The Supreme Court has clarified that an appeal from a CESTAT order involving the excisability of goods is not maintainable before the High Court under Section 35G of the Central Excise Act, 1944, because excisability is a question having relation to the rate of duty for the purpose of assessment and falls within the exclusive appellate jurisdiction of the Supreme Court under Section 35L.

The Court held that Section 35L(2) is clarificatory and retrospective in this regard and the process of cutting, grooving, routing and bending aluminium composite panels to suit the design requirements of a building, followed by their installation at site, does not amount to “manufacture” under Section 2(f) because no new and distinct commercial product with a separate name, character or use comes into existence.

The Court also reaffirmed that manufacture requires conjunctive satisfaction of both transformation and marketability, and that the burden to establish marketability as a distinct and independent product lies on the Revenue. Accordingly, the Supreme Court allowed the appeal, held that the process undertaken by the appellant did not result in a distinct product, and set aside the impugned judgment of the High Court.

A Two-Judge Bench comprising Justice J.B. Pardiwala and Justice R. Mahadevan first held that the High Court lacked jurisdiction to entertain the Revenue’s appeal under Section 35G because the dispute related to the excisability of goods, which is a question having relation to the rate of duty for the purpose of assessment and therefore falls within Section 35L. The Bench observed that the determination of excisability is a precursor to assessment and is intrinsically connected with the rate of duty; accordingly, appeals on such issues lie directly to the Supreme Court.

The Bench further held that Section 35L(2), inserted in 2014 to state that determination of taxability or excisability is included within questions having relation to the rate of duty, is clarificatory and retrospective, as it merely makes explicit what was already implicit in the scheme of Sections 35G and 35L. On the merits, the Bench applied the two-fold test for manufacture: first, whether a new and distinct commodity having a different name, character or use emerges; and second, whether the transformed goods are marketable as distinct goods.

The Bench observed that cutting, grooving and bending ACPs merely adapted them for a particular use and did not alter their fundamental nature, identity or use; what entered the process and what emerged remained ACPs. It further observed that installation activities at site equally did not result in creation of any distinct goods.

As regards marketability, the Bench reiterated that marketability is an independent requirement and the burden of proving it lies on the Revenue by objective evidence; mere assertion or reliance on the process undertaken is insufficient. Since no transformation into distinct goods was established, the issue of marketability receded in significance.

Briefly, the appellant-assessee, a construction contractor, imported pre-coated aluminium composite panels (ACPs) in standard sizes on payment of customs duty and used them for exterior façade cladding of buildings. At its premises, the ACPs were cut into required rectangular or square sizes and grooves were made on the reverse side to enable affixation to buildings; thereafter, at site, frames were erected and the cut and grooved ACPs were fixed using angles, clamps and fasteners, with sealant applied between adjacent panels.

Though the appellant had paid excise duty on such activity prior to April 2002, it discontinued payment on the belief that cutting and grooving did not amount to “manufacture” under Section 2(f) of the Central Excise Act, 1944. A show cause notice demanded duty, interest and penalty for the period April 2002 to December 2003 on the footing that the activity amounted to manufacture. The adjudicating authority confirmed the demand, the Commissioner (Appeals) upheld the finding of manufacture while setting aside penalty and interest, the CESTAT held that the Revenue had failed to prove marketability and that no new product emerged, and the High Court, in appeal under Section 35G, reversed the CESTAT and restored the Commissioner (Appeals)’ order.

Appearances:
For Appellants:  Parthasarathy, AOR, Charanya Lakshmi Kumaran, Adv., Nitum Jain, Adv., Neha Choudhary, Adv., Devansh Garg, Adv., Swastik Mishra, Adv., Medha Sinha, Adv.

For Respondents: Venkataraman, A.S.G., Gurmeet Singh Makker, AOR, V.C. Bharathi, Adv., Prashant Singh Ii, Adv., Mukesh Kumar Singh, Adv., Mayank Pandey, Adv., Aman Jha, Adv.