Citation Codes

Equivalent Citations

citation codes

Case Number

C.W 1358 of 1975 & C.M 1063/1977.

Attorney(S)

For the Petitioners:— Mr. F.S Nariman, Sr. Advocate, with Mr. R.N Banerjee and Mr. R.P Kapur, Advocates.
— Mr. Charanjit Talwar with Miss Avinash Mahajan, Advocates.

Judges

Mr. Justice V.S. Deshpande
Mr. Justice H.L. Anand

Acts

Central Excise and Salt Act, 1944 (hereinafter) referred to as the Act)
Rule 9 of the Rules.
PETROLEUM ACT 1934
section 2 (e)

See more information ...

Smart Summary

Case Summary — Opinion of V.S. Deshpande, J.

Factual and Procedural Background

The petitioner manufactured calcium carbide in a factory where various chemicals were produced by separate plants. Until 1967 the petitioner sold calcium carbide in the market; thereafter the petitioner used its entire production of calcium carbide for captive consumption to generate acetylene gas within its factory. The calcium carbide was tapped from the furnace in molten form, cooled and solidified in trays, then broken into cakes and fed to acetylene generators situated in the same premises.

Entry 14AA was inserted in the First Schedule to the Central Excise and Salt Act, 1944, making calcium carbide assessable to ad valorem excise duty for the period relevant here (1-3-1970 to 30-9-1975). The Superintendent, Central Excise (order dated 5 January 1972), the Appellate Collector (order dated 25 November 1972) and the Central Government (order dated 16 September 1975) held that the petitioner's calcium carbide was assessable to excise duty. The petitioner filed a writ petition seeking quashing of those orders.

The opinion considers the requirements of sections 3 and 4 of the Central Excise and Salt Act, 1944 and Rules 9 and 49 of the Rules framed thereunder, and also examines the applicability of the Carbide of Calcium Rules, 1937 (made under the Petroleum Act, 1934).

Legal Issues Presented

Whether the calcium carbide produced by the petitioner constitutes "goods" within the meaning of the Act (section 3), considering material, economic and legal aspects.
Whether an article "of the like kind and quality" as the petitioner's product is sold or capable of being sold for the purposes of determining value ad valorem under section 4.
Whether the assessable value can be determined under section 4 at the time of "removal" of the article, in circumstances where the product is directly transferred within the same factory for captive use.
Whether the transfer of calcium carbide from the calcium carbide plant to the acetylene plant, when both plants are in the same factory, constitutes "removal" from the factory for the purpose of levy and collection of excise duty (drawing on Rules 9 and 49 and the definition of "factory" in section 2(e)).

Arguments of the Parties

Petitioner's Arguments

The calcium carbide produced is an intermediate product used solely for generation of acetylene gas in the same factory and is not a marketable "goods" in the sense of the Act.
The product is not marketable because in naked form it deteriorates (turns to dust on exposure to air) and only becomes "goods" when it attains commercial purity and is packaged in compliance with Chapter III of the Carbide of Calcium Rules, 1937.
Because it is not marketable, an assessable value cannot be determined under section 4—no article of the like kind and quality is sold or capable of being sold.
The product is not "removed" from the factory; the transfer from the calcium carbide plant to the acetylene plant is an intra-factory transfer and therefore does not trigger determination of value at removal or levy of excise duty.

Union of India / Respondents' Arguments

The product manufactured by the petitioner is calcium carbide as covered by tariff entry No. 14AA of the First Schedule and is liable to ad valorem excise duty.
Even though the petitioner used its product for captive consumption after 1967, the product remains "goods" within the meaning of the Act and was sold in the market prior to 1967.
Compliance with the Carbide of Calcium Rules (e.g., packaging or commercial purity) does not determine whether excise arises; excise is on manufacture, not on sale.
The calcium carbide (or an article of like kind and quality) is sold or capable of being sold, and captive consumption within the factory amounts to "removal" within the meaning of Rule 9 of the Rules.
The respondents pointedly did not deny that the movement of the product took place within the same premises; they contended the movement from one plant to another nonetheless constituted removal.

Table of Precedents Cited

No case law precedents were cited in the provided opinion; the opinion relies on statutory provisions, rules and standards.

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The court began by setting out the statutory prerequisites for imposition of excise duty under the Act and Rules: (1) the levy applies only to "goods" (items with economic significance: value, utility, exchangeability); (2) calcium carbide at entry 14AA is assessable ad valorem and its value is to be determined as the cash price of an article of the like kind and quality; (3) value must be determined at the time of removal from the factory; and (4) "factory" is defined by section 2(e) to include any premises in which excisable goods are manufactured.

The court approached the core question whether the petitioner's product is "goods" by analyzing three aspects: material, economic and legal.

Material aspect: the court considered whether the substance produced had the material composition and form of calcium carbide as contemplated in the First Schedule and noted the Indian Standards Institution specification for Calcium Carbide Technical. The respondents produced evidence that the molten carbide was solidified and cut into cakes of specified sizes for use in generators. The petitioner, via rejoinder, asserted that 74% of its production did not meet commercial purity per the Indian Standards Institution specifications, i.e., was sub-standard.

Economic aspect (marketability): the court examined whether the product had utility and exchangeability. It acknowledged that sub-standard products may still be marketable depending on degree of deficiency, and that the petitioner's cakes, being usable in acetylene generators, could be usable by others. However, in the absence of actual evidence of market sales of the product in its present form, the court could not conclusively call it marketable on material and economic grounds alone.

Legal/regulatory aspect: the court placed decisive weight on the Carbide of Calcium Rules, 1937 (made under the Petroleum Act, 1934). Chapter III of those rules expressly regulates and, to an extent, prohibits transport, storage, delivery, despatch and sale of calcium carbide except in compliance with safety and packaging requirements; Rule 20 refers to "commercially pure" in inverted commas, indicating regulatory recognition that calcium carbide must attain a certain degree of purity to be marketable. Thus, the court found that the Rules create a legal bar to marketability unless their requirements are met, and that calcium carbide that has not attained the statutory material form and purity is not marketable and therefore not "goods" within the economic sense of section 3.

The court also noted that Chapter V of the Carbide Rules separately contemplates use of calcium carbide for generating acetylene gas, indicating the Rules' designers foresaw that calcium carbide which does not meet the marketability requirements (Chapter III) might nonetheless be used as an intermediate material for acetylene production.

On the second issue—whether an article of the like kind and quality is sold or capable of being sold for section 4 valuation—the court concluded that because the petitioner's product had not attained the material form/composition required by the Carbide Rules and because those Rules legally barred marketability, the product was not capable of being sold. Therefore, valuation under section 4, which requires that an article of like kind and quality be sold or capable of being sold, could not be made.

On the third issue—the temporal requirement for determining assessable value at the time of "removal"—the court accepted the petitioner's untraversed assertion that the calcium carbide was transferred directly from the carbide plant to the acetylene plant within the same factory premises and was not removed from the factory to any other place. The respondents did not dispute the intra-factory movement but contended that such movement amounted to removal. The court referred to the definition of "factory" in section 2(e) (which includes the whole premises in which excisable goods are made) and to Rules 9 and 49, concluding that the requisite event for fixation of value—removal from the factory—had not occurred. Therefore, even assuming arguendo that the product were "goods" and assessable, the legal requirement of removal for levy and collection had not been satisfied.

The court therefore reasoned in two complementary strands: (a) because of regulatory requirements and lack of marketability the product is not "goods" in the economic/legal sense required by section 3 and is not capable of valuation under section 4; and (b) alternatively, even if the product were a "good," excise can be levied only upon removal from the factory and no such removal (beyond intra-factory transfer) occurred so long as the product remained within the combined premises.

Holding and Implications

Holding: The writ petition is allowed and the impugned orders of the Superintendent dated 5 January 1972, of the Appellate Collector dated 25 November 1972, and of the Central Government dated 16 September 1975 are quashed.

Implications:

Direct effect: The specific administrative orders assessing and directing levy and collection of excise duty on the petitioner's calcium carbide production were quashed; the petitioner succeeds on the writ petition. The court ordered no costs.
Scope: The court's decision rests on the factual and legal findings set out above—chiefly the marketability/regulatory bar created by the Carbide of Calcium Rules, 1937 and the absence of removal from the factory for purposes of determining value under section 4. The opinion does not purport to establish a broader rule beyond the facts and legal framework considered in the case.

Petition allowed.

Show full summary ...

The Delhi Cloth & General Mills Co. Ltd. & Another Petitioners v. The Joint Secretary, Govt. Of India & Another S

V.S Deshpande, J.:— The levy and collection of excise duty on goods listed in the First Schedule to the Central Excise and Salt Act, 1944 (hereinafter) referred to as the Act) can be done only after the relevant requirements of the Act and the Rules are satisfied. In the present case, the following requirements of section 3 and 4 of the Act and Rules 9 and 49 of the Rules framed thereunder are relevant:

(1) The duty can be imposed only on “goods”, i.e things which have an economic significance, that is value, utility, exchangeability, etc.

(2) Since the Calcium Carbide listed under entry 14AA of the Schedule is assessable to duty ad valorem, its value would be deemed to be the cash price for which an article of the like kind and quality is sold or capable of being sold.

(3) The value has to be determined at the time of the removal of the article chargeable to duty from the factory or any other premises of manufacture or production for delivery at the place of manufacture or production.

(4) “Factory” is defined by section 2 (e) to mean any premises, including the precincts thereof, wherein or in any part of which excisable goods are manufactured subject to any manufacturing process connected with their production.

2. We are concerned with the Act and the Rules as they existed from 1-3-1970 when the goods produced by the petitioner became liable to duty on the insertion of entry 14AA in the First Schedule to the Act to 30-9-1975 when the Act was amended. The existing clause (b) of sub-section (1) of section 4 of the Act is not, therefore, applicable to this case. Similarly, the residuary entry 68 making assessable to duty all other goods not elsewhere specified, manufactured in a factory but not excluded by the said item is also not applicable.

3. The undisputed facts are that the petitioner used to manufacture Calcium Carbide and sell the same till 1967. In the petitioner's factory various chemicals are manufactured by separate plants. There is an independent plant in which Calcium Carbide is manufactured. Since, 1967 however, the petitioner started using Calcium Carbide manufactured at its factoiy for the manufacture of acetylene gas in their acetylene gas plant. Since the whole quantity of Calcium Carbide produced by the petitioner is consumed in the manufacture of acetylene gas, the petitioner does not sell Calcium Carbide as such. The Calcium Carbide produced in the petitioner's factory is tapped from the furnace in liquid form and is placed in small trolly trays, where it is allowed to cool and solidify. The solid is then broken into cakes of desired sizes.

4. The petitioner contends that the calcium carbide manufactured by it is only of intermediary product, which is used for the generation of acetylene gas in the same factory. This intermediary product is not known to the market as calcium carbide for the following reasons:

1. It is not “goods” as known to the market. By its very properties, calcium carbide in its naked form, turns into dust if it comes into contact with air in the atmosphere due to the reaction of the moisture in the air on it. It can become “goods” only when it attains commercial purity and is put into containers as prescribed by the provisions of Chapter III of the Carbide of calcium Rules, 1937. The calcium carbide used by the petitioner for the generation of acetylene gas does not comply with these statutory provisions and is not, therefore, “goods”.

2. Since it is not marketable, its assessable value cannot be found under section 4, because no such article of the like kind and quality is sold or is capable of being sold.

3. It is not removed by the petitioner from its factory and hence the question of levy and collection of duty on it at the time of its removal does not arise.

4. The calcium carbide plant and the plant for the production of acetylene gas are both situated in one factory of the petitioner. The passage of calcium carbide from the former plant to the latter plant is not, therefore, its removal from the factory to any other place.

5. The orders of the Superintendent, Central Excise, Division Kota, dated 5th January, 1972, that of the Appellate Collector, dated 25th November, 1972 and that of the Central Government, dated 16th September, 1975 have, however, held that Calcium Carbide manufactured by the petitioner is assessable to levy and collection of such duty on it. The petitioner, therefore, seeks by this writ petition to get these orders quashed.

6. The Union of India has opposed the writ petition on the ground that what is manufactured by the petitioner is Calcium Carbide as mentioned in tariff entry No. 14AA of the First Schedule to the Act and as such is liable to ad valorem duty. This product was actually sold in the market till 1967 by the petitioner and even thereafter is “goods” within the meaning of the Act. The applicability of the Calcium Carbide Rules to this product does not arise as the petitioner does not transport the calcium carbide, but uses the entire production for captive consumption in its factory. The packaging of the calcium carbide is not relevant in the present case as the entire Calcium Carbide production is used by the petitioner for the manufacture if acetylene gas. Compliance with the Carbide of Calcium Rules in respect of this product by the petitioner is not a condition precedent for the product to become excisable. At any rate, excise duty is levied on manufacture and not on sale. Calcium Carbide of the like kind and quality is sold or is capable of being sold and is, therefore, assessable to duty under section 4 (b) of the Act. The use of the calcium carbide for captive consumption by the petitioner amounts to its removal in terms of Rule 9 of the Rules. Significantly, the defence is silent as to whether the Calcium Carbide is removed from the factory of the petitioner. The defence does not say that removal from one plant to the other plant, when both the plants are situated in the same factory, amounts to removal from the factory.

7. Let us consider the contentions of the petitioner vis-a-vis the legal requirements for the levy and collection of such duty set out above seriatim.

(1) Is the calcium carbide produced by the petitioner “goods”? The question has three aspects, material, economic and legal. Goods are matter. The material composition of goods shows whether the goods is in a form in which it has utility, value or exchangeability. Things which are in a raw or unfinished or an intermediate stage of formation will have to be examined with a view to see if they have reached a form of the goods as contemplated in the list of goods given in the First Schedule to the Act. What is raw, unfinished or intermediate as distinguished from a finished product, may often ‘be a question of degree, but, as Justice Holmes has said, many distinctions in law are often distinctions of degree.

8. Considerations of the material aspect of goods will be incomplete unless its economic aspect is examined. It is only if the term mentioned in the First Schedule is in a usable form that it can have economic significance. If will then have utility and exchangeability. To other words, it will have a meaning for the market. In economics market is not a place, but is the quality of goods which make them useful and exchangeable or saleable.

9. Lastly, the use and exchange of goods is often regulated by law. Unless the relevant rules are complied with, an article may not be useful or exchangeable and that may be an additional reason why it may not be “goods”.

10. Applying these tests to the substance manufactured by the petitioner, we have to see if it is carbide of calcium within the meaning of entry 14AA of the Schedule. As for the material composition of the substance manufactured by the petitioner, the Standard specification of calcium carbide are given in the Indian Standard specification for Calcium Carbide Technical issued by the Indian Standards Institution. The gas yield of Calcium Carbide is given at page 5 of the booklet issued by the Indian Standards Institution. The respondents point out that the Calcium Carbide produced in the molten form is solidified and broken into cakes for use in the acetylene gas plant. The petitioner has four generators for acetylene gas, two of which are small and the other two are very big. The small generators are fed with Calcium Carbide of 1-80 mm size, while the bigger ones are fed with Calcium Carbide of 80-250 mm size. The petitioner points out in the rejoinder that on the pleadings of the respondents themselves 74 per cent of the production of the so-called Calcium Carbide of the petitioner is not commercially pure as per the Indian Standards Institution specifications.

11. This would mean that the substance produced by the petitioner is sub-standard judged from the Indian Standards Institution specifications. This would, however, not necessarily make it unmarketable. The marketability would itself depend on the degree by which the product falls below the standard. It is not possible to lay down a hard and fast line as to when a sub-standard product becomes marketable and when it falls below the line of marketability. For instance, a car may be marketable if it or it may not have a roof, but it may not be marketable if it has no engine or no brakes. Since the substance in the form of cakes cut to required sizes is usable by the petitioner in its acetylene gas plant, it would also be usable by someone else for the generation of acetylene gas. It would then be saleable as being useful for that purpose. In the absence of actual evidence, it cannot, however, be said if the substance manufactured by the petitioner can be called in its material and economic senses Carbide of Calcium and whether it can be saleable as such.

12. What is decisive in the present case, however, is the law relating to the marketability of calcium carbide. Chapter III of the Carbide of Calcium Rules, 1937 made under the Petroleum Act, 1934, as applied to carbide of calcium prohibits the transport of Calcium Carbide its storage, its delivery or despatch and its sale, except after complying with the safety precautions prescribed by the rules and particularly by the provisions of Chapter III thereof. Most of these safely requirements do not have to be complied with by the petitioner because the petitioner is not storing, transporting, despatching, delivering or selling Calcium Carbide. It is particularly notable that the petitioner does not have to ensure that the calcium carbide produced by it is “commercially pure”. The significance of these statutory rules is two-fold. Firstly, they create a legal bar to the marketability of Calcium Carbide except in accordance with the rules. Secondly, the use of the expression “commercially pure” in Rule 20 in inverted commas shows that even statutory rules recognise that the calcium carbide must attain the requisite degree of purity before it can be rendered commercial or marketable. This lends substance to the view that Calcium Carbide is not “goods” unless it is marketable. Since the requirements of the Rules are not satisfied by the product of the petitioner because it has not attained the material form and purity required by the Rules, the product does not seem to be economical “goods” within the meaning of section 3 of the Act.

13. It is significant that Chapter V of the Carbide of Calcium Rules separately deals with use of Calcium Carbide for the generation of acetylene gas. This shows that it was within the contemplation of the framers of these Rules that the Calcium Carbide which does not comply with the requirements of Chapter III of the Rules as to its marketability can nevertheless be used for the generation of acetylene gas. Calcium carbide is used as an intermediate product or material which may not be otherwise marketable for the generation of the acetylene gas.

(2) The second question is whether an article of the like kind and quality, as the product of the petitioner, is sold or is capable of being sold within the meaning of section 4. Before section 4 of the Act can be applied to the product of the petitioner, it has to be seen that an article of the like kind and quality is sold or is capable of being sold within the meaning of section 4. Since the duty on this product is ad valorem, its value has to be found under s. 4. In the present case, it cannot be done unless it is shown that the product is sold or is capable of being sold. It is not disputed that after 1967 this product by the petitioner is not sold. The question is whether an article of the like kind or quality is sold or is capable of being sold. The words “of the like kind and quality” are important. They mean that it is not the calcium carbide which is actually marketable because it complies with the Carbide of Calcium Rules which is for consideration before us. On the contrary, the product under consideration is one which is neither sold nor is capable of being sold. The reasons for its non-marketability are already given above in dealing with the question whether it is “goods” within the meaning of section 3. The same reasons show that the product is not capable of being sold. Firstly, it has not attained the material form and composition which make it saleable as calcium carbide. Secondly, calcium carbide which does not attain the form and composition required by the Carbide of Calcium Rules for marketability is not marketable at all in view of the prohibition imposed by the Carbide of Calcium Rules. This leads to the third result that the calcium carbide is not economic goods and is not, therefore, capable of being sold.

(3) The third question is as to whether assessable value of the product can be determined under section 4. The crucial requisite of section 4 is that the value has to be determined at the time of the removal of the article chargeable with duty from the factory. The petitioner has alleged that the article manufactured by it is not removed from, its factory, but is straightway used to generate acetylene gas by the transfer of the article from one plant to another in the same factory. There is no denial by the respondents of this assertion. All that is said is that removal from one plant to another is removal within the meaning of section 4. But both the plants are situated in the same factory. The calcium carbide plant takes the first step, while the acetylene gas plant takes the second step and the two combined produce the acetylene gas. Since there is no traverse by the respondents of the pleading of the petitioner that this movement takes place within the factory, the point of time at which the value of the product is to be determined under section 4 is not reached. Consequently, the question of levy and collection of the duty does not arise.

(4) The expression “factory” is defined in section 2 (e) to mean any premises including the precincts thereof, wherein or in any part of which excisable goods are manufactured. The definition covers the present case because the calcium carbide is manufactured in one part of the factory while the acetylene gas is manufactured in another part thereof. The definition of “factory” makes it clear that the meaning of factory is not restricted to only the part in which the excisable goods are manufactured. On the other hand, it includes the whole of the premises in a part of which such goods are manufactured. At any rate the case of the petitioner is that the whole of the premises which comprise both the plants making calcium carbide and acetylene gas are its factory. It is not contended by the respondents that the calcium carbide plant constitutes a separate factory and the acetylene gas plant constitutes another factory. It cannot be said, therefore, that the so-called calcium carbide made by the petitioner is removed from the factory in which it is made. A perusal of Rules 9 and 49 makes it clear that the question of collection of any excise duty cannot arise unless and until the goods are removed from the factory.

14. We may conclude, therefore, that even if it is assumed for the sake of argument that for some reason or the other the calcium carbide made by the petitioner is “goods” and is, therefore, assessable to excise duty still the actual collection of the excise duty on these goods cannot be made unless and until these goods are removed from the factory of the petitioner.

15. For the above reasons, the writ petition succeeds, the impugned orders of the Superintendent, dated 5th January, 1972, of the appellate Collector, dated 25th November, 1972 and of the Central Government, dated 16th September, 1975 are quashed. There will be no order as to costs.