DUTY LIABILITY WHEN TRANSACTION IS ON PRINCIPAL TO PRINCIPAL BASIS

[Mr. M. GOVINDARAJAN]

The Supreme Court in 'Ujjagar Prints & Others V. Union of India' - 1988 (38) ELT 535, 'Empire Industries Limited & Others V. Union of India' - 1985 (20) ELT 179 and 'Commissioner of Central Excise, Baroda V. M.M. Khambhatwala' 1996 -TMI - 44275 - (SUPREME COURT OF INDIA) held that the duty liability, if any, would be on the job worker not on the principal manufacturer when the transactions between the principal manufacturer and the job worker are on principal to principal basis.

The said decision has been followed by the Delhi Tribunal in 'Eternit Everest Limited V. Commissioner of Central Excise, Bhopal' - 2010 (254) ELT 507 (Tri. Del). The appellant assessee manufactures asbestos cement corrugated sheets chargeable to Central Excise duty and other asbestos cement products chargeable to duty. A show cause notice was issued by the Department to the appellant in which it was narrated that the appellant applied for remission of duty on unmarketable asbestos cement products, which was allowed and thereafter those asbestos cement products were destroyed under the supervision of the jurisdiction Central Excise Officers. The small pieces of asbestos cement products were subsequently sent under job work challans to job workers for grinding the same into power and the powder called Hard Ground Powder (HGP) was returned to the appellant's factory from where it was sold. According to the Department the same is liable for excise duty and the same was disclosed by the appellant. The show cause notice proposed the duty and also penalty. The show cause notice also invoked the extended period. The show cause notice was adjudicated confirming the demand of duty. Equal amount of penalty was imposed under Sec. 11AC and penalty was also imposed under Rule 173Q(1) of Central Excise Rules, 1994.

On appeal the Commissioner (Appeals) allowed the appeal and set aside the order of Dy. Commissioner on the ground that the show cause notice is time barred and no case is made out by the Department for imposing penalty. On appeal by the Department before the Appellate Tribunal, the Tribunal allowed the appeal of the Revenue and remanded the matter to Commissioner (Appeals) for de novo adjudication.

The Commissioner (Appeals) as per the directions of the Tribunal heard the matter de novo upheld the Dy. Commissioner's order confirming the duty demand and imposing penalty under Section 11AC but set aside the penalty under Rule 173Q(1) on the ground that when penalty under Section 11AC is imposed, there was no necessity to impose separate penalty under Rule 173Q(1). He also ordered the charging of interest under Section 11AB on the duty demand confirmed under Section 11A(1). Against this order the appellant filed the present appeal.

The appellant submitted the following contentions:

* HGP is nothing but finely ground pieces of the asbestos cement product, which being not marketable, had been destroyed. It is not a mixture with a basis of asbestos or with a basis of asbestos and magnesium carbonate. It consists of cement, sand, fly ash, asbestos powder etc., and is nothing but pulverized and powdered asbestos cement products which were unmarketable. Just because it fetches a little price, it does not mean that the same is marketable and hence excisable;

* In 'Super Engineering Co., V. Commissioner of Central Excise, Rajkot' - 1996 (82) E:T 539 (Tri.) it was held that the process of pulverizing, washing and cleaning of brass dross/ash does not amount to manufacture, as no new marketable commodity with a separate and distinct name, having separate physical and chemical composition or characteristic comes into existence;

* In 'Hyderabad Industries Limited V. Union of India' 1995 (78) ELT 641 it was held that separating asbestos fibre and rock, in which it is embedded, by manual and mechanical means does not amount to manufacture;

* In 'Mahalakshmi Metal Industries V. Commissioner of Central Excise, Allahabad' - 2001 (136) ELT 1391it was held that Ravali obtained by pulverizing and sieving the brass dross and ash is not a manufactured product and hence not liable to duty;

* In 'Shree Ramakrishna Soap nut Works V. Superintendent of Central Excise' - [2007 -TMI - 1310 - SUPREME COURT OF INDIA]  it was held that pulverization of shikakai pods into shikakai powder does not amount to manufacture;

* The hard ground power had been made by the job workers and hence even if it is held to be excisable the duty liability would be on the job workers and not on the appellants;

* The show cause notice issued is time barred as there is no fraud, willful misstatement or suppression of facts with intent to evade payment of duty involved in this case;

The Department submitted the following contentions:

* The product is a power made by grinding the process of broken asbestos cement products and it is correctly classifiable as mixtures with a basis of asbestos;

* The very fact that the product, in question, is sold by the appellants shows that it is marketable and since it is marketable it attracts central excise duty;

* The question as to whether the duty is chargeable from the job workers or from the appellants, had never been raised in the proceedings before the Commissioner (Appeals) or before the Dy. Commissioner and hence this issue cannot be raised at this stage before the Tribunal.

* The broken asbestos sheets had been cleared under private challan to job workers without declaring to the Department and no declaration regarding the production of HGP during the period of dispute had been made to the Department. Therefore, the Department is justified in invoking the extended period.

The Tribunal considered the submissions from the sides. The question to be decided is whether the power obtained by grinding the broken pieces of the asbestos cement products is chargeable to central excise duty. The Department seems the liability as 'mixtures with a basis of asbestos or with a basis of asbestos with magnesium carbonate'. The Tribunal took note of the submissions of the appellant-

* HGP is a totally dead material not having any chemical bonding strength and the fly ash content of HGP is also dead not having any bonding strength;

* Fibre content present in HGP is practically zero length and it does not add any reinforcement to any finished product;

* The only use of this material is as landfill to avoid environment pollution; and

* Grinding of broken pieces of asbestos cement products into powder has been resorted to under compulsion of environment protection.

The Tribunal held that the Department has not produced any evidence in form of chemical test reports to show that the HGP has any bonding strength or that its asbestos fibre content is of usable length and that the HGP can be used for fabricating articles of asbestos. No evidence has been produced to show that HGP can be used as filtering material or as heat insulation material. Thus the Department has failed to make out a case for classification of the product.

The Tribunal also found that it is not under dispute that the grinding of the broken pieces of asbestos cement products into powder had been done through the job workers and it is a settled law that the duty liability, if any, would be on the job worker not on the principal manufacturer when the transactions between the principal manufacturer and the job worker on principal to principal basis. The department contended that the point as to who is liable to pay the duty cannot be taken at this stage, as the same has not been raised at the original adjudication stage or before Commissioner (Appeals). The Tribunal did not agree with this plea, as the fact that the grinding was being done through job workers is mentioned in the show cause notice itself and therefore, the question as to whether the job workers are liable to pay the duty on the Appellant are liable, is purely a point of law, which can be raised at any stage.