MARKETABILITY OF GOODS IS A CONDITION PRECEDENT FOR LEVYING CENTRAL EXCISE DUTY
I) INTRODUCTION
1) Under Article 246 of the Constitution of India, Central Government and State Governments have been empowered to levy and collect taxes/duties.
2) Article 265 of the Constitution also states that no tax shall be levied or collected except by authority of law.
3) Excise duty is essentially a duty on manufacture and is listed in Entry No. 84 of List-1 (Union List). Thus, entry 84 of Union List, read with Article 246 authorizes the Central Government to levy Excise duty on tobacco and other goods manufactured or produced in India, except on few items. Entry 84 reads thus,-
Duties of excise on tobacco and other goods manufactured or produced in India, except:
(1) Alcoholic liqours for human consumption
(2) Opium
(3) Narcotics
but including medical & toilet preparations containing alcohol, opium or Narcotics.
4) Excise duty is also levied by state Governments on alcoholic liquors, medicines containing alcohol, by virtue of Entry No. 51 of List II (State List) of Seventh Schedule to the Constitution. Entry No. 51 reads thus, –
Duties of excise on Alcoholic liqours for human consumption, opium, narcotics.
5) Thus, we have two types of excise duties namely Central Excise duty levied by Central Government on various goods, other than those levied by State Government and State Excise duty levied by various State Governments on alcoholic liquors, medicinal and toilet preparations containing alcohol. This article deals with Central Excise duty only.
II) LEVY & COLLECTION OF EXCISE DUTY ON GOODS WHICH ARE MANUFACTURED AND WHICH ARE MARKETABLE
6) In order to levy and collect excise duty on goods manufactured or produced, the Central Government has made various laws. Few important laws are :
i) Central Excise Act, 1944
Basic legislation covering levy, valuation, demands, refunds, appeals etc.
ii) Central Excise Rules, 2002
Procedures for administration – dealing with Registration, maintenance of records, etc.
iii) Cenvat Credit Rules, 2004
Granting credit of duty paid on the inputs used in or in relation to the manufacture of final products and also granting credit of duty paid on the capital goods used in the factory of the manufacturer
iv) Central Excise Tariff Act, 1985
Providing for classification of goods manufactured. Has 96 Chapters to classify the goods. This legislation is based on the classification followed by Harmonized System of Nomenclature (HSN). This act also prescribes the rate of duty applicable on goods.
7) Section 3 of the Central Excise Act, 1944 provides for levy and collection of duty on all excisable goods which are produced or manufactured in India.
8) Central Excise Act defines ‘excisable goods’ in Section 2(d) as goods specified in the Schedules to the Central Excise Tariff as being subjected to duty of excise and includes salt.
9) Though the term ‘goods’ is not defined, in Article 366(12) of the Constitution, the term ‘goods’ has been defined as “Goods includes all materials, commodities and articles”. Sale of Goods Act, in Section 2(7) defines ‘goods’ as every kind of movable property other than actionable claims and money and includes stocks and shares, growing crops, grass and things attached to and forming part of land which are agreed to be severed before sale or under the contract of sale.
10) Thus, in order to levy of central excise duty, the following criteria are to be fulfilled:
(a) There must be manufacture or production
(b) Such manufacture or production must be in India
(c) Such manufacture or production must result in goods
(d) Such goods must be excisable
11) The Courts have construed goods for the purpose of levy of excise duty and according to these judicial pronouncements, goods must satisfy the following requirements:
(a) They must be movable
(b) They must be marketable
12) In other words, an article must be something, which can ordinarily come to the market to be bought and sold. This essentially involve:
(1) Mobility
(a) Movable goods mean property other than immovable property. Immovable property includes land, benefits arising out of land, and things attached to the earth, or permanently fastened to anything attached to the earth.
(b) Manufacture or Production is associated with movables. Dam or Road is constructed and not manufactured..
(2) Marketability
(a) The article must be capable of being marketed, i.e. put into the market for being bought and sold.
(b) The Goods must be known in the market as separate, distinct and identifiable product.
(c) Whether a product is marketable or not is to be decided on the facts of each case.
(d) The burden of proving marketability of goods is on the Revenue Department, if the assessee claims non-marketability.
MOBILITY OF EXCISABLE GOODS
13) The Courts have held that only movable goods can be levied to excise duty, that too, emerging from manufacture or production. Immovable goods are not therefore excisable and no excise duty can be levied by the Central Government.
14) Few decisions of the Supreme Court holding that no excise duty can be levied on immovable goods are:
a) Quality Steel Tubes Pvt. Ltd. vs. CCE 1995 (77) ELT 17 (SC)
b) Mittal Engineering Works (P) Ltd. vs. Collector 1996 (88) ELT 622 (SC)
c) Triveni Engineering & Industries Ltd. vs. CCE 2000 (120) ELT 273 (SC)
d) CCE vs. Virdi Brothers 2007 (207) ELT 321 (SC)
e) Craft Interiors Pvt. Ltd. vs. CCE 2006 (203) ELT 529 (SC)
f) TTG Industries Ltd. vs. CCE 2004 (167) ELT 501 (SC)
15) The judicial pronouncements holding that the immovable goods are not liable to excise duty is many. The test evolved by the Supreme Court in Triveni Engg. in deciding whether the subject goods are immovable is this,-
The marketability test requires that the goods Preparation of such odoriferous compounds, substances applied on the Agarbathi varies from one Agarbathi manufacturer to another. Such preparations are not sold by them in the market so as to keep their respective trade secrets. As the constituents, their proportions and formula of preparation are kept as secret, such compounds cannot be considered to be marketable in the commercial parlance.
16) In all the above decisions, the Supreme Court held that when the goods are firmly fixed to the earth and if without damage to the goods and the goods can be taken to another site as such without breaking into components, then they are immovable.
17) Based on the above judicial pronouncements, the Board issued a detailed circular / order under Section 37B dated 15.1.02 clarifying that plant set up by assembling and erecting various machinery will not be liable to excise duty. The machinery as cleared from the factory will be, of course, liable to excise duty. The gist of the circular is as under:
- Where items are assembled and erected at site and attached by foundation to earth and cannot be dismantled without causing substantial damage to the components and thus cannot be reassembled, it is immovable property.
- Steel Plants, Cement Plants, Power Plants, Air conditioning / refrigeration plants interconnected with civil construction will be considered as immovable property.
- Lifts and escalators installed in buildings and permanently fixed in civil construction are nor excisable goods. If lift and escalator is fabricated as whole and movable in nature will be dutiable.
- When final product is immovable and hence not excisable goods, the same product in CKD or unassembled form will also not be dutiable as a whole applying Rule 2(a) of Rules of Interpretation of CETA. The components and parts, which are excisable goods, will remain dutiable as such goods at the time of removal from factory.
18) Thus, lift erected in a building will not be liable to excise duty as lift. However, various components and machinery like motors cleared from the factory will be subject to excise duty. This what, the Bombay High Court held in Otis Elavator – 2003 (151) ELT 499 (Bom).
MARKETABILITY OF EXCISABLE GOODS
19) The other important factor is that the excisable goods must be marketable. Though actual sale is not essential, the goods must be capable of being marketed.
20) The goods are not marketable either because of short shelf life or because they are crude or unfinished.
21) Short shelf life arising in various chemicals or pharmaceutical items, where the assessee makes such goods and consumes them within the factory, within specified time limit of say within few hours or within a day.
22) The leading case on this issue is the decision of Supreme Court in CCE vs. Ambalal Sarabhai Enterprises – 1989 (43) ELT 214 (SC). The Supreme Court held that starch hydrolysate arising during the intermediate stage is highly unstable and quickly fragmented and losing its character in a couple of days. Therefore, the Supreme Court came to be conclusion that it is highly improbable that it was capable of being marketed and in the absence of any evidence to the contrary, they are not “goods” and hence not liable to duty.
23) In Moti Laminates Pvt. Ltd. vs. CCE – 1995 (77) ELT 241(SC), this aspect was again reiterated by the Supreme Court in the following words:
6. The duty of excise is leviable under Entry 84 of List I of the VIIth Schedule on goods manufactured, or produced. That is why the charge under Section 3 of the Act is on all, `Excisable goods’, `produced or manufactured’. The expression `excisable goods’ has been defined by clause (d) of Section 2 to mean, `goods’ specified in the Schedule. The scheme in the Schedule is to divide the goods in two broad categories – one, for which rates are mentioned under different entry and other the residuary. By this method all goods are excisable either under the specific or the residuary entry. The word `goods’ has not been defined in the Act. But it has to be understood in the sense it has been used in Entry 84 of the Schedule. That is why Section 3 levies duty on all excisable goods mentioned in the Schedule provided they are produced and manufactured. Therefore, where the goods are specified in the Schedule they are excisable goods but whether such goods can be subjected to duty would depend on whether they were produced or manufactured by the person on whom duty is proposed to be levied. The expression `produced or manufactured’ has further been explained by this Court to mean that the goods so produced must satisfy the test of marketability. Consequently it is always open to an assessee to prove that even though the goods in which he was carrying on business were excisable goods being mentioned in the Schedule but they could not be subjected to duty as they were not goods either because they were not produced or manufactured by it or if they had been produced or manufactured they were not marketed or capable of being marketed.
7. The duty of excise being on production and manufacture which means bringing out a new commodity, it is implicit that such goods must be useable, moveable, saleable and marketable. The duty is on manufacture or production but the production or manufacture is carried on for taking such goods to the market for sale. The obvious rationale for levying excise duty linking it with production or manufacture is that the goods so produced must be a distinct commodity known as such in common parlance or to the commercial community for purposes of buying and selling. Since the solution that was produced could not be used as such without any further processing or application of heat or pressure, it could not be considered as goods on which any excise duty could be levied.
24) The Supreme Court specifically held that even if the goods are specified in the Central Excise Tariff, that per se will not attract excise duty, unless it is shown that the goods so mentioned in the Tariff has emerged as a result of manufacture or such goods are marketable.
25) This decision of Supreme Court was affirmed by the Constitution Bench in UOI vs. Man Structurals — 2001 (130) ELT 401 (SC).
26) The following circulars issued by the Central Board of Excise and Customs are also throw light on this aspect.
i) Circular No.495/61/99 Cx.3 dated 22-11-1999 – (reported in 1999 (114) ELT page T-50)
This circular relates to Odoriferous compound prepared and used captively in the manufacture of agarbathies, CBEC clarified that the odoriferous compounds or Agarbathi dough mixed with odoriferous substances, not being capable of being bought and sold in the market in the normal course of trade, is not an excisable product and no duty is therefore leviable on such compound arising during the course of manufacture of Agarbathi. The relevant portion of clarification reads thus,-
“In this case each brand of Agarbathi has a different fragrance which is on account of the different formulations used by the manufacturers which is specific to that particular brand. Preparation of such odoriferous compounds, substances applied on the Agarbathi varies from one Agarbathi manufacturer to another. Such preparations are not sold by them in the market so as to keep their respective trade secrets. As the constituents, their proportions and formula of preparation are kept as secret, such compounds cannot be considered to be marketable in the commercial parlance.
ii) CBEC Circular No.464/30/99-Cx. Dated 30-6-1999 (reported in 1999 (111) ELT page T-31)
This circular relates to Intermediate products such as binder/resin/glues used in the manufacture of particle boards. CBEC clarified thus:
“Binder/resin/glues are specifically developed and made by the industry manufacturing particle boards only for captive consumption and not for external sale. The judgment of the Apex Court in the case of Moti Laminates Ltd vs. CCE reported in 1995 (76) ELT 241 (SC) and the ratio of the said judgment that if goods produced and used captively are not liable to be duty, if not marketable, notwithstanding the fact of their being specified in Tariff Schedule.”
27) The other category of goods are crude or unfinished goods. These are also not marketable. The important decision on this aspect is the decision of Supreme Court in Union Carbide India Ltd. vs. UOI – 1986 (24) ELT 169 (SC). In this case the Supreme Court was concerned with crude aluminium cans. The Supreme Court observed as under:
6. It does seem to us that in order to attract excise duty the article manufactured must be capable of sale to a consumer. Entry 84 of List I of Schedule VII of the Constitution specifically speaks of “duties of excise on tobacco and other goods manufactured or produced in India……”, and it is now well accepted that excise duty is an indirect tax, in which the burden of the imposition is passed on to the ultimate consumer. In that context, the expression “goods manufactured or produced” must refer to articles which are capable of being sold to a consumer. In Union of India v.Delhi Cloth & General Mills – 1963 Supp. I S.C.R. 586 = 1977 E.L.T. (J 199), this Court considered the meaning of the expression “goods” for the purposes of the Central Excises and Salt Act, 1944 and observed that “to become `goods’ an article must be something which can ordinarily come to the market to be brought and sold”, a definition which was reiterated by this Court in South Bihar Sugar Mills Ltd., etc. v. Union of India & Ors. – (1968) 3 S.C.R. 21 = 1978 E.L.T. J 336 (S.C).
7. The? question here is whether the aluminium cans manufactured by the appellant are capable of sale to a consumer. It appears on the facts before us that there are only two manufacturers of flashlights in India, the appellant being one of them. It appears also that the aluminium cans prepared by the appellant are employed entirely by it in the manufacture of flashlights, and are not sold as aluminium cans in the market. The record discloses that the aluminium cans, at the point at which excise duty has been levied, exist in a crude and elementary form incapable of being employed at that stage as a component in a flashlight. The cans have sharp uneven edges and in order to use them as a component in making flashlight cases the cans have to undergo various processes such as trimming, threading and redrawing. After the cans are trimmed, threaded and redrawn they are reeded, beaded and anodised or painted. It is at that point only that they become a distinct and complete component, capable of being used as a flashlight case for housing battery cells and having a bulb fitted to the case. We find it difficult to believe that the elementary and unfinished form in which they exist immediately after extrusion suffices to attract a market. The appellant has averred in affidavit that aluminium cans in that form are unknown in the market. No satisfactory material to the contrary has been placed by the respondents before us. Reference has been made by the respondents to the instance when aluminium cans were ordered by the appellant from Messrs. Krupp Group of Industries. This took place, however, in 1966 as a solitary instance, and what happened was that aluminium slugs were provided by the appellant to Messrs. Krupp Group of Industries for extrusion into aluminium cans. The facts show that the transaction was a works contract and nothing more. Apparently, the appellant made use of the requisite machinery owned by that firm for extruding aluminium cans. Not a single instance has been provided by the respondents demonstrating that such aluminium cans have a market. The record discloses that whatever aluminium cans are produced by the appellant are subsequently developed by it into a completed and perfected component for being employed as flashlight cases.
28) In Sonic Electrochem – 2002 (145) ELT 274 (SC), the Supreme Court in paras 8 and 9 held as under:
8. We do not? consider it necessary to discuss the cases on the question of marketability, as this Court has dealt with all relevant cases in A.P. State Electricity Board’s case (supra). In that case, the question was whether electric poles manufactured with cement and steel for the appellant-Board were marketable. After considering various cases on the question of marketability of goods, B.P. Jeevan Reddy, J., speaking for the Court, summed up the position thus :
“It would be evident from the facts and ratio of the above decisions that the goods in each case were found to be not marketable. Whether it is refined oil (non-deodorised) concerned in Union of India v. Delhi Cloth and General Mills[1963 Suppl. (1) SCR 586] or kiln gas in South Bihar Sugar Mills Ltd. v. Union of India [1968 (3) SCR 21] or aluminium cans with rough uneven surface in Union Carbide India Ltd. v. Union of India [1986 (2) SCC 547] or PVC films in Bhor Industries Ltd. v. Collector of Central Excise [1989 (1) SCC 602] or hydrolysate in Collector of Central Excise v.Ambalal Sarabhai Enterprise [1989 (4) SCC 112] the finding in each case on the basis of the material before the Court was that the articles in question were not marketable and were not known to the market as such. The ‘marketability’ is thus essentially a question of fact to be decided on the facts of each case. There can be no generalisation. The fact that the goods were not in fact marketed is of no relevance.”
9. It may be noticed that in the cases referred to in the passage, quoted above, the reasons for holding the articles ‘not marketable’ are different, however they are not exhaustive. It is difficult to lay down a precise test to determine marketability of articles. Marketability of goods has certain attributes. The essence of marketability is neither in the form nor in the shape or condition in which the manufactured articles are to be found, it is the commercial identity of the articles known to the market for being bought and sold. The fact that the product in question is generally not being bought and sold or has no demand in the market would be irrelevant. The plastic body of EMR does not satisfy the aforementioned criteria. There are some competing manufacturers of EMR. Each is having a different plastic body to suit its design and requirement. If one goes to the market to purchase plastic body of EMR of the respondents either for replacement or otherwise one cannot get it in the market because at present it is not a commercially known product. For these reasons, the plastic body, which is a part of the EMR of the respondents, is not ‘goods’ so as to be liable to duty as parts of EMR under para 5(d) of the said exemption notification.
29) The following circular dated 11.6.01 issued by the Board also helps us in understanding the marketability of goods.
1. It has been brought to the notice of the Board that field formations are demanding duty on the plastic plaiting material (small capicillary tubes) used for manufacture of plastic mats/satranjis classifying them under Heading 3926.90 or Heading 39.17 of the Central Excise Tariff.
2. The matter has been examined in the Board. The plastic?tubes are manufactured out of polypropylene granules. These are fed into extruder to obtain a product having a tube like appearance that is plaited/weaved to produce mats called satranjis. The PPM are approximately of 1.5 mm diameter. These tubes are cut to different sizes depending upon the type of mat to be reproduced – usually lengths of 2 or 4 feet are only taken. Subsequently, the tubes are put on the looms and the mats are woven.
3. To become ‘goods’ an article must be something which can?ordinarily come to the market to be bought and sold and is known to the market. The units engaged in the manufacture of plastic mats have their own extruders for conversion of plastic granules into PPM. The product is captively consumed and is not available in the market for sale. Further, it is not capable of being marketed because it loses shape if not weaved or plaited immediately. Therefore, the product is neither marketed nor considered to be marketable in the commercial parlance.
4. Accordingly, it is clarified that plastic plaiting?material (tubes) used for manufacture of plastic mats, not being capable of being bought and sold in the market in the normal course of trade, is not an excisable product and no duty is therefore, leviable on such plastic plaiting material (tubes) used for manufacture of plastic Mats.
30) in 2006 (203) ELT 3 (SC) – CCE vs. Indian Aluminium Co. Ltd., reiterating the earlier view taken by it, the Supreme Court waste and rubbish emerging during the manufacture of goods is not liable to excise duty.
31) To conclude, in order to levy excise duty on excisable goods,-
1) Actual sale is not necessary. Article must only be saleable or suitable for sale.
2) Mere fact that a commodity is captively consumed is no evidence of marketability. The captively consumed items must be marketable in the condition in which they are manufactured and further consumed. Even Transient items (unstable items) are goods if they can be marketed during the short period of their life.
3) Even one purchaser is enough. Marketability does not depend upon the number of buyers, sellers, territorial limits of the country.
4) Actual open market is not necessary. An estimate of market will have to be done on hypothetical basis.
5) Everything sold is not marketable. Marketability implies regular market for a product. Occasional, stray, distress sales don’t mean that the product is marketable.
6) The product must be known to commerce as marketable commodity and worthwhile to trade in. ‘Dross and skimming’ arising during manufacture of Aluminium, refuse or ashes are not goods, even if they fetch some price.
7) Scrap, waste cannot be treated as goods merely because it is capable of fetching some price, if such sale is distress and the price is determined at the whims of the of the buyers as there is no ready market for it.
8) Stray sales don’t mean the product is marketable.
9) Mere mention in the tariff/ Chemical Dictionary/ Technical Dictionary is not enough. Marketability is to be proved.
10) State in which it is produced is relevant. The commodity must be marketable as it is and not by further processing, be made marketable.
