Supreme Court of India (Division Bench (DB)- Two Judge)

Appeal (Civil), 5784-5788 of 2007, Judgment Date: Dec 14, 2015

                                                              NON-REPORTABLE

                        IN THE SUPREME COURT OF INDIA

                        CIVIL APPELLATE JURISDICTION

                     CIVIL APPEAL NOS. 5784-5788 OF 2007


M/S GUJARAT INDUSTRIES & ORS.                              .....APPELLANT(S)           

                                    VERSUS                                                                 

COMMISSIONER OF CENTRAL EXCISE-I, AHMEDABAD               .....RESPONDENT(S)          

                                   W I T H

                     CIVIL APPEAL NOS. 9196-9202 OF 2012



                               J U D G M E N T


A.K. SIKRI, J.

The assessee/manufacturer in the instant appeals, has commended  this  Court
to decide the following questions of law which arise  for  consideration  in
these appeals:
(a)  Whether the process of cold-rolling undertaken by the assessee  on  the
hot-rolled stainless steel patta/pattis amount to 'manufacture'  within  the
meaning of Section 2(f)(i) of the Central Excise Act, 1944?
(b)  Whether the Custom Excise & Service  Tax  Appellate  Tribunal  (CESTAT)
was correct in holding that the process of cold-rolling of  stainless  steel
patta/pattis amounts to manufacture in  view  of  Chapter  No.4  of  Chapter
No.72 of the Central Excise Tariff Act, 1985, when  the  said  Chapter  Note
was not even referred to or relied upon in the show cause notice?
(c)  Whether in the facts and circumstances of the case, extended period  of
limitation under proviso to  Section  11A  of  the  Act  was  invokable  for
demanding duty from the assessee and for imposing penalty on the assessee?

The factual background under which the appeals have been  preferred  by  the
appellants  can  be  captured  by  taking  note  of  the  following  salient
features:
      The assessee is engaged in the process of cold-rolling  of  hot-rolled
stainless steel patta/patti on job work basis.  As  per  the  assessee,  for
this  purpose,  it   receives   hot-rolled   SS   patta/patti   from   other
manufacturers and thereafter undertakes the process of cold-rolling  in  the
cold-rolling mill.  The purpose of cold-rolling is only to reduce the  gauge
of the SS patta/patti.  After so reducing the gauge by the process of  cold-
rolling, the SS patta/patti are  sent  back  to  the  suppliers.   For  this
purpose, the assessee  receives  job  charges  from  the  suppliers  of  the
materials.  The assessee claims  that  apart  from  cold-rolling,  no  other
process was undertaken by the assessee on the SS patta/patti.  The  assessee
had undertaken this activity during the period  between  November  1995  and
March 1997.  It is also the case of the assessee  that  by  the  process  of
cold-rolling, only the gauge of the SS patta/patti gets reduced and  no  new
commercially  identifiable  commodity  comes   into   existence,   and   the
appellants were under the bona fide belief that the process of  cold-rolling
does not amount to manufacture under the Central Excise Act and  accordingly
did not take out central excise  registration  and  did  not  discharge  any
central excise duty liability.

After  conducting  some  investigation,  Commissioner  of  Central   Excise,
Ahmedabad issued a show  cause  notice  dated  15.05.2000  to  the  assessee
contending that the process  of  cold-rolling  undertaken  by  the  assessee
amounts to manufacture within the meaning of Section 2(f)  of  the  Act  and
accordingly, the show cause notice sought to demand duty  of  Rs.24,06,310/-
from the assessee for the period from 1995-96 to  1996-97  by  invoking  the
extended period of limitation under proviso to Section 11A of the  Act.

After considering the reply of the assessee,  the  Commissioner  of  Central
Excise, Ahmedabad passed Order-in-Original confirming  the  duty  demand  of
Rs.12,20,563/- after extending the benefit  of  small  scale  exemption  and
imposing penalty of Rs.12,32,563/- on the assessee.  The  Commissioner  held
the process of cold-rolling to be amounting  to  manufacture,  in  terms  of
Chapter Note 4 to Chapter 72.  The Commissioner also  imposed  penalties  on
the suppliers of the materials.
      On the appeals filed by the assessee and the  suppliers  of  the  cold
rolled SS patta/patti, the Tribunal by a 2-1 majority held that the  process
of cold-rolling amounts  to  manufacture  in  view  of  Chapter  Note  4  to
Chapter 72.  The majority of the Tribunal further  held  that  the  extended
period of limitation under proviso to Section 11A of the  Act  is  invokable
and accordingly confirmed the duty demands and the penalties imposed by  the
Commissioner.

 It is in the aforesaid backdrop the questions of law  formulated/raised  by
the appellants need to be decided.

We first advert to the central and crucial issue, namely, whether the  gauge
reduction of the hot rolled SS patta/pattis  by  cold-rolling  process  will
amount to manufacture of a new product  attracting  further  central  excise
duty.  As we have  already  pointed  out  above,  the  Department  seeks  to
include the said  item  of  the  assessee  under  Chapter  Heading  7220.20.
Chapter 72.20 including the entry in which  Department  claims  the  product
falls, is as under:
|72.20|       | |Flat-rolled products of stainless steel,|     |
|     |       | |of a width of less than 60mm            |     |
|     |7220.10|-|Not further worked than hot-rolled,     |15%  |
|     |       | |whether or not in coils                 |     |
|     |7220.20|-|Not further worked than cold-rolled     |15%  |
|     |       | |(cold-reduced)                          |     |
|     |7220.90|-|Other                                   |15%  |

We find that in the Order-in-Original passed by the  Adjudicating  Authority
on the question as to whether cold-rolled  pattas  are  distinct  marketable
commodities, he relied upon the Harmonised Commodity Description and  Coding
System (HSN) published by World Custom Organisation  to  facilitate  uniform
classification of goods traded in the world classifies  cold  rolled  strips
and the hot rolled strips under two separate headings.   As  per  him,  this
itself shows that all over  the  world  these  products  are  considered  as
separate identifiable products.  As per general explanatory notes  given  in
part (IV)(B) to Chapter 72 of HSN on which Central Excise Tariff  Act,  1985
is based,  cold  rolled  products  can  be  distinguished  from  hot  rolled
products by the following criteria:-
(a)  The surface of cold rolled products has a  better  appearance  than  of
products of hot rolled and never has a layer of scale.
(b)  The dimensional tolerances are smaller for cold rolled products.
(c)  Thin-Flat products are usually produced by cooled rolling.
(d)  Microscopic  examination  of  cold-worked  products  reveals  a  marked
deformation of the grains and grain orientation parallel  to  the  direction
of working.  By contrast, products  obtained  by  hot  process  show  almost
regular grains owing to recrystallisation;
(e)  He also opined that  cold  rolling  in  the  true  sense,  changes  the
crystalline structure of the work piece by considerably reducing  its  cross
section.
      Thus  what  emerges  after  cold  rolling  of  hot  rolled  strips  is
altogether a different product  which  has  different  physical  properties.
And, in the explanatory Note to Chapter Heading 72.09 of HSN, it is  further
elaborated  that  because  of  their  special  properties  (better   surface
finished, better aptitude to cold – forming, stricter tolerances,  generally
reduced thickness, higher mechanical strength, etc.), the products  of  this
heading are in general use for purposes different from those  of  their  hot
rolled counterparts, which they increasingly  tend  to  replace.   They  are
used,  in  particular,  in  the  manufacture  of  automobile  bodies,  metal
furniture,  domestic  appliance,  and  central  heating  radiators  and  for
producing angles, shapes and sections by cold  process  (either  forming  or
profiling).   They  are  easy  to  coat  (by   tinplating,   electroplating,
varnishing, enamelling, lacquering, painting, coating with plastics,  etc.).
 They are  often  delivered  after  annealing,  normalizing  or  other  heat
treatment.

From the above, he concluded that the explanatory notes to  HSN  also  lends
support to the fact that hot rolled products and  cold-rolled  products  are
two distinct products having their own identity, name,  character  and  use.
Cold-rolled strips are used for making cycle/auto-parts  etc.,  whereas  hot
rolled strips cannot be used for this purpose.  The order,  thus,  proceeded
to hold that cold-rolled  strips  are  entirely  different  than  hot-rolled
strips which forms the principle raw material  for  the  manufacture  of  CR
strips.  A categorical finding was given by the Adjudicating Authority  that
goods are of different use and have a distinct identity of their own in  the
market which was sufficient to hold that the new  commodity  has  come  into
existence as for a product to be marketable it is  not  necessary  that  the
products  should  be  actually  marketed  but  they  should  be  capable  of
marketing since cold reducing is being independently by multiple  number  of
units either on job work basis or for use in their  other  factories  it  is
certainly capable of being marketed.

 When the matter was taken in appeal before the Tribunal  by  the  assessee,
Judicial Member took the view favourable to the assessee  whereas  Technical
Member affirmed the view of the Commissioner.  The Technical Member  in  his
brief order pointed out that the Commissioner had  given  detailed  findings
that the process  of  cold-rolling  imparts  quality  of  hardening  to  the
products  in  question   and   this   process   entails   changes   in   the
characteristics.  The Judicial Member also  passed  a  brief  order  holding
that the case was covered by the judgment of  this  Court  in  Steel  Strips
Ltd. wherein it was held that cold-rolling of steel strips  reduced  out  of
the  duty  paid  hot-rolled  steel  strips  do  not  undergo  a  process  of
manufacture.  The Judicial Member also observed that there  was  nothing  on
record to show that the mere passing of hot-rolled SS  patta/pattis  between
the two rollers, so as to reduce the  thickness  of  the  same,  amounts  to
process of hardening or tempering being undertaken.

With this difference of opinion, when the matter came up  before  the  Third
Member, he undertook a very detailed  discussion  and  ultimately  concurred
with the opinion of the Technical Member. Not only he relied  upon  the  HSN
explanatory notes which  corresponds  to  the  Chapter  sub-heading  of  the
Schedule to the Tariff Act but also took note  of  the  entire  process  and
discuss the same with reference to the technical literature.

After going through the said order, we  are  inclined  to  concur  with  the
reasons and rationale given by the Third Member holding the  entire  process
to be 'manufacture' within the meaning of Section 2(f) of the  Act.   Since,
we are agreeing with the said reasoning, it would be apt  to  reproduce  the
relevant portion thereof:
“5.  In this context, the Harmonized System of  Nomenclature  known  as  HSN
Explanatory  Notes  was  referred  to  by  both  the  sides.   These   notes
correspond to the Chapter sub-headings of the Schedule to  the  Tariff  Act.
The HSN throw considerable light on the process of production  in  iron  and
steel industries.  To begin with,  in  the  present  context,  semi-finished
products and in certain cases ingots are converted  into  finished  products
which are generally sub-divided into flat products (“wide  flats”  including
universal plates, wide coil, sheets, plates and  strip)  and  long  products
(bars and rods, hot-rolled, in  irregularly  would  coils,  other  bars  and
rods, angles, shapes, sections and wire).  These products  are  obtained  by
plastic deformation, either  hot,  directly  from  ingots  or  semi-finished
products (by hot-rolling, forging or hot-drawing); or cold, indirectly  from
hot finished products (by cold rolling, extrusion,  wire,  drawing,  bright-
drawing), followed in  some  cases  by  finishing  operations  (e.g.,  cold-
finished bars obtained by centreless grinding or by precision turning).   In
the category of hot plastic deformation, “hot- rolling” means rolling  at  a
temperature between the point of rapid recrystallization  and  that  of  the
beginning of fusion.  The temperature range depends on various factors  such
as the composition of the steel.  As a rule, the final  temperature  of  the
work-piece in hot-rolling is about 900ºC.  In the category of  cold  plastic
deformation, “cold-rolling” is carried out  at  ambient  temperature,  i.e.,
below  the  recrystallization  temperature.   Thus,  the  most   significant
operational distinction between the hot-rolling and  cold-rolling  is  that,
hot-rolling is a rolling done at a temperature between the  point  of  rapid
recrystallization and that of the beginning of fusion,  while  cold  rolling
is  carried  out  at  ambient  or  room  temperatures  which  is  below  the
recrystallization temperature.

The cold-rolled strips have the following properties which may be shared  by
certain hot-rolled products:-

(a)  because of the strain or work  hardening  they  have  undergone,  cold-
worked products are very hard and possess  great  tensile  strength,  though
these properties may diminish appreciably with heat treatment;

(b)  elongation of fracture is very low  in  cold  worked  products;  it  is
higher in products that have undergone suitable heat treatment.

Cold-rolling in the true sense also includes  cold  reduction  changing  the
crystalline structure of the work-piece by considerably reducing its  cross-
section.  The HSN Notes, therefore,  clearly  indicate  that  in  the  cold-
rolling processes because of the strain or work hardening,  the  cold-worked
product becomes very hard.  Therefore, when  hot-rolled  strips,  which  are
flat-rolled products,  are  subjected  to  cold  rolling,  such  cold-worked
product would be very hard and would possess great  tensile  strength.   The
process of cold-rolling  on  such  flat  products  would  harden  them  and,
therefore, it is a process of hardening.  The fact  that  hardening  can  be
achieved by heat treatment of steel cannot lead  to  a  conclusion  that  no
hardening can take place by  cold-rolling.   Hardening  or  tempering  of  a
matter by heat treatment  does  not  negate  the  existence  of  process  of
hardening or tempering by cold-rolling.  The reference to the literature  on
hardening or tempering from a 'Dictionary of Metal  Heat  Treatment',  'Hand
book of Heat Treatment Steels', 'Heat Treatment Principles and  Techniques',
would give a lop sided picture of the concept  of  hardening  or  tempering.
If by heat treatment hardening  or  tempering  of  metal  can  be  achieved,
equally so by a cold-reducing or cold-rolling or cold-working, hardening  of
the  flat  rolled  product/strips  can  be  achieved.   Heat  treatment  for
hardening or tempering may be suited for  particular  products  while  cold-
rolling or cold-working may be  suited  for  hardening  or  tempering  other
kinds  of  products.   Therefore,  by  merely  referring  to  hardening   or
tempering by process of heat treatment, one cannot shut out the entire cold-
rolling or cold-working processes which bring about hardening or  tempering.
 In the midst of technical literature produced on behalf of  the  appellant,
there are certain excerpts from 'Material Science and  Metallurgy',  Chapter
57 of which deals with mechanical working processes.  Mechanical working  of
metals may either by (i)  Hot  working,  or  (ii)   Cold  working.   Plastic
deformation of a metal above the recrystallization  temperature,  but  below
the  melting  or  burning  point  is  called  hot  working  whereas  plastic
deformation of a metal below its recrystallization temperature is  known  as
cold working.  In that chapter, there is an analysis done on  principles  of
hot and cold working of metals and their effects on  mechanical  properties.
The purposes of hot working and its  advantages  as  well  as  purposes  and
advantages of cold working are narrated.  While stating  the  principles  of
hot and cold working, the very  first  distinction  drawn  is  that  in  hot
working, metal working is performed on a metal held at  such  a  temperature
that the metal does not work-harden, while in  cold  working  it  is  stated
that it is a  plastic  deformation  of  a  metal  which  results  in  strain
hardening.  It usually involves working at ordinary (room) temperature,  but
for high melting point metals cold-working may  be  carried  out  at  a  red
heat.   Hot  working  processes  are:  forging,   rolling,   pipe   welding,
extrusion, spinning and hot piercing and rolling (tubes)  etc.,  while  cold
rolling processes commonly employed are : rolling, extrusion,  pressing  and
deep drawing, stamping, squeezing, bending, shearing etc.

Cold rolling is a process by which the sheet metal or  strip  is  introduced
between rollers and then compressed and  squeezed.   The  amount  of  strain
introduced determines the hardness and  other  material  properties  of  the
finished product.  Cold rolled sheet can be produced in  various  conditions
such as skin-rolled, quarter hard, full hard  depending  on  how  much  cold
work has been performed.  This  cold  working  (hardness)  is  often  called
temper, although this has nothing to do with heat treatment  temper.   Cold-
rolled metal is  given  a  “temper”  rating  based  on  the  degree  it  was
compressed.  Temper is the state or  a  condition  of  a  metal  as  to  its
hardness  or  toughness  produced  by  either  thermal  treatment  or   heat
treatment and quench or cold working or a combination of same  in  order  to
bring the metal to its specified  consistency.   As  per  Steel  dictionary,
cold rolling means rolling metal at a temperature below the softening  point
of the metal to create strain hardening (work-hardening).  It  is  the  same
as cold reduction, except that the working method  is  limited  to  rolling.
Cold rolling  changes  the  mechanical  properties  of  strip  and  produces
certain useful combinations of hardness, strength, stiffness, ductility  and
other characteristics known as tempers.

It is not disputed that cold-rolled  sheet  products  are  used  in  a  wide
variety of  end  applications  such  as  appliances-refrigerators,  washers,
dryers,  and  other  small  appliances,  automobiles-exposed  as   well   as
unexposed parts, electric motors, and bathtubs.  Cold-rolled sheet  products
are used in these and many  other  areas  of  manufacturing.   To  meet  the
various   end   use   requirements,   cold-rolled   sheet    products    are
metallurgically  designed  to  provide  specific  attributes  such  as  high
formability, deep drawabiliity, high strength, high  dent  resistance,  good
magnetic properties, enamelability and paintability.   The  primary  feature
of cold reduction is to  reduce  the  thickness  of  hot-rolled  coils  into
thinner thicknesses that are not generally  attainable  in  the  hot  rolled
state.  Cold reduction operation induces very high strains (work  hardening)
into the sheet.  Thus, the sheet not only becomes thinner, but also  becomes
much harder, less ductile, and very difficult to form.  However,  after  the
cold-reduced product is annealed (heated to high  temperature),  it  becomes
very soft and formable.  Tempering is a form of cold rolling that gives  the
steel a precise amount of hardness on the outer surface of the steel.   Cold
rolling is undertaken to reduce the thickness, improve the  surface  finish,
improve the thickness tolerances, to offer a  range  of  tempers  and  as  a
preparation for surface coating.   Thus,  cold-rolling  process  is  also  a
process of hardening or tempering which is applied to flat rolled  products,
namely hot rolled strips so as to attract Chapter Note 4 of  Chapter  72  of
the Schedule to the Tariff Act.  In the present case, there  is  no  dispute
over the fact  that  the  appellant-assessee  was  undertaking  cold-rolling
process on its cold-rolling mills on the hot-rolled strips which  were  sent
to it for the job work of reducing the gauge.  The process of  reducing  the
gauge by cold-rolling was also a process of hardening or  tempering  because
cold-rolled products become hard and possess a very  high  tensile  strength
by the process of cold-rolling.  The fact that a degree of hardness  can  be
achieved will not dilute the applicability of the  Chapter  Note  4  because
every degree of hardening or type of tempering resulting  from  cold-rolling
of flat-rolled products would amount to manufacturing within the meaning  of
Chapter Note 4 of Chapter 72.  The fact  that  annealing  and  pickling  was
done earlier by the party sending the goods for job work, will not make  any
difference because hardening  or  tempering  of  such  flat-rolled  products
comes about only after cold-rolling.  Having regard to the variety of  flat-
rolled products, which are cold-rolled, it cannot be  said  that  the  goods
are not marketable.  Admittedly, none of the parties sending the  goods  for
job work to the appellant-assessee adopted  the  procedure  of  sending  the
goods for job work, as contemplated  by  Rule  57F  of  the  Central  Excise
Rules, 1944 and, therefore, there can arise no question of the goods  having
been sent for job work under Rule 57F.  It was not the case of any of  these
appellants that the goods were sent in accordance  with  the  provisions  of
Rule 57F of the said Rules.


The other question raised in the appeals pertains to the extended period  of
limitation.  The case set up by the assessee is that,  in  any  case,  there
was no willful mis-declaration, mis-statement or suppression on the part  of
the assessee and, on the other hand, the facts gave  rise  to  a  bona  fide
belief that the process did not amount to manufacture and,  therefore,  show
case notice dated 15.05.2000 was beyond  the  normal  period  of  limitation
and, thus, time barred.  As pointed out above, the  assessee  had  not  been
paying any excise duty on the aforesaid process as  according  to  it,  this
process did not amount to manufacture and no excise duty was  paid.   It  is
only on the basis of intelligence report that assessee was  evading  central
excise duty that the matter came to the notice of the Revenue which  led  to
the exercise of issuing of notice.  It so happened  that  on  the  basis  of
intelligence,  the  Officers  of  Central  Excise  Department  visited   and
searched the said factory premises on 25.03.1999  in  the  presence  of  two
independent panchas  and  Shri  Rajnibhai  Veljibhai  Katharia,  partner  of
assessee and seized certain records for  which  panchnama  dated  25.03.1999
was prepared.  Officers in the panchnama observed that the  two  housing  of
cold-rolling mills fitted with debapti and gearbox were found installed  and
other parts were not found in the said rolling mills.  During the course  of
panchnama itself, it was stated by Shri Rajnibhai in presence of panchas:
      (a)   That the said factory was engaged in the reduction of gauge  (15
gauge to 20 gauge) of hot-rolled SS patta, received from various parties  on
two cold-rolling installed in the factory  from  November,  1995  to  March,
1997;
      (b)  That hot-rolled SS pattas after  annealing  and  picking  process
were received from various units in  his  factory  and  after  reducing  the
gauge from (15 to 20 gauge) in his  factory,  the  same  was  sent  back  to
senders on job charges of Rs.1.50 per KG for the said process;
      (c)  That they closed the said two rolling mills in  April,  1977  and
sold out the parts other than housing, debapti and gearbox.
      Statements of the responsible persons for the said unit were  recorded
and  after  conducting  some  investigation,  the  Commissioner  of  Central
Excise, issued the show  cause  notice  dated  15.05.2000  to  the  assessee
contending that the process  of  cold-rolling  undertaken  by  the  assessee
amounts to the manufacture within the meaning of Section 2(f) of the Act.

Once, we keep the aforesaid facts in mind, it is difficult  to  accept  that
the assessee was under bona fide belief that excise  duty  was  not  payable
and that it was not permissible for  the  Department  to  avail  the  larger
period of limitation by invoking proviso to Section 11A  of  the  Act.   All
the Authorities below have rejected this  argument  of  the  assessee.   The
Tribunal while upholding the  view  of  the  Commissioner  agreed  with  the
reasons given by the Commissioner in the following manner:
“The Commissioner has also for valid reasons held that the  extended  period
of limitation was applicable and that the Department's record did  not  show
the receipt of any letter allegedly written on  28.09.1996.   The  assessee,
dealing with several similar manufacturing units who  paid  excise  duty  on
identical  processes,  and  doing  job  work  on  their  behalf  would  have
obviously known that excise registration was required for the  cold  rolling
mills  in  its  factory  for  the  purpose  of   manufacturing   cold-rolled
pattas/pattis.  The partner of  the  assessee  was  fully  aware  that  such
activity was dutiable, in view of the fact that four out of six  units  from
which the goods were received by M/s. Gujarat Industries  were  paying  duty
on similar manufacturing activity.   Thus,  the  Commissioner  is  right  in
issuing the show cause notice by invoking the extended period of  limitation
and also holding that the assessee had connived and deliberately acted in  a
manner to defraud the Revenue.  The  Division  Bench  of  this  Tribunal  in
Indian Strips v. CCE, Ahmedabad 2004 (173) ELT 265 took note of the  Chapter
Note 4 of Chapter 72 for holding that cold rolling process  on  flat  rolled
product would amount to  manufacture.   This  decision  was  rendered  after
considering the decision of Hon. Supreme Court in  Steel  Strips  Ltd.  1995
(77) ELT 248 (SC), which was rendered prior to the  enactment  of  the  said
Chapter Note 4 which had the effect of including the  process  of  hardening
or tempering in relation  to  flat-rolled  products  in  the  definition  of
'manufacture'.  The subsequent decision in Lalit Engineering Works  v.  CCE,
Ahmedabad could not have taken  a  view  contrary  to  the  earlier  binding
decision in Indian Strips v. CCE,  Aurangabad  (supra)  is  required  to  be
followed in a subsequent decision of the Division Bench.  The assessee  M/s.
Gujarat Industries removed the goods without any cover  of  excise  invoices
and the other assessees received the  cold-worked  goods  without  cover  of
such excise invoices.”


We, thus, reject the plea of the assessee that the impugned notice was  time
barred.

We do not find any merit in these appeals, which are accordingly dismissed.

                             .............................................J.
                                                                (A.K. SIKRI)



                             .............................................J.
                                                     (ROHINTON FALI NARIMAN)

NEW DELHI;
DECEMBER 14, 2015.