Holding

A cylinder liner that has been fully machined ceases to be a crude iron casting and becomes a dutiable machine part under Entry 68, and earlier exemption does not bar the levy of duty.

Summary

PEFCO Foundry Chemicals Ltd manufactured cylinder liners by casting iron and then machining and honing them before delivering the goods to Indian Railways. The Central Excise authorities treated the liners, at the time of supply, as fully machined machine parts liable to duty under Entry 68, while the appellant argued they remained crude iron castings exempt under Entry 25. The Tribunal held that the contract was for "fully machined cylinder liners" and that the goods had ceased to be mere cast iron once they left the factory, making them dutiable. The Supreme Court affirmed the Tribunal's finding, stating that excise duty is levied on the manufacture of a good, not its later use, and that earlier exemption classifications do not estop the department from levying duty. Consequently, the appeal was dismissed with costs.

Issues considered

Whether cylinder liners, after machining and honing but before final railway processing, constitute a machine part liable to excise duty under Entry 68 of the Central Excises and Salt Act.
Whether a prior exemption classification for cylinder liners as crude iron casting precludes the authorities from issuing a notice and levying duty on the same item.

Legislation cited

Central Excise Rules, 1944s. Rule 8
Central Excises and Salt Act, 1944s. 4

Subjects

excise dutycylinder linermachine parttariff classificationexemptionCentral Excise Actmanufactureestoppel

Judgment

PEFCO FOUNDRY CHEMICALS LTD. A
v.
COLLECTOR.6J'·CENTRAL EXCISE, PUNE
•' FEBRUARY 19, 1992

(AM. AHMADI, K. RAMASWAMY AND R.M. SAHAI, JJ.] B

Central Excises and Salt Act, 1944/Central Excise Rules, 1944 :

Section 4/Rule 8-Entry 68--Cylinder liner-Manufactured and sup-
plied after machining and honin15Whether identifiable as machine C
part-Whether e.xigible to duty. .

The appellant was manufacturing cylinder liner by casting molten
iron in specific shape. The rough surface of the cylinders was removed
and after ma10hining and honing it was delivered to Railways.
D
The respondent took the view that at the time the cylinders were
supplied to Railways, they became identifiable as machine part attracting
duty. According to the appellant, the cylinders continued to he iron
1 casting and only after Railways further treated the cylinders with honing
and chrome plating, they became machine_ parts and excisable under the
Central Excises & Salt Act, the duty being exigible under Entry 68. E
On appeal, the Tribunal gave a finding that by the time the goods
were cleared from the factory, they ceased to be casting and assumed the
charader of fully machined cylinders, identifiable as such and exigible to
duty under Entry 68.
F
Being aggrieved against the Tribunal's order, the assessee preferred
the present appeal.

The appellant contended that till the cylinder liner was finaUy
processed by the Railways, it was incapable of being used as machine part, G
and as such no excisable commodity came into being at the time when the
cylinder liners were supplied to,.Railways.

It was also contended that the authorities were precluded from issuing
notice and adjudicating whether the cylinder liner was a machine part, since
in respect or an earlier period the classification list claiming it as iron H
891
892 SUPREME COURT REPORTS [1992] 1 S.C.R.

A casting and th11s exempt from duty, has been approved by the authorities.

Dismissing the appeal, this Court,

HELD: 1. The Tribunal found that the contract in pursuance of
which the goods were manufactured was for supply of 'fully machined
B cylinder liner'. The Railways would not have accepted the cylinder unless it
tallied with the specification. There was no dispute before the authorities
that first machining and honing was done in assessee's factory. Also, from
the letter issued by Railways, it is clear that what was supplied by appellant
·was fully machined cylinder liner. That was the contract as well. Thus, the { -
C tribunal's finding that the contract was for supply of, 'fully machined
cylinder liners' stands supported by the letter of Railw~ys also. The
i . Tribunal, in the circumstances, was justified in recording the finding that by
the time the goods cleared from factory they had.ceased .to be casting, and
had assumed the character of fully machined cylinder liner or fully machined
or proof machined cylinders which were identifiable as such. Since duty
D under Centra.1 Excises and Salt Act is leviable on manufacture of goqds
produced, the ·cylinder liner became exigible to duty under Entry 68. The
duty of excise is on manufacture of a good and not on its use, as in the instant
case, by the Railways. [894G-H; 89SA, D, G-H; 896A)

Tatalron&SteelCo.Ltd. v.Unionoflndia, [1988] 3SCR1025; Union of
E
India v. Delhi Cloth & General Mills Ltd., [1963] 1 SCR 587 referred to.

2. Once the tribunal found that cylinder liner ceased to be cast
iron it is obvious that the department could not be precluded from levying
duty on it subject to the law of limitation. Since show cause notice which
F resulted in these proceedings was for a period other than for which
proceedings had been dropped, it cannot be said to be review proceed·
ings. [896B]

Plasmac Machine Mfg. Co. Pvt. Ltd. v. Collector of Central Excise, AIR
G 1991 SC 999 relied on.
CIVIL AP PELLATE JURISDITION : Civil Appeal No. 4457 of1984.

From the Order dated 17.8.1984 of the Customs Excise and Gold
{Control) Appellate Tribunal, Delhi in Appeal No. ED {SB) 776/83- B)
H Order No. 623 - Bl 84.
PEFCO CHEMICALS v. COLLECTOR [SAHAI, J.] 893

R.F. Nariman, Sumant Bhardwaj, B.R.Agarwala and Sunil Goyal for A
the Appellants.

A.Subba Rao, A.D.N. Rao, G.V.Rao and P. Parmeswaran for the
Respondents.
B
The Judgment of the Court was delivered by

R.M. SAHA!, J .. Two questions arise for consideration in this
appeal directed against the order of the Customs, Excise & Gold (Control)
Appellanie :Tribunal Special Bench 'B'. One, whether cylinder liner
manufactured by the appellant out of ir.on casting identifiable as machine C
part was exigible to duty under tariff item no. 68 or it continued to be iron
casting and thus exempt under Notification issued under sub-rule (1) of
Rule 8 of Central Excise Rules. Second, whether the authorities were
precluded from issuing notice and adjudicating if the cylinder liner was a
machine part, even though for an earlier period the classification list D
claiming it as iron casting, thus exempt, had been approved.

Cylinder liner was manufac_tured by the appellant by casting molten
iron in specific shape. By itself it was of no use. This could be said to be
first stage. Its rough surface was thereafter removed. And after machining
and honing it was delivered to the Railways. According to department it E
became identifiable as machine part. This was second stage. The Railways
further treated it with honing and chrome plating before putting it to use.
There is no dispute that on the first stage it is an iron casting which is
exempt under item no. 25. Nor there is any dispute that at the third stage
it is an excisable commodity. The only dispute is if at the second stage F
when it was supplied )Jy the appellant to the Railways it could be subjected
to duty. According to the appellant till its final processing by the Railways
it did not become a machine part. . It continued to be iron casting. It is
claimed that merely because it was supplied to Railways or that it became
identifiable as a machine part no duty was attracted as no excisable
commodity came into being. Reliance was placed on Tata Iron & Steel Co.
G·
Ltd. v. Union of India, [1988] 3 SCR 1025. It was urged that this Court
having held that rough machining before supplying after removing the
excess layer of steel commonly referred to as excess skin did not convert
the iron steel into wheels, tyre, and axle. According to learned counsel the
principle of this case squarely applied to facts of the case. Reliance was H
894 SUPREME COURT REPORTS (1992] 1 S.C.R.

A also placed· on Union of India v. Delhi Cloth & General Mills Ltd., (1%3] 1
SCR 587. The main plank of the argument was that till cylinder liner was
finally processed by. the Railways it was incapable of being used as a
machine part.

To appreciate the submission it is necessary to extract tariff item 25
B which reads as under :

"25. IRON IN ANY CRUDE FORM-including pig iron,
11
scrap iron, molten iron or iron cast in any other shape or size.

Notification No. 74/62 issued on 24A.1%2 as amended by Notifica-
c tion no. 119/64 dated 27.6.1%4, under sub-rule (1) of Rule 8 of Central
Excise Rules, 1944 is extracted below :

"Exemption to iron in any crude form produced from old iron
or steel scrap.- In exercise of the powers conferred by sub-rule
(1) of Rule 8 of the Central Excise Rules, 1944, the Central
D
Government hereby exempts iron in any crude form including
pig, iron, scrap, iron, molten iron or iron case in any other
shape or size failing under !\em no. 25 of the First Sechedule
to the Central Excises and Salt Act, 1944 (1 of 1944), and
produced out of old iron or steel scrap or scrap obtained from
E duty-paid virgin metal, is with ·effect from 1st March, 1964,
exempted from the payment of the excise duty leviable thereon."

In the classification list exemption was sought on cylinder liner by
describing it at serial no. 4 as under :

F "4. Cylinder liners to Part No. 10123416 which is not identifi-
able part in that it is partially machined only and not ready for
use."

The description of the goods as, partially machined, does not appear
to be correct. The tribunal found that contract in pursuance of which the.
G goods were manufactured was for the supply of, 'fully machined cylinder
liner.' And in absence of any material it was obvious that the Railways
would not have accepted the cylinder unless it tallied with the specification.
There was no dispute before the authorities that first machining and honing
was donein assessee's factory. According to appellant it was only akin to -./J.
H removal of rough layer as in Tata's case whereas according to department
PEFCO CHEMICALS v. COLLECTOR (SAHA!, J.] 895

it was much more and it resulted in rendering it as machine part. The A
· Collector. observed,'

"However, the specifications given by these clients state in
particular that the first machining and honing is to be done at
the assessee's end. The process mainly covers grinding which
is defined as 'Reducing to size by removing material by contact B
with a rotating, abrasive wheel; plane or cylindrical surfaces
may be very accurately finished with regard to size and shapes'
(as per Dictionary of Mech. Eng. Alfred Del Vecchio and
Chambers' dictionary of Sc. and Tech.) Similarly, the term
honing is defined as, 'a term applied to fine textured even C
grained indurated sedimentary rocks, which· may be used for
imparting a keen edge to cutting tools, replaceable by silicon
carbide products'. ( ... as per Chambers' dictionary of Sc. &
Tech.)."

It is thus obvious that the processing undertaken in assessee's factory D
to render the cylinder liner .as fully machined resulted in changing the
, goods from crude cast iron in size and shape to an identifiable commodity.
"> The duty of excise is on manufacture of a good and not on its use.

Reliance was placed on a letter issued by the Controller of Stores E
Indian Railways Diesel Locomotive Works, Varanasi stating therein :

"Thus, it would be completely out of question to use the cylinder
liners fully machined and after first honing as supplied by the
suppliers in the engine without further processing (chrome
plating and honey combing) howsoever uniform and smooth F
the cylinder liners supplied by the manufacturers may be."

In our opinion it does not help the appellant. In Tata Iron & Steel
Co. (supra) it was admitted in the letter of Railway that what was supplied
was rough machined or forged condition. But from the letter extracted G
above it is clear that what was supplied by appellant was fully machined
cylinder liner. That was the contract as well. The tribunal's finding that
the contract was for supply of, 'fully machined cylinder liners' thus stands
supported even by the letter of Railways. The tribunal in the circumstan-
ces, in our opinion, was justified in recording the finding that by the time
3' the gooos cleared from factory they had ceased to be casting, and had H
896 SUPREME COURT REPORTS [199~] 1 S.C.R.

A assumed the character of fully machined cylinder liner or fully machined
or proof machined cylinders which were identifiable as such. Since duty
under Excise and Salt Act is leviable on manufacture of goods produced
the cylinder liner became exigible to duty under Entry 68.

Once the tribunal found that cylinder liner ceased to be cast iron it
B is obvious that the department could not be precluded from levying duty
on it subject to the law of limitation. Since show cause notice which
resulted in these proceedings was for a period other than for which
proceedings had been dropped, it was not review as urged by the learned
counsel for appellant. In Plasmac Machine Mfg. Co. Pvt. Ltd. v. Collector
C of Central Excise, AIR 1991 SC 999 it was held by the court, of which one
of us (R.M.Sahai, J.) was a member, that if an item was found dutiable
then the department could not be prevented from levying duty on it
because it had earlier approved classification as there is no estoppel against
statute.

D In the result this appeal fails and is dismissed with costs.

G.N. Appeal dismissed.

r
'

-