1988 (5) TMI 39 - SC - Central Excise

Whether for the purpose of Item 26AA(ia) of the Central Excise Tariff set out in the First Schedule to the Central Excises and Salt Act, 1944 the weight of the steel should be calculated as at the time when the forging was complete or after machining and polishing to remove the excess skin of steel? Whether, as a result of the polishing and machining done by the appellant on the said goods before supplying them to the railways the same were transformed into new commercial commodities, namely, finished axles, wheels, tyres and so on or whether these finished or manufactured goods which could be regarded as distinct commercial products came into existence only after precision machining done at workshops of the Indian Railways to enable the Railway to put these goods to use to meet the actual requirements of the Railways? Held that - In respect of the said goods the weight for the purpose of levy of excise duty under Item 26AA(ia) should be taken after the machining and polishing is done to remove the excess surface skin and the contention of the appellant in this regard must be accepted. In these state of affairs, it is quite clear that the finished goods, namely, finished wheels, tyres, axles and blanks could be said to have come into existence only after the precision machining and other processing at the Railways workshops was completed and the appellant is not liable to pay any duty on these goods as under Item No. 68 of the said Central Excise Tariff. The period of limitation would clearly be only six months prior to the service of the show cause notice. The demand for excise duty against the appellant on the said composite units under Item No. 68 of the Excise Tariff, to the extent that it exceeds the period of six months prior to the service of the show cause notice must, therefore, be struck down. In the result, the appeal is allowed. The appellant is liable to pay duty on the goods referred to in the petition other than the composite units only under Item No. 68 of the First Schedule to the Central Excises Act and the duty will be based on the weight after the machining carried out in the factory of the appellant to remove the excess skin or excess surface steel. Secondly, in respect of the composite sets, the appellant is liable to pay duty both under Items Nos. 26AA(ia) and 68, but only for a period of six months prior to the service of the show cause notice.

Summary

Issues Involved:
1. Classification of Goods under Central Excise Tariff
2. Calculation of Weight for Excise Duty
3. Transformation into New Commercial Commodities
4. Limitation Period for Demand of Duty

Issue-wise Detailed Analysis:

1. Classification of Goods under Central Excise Tariff:
The primary issue was whether the goods manufactured by the appellant, namely wheels, tyres, and axles, should be classified under Tariff Item No. 26AA(ia) or Tariff Item No. 68 of the Central Excise Tariff. The appellant contended that these items were dutiable only once under Tariff Item No. 26AA(ia), whereas the revenue argued that they were liable to duties at two stages: under Tariff Item No. 26AA(ia) when forged and under Tariff Item No. 68 after machining and polishing.

2. Calculation of Weight for Excise Duty:
Another significant issue was whether the weight of the steel should be calculated at the time of forging completion or after machining and polishing to remove the excess skin. The appellant argued that the process of forging was complete only after machining and polishing, which was required to meet Indian Railways' specifications. The court accepted the appellant's contention, stating that the weight for the purpose of levy of excise duty under Item 26AA(ia) should be taken after the machining and polishing, as these processes were incidental or ancillary to the manufacture.

3. Transformation into New Commercial Commodities:
The court examined whether the machining and polishing done by the appellant transformed the goods into new commercial commodities. It was determined that the goods supplied to the railways were not finished products but required further precision machining at the railways' workshops before they could be used. The court concluded that the finished goods came into existence only after the precision machining at the railways' workshops, and thus, the appellant was not liable to pay duty under Item No. 68 for these goods.

4. Limitation Period for Demand of Duty:
The court addressed the issue of the limitation period for the demand of duty. According to Section 11A of the Central Excises and Salt Act, 1944, the period for which the demand could be made was only six months prior to the service of the notice unless there was suppression or mis-statement of facts. The court found that there was no suppression or mis-statement of facts by the appellant, as the classification lists filed by the appellant since 1962 were accepted and approved by the excise authorities. Therefore, the demand for excise duty on the composite units under Item No. 68 was limited to six months prior to the service of the show cause notice.

Conclusion:
The appeal was allowed, with the court ruling that the appellant is liable to pay duty on the goods other than composite units only under Item No. 68, based on the weight after machining. For composite units, the appellant is liable to pay duty under both Items Nos. 26AA(ia) and 68, but only for a period of six months prior to the service of the show cause notice. No order as to costs was made.