INDIRECT TAX LAW

CENTRAL EXCISE

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BASIC CONCEPTS
1. Does the process of washing of ironore for removal of foreign materials from such ore amount to manufacture?
Commissioner v. Steel Authority of India Ltd. 2012 (283) E.L.T. A112 (S.C.)
Facts of the Case: The Steel Authority of India Ltd. (SAIL) was mining iron ore from mines.
The Department submitted that Steel Authority of India Ltd. (SAIL) was mining iron ore from mines and subjecting the same to crushing, grinding, screening and washing with an aim to concentrate the ores.
The Department contended that in the case of the respondents, their mining activity was done by fully mechanized system; that they were mining iron ores from mines and then ores were subjected to process of crushing, grinding and screening and washing with a view to remove foreign materials and to concentrate such ores; that at each stage of washing water is added to improve the flowability of material by removing the sticky particles and the processes undertaken by them involved removal of parts of foreign material from the ores and increase the “Fe” content (i.e. iron content); thus goods so obtained by such process would qualify as concentrate.
The SAIL submitted that the washing of iron ore by itself could never convert it into concentrates and that washing by itself did not amount to manufacture. The assessee also contended that the concentrates were manufactured by increasing the concentration of Fe content of the mineral by removing and separating different impurities; that concentrates were manufactured by enriching the material in terms of its Fe content; that under this process, raw iron ore of low Fe content was ground to very fine consistency and passed through various processes for making concentrates; that in the present matters neither they undertook any such process nor there was any variation in the Fe content of iron ore extracted from its mines and the Fe content of seized iron ore.
Point of Dispute: Department contended that any ore which after being subjected to physical or physico chemical process viz., crushing, screening, etc., has had part or whole of its extraneous, foreign matter removed, would be termed as “concentrate”; and thus the product obtained after the processes carried out by the Respondents was “iron ore concentrate” only and not iron ore.
Decision of the Case: The Supreme Court held that removal of foreign materials from iron ore, i.e., mining iron ore from mines and then subjecting to process of crushing, grinding,
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screening and washing with a view to remove foreign materials to concentrate such ores do not result in manufacture of different commercial commodity. No Central excise duty is leviable on iron ore concentrate.
2. Whether the addition and mixing of polymers and additives to base bitumen results in the manufacture of a new marketable commodity and as such exigible to excise duty?
CCE v. Osnar Chemical Pvt. Ltd. 2012 (276) E.L.T. 162 (S.C.)
Facts of the Case: Osnar Chemical Pvt. Ltd. (Osnar) was engaged in the supply of Polymer Modified Bitumen (for short “PMB”). The assessee additionally supplied Crumbled Rubber Modified Bitumen (CRMB). It entered into a contract with M/s. Afcons Infrastructure Ltd. (Afcons) for supply of PMB at their work site. As per the agreement, the base bitumen and certain additives were to be supplied by Afcons to Osnar directly at the site, where Osnar, in its mobile polymer modification plant, was required to heat the bitumen at a temperature of 160°C with the help of burners. To this hot bitumen, 1% polymer and 0.2% additives were added under constant agitation, for improving its quality by increasing its softening point and penetration. The process of agitation was to be continued for a period of 12 to 18 hours till the mixture becomes homogenous and the required properties were met. The said bitumen in its hot agitated condition was mixed with stone aggregates which were then used for road construction. The Osnar paid duty on PMB processed at their factory in Mumbai but had not paid the same for the conversion done at their work site.
Point of Dispute: Revenue contended that the aforesaid process carried out by the assessee (Osnar) amounted to manufacture of PMB in terms of section 2(f) of the Central Excise Act, 1944.
Revenue further, submitted that the end products, viz. PMB and (CRMB) were different from bitumen, in as much as polymers and additives were the raw materials consumed in the process of manufacture of the said final products and were therefore, covered by the definition of the term “manufacture” in section 2(f) of the Act. The Revenue added that PMB and CRMB were exigible to excise duty, as bitumen is classifiable under Chapter sub heading 27132000, and polymer is classifiable under Chapter sub heading 39019000, while the finished products, PMB and CRMB were classifiable under Chapter sub heading 27150090. Further, PMB and CRMB were commercially known in the market for being bought and sold and therefore, satisfied the test of marketability which is one of the essential conditions for the purpose of levy of excise duty.
Decision of the Case: The Supreme Court was of the view that “manufacture” could be said to have taken place only when there was transformation of raw materials into a new and different article having a different identity, characteristic and use. It was a well settled principle that mere improvement in quality did not amount to manufacture. It was only when the change or a series of changes take the commodity to a point where commercially it could no longer be regarded as the original commodity but was instead recognized as a new and distinct article that manufacture could be said to have taken place.
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The Court held that in order to bring a process within the ambit of section 2(f)(ii) of the Act, the same must be recognised by the legislature as manufacture in relation to the goods in the section notes or chapter notes of first schedule of the Central Excise Tariff Act. However, in the Schedule to the Central Excise Tariff Act, no such process or processes have been specified in the Section notes or Chapter notes in respect of Petroleum Bitumen falling under Tariff Item 27132000 or even in respect of bituminous mixtures falling under Tariff Item 27150090 to indicate that the said process amounts to manufacture. The Supreme Court thus concluded that the process of mixing polymers and additives with bitumen did not amount to manufacture.
3. Whether the metal scrap or waste generated during the repair of his worn out machineries/parts of cement manufacturing plant by a cement manufacturer amounts to manufacture?
Grasim Industries Ltd. v. UOI 2011 (273) E.L.T. 10 (S.C.)
Facts of the case: The assessee was the manufacturer of the white cement. He repaired his worn out machineries/parts of the cement manufacturing plant at its workshop such as damaged roller, shafts and coupling with the help of welding electrodes, mild steel, cutting tools, M.S. Angles, M.S. Channels, M.S. Beams, etc. In this process of repair, M.S. scrap and Iron scrap were generated. The assessee cleared this metal scrap and waste without paying any excise duty. The Department issued a show cause notice demanding duty on the said waste contending that the process of generation of scrap and waste amounted to the manufacture in terms of section 2(f) of the Central Excise Act.
Decision of the case: The Apex Court observed that manufacture in terms of section 2(f) includes any process incidental or ancillary to the completion of the manufactured product. This ‘any process’ can be a process in manufacture or process in relation to manufacture of the end product, which involves bringing some kind of change to the raw material at various stages by different operations. The process in relation to manufacture means a process which is so integrally connected to the manufacturing of the end product without which, the manufacture of the end product would be impossible or commercially inexpedient.
However, in the present case, it is clear that the process of repair and maintenance of the machinery of the cement manufacturing plant, in which M.S. scrap and Iron scrap arise, has no contribution or effect on the process of manufacturing of the cement, (the end product). The repairing activity in any possible manner cannot be called as a part of manufacturing activity in relation to production of end product. Therefore, the M.S. scrap and Iron scrap cannot be said to be a by-product of the final product. At the best, it is the by-product of the repairing process.
Hence, it held that the generation of metal scrap or waste during the repair of the worn out machineries/parts of cement manufacturing plant does not amount to manufacture.
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4. Are the physician samples excisable goods in view of the fact that they are statutorily prohibited from being sold?
Medley Pharmaceuticals Ltd. v. CCE & C., Daman 2011 (263) E.L.T. 641 (S.C.)
The question which arose for consideration was whether physician samples of patent and proprietary medicines intended for distribution to medical practitioner as free samples, satisfied the test of marketability. The appellant contended that since the sale of the physician samples was prohibited under the Drugs and Cosmetics Act, 1940 and the rules made thereunder, the same could not be considered to be marketable.
Supreme Court observed that merely because a product was statutorily prohibited from being sold, would not mean that the product was not capable of being sold. Physician sample was capable of being sold in open market.
Moreover, the Drugs and Cosmetics Act, 1940 (Drugs Act) and the Central Excise Act, 1944 operated in different fields. The restrictions imposed under Drugs Act could not lead to non-levy of excise duty under the Central Excise Act thereby causing revenue loss. Prohibition on sale of physician samples under the Drugs Act did not have any bearing or effect on levy of excise duty.
Therefore, the Court inferred that the physician samples were excisable goods and were liable to excise duty.
Note: This case was affirmed in case of Medley Pharmaceuticals Ltd. v. Commissioner - 2011 (269) E.L.T. A20 (S.C.).
5. Whether assembling of the testing equipments for testing the final product in the factory amounts to manufacture?
Usha Rectifier Corpn. (I) Ltd. v. CCEx., New Delhi 2011 (263) E.L.T. 655 (S.C.)
Facts of the case: The appellant was a manufacturer of electronic transformers, semi-conductor devices and other electrical and electronics equipments. During the course of such manufacture, the appellant also manufactured machinery in the nature of testing equipments to test their final products.
The appellant had stated in their balance sheet that the addition to the plant and machinery included testing equipments. The said position was further substantiated in the Director’s report wherein it was mentioned that during the year, the company developed a large number of testing equipments on its own.
However, the assessee contended that such items were assembled in the factory for purely research and development purposes, but research being unsuccessful, same were dismantled. Hence, it would not amount to manufacture.
The appellant further submitted that the said project was undertaken only to avoid importing of such equipment from the developed countries with a view to save foreign exchange.
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Decision of the case: The Supreme Court observed that once the appellant had themselves made admission regarding the development of testing equipments in their own Balance Sheet, which was further substantiated in the Director’s report, it could not make contrary submissions later on. Moreover, assessee’s stand that testing equipments were developed in the factory to avoid importing of such equipments with a view to save foreign exchange, confirmed that such equipments were saleable and marketable. Hence, the Apex Court held that duty was payable on such testing equipments.
6. Does the process of cutting and embossing aluminium foil for packing the cigarettes amount to manufacture?
CCE v. GTC Industries Ltd. 2011 (266) E.L.T. 160 (Bom.)
Facts of the case: A roll of aluminium foil was cut horizontally to make separate pieces of the foil and word ‘PULL’ was embossed on it. Thereafter fixed number cigarettes were wrapped in it. Aluminium foil, being a resistant to moisture, was used as a protector for the cigarettes and to keep them dry.
Revenue submitted that the process of cutting and embossing aluminium foil amounted to manufacture. Since the aluminium foil was used as a shell for cigarettes to protect them from moisture; the nature, form and purpose of foil were changed.
Decision of the case: The High Court pronounced that cutting and embossing did not transform aluminium foil into distinct and identifiable commodity. It did not change the nature and substance of foil. The said process did not render any marketable value, only made it usable for packing. There were no records to suggest that cut to shape/embossed aluminium foils used for packing cigarettes were distinct marketable commodity. Hence, process did not amount to manufacture as per section 2(f) of Central Excise Act, 1944. Only the process which produces distinct and identifiable commodity with marketable value can be called manufacture.
7. Does a product with short shelf-life satisfy the test of marketability?
Nicholas Piramal India Ltd. v. CCEx., Mumbai 2010 (260) E.L.T. 338 (S.C.)
Facts of the case: In the instant case, the product had a shelf-life of 2 to 3 days. The appellant contended that since the product did not have shelf-life, it did not satisfy the test of marketability.
Decision of the case: The Supreme Court ruled that short shelf-life could not be equated with no shelf-life and would not ipso facto mean that it could not be marketed. A shelf-life of 2 to 3 days was sufficiently long enough for a product to be commercially marketed. Shelf-life of a product would not be a relevant factor to test the marketability of a product unless it was shown that the product had absolutely no shelf-life or the shelf-life of the product was such that it was not capable of being brought or sold during that shelf-life.
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8. Whether the theoretical possibility of product being sold is sufficient to establish the marketability of a product?
Bata India Ltd. v. CCE 2010 (252) ELT 492 (SC)
Decision of the case: The Apex Court observed that marketability is essentially a question of fact to be decided on the facts of each case and there can be no generalization. The test of marketability is that the product which is made liable to duty must be marketable in the condition in which it emerges. The question is not whether there is a hypothetical possibility of a purchase and sale of the commodity, but whether there is sufficient proof that the product is commercially known. The mere theoretical possibility of the product being sold is not sufficient but there should be commercial capability of being sold. Theory and practice will not go together when one examine the marketability of a product.
The Supreme Court further ruled that the burden to show that the product is marketed or capable of being bought or sold is entirely on the Revenue. Revenue, in the given case, had not produced any material before the Tribunal to show that the product was either being marketed or capable of being marketed, but expressed its opinion unsupported by any relevant materials.
Note: The above judgment is in conformity with the explanation to section 2(d) of the Central Excise Act, 1944 inserted by the Finance Act, 2008.
9. Whether the machine which is not assimilated in permanent structure would be considered to be moveable so as to be dutiable under the Central Excise Act?
CCE v. Solid & Correct Engineering Works and Ors 2010 (252) ELT 481 (SC)
Facts of the case: The assessee was engaged in the manufacture of asphalt batch mix and drum mix/hot mix plant by assembling and installing its parts and components. The Revenue contended that the said plant would be considered to be moveable so as to be dutiable under the Central Excise Act, 1944.
Decision of the case: The Court opined that an attachment where the necessary intent of making the same permanent is absent cannot constitute permanent fixing, embedding or attachment in the sense that would make the machine a part and parcel of the earth permanently.
The Court observed that as per the assessee, the machine was fixed by nuts and bolts to a foundation not because the intention was to permanently attach it to the earth, but because a foundation was necessary to provide a wobble free operation to the machine.
Hence, the Supreme Court held that the plants in question were not immovable property so as to be immune from the levy of excise duty. Consequently, duty would be levied on them.
10. Does the activity of packing of imported compact discs in a jewel box along with inlay card amount to manufacture?
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CCE v. Sony Music Entertainment (I) Pvt. Ltd. 2010 (249) E.L.T. 341 (Bom.)
Facts of the case: The appellant imported recorded audio and video discs in boxes of 50 and packed each individual disc in transparent plastic cases known as jewel boxes. An inlay card containing the details of the content of the compact disc was also placed in the jewel box. The whole thing was then shrink wrapped and sold in wholesale. The Department contended that the said process amounted to manufacture.
Decision of the case: The High Court observed that none of the activity that the assessee undertook involved any process on the compact discs that were imported. It held that the Tribunal rightly concluded that the activities carried out by the respondent did not amount to manufacture since the compact disc had been complete and finished when imported by the assessee. They had been imported in finished and completed form.
10. Does the process of preparation of tarpaulin made-ups after cutting and stitching the tarpaulin fabric and fixing the eye-lets amount to manufacture?
CCE v. Tarpaulin International 2010 (256) E.L.T. 481 (S.C.)
Facts of the case: The assessee was engaged in manufacture of ‘tarpaulin made-ups’. The ‘tarpaulin made-ups’ was the tarpaulin cloth prepared by making solution of wax, aluminum stearate and pigments which were mixed. The solution was heated in a vessel and was transferred to a tank. Grey cotton canvas fabric was then dipped into this solution and passed through two rollers, whereafter the canvas was dried by exposure to atmosphere. Thereafter, the tarpaulin made-ups were prepared by cutting the cloth into various sizes and stitched and eye-lets were fitted. Department viewed that the “tarpaulin made-ups” prepared by means of cutting, stitching and fixing of eye-lets amounted to manufacture and, hence, they were exigible to duty. However, the assessee stated that the process of mere cutting, stitching and putting eyelets did not amount to manufacture and hence, the Department could not levy excise duty on tarpaulin made-ups.
Decision of the case: The Apex Court opined that stitching of tarpaulin sheets and making eyelets did not change basic characteristic of the raw material and end product. The process did not bring into existence a new and distinct product with total transformation in the original commodity. The original material used i.e., the tarpaulin, was still called tarpaulin made-ups even after undergoing the said process. Hence, it could not be said that the process was a manufacturing process. Therefore, there could be no levy of Central excise duty on the tarpaulin made-ups.
Hence, the Supreme Court, upholding the decision of the Tribunal, held that conversion of tarpaulin into tarpaulin made-ups would not amount to manufacture.
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CLASSIFICATION OF EXCISABLE GOODS
1. In case of specific classification viz-à-viz classification based on material used/composition of goods, which one should be adopted?
Commissioner of Central Excise, Bhopal v. Minwool Rock Fibres Ltd. 2012 (278) E.L.T. 581 (S.C.)
Facts of the Case: Minwool Rock Fibres Ltd. started manufacturing rockwool and slagwool using more than 25% of blast furnace slag by weight in 1993. They classified them under Central Excise Tarriff heading 6803.00 (i.e. Slagwool, Rockwool and similar mineral wools) and had been filing classification declarations mentioning this fact. Such declarations so filed prior to 1997-98 were accepted by the Department. However, another specific sub-heading 6807.10 of the Central Excise Tariff was introduced vide Budget 1997 for ‘Goods having more than 25% by weight blast furnace slag’. Accordingly, they claimed that the goods manufactured by them, namely, slagwool and rockwool should henceforth be classified under Chapter sub-heading 6807.10 of the Tariff.
The Revenue contended that when there was a specific sub-heading, i.e. 6803.00 wherein the goods, such as Slagwool, Rockwool and similar wools were enumerated, that entry requires to be applied and not Chapter sub-heading 6807.10.
Point of Dispute: The assessee’s contention was that the appropriate classification for their product was under Chapter sub-heading 6807.10 of the Act while the Department contended that the appropriate classification was under Chapter sub-heading 6803.00 of the Act.
This was the subject matter of the appeal before the Supreme Court.
Decision of the Case: The Supreme Court held that there was a specific entry which speaks of Slagwool and Rockwool under sub-heading 6803.00 chargeable at 18%, but there was yet another entry which was consciously introduced by the Legislature under sub-heading 6807.10 chargeable at 8%, which speaks of goods in which Rockwool, Slag wool and products thereof were manufactured by use of more than 25% by weight of blast furnace slag.
It was not in dispute that the goods in question were those goods in which more than 25% by weight of one or more of red mud, press mud or blast furnace slag was used. If that be the case, then, in a classification dispute, an entry which was beneficial to the assessee required to be applied and the same had been done by the adjudicating authority, which had been confirmed by the Tribunal. Further, tariff heading specifying goods according to its