Important point
Process of pulverization under which Low Density Polyethylene and High Density Polyethylene granules are converted into moulding powder constitutes ‘manufacture’ in terms of Section 2(f) of the Central Excise Act, 1944 read with note 6(b) of Chapter 39 of the Central Excise Tariff Act, 1985.

Headnote:Central Excise Act, 1944—Sections 2(d), 2(f), 11A(1) As Amended—Central Excise Rules, 1944—Rule 9—Central Excise Tariff Act, 1985—Note 6(b) to Chapter 39—Manufacture—Powdering of Low Density Polyethylene (LDPE) and High Density Polyethylene (HDPE) granules into moulding powder—Assessee manufactures plastic water storage tanks and toys—During visit of the factory of assessee by officers of Anti Evasion Branch of Central Excise Commissionerate, it was noticed that the assessee had installed the injection, moulding, extruding and pulverizing machines, operated with electric power, to handle plastic inputs and produce moulded shapes for manufacturing toys, water storage tanks, desks, tables etc.—On enquiry, process revealed that moulding machine accepted plastic input only—Inputs consisting of LDPE and plastic colouring material were procured in the granular form, it was pulverized to produce the moulding powder—Two show cause notices were issued demanding duty—Whether process of conversion of granules into moulding powder constituted ‘manufacture’ in terms of Section 2(f) of the 1944 Act—(Yes)—Whether the said powder was an ‘excisable product’ in terms of Section 2(d) of the 1944 Act—(Yes)—Valuation of moulding power—Whether on facts and circumstances of this case, department was right in invoking the extended period of limitation vide show cause notice dated 4-11-1997—Questions to be decided by the Commissioner.
Held : Reading note 6(b), it is clear that blocks and powders are two different “primary forms” and if the block is pulverized into powder, the activity would amount to “manufacture” in terms of clause (ii) of section 2(f). By the very language of note 6, conversion from granules into moulding powder would result in “manufacture”. Therefore, as a consequence of the new definition of “manufacture” in terms of section 2(f), the activities which otherwise do not amount to “manufacture” can now be treated as “manufacture” and made liable to duty. On the question of marketability, we find from the register in Form-IV maintained by the assessee that on several occasions, the assessee had bought the moulding powder from the market, which circumstance by itself indicates that moulding powder is a marketable commodity and, therefore, excisable in terms of section 2(d) of the 1944 Act. The Tribunal was, therefore, right in holding that the said powder was classifiable under Heading 39.01 of the 1985 Act. Now on the question of valuation of the moulding powder, the Commissioner (Adjudication) found that the manufacturing expenses of the assessee did not include the profit margins and accordingly, the Adjudicating Authority worked out the profit margins on the basis of the ratio of gross profit : Sales for the year ending 31.3.1996. According to the assessee, the Commissioner (Adjudication) had erred in taking into account the gross profit of the previous year while calculating the profit margin. In this connection, reliance was placed by the assessee on Circular No. 258/92/96-CX dated 30.10.1996 issued by Central Board of Excise & Customs, New Delhi, which prescribes the formulae for calculating the value of the captively consumed goods under rule 6(b)(ii) of the Central Excise (Valuation) Rules, 1975. The short point which arises for determination is – whether calculation of the profit margin, includible in the manufacturing expenses, should be on ‘gross profit’ or ‘net profit’ of the previous year. We do not wish to express any opinion. Suffice it to state that this issue will have to be decided by the Commissioner (Adjudication) afresh. Accordingly, we remit the matter back to the Commissioner (Adjudication) for a fresh determination in the light of the circulars No.26/88 dated 4.4.1988, no. 258/92/96-CX dated 30.10.1996, No. 692/8/2003-CX dated 13.2.2003 as also any other circular which might have been issued by the Central Board of Excise & Customs during the relevant period. (Paras 13 to 16)
For the aforestated reasons, we hold that the process of pulverization under which granules are converted into moulding powder constitutes “manufacture”; that the moulding powder produced by the aforestated process was marketable; that the show-cause notice dated 4.11.1997 was beyond limitation; that the Commissioner (Adjudication) will decide the question of valuation under rule 6(b)(ii) of the Central Excise (Valuation) Rules, 1975, in the light of the Circulars dated 4.4.1988, 30.10.1996 and 13.2.2003 issued by the Central Board of Excise & Customs; and lastly, the Commissioner (Adjudication) will also decide the question of limitation for the duty demanded under the show-cause notice dated 1.5.1997 in the light of the Circular dated 19.9.2001 issued by the Central Board of Excise & Customs as well as in the light of Amending Act 10 of 2000 under which section 11A(1) stood amended. (Para 21)

Judgment

Kapadia, J.—The short question which arises for determination in these civil appeals filed under section 35L (b) of the Central Excise Act, 1944 is – whether powdering of Low Density Polyethylene (LDPE) and High Density Polyethylene (HDPE) granules into moulding powder amounts to “manufacture”.

2. Assessee manufactures plastic water storage tanks and toys. On 24.4.1997, the factory of the assessee was visited by Officers of Anti Evasion Branch of Central Excise Commissionerate, Delhi. During this visit, it was noticed that the assessee had installed the injection, moulding, extruding and pulverizing machines, operated with electric power, to handle plastic inputs and produce moulded shapes for manufacturing toys, water storage tanks, desks, tables etc. On enquiry, the process revealed that the moulding machine accepted the plastic input only and since the inputs, consisting of LDPE and plastic colouring material, were procured in the granular form, the same was first required to be intermixed in specified proportion and then pulverized to produce the moulding powder. This was done with extruders and pulverizers. After receiving the two inputs, the extruder through hoopers melted and mixed them in the melting and mixing chambers to produce filaments which after being cooled were chipped into small pieces. These small pieces produced with the extruder were later placed in the pulverizers which grinded them into powder.

3. Accordingly, two show-cause notices dated 1.5.1997 demanding duty for the period October, 1996 to March, 1997 and dated 4.11.1997 for the period May, 1993 to September, 1996 were issued to the assessee calling upon them to show-cause as to why the above process was not “manufacture” in view of note 6(b) to Chapter 39 of the Central Excise Tariff Act, 1985 (hereinafter referred to for the sake of brevity as “the 1985 Act”). According to the show-cause notices, the aforestated process constituted “manufacture” and the moulding powder constituted “excisable goods” as defined under section 2(d) of the Central Excise Act, 1944 (hereinafter referred to for the sake of brevity as “the 1944 Act”). According to the said show-cause notices, assessee had clandestinely removed the said powder without filing the classification list and in breach of Central Excise Rules, 1944 (hereinafter referred to for the sake of brevity as “the 1944 Rules”) resulting in escapement of duty from assessment Consequently, the department issued the above two show-cause notices under rule 9 read with section 11A of the 1944 Act.

4. In reply, the assessee contended that conversion of granules into moulding powder did not amount to “manufacture”, in terms of section 2(f) of the 1944 Act; that the said moulding powder was prepared as per specifications and requirement depending on the end product being water tanks or toys and consequently, no other manufacturer besides the assessee could use the said powder prepared by the assessee. It was further contended that the said powder was not marketable and, therefore, it did not constitute “excisable goods”, as defined under section 2(d) of the said 1944 Act.

5. By orders dated 18.11.1997 and 29.12.1998, the Commissioner (Adjudication) held that conversion of granules into moulding powder constituted “manufacture” in terms of note 6(b) to Chapter 39; that both granules and the moulding powder forms fell under Tariff Heading 39.01; that while using the said powder in the manufacture of plastic water tanks and toys, the assessee should have paid duty on the basis of deemed clearances, since the powder was captively consumed; that the assessee had started the above conversion process from 10.5.1993; that the assessee was aware that the said powder was excisable and yet wilfully omitted to file the requisite classification list; that the manufacturing expenses did not include the profit margins; that even the quantity produced did not tally with the records maintained by the assessee; and consequently,

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2005 Supreme(SC) 197

Cases Referred (2)