CESTAT Rules Bought-Out Plywood Tops Are Trading Goods, Not Part Of Excise Value On Manufactured Folding Cots

CESTAT Rules Bought-Out Plywood Tops Are Trading Goods, Not Part Of Excise Value On Manufactured Folding Cots

Introduction

The Customs, Excise and Service Tax Appellate Tribunal (Kolkata Bench) has granted partial relief to Shree Durga Industry by holding that while fabrication of steel folding cots amounts to “manufacture” under the Central Excise Act, the value of optional plywood tops procured from third parties cannot be included in the assessable value for levy of excise duty. The Bench comprising Judicial Member R. Muralidhar and Technical Member K. Anpazhakan was hearing appeals against an order confirming excise duty demand of ₹3.32 crore along with interest and penalties for the period 2011–12 to 2014–15.

Factual Background

Shree Durga Industry, a small-scale unit holding Directorate General of Supplies and Disposals rate contracts, supplied folding steel cots to Indian paramilitary forces. The Department alleged that the appellant had manufactured and cleared folding cots with plywood tops without payment of appropriate central excise duty and that the value of the plywood tops supplied along with the cots should be included in the assessable value. The appellant contended that fabrication of steel cot frames did not amount to “manufacture” under Section 2(f) of the Central Excise Act, 1944, and further argued that the plywood tops were bought-out items procured from the open market and supplied optionally as per customer requirements. During adjudication, however, the company admitted that if the activity were treated as manufacture, duty of ₹58.59 lakh would be payable after availing SSI exemption.

Procedural Background

The adjudicating authority confirmed the entire demand of over ₹3.32 crore along with interest and penalties on both the firm and its partner, Goldi Sethi. Aggrieved by the findings on manufacture, valuation and penalty, the appellants approached the Tribunal seeking setting aside of the order.

Issues

1. Whether fabrication of steel folding cots amounts to “manufacture” under Section 2(f) of the Central Excise Act, 1944.

2. Whether the value of optional plywood tops procured from third parties can be included in the assessable value of folding cots for excise duty.

3. Whether penalties imposed on the firm and its partner were sustainable.

Contentions of the Parties

The appellant argued that cutting, bending and welding of MS pipes did not result in a new commercially distinct product and therefore did not amount to manufacture. It further submitted that plywood tops were general commercial boards purchased from third-party traders and supplied optionally depending on customer specifications, and thus constituted trading activity. Since these plywood tops were neither manufactured by the appellant nor integral to the folding cot frame, their value could not be added to the assessable value. The Department contended that the activity resulted in emergence of a marketable product, namely folding cots, and therefore satisfied the test of manufacture. It further argued that since plywood tops were supplied along with the cots, their value formed part of the composite supply and was liable to be included for assessment of excise duty.

Reasoning and Analysis

The Tribunal examined the production process and held that cutting, bending and welding of MS pipes resulted in a distinct and marketable product, namely folding cots, thereby satisfying the definition of manufacture under Section 2(f) of the Act. It observed that a new commercially identifiable product emerged at the appellant’s end and was therefore exigible to excise duty. However, on the question of valuation, the Tribunal drew a clear distinction between manufactured goods and traded items. It noted that the plywood tops were general-purpose boards procured from third-party sources and were supplied either separately or along with the cot frame depending on customer requirement. The folding cot could be used with cotton tape or with a plywood top, and the plywood was not a specialized or integral component manufactured by the appellant. The Bench held that supply of plywood tops constituted a trading activity and therefore their value could not be added to the assessable value of the folding cots. It concluded that inclusion of plywood tops in the assessable value was unsustainable in law.

Decision

The Tribunal sustained excise duty liability only to the extent of ₹58.59 lakh on folding cots, subject to adjustment of amounts already paid and along with applicable interest. It set aside the major portion of the demand amounting to approximately ₹2.74 crore relating to inclusion of plywood tops, along with corresponding interest and penalties. The penalties imposed on both the firm and its partner were also set aside. While the appeal of the firm was partly allowed, the appeal of the partner was allowed in full.

In this case the appellant was represented by Advocate Indranil Banerjee and Mukul Agarwal. Meanwhile the respondent was represented by Authorized Representative, A. Mukherjee.