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AMICUS AI
Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
  • K. Sreedharan
  • G.A. Brahma Deva
  • C.N.B. Nair
Acts
  • Rule 5 of the Re-Rolling Steel Mill Annual Capacity Determination Rules, 1997.
  • sub-section (2) of Section 3A of the Central Excise Act.
  • sub-section (2) of Section 3A of Central Excise Act
  • provisions contained in Rule 4. Rule 4
  • Section 3A of Central Excise Act, 1944.
  • Sub-rule (3) of that rule
  • Sub-rule (2) of that rule
  • sub-rule (3) of Rule 3
  • Rule 4(2)
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Cites
Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
  • K. Sreedharan
  • G.A. Brahma Deva
  • C.N.B. Nair
Acts
  • Rule 5 of the Re-Rolling Steel Mill Annual Capacity Determination Rules, 1997.
  • sub-section (2) of Section 3A of the Central Excise Act.
  • sub-section (2) of Section 3A of Central Excise Act
  • provisions contained in Rule 4. Rule 4
  • Section 3A of Central Excise Act, 1944.
  • Sub-rule (3) of that rule
  • Sub-rule (2) of that rule
  • sub-rule (3) of Rule 3
  • Rule 4(2)
See more information ...
Smart Summary

Concise Analytical Summary of the Opinion (Order per C.N.B. Nair, Member (T))

Factual and Procedural Background

M/s. Sawan Mal Shibu Mal Steel Rolling Mills operates a hot steel re-rolling mill producing hot re-rolled non-alloy steel products. They opted to pay duty on a compounded basis under Section 3A of the Central Excise Act, 1944. Annual capacity for duty determination is computed under the Hot Rolling Steel Mills Annual Capacity Determination Rules, 1997, primarily by the formula in sub-rule (3) of Rule 3. Rule 4(2) prescribes the procedure for a manufacturer to seek approval from the Commissioner if any change in installed machinery affects specified capacity parameters. Rule 5 provides a deeming provision that, where capacity computed by Rule 3 is less than actual production in 1996‑97, capacity shall be deemed equal to actual 1996‑97 production.

In the present case the Commissioner initially determined the mill's annual capacity at 3,154.253 metric tonnes (MT). Because that figure was less than actual production in 1996‑97 (5,390.340 MT), the Commissioner invoked Rule 5 and deemed annual capacity to be 5,390.340 MT. The appellant later notified a change in machinery parameters (specifically the "d" factor) and sought re-determination under Rule 4(2). The re-computed capacity became 3,488.535 MT. The Commissioner nevertheless retained the deemed capacity based on the 1996‑97 production. The appellant challenged that decision, contending that Rule 5 does not apply when capacity is re-determined under Rule 4(2), and relied on several earlier Tribunal orders. The Single Member Bench referred the question to a Larger Bench (Hon'ble President) for determination, and the issue was decided by the Bench delivering the present order.

Legal Issues Presented

  1. Whether Rule 5 of the Hot Rolling Steel Mills Annual Capacity Determination Rules, 1997 — the deeming provision equating annual capacity to actual production in 1996‑97 where the formula-based capacity is lower — applies where annual capacity is to be re-determined under Rule 4(2) on account of changes in machinery.
  2. Whether the applicability of Rule 5 differs depending on whether the re-determination under Rule 4(2) results in an increase, a decrease, or no change in the computed annual capacity (i.e., whether Rule 5 applies when capacity is increased or remains same, and does not apply when capacity is reduced).

Arguments of the Parties

Appellant's Arguments

  • Rule 5 applies only to cases where the annual capacity is determined by the formula in sub-rule (3) of Rule 3; it does not apply to re-determination under Rule 4(2) following changes in machinery.
  • According to the appellant, Rule 4(2) is the exclusive provision governing changes in installed machinery and its effect on annual capacity, so Rule 5 could not be applied after a Rule 4(2) re-determination.
  • The appellant presented precedent decisions of the Tribunal (listed in the opinion) which, they contended, supported the non-application of Rule 5 to re-determinations under Rule 4(2).

Respondent's (Department's) Arguments

  • All determinations and re-determinations of annual capacity are governed by Rule 3, which contains the only formula for computing capacity; thus Rule 3's parameters apply even when Rule 4(2) is invoked.
  • Because re-determination under Rule 4(2) employs the Rule 3 formula, Rule 5 remains relevant: if the formula-based capacity is less than 1996‑97 production, the Commissioner may apply Rule 5 and deem capacity to be the 1996‑97 production.
  • It would not be unreasonable to compare an increased capacity with actual production of 1996‑97; therefore, the Commissioner was correct in retaining the deemed capacity in this case.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Final Order dated 3-6-1999 in M/s. Awadh Alloys (P) Ltd. v. CCE, Meerut Relied on by appellant to support non‑application of Rule 5 to Rule 4(2) re-determinations. The Court observed this and similar decisions related to cases where machinery changes led to reduction of capacity; they do not support a blanket rule that Rule 5 is always inapplicable.
Final Order dated 6-4-2000 in M/s. Doaba Steel Rolling Mills v. CCE, Chandigarh (2000 (39) RLT 976) Relied on by appellant for the proposition that Rule 5 does not apply when capacity is re-determined under Rule 4(2). The Court treated the decision as one concerning reductions in capacity and held it cannot be generalized to cases where capacity is increased or unchanged.
Final Order dated 26-4-2000 in M/s. Vandana Rolling Mills v. CCE, Raipur (2000 (40) RLT 225) Relied on by appellant to show Rule 5's non-applicability to Rule 4(2) situations. The Court found the case related to reduced capacity and thus did not control situations where capacity is augmented or unchanged.
Final Order dated 4-7-2000 in M/s. Ballary Steel Rolling Mills v. CCE, Belgaum (2000 (39) RLT 701) Relied on by appellant in support of their interpretation of Rule 5 and Rule 4(2). The Court observed it concerned reduction of capacity and therefore did not establish that Rule 5 is wholly inapplicable to re-determinations under Rule 4(2).
Final Order dated 5-7-2000 in M/s. Pepsu Steel Rolling Mills v. CCE, Chandigarh (2000 (41) RLT 88) Relied on by appellant to argue Rule 5 should not apply after machinery changes. The Court noted this precedent also related to capacity reduction and thus is not inconsistent with the present conclusion that Rule 5 may apply when capacity is increased or unchanged.

Court's Reasoning and Analysis

The Court's analysis proceeded from the text and structure of the Rules and the purpose of compounding under Section 3A. Key points of the reasoning were:

  1. Rule 3(3) contains the sole formula for determining annual capacity of hot rolling mills: the parameters in that formula (d, n, i, e, w, number of utilised hours) are the basis for any capacity computation. Because Rule 3 contains the exclusive formula, re-determinations under Rule 4 must employ that same formula.
  2. Rule 4(2) provides a procedural mechanism for manufacturers to notify and obtain approval from the Commissioner before making alterations in installed machinery that affect parameters used in the Rule 3 formula. Rule 4(2) does not itself provide an alternative formula for computing capacity; it contemplates re-determination by reference to Rule 3.
  3. Rule 5 is a deeming provision (a rider) that operates where the annual capacity worked out by the Rule 3 formula is less than actual production in 1996‑97 — in such situations the annual capacity is deemed to be the 1996‑97 actual production. This operates to make duty payable on the higher, actual production for that year.
  4. The Court analysed different factual permutations that can follow a re-determination under Rule 4(2):
    • If changes in machinery reduce computed annual capacity, applying Rule 5 (thus fixing capacity at the higher 1996‑97 production) would be unreasonable and unjust because it would disregard the actual, reduced capacity and compare non-comparable situations. In such cases Rule 5 should not apply.
    • If changes in machinery increase or do not alter computed annual capacity, applying Rule 5 (i.e., retaining the deemed capacity based on 1996‑97 production) does not impose an undue hardship, because the basis for compounding (capacity) after change is not lower; comparison with 1996‑97 production is reasonable and permissible.
  5. The Court reviewed the precedents relied on by the appellant and found they uniformly dealt with cases of capacity reduction; those precedents therefore supported non-application of Rule 5 in reduction scenarios but did not justify a universal rule that Rule 5 is always inapplicable where Rule 4(2) is invoked.
  6. Applying the above analysis to the facts: the appellant's change in the "d" factor increased computed capacity from 3,154.253 MT to 3,488.535 MT. Because the computed capacity after change remained below the 1996‑97 production but was higher than the initial formula figure, retaining the deemed capacity of 5,390.340 MT (based on Rule 5) was reasonable and did not violate Rule 4. The Commissioner therefore correctly applied Rule 5.

Holding and Implications

Holding: The Bench answered the reference and held that Rule 5 is applicable in all cases where (a) there is no change in the annual capacity of production or (b) the annual capacity of production is augmented on account of change in machinery. Conversely, Rule 5 has no application when the change in machinery leads to a reduction in the annual capacity of production as computed under Rule 3 of the Hot Rolling Steel Mills Annual Capacity Determination Rules, 1997.

Direct consequence in the present case: the appellant's challenge was dismissed and the appeal was rejected because the post-change computed capacity (3,488.535 MT) was higher than the earlier formula-based capacity and Rule 5 was correctly applied by the Commissioner to retain the deemed capacity of 5,390.340 MT.

Broader implication: The decision clarifies the limited circumstances in which Rule 5 may be applied following a Rule 4(2) re-determination — it is not categorically inapplicable to all Rule 4(2) re-determinations; its application depends on whether capacity is reduced or not. The opinion distinguishes earlier Tribunal decisions as pertaining to reductions in capacity and therefore not controlling when capacity is increased or unchanged.

Show full summary ...

    Sawanmal Shibumal Steel Rolling Mills v. Commissioner of Central Excise, Chandigarh-I

    [Order per : C.N.B. Nair, Member (T)]. - M/s. Sawan Mal Shibu Mal Steel Rolling Mills manufactures hot re-rolled products of non-alloy steel by operating a hot steel re-rolling mill. They are liable to pay duty at compounded rates in terms of Section 3A of Central Excise Act, 1944. The duty is determined depending on the annual capacity of production, or such factors relevant to the annual capacity of production of the factory in terms of sub-section (2) of Section 3A of the Central Excise Act. Further, Hot Rolling Steel Mills Annual Capacity Determination Rules, 1997 issued under sub-section (2) of Section 3A of Central Excise Act laid down, how the annual capacity of hot re-rolling mills is to be determined. Rule 3 of these rules stipulates that annual capacity shall be determined in the manner laid down therein. The formula for determination of the annual capacity as stated under sub-rule (3) of Rule 3 is as under :-

    “Annual Capacity = 1.885 x 10-4 x d x n x i x e x w x Number of utilised hours (in metric tonnes)”

    Rule 4 of the same Rule relates to calculation of capacity of production among other things, in the case of “any change in the mill capacity”. Sub-rule (2) of that rule reads as under :-

    “(2) In case a manufacturer proposes to make any change in installed machinery or any part thereof which tends to change the value of either of the parameters ‘d’, ‘n’, ‘e’, ‘i’ and ‘speed of rolling’ referred to in sub-rule (3) of Rule 3, such manufacturer shall intimate about the proposed change to the Commissioner of Central Excise in writing, with a copy to Assistant Commissioner of Central Excise, at least one month in advance of such proposed change, and shall obtain the written approval of the Commissioner before making such change. Thereafter the Commissioner of Central Excise shall determine the date from which the change in the installed capacity shall be deemed to be effective.”

    Rule 5 which has also relevance to the present reference reads as under :-

    “In case, the annual capacity determined by the formula in sub-rule (3) of Rule 3 in respect of a mill, is less than the actual production of the mill during the financial year 1996-97, then the annual capacity so determined shall be deemed to be equal to the actual production of the mill during the financial year 1996-97.”

    2. Facts of the present case are that the appellants opted for payment of duty on compounded basis and their annual capacity was determined by the Commissioner at 3154.253 MTs. per annum. Since this annual capacity determined was less than the actual production of the mill during 1996-97 the Commissioner ordered that annual capacity shall be deemed to be equal to the production of the mill during the financial year 1996-97, i.e. 5390.340 MT. The deemed capacity was fixed in terms of Rule 5 of the Re-Rolling Steel Mill Annual Capacity Determination Rules, 1997. Later on the appellant informed the Central Excise Commissioner that they have made change in the installed machinery which has already the relevant parameters for calculation of the annual capacity. Based on that they sought recalculation of the annual capacity of the mill. The recalculated capacity came to 3488.535 on account of change in the “d” factor. Thus, the change in the machinery resulted in a higher annual capacity. Since this augmented annual capacity was also lower than the deemed capacity (based on the actual production of 1996-97), the Jurisdictional Commissioner ordered that the annual capacity of 1996-97 shall be deemed to be the annual capacity even after change in the “d” factor. The appellant challenges this decision contending that Rule 5 which permits adoption of the actual production of 1996-97 has non-application in the case of a change in the annual capacity on account of change in machinery. The appellant's contention is that only Rule 4(2) will be applicable in a case of change in annual capacity on account of change of machinery and that Rule 5 could have no application whatsoever in such a case. The appellants have relied on the following decisions of this Tribunal in support of their contention :-

    1.       Final Order dated 3-6-1999 in M/s. Awadh Alloys (P) Ltd. v. CCE, Meerut - -NB (DB)
    2.       Final Order dated 6-4-2000 in M/s. Doaba Steel Rolling Mills v. CCE, Chandigarh - 2000 (39) RLT 976 -NB (DB)
    3.       Final Order dated 26-4-2000 in M/s. Vandana Rolling Mills v. CCE, Raipur - 2000 (40) RLT 225-NB (DB)
    4.       Final Order dated 4-7-2000 in M/s. Ballary Steel Rolling Mills v. CCE, Belgaum - 2000 (39) RLT 701-SB (DB)
    5.       Final Order dated 5-7-2000 in M/s. Pepsu Steel Rolling Mills v. CCE, Chandigarh - 2000 (41) RLT 88 (T)

    3. When the appeal went before a Single Member Bench of this Tribunal, the learned Member took the view that Rule 4(2) enables the manufacturers who propose to make any change in the specified parameters of their capacity to approach the Commissioner and obtain his prior approval before making such change. This rule did not contain any other provision to compute the annual capacity of production and that formula provided in Rule 3(3) is the relevant formula for working out the change of annual capacity. The learned Member also expressed the view that Rule 5 was an over-riding provision and that would apply to cases of involving change of machinery also. In view of the reliance placed by the appellants on earlier decisions of the Tribunal, the learned Member referred the case to the Hon'ble President for placing the issue before Larger Bench. The issue has, thus, come before us.

    4. The issue involved is whether Rule 5 applies to cases where capacity of production is to be re-fixed in terms of Rule 4(2) on account of changes in machinery. The learned Counsel representing the appellant took us through the Rules and the previous decisions of the Tribunal and submitted that Rule 5 has no application to a case where annual capacity is to be re-determined under Rule 4(2). He submitted that Rule 5, in terms, stated that, that Rule's application is to cases where “annual capacity is determined by the formula in sub-rule (3) of Rule 3 in respect of a mill”. He, therefore, submitted that it cannot have any applicability in cases of re-determination of capacity under Rule 4(2). He stated that this is the position irrespective of whether the changes in the machinery led to increase in annual capacity or decrease in annual capacity. He also held that, that was the interpretation placed upon this rule in previous decisions of this Tribunal.

    5. As against the aforesaid submissions on behalf of the appellant, the learned DR submitted that all determinations of annual capacity are in terms of Rule 3 and that, that rule laid down the relevant parameters. He submitted that even in the case of re-determination of annual capacity on account of change in machinery as contemplated in Rule 4 the re-determination is done according to the formula stipulated in Rule 3 only. He, therefore, submitted that the Commissioner was correct in fixing the annual capacity on a deemed basis at the actual production of 1996-97. He also submitted that in a case where the annual capacity goes up on account of changes in machinery, it cannot at all be argued that comparison with the actual production during the financial year 1996-97 would be unreasonable.

    6. We find that Rule 5 is in the nature of a rider. It incorporates a deeming provision that in case the annual capacity worked out according to the parameters contained in Rule 3 is less than the actual production of the mill during the financial year 1996-97, then the annual capacity shall be deemed to be equal to the annual production of the mill during the financial year 1996-97. Thus, the deeming provision makes duty payable on the actual production of 1996-97. In view of this clause, wherever the annual capacity determined according to the formula is less than the actual production the annual capacity is deemed to be the actual production of 1996-97.

    7. Compounding of duty is a common practice adopted under different levies. Its purpose is to simplify the mode of collection as well as to check evasion. Section 3A and the Rules thereunder have been enacted to levy duty based on the annual capacity of production. Rule 3 stipulates the method of determining the annual capacity of production. Sub-rule (3) of that rule contains a specific formula for determination of annual capacity of production of hot rolled products. This is the only formula contained in the Rules for determination of annual capacity of production. Therefore, rule (3) applies to re-determination of annual capacity permitted under Rule 4 also. The effect of Rule 5 is that in cases where annual capacity determined according to Rule 3 is less than the actual production of 1996-97, the actual production of 1996-97 shall be deemed to be the annual capacity of production.

    8. Various situations have to be considered keeping the above legal position. Re-determination is occasioned by changes made in the installed machinery. When changes in machinery cause reduction in the annual capacity of production, fixing the annual capacity of production based on the actual production of a previous year, when the capacity for production of the machinery was higher, would be highly unreasonable and it would amount to comparing the uncomparables. The application of the deeming provision contained in Rule 5 in such a case would be grossly unjust. It would be also impermissible, as such a determination would be without any regard to the annual capacity of production, the basis for the compounded levy. However, the situation is quite different when the modification of the machinery is to augment the annual capacity of production. In the appellant's case, the change in the “d” factor has increased the annual production capacity from 3154.253 MT to 3488.535 MT. Therefore, the basis of compounding is a higher capacity of production and not a lower capacity of production. Since the appellant had produced a much higher quantity at 5390.340 MT in 1996-97, making use of machinery of a lower capacity, the Commissioner applied Rule 5 to retain the annual capacity as already determined. This cannot be argued to be placing any undue hardship on the appellant or contrary to the provisions contained in Rule 4. Rule 4 confers on the assessee a right to seek re-determination of annual capacity consequent upon change of machinery. However, the re-determination has to be in conformity with relevant Rules. As changes in machinery increased the annual capacity of production, there was no justification to reduce the capacity already determined. Rule 5 was correctly made applicable.

    9. From a perusal of our previous decisions, we find that all of them related to cases involving reduction of capacity of production on account of changes in the machinery. In those circumstances the Tribunal held that Rule 5 had no application to those cases. Those decisions cannot constitute the basis for the contention that Rule 5 is wholly inapplicable irrespective of whether the change in machinery is for reduction in the capacity, to retain the same capacity or augmenting the capacity of production. When the capacity remains the same or the capacity is increased on account of change of machinery, no unintended hardship is visited upon tax payers by the application of Rule 5. However, when change of machinery leads to reduction of annual capacity, Rule 5 would not apply.

    10. In the light of the above discussions, we answer the reference by stating that Rule 5 would be relevant and applicable in all cases where there is no change in the annual capacity of production or the annual capacity of production is augmented on account of change in the machinery of production. However, it would have no application when change in machinery leads to reduction in the annual capacity of production, when the same is computed according to the parameters mentioned in Rule 3 of the Hot Rolling Steel Mills Annual Capacity Determination Rules, 1997.

    11. The present appeal has no merit in the light of our decision in the reference. Accordingly, the same is rejected.

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    Comments

    Sawanmal Shibumal Steel Rolling Mills v. Commissioner of Central Excise, Chandigarh-I
    (Dec 12, 2000)