M/S. Cadila Laboratories Pvt. Ltd. Vs. C.C.E. Vadodara
 Insc 75 (13 February 2003)
S.N. Variava & B.N. Agrawal S. N. Variava,
Appeal (civil) 6922 of 1999
Civil Appeal No. 6745 of 1999 is against the
judgment of the Customs Excise & Gold (Control) Appellate Tribunal (CEGAT)
whereas Civil Appeal No. 6922 of 1999 is against the judgment of CEGAT dated 30th July, 1999.
The Appellants in these Appeals manufacture
various drugs. In Civil Appeal No. 6745 of 1999 the concerned drugs are Mebendazole,
Thrimethoprim, Tinidazole and Dexa-methazone. In the process of manufacture of
above drugs certain intermediate products come into existence. For the purposes
of this Appeal the intermediate products are Thiourea Derivatives, 3-4 Diamino Benzophenone,
Anilino Compound, Brown Oil and Epoxy Derivatives.
In Civil Appeal No. 6922 of 1999 the concerned
drug is Ethambutol Hydrochroride. In the process of manufacture an intermediate
product viz. D-2 Aminobatanol Tartrate is also manufactured.
The question in these two Appeals is whether
excise duty is payable on these intermediate products and whether the
Respondents were entitled to the extended period under Section 11A of the
Central Excise and Salt Act, 1944. The questions being common in both the
Appeals they are being disposed off by this common Judgment. In both the cases
it has been held by the CEGAT that the Appellants were liable to pay excise
duty and that the claim was not time barred.
Before the Orders of the Tribunal are considered
it is necessary to set out the law on the subject.
In the case of Union Carbide India Limited vs.
Union of India and others reported in 1986 (2) SCC 547 the question was whether
excise duty was payable on Aluminium cans produced from aluminium. The cans
were in a crude and elementary form. By a further process they were then made
into torch bodies. It was held that in order to attract excise duty the article
must be manufactured and it must be capable of sale to a consumer. It was held
that the expression goods in the Central Excise and Salt Act, 1944 only covers
an article which can ordinarily come to the market to be bought and sold. It
was held that the burden of showing that the goods are marketable was on the
department. In this case the department had shown that on one occasion, the
Appellants (therein) had ordered such aluminium cans from one M/s. Krupp Group
of Industries. It had also been shown that in the past the Appellant had
submitted a price list to the department, which price list included a margin of
profit. It was held that this was not sufficient to show that the product was
marketable. It was held that the instance of purchase from M/s. Krupp Group of
Industries was a works contract and nothing more. It was held that merely
because the Appellant had submitted a price list under a mistaken belief would
not show that the goods were marketable. It was held that as there was no
sufficient material to show that the goods were marketable excise duty was not
payable on the aluminium cans.
In the case of Bhor Industries Ltd., Bombay vs. Collector of
Central Excise, Bombay reported in 1989 (1) SCC 602, the Appellants manufactured leather
clothes, laminated jute mattings and PVC tapes. In the process of manufacture
of such products, an intermediate product viz. a PVC film was manufactured. The
question was whether the Appellant (therein) was liable to pay excise duty on
such PVC film. The department had shown that PVC films or sheets were available
in the market. However, what was available in the market was a finished,
embossed and printed PVC films whereas what was manufactured by the Appellant
was a crude PVC film which had much less tensile strength than that of the PVC
film available in the market. On behalf of the department it was submitted that
if the good was one which fell within the Schedule, then excise duty would be
This argument was repelled. It was held that for
the goods to be excisable they must be known in the market and must be capable
of being sold in the market as goods. It was held that actual sale in the
market was not necessary and that even though it may be used for captive
consumption, they would be liable to excise provided they were capable of being
sold in the market or known in the market as goods. It was held that the excise
duty would be leviable on manufacture of goods as known in the market. It was
further held that it was the duty of the department to adduce proof or evidence
that the PVC films were goods which were marketable.
In the case of Collector of Central Excise,
Baroda vs. M/s. Ambalal Sarabhai Enterprises (P) Ltd. reported in 1989 (4) SCC
112, the Respondents were manufacturing Sorbitel. An intermediate product
"starch hydrolysate" was manufactured. The department contended that
the intermediate product was glucose and excise was payable on it. The question
before the Court was whether the starch hydrolysate manufactured by the
Respondents was goods within the meaning of Central Excise and Salt Act. It was
shown that starch hydrolysate manufactured by the Respondents was highly
unstable and fermented if kept for a day or two. On behalf of the department it
was submitted that the test was not whether the product was unstable and
resulted in fermentation but whether it was capable of being marketed. It was
held that goods with unstable character can be theoretically marketed but that
one had to take a practical approach. It was held that the evidence showed that
hydrolysed starch fermented and decomposed and at higher concentration it crystalised
within two or three days. It was held that this was evidence indicating
propensity of its not being marketed. It was held that this was good evidence
to conclude that it would be unlikely to be marketable. The Court noted that
the department had made no enquiry whatsoever as to whether starch hydrolysate
was ever marketed by anybody. It was held that the department merely relied on
the fact that starch hydrolysate was stored in tanks. It was held that this was
not sufficient as it had been shown that such storage was only for a period of
few hours and only as a step in the process of transfer. It was held that the
burden of showing that the starch hydrolysate was marketable was on the
department. It was held that as no enquiry had been made nor any evidence
produced the department had not discharged the burden. It was held that starch hydrolysate
manufactured by the Respondents were not goods within the meaning of Central
Excise and Salt Act.
In the case of Union of India and another vs.
Delhi Cloth & General Mills Co. Ltd and another reported in 1997(5) SCC
767, the question was whether an intermediate product "calcium
carbide" was excisable. It was shown that the calcium carbide manufactured
by the Respondents was not of a purity that rendered it marketable. It was held
that the rationale for levying excise duty is that the goods, which are
manufactured, must be a distinct commodity as such known in common parlance or
to the commercial community for the purposes of buying and selling. It was held
that the manufacture of calcium carbide by the Respondents was not of the
purity nor was it packed in air-tight container so as to make it marketable. It
was held that the commodity must be marketable as it is and not become
marketable by a further process.
In the case of Collector of Central Excise,
Baroda vs. United Phosphorus Ltd. reported in 2000 (4) SCC 18 certain
intermediate products came into existence in the process of manufacture of
insecticides, fungicides, weedicides and pesticides. The question was whether
those intermediate products were excisable.
It was held that even though an intermediate
product may be one which is specified in the Schedule it was still not subject
to duty unless it satisfied the test of marketability. It was held that the
burden of showing that the goods were marketable was on the department and that
in the absence of any proof by the department it could not be held that the
goods were marketable. It was held that merely because some of the items were
entitled to draw back duty under a Notification did not mean that the test of
marketability was satisfied.
Thus the law is that in order to be excisable,
not only goods must be manufactured i.e. some new product brought into
existence, but the goods must be marketable. By marketable it does not mean
that the goods must be actually bought and sold in the market. But the goods
must be capable of being bought or sold in the market. The law also is that
goods which are in the crude or unstable form and which require a further
processing before they can be marketed, cannot be considered to be marketable
goods merely because they fall within the Schedule to the Excise Act.
The Appellants have all along contented that the
intermediate product manufactured by them are in crude and unstable form. They
have shown that the intermediate products manufactured by them have a
shelf-life of only a few hours unless and until by a further processing they
are purified. In respect of some of the products they have shown that they are
in an impure form. They have also filed affidavits of traders to show that some
of the products are not marketable.
We have seen the Order passed by the Collector
September, 1991 in Civil Appeal No. 6922 of 1999. By the Order dated 18th September, 1991, the Collector had accepted
the Appellants case and dropped the show cause proceedings. However, thereafter
the Central Board of Excise and Customs exercised powers under Section 35-E and
had the matter referred to the Tribunal.
We have also seen the Order dated 19th August, 1993 passed by the Collector
in Civil Appeal No. 6745 of 1999. In this Order the Collector has relied on a
report of a chemical analyser, statements made by one Shri Champaklal Maniklal,
a Manager of the Appellant and a Customs Notification bearing No.14/88-C.
Reliance is also placed on fact that Appellants
store their products in cans for some period of time. Reliance was also placed
on the fact that at one stage the Appellants had bought one of the products
from the market. On this material the Collector concludes that "these
facts make it evident that the impugned products can conceivably be sold to
another industrial user who needs that kind of product".
It is an admitted position that the department
(1) made no efforts to ascertain whether any of
the intermediate products are available in the market;
(2) even if available whether or not products
available in the market are the same as that produced by the Appellant;
(3) none of the intermediate products
manufactured by the Appellants were got analysed by a chemical analyser.
It is admitted that the Report of the chemical
analyser, relied on, was based only on the write up given by the Appellant. In
his cross-examination the chemical analyser admits that there was no facility
available in his laboratory to carry out tests to establish the identity of the
products. He also admits that, except for 3-4 Diamino Benzophenone there was no
reference available, regarding other intermediate products, in the technical
literature available in the laboratory.
At this stage it must be mentioned that the
Customs Notification relied upon does not refer to all the products. Reliance
on such a Notification may be relevant and may show marketability if the goods
are identical. However where a question is raised that goods available in the
market are finished or refined product whereas what is manufactured is in a
crude and unrefined form, the burden would be on the department to show that
what is available in the market is the same as the goods manufactured. In this
case, no attempt is made to find out whether any of these products are bought
or sold in the market and more importantly it has not been verified, by drawing
samples of Appellants' products and getting them chemically analysed, whether
their claim is false. It has not been ascertained whether or not Appellants'
products are in crude and unstable form and/or whether these products had a
shelf life of only a few hours. Mere fact that they are stored in tins or cans
for a short period would not ipso facto lead to the conclusion that the
products were stable.
It is admitted that the Appellants had bought
one of the products from the market at one stage. However, they have explained
that what was bought was in a purer form and the product they manufacture does
not have that purity.
It was for the department to check this. The
department has chosen not to do so.
The burden being on the department it will have
to be held that they have not discharged that burden. The Order passed only on
the basis that these goods "can conceivably be sold" cannot be
sustained in the light of the law which has been set out hereinabove.
The Tribunal thereafter has passed a very
perfunctory Order accepting the reasoning of the Collector. In that Order, the
Tribunal has held as follows:
"that marketability is essentially a
question of fact to be decided in the facts of each case. In the present
matters the fact of purchase of some of the impugned products from the market,
their storage, weighment and storage indicate that the impugned goods can
ordinarily come to the market to be bought and sold. We are, therefore, of the
view that the Department has discharged its onus to prove that the impugned
products are marketable." In Civil Appeal No.6922 of 1999 the Tribunal has
adopted the same reasoning. For the above reasons we hold that it has not been
established that the intermediate products manufactured by the Appellants are
marketable. The demand raised in the show cause notices cannot thus be
The other question raised by the Appellant is
that the extended period under Section 11-A of the Central Excise and Salt Act
was not available to the Revenue.
The law on the subject is also very clear.
In the case of Collector of Central Excise,
Hyderabad vs. M/s. Chemphar Drugs and Liniments, Hyderabad reported in 1989 (2)
SCC 127 the Assessee had not declared the goods under a belief that the
exempted goods were not required to be declared. It has been held that the
period of five years, under the proviso to Section 11-A, requires the
commission of some positive and deliberate act of fraud, collusion,
misstatement, suppression or contravention of a provision of the Act. It is
held that mere inaction or failure on the part of the manufacturer or producer
is not sufficient to extend the period of limitation. It is held that whether
there was any fraud or collusion or wilful misstatement or suppression, is a
question of fact depending on the facts and circumstances of each particular
It is held that mere non-declaration of goods did
not amount to any conscious or deliberate withholding of information.
In the case of M/s. Padmini Products vs.
Collector of Central Excise, Bangalore reported in 1989 (4) SCC 275, the question was whether dhoop
sticks were excisable. The Assessee, in the belief that they were Agarbatis,
had not filed any declaration and had not paid any excise on the same. One of
the questions was whether the extended period, under the proviso to Section
110A, was available to the Revenue. After setting out the above mentioned
judgment, this Court held that there was scope for belief that there was no
need to take out a licence or pay duty at the time of removing dhoop sticks. It
was held that the Assessee was not guilty of either fraud or collusion, or wilful
misstatement or suppression of fact or contravention of any provisions of the
Act and the Rules. It was held that mere failure to pay duty or take out the licence
did not amount to fraud, collusion, misstatement, suppression or contravention
of provisions of the Act. The argument that failure to take out a licence and
taking the goods out of the factory gate without payment of duty was itself
sufficient to infer that the Assessee came within the mischief of the proviso,
In the case of Tamil Nadu Housing Board vs.
Collector of Central Excise, Madras and another reported in 1995 (Supp. 1) SCC
50, the Assessee had two manufacturing units one for commercial purposes and
another for its own use.
The Assessee obtained a licence for the
commercial unit but did not obtain a licence for the unit which was for its own
use. The Assessee claimed that it had been so advised by somebody in the Excise
Department. The Assessee did not lead evidence of the officer who was supposed
to have been so informed by the Excise Department. It was held that mere non
examination of an officer could not give rise to an inference that the Assessee
was intentionally evading payment of duty. It was held that the onus was on the
Department to prove that there was a deliberate act of fraud, collusion,
misstatement, suppression or contravention of the Act. It was held that if
there was any scope for doubt then the proviso to Section 11-A of the Act would
not be attracted. It was held that the department was not entitled to the
In the case of Collector of Central Excise vs.
H.M.M. Limited reported in 1995 (Supp. 3) SCC 322, the show cause notice did
not specifically state as to which of the default enumerated in the proviso to
Section 11-A was committed by the Assessee. It was held that such a notice was
not sufficient as the Assessee must know what case he has to meet. It was held
that mere failure to make a declaration would not justify an inference that the
intention was to evade payment of duty.
In this case, the Appellants had pointed out
that in the same compound they have a sister concern which is also
manufacturing identical intermediate product.
That sister concern had been examined by the
officers of the same Circle. That sister concern had disclosed what intermediate
products were coming into existence. Thereafter no show cause notice was issued
to the sister concern nor were they told that these products were excisable.
The Appellants have contended that they were therefore under a bonafide belief
that these intermediate products were not excisable. It was also pointed out
that prior to 1.3.1986, all the intermediate products were exempted from
payment of excise duty. Thereafter the final product was exempted with the
intention of regulating price of these drugs.
The Appellants claim that they were under a
belief that intermediate products continued to be also exempted as otherwise
the price of the final product would go up. The Appellants also claim that they
were under a belief that as their intermediate products were crude and in an
unstable form and not marketable, the same were not excisable. The Appellant
also by their letters dated 21st April, 1987 and 23rd December, 1987 had pointed out that
these intermediate products came into existence in the manufacture of final
The only ground on which it has been held that
the extended period was applicable is there was suppression by non filing of
the classification list and that in their letters dated 21st April, 1987 and
23rd December, 1987, it has not been set out that these intermediate products
were separated and stored in plastic or tin containers. In our view these are
not sufficient for the purpose of invoking the extended period of limitation.
It could not be denied that no duty was sought to be levied on the same
products manufactured by the sister concern. Therefore it could not be said
that the belief of the Appellants was not bonafide. Further the premises of the
Appellants were visited on 7th April, 1987. The officers saw that the
intermediate products were being temporarily stored in plastic or tin
containers. Thereafter by the letter dated 21st of April, 1987, it is pointed
out that these intermediate products are being manufactured. There was thus no
deliberate act of fraud, collusion, misstatement, suppression or contravention
of the Act.
Mere fact of not filing of the classification
lists is not sufficient to bring into play the extended period of limitation.
It is therefore held that the extended period of limitation, under the proviso
to Section 11-A, was not available.
In this view of the matter, both the Appeals are
allowed. The demand made in the show cause notices are set aside. There shall
be no order as to costs.