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2015 (6) TMI 334 - AT - Central ExciseManufacturing activity or not - whether making pencil slats from wooden logs (timber) would amount to manufacture and whether such pencil slats would attract Central Excise duty - Exemption Notification No. 56/02-CE dated 14/11/02 - Held that:- Timber logs are cut into blocks, which are further cut into smaller blocks and, thereafter, these smaller blocks are subjected to the process of boiling to soften the wood and it is the softened wooden blocks which are sliced into the slats. The slats, thereafter, are subjected to further processing in the pressure vessel where they are subjected to pressure at high temperature and also treated with the colouring material and into termite chemicals. The slats obtained by this process are stained slats while the slats obtained by slicing the boiled wooden blocks are called un-stain slats. There is no dispute that these slats are meant only for manufacture of pencils. From the manufacturing process described in the appeal memo and also in the order of the Assistant Commissioner it is clear that there is transformation of timber block into a new commodity in course of making of pencil slats from timber logs/wood blocks in as much as (a) boiling of wooden blocks results in certain changes in the wood which makes it soft and (b) subjecting the un-stained slats to pressure at high temperature in the pressure vessel and treating them with certain chemicals and colouring matter gives the pencil slats changes their properties which makes them suitable for use in the manufacture of pencil. The pencil slats obtained by the above process have no other use except in the manufacture of pencil. Pencil slats are specifically covered by HSN sub-heading 44219040. Harmonised commodity description and coding system, generally referred to as harmonised system of nomenclature (HSN), is a multi purpose international product nomenclature developed by the world customs organisation and it harmonises customs and trade procedure and thus reduces the cost relating to international trade. Moreover when the manufacturing units of both the appellants were located in the areas notified under Notification 56/02-CE and HPPL was in fact availing of this exemption, there would be absolutely no incentive, in fact, negative incentive, for them to avoid the payment of duty, as (a) as per the scheme of Notification 56/02-CE, whatever duty is payable through PLA after availing the Cenvat credit available at the end of the month to the extent possible, is exempt and is available as refund in form of credit in PLA, and (b) while the assessee availing of 56/02-CE exemption gets refund of the duty paid through PLA, in terms of Rule 12 of the Cenvat Credit Rules, 2004, the manufacturing units (customers) receiving the goods from him would be eligible for full Cenvat credit as if no part of duty payable on the goods was exempt and for this reason the tendency of the units availing of exemption under Notification No. 56/02-CE would be to pay as much duty as possible rather than avoid the payment of duty. In view of this position, we hold that in both the cases, the appellants cannot be accused suppressing of any material fact from the Department with intent to evade the duty. Only the normal limitation period would be available to the Department for recovery of duty and for the same reason, no penalty under Section 11AC of Central Excise Act, 1944 or Rule 25 (1) of the Central Excise Rules, 2002 would be justified. However, for quantification of the demand within normal limitation period, the matter would have to be remanded to the original Adjudicating Authority. In the case of HPPL, since they were initially paying the duty and availing of exemption under Notification No. 56/02-CE and since it is only on the orders of the Assistant Commissioner rejecting their refund claims under Notification No. 56/02-CE holding that the process undertaken by them does not amount to manufacture, they stopped payment of duty, if they claim the exemption under Notification No. 56/02-CE, the same would have to be allowed. - Decided partly in favour of assessee.
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