Holding

The Court held that excess‑skin removal is merely ancillary to forging, so excise duty on the wheels, tyres and axles (except composite units) is payable only under Tariff Item 26AA(ia) on the weight after the appellant’s machining, they are not liable to duty under Item 68, and, absent any misstatement, the limitation period is six months.

Summary

Tata Iron & Steel Co. Ltd. (the appellant) manufactured wheels, tyres and axles for Indian Railways, forging them and then machining and polishing to remove excess steel skin. The Revenue argued that the goods became a new commercial commodity after machining, making them liable to excise duty under Tariff Item 68 in addition to Item 26AA(ia), and that duty on the forged stage should be based on weight before machining. The appellant contended that machining was merely incidental to forging, that weight should be measured after machining, and that there was no misstatement of facts to justify a five‑year limitation period. The Supreme Court held that removal of excess skin is ancillary to manufacture, so duty is payable only under Item 26AA(ia) on the post‑machining weight, the goods do not attract Item 68 duty until the Railways complete final precision machining, and no misstatement occurred, limiting the demand to six months before the show‑cause notice. For composite units, liability under both items was affirmed but also limited to six months. The appeal was allowed.

Issues considered

The appropriate stage at which the goods are deemed forged for purposes of Tariff Item 26AA(ia) and whether weight for duty should be measured before or after machining and polishing.
Whether machining and polishing by the appellant transforms the forged goods into new commercial commodities liable to duty under Tariff Item 68.
Whether the appellant committed any misstatement of facts that would extend the limitation period for demand to five years instead of six months.

Legislation cited

Central Excise Rules, 1944s. 173-B, s. 173(G)(i), s. 173(i)(a)
Central Excises & Salt Act, 1944s. 11-A, s. 2(f)
Medicinal and Toilet Preparations (Excise Duties) Act, 1955s. 2(c)

Subjects

excise dutytariff classificationforged goodsmachiningweight measurementlimitation periodcomposite unitsIndian Railwaysmisstatement of factsancillary process

Judgment

T,~TA IRON & STEEL CO. LTD.
. v.
UNION OF INDIA & ORS.

MAY 6, 1988

[R.S. PATHAK, CJ, AND M.H. KANIA, J.] B

Central Excises & Salt Act, 1944/Centra/'Excise Rules, 1944: Sec-
tion 2(f), 1ZA & First Schedule Item Nos. 26AA, 26AA(ia) and 68
Rules 173-B, 173(G)(i) and 173(i)(a)-Assessee-manufacturer supplies
wheels, ty;es and axles as also wheels and axles as composite units to the
Railways-goods after being forged machined and polished to remove C
excess layer of steel-goods whether dutiable at or« .?fo~e or two stages-
Demand for excess duty period of limitation.

The appellant-assessee manufactures and supplies to the Indian
Railway wheels, tyres and axles as separate items. The goods are forged
products. After being forged, the goods are rough machined and D
polished before supplying, thus removing the excess layer of steel, com-
monly referred to as 'excess skin'. The appellant also makes and sup-
plies to the Railways wheels and axles as composite units.

Right from 1962 the appellant/assessee was filing classification
lists showing the forged goods as liable to excise duty only under Tariff E
Item No. 26AA(ia) of the Central Excise Tariff set ·out iu the First
Schedule to the Central Excises and Salt Act, 1944, and this classifica-
tion was being accepted and approved by the Excise Authorities. It -is
common ground that duty under Tariff Item No. 26AA was payable ou
.:._.. the forged product and duty nuder Tariff Item No. 68 was payable only
\ at the stage of the completion of the manufacture of the finished goods. F

In 1981, the Assistant Collector, Central Exicse, called upon the
appellant to show cause why it should not be proceeded against for
contravention of Rule 173-B, 9(i) read with Rule 173(G)(i) and Rule
l 73(i)(a) on the ground that the goods supplied to the railways were not
forged items as such, but the said goods after they had undergone G
>-- machining and polishing after having been forged had been turned into
a distinct commercial commodity which process amounted to manu-
facture and hence the goods were liable to excise duty as set out in Item
68. The notice also called upon the appellant to show cause as to why
duty on the forged goods under Tariff Item No. 26AA(ia) should not be
payable on the footing of the weight of the goods as forged and before H
1023
1024 SUPREME COURT REPORTS [1988] 3 S.C.R.

A the removal of the excess skin. The basic contention of the revenue was
that the goods were liable to duties at two stages, namely, under Tariff
Item No. 26AA(ia) when they were forged and under Triff Item No. 68
after they were machined and polished.

The stand of the appellant was that the process of forging of the
B goods could be paid to be completed only after machining and polish-
ing, that machining and polishing was required to be done in order to
bring the goods in line with the specification of the Indian Railways,
that the goods supplied have to be further precision machined and rme
polished at the railway workshop before these could be put to use by the
- '

railways, and hence the machining by the appellant did not amonnt to
manufacture.
c
A Certificate issued by the Railways states that axles are supplied
to the railways in rongh machined condition and wheels, tyres and
blanks are supplied in "as rolled/as forged" condition. It further states
that these wheels, tyres, exles and blanks have to be sometimes rough
D machined partially to remove excess steel or manufacturing defects,
and these products are snbsequently precision machined by the Rail-
ways at their workshops before being put to use.

The Collector rejected the stand of the appellant and held that the 1
appellant was liable to pay differential duty under Item 26 AA (ia) on
E the difference between weight of the said goods when forged and the
weight after machining to remove the excess skin as well as the duty under
Tariff Item No. 68. The Collector also held that the appellant was liable -
to penalty of Rs. I lac under Rule 173 Q for suppression of facts or
giving misleading particulars. On that basis the Collector took the view
that the period of limitation for making the demand was 5 years prior to y
F the service of the show cause notice.

The appellant filed writ petition in the Patna High Court for
quashing the order passed by the Collector. The ijigh Court accepted
the conclusions of the Collector save and except that they took the view
that there was no suppression or mis-statement of facts and hence the
G period of limitation would be only 6 months prior to the service of the
show-cause notice. ,..._.

The Appellants contends before this Court that machining and
polishing which is done in its workshop was not of a significant character
and is only in the nature of shaping by removing the superficial material
H to bring the forged items upto Railways' specifications. It is further
TATA IRON & STEEL CO. v. U.0.1. 1025

contended that the weight should be measured only after the machining
A
and polishing at the appellant's workshop was complete. The Respon-
dents, on the other hand, contend that the forging of the goods was
complete before machining and polishing was done and that the duty on
the forged goods under Tariff Item No. 26AA(ia) should be payable on
the footing of the weight of the goods as forged and before the removal
of the excess skin by machining. B

Three points arise for decision: (1) at what stage could the goods
suplied by said to be forged, and in respect of the said goods whether
the weight for the purpose of levy of excise duty under item i6AA(ia)
should be taken before or after the machining and polishing is done by
the appellant to remove excess skin; (ii) whether as a result of machin-
ing and polishing the forged goods were transformed into new commer- c
cial commodities; (iii) whether the appellant was guilty of misstatement
of facts so as to attract longer period of limitation.

Allowing the appeal, this Court,
D
HELD: (i) The removal of extra/unwanted surface steel by either
trimming or skin cutting of the forged product must be regarded as
incidental or ancillary to the process of "manufacture" as defined in
sub-section 2(1) of the Central Excises and Salt Act, 1944. The appellant
is, therefore, liable to pay duty on the goods referred to in the petition
other than the composite units only under Item No. 26AA(ia) of the E
First Schedule to the <;entral Excises Act and the duty will be based on

- the weight after the machining carried out in the factory of the appel-
lant to remove the excess skin or excess surface steel. I10300-F l

.:._.._. (ii) It is quite clear on facts that the finished goods, namely,
~ finished wheels, tyres, axles and blanks could be said to have come into F
existence only after the precision machining and other processing at the
Railways' workshops was complete and therefore the appellant is not
liable to pay any duty on these goods as under Item No. 68 of the
Central Excise Tariff. IJ03 IF)

(iii) It is common ground that right from 1962 the appellant's G
classification lists were accepted and approved by the excise authorities.
In these circumstances, it could not be said that the appellant was guilty
of any suppression or mis-statement of facts or collusion or violation of
the provisions of the Central Excises Act as contemplated under the
proviso to Section ll-A of the said Act. In view of this, the period of
limitation would clearly be only six months prior to the service of the H
show cause notice. [1032E-F
1026 SUPREME COURT REPORTS [1988] 3 S.C.R.
i
(iv) In respect of the composite sets, it is beyond dispute, and it is
A conceded by the appellant, that the appellant is liable to pay duty both
under Items Nos. 26AA(ia) and 68, but only for a period of six months
prior to the service of the show-cause notice. [1033A-B I

Metal Forgings Pvt. Ltd. v. Union of India, [1985] 20 E.L.T.
B approved. _.(

CIVIL APPELLATE WRISDICTION: Civil Appeal No. 783
(NM) of 1987.

From the Judgment and Order dated 9.3.87 of the High Court of
Patna in C.W.J.C. No. 608of1983.
c
Soli J. Sorabjee, Ravinder Narain, S. Ganesh, Laxmi Kumaran,
P.K. Ram and D.N. Mishra for the Appellant.

Govind Das, C.V. S. Rao and A. Sobba Rao for the Respon-
D dents.

The Judgment of the Court was delivered by

KANIA, J. This is an appeal by the Tata Iron and Steel Co. Ltd. ~
(referred to hereinafter "the Tisco") against the judgment of a Divi-
E sion Bench of the Patna High Court in Writ Petition filed by the Tisco.
The Writ Petition was filed by the Tisco for quashing an order passed
by the Collector, Central Excise, Patna on 24th September, 1982. The
Division Bench of the Patna High Court in the impugned judgment
only granted partial relief to the Tisco and the appeal in respect of the
-
relief refused. j•
F
The relevant facts are follows:

The appellant manufactures inter alia wheels, tyres and axles of
rail ~ys. The buyers of these products are the Indian Railways.
Apart from this, the appellant also makes and supplies to the
G Indian Railways wheel and exles as composite units. These are
forged products. Before the said goods are supplied to the rail- ~
ways the said goods after being forged are machined and
polished by the appellant and as a result of this machining and
polishing the excess layer of steel which is commonly referred as
"excess skin" 'is removed; and one of the disputes is as to
H whether for the purpose of Item 26AA(ia) of the Central Excise
TATA IRON & STEEL CO. v. U.0.1. [KANIA. J.] 1027
~
Tariff set out in the First Schedule to the Central Excises and Salt
A
Act, 1944 (referred to hereinafter as "the Central Excises Act")
the weight of the steel should be calculated as at the time when
the forging was complete or after machining and polishing to
remove the excess skin of steel. Certain other incidental work on
the said goods might have been done by the appellant, but that is
not material for our purposes. The stand of the appellant was B
that these items were dutiable in their hands only once and under
Tariff Item No. 26AA(ia). The contention of the revenue was
that in the hands of the appellant they were liable to duties at two
stages, namely, under Tariff Item No. 26AA(ia) when they were

i forged and under Tariff Item No. 68 of the Excise Tariff after
they were machined and polished for being supplied to the rail-
ways. Right from 1962, the appellant was filing classification lists
showing these goods as liable to excise duty only under Tariff
c
Item No. 26AA(ia) and this classification list submitted by the
appellant was accepted and approved by the excise authorities.
In 1981, the Asst!. Collector, Central Excise, Jamshedpurwho is
one of the respondents before us by a show-cause notice dated D
16.5.1981 called upon the appellant to show cause why it should
not be proceeded against for contravention of Rule 173-B, 9(i)
read with rule 173(G)(i) and rule 173(i)(a). The ground was that
the goods supplied by the appellant to the railways were not
~ forged items as such, but the said goods after they had undergone
machining and polishing after being forged and had been turned E
into distinct commercial commodities by the process of machin-

- ing and polishing which amounted to manufacture and hence the
goods were also liable to the payment of excise duty as set out in
Item 68. The notice also called upon the appellant to show cause
as to why duty on the forged goods under Tariff Item No.
~- 26AA(ia) should not be payable on the footing of the weight of F
the goods as forged and before the removal of the excess skin by
the machining. The appellant by their letter dated 27th May,
1982 replied to the said notice taking up the stand that the pro-
cess 9f forging of the goods could be said to be completed. only
after machining and polishing and that this was required to be
done in order to bring the goods in line with the specifications of G
the Indian Railways. The said Jetter addressed to the Collector
>- inter alia pointed out that all the wheels, tyres and axles had to be
rolled and machined by the appellant to make them conform to
the Indian Railways standard denominations. However, all
wheels, tyres and axles supplied by the appellant were further
precision machined and fine polished at the railway workshop H
1028 SUPREME C~URT REPORTS [1988) 3 S.C.R.
i
that this further machining at the railway workshop, is a must
A
before the said articles could be put to use by the railways and
hence the machining by the appellant did not amount to man-
ufacture. A copy of the letter is not on record, but there is a clear
reference to it in the order passed by the Collector imposing
excise duties as aforesaid. The Collector rejected the stand of the
B appellant and held that the apellant was liable to pay differential
duty under item 26AA(ia) on the difference between weight of
the said goods when forged and the weight after machining to
removi; the excess skin as well as the duty under Tariff Item No.

c
68 as set out earlier. The Collector further held that the appellant
was liable to penalty of Rs. llac under Rule 1730 of the Central
Excise Rules, 1944 for suppression of facts or giving misleading
particulars. The Collector took the view that the appellant was
guilty of mis-statement of suppression of facts and hence the
period of limitation for making the demand was 5 years prior to
r
the service of the show cause notice. The Division Bench of the
Patna High Court accepted the conclusions of the Collector save
D and except that they took the view that there was no suppression
or mis-statement of facts on the part of the appellant and hence
the period of limitation would be only 6 months prior to the
service of the show-cause notice.

Before proceeding further, we would like to set out the relevant
.... \'(\

E items from the Central Excise Tariff. The relevant portion of Item I
26AA of the Central Excise Tariff, at the relevant time read as follows
(with emphasis supplied):

"26AA. Iron or steel products, the following, namely,:
_.,.
-
;
F (ia) Bars, rods, coils wires, joists, girders, angles, other
than slotted angles, channels, other than slotted channels,
tees, beams, zeds, trough, piling and all other rolled, forged
or extruded shapes and sections, not otherwise specified."

Item 68 of the Excise Tariff is the residury item and it ran as
G follows:
~.
"68. All other goods, not elsewhere specified, but
excluding:

(a) alcohol, all sorts, including alcoholic liquors for
H human consumption;
t TATA IRON & SIBEL CO. v. U.0.1. (KANIA, J.I 1029

(b) opium, Indian hemp and other narcotic drugs and
A
narcotics; and

(c) dntiable goods as defined in section 2(c) of the
Medicinal and-Toilet Preparations (Excise Duties) Act
1955 (16 of 1955)."
B
There is an explanation to Item 68, but the same is not relevant for our
purpose.

A perusal of these items makes it clear that forged steel products
are liable to duty in terms of Tariff Item No. 26AA. It is also beyond

J dispute that forged steel goods with which we are concerned would be
covered by Tariff Item No. 26AA(ia) which includes forged or extruded
shapes and sections, not otherwise ~pecified. It is common ground that
the appellant is liable to pay excise duty on the said goods under Tariff
c

Item No. 26AA(ia). The dispute in this connection is what is the stage
at which the said goods could be said to be forged iron and steel
products as contemplated in the said item; whether they could be D
regarded as such as soon as they are forged or after machining and
polishing to remove the excess skin before being supplied to the Indian
Railways. The stand of the appellant is that this machining and polish-
ing which is done in its workshop, is not significant character and
:>- extensive precision machining and polishing has to be done by the
railway at their workshop before the wheels, tyres and axles supplied E
by the appellant can be attached to the rolling stock. The machining
and polishing done in the workshop of the appellant was only in the
nature of shaping by removing the superficial material to bring the
forged items upto with the Railways' specifications. A perusal of Item
~ 26AA would show the excise duty on forged goods covered under the
\ said entry, is according to the weight of the goods. It was contended by F
the appellant that the weight should be measured only after the polish-
ing and machining at the appellant's workshop was completed. It is
obvious that as a result of such machining and polishing there would be
some loss weight on account of excess skin removal. It was on the
other hand contended on behalf of the Revenue, the respondent
herein, that the forging of the goods was complete before the machin- G
>-- ing and polishing was done to remove the excess surface or excess skin.
It appears to us that the aforesaid contention of the appellant deserves
to be accepted. Even to prepare forged goods for supplying to the
Railways, it was essential that the goods should comply with the Rail-
ways' specifications and the excess steel on the surface or the excess
skin as it is called, would have to be removed for that purpose. H
1030 SUPREME COURT REPORTS 11988] 3 S.C.R. ~

Moreover, as pointed out by learned single judge of the Delhi High
A
Court, i11 Metal Forgings Pvt. Ltd. & Anr. v. Union of India & Ors.,
11985] 20 E.L.T. p. 280 at paragraph 12:

"The process of manufacture of forged products con-
sists of cutting of steel, pre-heating of material, heating and
B beating of steel material till final shaping is achieved. The
steel forging process involves open forging process where
the quantity small and drop/close die forging and/or upset
forging process under which the product is made with the

~
help of dies. Thereafter, the extra/unwanted material is
removed by either trimming or by gas cutting or by skin
cutting to achieve the shape and section nearest' to the
c forged steel product required and also the forging clear-
ances specified in the standards by l.S.l./or International.
It is conceded by the Government that forging would not
cease to be forging by processes like removal of superflu-
ous extra skin of cast iron."
D
The learned judge has further pointed out in the next paragraph
of the said judgment that the removal of extra/unwanted surface steel
by either trimming or by gas cutting or by skin cutting of the forged
products must be regarded as incidental or ancillary to the process of 1
manufacture. This view is also consistent with the definition given to
E the term "manufacture" contained in Sub-section (f) of section 2 of the
Central Excises and Salt Act, 1944. Tliis definition shows that the man-
ufacture includes any process incidental or ancillary to the completion
of a manufactured product. We are, therefore, of the view that in
respect of the said goods the weight for the purpose of levy of excise
..-~
duty under Item 26AA(ia) should be taken after the machining and (

F polishing is done to remove the excess surface skin and the contention
of the appellant in this regard must be accepted.

The next question is, whether, as a result of the polishing and
machining done..by the appellant on the siiid goods before supplying
them to the railways the same were transformed into new commercial
G commodities, namely, finished axles, wheels, tyres and so on or
whether these finished or manufactured goods which could be ~
regarded as distinct commercial products came into existence only
after precision machining done at workshops of the Indian Railways to
enable the Railway to put these goods to use to meet the actual requir-
ments of the Railways. It is not the case of the respondent that there
JI were three distinct sets of _g_oods, namely, one the forged steel pro-
TATA IRON & SIBEb CO. v. U.0.1. (KANIA, J.( 1031

ducts, two the manufactured goods supplied by the appellant to the A
Railways and three, the finished goods as turned out from the Indian
Railways' workshops for being used by the Railways. It must be
regarded as common ground that duty under Item No.26AA was pay-
able on the forged products and duty under Tariff Item No. 68 was
payable only at the stage of the completion of the manufacture of the B
finished goods, namely, axles, wheels, tyres and so on. The certificate
issued by A.K. Malhotra, Additonal Director; Railways (Stores)
clearly states that the goods supplied by the appellant to the· Indian
Railways and manufactured at its plant at Jamshedpur are manu-
factured according to specifications and drawings agreed to between
the parties. Axles are supplied to the railways in rough machined
condition and wheels, tyres and blanks are supplied in as "rolled/as c
forged" condition. These wheels/tyres, axles and blanks have to be
sometimes rough machined partially to remove excess steel or man-
ufacturing defects. These products are subsequently precision
machined by the Railways at their workshops before being put to use
to meet the actual requirements of the Railways. There is no challenge D!
to the correctness of this certificate either before the Collector or
before the Trial Court and there is no reason as to why it should not be
taken as correct. The certificate clearly shows that axles supplied by
the appellant to the Railways were in rough machined condition and
wheels,· tyres and blanks were supplied in rough or forged condition.
Sometimes wheels, tyres, axles and blanks had to be even rough E
machined partially at the Railways workshop to remove excess steel or
manufacturing defects. All these products had to be subsequently pre-
I
cision machined by the Railways before being put to use. In these state
of affairs, it is quite clear that the finished goods, namely, finished
wheels, tyres, axles and blanks could be said to have come into exist-
ence only after the precision machining and other processing at the F
Railways' workshops was completed and the appellant is not liable to
pay any duty on these goods as under Item No. 68 of the said Central
Excise Tariff.

We may make it clear that what we have said in the foregoing
paragraphs is applicable to all the goods with which we are concerned G
save and except wheels, tyres and axles manufactured by the appellant
and supplied as composite units. In respect of these composite units, it
is beyond dispute, and it is conceded by the appellant, that it is liable
to pay duty on the same under Tariff Item No. 26AA(ia) as well as
under Tariff Item No. 68. The only contention in "this connection is as
regards the question of limitation to which we shall presently come. H
1032 SUPREME COURT REPORTS [1988] 3 S.C.R.

Regarding the question of limitation, the dispute is whether,
A
assuming that the demand made by the Collector was valid, what is the
period to which it could relate, it being common ground that as far as
composite units comprising wheels, tyres and axles supplied by the
appellant to the Indian Railways are concerned the demand under
Item No. 68 of the Central Excise Tariff was justified. The question
B here is as to whether that demand could extend only to six months
prior to the service of the show cause notice as contended by the
appellant or upto a period of five years prior to that notice as con-
tended by the respondent. In this regard, Section 11-A is the relevant
provision. The said Section has been amended in 1978, but we are not
concerned with that amendment. A perusal of Sub-section (1) of that
Section shows that where any duty of excise has not been levied or
c short levied or short paid or erroneously refunded, the Central Excise
Officer concerned may, within six months from the relevant date,
serve notice on the person chargeable with that duty. This provision
would clearly show that the period for which the demand could be
made was only six months prior to the service of the notice. Now, in
D the present case, it has been found by the High Court and, in our
opinion, rightly that there was no suppression or mis-statement of facts
or fraud by the appellant to which the alleged short levy or non-levy
could be attributed. In fact, it is common ground that right from 1962
the appellant was filing classification lists containing the description of ~
the items and showing them as liable to the payment of excise duty
E only under Item No. 26AA(ia) and these lists were accepted and
approved by the excise authorities. In these circumstances, we fail to
see how it could be said that the appellant was guilty of any suppres-
sion or mis-statement of facts or collusion or violation of the provisions
of Central Excises Act as contemplated under the proviso to Section
11-A of the said Act. In view of this, the period of limitation would -j>
F clearly be only six months prior fo the service of the show cause notice.
The demand for excise duty against the appellant on the said compo-
site units under Item No. 68 of the Excise Tariff, to the extent that it
exceeds the period of six months prior to the service of the show cause
notice must, therefore, be struck down.

.G In our view, the learned judges who delivered the impugned
judgment were in error in taking the view which they took on the .-4,
questions discussed aforesaid, except regarding limitation. The
learned judges have placed considerable reliance on the new classifi-
cation of the Tariff Items in 1985 in considering the trne scope of Item
No. 26AA and Item No. 68 as they stood in 1981. In our opinion, this
H reliance was misplaced.
TATA IRON & STEEL CO. v. U.0.1. [KANIA, J.J 1033

In the result, the appeal is allowed. The appellant is liable to pay A
duty on the goods referred to in the petition other than the composite
units only under Item No. 26AA(ia) of the First Schedule to the_ Cent-
ral Excises Act and the duty will be based on the weight after the
machining carried out in the factory of the appellant to remove the
excess skin or excess surface steel. Secondly, in respect of the com po-·
! )._
site sets, the appellant is liable to pay duty both under Items Nos. B
I
26AA(ia) and 68, but only for a period of six months prior to the
service of the show cause notice. Looking to all the facts and circumst-
ances of the case, there will be.no order as to costs.

R.S.S. Appeal allowed.

-