be relied upon by it. The court particularly observed that lack of evidence leads to failure of cases of Excise Department, resulting in loss of revenue. The court, thus dismissed the department's appeal not because it held that the process of cold rolling does not amount to manufacture but because the department failed to establish in the case before it that the process amounted to manufacture by leading evidence.
13. The latest pronouncement on the issue is again by the Supreme Court in the case of CCE, Chandigarh-II v. Steel Strips, 2003 (87) ECC 246 (SC) : 2003 (154) ELT 336 (SC) where the Hon'ble Court considered its decision cited supra (1995 (77) ELT 248) and remanded the case directing that the issue whether cold rolling a hot rolled product amounts to manufacture be examined on the following lines:
"Whether the excise authorities have led any evidence before the first adjudicating authority on the question as to whether cold rolled strips are the result of a process of the manufacture undertaken by the assessee or whether the material referred to in the order of the Assistant Commissioner is based upon his own personal knowledge or is based on authoritative publications. The burden is on the department to prove that the process of manufacture resulted in emergence of a commercially distinct product."
14. We wish to put the present appeals to the same test as indicated by the Hon'ble Supreme Court in the case cited supra.
15. The evidence as led by the department is that M/s. IS. had brought duty paid hot rolled S.S. pattas/patties into their premises. These goods were earlier subjected to a process of annealing and pickling in the premises of M/s. Bhoomika Strip situated nearby and owned by the same person who owns the appellants' unit. M/s. IS. reduced the gauge of the strips from 15 to 20 gauges by passing the strips through a rolling mill at room temperature. The very same rolling mill was earlier used by M/s. Bhoomika Strips for cold rolling the products received by it. M/s. Bhoomika Strips were paying duty under compounded levy scheme for the very same activity of cold rolling. Let us examine the version of Shri Jignesh Shah, the person in charge of M/s. IS. as to the activity that goes on in the premises. He inter alia states that "M/s. Indian Strips was engaged in gauge reduction of hot rolled strips on job work basis. There are two rolling mills in the said factory premises; that out of two rolling mills, one was back-up drive and second one was work roll drive; that through back-up drive mill the hot rolled strips were passed and as a result, gauge from 15 to 20 was reduced. Generally the strips were passed two to three times. In the second machine, gauge is reduced by work roll mill. On the basis of the quality of the goods, they used to pass the strips through the mill five to six times to reduce the gauge from 15 to 20. Except reduction of gauge no process was being undertaken in the premises of M/s. Indian Strips." It is admitted repeatedly by the authorised signatory that in the said premises only gauge reduction takes place.
16. That the strips were passed through rolling mill at room temperature, that the gauge is reduced by passing the strips through the rollers and that a part of resultant product is being used for manufacture of stainless steel vessels and the other is sold in the open market are admitted facts. The authorised signatory was asked whether the process undertaken by him amounted to manufacture of cold rolled strips. He replied that what all he did was to reduce the gauge.
17. From the evidence, the department alleged:
"It appeared to the officers that the hot rolled patta-patties are pickled in dilute hydrochloric acid for removal of rust and scale the cold rolled steel strip is produced by cold rolling descaled hot rolled strips between plain rolls to obtain a bright surface closely controlled gauge, thinner gauge, and a variety of tempers, cold working by cold rolling by passing unheated, previously hot rolled patta-patties (cleaned of scale) through a set of rolls often many times until the final size is obtained. It further appeared that cold rolling is a generic term applied to the operation of passing unheated metal through rolls for the purpose of reducing its thickness, producing a smooth, dense surface and with or without subsequent heat treatment, developing controlled mechanical properties. Any single one or combination of these three effects are the reason for the cold rolling of a particular product. Actually, in terms of modern nomenclature of the steel industry, cold rolling implies a rolling operation in which the thickness of the material is reduced by a relatively small amount usually just enough to produce a superior surface or impart the desired mechanical properties to the rolled material."
18. The evidence placed before the adjudicating authority is that hot rolled strips are annealed in M/s. Bhoomika Strips, they were then taken to M/s. Indian Strips where they were subjected to rolling at room temperature to reduce its gauge to the desired level, and after this they were despatched to various parties on collection of job work charges.
19. The Commissioner considers this evidence which has also been put across to the appellants in the form of show cause notice and arrives at a conclusion that the process undertaken by M/s. I.S. amounts to manufacture and thus the resultant product is dutiable. The authoritative text on the subject of cold rolling was also made known to the appellants through the show cause notice so that they could establish that their process did not result in cold rolling.
20. The Commissioner relies on Chapter Note 4 of Chapter 72, which reads thus "In relation to flat rolled products of this chapter, the process of hardening or tempering shall amount to manufacture", to say that the activity carried out by the appellants amounts to manufacture. He observes that such a chapter note was not in existence when the Supreme Court pronounced its judgment reported in 1995 (77) ELT 248. He says that under the new tariff this note has been incorporated which enables the department to levy duty on products which have undergone the process mentioned in the chapter note.
21. He discusses as to which process amounts to cold rolling and observes that reducing the cross sections of a metal bar in a rolling mill below the recrystallization temperature usually room temperature amounts to cold rolling. He also observes that during the process of cold rolling, the metal hardens. His finding that cold rolling has the effect of hardening the metal is based on Mechgram Hill dictionary of Scientific and Technical terms.
22. As per book on "Practical Metallurgy" cold rolled sheet makes up a large part of steel production. Hot rolled steel is cleaned with acid dip called pickling, followed by a dip in lime water. The sheet is then cold rolled under very heavy pressure after which it is warned in coils. Some of these sheets are used to produce household appliances. Shri Jignesh Shah has been specifically asked whether the process undertaken by M/s. I.S. amounts to manufacture. While he confirmed that M/s. I.S. reduces the gauge of S.S. pattas which had been hot rolled by passing them rolling mills in their factory, he refused to confirm that such a gauge reduction amounts to manufacture. Before the Commissioner, the stand taken was that M/s. I.S. only does 'roughing' of hot rolled products and that does not amount to manufacture. While the appellants are entitled to have their opinion on whether a process of manufacture takes place or not, the department has to establish that indeed a process takes place in the appellants' matter.
23. It is under these circumstances the principle enunciated by the Supreme Court in the case of CCE, Chandigarh v. Steel Strips Ltd. cited supra has to be examined.
(a) Whether excise authorities led evidence before the adjudicating authority on the question as to whether cold rolled strips are the result of a process of the manufacture undertaken by the assessee? The answer is yes.
(b) Whether the material referred to in the order is based on his own (Commissioner's) personal knowledge or is based on authoritative publications?
The answer is that authoritative texts are quoted in the show cause notice to indicate what cold rolling is and how the assessee is engaged in cold rolling by subjecting the hot rolled strips to a manufacturing process. It is brought out that reducing the gauge and hardening the strips amounts to manufacture, The appellants were given an opportunity in the show cause notice to rebut the department's contention.
(c) The burden cast on the department that the process of manufacture resulted in the emergence of a new product has been discharged or not? The answer is yes. The Commissioner addresses himself to this issue. He observes that HSN makes a clear distinction between hot rolled products and cold rolled products. Thus, all over the world the distinction is recognised. He observes that cold rolled products are used in the manufacture of household goods. The appellants admit that after the process of manufacture undertaken by them, the product is used in the manufacture of household utensils. He discusses as to how the cold rolled strips/rolls are used in various industries. He discusses how/why these industries prefer only cold rolled products. It has also come out during the investigation that the S.S. pattas and patties manufactured by them are used in the manufacture of S.S. vessels by the recipients. That distinct marketable commodity comes into existence different from hot rolled strip is thus established. The test the Supreme Court has laid down as mentioned in (c) above is thus satisfied.
24. The further contention of the appellants is that the show cause notice is time barred inasmuch as a reference made to the department, seeking clarification as to whether the process of roughing amounts to manufacture went unanswered. This reference appeared to have been made by another unit situated nearby. The appellants produced a copy of certificate of posting to show that such a letter was written alongwith the letter so written. This contention has to be rejected as the appellants failed to produce any evidence that such a letter was received by the department. A certificate of posting does not establish that the letter was addressed to the department unless an acknowledgement of such receipt is produced. The department's contention that the appellant (M/s. I.S.) did manufacture goods in contravention of the Central Excise Rules and Act is thus established. The Commissioner has brought out clearly at page 15 of his order as to how the appellant was aware that the activity carried out at M/s. I.S. resulted in the manufacture of excisable goods liable to duty. They chose not to get themselves registered with an intent to evade duty. Larger period of limitation is therefore invocable.
25. Another contention of the appellants is that during the period in dispute for which the notice is issued, the S.S. strips fell under chapter sub-heading 7220.90 in 1996-97, 7220.30 in 1997-98 and 7220.30.
26. The Department's case is that during the period in dispute, the appellants manufactured goods 'not further worked than cold rolled (cold reduced)' falling under chapter sub-heading 7220.20 in 1996-97, 7220.30 in 1997-98 and 7220.30 in 1998-99 chargeable to duty at the rates specified against these headings. The appellants' contention that their product falls under chapter sub-heading meant for 'others' attracting nil rate of duty during the relevant period is not understandable. Products not further worked than cold rolled do fall under the chapter sub-headings stated above. We therefore, reject this contention as well.
27. Regarding the penalty under Section 11AC as imposed by the learned Commissioner, we observe that such a penalty is imposable in the facts and circumstances of the case.
28. Regarding penalties imposed on various appellants under Rule 209A, we observe that all the persons involved are aware that they were dealing in goods on which duty at the appropriate rate has not been discharged. The persons on whom penalties are imposed are the ones who got the job work done by M/s. I.S. All the units who get the job work done are managed by either Jignesh Shah or Sheshmal Shah. They are all involved in transporting, removing, dealing in, the impugned goods. They are therefore, liable to penalties as imposed by the Commissioner. We see no reason to interfere with this part of the order.
29. M/s. I.S. did contravene the provisions of the Central Excise Rules 174, 173B, 173C, 9(1), 172F, 52A, 173G(2) and 226. The goods produced by the unit were rightly held liable to confiscation. The rolling mills used for production of goods which were removed without payment of appropriate duty are liable to confiscation. The confiscation of the same is also upheld.
30. The duty as demanded is also confirmed.
31. All the appeals are rejected. The order of the Commissioner is upheld.