Case: Hindustan Poles Corporation Vs. Commissioner Of Central Excise, Calcutta

5. In these appeals, the appellants have challenged the show-cause-notice issued by the Additional Collector of Central Excise, Calcutta - 1. The said notice was issued on the ground that by the process of welding of electric resistant pipes/tubes of different diameters, which are duty paid, and purchased from the open market, results in a new product and, hence, is liable to excise duty under the Residuary Entry i.e. erstwhile Tariff Item 68 upto 27.2.1986, and thereafter under Tariff Item 7308 the period from 28.2.19866. In pursuance to the Finance Ministers Budget speech of 1984, a Study Groups was constituted to review the Central Excise Tariff with a view to rationalize it. The Study Group in its report has mainly recommended:-(1) To rationalize the Central Excise Tariff to make it more scientific and detailed one duly supported by formal Rules of Interpretation and clarificatory notes so as to avoid classification disputes;(2) To omit non-specific Tariff Item 68 and re-classify the goods covered by it under the respective class of goods of new Tariff;(3) To incorporate the concept of Manufacture in the selective Tariff entries, wherever needed;(4) To minimize the multiplicity of effective rates of duty;(5) To extend Proforma Credit/Set-off procedure to all products with few exceptions;(6) To devise long term flawless scheme for exemption to Small Scale Sector;(7) To provide for the issue of administrative rulings on classification of goods;(8) Change in the departmental stand on classification of goods to have prospective effect only; and(9) Change in Excise procedures to make them more simplified with a view to avoid complications and disputes7. Based on these recommendations of the Technical Study Group, the Central Excise Tariff has been delinked from the Central Excise Act and is an independent enactmentThe main features of the new Excise Tariff are:-(a) Central Excise Tariff has been made more detailed and comprehensive after taking into account all Technical and Legal aspects(b) It is based on a system of classification derived from international convention of Harmonised Commodity Description and Coding System (HSN) with such Contractions or Modifications as are necessary to fall within the scope of levy of Central Excise Duty(c) Goods of the same class have been grouped together to enable parity in treatment(d) It contains Section/Chapter notes giving detailed explanation as to the scope and ambit of the respective Section/Chapter. These notes have been given statutory backing and have been incorporated at the top of each Section/Chapter(e) Special provision has been incorporated in respective Chapters in relation to the goods which poses problem in the matter of levy of excise duty(f) General residuary Tariff Item 68 has been dispensed with and instead residuary items have been provided separately for each class of goods under each Chapter(g) Interpretative rules have also been provided to serve as statutory guideline for interpreting the Tariff Schedule(h) To preserve by and large the existing duty structure to the extent possible(i) Government will have, for the first time, the power to raise duty through notification in certain circumstances but subject to limits provided in the proposed enactment(j) To continue the present practice of granting exemption from duty under Rule 8 of the Central Excise Rules8. The other salient feature of the new Central Excise Tariff is that it adopts the principle of classifying all goods beginning with the raw materials and ending with the finished products within the same Chapter. Thus for the purpose of grouping various products, the New Tariff does not distinguish between the raw materials and semi-manufactured products and finally manufactured products except for a few exceptions. The New Tariff is designed to group all goods relating to the same industry and all the goods obtained from the same raw material under one Chapter in a progressive manner10. According to the appellants, the process carried out is mere joining of three pipes of different diameters with one another to obtain the desired length. This is done by a process of welding of pipes. The pipes do not lose their original character, and get converted into something, which is a commercially distinctive product. Pipes/poles do not lose their original character and identity as pipes. The pipes retain their character as pipes, hence, no process of manufacture as per Section 2(f) of the Central Excise Act is carried out. According to the appellants, the duty paid pipes which are purchased by the appellants are classified under Tariff Item 26AA (iv) upto 27.2.1986 and thereafter under Tariff Item 7306.90 as pipes from 28.2.1986Tariff Item 26AA(iv) reads as under:No. 26AA(iv): Pipes and tubes (including blanks therefore) all sorts, whether rolled, forged, spun, cast, drawn, annealed, welded or extrudedAfter 28.2.1986, the said pipes were classified under Sub-heading 7306.90 of the Schedule, which reads as under:Heading No. 73.06: Other tubes, pipes and hollow profiles (for example, open seam or welded, riveted or similarly closed) of iron or steel11. According to the appellants, the essence of manufacture is the transformation of one item into another for marketable purpose12. The appellants submitted that the Additional Collector of Central Excise, Calcutta has erroneously relied upon the judgment of the Central Excise & Gold (Control) Appellate Tribunal (for short CEGAT) in the case of Associated Strips Pvt. Ltd. vs. Collector of Central Excise. This judgment has been overruled by a judgment of this Court dated 22.7.1991 passed in Civil Appeal No. 6212 of 1990 filed by the Associated Strips Pvt. Ltd. The respondent Department is seeking to classify the poles manufactured by the appellants under Tariff Item 7308.90 which is a Residuary Entry under Heading 73.08 pertaining to Structures. According to the appellants, the respondent Department has not discharged the burden of proving how the poles fall under Residuary Entry of Structures by mere process of welding. The burden to prove manufacture is always on the Revenue, as has been held by this Court in a series of cases and reiterated in a recently decided case Shyam Oil Cake Ltd. vs. Collector of Central Excise, Jaipur reported in 2005(1) SCC 26413. Reverting to the facts of this case, the relevant part of the show-cause-notice was sent by the respondent - Additional Collector of Central Excise Calcutta to the appellants on 11.1.1989 reads as under:-It appears that M/s. Hindustan Poles Corporation, a partnership firm having their office at 4A, Marcus Square, Calcutta-7 and works at 120A, Manicktola Main Road, Calcutta-54 (hereinafter referred to as the said firm) manufacturer of Steel Tubular Poles (hereinafter referred to as the said goods) classifiable under Chapter Sub-heading No. 7308.90 of the Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) and which was classifiable under Tariff Item 68 of the erstwhile Central Excise Tariff before the introduction of the Central Excise Tariff Act, 1985 have contravened the provision of Section 6 of the Central Excises & Salt Act, 1944 (hereinafter referred to as the said Act) read with rule 174 and the provisions of rule 9(1), 173B, 173C, 173G(1) & (2) read with rules 52A, and 173G(4) read with rules 53 and 54 and 226 of the Central Excise Rules 1944 (hereinafter referred to as the said rules) with the intent to evade payment of Central Excise duty leviable on the said goods by suppressing material fact relating to production and clearance of the said goods and by abusing the concession granted under Notification No. 178/85 dated 1.8.85 and No. 175/86 dated 1.3.86 as amended in as much as the said company manufactured in and removed from their works at 120A, Manicktola Main Road, Calcutta-54It was further mentioned in the notice as under:3(b)(i) In course of visit of works on 20.12.88 and from the statement dated 20.12.88 submitted by the said firm it was learnt that the said goods are manufactured from E.R.W. Tubes in three sections of suitable length and thereafter the higher and smaller dia pipes are made red hot and reduced to relevant smaller dia pipes through manual hammers. Electric power is also used for maintaining an uniformity during cutting of big size pipes into smaller ones. The higher dia pipes will be such that smaller dia pipes are allowed to enter and cool by natural process. The joints of the above pipes are swaged to give a circumferential grip at the joints and the step of each reduction shall be uniform and with a surface inclination of 45 degree at the transition point to shed water. This is a new product viz. Steel Tubular Poles has emerged out of the steel pipes (E.R.W. Tubes) as stated aforesaid which is a manufactured product within the meaning of definition of manufacture as given in Section 2(f) of the said Act14. The appellants immediately had sent reply to the said notice. The relevant portion of the reply reads as follows:E.R.W. Tubes of different dia reduced at one end to require smaller dia by red hot heat wherein-in the tube of the smaller dia is inserted through manual hammering in three section, where-after the joints at the entering points are swaged to give a circumferential grip with a surface inclination of 45 degree to shad water. Power is used in cutting the pipes of bigger length into smaller lengths. The resultant product, via, Pole thus emerges out as a new article involving process of manufacture within the meaning of Section 2(f) of the Act2.5. Even though the joints of the three sections of the Pole are welded during the course of making the joints and the resultant Pole is painted by using of paints and varnishes before delivery, nothing was mentioned about the using of electric are welding used for welding the joints as also of paints and varnishes used for painting, although it was found on scrutiny of the Balance Sheet that a regular and recurring expenses is incurred by us for (a) cutting and welding, and (b) paints and varnishes for paintingIn this reply, it is also mentioned that the process undertaken by the appellants was merely joining pipes of three different dias one with the other to desired length whereby no new goods and/or article other than pipes does emerge out inasmuch as even after such process of joining the pipes one with the other they do not lose their identity as M.S. Welded pipes and thus does not attract the mischief of Section 2(f) of the Act, since the process of mere welding of pipes of three different dias one with the other is not a process of manufacture within the meaning of Section 2(f) of the Act15. According to the order of the Collector of Central Excise, Calcutta-I dated 30.7.1991 the process which had been undertaken by the appellants is that the poles are brought out under the new Tariff Item No. 7308.90 and the appellants are under an obligation to pay duty and penalty16. The appellants, aggrieved by the order of the Collector of Central Excise, Calcutta, preferred Appeal Nos. E-SB-571 and E-SB-582 of 1991 before the CEGAT. CEGAT, while affirming the judgment of the Collector of Central Excise, stated that the essence of manufacture is transformation of one item into another for marketable purpose. The resultant product, in the instant case, is having a distinct name, character and use. The same is the result of transformation by application of labour. According to the CEGAT, pipes and poles are two different and distinct items known in the market. As such, it cannot be said that there is no process of manufacture involvedThe appellants aggrieved by the said judgment have approached this Court.

Court's reasoning:
We have also carefully perused the pleadings and examined a series of cases decided by this Court. The following conclusions are irresistible:1) The process carried out by the appellants do not change the basic identity or original character of M.S. Welded Pipes to make it a new marketable product leading to manufacture as defined under Section 2(f) of the Central Excise Act, 19442) The burden to prove manufacture is always on the Revenue. In the instance case the Revenue has completely failed to prove that the activity carried out by the appellant amounts to manufacturing. It is settled law that when one particular item is covered by one specified entry, then the Revenue is not permitted to travel to residuary entry3) The residuary entry is meant only for those categories of goods which clearly fall outside the ambit of specified entries. Unless the Department can establish that the goods in question can by no conceivable process of welding be brought under any of the tariff items, resort cannot be had to be residuary item36. In view of the settled legal position the activity of the appellants of merely joining of three pipes, one with other, of different dimensions to obtain a desired length can by no stretch of imagination be brought within the category of manufacture