SIDDHARTHA TUBES LTD.versusCOMMISSIONER OF CUSTOMS & CENTRAL EXCISE, INDORE (MP)

                SIDDHARTHA TUBES LTD.                                            A
                          v.
   COMMISSIONER OF CUSTOMS & CENTRAL EXCISE, INDORE
                        (MP)

                           DECEMBER 16, 2005
                                                                                 B
                [ASHOK BHAN AND S.H. KAPADIA, JJ.]


      Excise:

      Central Excise Act, 1944-Section 4-Assessabl~ value-Of m.s. C
galvanized pipes-Pipes manufactured out of H.R. coils subjected to various
processes including galvanization resulting in formation of m.s. galvanized
pipes-Galvanization took place before the final product was cleared from
the place of removal-It added to quality of the final product and increased
its value-Held: Process of galvanization which gave value-addition was D
incidental to the manufacture-Hence, cost incurred by assessee for
galvanization includible · in assessable value of the m.s. galvanized pipes.

      Pipes manufactured out of H.R. coils were subjected to various processes
including galvanization resulting in formation of m.s. galvanized pipes.
Galvanization took place before the final product was cleared from the place     E
of removal, as defined under Section 4(4)(b). It added to quality oftlte final
product and increased its value.

      In the present appeals which concerned the period May, 1994 to July,
1996, the question which arose for consideration is whether the cost incurred p
by assesee-appellant for galvanization was includible in assessable value of
the m.s. galvanized pipes.

      Partly allowing the appeal, the Court

       HELD: 1.1. Value is the function of price under Section 4(4)(d)(i) of the G
Central Excise Act, 1944. The concept of "valuation" is different from the
concept of "manufacture". Under Section 3 of the Act, the levy is on the
manufacture of the goods. However, the measure of the levy is the normal
price, as defined under Section 4(1)(a) of the Act. (855-H; 856-AI

                                     851                                         H
    852                     SUPREME COURT REPORTS (2005) SUPP. 5 S.C.R.

A          1.2. It is not disputed that galvanization as a process does not amount to
    manufacture. However, on facts, it has been found by the Commissioner that
    the process of galvanization has taken place before the product is cleared
    from the place of removal, as defined under Section 4(4)(b ). Further, on facts,
    the Commissioner has found that galvanization has added to the quality of the
B   product. It has increased the value of the pipes. Hence, the costs incurred by
    the assessee for gal~anization had to be loaded on to the sale price of the pipes.
    Therefore, the cost had to be included in the assessable value of m.s. galvanized
    pipes. This Court does not find any error in the reasoning of the adjudicating
    authority. [856-B, CJ

C         1.3. The product cleared from the factory was m.s. galvanized pipes.
    Galvanization had given value addition to the m.s. pipes. The process of
    galvanization was incidental to the manufacture of the m.s. galvanized pipes
    and, therefore, the cost of that process was rightly included in the assessable
    value. No error is found in the concurrent findings recorded by the
D   Commissioner and by the Tribunal. (855-F, G; 857-G(

         Procter & Gamble Hygiene & Health Care Ltd v. Commissioner of
    Central Excise, Bhopal, (2005) 9 Scale 559 and Union of India & Ors. v.
    Bombay Tyre International Ltd, AIR (1984) SC 420, relied on.

E        Sidhartha Tubes Ltd v. Collector ofCentral Excise, (2000) 115 ELT 32
    and Hindustan Polymers v. C.C.E., (1989) 43 ELT 165, referred to.

          2. A penalty ofRs.10 lacs was imposed by the Commissioner. On appeal,
    it has been reduced to Rs. 7.5 lacs. No reasons have been given for imposing
    the penalty. The matter has arisen at the stage of assessment. The appellant
F   has succeeded, in showing that the cost of rubber rings (p.p.ri~gs) was not
    facludible in the assessable value of the m.s. galvanized pipes. The matter
    was, therefore, arguable. Hence, the penalty of Rs. 7.5 lacs is set aside.
                                                                  (857-H; 858-AJ

G         CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 4247-4248 of
    2000. .

         From the Judgment and Order dated 16.3.2000 of the Customs, Excise
    and Gold (Control) Appellate Tribunal, New Delhi in F.O. No. 152/2000-A and
    Misc.0. No. 36/2000-A in A. No. E/1183/97-A with E/Misc. No. 512of1999-
H A.


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    SIDDHARTHA TUBES LTD. v. COMMR. OF CUSTOMS & CENTRAL EXCISE [KAPADIA, J. J853

         J. Vellapally, Pradeep Aggaiwal, Ragevesh Singh for Sushi! Kr. Jain and     A
    Ms. Pratibha Jain with him for the Appellant.

        G.E. Vahanvati, Solicitor General, Rajeev Dutta, T.A. Khan, Rupesh
    Kumar and P. Parmeswaran with them for the Respondent.

          The Judgment of the Court was delivered by                                 B
          KAPADIA, J. The short question which arises for determination in
    these civil appeals filed by the assessee under section 35-L(b) of the Central
    Excise Act, 1944 (hereinafter referred to as "the Act") is - whether there was
    value addition on account of galvanization includible in the assessable value    C
    of m.s. galvanized pipes. In these civil appeals, we are concerned with the
    period May 1994 to July 1996.

          Appellant was engaged inter alia in the manufacture of m.s. galvanized
    pipes. These pipes were made from H.R. coils. The pipes emerging on hydro
    testing stage were pickled in acid, washed in running water and galvanized       D
    by dipping in molten zinc.

          The appellant filed its classification list claiming that "galvanization"
    did not amount to manufacture. The appellant claimed that m.s. galvanized
    pipes were non-excisable goods, as the said pipes had been processed out
    of duty paid m.s. pipes manufactured in its factory. A show-cause notice was E
    issued by the department stating that the appellant had cleared m.s. pipes
    without adding the cost of galvanization. Accordingly, the department alleged
    under-invoicing. According to the appellant, there were two sections in its
•   factory, namely, "tube mi,11 section" and "galvanizing section". According to
    the appellant, 30% of its total production was in m.s. pipes cleared from tube F
    mill section and the balance 70% of the pipes were transferred to another
    section, known as galvanizing section, in which the fully finished m.s. pipes
    were galvanized. According to the appellant, the process of galvanization
    took place after completion of the manufacture of the m.s. pipes, which were
    cleared on payment of duty and since the process of galvanization took place G
    after completion of m.s. pipes and since galvanization did not amount to
    manufacture, the department was not entitled to load the cost of galvanization
    on the nonnal price of m.s. pipes.

          Shri Joseph Vellapally, learned senior counsel appearing on behalf of
    the assessee submitted that the process of galvanization did not amount to H
    854                     SUPREME COURT REPORTS [2005] SUPP. 5 S.C.R.

A    manufacture, both on general principles as well as under section 2(f) of the
     said Act. He submitted that in the matter of levy of excise duty, the taxable
     event takes place at the point where the goods are cleared from the licensed
     premises and, therefore, the value of a product at the time of clearance should
     be taken into account. In this connection, he urged that the assessee was a
B    registered company having its factory at Sarangpur, district Rajgarh, Madhya
     Pradesh and was inter alia engaged in the manufacture of m.s. pipes and
     tubes. He further pointed out that the assessee had two sections in its
     factory, one named a.s tube mill section, in which the assessee manufactured
     m.s. pipes and tubes. For manufacture of m.s. pipes and tubes, steel coils,
     strips and slits of required thickness were purchased from the market by the
C    assessee. These items were then rolled in, welded and cut to required lengths
    and to ensure smoothness, grinding was carried out throughout the lengths
     of the pipes. The edges of the pipes were subjected to the process of
    elimination of uneven edges. The pipes were then subjected to hydro testing
    and threading. Learned counsel submitted that at this stage, the manufacture
D   of pipes got completed and they became marketable. According to the assessee,
     the above entire process was carried out in "tube mill" section. The appellant
    sold about 30% of the entire production of m.s. pipes from the tube mill
     section to its wholesale dealers after payment of duty under sub-heading
     7306.90. The balance 70% of the pipes manufactured in tube mill section were
     transferred to another section known as "galvanizing section'', which was far
E    away from the tube mill section and in a different shed. According to the
    assessee, in the galvanizing section, the fully finished m.s. pipes were
    galvanized. They were washed in ru1ming water and dipped in molten zinc.
     According to the assessee, galvanization of pipes and tubes was done in
    order to protect the pipes from rusting. Apart from this, the assessee also
F   purchased from the market fully finished black pipes, which were also subjected
    to process of galvanization in the galvanizing section and thereafter sold as
    m.s. galvanized pipes. Learned counsel urged that "galvanization" did not
    amount to manufacture and since 70% of the assessee' s production of black
    pipes was transferred to the galvanizing section and since it was not disputed
G   that black pipes were in fully finished forms, and that, they were cleared from
    tube mill section on payment of duty, the cost of galvanization was not
    includible in the assessable value. According to the learned counsel, as soon      .._'
    as manufacture of m.s. pipes became complete, the product became capable
    of being bought and sold; the tariff description contained in sub-heading
    7306.90 also stood answered and levy got attracted at that stage alone under
H   section 3 of the said Act. That, in any event, even assuming for the sake of
SIDDHARTHA TUBES LTD. v. COMMR. OF CUSTOMS & CENTRAL EXCISE [KAPADIA, J. J855

argument that the process of galvanization amounted to manufacture on the A
facts of this case, galvanization as a process took place after completion of
m.s. pipes and, therefore, the cost of galvanization was not includible in the
assessable value.

        Shri G.E. Vahanvati, learned Solicitor General submitted on b~'1alf of the
department that the question involved in these appeals related to assessment B
 of duty under section 4 of the Act and not on the excisability of the goods.
 He submitted that the concept of "valuation" was different from the concept
of "manufacture". He submitted that in the present case, the goods were
cleared as m.s. galvanized pipes. He submitted that the customers were charged
by the assessee for purchase of m.s. galvanized pipes. Learned counsel C
submitted that in the matter of valuation, one has to ascertain the "normal
price" under section 4 of the Act. Learned counsel urged that in cases of
"value addition", the cost of ~ process hcidental to the manufacture of m.s.
galvanized pipes has got to be taken into account. Learned counsel submitted
that per se the process of "galvanization" may not amount to manufacture. D
However, if such a process was incidental or ancillary to the manufacture of
 m.s. galvanized pipes then the cost of galvanization has got to be included
 in its assessable value. In this connection, learned counsel relied upon the
judgment of this Court in the case of Sidhartha Tubes Ltd. v. Collector of
Central Excise, reported in (2000) 115 EL T 32; and the decision in the case
of Procter & Gamble Hygiene & Health Care Ltd. v. Commissioner of E
Central Excise, Bhopal, reported in (2005) 9 Scale 559.

      In the present case, the commissioner on facts found that the assessee
was clearing from its factory galvanized pipes classifiable under heading
73.06. It was not disputed that the process of galvanization by itself did not F
amount to manufacture, but when the assessee was selling its product (m.s.
galvanized pipes) manufactured out ofH.R. coils aftP.r passing through various
processes (including galvanization) then such a process gave value addition
to the product and consequently, the cost of galvanization had to be included
in the assessable value. Galvanization added to the quality. Galvanization
increased the value of pipes. It enriched the value of goods and, therefore, G
the cost incurred by the assessee for galvanization was required to be included
in the assessable value.

      At the outset, we may state that value is the function of price under
section 4(4)(d)(i) of the Act. The concept of"valuation" is different from the H
    856                    SUPREME COURT REPORTS [2005) SUPP. 5 S.C.R.

A concept of "manufacture". Under section 3 of the Act, the levy js on the
    manufacture of the goods. However, the measure of the levy is the nonnal
    price, as defined under section 4(l)(a) of the Act. It is not disputed that
    galvanization as a process does not amount to manufacture. However, on
    facts, it has been found by the commissioner that the process of galvanization
B   has taken place before th product is cleared from the place of removal, as
    defined under section 4(4)(b). Further, on facts, the commissioner has found
    that galvanization has added to the quality of the product. It has increased
    the value of the pipes. Hence, the costs incurred by the assessee for
    galvanization had to be loaded on to the sale price of the pipes. Therefore,
    the cost had to be included in the assessable valu.e of m.s. galvanized pipes.
C   We do not find any error in the reasoning of the adjudicating authority.

          In the case of Union of India & Ors. v. Bombay Tyre International Ltd,
    reported in AIR (1984) SC 420, this Court observed as follows:

           " ...... the price of an article is related to its value, and into that value
D          one has to pour several components, including those which enrich the
           value of the product and which give to an article its marketability in
           the trade. Therefore, the expenses incurred on account of the several
           factors, which have contributed to th.e value of the product up to the
           date of sale, are liable to included in the assessable value."
E
         Recently, this court in the case of Procter & Gamble Hygiene & Health
    Care (supra), has observed as foliows:

                 "9. This case relates to valuation. At the outset, we would like to
           clarify certain concepts under the Excise Law. The levy of excise duty
F          is on the "manufacture" of goods. The excisable event is the
           manufacture. The levy is on the manufacture. The measure or the
           yardstick for computing the levy is the "normal price" under section
           4( I )(a) of the Act. The concept of "excisability" is different from the
           concept ·or "valuation". In the present case, as stated above, we are
           concerned with valuation and not with excisability. In the present.
G
           case, there is no dispute that AMS came under sub-heading 3402.90
           of the Tariff. There is no dispute in the present case that AMS was
           dutiable under section 3 of the Act. In the case of Union of India &
           Ors etc. v. Bombay Tyre International Ltd etc., reported in AIR (1984)
           SC 420, this Court observed that the measure of levy did not
H
SIDDHARTHA TUBES LTD. v. COMMR. OF CUSTOMS & CENTRAL EXCISE [KAPADIA, J. J857

       conclusively detennine the nature of the levy. It was held that the         A
       fundamental criterion for computing the value of an excisable article
       was the price at which the excisable article was sold or was capable
       of being sold by the manufacturer. It was further held that the price
       of an article was related to its value and in that value, we have several
       components, including those components which enhance the                    B
       commercial value of the article and which give to the article its
       marketability in the trade. Therefore, the expenses incurred on such
       factors inter alia have to be included in the assessable value of the
       article up to the date of the sale, which was the date of delivery.

            10. In the case of Sidhartha Tubes Ltd. v. Collector of Central C
       Excise, reported in (2000) 115 EL T 32, this court held that the process
       of galvanization, though did not amount to "manufacture", resulted in
       value addition and, thPrefore, the galvanization charges were includible
       in the assessable value of the M.S. black pipe.

           11. The concepts of "manufacture" and "valuation" are two D
       different and distinct concepts. In the present case, we are concerned
       with valuation. Value is the function of price under section 4(l)(a) of
       the said Act... ."

      In the case of Hindustan Polymers v. C.C.E., reported in 1989 (43) ELT       E
165, this Court has held that the normal price for which goods are sold at the
factory gate has to be taken as the assessable value and addition thereto has
to be made where, in addition to the price, the manufacturer levied a charge
for an item which was intrinsically necessary to place the manufactured goods
on the market.
                                                                                   F
      In the present case, we find that the product cleared from the factory
was m.s. galvanized pipes. Galvanization had given value addition to the m.s.
pipes. The process of galvanization was incidental to the manufacture of the
m.s. galvanized pipes and, therefore, the cost of that process was rightly
included in the assessable value. We do not find any error in the concurrent G
findings recorded by the commissioner and by the tribunal.

     Before concluding, we may point out that in the present case, a penalty
of Rs. I 0 lacs was imposed by the commissioner. On appeal, it has been
reduced to Rs.7.5 lacs. No reasons have been given for imposing the penalty.
The matter has arisen at the stage of assessment. The appellant has succeeded      H
    858                    SUPREME COURT REPORTS (2005) SUPP. 5 S.C.R.

A   in showing that the cost of rubber rings (p.p. rings) was not includible in the
    assessable value of the m.s. galvanized pipes. The matter was, therefore,
    arguable. Hence, we set aside the penalty of Rs.7.5 lacs.

          Accordingly, the appeals are partly allowed, with no order as to costs.

B B.B.B.                                                   Appeal partly allowed.
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