2005 (2) TMI 113 - SC - Central Excise

Manufacture - Valuation (Central Excise) - Captive consumption - Profit margin - Demand - Limitation

Issues Involved:
1. Whether powdering of Low Density Polyethylene (LDPE) and High Density Polyethylene (HDPE) granules into moulding powder amounts to "manufacture".
2. Whether the said moulding powder is "excisable goods".
3. Whether the department was right in invoking the extended period of limitation vide show cause notice dated 4-11-1997.
4. Determination of the correct profit margin for valuation of the moulding powder.

Issue-Wise Detailed Analysis:

1. Whether powdering of LDPE and HDPE granules into moulding powder amounts to "manufacture":

The court examined whether the process of converting LDPE and HDPE granules into moulding powder constitutes "manufacture" under Section 2(f) of the Central Excise Act, 1944, read with Note 6(b) of Chapter 39 of the Central Excise Tariff Act, 1985. The definition of "manufacture" includes any process incidental or ancillary to the completion of a manufactured product or specified in relation to any goods in the section or chapter notes of the First Schedule to the Central Excise Tariff Act, 1985. Note 6(b) states that the conversion of primary forms (e.g., granules) into another primary form (e.g., powder) amounts to "manufacture". The court concluded that the conversion of granules into moulding powder constitutes "manufacture" as per the legislative intent and the specific inclusion in Note 6(b).

2. Whether the said moulding powder is "excisable goods":

The court considered whether the moulding powder is marketable and thus "excisable goods" under Section 2(d) of the Central Excise Act, 1944. Evidence showed that the assessee had purchased moulding powder from the market on several occasions, indicating its marketability. Consequently, the court upheld the Tribunal's finding that the moulding powder is a marketable commodity and thus excisable.

3. Whether the department was right in invoking the extended period of limitation vide show cause notice dated 4-11-1997:

The court reviewed the facts and found that the assessee had maintained detailed records, which were audited and certified by the department. The department had been aware of the assessee's processes and had not objected during the relevant period. Therefore, the court held that the extended period of limitation could not be invoked for the show cause notice dated 4-11-1997, and the Tribunal was correct in directing the proceedings to be dropped.

4. Determination of the correct profit margin for valuation of the moulding powder:

The court addressed the issue of whether the profit margin should be calculated based on gross profit or net profit of the previous year. The Commissioner (Adjudication) had included the profit margins based on gross profit, which the assessee contested. The court remitted the matter back to the Commissioner (Adjudication) for fresh determination of the profit margin in light of relevant circulars issued by the Central Board of Excise & Customs.

Additional Determinations:

- Show Cause Notice dated 1-5-1997: The court noted that the validity of the show cause notice dated 1-5-1997, covering the period October 1996 to March 1997, needed to be re-examined by the Commissioner (Adjudication) in light of the amendments to Section 11A(1) and the deletion of Rule 9(2) with effect from 12-5-2000.

Conclusion:

The court held that the process of converting granules into moulding powder constitutes "manufacture" and that the moulding powder is marketable and thus excisable. The show cause notice dated 4-11-1997 was beyond the limitation period, and the Commissioner (Adjudication) must re-evaluate the valuation and limitation issues for the show cause notice dated 1-5-1997. The appeals were disposed of with no order as to costs.

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