2016 (11) TMI 230 - AT - Central Excise

Manufacturing activity or not - emergence of new marketable product or not - Whether the main appellant is liable to Central Excise duty on the aluminium channels brought from market on which they have carried out process like cutting drilling and bending as per the requirement of the customers will amount to manufacture or not - Held that - Such drilling and bending is also carried out at site of the customers depending upon the requirement of structure to be installed in the premises alongwith other civil work. In such situation it is necessary to have a clear recording on the facts as to what type of new identifiable product emerges from aluminium sections brought in by the main appellant - In such a situation we are unable to agree with the findings of the Original Authority that a new and different article having distinct name character or use as emerged in the present case. Regarding the second issue of addition of trading activity for the turnover of the appellants to arrive at the SSI exemption the impugned orders held that the suppliers did not have manufacturing facility and the purchase and sale transaction of the wall mounted brackets is not acceptable - In this connection the appellant contested that simply because the suppliers from whom they procured these materials do not themselves have manufacturing facility by itself cannot lead to a conclusion that the whole transaction is bogus - Appeal allowed by way of remand.

Summary

The core legal questions considered by the Tribunal in these appeals are as follows:

(a) Whether the processes carried out by the main appellant on aluminium channels procured from outside-specifically cutting, drilling, and bending-amount to "manufacture" under the Central Excise law, thereby attracting Central Excise duty.

(b) Whether the turnover of wall mounted brackets was properly recorded by the main appellant, or whether a portion of sales attributed to trading of items purchased as such should be included in the turnover for the purpose of calculating the Small Scale Industry (SSI) exemption limit. This issue also involves the legitimacy of the suppliers' transactions, particularly those of the third appellant, who supplied wall mounted brackets purportedly purchased and supplied to customers.

Issue-wise Detailed Analysis

(a) Liability to Central Excise Duty on Aluminium Channels after Processing

Relevant Legal Framework and Precedents: The levy of Central Excise duty applies on "manufacture" as defined under the Central Excise Act. The key test is whether the process transforms the input goods into a new and distinct article having a different name, character, or use. The Tribunal's earlier decision in Mahindra and Mahindra (2005) was cited by the Original Authority, which held that fabricated structural parts, prior to their permanent fixing, attract excise duty.

Court's Interpretation and Reasoning: The Original Authority had held that the processes of cutting, drilling, and bending aluminium channels resulted in a new product classified under heading 7610 as aluminium structures, distinct from the raw aluminium sections purchased. However, the Tribunal found this reasoning flawed. It observed that cutting, drilling, and bending-especially when not uniformly applied to all aluminium sections and sometimes performed at the customer's site-do not necessarily amount to manufacture. The Tribunal emphasized the absence of clear evidence demonstrating that the processed aluminium sections constitute a new and different article having distinct name, character, or use.

Key Evidence and Findings: The Original Authority's conclusion was based on the classification of the final product as aluminium structures. However, the Tribunal noted the lack of clarity on what specific new product emerges from the processed aluminium sections and recognized that the aluminium sections remained essentially the same goods as initially purchased.

Application of Law to Facts: The Tribunal applied the legal principle that mere processes such as cutting and drilling, which do not result in a new and distinct article, do not amount to manufacture attracting excise duty. It also distinguished the present case from Mahindra and Mahindra, where the structural parts were fabricated and intended for permanent fixing, unlike the present case where the nature of the processed goods and their marketability as distinct products were not established.

Treatment of Competing Arguments: The Revenue's contention that the processed aluminium channels are new goods liable to duty was rejected due to insufficient factual and legal basis. The Tribunal found the Original Authority's reliance on classification and analogy to previous decisions misplaced without detailed factual findings.

Conclusion: The Tribunal set aside the Original Authority's findings on this issue and remanded the matter for fresh consideration with a directive to thoroughly examine the nature of the processes and the goods resulting therefrom, supported by evidence and relevant case law.

(b) Inclusion of Trading Turnover of Wall Mounted Brackets for SSI Exemption

Relevant Legal Framework and Precedents: The SSI exemption limit is calculated based on turnover from manufacture. The question arises whether turnover from trading activities should be included. Section 9D of the Central Excise Act governs the procedure for recording and relying on statements during adjudication. Relevant High Court decisions (Ambika International, Jindal Drugs Pvt. Ltd., and J&K Cigarettes Ltd.) emphasize the necessity of following procedural safeguards, including cross-examination, when statements of co-noticees are relied upon.

Court's Interpretation and Reasoning: The Original Authority rejected the appellant's claim to exclude turnover from trading, based on the finding that suppliers did not have manufacturing facilities and that the purchase-sale transactions were not genuine. The Tribunal found this reasoning unsustainable, noting that the absence of manufacturing facilities by suppliers does not automatically render the transactions bogus. The appellant's assertion that they purchased goods from traders was not disproved.

Key Evidence and Findings: The Department's case rested on the allegation that suppliers had no manufacturing capacity, implying that the transactions were sham. The Tribunal pointed out procedural irregularities, including the denial of cross-examination of key witnesses (Shri Joshi and Shri Chandra), whose statements were relied upon by the Department. This violated principles established in the cited High Court decisions.

Application of Law to Facts: The Tribunal applied the procedural safeguards mandated under Section 9D and relevant judicial precedents. It held that statements of co-noticees cannot be accepted without affording the affected parties an opportunity for cross-examination, especially when such statements form the basis for adverse findings.

Treatment of Competing Arguments: The appellant's contention that trading turnover should be excluded and that procedural fairness was denied was accepted. The Revenue's presumption of bogus transactions based solely on the suppliers' lack of manufacturing capacity was rejected as insufficient.

Conclusion: The Tribunal remanded this issue for fresh adjudication, directing the Original Authority to provide adequate opportunity to the appellants to present their case and to comply with the procedural requirements under Section 9D.

Significant Holdings

On the issue of manufacture and excise duty liability, the Tribunal held: "It is not clear as to how an aluminium section cut to size and drilled/bent wherever required will become a distinct marketable product from the input used... the aluminium section remained as aluminium section as per the Original Authorities own finding... we are unable to agree with the findings of the Original Authority that a new and different article having distinct name, character or use has emerged."

On the issue of turnover inclusion for SSI exemption and procedural fairness, the Tribunal emphasized: "The denial of cross-examination of Shri Joshi and Shri Chandra on the ground as they are co-noticee, is also not sustainable... when the appellant wants to verify the truth of the statements then necessarily the procedure as stated out under Section 9D of the Act has to be followed... This has been emphasized in the decision of Hon'ble Punjab & Haryana High Court and Hon'ble Delhi High Court."

The Tribunal conclusively set aside the impugned order and remanded the matter for fresh adjudication on both issues, directing adherence to procedural safeguards and thorough factual and legal examination.