By TIOL News Service

NEW DELHI, DEC 15, 2015: THE questions of Law in the appeals before the Supreme Court are:

(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 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.

3. 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.

4. 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.

The Third Member in the majority decision held,

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.

The Supreme Court agreed with this view.

On limitation, the Tribunal agreed with the Commissioner's order as:

"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 Supreme Court agreed with this also and rejected the appeals of the assessees.

(See 2015-TIOL-298-SC-CX)