Holding

Goods are excisable only if they are marketable, and the burden of proving marketability rests on the Revenue; consequently, the intermediate products were not marketable and the extended limitation period under Section 11‑A did not apply.

Summary

The Supreme Court examined whether excise duty was payable on intermediate pharmaceutical products manufactured by Cadila Laboratories and whether the Revenue could invoke the extended limitation period under Section 11‑A of the Central Excise and Salt Act, 1944. The appellants argued that the intermediates were in a crude, unstable form, had a shelf‑life of only a few hours and were therefore not marketable, and that any claim by the Revenue was time‑barred. The Court held that for goods to be excisable they must be marketable, meaning capable of being bought or sold, and that the burden of proving marketability lies on the department. It found that the Revenue had not produced any evidence that the intermediates were sold in the market, had not chemically analysed the products, and had relied merely on storage in tins and a single purchase of a purer product, which was insufficient. Consequently, the Court concluded that the intermediates were not marketable and that the extended period under Section 11‑A was not applicable as there was no deliberate fraud or collusion. Both appeals were allowed and the show‑cause demands were set aside.

Issues considered

Whether the intermediate pharmaceutical products manufactured by Cadila Laboratories are marketable within the meaning of the Central Excise and Salt Act, 1944.
Whether the Revenue can invoke the extended limitation period under the proviso to Section 11‑A of the Central Excise and Salt Act, 1944.
Who bears the burden of proving marketability of the goods.

Legislation cited

Central Excise and Salt Act, 1944s. 11-A, s. 35-E
Indian Evidence Act, 1872

Subjects

excise dutyintermediate productsmarketabilitySection 11-Aextended limitation periodburden of proofpharmaceutical manufacturingcustoms notification

Judgment

A MIS CADILA LABORATORI.ES PVT. LTD.
v.
C.C.E. VADO DARA

FEBRUARY 13, 2003

B [S.N: VARIAVA AND B.N. AGRAWAL, JJ.]

Central Excise and Salt Act, 1944:

Excise duty-Levy of-On intermediate products-Held, in order to be
C excisable goods not only must be manufactured, but the same must be
marketable-Burden to prove marketability is on the Revenue-Evidence Act,
1872.

E
'Marketable '.....,;.Meaning of-In the context of Central Excise and Salt,
Act, 1944.

Show cause notice was issued to the appellant-manufacturer to pay.
excise duty on the intermedia.te products derived in the process of ·
-
manufacture.

The. case of the app'ellant-manufacturer was that the intermediate
F products were not liable to excise duty as the same were in crude and
unstable form and were not marketable; and that the claim was time
barred .and extended period u/s 1lA of Central Excise and Salt Act, 1944
was not available to the Revenue as the appellant-manufacturer had not
declared the goods under bona fide belief that the products were not
excisable.
G /
'
Collector placed reliance on the report of chemical analyser. He also
relied on a Customs Notification, as also on the facts that manufacturers
st.ored their products in cans for some period, and had bought one of the
products from the marke~. and held that the products could be sold to
another industrial user who needed that kind of product. However,
H 1048
CADILA LABORATORIES PVT. LTD ''· C.C E VADODARA ] 049

accepting the case of the appellant-manufacturers he dropped the show A
cause proceedings.

On reference, the Central Excise and Gold Appellate Tribunal
accepted the reasoning of the Collector and held that purchase of some of
the products from the market, their storage, weighment and storage
indicated that the products were marketable and hence liable to duty; and B
that the claim was not time barred. Hence the present appeals.

Allowing the appeals, the Court

HELD: 1.1. In order to be excisable, not only goods must be
manufactured i.e. some new product brought into existence, but the goods C
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
1 of being bought or sold in the market. 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 D
they fall within the Schedule to Central Excise and Salt Act, 1944.
[1053-H; 1054-A, B[

.. 1.2. 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 E
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 F
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 G
the products were stable. [1055-B-D)

1.3. 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 H
1050 SUPREME COURT REPORTS [2003] 1 S.C.R.

A 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 those goods "can conceivably be sold"
cannot be sustained. 11055-E-F)

Union Carbide India Limitedv. Union of India and Ors., (1986] 2 SCC
B 547; Bhor industries Ltd., Bombay v. Collector of Central Excise, Bombay,
[1989) 1 SCC 602; Collector of Central Excise, Baroda v. Mis Ambalal
Sarabhai Enterprises (P) Ltd. [1989) 4 SCC 112; Union of India and Anr. v. >- .,....

Delhi Cloth & General Mills Co. Ltd., [1997) 5 SCC 767 and Collector of
Central Excise, Baroda v. United Phosphorus Ltd., [2000) 4 SCC 18, relied
on.
c
2. The extended period of limitation, under the proviso to Section
11-A was not a\lailable. There was no deliberate act of fraud, collusion,
misstatement, suppression or contravention of the Act. Mere fact of not t
filing of the classification lists is not sufficient to bring into play the
D extended period of limitation. [1058-D)

Collector of Central Excise, Hyderabad v. Mis. Chemphar Drugs and
Liniments, Hyderabad, (1989] 2 SCC 127; Mis. Padmini Products v. Collector
of Central Excise, Bangalore, [1989] 4 SCC 275; Tamil Nadu Housing Board r
-(
v. Collector of Central Excise, Madras and Anr., [1995] Supp. 1 SCC 50 and
E Collector of Central Excise v. H.M.M. Limited, (1995] Supp. 3 SCC 322,
referred to.

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 6475 of 1999.

From the Order dated 20. 7.1999 of the Customs Excise and Gold
F (Control) Appellate Tribunal New Delhi in Appeal No. E/2748/93-C against
Order No. 619/99-C.

WITH

Civil Appeal No. 6922 of 1999. ,..
G
Anil B. Divan, G. Choudhary, M.L. Verma, V. Lakshmi Kumaran,
. Bhargava V. Desai, Siddhartha Choudhary, Sanjeev Kumar Singh, Ms. Vibha
Datta Makhija, Amit Mahajan, Ms. Bharti Tyagi, B. Krishna Prasad arid D.S.
Mahra for the appearing parties:

H The Judgment of the Court was delivered by
CAD ILA LABDRATDRIES PVT LTD.,.. CC E. VADODARA [VARIAVA. l] J 05 J

S.N. VARIAVA, J. Civil Appeal No. 6745 of 1999 is against the A
judgment of the Customs Excise & Gold (Control) Appellate Tribunal
(CEGAT) dated 20th July. 1999, 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_, B
Thrimethoprim, Tinidazole and Dexa-methazone. In the process of manufacture
J. of above drugs certain intennediate products come into existence. For the
purposes of this Appeal the intermediate products are Thiourea Derivatives,
3-4 Diamino Benzophenone, Aniline Compound, Brown Oil and Epoxy
Derivatives. In Civil Appeal No. 6922 of l 999 the concerned drug is C
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 11 A of the Central Excise and Salt Act, l 944. D
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.
E
In the case of Union Carbide India Limited v. Union of India and Ors.,
reported in (1986] 2 sec 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. h was held F
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 d·epartment. In this case the department had shown that on one
occasion, the Appellants (therein) had ordered such aluminium cans from one G
Mis. Krupp Group of Industries. It had also been shown that in th~'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
Mis. 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 H
1052 SUPREME COURT REPORTS f2003] 1 S.C.R.

A 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 v. Collectvr of' Central
Excise, Bombay i·eported in [ 1989) I SCC 602, the Appellants manufactured
B leather clothes, laminated jute meetings ahd 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
C 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 payable. This argument was
repelled. It was held that for the goods to be excisable they must be known
D 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 t~
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 leviabie on
. I
E 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 v. Mis. Ambalal
Sarabhai Enterprises (P) Ltd., reported in ( 1989) 4 SCC I 12, the Respondents
F 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
G 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
H hydrolysed starch fermented and decomposed and at higher concentration it
CADILA LA BORA TORIES PVT LTD.•·. C.C.E. VADODARA [VARIAV,O.,l.] I053
crystalised within two or three days. h was held· that this was evidence A
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 B
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 C
were not goods within the meaning of Central Excise and Salt Act.

In the case of Union of India and Anr. v, Delhi Cloth & General Mills
Co. Ltd and Anr., reported in [1997) 5 SCC 767, the qu.estion was whether
an intermediate product "calcium carbide" was excis.able. It \Vas.-shown that
the calcium carbide manufactured by the Respondents was not of a purity D
that rendered it marketable. It was held that the rati.onale 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- E
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 farther process.

In the case of Collector of Central Excise, Baroda v. United Phosphorus
ltd. reported in [2000) 4 sec 18 certain intermediate products came into
existence in the process of manufacture of insecticides, fungicides, weedicides F
and pesticides. The question was whether those intermed/ate products were
excisable. It was held that even though an intermediate pr\)duct 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 G
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 H
1054 SUPREME COURT REPORTS f2003l I S.C.R.

A 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 la\\ also is that goods which are in
the crude or unstable form and which require a fu1ther processing before they
B 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
C 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 on 18th September,
D 1991 in Civil Appeal No. 6922of1999. By the Order dated 18th Septernber,
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
'E 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 ~tage the Appellants had bought one of the products from
F 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 has (I) made no efforts
to ascertain whether any of the intermediate products are available in the ,-
G 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 Repo1t of the chemical analyser, relied on,
was based only on the write up given by the Appellant. In his cross7
H examination the chemical analyser admits that there was no facility available
CADlLA LABORATORIES PVT_ LTD 1·. C.C_E_ VADOD.\RA [VA RIA VA. J ! 1055

in his laboratory to carry out tests to establish the identity of the products. A
He also ad111its that. except for 3-4 Dia111ino Benzophenone there \\·as no
reference available. regarding other intennediate products, in the technical
literature available in the laboratory.

At this stage it 1nust be 1nentioned that the Custo111s Notification relied
upon docs not refer to all the products. Reliance on such a Notification n1ay B
be relevant and 111ay sho\v 1narketability if the goods are identical. l-~o,vever
-...\ \vhere a question is raised that goods available in the 1narket are fir.ished or
refined product whereas what is 1nanufactured is in a crude and unrefined
form, the burden would be on the department to show that what is available
in the 111arket is the same as the goods manufactured. In this case, no atte1npt C
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 sho11 D
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 1narket at one stage. Ho\vever, they have explained that \Vhat \vas bought
\vas in a purer form and the product they 111anufacture does not have that
E
purity. It \vas for the departinent to check this. The departn1ent 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, F
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 e,ach case, In the present matters the fact of purchase of G
some of the impugned products fron1 the market, their storage.
\Veighment and storage indicate that the impugned goods can ordinarily
come to the market to be bought and sold. We are, therefore, of ihe
view that the Departn1ent has discharged its onus to prove that the
impugned products are 1narketable."
H
1056 SUPREME COURT REPORTS [2003] I S.C.R.

A In Civil Appeal No.6922 of I 999 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 sustained.

· The other question raised by the Appellant is that the extended period
B 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 v. Mis. Chemphar
Drugs and Liniments, Hyderabad reported in [ 1989] 2 SCC 127 the Assessee
had not declar.ed the goods under a belief that the exempted goods were not
C required to be declared. It has been held that the period of five years, under
the proviso to Section 11-A, requires the commissior 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
D 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 case. It is held that mere non-declaration of
goods did not amount to any conscious or deliberate withholding of
information.

E In the case of Mis. Padmini Products v. Collector ofCentral Excise,
Bangalore, reported in [1989] 4 SCC 275, the ques.tion .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 9uestions was whether the extended period, under the proviso to Section
F I lOA, 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 h"eld that mere failure to pay duty or take
G out the licence did not amount to fraud, collusio~, 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, was negatived.

H In the case of Tamil Nadu Housing Board v. Collector of Central
CADILA LABORATORIES PVT.LTD .-. C.C.E. VADODARA [VARIAVA. JJ ] 057

Excise, Madras and Anr., reported in [ 1995] Supp. I SCC 50; the Assessee A
had two manufacturing units one for co1nmercial purposes and another for its
O\Vn use. The Assessee obtained a licence for the con1n1ercial unit but did not
obtain a licence for the unit which was for its O\vn use. The Assessee clai111ed
that it had been so advised by somebody in the Excise Depa1tment. 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 B
of an officer could not give rise to an inference that the AsSessee \Vas
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 1.1-A of the Act C
would not be attracted. It was held that the department was not entitled to the
extended period.

In the case of Collector of Central Excise v. 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 D
committed by the Assessee. It was held that such a notice was not sufficient
; as the Assessee must know what case he has to 1neet. It was held that mere
failure to 1nake 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 E
they have a sister concern which is also 1nanufacturing identical intennediate
product. That sister concern had been examined by the officers of the same
Circl~. That sister concern had disclosed what intennediate products were
coining into existence. Thereafter no sho\v cause notice was issued to the
. sister concern nor were they told that these products were excisable. The p
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. I 986, 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 G
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 fonn and not marketable, the sa1ne were not excisable.
The Appellan.t also by their letters dated 21st April, 1987 and 23rd December,
1987 had pointed out that these intermediate products came into existence in H
1058 SUPREME COURT REPORTS [2003] I S.C R.

A the manufacture of final product.

The 011 ly 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
B 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
C 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 1
of not filing of the classification lists i~ not sufficient to bring into play the
D extended period of limitation. It is th\!refore 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.
E
K.K.T. Appeals allowed.