By TIOL News Service

NEW DELHI, APR 30, 2015: THE present case raises an interesting question as to whether excise duty is payable on an intermediate product, namely, Transmission Assembly which comes into existence during the manufacture of tractors made by the appellant. The period involved is January 1996 to May 1998. The tractors that are manufactured have engines that are below 1800 CC and are covered by an exemption notification 162/1986. It is informed, however, that after 1.6.1998 this exemption has gone and even tractors of an engine capacity of less than 1800 CC now have to bear excise duty.

By a Show Cause Notice dated 31.1.2001, the Department charged that Transmission Assemblies of tractors was a commodity known to the market as such and, therefore they were excisable.

The Commissioner's adjudication order stated, "Assembly of a vehicle or machine on line or otherwise still remains assembly i.e. various parts and components are either manufactured first by the assessee himself or procured from outside and then assembled to produce the resulting machine. All excisable goods emerging during such assembly or production are themselves excisable as intermediate goods meant for captive consumption unless or until specifically exempt. Transmission assembly is one such excisable intermediate product and therefore its duty liability is obvious. Therefore, I hold that these are independent, identifiable, commercial goods capable of being bought and sold in the market and, therefore, are excisable goods leviable to Central Excise duty under Section 3 of the Central Excise Act, 1944."

On appeal by the assessee, the CESTAT dismissed the appeal and upheld the order of the Commissioner. The assessee is before the Supreme Court.

Appellant's plea: the tractors manufactured by the appellant (having engines of a capacity of less than 1800 CC) had no such thing as a Transmission Assembly. The so-called Transmission Assembly was only an aggregate of various items which connected the engine of the tractor with its wheels. Further, the so-called Transmission Assembly was specifically designed for the appellant's tractor and was not saleable in the market. Also, not a single instance of sale in the market had ever taken place. In fact, the so-called Transmission Assembly was not something which came into existence at all but was part of a continuous process on the assembly line in the appellant's factory of manufacture at the end of which a complete tractor came into existence. That post 1.6.1998 in any case, the appellant had been paying 8% under Rule 57 CC on the value of the said Transmission Assembly as required. It is only for the period upto August 1996 that would be in dispute. Even for this period, he contends that ultimately the figures would show that it was revenue neutral in that MODVAT credit reversed for this period would amount to 1.71 crores, the duty demand being approximately 2.43 crores out of a total of 9.66 crores for this period of 8 months. He also argued that the duty demand was absurd in that the Transmission Assembly of TAFE which is said to be the same as that of the petitioner's was only 13,000 rupees per piece as opposed to the highly inflated figure of Rs.53,790/-. If the figure of Rs.13,000/- is to be taken, it is clear that the reversal of MODVAT credit would amount to much more than the duty demand itself. That in any case since there was no fraud or willful suppression of facts, invoking the extended period of limitation was not in order and that in any case the show cause notice being beyond one year of the stated period would have to be quashed on this ground alone.

Revenue arguments: Transmission Assembly was very much excisable goods known to the market as such from the statements of the appellants themselves. Further, the revenue had discharged its burden by oral and documentary evidence which showed beyond doubt that Transmission Assembly of tractors were excisable goods in that a new commodity came into existence known to the market as such. It is completely irrelevant that no sale actually took place of any such Transmission Assembly. It is enough to show that the said goods were capable of being sold which, undoubtedly, they were. The extended period of limitation was available in the present case as the appellants on their own showing knew that the intermediate product of Transmission Assemblies was marketable as such and had suppressed this fact while claiming exemption of excise duty on the finished product, namely, the tractor.

Supreme Court observations: Although the definition of "goods" is an inclusive one, it is clear that materials, commodities and articles spoken of in the definition take colour from one another. In order to be "goods" it is clear that they should be known to the market as materials, commodities and articles that are capable of being sold.

After referring to several famous cases like Delhi Cloth and General Mills and Moti Laminates , the Supreme Court observed, "The facts in the present case show that Transmission Assemblies of tractors are commercially known products. The fact that not a single sale of such Assembly has been made by the appellants is irrelevant. This being the case, we are of the view that the Transmission Assembly of the tractor on the facts before us is clearly an intermediate product which is a distinct product commercially known to the market as such. On this ground therefore, the appellants are not liable to succeed."

Limitation: The Supreme Court observed, "it is clear that on facts in the present case there was no suppression on the part of the appellants nor was there any willful attempt to evade duty. As stated by the appellant, the appellant has been manufacturing tractors from 1965 onwards. There has never been any change in the manufacturing process. In the year 1994-95, IC engines were stated by the department to contain Transmission Assemblies, which were dutiable. On receiving a reply from the appellant, the department did not levy any excise duty on such Transmission Assemblies. The show-cause notice itself stated that the issue of manufacture and captive consumption of Transmission Assemblies for tractors is the same as that for IC engines. These facts, coupled with the fact that not a single Transmission Assembly of tractors manufactured by the appellant had been sold makes it clear that there was no suppression or any intent to evade excise duty in the present case. We feel that the show cause notice needs to be quashed on this ground alone."