1. This is an appeal against the order No. 1/82, dated 10-8-1982 of the Additional Collector of Central Excise, Nagpur. In this order, the Additional Collector has held that the "outer races" manufactured by the appellants for taper roller bearings were liable to duty under Item 68 of the Central Excise Tariff Schedule. (The word "manufactured" is used for convenience and without prejudging the appellants' contention that no process of manufacture was involved). In addition to demanding duty on the outer races seized as well as those held to have been clandestinely removed, the Additional Collector has imposed a penalty of Rs. 50,000 on the appellants.
2. The main contention of Shri Habbu, who appeared for the appellants, was that the "outer races" could not be considered as having been manufactured, that the processes carried out on them were on behalf of M/s. Metal Box India Ltd., who supplied the appellants with the raw material for the outer races, and to whom the latter were returned, that these outer races were made specifically for incorporation in the bearings manufactured by M/s. Metal Box India Ltd., and patented by them and could not be sold in the market, that they had to undergo further processes in the factory of M/s. Metal Box India Ltd., and that in view of all this they could not be considered as having undergone a process of manufacture or having become excisable goods.
3. In support of his arguments Shri Habbu relied on the correspondence enclosed by the appellants as "exhibits" along with their appeal. These have been referred to also in the Additional Collector's order. One is a letter dated 6-7-81 addressed by M/s. Metal Box India Ltd., to the appellants, in which they stated that they would be sending raw material for the manufacture of races at the appellants' end, which would subsequently come back to them for manufacture of rolling bearings under T.I. 49. They stated that it appeared that the races which the appellants would be clearing from their factory premises fell under T. I. 68 under excise law with 8% excise duty. They went on to say that the payment of duty by the appellants would form a part of the bills submitted by them to M/s. Metal Box India Ltd., and the latter would get proforma credit of the duty under Rule 56A. In reply to the aforesaid letter, the appellants, in their letter dated 11-7-81 to M/s.
Metal Box India Ltd., stated that the Central Excise Department was ready to allow them to remove the material on payment of duty under T.I. 68 but they did not agree to charge duty only on the labour and overhead charges made by the appellants. According to the Central Excise Department the basis for charging duty would be the labour charges plus the cost of the raw material. The appellants suggested to M/s. Metal Box India Ltd., that they could resort to the provisions of Rule 56C, which had recently been introduced.
4. Shri Habbu stated that although both M/s. Metal Box India Ltd., and the Central Excise authorities at Nagpur had advised the appellants that duty under Item 68 was leviable on the outer races, they had consulted their legal adviser who advised them that duty was not leviable on the outer races, as they could not be said to have undertaken a process of manufacture. According to Shri Habbu, the appellants were "confused", and they had started sending the outer races to M/s. Metal Box India Ltd., without payment of duty.
Subsequently, in September 1981, the excise authorities carried out raids and seized a number of the outer races manufactured by the appellants, ultimately resulting in the present proceedings.
5. Taking us through the Additional Collector's order, Shri Habbu referred to the discussion contained therein, on the company's plea that there was no intention to evade duty and no mala fides on its part. The order contained a detailed discussion of this plea. Stress was laid on the correspondence between the appellants and M/s. Metal Box India Ltd., which according to the Additional Collector showed that the appellants had full knowledge of the legal position. It was further observed that the appellants had removed the goods under seizure to the premises of their own employee Baidyanth Singh and secreted them there.
The markings on the wooden cases were made in the name of a "dummy" M/s. Ashok Auto Enterprises, which was managed by P.C. Bahirwani, who was also the Director of the Company, obviously to aviod detection. The removal of the goods was also done on a holiday and it was done not through the main gate nor were any entries of the removal made at the gate. After setting out these and other circumstances brought out during investigation, the Additional Collector had observed that these circumstances fully ruled out the defence that there was no intention to evade duty.
6. Shri Habbu submitted that the Additional Collector had been so preoccupied with the question of mala fides that he had not applied his mind to the basic question whether at all the outer races were excisable and liable to duty. He submitted that if they were not dutiable, the mere belief of the appellants or the pattern of their behaviour could not make the articles as dutiable. He contended that the appellants had taken the ground that the articles were not goods and were not excisable. (In the appeal there is a reference to the appellants' reply to the show cause notice, which is stated to have been annexed to the appeal as exhibit "F". However, it was in fact not annexed. Shri Habbu himself brought this to our notice. He stated that this had happened due to inadvertence but the case could be argued even in the absence of this document, and he would proceed on that basis).
7. Shri Habbu referred to para 7 of the Additional Collector's order, in which it was noted that the appellants in their reply to the show cause notice had contended that the articles were to be used by M/s.
Metal Box India Ltd., in their works at Kharagpur for further operations such as (i) Shot Blasting (ii) Hardening (iii) Grinding (iv) Honing (v) Quality test and (vi) Assembling, and that in view of these operations the material was in a semi-finished condition. The appellants had also stated that each and every contention in this regard was endorsed by M/s. Metal Box India Ltd. The appellants had also submitted that the material was not salable in the open market.
[Shri Habbu referred to para 3(iv) in the show cause notice issued to the appellants, in which it was stated that the outer races were capable of being used in a roller bearing patented by M/s. Metal Box India Ltd., Kharagpur].
8. Shri Habbu stressed that the Additional Collector had not applied his mind to these contentions, or appreciated that since only M/s.
Metal Box India Ltd., could use the outer races, they could not come to the market to be bought and sold. He relied on the judgment of the Supreme Court in the case of Union of India v. Delhi Cloth and General Mills and Ors., reported in 1977 E.L.T. (J 199). He pointed out that in that judgment it has been laid down to become "goods" an article must be something which can ordinarily come to the market to be bought and sold. Shri Habbu also relied on the judgment of the Patna High Court in the case of Tata Yodogwa Ltd. v. Assistant Collector of Central Excise, Jumshed-pur and Ors., reported in 1983 E.L.T. 17 (PAT). According to him, it was clear from that judgment that Item 26AA(v) of the Central Excise Tariff referred to "steel castings", but this expression could not be held to cover semi-finished steel castings. In the light of these decisions, Shri Habbu submitted that the articles "manufactured" by the appellants were not excisable goods, and therefore no duty was leviable on them.
9. On the question of penalty, Shri Habbu stated that he was not advancing any arguments, since he was relying on his main argument that the articles were not dutiable at all. If they were not dutiable then no offence had committed and there was no question of the penalty.
10. Replying to Shri Habbu, Shri Tayal referred to the correspondence exchanged between the appellants and M/s. Metel Box India Ltd. He stressed that there was no doubt that in the minds of both of them that the articles were excisable. The appellants had not filed any classification list. The appellants were manufacturing other excisable goods. They could have filed a classification list showing these articles as non-excisable, so that the Department could have given a finding. Alternatively they could have written to the Department, asking for clarification. By failing to do either of these things, they had denied the Department an opportunity to decide in advance whether the goods were excisable, and had also demonstrated their mala fides.
11. As regards the submission that the articles had not undergone a process of manufacture, Shri Tayal submitted that they had in fact undergone a substantial change in comparison with the raw material supplied by M/s. Metal Box India Ltd., which was a pipe. They had been cut into the shape of rings of particular dimensions, and a substantial amount of machining had been done on them. Shri Tayal referred to the schedule of charges agreed upon between the appellants and M/s. Metal Box India Ltd., which varied from Rs. 2 60 to Rs. 4.40 per piece. This clearly showed that a very substantial change in the material took place. The fact that some further processing was to be carried out in the factory of M/s. Metal Box India Ltd., was not relevent in this connection, because there was no rule that excise duty should not apply to goods which were raw materials or semi-finished goods in the hands of another manufacturer.
12. Shri Tayal controverted the contention of Shri Habbu that the Additional Collector had not applied his mind on the question of excisability of the articles. In paras 8(i) and 8(ii) of the order the Additional Collector had referred to the correspondence exchanged between M/s. Metal Box India Ltd., and the appellants. He had observed that it was not correct to say that the job work done by the appellants consisted of only semi-finished outer rings or bearings, and that this contention was not supported by the agreement dated 15-5-81, (the document annexed as exhibit 'B' to the appeal entitled "Minutes of discussions at Amber Bearing, Nagpur"). Again, in para 8(vi) of his order, the Additional Collector had observed that the principal raw material was steel tubes from which the outer races had to be made. He had specifically referred to the decision of the Supreme Court in the D.C.M. case and observed that this transformation resulted in goods having a distinctive name, character or use and it involved process of manufacture and therefore the races fell under Item 68 and were taxable. He had observed that these races were commercially a different article than steel tubes, that they had a distinct entity for commercial purposes, and that to be called as "goods" for the purposes of excise levy, the goods need not be actually sold in the market place. Further, in para 8(vii) the Additional Collector had observed that there was no substance in the contention that after various operations such as shot blasting etc., the Central Excise duty was definitely to be paid by M/s. Metal Box India Ltd. He had observed that the liability to pay duty on the goods manufactured was on the company and it could not get away from it simply on the ground that duty would have been paid by M/s. Metal Box India Ltd. 13. Shri Tayal therefore submitted that the "outer races" had clearly undergone a process of manufacture and that they were "excisable goods" liable to duty under Item 68.
14. On the question of penalty, Shri Tayal stated that since no specific submissions had been made by Shri Habbu, he had nothing controvert.
15. Replying to Shri Tayal, Shri Habbu reiterated that the appellants had taken legal advice and it was not incumbent on them to get a clarification from the Central Excise authorities.
16. We have carefully considered the matter. The basic question is whether the articles known as "outef races" were excisable goods Shri Habbu has advanced a number of arguments to 'show that they were not.' One of these is that these were semi-finished good's which had to undergo several 'further processes in the factory of M/s. Metal Box India Ltd. We observe in this connection that what are the end products of one manufacturer may well be raw material or semi-finished goods for another. This would apply to a large variety of chemicals, metals, materials like plastics or rubber, and so on. There fore the fact that an article is "semi-finished" in the sense of requiring some further processing before being put to its final use does not mean that it cannot be "goods".
17. It is also relevant that in the correspondence between the appellants and M/s. Metal Box India Ltd., the articles have been described as "races" or "pieces". They are nowhere described as semi-finished goods. Shri Habbu has contended that the appellants and M/s. Metal Box India Ltd. might have had a mistaken impression about the excisatibility of the articles, but the correspondence goes to show that these two parties, who were dealing in the articles by way of trade and industry, neither referred to them nor apparently thought of them as semi-finished articles, but on the contrary applied the aforesaid terms to them which indicate that they were articles of a kind known to the market.
18. It is important to note that the item under which the articles have been classified is Item 68. This applies to all goods which are not specified elsewhere. It is not necessary for the purpose of classification under Item 68 that the articles should satisfy the description of any particular article of commerce. The present situation can be distinguished from that dealt with in the case of Tata Yodogwa Ltd., cited by Shri Habbu. In that case there was a specific entry in the tariff, namely "all other steel casting not otherwise specified". Even in that judgment there is no specific pronouncement that a semi-finished casting is not assessable under Item 26AA(v). What the Court did was to negative the contention that semi-finished steel castings were excisable under Item 26AA(v) and that after cleaning, machining and polishing they became excisable under Item 68. In this context the Court observed that Item 26AA(v) does not speak about semi-finished and finished castings. The above judgment does not assist the appellants in the present case. It should also be noted that in the present case relating to Item 68, there is no specific description as under Item 26AA(v) to which the articles have to conform.
19. We find force in the submission of Shri Tayal that the cutting of a steel tube into the form of rings and carrying out turning operations (it has been indicated that the work to be done involves lathes and mini-chukers) results in substantial transformation and the emergence of a new article having distinctive name, character and use.
20. We are not able to accept Shri Habbu's contention that because the bearings in which these races were to be incorporated were patented by M/s. Metal Box India Ltd., the races would fall outside the definition of "goods" as "articles which can come to the market to be bought and sold". It is normal practice for a large scale unit, particularly one manufacturing goods which require a number of parts, to purchase their requirements from ancillary units. Since these parts have to fit into a specific product made by the large unit, their dimensions, specifications etc., would have to be as laid down by the large unit.
It may very well happen that such articles could not be used by any other manufacturer. This however would not mean that such articles ceased to be excisable. In this connection it would be relevant to refer to a judgment of the Allahabad High Court in the case of Union of India and Ors. v. Union Carbide India Ltd., reported in 1978 E.L.T. (J 1). The question in that case was whether aluminium cans or torch bodies manufactured by Union Carbide India Ltd., in the course of manufacturing torches, could be subjected to duty under Item 27(e) of the Central Excise Tariff as "extruded shapes and sections including extruded pipes and tubes". It was contended by the manufacturers that the cans were not goods liable to excise duty. M/s. Union Carbide and anr. flashlight manufacturer, who had challenged the levy before the High Court, had emphasised that they were the only two manufacturers of torches in the country and that no one else produced aluminium cans or torch bodies, because this article was exclusively usable for manufacturers flashlight. Repelling the contention of the manufacturers, the High Court held that the product might not be known to the general public or to the traders in general but it was known and used by that trade which makes torches. It was held that the aluminium cans were known and dealt with as an entity by itseif, and were marketable according to the needs of those who dealt in it. The fact that these cans had a very limited and specialized market would make no impact on the legal position. The Court went on to observe that the test of general marketability did not appear sound, as it would fail in a monopoly product and for such a product the relevant entry would become nugatory. These observations would apply to the persent case, with even greater force. If aluminium cans which could be used only by a particular manufacturer and were used only for captiye consumption by him could be considered as goods, there is no reason why these outer races which were cut to a particular shape and size and subjected to machining by the appellants and thereafter supplied to M/s. Metal Box India Ltd., another manufacturer, should not be considered as goods.South Bihar Sugar Mills Ltd. v. Union of India and Ors., reported in 1978 E.L.T. (J 336) (S.C.) (which judgment along with that in the D.C.M. case, is very important as laying down the significance of the terms "goods" and "manufacture") it is pointed out that the mere fact that an article is not actually sold would not make any difference to its excisability if it is covered by the description in the tariff.
22. In the result, we find that the Additional Collector was correct in holding that the outer races resulting from the processes carried out by the appellants had undergone "manufacture" and that they were excisable under Item 68 of the Central Excise Tariff.
23. We need not comment in detail the question of penalty since Shri Habbu himself has not addressed any arguments on it. The correspondence between the appellants and M/s. Metal Box India Ltd., clearly shows that M/s. Metal Box India Ltd., believed the articles to be excisable, and that the appellants had been specifically advised by the Central Excise authorities at Nag-pur that they were excisable. Reference has been made to some advice to the contrary which is stated to have been given by the legal adviser of the appellants. There is nothing in the record to indicate who gave this advice and in what terms. The conduct of the appellants, as set out in the Additional Collector's order (vide para 5 above) also clearly brings out their consciousness that what they were doing was unlawful. In the circumstances we consider that the Additional Collector was fully justified in holding that offences punishable under Rule 173Q had been established and in imposing on them a penalty of Rs. 50,000.
24. In the result we confirm the Additional Collector's order and reject the appeal.