Supreme Court of India

COMMISSIONER OF CENTRAL EXCISE, HYDERABADversusM/S. ALDEC CORPORATION

Citation: 2005 INSC 446
Decided: 26 September 2005
Disposal: Dismissed
Bench: B P SINGH

Holding

The Supreme Court held that the Department’s order cannot be interfered with because it failed to consider the essential statutory provisions and evidence on marketability, and the earlier findings that the processes did not constitute manufacture stand.

Summary

M/s Aldec Corporation purchased aluminium sheets and sent them to two job processors, VPI and SREW, for slitting, re‑rolling and painting, after which Aldec sold the painted aluminium slats (PAS) for venetian blinds. The Central Excise Department, relying on earlier decisions that slitting and painting did not amount to manufacture, later re‑characterised Aldec as a processor and issued show‑cause notices demanding duty for 1990‑95, alleging that the combined processes created a new product classifiable under sub‑heading 7616.90. The Tribunal set aside the demand, holding that no new article was manufactured. On appeal, the Supreme Court examined whether the combined activities satisfied the statutory test of "manufacture" and marketability, and whether the Department had considered the relevant tariff notes and section provisions. The Court found that the Department failed to address these essential points and that there was no evidence of duty evasion, affirming the earlier view that the processes did not constitute manufacture. Consequently, the civil appeals were dismissed.

Issues considered

Whether the combined processes of slitting, re‑rolling and painting constitute "manufacture" of a distinct product under section 2(f) of the Central Excise Act, 1944.
Whether the painted aluminium slats are classifiable as a separate article under sub‑heading 7616.90 of the Central Excise Tariff Act, 1985.
Whether chargeability and liability to pay excise duty are distinct concepts requiring proof of marketability.
Whether the fragmentation of activities by Aldec indicates an intention to evade duty.
Whether the Department considered the relevant statutory notes (Note 2 to Section XV and Section 2(b) of Section XVI of the HSN) in its assessment.

Legislation cited

Central Excise Act, 1944s. 2(j), s. 3, s. 6
Central Excise Rules, 1944s. Rule 174
Central Excise Tariff Act, 1985s. Heading 76.06, s. Sub‑heading 7616.90

Subjects

central excisemanufacturechargeabilityclassificationmarketabilitytariff classificationpainted aluminium slatsvenetian blindsfragmentation of activitiesduty evasion

Judgment

A COMMISSIONER OF CENTRAL EXCISE, HYDERABAD
v.
MIS. ALDEC CORPORATION

B SEPTEMBER 26, 2005

[B.P. SINGH AND S.H. KAPADIA, JJ.]

C Central Excise- Manufacture-Central Excise Act, 1944, Sections 2(j),
3 and 6 and Items 27 (6) and 68-Central Excise Rules, 1944, Rule 174--
Central Excise Tariff Act, 1985-Heading 76.06, Sub Heading 7616.90 Section
XV. note 2, Section XVI, note 2 (b)-Production of PAS for venetian blinds
by fragmented activities of trader and his job processor-Trader purchasing
D aluminium sheets of thickness 2. 03 mm in coil form-One of his job processor
slitting and re-rolling them into slats of 0.23 mm thickness-Another job
processor painting the same and thereafter the trader selling them as PAS
for venetian blinds-Whether they were engaged in manufacture of a separate,
independent and identifiable product PAS in lerms of manufac/ure and
markelabi/ity classifiable under Sub Heading 7616.90 rendering the trader
E liable to pay duty-Earlier in 1986-87, Department considering the case
under lhe 1944 Act of only the two job processors hold that the PAS
remained covered.under Item 27(6) and no new article stood produced so
as to fall under //em 68-Commissioner now considering the activities of the
trader and its job processors as a whole hold that the same had resulted
F in a new product PAS/or venetian blinds falling under Sub Heading 7616.90
rendering the trader liable to pay excise duty for the period 1990-95-The
Tribunal, on appeal reversed thal order. On further appeal, this Court refused
to inlerfere in the matter in view ofthe omission on the part ofCommissioner
to consider relevant facts and legal provisions-However, held ownership
was also relevant to de/ermine the question whether activity constitute
G manufacture-The question whether fragmentation of the aclivities by the
trader was wilh intention to evade duty not examined.

Words and Phrases-Chargeability and Classification-Held,
chargeabi/ity is different from liability to pay duty-Chargeability arises on
manufacture-Liability to pay excise duty depends on classification.
H
Respondent firm, M/s Aldec purchased aluminium sheets of thickness

536
COMMR. OF CENTRAL EXCISE, HYDERABAD v. ALDEC CORPN. 53 7
2.03 mm in coil form and fonvarded them to Mis. VPI which in tum fonvarded A
the same to Mis SREW for slitting and re-rolling them into slats of thickness
0.23 mm. SREW returned the slats to VPI, which after painting the slats
returned them to Aldec. Aldec then sold such PAS as trader in the market
. for venetian blinds. Aldec paid excise duty under Heading 76.06 on behalf of
SREW and VPI treating them as its job processor. Question whether the
fragmented activities of these three resulted in manufacture of a separate, B
independent and distinct identifiable product PAS for venetian blinds
classifiable under sub-heading 7616.90. In the past (1986-87) Department
considered the case of only VPI and SREW and hold that aluminium sheets
even though slitted and painted remained covered under Item 27(6) and no
new article stood produced so as to fall under Item 68. In 1994, Department C
took the view that Aldec was the processor and not a trader as VPI and SREW
were only its workmen /labourers wholly owned and controlled hy it Demand
notice for payment of excise duty for the period 1990-95 issued by the
Department was confirmed by the Commissioner. Tribunnl, on appeal, set aside
that order and held that slitting of sheets into strips and painting on them did
not amount to manufacture. Tribunal also opined that the Department having D
accepted the decisions taken in 1986-87 could not claim recovery of duty from
Aldec. The Department filed the present appeal.

Dismissing the Appeal, the Court

HELD: 1. The basic question is whether Mis Aldec Corporation, Mis E
VPI and M/s SREW were engaged in the manufacture of an independent
identifiable distinct product, in terms of manufacture and marketability.
Chargeability is different from liability to pay duty. Chargeability arises on
manufacture under section 3 of the said 1994 Act Liability to pay excise duty
depends on classification. Levy is a constitutional concept Therefore, under p
the excise law, chargeability, classification, valuation and exemption are
different and distinct concepts. 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 persons on
whom duty is proposed to be levied. The expression "produced or
manufactured" mean that the goods so produced must satisfy the test of G
marketability. Therefore, it is open to an assessee to prove that even though
the goods in which he is carrying on business is excisable, being mentioned
in the schedule, it could not be subjected to duty if it does not constitute
"goods", either because they are not produced or manufactured or if they
have been·produced or manufactured, they were not marketable or capable of H
538 SUPREME COURT REPORTS (2005] SUPP. 3 S.C.R.

A being marketed. In short, the twin test contemplated by the excise law is that
the goods must not only be manufactured but they also should be capable of
being marketed. [548-H; 549-A, B, C, D[

Union of India and Ors. v. Bombay Tyre International Ltd., AIR (1984)
SC 420; Moti Laminates Pvt. Ltd. v. Collector of Central Excise, Ahmedabad,
B (1995) 76 ELT 241; Commissioner of Central Excise; Goa and Chennai v.
M.R.F.Ltd., Chennai, [2005[ 2 SCC 733 and Hindustan Zinc Ltd. v.
Commissioner of Central Excise, Jaipur, (2005) 181 ELT170, referred to.

2. Whether an article as envisaged by section 2(1) has been manufactured
C or not solely depends on whether the article in question satisfies the test as
laid down in the relevant chapter heading or sub-heading and is known as
such in the commercial community. The coverage of the respective chapter
headings has to be determined in the light of the section notes and chapter
notes. Further, when an article is specified with reference to the raw material
like "Articles of Aluminium", the general use to which an article is capable
D of will be relevant. [550-B-C]

Airgrill Industries v. Commissioner of Central Excise, (2002) 141 ELT
A90, referred to.

3. The question whether a process, taken singly or jointly, constitutes
E "manufacture" on first principles or under section 2(1) has to be determined
having regard to the facts and circumstances of each case. The definition of
"manufacture" as per section 2(1) includes any process incidental or ancillary
to the completion of a manufactured product [550-DJ

4.1. Applying the above tests to the facts of the present case the Court
F refused to interfere in the matter. The Court found that Note 2 to section
XV, under which chapter 76 falls, has not been considered. Similarly, section
2(b) of section XVI of the HSN has not been considered. Further, the functional
utility of PAS as deflector of air-flow has not been considered. The issue as
to whether the PAS in question was for general purpose or was user specific
G was not considered. The commissioner has not discussed the difference
between the old tariff items 27(6) and 68 vis-a-vis chapter heading 76.06 and
sub-heading 7616.90 of the Tariff Act, 1985. Even on marketability, there is
no evidence as to the type of PAS (with particulars of dimension) being sold
in the market [550-E-F)

H 4.2. The department has accepted the decision passed in 1986 and 1987
COMMR OF.CENTRAL EXCISE, HYDERABAD r. ALDEC CORPN. [KAPADIA, J .] 539

holding that each of the above process do not constitute "manufacture". The A
respondent herein has acted on that basis for at least ten years. Hence, the
court did not find any intention to evade duty on the part of the respondent
[550-G-HJ
•
4.3. The court did not find any merit in the argument that it was not
necessary for the tribunal to go into the question of ownership as it had B
taken the view that the activities did not constitute manufacture. The question
of ownership was directly relatable to the clearances made in the names of
Mis VIP and Mis SREW and, therefore, the tribunal ought to have adjudicated
upon the question as to whether the clearances were made in the name of
dummy firms. (551-B-C) C
4.4. The Court did not examine the question whether the bifurcation
impugned was with the intention to evade duty. However the Court stated that
the tribunal should have examined the effect of bifurcation of activities by
Mis Aldec Corporation; it should have examined the processes involved either
jointly or singly in the light of relevant section notes, chapter notes, notes to D
HSN etc. as also the functional utility of the product. (551-Dl

CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 78I4-7817 of
2004.

From the Judgment and Order dated 14.5.2004 of the Customs, Excise E
and Service Tax Appellate Tribunal, South Zonal Bench, Bangalore in F.O.
Nos. 925-92812004 in A. Nos. El368, El374, El375 and El379 of2000.

K. Radha Krishnan, Ms. T.A. Khan, Shalini Kumar, Rupesh Kumar and
P. Parmeswaran with him for the Appellant.

Joseph Vellapally, Rajesh Kumar, Ragvesh Singh and K.R. Sasiprabhu
F
with him for the Respondents.

The Judgment of the Court was delivered by

KAPADIA, J. The issue involved in these civil appeals under section
35L(b) of Central Excise Act, 1944 is - whether on the facts and circumstances G
of the case, the Commissioner was right in holding that the fragmented
activities of Mis Aldec Corporation, Mis Yitthaleshwara Painting Industries
(VPI) and Mis Srinivasa Rolling and Engineering Works (SREW) taken
individually or jointly resulted in "manufacture" of a separate, independent
·-'
and distinct identifiable product namely, painted aluminium slat (PAS) for H
540 SUPREME COURT REPORTS (2005] SUPP. 3 S.C.R.

A venetian blinds classifiable under chapter sub-heading 7616.90.
On 8.11.1994, while patrolling, officers of Central Excise, Hyderabad
inspected an auto-trolley bearing registration No. AHT-8500. On verification
of the goods, being transported by the above trolley and on verification of
documents produced by the driver, the officers found that the goods in transit
B were PAS for venetian blinds. The officers found that the goods in transit did
not suffer excise duty and accordingly, they seized the vehicle on a reasonable
belief that the goods in transit were excisable goods under chapter sub-
heading 7616.90. On 9.11.1994, as a follow-up of the seizure, the officers
visited the premises of Mis Aldec Corporation and also premises of Mis VP!
C and' Mis SREW under the authority of the search warrant. As a follow-up,
the department issued show-cause notice on 27.3.1995 alleging purchase of
aluminium sheets from Mis Hindalco Industries Ltd. and paint from Mis
Goodlass Nerolac Paints Ltd., which, the department alleged, was being used
in the manufacture of PAS for venetian blinds measuring 50mm x .23 mm and
25 mm x .23 mm, running into mill length (over 100 ft.). According to the show
D cause notice, Mis Aldec Corporation bought aluminium sheets in coil form
measuring 472 mm x 2.03 mm and in tum forwarded the said aluminium sheets
to Mis VP! Gob processor) which in tum forwarded the aluminium sheets to
SREW Gob processor) for slitting and re-rolling the above sheets into slats
of 50 mm x .23 mm and 25 mm x .23 mm running into more than I 00 ft. Mis
E SREW thereafter returned back the slats to VP! who after painting the slats
returned them back to Mis Aldec Corporation which then sold the said PAS
as trader in the market. These PAS were used in the manufacture of venetian
blinds. According to the show-cause notice, Mis Aldec Corporation paid
excise duty on the aluminium sheets bought from Mis Hindalco under tariff -
item 76.06. According to the show-cause notice, the department had examined
F the d9cuments seized including balance-sheets and on that basis, it was
alleged that Mis Aldec Corporation had paid excise duty under tariff item
76.06 on behalf of so-called job processors, Mis VP! and Mis SREW. According
to the show-cause notice, Mis Aldec Corporation had paid excise duty which
was passed on to the customers in the past and on obtaining refund from the
G department in the name of Mis VP! and Mis SREW, Mis Aldec Corporation
refunded the amounts received from the department to its customers.
According to the show-cause notice, Mis Aldec Corporation had two partners
by the name, Vinay Asar and Harish Asar, whose father Vallabdas
Purushottamdas Asar was a partner of a firm Mis Sunder Das & Co. According
to the show-cause notice, Mis Sunder Das & Co. had let out the premises
H to Mis Aldec Corporation. On behalf of Mis Sunder Das & Co., lease was
COMMR. OF.CENTRAL EXCISE, HYDERABAD 1•. AL DEC CORPN. [KAPADIA, J.] 541
signed by Vallabdas Asar as lessor whereas the lease-deed was signed by A
Vinay Asar as partner of Mis Aldec Corporation (lessee). There was also an
agreement between Mis Sunder Das & Co. and Mis VP!. There was also an
agreement between Sunder Das & Co. and Mis SREW. Both these agreements
were for supply of power, lighting and water to Mis VP! and Mis SREW.
According to the show-cause notice, the work assigned to Mis VPI & Mis B
SREW was to convert aluminium sheets measuring 472 mm x 2.03 tnm into 50
mm x .23 mm thickness and 25 mm x .23 mm thickness. It was further alleged
that Mis SREW collected job work charges not from Mis Aldec Corporation
but from Mis VPI for the work of re-rolling and slitting. In the light of the
aforestated circumstances, the department alleged that the entire control of
all the aforestated activities vested in Mis Aldec Corporation and with the C
intention to evade excise duty, Mis Aldec Corporation called itself a "trader"
and called Mis SREW and Mis VPI as job processors. According to the
show-cause notice, Mis Aldec Corporation was not a trader; that it was in
fact a processor and that Mis Aldec Corporation had resorted to the
aforestated modus operandi with the intention to evade excise duty by
fragmenting the aforestated different and distinct activities which if taken D
together resulted in the manufacture of an independent identifiable product,
namely, painted aluminium slat (PAS), classifiable as a separate article under
chapter sub-heading 7616.90. From the show-cause notice, one finds that in
the year 1986, Mis VPI was asked by the Superintendent to apply for Central
Excise Licence and to follow central excise procedures. Being aggrieved, E
Mis VPJ had filed a writ petition in the High Court of Andhra Pradesh. That
writ petition was disposed of on 10.6.1987 directing Mis VPI to approach the

- collector. Similar immunity was also claimed by Mis SREW. The collector
upheld the contentions of Mis VPI and Mis SREW holding that painting of
aluminium sheets did not amount to "manufacture". The additional collector
also came to the conclusion that the slitting of aluminium sheets did not F
amount to "manufacture". Consequently, the additional collector took the·
view that the aluminium sheets remained under tariff item 27(6) and there was
no new article produced or manufactured from such aluminium sheets as a
result of slitting and painting so as to fall under tariff item 68 (as it then
stood). However, under the impugned show-cause notice, the department G
contended that in the earlier proceedings, notices were given only to Mis VPI
and to Mis SREW; that no notice was given to Mis Aldec Corporation; that
the earlier proceedings focussed on individual activity of slitting and the
individual activity of painting; that the various different stages through which
the original sheets had undergone different processes at the behest of Mis
Aldec Corporation was not examined by the department; and that the department H
542 SUPREME COURT REPORTS [2005] SUPP. 3 S.C.R.

A had proceeded on the basis that Mis VPJ and Mis SREW were independent
job processors. According to the department, in the present case, on
examination of the documents and from subsequent recovery, the department
found that Mis Aldec Corporation was the processor and that Mis VPI and ,
Mis SREW were only its workmen/labourers and, therefore, the impugned
show-cause notice had called upon Mis Aldec Corporation to show-cause
B why the above activity/process taken together should not be treated as
"manufacture", both on first principles as well as under section 2(f) of the said
Act, 1944. The impugned show-cause notice, therefore, did not accept Mis
Aldec Corporation as a trader but as a job processor/manufacturer. Jn the
circumstances, the show-cause notice, in the present case, has alleged violation
C of rule 174 of Central Excise Rules, 1944 read with section 6 of the said Act,
1944. By the said show-cause notice, the department has called upon M/s
Aldec Corporation to pay duty amounting to Rs. 1.51 crores (approximately)
for the period April 1990 to October 1994. A similar show-cause notice was
also issued by the department on 5.7.1995 for recovery of an amount of
Rs.9.57 lacs (approximately) for the period December 1994 to April 1995.
D According to the show-cause notice, the aluminium sheets bought by Mis
Aldec Corporation from Mis Hindalco was ten times thicker than the slats.
The value of the slat was Rs. 230 per kg. and that these slats were sold to
different buyers whose names find place in the order of the Commissioner.

E In reply to the show-cause notice, Mis Aldec Corporation submitted
that the basis of the show-cause notice was erroneous because it ignored the
previous binding orders of the additional collector and the commissioner

-
(appeals) stating that the activities carried by Mis VPI and Mis SREW did
not amount to "manufacture". It was contended that Mis Aldec Corporation
was•a trader in aluminium strips in the coil form and that the department was
F always aware of its activities as a trader. According to Mis AIdec Corporation,
there was no difference between tariff item 27(6) and tariff item 68 (which
existed prior to 28.2.1986) on one hand and tariff item 76.06 as well as chapter
sub-heading 7616.90 under the Central Excise Tariff Act, 1985 on the other
hand and, therefore, the decision taken by the department in 1986 was
G irreversible. In the reply, Mis Aldec Corporation·contended that Mis VPI and
Mis SREW were job processors, which position was accepted by the
department in its earlier decisions in 1986/1987 and, therefore, it was not open
to the department in the year 1995 to contend that the slats were now
classifiable under sub-heading 7616.90. According to Mis Aldec Corporation,
the business of the corporation was trading and, therefore, it was not required
H to obtain licence or registration under the Central Excise Act, 1944. According
COMMR. OF.CENTRAL EXCISE, HYDERABAD1·. ALDEC CORPN. [KAPADIA, J.] 543

to Mis Aldec Corporation, the department had accepted that the activities of A
Mis VP! and Mis SREW were non-manufacturing activities and in fact refunds
were sanctioned in favour of these units and, therefore, it was not open to
the department now to allege evasion of excise duty by Mis Aldec Corporation,
as indicated in the show-cause notice, w.e.f. April 1990. Mis Aldec Corporation,
therefore, submitted that they were traders of aluminium strips in the form of B
coils and, therefore, there was no question of payment of excise duty on such
trading activity. However, in reply to the impugned show-cause notice, vide
para l 4(h), Mis Aldec Corporation submitted that they were not concerned
with the show-cause notices given to Mis VP! and Mis SREW. The tenor of
the reply of Mis Aldec Corporation indicates that Mis Aldec Corporation was
a trader whereas Mis VPI and Mis SREW were job processors whereas C
according to the department, in view of the complete control of all the
activities by Mis Aldec Corporation, the real processor was Mis Aldec
Corporation and not Mis VP! or Mis SREW. In reply, Mis Aldec Corporation
submitted that the excise duty was on the activity of 'manufacture'; the duty
of excise was to be imposed on manufacture of goods; that in the case of
Mis Ujagar Prints etc. v. Union of India and Ors., reported in ( 1988) 38 ELT D
535, it has been held by this Court that in the case of processing-houses, duty
was leviable on the processors not because they were owners of the goods
but because they caused the manufacture of the goods. Mis Aldec Corporation
submitted that they did not cause the manufacture of the goods in the present
case and, therefore, they were not liable. According to the reply, the owner.;hip E
of the goods or owners of the plant or machinery was not relevant. According
to Mis Aldec Corporation (respondent herein), what was relevant was the
nature of the activity and not the nature of the ownership. Mis Aldec
Corporation denied the charge of fragmentation of the activities. In any event,
it was submitted that the facts relating to the alleged fragmentation were
known to the department at all material times including in the earlier adjudication F
and, therefore, it was not open to the department to claim duty amount
retrospectively.

By order dated 30.11.1999, the commissioner confirmed the demands
raised by the department in the show-cause notices. It was held that at the G
relevant time, the aluminium sheets measuring 472 mm x 2.03 mm thickness
were classifiable under chapter sub-heading 7606.20 whereas other articles of
aluminium as final product were classifiable under chapter sub-heading 7616.90.
According to the commissioner, the process of slitting, rolling and trimming
by Mis SREW constituted "manufacture" because at that stage, the width of
the original aluminium sheets bought from Mis Hindalco was slitted to smaller H
544 SUPREME COURT REPORTS [2005] SUPP. 3 S.C.R.

A sizes and reduced in thickness as indicated in the above dimensions, which
resulted in a separate, independent identifiable product known in the market
as aluminium slats. According to the commissioner, Mis Aldec Corporation
had used slitting and rolling machines in the course of the aforestated activities,
which resulted manufacture of a finished product known as 'painted aluminium
slat' for venetian blinds. The commissioner further found that the real
B manufacturer of the aforestated processes was M/s Aldec Corporation and
not Mis VP! and M/s SREW. The commissioner examined various documents,
balance-sheets, income expenditure statements etc. and came to the conclusion
that M/s VP! and M/s SREW had partners who were wage earners/employees
of M/s Aldec Corporation; and that Mis VP! and M/s SREW were dummies
C created for the purposes of fragmenting the various activities/processes with
the idea of evading excise duty. According to the commissioner, Mis Aldec
Corporation had fragmented the various processes referred to above involved
in the manufacture of PAS for venetian blinds with the intention to evade
duty; that the customers were approaching M/s Aldec Corporation for job
work and that these customers did not approach M/s VP! or M/s SREW for
D job work; that in fact Mis Aldec Corporation was the job worker or in any
event, M/s Aldec Corporation controlled all the activities. According to the
commissioner, in the present case, if one was to look to the totality of all the
processes, the same would come within section 2(f) of the Act, 1944 and that
PAS for venetian blinds would emerge as an independent product under
E chapter sub-heading 76 I6.90. The commissioner further held that the earlier
decision of the department was not conclusive because in the earlier
proceedings, no notice was given to M/s Aldec Corporation; that the decisions
of the commissioner in the earlier round in favour of M/s VPI and M/s SREW
indicate that the point of classification alone was put in issue. According to
the commissioner, in the earlier round of litigation, M/s VP! and M/s SREW
F had contended that the aluminium sheets bought from M/s Hindalco came
under tariff item 27(6) and that the slats continued to remain aluminium sheets
under item 27(6) and did not constitute a separate product under the tariff item
68 and, therefore, the question of manufacture under section 2(f) did not arise
for determination. Consequently, the commissioner confirmed the demand
G raised in the show-cause notice.
Aggrieved by the aforesaid decision of the commissioner, the matter
was carried in appeal by Mis Aldec Corporation (respondent herein) to the
Customs, Excise & Service Tax Appellate Tribunal (hereinafter referred to as
"the tribunal"). By the impugned decision, the tribunal came to the conclusion
H that in the present case, the aluminium sheets bought by Mis Aldec
COMMR OF.CENTRAL EXCISE, HYDERABADv. ALDEC CORPN. [KAPADIA, J] 545

Corporation (respondent herein) were cut to aluminium strips by Mis SREW; A
that the thickness was reduced to .23 mm; and that slitting of sheets into
strips did not amount to "manufacture". The tribunal further held that Mis
VP! did painting on strips which did not amount to manufacture. The tribunal
found that the issue involved in the present case stood decided as far back
as 27 .8.1987 vide order of the commissioner holding that the painting activity B
carried out by Mis VP! did not amount to "manufacture". Similarly, as far back
as 26.11.1986, the collector had held that the activity of slitting and rolling did
not amount to "manufacture". According to the tribunal, both the decisions
dated 26.11.1986 and 27 .8.1987 were accepted and, therefore, the department
has no authority to claim recovery of duty from Mis Aldec Corporation
co;nmencing from April 1990. In the impugned judgment, the tribunal held that C
the earlier decisions dated 26.11.1986 and 27.8.1987 did not change with the
introduction of the new tariffw.e.f. 28.2.1986 particularly when the processes
carried out since 1985 remained unchanged. The tribunal observed that in the
impugned decision of the commissioner, there is no discussion as to how
painted aluminium slats for venetian blinds fell under chapter sub-heading
7616.90 and, therefore, the tribunal came to the conclusion that no new D
excisable product came into existence classifiable under chapter sub-heading
7616.90. In the circumstances, the appeals were allowed by the tribunal and
the demand raised by the department was set aside. Hence, these civil appeals.

Shri K. Radha Krishnan, learned senior counsel appearing on behalf of E
the department submitted that the commissioner had examined the balance-
s~eets, income and expenditure statements, the lease-agreements and other
documents while coming to the conclusion that the entire modus-operandi
adopted by Mis Aldec Corporation (respondent herein) was to evade liability

- to pay excise duty. It was urged that the partners of Mis VP! and Mis SREW
were workmen and employees of Mis Aldec Corporation; that they received
salaries from Mis Aldec Corporation; that the expenses of Mis VPI and
F

Mis SREW were borne by Mis Aldec Corporation; that the customers treated
Mis Aldec Corporation as job processors; that excise duty was collected by
Mis Aldec Corporation on behalf of Mis VP! and Mis SREW and, therefore,
Mis VPI and Mis SREW were dummy companies. Learned counsel submitted G
that the real job worker was Mis Aldec Corporation and not Mis VP! or
Mis SREW. It was urged that on examination of the documents, the
commissioner correctly found that Mis Aldec Corporation was statutorily
obliged to obtain registration and licence for the manufacture of painted
aluminium slats for venetian blinds and by not getting itselfregistered, breach
of rule 174 took place for which Mis Aldec Corporation was liable. Learned H
546 SUPREME COURT REPORTS (2005) SUPP. 3 S.C.R.

A counsel urged that in the entire decision of the tribunal, there is not a single
word on this issue and consequently, the matter needs to be remitted to the
tribunal. Learned counsel urged that in the past, notices were given by the
department to Mis VP! and Mis SREW in which it was alleged that the work
of painting constituted "manufacture" and, therefore, the said PAS came
B within the then tariff item 68. Similarly, in the past, the show-cause notices
were given to Mis SREW, in which it was alleged by the department that the
work of slitting resulted in a new product classifiable under item 68 and,
therefore, in the past, according to the learned counsel, focus was put on
individual activities of individual units, which in the present case is not there.
In the present case, according to the department, if one looks to the totality
C of all the above activities taken, individually and/or jointly, would result in the
manufacture of a different, independent identifiable product known in the
market as PAS for venetian blinds. According to the learned counsel, in view
of the aforestated circumstances, the decisions earlier taken in I 98611987 by
the department were not binding on the department. It was urged that in the
present case, we are concerned with the concept of "manufacture" both on
D first principles as well as under section 2(f) of the Act, which has not been
examined at all by the tribunal. Learned counsel submitted that the issue of
classification was different from the issue of excisability. Learned counsel
submitted that this difference has not been looked into by the tribunal.
Therefore, learned counsel urged that the impugned decision is erroneous
E and liable to be set aside. Learned counsel submitted that the thickness of
aluminium sheets was ten times more than the thickness of the strips; that
there is value-addition in case of PAS for venetian blinds; that the process
of slitting, trimming and re-rolling changed the structure of the original

F
aluminium sheets resulting in a distinct identifiable commodity known in the
market as PAS. Reliance was also placed on the names of the buyers of PAS
referred to in the decision of the commissioner to show that PAS was an
independent product both in tenns of manufacture and in terms of marketability.
-
Shri Vellapally, learned senior counsel appearing on behalf of the assessee
on the other hand submitted that the combined activity of slitting, trimming,
G re-rolling and painting of PAS did not result in production of a new article
of aluminium falling under chapter sub-heading 7616.90. In this connection,
it was submitted that if two different processes, neither of which by itself
amounts to manufacture, are carried on individually in different factories, no
new product comes into existence. If two factories are owned by one individual,
it will make no difference. Learned counsel submitted that in the present case,
H the nature of the process and the nature of the finished item in contra-
COMMR. OF.CENTRAL EXCISE, HYDERABADv. ALDEC CORPN. [KAPADIA, J.] 547
distinction to the aluminium sheets purchased from Mis Hindalco had to be A
decided and that question has not been decided by the commissioner.
According to the learned counsel, "article of aluminium" is an expression
used in chapter 76 to distinguish a finished product made of aluminium from
commodity of aluminium which is used as a raw-material to manufacture
various articles, Learned counsel submitted that in the present case, the B
evidence produced by Mis Aldec Corporation (respondent herein) clearly
shows that the strips sold by them was a raw-material suitable for manufacture
of venetian blinds, decorative, lamps etc. and, therefore, it remained under
tariff item 76.06 and it did not come out of that item into chapter sub-heading
7616.90. Learned counsel submitted that the process of rolling and slitting
followed by painting did not result in production of a new article. According C
to the learned counsel, what Mis Aldec Corporation purchased was an
"aluminium strip" and, irrespective of the ownership of the processing units,
the output namely PAS still remained an aluminium strip falling under chapter
heading 76.06 as no new item emerged by reason of the above activities.
Learned counsel submitted that painted aluminium slats are capable of being
put to use not just for venetian blinds but also for making false ceilings, lamps D
etc. and, therefore, in common parlance, PAS is known as "painted slats for
venetian blinds". It was urged that the onus of establishing "manufacture"
as also "classification" was on the department; that the department had failed
to discharge its onus; that the commissioner had made repeated assertions
without any supporting evidence. Learned counsel submitted that the prior ·E
history of adjudication in this regard shows that the burden was on the
department in the present case on the heavier side to show that the slitting,
rolling and painting resulted in emergence of a new product, both in terms
of"manufacture" and in terms of"marketability". Reliance was also placed on
chapter note (d) to chapter 76 which indicated that the aluminium strip
remained classified under heading 76.06 notwithstanding the processing of F
such strip in the manner contemplated by the note. Learned counsel submitted
that the strips sold by Mis Aldec Corporation continued to be classified
under heading 76.06 and became an article of aluminium only when the
venetian blinds were manufactured by the buyers. Learned counsel urged that
the tariff heading made no difference between a polished or a coated strip G
vis-a-vis unpolished or uncoated strip and, therefore, the commissioner had
erred in holding that the process adopted by the respondent constituted
"manufacture". Lastly, the learned counsel urged that the department had
accepted orders dated 26.11.1986 and dated 27.8.1987 passed in favour of
Mis SREW and Mis VPI holding that the process of trimming, slitting, re-
rolling and painting etc. did not amount to "manufacture" and, therefore, it H
548 SUPREME COURT REPORTS (2005] SUPP. 3 S.C.R.

A was impermissible for the department now to contend that it was in the dark
about relevant facts. Learned counsel submitted that the entire issue was
based on the nature of the activities and when the tribunal came to the
conclusion that the different processes taken individually or jointly did not
amount to "manufacture", it was not necessary for the-tribunal to go into the
B question of ownership of the processing units. Learned counsel submitted
that whether Mis Aldec Corporation was the real processor or whether Ml
s VPI or Mis SREW were the real processors was not the relevant question
and, therefore, the tribunal was right in not deciding that question in the
present case. In the above circumstances, the learned counsel urged that no
interference is called for in the present case.
c Before dealing with the rival contentions of the parties, we reproduce
hereinbelow the relevant headings of Chapter 76 of the Central Excise Tariff
Act, 1985:

CHAPTER 76: ALUMINIUM & ARTICLES THEREOF
D Heading No. Sub- Description of Goods
Heading No.

1 2 3

76.06 Aluminium plates, sheets (including
E circles) and strip, of a thickness
exceeding 0.2 mm.

760620 Of aluminium alloys.

76.16 Other Articles of Aluminium
F
7616.10. Nails, tacks, staples, screws, bolts,
nuts etc.

7616.90 Others
G
The basic question which needs to be answered in the present case is
whether Mis Aldec Corporation, Mis VPI and Mis SREW were engaged in
the manufacture of an independent identifiable distinct product, in terms of
manufacture and marketability. Chargeability is different from liability to pay
duty. Chargeability arises on manufacture under section 3 of the said 1944
H
COMMR. OF.CENTRAL EXCISE, HYDERABAD v. ALDEC CORPN. [KAPADIA, J.] 549

Act. Liability to pay excise duty depends on classification. Therefore, there A
is a difference between the concept of "chargeability" and the concept of
"classification". Levy is a constitutional.concept as held in the case of Union
of India and Ors. v. Bombay Tyre International Ltd, reported in AIR (1984)
SC 420. Therefore, under the excise law, chargeability, classification, valuation
and exemption are different and distinct concepts. In the case of Mali Laminates B
Pvt. Ltd. v. Collector of Central Excise, Ahmedabad, reported in (1995) 76
EL T 241, this Court has held that section 3 levies duty on all excisable goods,
provided they are manufactured or produced. 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 C
expression "produced or manufactured" has been explained to mean that the
goods so produced must satisfy the test of marketability. Therefore, it is open
to an assessee to prove that even though the goods in which he is carrying
on business is excisable, being mentioned in the schedule, it could not be
subjected to duty if it does not constitute "goods", either because they are
not produced or manufactured or if they have been produced or manufactured, D
they were not marketed or capable of being marketed. In short, the twin test
contemplated by the excise law is that the goods must not only be manufactured
but they also should be capable of being marketed. In the case of Commissioner
of Central Excise, Goa and Chennai v. MR.F. Ltd., Chennai, reported in
[2005] 2 sec 733, this court held that although the basic commodity was a E
tyre cord and the final product was a rubberised nylon tyre cord, the
intermediate product, namely, dipped nylon tyre cord, could constitute a
separate identifiable product in terms of manufacture and marketability. In that
case, on the question of marketability, the matter had to be remitted to the
commissioner (adjudication). In the case of Hindustan Zinc Ltd. v.
Commissioner of Central Excise Jaipur, reported in (2005) 181 EL T 170, this F
Court held that emergence of silver chloride by filtering sulphates from mixture
of zinc chloride was a process which amounted to manufacture. However, no
evidence was led by the department to show that the silver chloride which
emerged out of the said process was capable of being sold in the market and,
therefore, although the department succeeded in making out a good case on G
manufacture, it failed on marketability for want of evidence. In the said case,
this court found that silver chloride was an independent identifiable product.
However, the department had failed to lead evidence as to whether the silver
chloride which was sold in the market having 75% silver content and the
silver chloride which emerged as a by-product in filtering sulphate from
mixture of zinc chloride had the same quantity of pure silver. It was found that H
550 SUPREME COURT REPORTS [2005) SUPP. 3 S.C.R.

A the silver chloride which emerged by filtering sulphate from zinc chloride had
only 50-53% silver whereas silver chloride sold in the market had 75% content
of silver. Since the department had failed to prove marketability, this Court did
not accept the contention of the department that a new product had emerged.
Further, whether an article as envisaged by section 2(f) has been manufactured
B or not solely depends on whether the article in question satisfies the test as
laid down in the relevant chapter heading or sub-heading and is known as
such in the commercial community. The coverage of the respective chapter
headings has to be determined in the light of the section notes and chapter
notes. Further, when an article is specified with reference to the raw material
like "Articles of Aluminium", the general use to which an article is capable
C of will be relevant. [See: Airgrill Jndustries v. Commissioner a/Central Excise
reported in (2001) 132 ELT 646 (T) affirmed by this Court in 2002 (141) ELT
A90]. Lastly, the question whether a process, taken singly or jointly, constitutes
"manufacture" on first principles or under section 2(f) has to be determined
having regard to the facts and circumstances of each case. The definition of
"manufacture" as per section 2(f) includes any process incidental or ancillary
D to the completion of a manufactured product. For example, painting of steel
furniture is incidental or ancillary to the manufacture of steel furniture. But
if the steel furniture is sold without painting and if painting is done after the
furniture is sold then painting will not amount'to manufacture.

E Applying the above tests to the facts of the present case, we find that
Note 2 to section XV, under which chapter 76 falls, has not been considered.
Similarly, section 2(b) of section XVI of the HSN has not been considered.
Further, the functional utility of PAS as deflector of air-flow has not been
considered. The issue as to whether the PAS in question was for general
purpose or was user specific was not considered. In the present case, the
F commissioner has not discussed the difference between the old tariff items
27(6) and 68 vis-a-vis chapter heading 76.06 and sub-heading 7616.90 of the
Tariff Act, 1985. Even on marketability, there is no evidence as to the type
of PAS (with particulars of dimension) being sold in the market. In the
circumstances, we do not wish to interfere in the matter.

G Ordinarily, we would have remitted the matter to the commissioner.
However, in this case, we find that the department has accepted the decisions
of the Commissioner (Appeals) and Additional Collector passed in 1986 and
1987 holding that each of the above process do not constitute "manufacture".
The respondent herein has acted on that basis for at least ten years. Hence,
H we do not find any intention to evade duty on the part of the respondent.
COMMR. OF.CENTRAL EXCISE, HYDERABAD v. ALDEC CORPN. [KAPADIA, J.] 55 J

We cannot expect the respondent to collect duty from its customers for the A
last ten years.

In the present case, it was vehemently urged on behalf of Mis Aldec
Corporation that ownership of the goods or ownership of the plant or
machinery was not relevant. That what was relevant was the nature of the
activity and not the nature of the ownership. It was urged that it was not B
necessary for the tribunal to go into the question of ownership as it had taken
the view that the activities did not constitute manufacture. We do not find
any merit in this argument. The question of ownership was directly relatable
to the clearances made in the names of Mis VP! and Mis SREW and, therefore,
the tribunal ought to have adjudicated upon the question as to whether the C
clearances were made in the name of dummy firms.

Before concluding, we may state that the tribunal should have examined
the effect of bifurcation of activities by M/s Aldec Corporation; it should
have examined the processes involved either jointly or singly in the light of
the above section notes, chapter notes, notes to HSN etc. as also the functional D
utility of the product. For example, painting after slitting, re-rolling etc. and
before sale of PAS may have a different result vis-a-vis painting as an activity
per se. Learned counsel for the respondent, on instruction, says that Mis
AIdec Corporation will get itself registered under protest and without prejudice
to its rights and contentions that the said process, taken jointly and/or singly,
will not constitute manufacture under section 2(f) and will not make PAS E
classifiable under sub-heading 7616.90. We take the above statement on
record and accordingly, we are not examining the question whether the
bifurcation impugned was with the intention to evade duty.

Subject to above, these civil appeals are dismissed, with no orders as F
to costs.

K.G. Civil Appeals dismissed.

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