Recently the department have issued a number of show cause notice to the units engaged in the manufacture of wire claiming that the process of drawing of wire from rod, bar etc. does not amount to manufacture. The department alleges that since this does not amount to manufacture, cenvat credit taken by the units is illegal and must be reversed. Such demand of the department is grossly illegal, against its own circulars and contrary to the judicial decisions. This paper is an attempt to bring such illegality in the notice of esteemed readers.
The allegation is based on Hon’ble Supreme Court Judgment dated 27.03.2003 in the case of CCE V/s Techno weld Industries & others [2003 (155) ELT 209 (SC)], wherein the Court held that drawing of wire from wire rod doesn’t amount to manufacture in case of steel products. Based on this judgment the Board issued a Circular No. 720/36/2003- CX. dated 29.05.2003 withdrawing an earlier Circular No. 570/07/2001 CX.-dated 16.02.2001 wherein it said that drawing of wire from wire rod shall amount to manufacture with respect to steel products. Based on these the notice allege that since the process does not amount to manufacture, no cenvat credit is admissible.
It may be noted that rod/bar and wire falls under different heading of CETA. It means that the legislature have treated these two products as two distinct and different products. When the legislative intent of the Parliament is clear about treating these two products differently, it cannot be said that they are same products. The above “Test of different heading” was applied by the Hon’ble Supreme Court in Lal Woolen and Silk Mills Ltd. V/s CCE, Chandigarh [1999 (108) ELT 7(S.C.)], wherein the Hon’ble SC held,
“An attempt was made by the learned counsel for the assessee that conversion of gray yarn into dyed yarn did not amount to manufacture hence two separate duties are not leviable. We do not find any merit in the submission. Admittedly both “dyed yarn” and “gray yarn” are covered by two separate distinct head of tariff item with different duty. So this itself recognizes them to be two different goods with separate levy. In view of this it cannot be urged that there is no manufacture of dyed yarn from the gray yarn.”
It may be noted that the principle, that “process amounts to manufacture when tariff heading changes” has been accepted by the Central Board of Excise & Customs since long and is being followed consistently by the Board. The Central Board of Excise and Customs in Circular No. 33/89 dated 12.05.89 says;
“under these circumstances, the board felt that since the product obtained as a result of cutting and setting would fall under a different entry of the tariff, the process would amount to manufacture (specifically so intended by the parliament by provision of separate tariff entries) and the products would again be liable to duty, under the new tariff entry in which they would fall. Modvat benefit, it applicable, would be granted.”
Similarly the Central Board of Excise and Customs has clarified in Circular No. 584/29/2001- CX. Dated 07.09.2001, the Board stated and clarified as under,
“It is hereby clarified that cutting of HR/CR coils of iron or non-alloy steel into sheets or slitting into strips of lesser width or slitting of sheets into strips will amount to manufacture if the resultant product is classifiable under different sub-heading of the Central Excise Tariff.”
In view of these binding Circulars, if a process results into a product classifiable in different tariff heading, such process shall amount to manufacture. It may be noted that, in this particular case rod/bar and wire falls in different tariff heading, therefore conversion of “ rod/bar” into “wire” shall amount to manufacture. Thus in view of these Circulars issued by the Board the process of conversion of bar/rod into wire shall amount to manufacture.
It may further be noted that the “ Bars and Rods” have been defined in Chapter Note 1(d) of Chapter 74 (in case of copper, but true for al metals) where as “Wire” has been defined in Chapter Note 1(f) of Chapter 74. When the legislature has given distinct meaning to these products it cannot be argued that these two are same products. Thus they are different products and conversion of bar/rod into wire shall amount to manufacture.
The Central Board of Excise and Customs took note of different legislative definition and declared in Circular No. 94/5/95-CX., dated 23-1-1995,
“Attention is drawn to Section Note 6(a) and (b) of Section XV which contains the definition of waste and scrap and powders. Further Note 1(h) of Chapter 72 defines granules. Although granules and powders of pig iron, spiegeleisen, iron and steel are classifiable under the Heading 72.05 yet granules, powders and waste and scrap have their own specific definitions and are known distinctly in end use and character. The Board, therefore, is of the view that conversion of cast iron granules/cast iron turnings and borings into cast iron powder amounts to manufacture.”
In view of different definitions given by the legislature and binding Board’s Circular, the author is of the view that the process of conversion of rod into wire shall amounts to manufacture. At least the department cannot take a stand that it doesn’t amount to manufacture. It may be noted that trade parlance will not prevail if the Act defines an article in a particular way. It is well settled that statutory definition prevails over trade parlance or dictionary meaning. In Ichchapur Industrial Coop Society v/s ONGC [1996 (9) SCALE 421], the Hon’ble Supreme Court held that “water is mineral” in view of specific definition of mineral in the statute and discarded the popular meaning.
It may be noted that Circulars and stand taken by the Board is binding on the department and the department cannot take a stand contrary to a Circular. In CCE v/s Usha Martin Industries [1997(94) ELT 460 (SC)] the Hon’ble Supreme Court held,
“ Through a catena of decisions, this court has pronounced that Revenue cannot be permitted to take a stand contrary to the instructions issued by the Board. It is a different matter that an assessee can contest the validity and legality of a departmental instructions, but the right cannot be conceded to department, more so when the others have acted according to such instructions.”
Further the Board’s instruction is binding upon the department even when it is against the interpretation given by the Hon’ble Supreme Court. A five Judge-Bench of the Supreme Court held in CCE v/s Dhiren Chemicals Industries [2002 (139) ELT 3 (SC)],
“ Regardless of the interpretation that we have placed on the said phrase, if there is a circular which have been issued by the Central Board of Excise and Customs, which places a different interpretation upon the said phrase, that interpretation will be binding on the Revenue.”
The case was followed by the Supreme Court in CCE v/s Maruti Foam [2004 (164) ELT 394 (SC)], wherein the Hon’ble Supreme Court held that even if there is a contrary order of the Supreme Court, the departmental Circular is binding on the department unless it is withdrawn. In Ranadey Micronutrients v/s CCE [1996(87) ELT 19 (SC)], the Supreme Court held that a departmental circular is binding on the department even when it is against a statutory provision. In CCE v/s Kores India [1997 (89) ELT 441 (SC)] the Supreme Court held that the department cannot advance any argument contrary to a trade notice.
The Supreme Court affirmed and reaffirmed this view in many other cases like, CCE v/s Jagat Delta Pvt. Ltd. [1997 (88) ELT 638 (SC)], Fenner India v/s CCE [2004 (167) ELT 18 (SC)], Paper Products Ltd. V/s CCE [1999 (112) ELT 765 (SC)]. With these judgments the issue is well settled that the departmental circular is binding upon the department.
It may further be noted that even if the process does not amount to manufacture, then no duty was required to be paid on the wire. Since all along the duty was collected by the department on the wire as finished manufactured product, now the department shouldn’t turn around and say that Cenvat Credit is not admissible. The duties paid by the noticee in these circumstances are nothing but reversal of Cenvat Credit with is much more than the amount of Cenvat Cedit taken. In these circumstances no demand of reversal of Cenvat Credit is maintainable. The issue has been examined by the judicial authorities in a number of case which is being analyzed below.
In the case of PSL Holdings Ltd. Vs. CCE [ 2003 (156) ELT 602 (Tri.- Mumbai)], where the department alleged that “coating” of pipes does not amount to manufacture and demanded recovery of CENVAT, it was held payment of duty in such circumstances is nothing but reversal of cenvat credit. In the case of Standard Surfactants Ltd. Vs. CCE [2000 (115) ELT 763 (Tribunal)], when the department alleged that packing of detergent powder and soap bar together does not amount to manufacture and CENVAT was sought to be recovered, it was held that no such recovery can be ordered. In Deioners Specialty Chemicals (P) Ltd. V/s CCE [1997 (96) ELT 659 (T)], where the department demanded reversal of Modvat Credit alleging that the final product is chargeable to nil rate of duty, the Tribunal held payment of duty on the product, on which no duty was payable have serve the purpose and no further recovery can be made.
It the process does not amount to manufacturer then the assessee was deemed to be involved in trading of the goods. As a trader, registered with Central Excise, the assessee is entitled to take the credit and pass on the credit. The Hon’ble Tribunal held in Singh Scrap Processors Ltd. V/s CCE [2002 (143) ELT 619],
“ there is no reason to uphold denial of credit availed, even if subsequently it is found and upheld that the “find baled scrap” was not dutiable. The appellants have paid the amount as duties, in excess of credit availed. They were in any case eligible to issue credit eligible invoices as dealers.”
Further, if the department is of the view that the assessee is registered as manufacturer then also the assessee is entitled to trade in inputs as such.
The Hon’ble Tribunal held in Kabra Investment Pvt Ltd. V/s CCE [2002 (149) ELT 695 (T)], where the department alleged that cutting of fabrics does not amount to manufacture and demanded reversal of Cenvat credit, the Hon’ble Tribunal held as under:
“We have considered the submissions of both the sides. The facts, which are not in dispute, are that the inputs are HDPE/PP fabrics whereas the final product is HDPE/PP sacks. Further admittedly appellants had only cut the rolls of fabrics into pieces of required sizes, a process which does not amount to manufacture. The appellants have, thereafter, instead of manufacturing sacks, sold the pieces of HDPE/PP fabrics. It is thus evident that the inputs were not used in or in relation to the manufacture of the final product manufactured by the Appellants. In the other hand, the inputs were sold by them Accordingly, in terms of the proviso to Rule 57F (1) duty of Excise cannot be less than the amount of credit that has been allowed under Rule 57A. This was the ratio of the Larder Bench of the Tribunal in the case of Asia Brown Boveri Ltd., (supra). Accordingly the duty equivalent to Modvat credit is payable by them. However, we agree with the learned Advocate that amount of duty, if any, already paid by the Appellant has to be adjusted from the demand of duty confirmed, of not already adjusted. In the facts and circumstances of the case, no penalty is imposable on the Appellants and accordingly we set aside the penalty.”
The issue was settled by the tribunal in case of Syndet India v/s CCE [2004 (166) ELT 349], wherein the Tribunal held in unequivocal terms,
“ Even if the duty was not payable on the finished goods (there being no manufacture), the utilization of credit towards payment of such duty having taken care, the question of further recovery would not arise.”
It may further be noted that reversal of cenvat credit can be demanded only from the manufacturer. If the process undertaken by the person does not amount to manufacture, he is not a manufacturer and hence Rule 12 of the Cenvat Credit Rules is not applicable to the person concerned. The rule provides that wrongfully taken or utilized cenvat credit shall be recovered from the manufacturer. Since the assessee, as claimed by the department is not a manufacturer, no such recovery can be made from the assessee.
Rule 12 of the Cenvat Credit Rules reads as,
“ where the Cenvat Credit has been taken or utilized wrongly or has been erroneously refunded, the same along with interest shall be recovered from the manufacturer and the provisions of section 11A and Section 11AB of the Act shall apply mutatis mutandis for effecting such recoveries.”
Thus Rule 12 is applicable only to the manufacturer and if the process taken by a person does not amount to manufacture, he is not a manufacturer. In view of this no recovery can be affected against the person under Rule 12 of the Cenvat Credit Rules.
On the basis of these arguments the author is of the view that these show cause notice are grossly illegal and have been issued without application of mind. These notices are affecting a large group of assesses and introducing uncertainty in the application of Central Excise Law. We can only hope that the Board will look into the matter.
Written by:- Advocate Rajesh Kumar. The author can be contacted on The author can be contacted on firstname.lastname@example.org , Web: www.rajeshkumar.co.in