3M India Ltd Vs Commissioner of Central Excise (CESTAT Bangalore)
CESTAT Bangalore held that process undertaken by job worker of injecting the raw materials into aerosol cans doesn’t amount to manufacture and hence excise duty demand thereon not sustainable.
Facts-
The present appeal is filed by M/s. 3M India Limited to assail the order passed by the Commissioner of Central Excise, Bangalore III, Commissionerate Bengaluru, to the extent it has imposed a penalty of Rs. 1,51,00,000/- upon the appellant under rule 26 of Central Excise Rules, 2002.
The appellant is engaged in the manufacture and trading of various products in diverse sectors, such as transportation, health care, electrical and communications. The appellant inter alia engages various job workers for performing product services by supplying raw materials and packing materials. The appellant contends that where the activity undertaken by the job worker amounts to manufacture, it discharges the applicable excise duty on the said goods in the capacity of the principal manufacturer, but in cases where the process undertaken by the job worker does not amount to manufacture, excise duty is not paid and in such cases, the appellant instructs the job worker to discharge service tax. The goods so received by the appellant from the job worker without payment of excise duty are traded by the appellant.
In one of the premises of the assessee, it receives raw materials, avails CENVAT credit on the eligible raw materials and dispatches the same to the job worker for the manufacture of excisable products. Upon receipt of the manufactured goods from the job workers, the appellant clears the same from the BB warehouse upon payment of excise duty.
The appellant carries trading activities in its other premises, the appellant sends the materials to the job worker and the processed goods received back from the job worker are sold by the appellant without payment of excise duty, as according to the appellant the activities undertaken by the job worker do not amount to manufacture.
A show causes notice 22.05.2015 was issued by the Additional Director General to the job worker, the appellant, and some of the employees of the appellant and the job worker proposing demand of central excise duty on goods manufactured by the job worker.
Conclusion-
Held that the activity of injecting the raw materials into aerosol cans would not amount to adopting any treatment on the raw materials to render the product marketable.
In this view of the matter, the activity undertaken by the job worker would not amount to manufacture even under the third limb of the Chapter note.
The inevitable conclusion, therefore, is that the process undertaken by the job worker would not amount to manufacture in terms of section 2(f)(ii) of the Excise Act read with note 6 of Chapter 34 or note 10 of Chapter 38 of the Central Excise Tariff.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
Excise Appeal No. 20847 of 2016 has been filed by M/s 3M India Limited1 to assail the order dated January 19, 2016 passed by the Commissioner of Central Excise, Bangalore III, Commissione rate Bengaluru2, to the extent it has imposed penalty of Rs. 1,51,00,000/- upon the appellant under rule 26 of the Central Excise Rules, 20023.
2. Excise Appeal Nos. 20841 to 20846 of 2016 have been filed by Chief Finance Officer, Vice-President, Manager, Managing Director, General Manager and Senior General Manager of the appellant to assail the order dated January 19, 2016 to the extent it seeks to impose a penalty of Rs. 30 lacs on each them under rule 26 of the Rules.
3. Excise Appeal No. 20825 of 2016 has been filed by M/s Indi Cans4 to assail the order dated January 19, 2016 insofar as it confirms the demand of central excise duty amounting to Rs. 3,02,87,970/- on the goods said to have been manufactured by it as a job worker, with interest and penalty.
4. Excise Appeal No. 20826 of 2016 has been filed by the Chief Executive Officer of M/s Indi Cans to assail the order dated January 19, 2016 insofar as it imposes a penalty of Rs. 25,00,000/- on him under rule 26 of the Rules.
5. The appellant is engaged in the manufacture and trading of various products in diverse sectors, such as transportation, health care, electrical and communications. The appellant inter alia engages various job workers for performing product services by supplying raw materials and packing materials. The appellant contends that where the activity undertaken by the job worker amounts to manufacture, it discharges the applicable excise duty on the said goods in the capacity of the principal manufacturer, but in cases where the process undertaken by the job worker does not amount to manufacture, excise duty is not paid and in such cases the appellant instructs the job worker to discharge service tax. The goods so received by the appellant from the job worker without payment of excise duty are traded by the appellant.
6. According to the appellant, the premises of the appellant houses two warehouses, namely, BB and BG. BB warehouse is the demarcated area registered with Central Excise Department as a The remaining part of the warehouse is known as BG warehouse and is utilized by the appellant for trading transactions.
7. In BB warehouse, the appellant receives raw materials, avails CENVAT credit on the eligible raw materials and dispatches the same to the job worker for the manufacture of excisable products. Upon receipt of the manufactured goods from the job workers, the appellant clears the same from the BB warehouse upon payment of excise duty. All the goods manufactured and cleared from the BB warehouse bear the item code starting with „IA‟.
8. The appellant carries trading activities from its BG warehouse. The appellant sends the materials to the job worker and the processed goods received back from the job worker are sold by the appellant without payment of excise duty, as according to the appellant the activities undertaken by the job worker do not amount to manufacture. Such products received in the BG warehouse bear item code starting with „IE‟. For this purpose, the appellant enters into a Product Purchase Agreement5 with the job worker. In terms of the said Agreement, the job worker performs product services in respect of three IE coded products, namely, (i) Diesel Engine Conditioner; (ii) Fuel System Cleaner; and (iii) Intake System Cleaner. The product services required to be undertaken by the job worker involve repacking from bulk containers to retail pack. In consideration for the above, the appellant pays job charges to the job worker and the purchase orders on the job worker indicate the excise duty as Nil and service tax at @12.36%. The raw material in liquid form is supplied to the job worker in bulk containers consisting of 200 litre barrels. The job worker fills the liquid in small aerosol containers and returns the IE coded goods to the appellant.
9. However, a show cause notice 22.05.2015 was issued by the Additional Director General to the job worker, the appellant, and some of the employees of the appellant and the job worker proposing:
(i) demand of central excise duty amounting to Rs. 3,02,87,970/- on the goods manufactured by the job worker [Excise Appeal No. 20825 of 2016] during the period 01.05.2010 to 31.12.2014 by classifying the impugned goods under Central Excise Tariff Heading6 3403 and adopting M.R.P. based assessment; and
(ii) penalty under rule 26 of the Rules on the appellant [Excise Appeal No. 20847 of 2016] as well as on the employees of the appellant [Excise Appeal Nos. 20841 to 20846] and the employee of the job worker [Excise Appeal No. 20826 of 2016].
10. Replies were filed, denying the charges alleged in the show cause notice dated May 22, 2015. An order dated January 19, 2016 was thereafter passed by the Commissioner holding that:
(i) The activity undertaken by the job worker would amount to „manufacture‟ under section 2(f)(ii) of the Central Excise Act, 19447 read with Chapter note 6 to Chapter 34 of the Central Excise Tariff contained in the First Schedule to the Central Excise Tariff Act, 19858;
(ii) such manufactured goods are classifiable under CTH 3403 as „lubricating preparations‟ and are liable for MRP based assessment in terms of section 4A of the Excise Act;
(iii) the extended period of limitation is invokable; and
(iv) penalties on the employee of the job worker, the appellant and the employees of the appellant under rule 26 of the Rules are imposable.
11. Shri V. Lakshmikumaran, learned counsel appearing for the appellant and its employees and Shri M.S. Nagaraja, learned counsel appearing for the job worker and its employee made the following submissions:
(i) The activities undertaken by the job worker do not amount to „manufacture‟ under section 2(f)(ii) of the Excise Act;
(ii) The impugned goods are not lubricating preparations classifiable under CTH 3403. The impugned goods are additives classifiable under CTH 3811 or alternatively under CTH 3402 as cleaning preparations; and
(iii) Penalty could not have been imposed under rule 26 of the Rules as the demand itself is not sustainable, apart from the fact that the employees acted in a bonafide manner. In fact, Amit Laroya, Sunil Bhantiya, Sameer Agarwal and Milind Joglekar were not even employees of the appellant at the time when the contract with the job worker was entered.
12. Ms. D.S. Sangeetha, learned authorized representative appearing for the department has, however, supported the impugned order and made the following submissions:
(i) The activities undertaken by the job worker would amount to „manufacture‟ under section 2(f)(ii) of the Excise Act. In support of this contention, reliance has been placed upon the decision of the Tribunal in Nestle India Ltd. vs Commissioner of Central Excise, Chandigarh9;
(ii) The impugned goods are lubricating preparations classifiable under CTH 3403 and not additives classifiable under CTH 3811. They are also not cleaning and washing preparations classifiable under CTH 3402; and
(iii) Penalty has been correctly imposed under rule 26 of the Rules.
13. The submissions advanced by the learned counsel for the appellant and its employees, the learned counsel appearing for the job worker and its employee and the learned authorized representative appearing for the department have been considered.
14. Before dealing with the submissions, it would be useful to examine the relevant provisions of the Excise Act and the Central Excise Tariff.
15. Section 2(f) of the Excise Act defines „manufacture‟. It is, as it stood at the relevant time, reproduced:
“2(f) “manufacture” includes any process, ²
(i) incidental or ancillary to the completion of a manufactured product;
(ii) which is specified in relation to any goods in the section or Chapter notes of The First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) as amounting to manufacture; or
(iii) which, in relation to the goods specified in the Third Schedule, involves packing or repacking of such goods in a unit container or labelling or relabelling of containers including the declaration or alteration of retail sale price on it or adoption of any other treatment on the goods to render the product marketable to the consumer, and the word “manufacture” shall be construed accordingly and shall include not only a person who employs hired labour in the production or manufacture of excisable goods, but also any person who engages in their production or manufacture on his own account;”
(emphasis supplied)
16. The definition of manufacture in section 2(f) of the Excise Act includes any process which is specified in relation to any goods in the Section or Chapter notes of the First Schedule to the Tariff Act as amounting to manufacture.
17. Chapter note 6 of Chapter 34 of the Central Excise Tariff is as follows:
“CHAPTER 34
Soap, Organic Surface-Active Agents, Washing Preparations, Lubricating Preparations, Artificial Waxes, Prepared Waxes, Polishing Or Scouring Preparations, Candles and Similar Articles, Modelling Pastes, “Dental Waxes” and Dental Preparations with a basis of plaster
Notes:
1. to 5 xxxx xxxxx xxxx
6. In relation to products of this Chapter, labelling or relabelling of containers or repacking from bulk packs to retail packs or the adoption of any other treatment to render the product marketable to the consumer,
shall amount to „manufacture‟.”
18. Chapter note 10 of Chapter 38 of the Central Excise Tariff is as follows:
“CHAPTER 38
Miscellaneous chemical products Notes:
1. to 9 xxxx xxxxx xxxx
10. In relation to products of this Chapter (other than products of heading 3808), labelling or relabelling of containers or repacking from bulk packs to retail packs or the adoption of any other treatment to render the product marketable to the consumer, shall amount to „manufacture‟.”
19. The relevant portions of CTH 3402, CTH 3403 and CTH 3811 are as follows:
