excise - dg education basics new.pdf · as per section 2(d) of central excise act, 1944, excisable...

EXCISE:

CONSTITUOINAL BACKGROUND : Entries in Union and State Lists as to Indirect Tax Laws (Relevant Extracts)

Name of tax / duty

Source of power

Power with Tax imposed on - Corresponding law

Excise duty Entry 51 of List II

State Government

Manufacture or production of — a) alcoholic liquors for human

consumption; b) opium, Indian hemp and other narcotic

drugs and narcotics

State excise laws

Entry 84 of List I

Central Government

Manufacture or production in India of all goods — • except those falling in Entry 51 above • but including medicinal and toilet

preparations containing alcohol or opium, Indian hemp and other narcotic drugs and narcotics.

• Duty on medicinal and toilet preparations containing alcohol, etc. is levied under "MEDICINAL AND TOILET PREPARATIONS (EXCISE DUTIES) ACT, 1955 [M&TP ACT]". This duty is levied by the Centre but collected by States.

• In general, excise duty on all goods is levied under CENTRAL EXCISE ACT, 1944 read with Central Excise Tariff Act, 1985 and other central laws dealing with specific goods. These duties are levied and collected by the Central Government.

. APPLICABLE ED RATES • EC and SHEC on excise duty exempted and general rate increased to 12.5% (w.e.f. 1st March, 2015)

• The general rate of excise duty has been increased to 12.5% (even in respect of medicinal and toiletry preparations containing alcohol/drugs, etc.)

• Further, EC/SHEC on excise duty has been exempted w.e.f. 1-3-2015 vide Notification Nos. 14/ 2015 and 15/2015-CE. Therefore, in nutshell, duty is increased to 12.5% as against 12.36%

GIST OF CHANGES

Particulars Effective Date

Relevant Section /Rule / Notification

BASIC CONCEPTS

1. Standard ad valorem rate of excise duty increased from 12% to 12.50% and education cesses leviable on excisable goods fully exempted

01.03.2015 First Schedule to the CETA, 1985 & E/N14/ 2015& 15/2015 CE dated01.03.2015

CHARGING SECTION

2. “Factor” relevant to production u/Sec 3A (2) and 3A (3) of Central Excise Act, 1944 to include “Factors ” relevant to production

01.03.2015 Sec 3A(2) & 3A(3) of Central Excise Act, 1944

CENTRAL EXCISE RULES, 2002

5. Non/short-payment of duty reflected in the periodic returns and penalty payable under rule 8(3A) of Central Excise Rules, 2002 [CER] to be recovered under section 11 of CEA

01.03.2015 Rule 8(4) of CER, 2002

6. Minimum General penalty under rule 25 of CER increased from Rs 2,000 to Rs 5,000

This is pursuant to amendment made in Sec 37 of CEA, 1944. Sec 37 has been amended to provide for imposition of residuary penalty of an amount upto Rs 5,000 (earlier, it was upto Rs 2,000)

14.05.2015 Rule 25 of CER, 2002

.


BASIC CONCEPTS & DEFINITIONS: EXCISABLE GOODS – SEC 2(d) 1. Explain briefly the concept of “excisable goods’ as amended by the Finance Act, 2008.

(Nov 2009 2 Marks) “Excisable goods” have been defined u/s 2(d) of the CETA to mean goods specified in the First and Second Schedule of CETA as being

subject to excise duty and includes salt. This definition uses the expression “goods” but in entire CEA, the expression goods was not defined. SC settled the judicial meaning of

the term “goods” to mean an article which is movable and marketable. And the term “marketability” was understood to mean an article which is ordinarily capable of being sold into the market. Many disputes arose in the past as to excisability and dutiablity of dross/skimming, ashes, residues etc. as assessee contested these to be non-marketable on ground of their not being ordinarily saleable. Now, FA, 2008 has made an amendment in the definition of “excisable goods” to bring all these within the coverage of goods. FA, 2008 had inserted an explanation to the definition of excisable goods to provide that for the purpose of “excisable goods” the expression “goods” shall now include any article, material or substance which is capable of being sold and such goods shall necessarily be deemed to be marketable.

Author’s Note: CBEC very recently had also clarified that after insertion of this explanation, even dross/skimming, ashes and residues etc shall also be treated as marketable and hence, excisable goods chargeable to excise duty [CBEC Circular 904/24/2009] However, student shall appreciate, even after the introduction of concept of ‘deemed marketability’, such excisable goods will attract ED only if they can be said to be ‘manufactured’ (i.e., if it has arisen as a result of process of manufacture)’. [In case of BALRAMPUR CHINNI MILLS LTD-2013- ALLAHBAAD HC held that ‘bagasse arising as a residue/waste of sugarcane, during crushing of sugarcane as a part of process of manufacture of sugar, is not a ‘manufactured product’. Explanation to Sec 2(d) makes ‘bagasse’ marketable, but it doesn’t make bagasse a manufactured product.’ The Allahabad HC even quashed the CBEC Circular which stated that bagasse is now chargeable to ED.

Author’s Note: • The principle laid down by Hon’ble ALLAHBAAD HC is sound. Unless twin condition of ‘goods being excisable goods in terms of Sec 2(b)’

and ‘goods being manufactured in terms of Sec 2(f)’ are satisfied, ED cannot be levied. • Still the reason why bagasse shall not be treated as ‘manufactured product’ is not clear [it can be argued that it is manufactured product

as it has arisen during course of manufacture of final product, sugar] 2. Briefly explain the following with reference to the provisions of the Central Excise Act,: (i) Excisable goods.

(Nov 2009 2 Marks) Excisable Goods: Sec 2(d) of Central Excise Act, 1944 defines the term “excisable goods” to mean goods specified in the First and Second Schedule of the Central Excise and Tariff Act, 1985 as being subject to excise duty and it shall include salt.

3. Is there any difference between ‘non-excisable goods’ and ‘goods carrying nil rate of duty’.

(2 marks) “Non-excisable goods” and “goods carrying nil rate of duty” are different as ”non-excisable goods” don’t fall in excise regime at all

(because they are not mentioned in the Schedules to CETA) while “goods carrying Nil rate of duty” fall within the excise regime. Though so far question of dutiability is concerned, no duty can be demanded on both. But “non-excisable goods” don’t attract levy

at all and therefore, no duty demand is possible even if these become excisable as on date of their removal. In contrast, “goods carrying nil rate of duty” attract excise levy as on their date of manufacture and hence, duty demand is possible in the event of enhancement of duty as on their date of removal.

4. Differentiate between "non-excisable goods" and "non-dutiable goods". (May 2010 3 Marks)

Non-Excisable Goods Non-dutiable Goods Expression ‘Non-excisable goods’ is narrower in scope when compared to non-dutiable goods. It is one of species of ‘non-dutiable goods.

Expression ‘Non-dutiable goods’ is wider in scope when compared with ‘non-excisable goods’. It covers up both non-excisable goods and certain excisable goods.

Non-excisable goods consist of goods not mentioned in the Schedule to CETA.*

Non-dutiable goods consists of following: a) Non-excisable goods; b) 100% exempted goods; c) Goods chargeable to Nil Rate of duty

*Author: Goods against which no rate has been specified in Tariff (i.e., rate is ‘Blank’) are non-excisable goods. [SC]


Examples: • Live Animals [Chapter 1 of CETA); • Live Trees [Chapter 6 of CETA); • Electrical Energy [Chapter 27 of CETA); • Newspapers and Maps [Chapter 49 of CETA);

.

5. Write a short note with reference to the Central Excise Act, 1944 and Cenvat Credit Rules 2004 on “GOODS” and “EXEMPTED

GOODS”. [May 2011 3 Marks]

GOODS as per Central Excise Act, 1944: Explanation to Sec 2(d) of Central Excise Act, 1944 defines the term ‘goods’ in an inclusive manner. It defines goods to include any article, material or substance which is capable of being brought and sold into the market for a consideration and such goods shall be deemed to be marketable. CBEC has clarified that this definition of ‘goods’ has been introduced to overrule certain judgments of Courts where it was held that residues, waste etc which are not sold regularly shall not be treated as goods.

EXEMPTED GOODS as per Cenvat Credit Rules, 2004 Exempted goods have been defined by Rule 2 of the Cenvat Credit Rules, 2004. It defines exempted goods to mean goods which

are wholly exempt from duty of excise. Besides that, it includes following two: 1) Goods which are chargeable to Nil rate of duty. 2) Goods which are partially exempted under E/N 1/2011 and those which are covered by Sl No 67 and 128 of E/N 12/2012.

MOVABLE – CASE ANALYSIS 6. With reference to the provisions of Central Excise Act, 1944, explain whether the following items can be considered as

excisable goods:

(i) Huge metal tanks erected at site for storing petroleum products in oil refineries. Such tanks are not embedded in earth, but once erected they cannot be physically moved and will have to be necessarily dismantled in case of sale/disposal.

(ii) Turn key projects [ICAI RTP – NOV 2014]

As per section 2(d) of Central Excise Act, 1944, excisable goods means goods which are specified in the First Schedule and the Second Schedule to the Central Excise Tariff Act, 1985 as being subject to a duty of excise and includes salt. Thus, in essence, goods specified in CETA are excisable goods. For an article to be called goods, it shall be ‘movable’ and ‘marketable’. Movability of an article is rendered by the feature that it shall be capable of being transferred to another place of use in the same condition, i.e., without dismantling. Marketability of product is rendered by the feature that it shall be capable of being sold.

In the light of the above provisions/position, the excisability of the two items are discussed below:

(i) Huge Metal tank- requiring dismantling if to be transferred: Movability is not simple capability of being transferred. The article shall be capable of being transferred to another place

of use in same condition, i.e., without necessity of dismantling. If dismantling is required, then article shall be treated as ‘immovable;.

Thus, though such huge metal tanks are not embedded in the earth, they are erected at site, stage by stage, and after completion they cannot be physically moved. Further, on sale/disposal they have to be necessarily dismantled and sold as metal sheets/scrap and it is not possible to assemble the tank all over again. Therefore, such tanks are not moveable and cannot be considered as excisable goods.

(ii) Turn key projects: Turn key projects like steel plants, cement plants, power plants etc. involves supply of large number of components,

machinery, equipments, pipes and tubes etc. for their assembly/installation/erection/integration/inter-connectivity on foundation/civil structure etc. at site. They will not be considered as excisable goods for imposition of central excise duty. However, their components would be dutiable in the normal course.

[Similar stand has been taken by CBEC in its order issued u/Section 37B (58/1/2002) ] 7. A public sector undertaking has given a turnkey contract to M/s B.S. Ltd. for erection, installation and commissioning of a Central

Air-conditioning plant. Please examine with the help of decided case laws as to whether the duty of excise is payable on the plant.

(4 Marks) Turnkey Contract = Composite contract where the contractor is just required to turn key to make the project operational (just as in case of car, only key turning is required)


As per the given facts, M/s B.S. Ltd has undertaken the contract of erection, installation and commissioning of Central Air-conditioning plant. Upon execution of such contract, the central air-conditioning system has come into existence upon which excise duty has been demanded by the Department.

The issue for consideration before us is whether the said plant is exigible (liable) to excise duty. Sec 3 of the Act which is the charging provision authorizes levy and collection of excise duty only on “excisable goods”. To be an

“excisable goods” turbo-alternator must have the attributes (qualities) of movability and marketability. In fact, the Apex Court in case of QUALITY STEEL TUBES PVT. LTD. - 1995-SC, has very clearly held that “erection and installation of a plant can’t be held to be resulting into excisable goods. If such wide meaning is assigned it would result in bringing within the ambit of term ‘goods’ structures, erections and installations.” In the case of MUNICIPAL CORPORATION OF GREATER MUMBAI – 1996-SC laid down the “test of permanency” to check out whether an article is movable or not. As per that test, if an article is liable to be dismantled and re-erected at another place (instead of being movable to another place of use as such) then it is an immovable article. Applying that test to the air-conditioning plant, it is an immovable article. This is for the reason that air-conditioning plant is basically system comprising of compressors, ducting, pipings, insulators and sometimes cooling towers etc. which comes into existence only by assembly and connection of various components and parts and thus, not transferable to another place without dismantling into its component parts.

In light of the above discussion, the said plant is not exigible(*liable) to excise duty.

Tutorial Note: If answer appears to be lengthy (and you are running short of time in exams), then you can skip the introduction as given in “first para”.

8. PQR & Co. is engaged in the business of fabrication and erection of structures of various types contract basis. They entered into a

contract with M/s. XYZ Co. for fabrication, assembly and erection on turn key basis of WASTE WATER TREATMENT PLANT. This activity involved procurement, supply, fabrication, transportation of various duty paid components and finally putting up a civil construction and erection of the wastewater treatment plant and commissioning the same. The entire fabrication is done at site. The pressure testing was carried out as such until it was wholly built. The Excise department has issued a SCN that the fabrication at site amounted to manufacture of excisable goods since the plant came into existence in an unassembled form as per drawings and designs approved by the client M/s. XYZ Co. before the fabrication activity was under taken. Therefore according to the department excise duty was payable on the value of the plant excluding the value of the civil work. Briefly discuss with reference to case law whether the SCN is sustainable in law.

[May 2011 5 Marks] As per the given facts, PQR & Co has built up ‘Waste Water Treatment Plant’. Assessee has not paid excise duty on it as it is

considered immovable by assessee. The reason for such treatment by assessee is that it has been embedded into the earth and it becomes operational only after such embedding. However, department is of opinion that plant comes into existence before embedding it into civil structure and thus, it is movable and thus, chargeable to excise duty. Excise duty shall be payable on value of plant excluding the value of civil works.

The issue for consideration before us is whether SCN demanding excise duty is sustainable/valid. It shall be noted that mere bringing of the duty paid parts in an unassembled form at one place, i.e. at the site does not amount to

manufacture unless an excisable movable product (say a plant) comes into existence by assembly of such parts. In the present case, waste water treatment plant did not come into existence only when all the parts were put together and embedded in the civil work. WASTE WATER TREATMENT PLANT did not become a plant until the process which included the civil work, was completed. Thus, no commercial movable property came into existence until the assembling was completed by embedding different parts in the civil works. Hence, the fabrication, assembly and erection of waste water treatment plant does not amount to manufacture of EXCISABLE GOODS. On identical facts same stand was taken by Mumbai HC in case of LARSEN & TURBO LTD- 2000

In view of the aforesaid discussion, SCN is not sustainable. MARKETABLE – CASE ANALYSIS 9. “Everything that is sold is not necessarily a marketable commodity chargeable to excise duty under the provisions of the Central

Excise Act, 1944.” or "Mere selling of a commodity does not mean it is marketable". Elucidate.

(5 Marks) The attribute of marketability requires that an article shall be capable of being sold in the market as such. Whether an article is

marketable or not, is a question of fact. In general sense, anything which is brought and sold in the market is considered to be marketable.

However, under excise marketability has always been very contentious issue. Many times assessee has challenged marketability of an article even where it was actually sold. The said issue was settled in the landmark case of INDIAN ALUMINIUM CO. – 1995-SC. In that case, dross/skimming arose during the manufacturing activity carried out by assessee. Such dross/skimming were actually sold by assessee for a consideration. The department demanded duty alleging dross/skimming marketable considering their actual sale by assessee. However, Hon’ble SC in that landmark judgment held that merely because dross/skimming can be sold doesn’t make them marketable commodity. Anything which is sold shall be treated as marketable commodity only when it is known to the commerce and it is worthwhile to trade in. Dross and skimming are not marketable as understood in the commercial parlance.


Thus, the aforesaid judgment settled that everything which is sold is not a marketable commodity. However, FA 2008 has overruled that decision by inserting an explanation to the definition of “Excisable Goods”. The explanation provides that “GOODS” includes any article, material or substance which is capable of being bought and sold for a consideration and such goods shall be deemed to be marketable. After this explanation any article which is capable of being brought and sold shall be deemed to be marketable, even though it is not ordinarily saleable. Thus, even dross/skimming will attract ED liability.

CONCEPT OF CAPTIVE CONSUMPTION

Captive Consumption – Related exemption 67/95 • Goods captively used in manufacture of other dutiable goods — Exempt :

Intermediate goods, being sugar syrup, used captively in manufacture of dutiable aerated waters is exempt from excise duty. —PARLE BISLERI PVT. LTD. – 2015-SC .

• Exemption to Captive consumption — Not covers "consumption within different factory of same manufacturer" Exemption subject to condition of use of the goods within the factory of their production (captive consumption) cannot be allowed to goods sent to the other factory for production of the same manufacturer. Hence, demand of duty was confirmed. — BATA INDIA LTD.- 2015-SC

10. A Ltd. is manufacturing a product which is captively consumed to produce a final product, which is exempt from the payment of

excise duty. The intermediary product is having a distinct market of its own. The company is of the view that since the final product is exempt, no duty liability arises on intermediary product also. The department objected the view of the assessee. Discuss, with reference to a decided case law, if any, whether the view of company is justifiable?

(Nov 2009 5 Marks) As per the facts of the given case, assessee has manufactured a product, which is marketable but has captively consumed it for manufacturing other product. The other product so manufactured by him is exempt from excise duty and considering that assessee had opined no excise duty is payable by him at all. However, department opined ultimate final product being exempt, assessee shall pay excise duty on its captively consumed goods as it is marketable. The issue for consideration is whether excise duty is payable on captively consumed goods. It is settled law under excise that duty stands attracted even on captively consumed goods if it is marketable. For being marketable it need not be actually sold in the market, it shall be capable of being sold. Though, CG has issued exemption to captively consumed goods that exemption is applicable only when ultimate final product is dutiable (E/N 67/95). In the case before us, the ultimate final product is exempt from excise duty and thus, even benefit of that exemption is not available to the assessee. In view of aforesaid discussion, the view of the company as to non-payment of any excise duty is not justifiable.

11. Odyssey Machines Limited manufactures C.I. Castings which are captively consumed for producing C.I. Chilled Rolls. These Chilled

Rolls are exempted from payment of excise duty. Revenue alleges that C.I. castings which are intermediary product, are marketable. Therefore, excise duty is payable on them as the final product is exempt from duty. However, the Revenue fails prove the marketability of C.I. castings.

Discuss, with reference to a decided case law, if any, whether the allegation made by the Revenue is justifiable. [RTP June 2009 (Old Syllabus)]

C.I. Casting: Cast Iron Casting (loosely, you can call it Moulds/ Dies) Cast Iron: It usually refers to grey iron. It is made by re-melting ‘pig iron’. [First iron is melt and then Carbon and Silicon is added – and then final

form is produced by casting] Casting: it involves pouring a liquid metal into a mold, which contains a hollow cavity of the desired shape and then is allowed to solidify

Under excise, it is settled law that even captively consumed goods will attract excise duty liability so long as the captively consumed

goods are marketable. In respect of captive consumption, CG has issued E/N 67/95 which exempts exemption to intermediate goods (which covers ‘capital goods’ also) when used in manufacture of final product on which duty is payable. If no duty is payable on Final Product, then intermediate goods are not exempt. However, if such intermediate goods are not ‘marketable’ at all, then there arises no question of any payment of ED on intermediate goods as these are then ‘non-excisable goods’.

In the instance case, the final product is exempt from duty and thus intermediate product shall be liable for payment of excise duty. However, intermediate product shall be liable only if it is excisable/marketable. It is settled law that burden of proving marketability is on the Department. In the instant case, since the Department failed to prove marketability, the intermediate goods is non-marketable and hence, non-excisable. It was so held in case of WHITE MACHINES-2008-SC.

12. Your advice as a consultant is sought by the taxpayer in the case below. Kindly indicate, with reasons, your decision.“One of the

plants of the taxpayer produces ferrous sulphate, chromium sulphate and sulphur di-oxide during the preparation of Khaki dye. These are intermediate goods/ semi finished goods and are not marketable. Central Excise Authorities demand excise duty on the ground that the taxpayer was manufacturing these goods and was clearing them for internal consumption.”

(5 Marks) Sec 3 of the Act which is the charging provision authorizes levy and collection of excise duty only on excisable goods which have

been defined u/s 2(d) of the Central Excise Act, 1944 to mean goods specified in the Schedule to CET Act as being subject to a duty of


excise including salt. To be called excisable goods, the article must be shown to have attributes of excisable goods as understood in the Excise Law. These attributes are – movability and marketability. The attribute of marketability requires that an article shall be capable of being sold in the market as such.

Undoubtedly, marketability depends upon “capability of sale” and not on “actual sale”. Thus, even captive consumption (consumption of intermediate goods) may attract dutiability. But, in case of MOTI LAMINATES (P) LTD. -1995-SC, it was observed by SC that duty is attracted on captive consumption of any article, but it must be goods within the meaning of the Act which must be marketable or capable of being marketed. The captive consumption, by itself, is not determinative of marketability of product unless supported by other factors like a regular market, shelf life of an article etc.

Under the stated facts, intermediate good (semi-finished good) is non-marketable and that point has not been challenged by the Department. Department case is only that captive-consumption shall itself be taken as proof of marketability of product. That contention of Department is unacceptable in view of above cited decision of SC.

Accordingly, the assessee is advised to represent his case to the Department on the above basis or, where the demand has already been adjudicated, challenge the order in-appeal.

13. M/s XYZ Distillery purchased Yeast form the market and mixed the same with molasses. The mixture called wash is used for

production of alcohol. M/s XYZ contends that Wash is not excisable as it has no shelf life of more than 8 hours. Please offer your considered views.

(4 Marks) As per the facts of the case, an intermediate good, namely ‘Wash’, has come into existence during the course of production of alcohol.

This product is having shelf life of not more than 8 hours. The issue for consideration before us is whether an intermediate product which is not sold but used captively can be held to be

marketable in the absence of longer shelf life. Long ago, in the case of DCM – 1977, the SC hold out that “the excise duty is on the production/manufacture of goods and not

their sale. Therefore, the fact that a substance produce at an intermediate stage is not put for sale in the market would not make any difference.” However, in MOTI LAMINATES PVT. LTD. –1995, SC held that “duty is attracted on captive consumption of any article, but it must be goods within the meaning of the Act which apart from having a distinct name and known as such must be marketable or capable of being marketed.” For determining whether the intermediate product is marketable or capable of being marketable, the shelf-life of the product shall be given due consideration. In JAGJIT INDUSTRIES LTD. -2002, SC held that “absence of shelf-life or short-shelf life of goods proves non-marketability. Yeast having short shelf life is not “goods” when there is no proof of its marketability.”

In view of above discussion, ‘Wash’ is not excisable as having short shelf-life within which it can’t be marketed.

DID YOU ANSWER THE QUESTION? Question requires you to offer your views. Your view should be in one way or the other. In other words, you should conclude whether “wash” is excisable or non-excisable. You are not expected to leave the issue open by saying that “if it is marketable in 8 hours, then it is excisable, otherwise it is non-marketable”.

14. M/s. Healthcare Ltd. is manufacturer of patent and proprietary medicines. Physician samples were distributed to medical

practitioners as free samples. The Central Excise Department raised the demand of excise duty on such samples. The assessee contended that since the sale of the physician samples were prohibited under the Drugs and Cosmetics Act, 1940 and

the rules made thereunder, the same could not be considered to be marketable and hence were not liable to excise duty. . Examine with the help of a decided case law whether the contention of the assessee is valid in law. [Nov 2014 – 3 Marks]

The facts of the given case are similar to the case of MEDLEY PHARMACEUTICALS LTD. -2011-SC. In the instant case, the Supreme Court observed that merely because a product was statutorily prohibited from being sold would not mean that the product was not marketable. Sale is not a necessary condition for charging duty as excise duty is payable in case of free supply also. The Supreme Court observed that since physician samples were capable of being sold in open market, the same were marketable and thus, liable to excise duty. Therefore, in view of the above-mentioned ruling of the Supreme Court, the contention of the assessee is not valid in law.

Author 1. Goods the sale of which is prohibited under any statute shall be treated as non-marketable as they are not capable of being sold at all. However, this was not the case with ‘pharmaceuticals samples’ as distribution of goods as samples was discretion of assessee and not any statutory requirement.

2. OBSERVATION of Hon’ble SC in case of MEDLEY PHARMACEUTICALS LTD: “Admittedly the regular packs are being sold by the appellant in the open market, the samples of the same product consisting the same medicine, though less in numbers and smaller in size, are also capable of being bought and sold in the market from the shelf itself. Merely because such samples, on account of being endorsed with the words "physician samples", are prohibited for being sold in the market on account of prohibition as contained in the Drugs and Cosmetics Act, they cannot be held as non marketable.

15. Briefly examine the correctness or otherwise of following statement with reference to the Central Excise Act, 1944 giving reasons to

support your answers: (i) Parts used for repair or replacement during warranty period are excisable. (3 Marks)


The given statement is “correct”. Excise duty is on production or manufacture of goods and not on their sale. It is settled principle under excise laws that goods which is not sold but is capable of being sold shall be treated as “marketable” and hence, will be subject to excise duty. Since parts used for repair or replacement during warranty are otherwise marketable, these will be excisable even if supplied free of cost during warranty. It was so held by Hon’ble SC in case of BHEL-2003.

CONCEPT OF ‘DEEMED MARKETABILITY’

16. Discuss the concept of ‘deemed marketability’ as recently introduced by Explanation to Sec 2(d) of CEA, 1944. Sec 2(d) of CEA, 1944 has been amended in 2008 to insert a deeming fiction regarding marketability. Explanation to Sec 2(d) has been inserted providing that any article, material or substance which is capable of being brought and sold for a consideration shall be deemed to be marketable and shall be treated as ‘goods’. In view of introduction of concept of deemed marketability, waste/refuse arising in course of manufacture of final product shall undisputedly be treated as ‘marketable’ and hence, excisable goods for the purpose of levy of ED thereon.

Deemed marketability: Some instances of waste/refuse which now shall be treated as ‘marketable’

Main Product Waste/Refuse Biscuits Floor

Sweepings During the course of manufacture certain inputs like vanaspati, maida etc. fall down on the floor. To clean the floor the appellant is required to sweep the floor and these ˜sweepings' upon selling fetch certain amount to the appellant as it is used as animal feed. Fact: These floor sweepings were purchased by dairy owners, being a distress sale, the sale price

depended upon the whims of the buyer BRITANNAI INDUSTRIES LTD- TRIBUNAL: In such a situation it cannot be held that the goods had a

ready market and that they had regular sales, and that they were marketable – no basis to conclude that these goods were excisable products.

At present, these goods shall be deemed to be ‘marketable’.

Sugar Bagasse The dry, fibrous residue remaining after the extraction of juice from the crushed stalks of sugarcane. Bagasse can be used for manufacture of some paper products.

Paper Sludge “Sludge’ is generic term for the residue that results from pulp and papermaking. Generally, it is solid residue recovered from the wastewater stream of the pulping and papermaking process. Generally, most sludge produced by pulp and paper mills is dewatered and landfilled. It can be used for brick production and hence, may fetch some price.

Aluminum Dross / Skimming

Aluminium dross, a byproduct of the aluminum production. This dross can be recycled and used.

Issue 1: Whether anything be considered to be non-marketable even after introduction of concept of ‘deemed marketable’? .

Yes, anything which is not capable of being brought and sold for consideration will still be considered to be non-marketable. For example: 1. Goods the sale of which is prohibited under any statute shall be treated as non-marketable as they are not capable of being sold at all.

AMRIT BOTTLERS PVT. LTD. – 2014 –ALLAHABAD HC Contaminated aerated water: Sale prohibited (as per Prevention of Food Adulteration Act) – thus, non-marketable Further, such contaminated water when drained cannot be said to ‘manufactured goods’ – thus, no duty payable. Facts

• Assessee, a manufacturer of aerated water, was draining out aerated water without entering it into daily stock account as certain bottles were found to be defective on account of contamination, under/overfilling of bottles or it was badly crowned bottles, because same was unusable under Weights and Measures Act as well as under Prevention of Food Adulteration Act.

• Department argued that even if said bottles were unfit for human consumption, nonetheless, it was required to be entered in daily stock account and thereafter, assessee should have applied for remission, which was not done.

• Department demanded duty.

Held • Since law requires screening test prior to bottles being eligible for sale, said screening test as per Legal Meterology Act as well as under Prevention of Food Adulteration Act is a necessary condition of marketability.

• Accordingly, aerated water drained by assessee was not marketable and was, therefore, not excisable and not required to be entered in Daily Stock Account.

Therefore, demand was set aside.

.

2. Goods which are never sold as a matter of trade secrecy (as is implied from the following circular)

CIRCULAR NO 989/13/2014 Subject Matter

Excisability of AGARBATHI MIX (Odoriferous compound) arising during the course of manufacture of agarbathi [Agarbatti = Incense Stick]


Clarification • It has been reported that some manufacturers of such odoriferous compounds have claimed non- excisability on the ground that such compounds are a trade secret (The formula of preparation of such compounds is kept a secret), not sold in the market and hence not excisable. This is despite the fact that such compounds have shelf life and are capable of being marketed as a distinct identifiable commodity.

• It may be noted that Sec 2(d) of CEA, 1944 has been amended in 2008 to insert a deeming fiction regarding marketability. Specific cases have been detected, where intermediate masala mix has been found to be actually bought and sold. It is therefore clarified that

o Agarbati Mix the preparation of which is kept a secret and thus, not capable of being bought and sold shall be treated as non-excisable goods.

o in cases where on the basis of evidence it is established that such intermediate compounds are capable of being marketed, the same will be excisable, irrespective of whether the compound is actually marketed or not.

Illustrations (Author) • M/s Ketan Agarbathi Works is manufacturing and selling ‘ready mix agarbathi powder (agarbathi raw material)’. Thus, such powder is very will

marketable and excisable. M/s Ketan shall be liable to pay ED on ready mix power sold by it as well as consumed by it. • M/s Juhi Agarbathi is manufacturing agarbathis. The agarbathi mix for that is manufactured in-house. The agarbathi mix is a guarded secret and

not disclosed to anyone in trade. Further, M/s Juhi Agarbathi is not selling it. In this case, agarbathi mix can be claimed to be non-marketable. Author: Intermediate goods in manufacture of Agarbatti exempted w.e.f. 1-3-2015 : All intermediate goods consumed within the factory of their production in manufacture of 'Agarbatti' have been exempted vide Notification No. 10/96-CE, as amended w.e.f. 1-3-2015. Hence, even if aforesaid intermediate goods are excisable, no duty is payable, as they have been exempted.

Issue 2: Whether every ‘deemed marketable’ article shall be subjected to ED? .

No, it shall further be seen whether the said goods emerged as a result of ‘manufacturing activity, as defined u/Sec 2(f). This explanation only relates to marketability and can put the goods into status of ‘excisable goods’ (if such goods finds mention in First and Second Schedule to CETA). The ‘criteria of manufacture’ shall also be satisfied. [The article may be ‘deemed marketable’, but it is not ‘deemed manufacture’] • HINDALCO INDUSTREIS LTD. 2015- BOMBAY HC: Conditions contemplated under Section 2(d) (excisable goods, movability and marketability)

and Section 2(f) (manufacture) have to be satisfied conjunctively in order to entail imposition of excise duty. Merely because goods satisfy test of being marketed and saleable and merely because goods are listed in tariff, it does not mean that they are 'manufactured goods'.

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BAGGASE – dutibility thereof Conditions of excisability Evaluation Remarks In India Satisfied ---- Excisable Goods Satisfied It is movable.

Post introduction of explanation to Sec 2(d), baggage shall be deemed to be marketable. Thus, baggase is excisable goods. .

Manufactured ??????? BALRAMPUR CHINNI MILLS LTD-2013- ALLAHBAAD HC KCP SUGAR & INDUSTRIES CORPORATION LTD. - 2015 – AP HC • Bagasse arising as residue / waste of sugarcane during crushing of sugarcane as a

part of process of manufacture of sugar, is not manufactured product. • Bagassse is a sugarcane waste. It is not a manufactured product. • ED not leviable, even if it is deemed marketable.

[CBEC Circular stating that ED is leviable was quashed by HC]

Author’s Note: With due respect to the Hon’ble HC, Author disagrees with the view that ‘bagasse’ is not manufactured goods. In personal view of Author, even bagasse is manufactured product. SC has admitted appeal against this judgment in Balrampur Chini Mills' case as reported in Kisan Sahakari Chini Mills Ltd. - 2015 –SC. • However, FOR EXAMS PURPOSES, if question is direct case-study based, then state view of HC only.

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ALUMINIUM DROSS / SKIMMING – dutibility thereof • In course of manufacture of aluminium sheets / coils, aluminium dross / skimmings emerged as by-products. Conditions of excisability Evaluation Remarks In India Satisfied ---- Excisable Goods Satisfied It is movable.

Post introduction of explanation to Sec 2(d), IT shall be deemed to be marketable. Thus, it is excisable goods.

Manufactured ???????? HINDALCO INDUSTREIS LTD. 2015- BOMBAY HC • Aluminum dross/skimming is not a manufactured product. • ED not leviable, even if it is deemed marketable.

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NEW ROUND OF LITIGATION IS GOING ON [Author] .


CONCEPT OF MANUFACTURE 17. Manufacture implies a change, but every change is not manufacture. Elucidate* this statement supported by at least one decided

case. (4 Marks) [*Elucidate = To Make Clear, Throw Light Upon]

The term “manufacture” has been defined u/s 2(f) of the Central Excise Act, 1944 in the inclusive manner. That definition does not throw any light on the real nature of any activity that will amount to manufacture. Therefore, it becomes a pertinent issue whether any process which brings a change in the commodity can be characterized as manufacturing process or it is only the process which results into emergence of a commercially distinct commodity, having distinct commercial identity, can be termed as manufacturing process.

The same issue arose for consideration before the SC in the celebrated case of DCM. – 1977. In that particular case, DCM purchased groundnut and til oil from the open market and subjected it to different processes in order to turn them into vanaspati. During the course of processing of these oil, these turned into crude form upon which the Revenue sought to charge duty claiming that even if it couldn’t be called “refined oil”, the raw material, on application of certain processes had undergone certain change. However, the SC rejected the revenue contention and hold out that “the word ‘manufacture’ is generally understood to mean as bringing into existence a new substance and does not mean merely to produce some change in the substance. Therefore, ‘Manufacture’ implies a change but every change is not manufacture and yet every change is result of treatment, labour, skill, and manipulation; something more is necessary---there must be a TRANSFORMATION, i.e., a new and distinct commodity must emerge having a distinctive name/nature/use. Therefore, the raw oil, through undergoes a number of processes bringing some change will not be excisable unless a new substance comes into existence which is ordinarily brought and sold in the market. The definition of the word ‘manufacture’ in section 2(f) doesn’t equate ‘processing’ to ‘manufacture’ and therefore, mere processing of goods is not liable to excise duty.”

The aforesaid proposition of law was followed by judicial forums (i.e., Courts and Tribunal) in all the subsequent decisions.

Author:

PROCESS MANUFACTURE A single operation / a part in manufacture A series of process is called manufacture The output of a process may or may not be finished product (i.e., new district article)

The output of manufacture must be a finished product (i.e., new district article)

Every process is not manufacture Every manufacture is a process. =.

18. Whether production of mustard oil and oil cake from mustard seeds amounts to manufacture? You are required to examine the

situation with the help of a decided case law. (ICAI Practice Manual)

The activity of producing mustard oil and oil cake from mustard seeds amounts to manufacture. This particular issue has been decided by the Supreme Court in the case of JAI BHAGWAN OIL AND FLOOR MILLS - 2009 - SC. In the instant case, the Apex Court held that the true test to ascertain whether a process is a manufacturing process producing a new and distinct article is whether the article produced is regarded in the trade, by those who deal in it, as a marketable product distinct in identity from the commodity/raw material involved in the manufacture. When mustard seeds were subjected to the process of extraction whereby mustard oil and oil cake were produced, the process involved manufacture of mustard oil as also the manufacture of oil cake.

Author:

Oilcake Oil cake is the solids remaining after pressing something to extract the liquids. Its most common use is in animal feed. In case of JAI BHAGWAN OIL AND FLOOR MILLS - 2009 – SC, SC held that … Oil cake had a distinct and different identity from mustard seeds and it had a separate name,

character and use different from mustard seed. Oil cake was not a waste to be thrown away, but was a valuable product with a distinct name, character, use and marketability.

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LATEST IN JUDICARY MMTC - PAMP INDIA PVT. LTD.– 2014 –AAR (AUTHORITY OF ADVANCE RULING) Activity of making Articles of precious metals (like pendants etc) out of gold amounts to manufacture M/S INTERNATIONAL INSTITUTE OF DIAMOND GRADING AND RESEARCH INDIA PVT LTD- 2015-AAR Activity of grading of diamonds and inscribing the word ‘FOREVERMARK’ to diamonds (inscribing provides assurance to customer as to that fact that product is genuine) doesn't amount to manufacture.

https://en.wikipedia.org/wiki/Expeller_pressing

https://en.wikipedia.org/wiki/Extract

https://en.wikipedia.org/wiki/Fodder


MARUTI SUZUKI INDIA LTD.– 2015 –SC Anti-Rust Treatment (EDC – Electro Deposition Coating) on motor vehicles parts like bumpers, grills etc. to increase their shelf-life does not amount to manufacture due to following reasons: 1) it does not convert these parts into a new commercial commodity known to the market – these parts are of commercial use in

themselves whether process of ED coating is applied or not 2) it involves mere value addition without any change in name, character or end-use of the goods.

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Author: EDC – Electro Deposition Coating (E-Coat) EDC is one of the most durable and cost-effective methods of corrosion protection. The E-Coat process involves the use of electrical current to deposit paint on material, which is then baked in an oven.

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M/S PITAMBER COATED PAPER LTD.– 2015 –SC Coating of paper does not amount to manufacture as no different commodity emerges after the coating. The coated paper continuous to be paper for printing and writing.

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Author: Coating is used to finish paper and provide some added-value. Coated paper (it absorbs less ink) Coating is a process by which paper or board is coated with an agent to improve brightness or printing properties. By applying PCC, china clay, pigment or adhesive the coating fills the miniscule pits between the fibres in the base paper, giving it a smooth, flat surface which can improve the opacity, lustre and colour-absorption ability. Various blades and rollers ensure the uniform application of the coating. Different levels of coating are used according to the paper properties that are required. They are divided into light coated, medium coated, high coated, and art papers - art paper is used for the high quality reproduction of artwork in brochures and art books. Uncoated paper (it absorbs more ink) Not all paper is coated. Uncoated paper is typically used for letterheads, copy paper, or printing paper. Most types of uncoated paper are surface sized to improve their strength. Such paper is used in stationery and lower quality leaflets and brochures.

LAMINATION is different from coating. .

LAMINATED PACKING – SC: Activity of lamination of kraft paper resulting into laminated kraft paper amounts to manufacture. . POONAM SPARK (P.) LTD. – 2015-SC • Assembly of various parts to make water purification / filtration system would amount to 'manufacture'

TEJO ENGINEERING SERVICES PVT. LTD. – 2015-SC • Mere cutting of legenthy conveyor belt into smaller sizes would not amount to manufacture

M/s SERVO-MED INDUSTRIES PVT LTD- 2015- SC

Facts Assessee purchased syringes and needles in bulk from the open market. Thereafter, it sterilize the syringes and the needles and put one syringe and one needle in an unassembled form in a printed plastic pouch. The syringe and the needle were capable of use only once and, hence, were disposable. The plastic pouches so packed were sold to buyer.

Dept: Activity = Manufacture • The process of sterilization brings about a transformation of the product by making something non-sterile sterile

Assessee: Activity = Not Manufacture • The process of sterilization does not bring about any change in the basic structure of syringes and needles even though post-

sterilization the value of the product gets enhanced.

Held Sterilization of syringe and needle is not manufacture • The process of sterilization does not produce a transformation in the original articles leading to new articles known to the

market as such. A surgical equipment such as a knife continues to be a surgical knife even after sterilization. If the Department were right, every time such instruments are sterilized, the same surgical instrument is brought forth again and again by way of manufacture and excisable duty is chargeable on the same. This would lead to an absurd result and fly in the face of common sense.

• All that the process of sterilization does is to remove bacteria which settles on the syringe's and needle's surface, which process does not bring about a transformation of the said articles into something new and different. Such process of removal of foreign matters from a product complete in itself would not amount to manufacture. In fact, no transformation of the original articles into different articles at all takes place. Neither the character nor the end use of the syringe and needle has changed post-sterilization. The syringe and needle retains its essential character as such even after sterilization.

INDIA MEDTRONICS PVT. LTD. – 2015-SC

Facts • Assessee was importing Arterial and Venous Tubing, connectors, filters, caps etc. • Arterial and Venous tubing were cut to specified lengths and connected to filter, connector and cap and once so assembled,

resultant "custom pack" was ready for use in a heart surgery. • Assessee argued that 'Custom Pack' was a packaging of accessories to surgery and did not amount to manufacture.

Held Mere packing of various accessories meant for 'heart surgery' to form 'custom pack' does not amount to manufacture. • No new product emerged as result of cutting tubing with connectors, tubing with blood filer / oxygen filter and packing same

ready to use condition for heart surgery. • Product 'custom pack' is only 'pack' and no new product is manufactured by assessee and no excise duty can be levied.


Facts • Assessee was importing Arterial and Venous Tubing, connectors, filters, caps etc.

• Arterial and Venous tubing were cut to specified lengths and connected to filter, connector and cap and once so assembled, resultant "custom pack" was ready for use in a heart surgery.

• Assessee argued that 'Custom Pack' was a packaging of accessories to surgery and did not amount to manufacture. Held Mere packing of various accessories meant for 'heart surgery' to form 'custom pack' does not amount to manufacture.

• No new product emerged as result of cutting tubing with connectors, tubing with blood filer / oxygen filter and packing same ready to use condition for heart surgery.

• Product 'custom pack' is only 'pack' and no new product is manufactured by assessee and no excise duty can be levied. M/s SATNAM OVERSEAS LTD- 2015- SC

Facts Activity= Mixing ‘raw rice, dehydrated vegetables and spices’ and packing it – Rice sold in the name of 'Rice and Spice'.

Dept: Activity = Manufacture • Rice did not remain rice at all as a mixed product containing rice, vegetable and spices

emerges after the specific process was undertaken by the assessee. • There is a transformation of a new commodity commercially known as distinct and

separate commodity having its own character, use and name.

Assessee: Activity = Not Manufacture • The aforesaid mixture, which is sold in a packaged form, is raw food and still needs to be

cooked to make it edible. • No new product which came into existence as that product was still known as rice which

did not lose its essential character and therefore it could not be treated as 'manufacture'. Held Activity is not manufacture

• Mere addition of dehydrated vegetables and certain spices to the raw rice, would not make it a different product. Its primary and essential character still remains the same as it is continued to be known in the market as rice and is sold as rice only.

• Further, this rice, again, remains in raw form and in order to make it edible, it has to be cooked like any other cereal. The process of cooking is even mentioned on the pouch which contains cooking instructions. Reading thereof amply demonstrates that it is to be cooked in the same form as any other rice is to be cooked. Therefore, there is a no transformation into a new commodity, commercially known as distinct and separate commodity.

FITRITE PACKERS – 2015 - SC

Facts • The assessee purchased duty-paid GI paper (Graphic Interface paper) from the market (base paper). • On this paper, the process of printing is carried out by the assessee according to the design and specifications of the customers

depending on their requirements. • This printing is done in jumbo rolls of GIP twist wrappers. • Bulk orders are received from Parle, which needs the said paper as a wrapper / packing paper for packing of their goods. • On the paper, logo and name of the product is printed in colorful form. • After carrying out the printing as per the requirement of the customers, the same is delivered to the customers in jumbo rolls

without slitting. Held Packing Paper / GI paper - Customized printing according to customers is manufacture

• GI paper is meant for wrapping and the use thereof did not undergo any change even after printing as the end use was still the same, namely, wrapping / packing.

• No doubt, the paper in-question was meant for wrapping and this end use remained the same even after printing. However, whereas blank paper could be used as wrapper for any kind of product, after the printing of logo and name of the specific product of Parle thereupon, the end use was now confined to only that particular and specific product of the said particular company / customer.

• The printing, therefore, is not merely a value addition but has now been transformed from general wrapping paper to special wrapping paper.

• In that sense, end use has positively been changed as a result of printing process undertaken by the assessee. Therefore, the process of aforesaid particular kind of printing has resulted into a product, i.e., paper with distinct character and sue of its own which it did not bear earlier.

19. Machcharkhalas is engaged in the manufacture of liquid mosquito destroyer. It obtains concentrated alletherin & dilutes the same

by adding solvents, deodorized Kerosene oil, perfume (as a making agent) & a stabilizing agent. Briefly examine with a note whether the addition of stabilizing agent, masking agent, etc., amounts to manufacture within the meaning of section 2(f) of the Central Excise Act, 1944.

(May 2010 -5 Marks) Allethrins: A pair of synthetic compounds used in insecticides Masking Agent: Agent which reacts with the chemical species Stabilizing Agent: Stabilizer is a chemical which tends to inhibit the reaction between 2 or more chemicals (it can be thought of as an antonym of

CATALYST)

Student shall note that in the absence of any information as to section /chapter notes of CETA (i.e., deemed manufacture), student shall answer the question with reference to ‘normal meaning of term ‘manufacture’.


The issue for consideration before us is whether process of dilution and stabilizing of insecticide can be treated as ‘manufacture’ within the meaning of Sec 2(f) of CEA, 1944.

On identical facts, in case of KARAM CHAND-2009-H.P, HC held that “Mere processing of the goods is not manufacture and to fall within the definition of manufacture a new substance should be formed. In the present case no new substance is formed and only a diluted form of original substance is packaged under a different brand name. Alletherin in its concentrated form is an insecticide and the final product manufactured by the respondent is a diluted form of insecticide which will only kill small insects like mosquitoes. There is no new substance which is created. In the absence of any provision in section notes or in the chapter notes of the Schedule to Central Excise Tariff deeming such process as amounting to manufacture, adding non-reactant substance cannot amount to manufacture. All that is being done is that the POTENCY of the insecticide is being reduced. This cannot be termed to be manufacture.

M.P.AGENCIES- 2015- SC

Facts Assessee dealing in following 2 products: 1) ‘Ujala Supreme’ which is described as fabric whitener for supreme whiteness of the cloth; 2) ‘Ujala Stiff and Shine’ which is described as liquid fabric whitener for crisp and shining cloth;

The aforesaid products are made by assessee by dilution of Acid Violet Paste (AVP). It purchases duty paid AVP, diluted it in water and filled in plastic containers and then sold under the brand name of ‘Ujala’.

Report of Chemical Examiner: There is mere dilution in water and nothing else.

Held Mere dilution does not amount to manufacture and no new product emerges. .

20. Briefly describe whether “Assembly” would tantamount to manufacture under the Central Excise Act, 1944.

(5 marks) Assembly is a process of putting together a number of items or parts of an item to make a product or item. Assembly may or may not

amount to manufacture depending upon the whether as a result of assembly a new article, having distinct character, name etc. emerges or not. If a new article emerges, then assembly will tantamount to manufacture. For example, assembly of duty paid components and parts of computer system would amount to manufacture because computer has commercial identity, nature and use different from the individual parts and components. However, if no new article emerges from assembly, the activity would not amount to manufacture. For example, putting together different duty paid items in a kit does not amount to manufacture because although kit has a distinct name, the other test laid down in precedent judgments of the Supreme Court for attracting duty liability are not satisfied there being no change in identity, character and use of the articles placed in the kit (XI TELECOM LTD.-1999--AP HC).

The assembly needn’t be in the factory itself to hold it manufacturing activity. Even assembly at site may amount to manufacture. For example, in case of NARNE TULAMAN MANUFACTURES (P) LTD. - 1988,where the assessee carried out the activity of assembling at site of the three components of the weighbridge and bringing into existence the complete weighbridge which has a distinctive name, character and use, SC held that the activity of fitting and assembling the three components would amount to manufacturing activity.

CRUX OF THE ISSUE Activity of assembly/ putting together may or may not amount to manufacture. The test is that if the various components assembled and put together, would the assembly perform a function different from that performed by individual components? If the answer is in affirmative, it would amount to manufacture. E.G., 1) Assembly of cooling units and condensing units of AC amounts to manufacture as its only they are assemble they can work as ‘complete

AC’ [FEDDERS LLYOD CORPORATION LTD- 2008-SC]; 2) Assembly of various items placed into ‘tool kit’ will not amount to manufacture [XI TELECOM LTD -1999- AP HC]

TRANMISSION ASSEMBLY Transmission: An assembly of parts including the speed-changing gears and the propeller shaft by which the power is transmitted from an engine to a live axle Transmissions are an essential part of what makes a car run. It’s attached to the engine and ensures that the engine and wheels turn in sync with each another. Think of the transmission like a chain on a bicycle. It keeps the engine (pedal) turning in time with the wheel regardless of what gear the vehicle is in. M/S ESCORTS LTD.– 2015 –SC Assembly of parts into transmission assembly = Manufacture • Transmission Assemblies of tractors are commercially known products. • Thus, Transmission Assembly of tractors is excisable/ chargeable to duty.

Notable Points in aforesaid judgment: 1. ESCORTS LTD was manufacturer of tractor, which was exempted from duty. Thus, transmission assembly arising as an intermediate

product in course of manufacture of tractor shall attract excise duty in hands of Escorts Ltd. 2. Said transmission assemblies were not sold into the market. Not even a single instance of sale was there. But still SC held that these parts


are marketable it is enough to show that that said goods were capable of being sold which, undoubtedly, they were.

INDIA MEDITRONICS (P.) LTD.– 2015 – GUJARAT HC Process involving: (a) import of tubes, connectors, filters and caps, etc.; (b) cutting of tubes, (c) assembling tubes with connectors and blood filter/oxygen filter and (d) packing same in ready to use condition for heart surgery,

does not amount to manufacture, as same is mere 'packaging of various accessories'

21. Parsvnath Furnishers Limited (PFL) is engaged in procuring the duty paid Office Furniture System/Work Stations (OFS/WS) from the

suppliers and erecting and installing them at site of customers, from whom it has procured the orders. After receiving the orders from its clients, a team of engineers prepares a lay out on computer aided design system where ready-made furniture systems and work stations manufactured by independent manufactures/suppliers are superimposed. Thereafter, based on the clients’ specifications, orders are placed upon the manufacturer of the furniture for each works station. After procuring the various elements of furniture system from the manufacturer, they join the same together according to the site drawing and the project code. The assessee contends that that they are only marketing OFS/WS. However, the Revenue alleges that PFL is liable to pay duty as the said activity amounts to manufacture. Examine, with reference to a decided case law, if any, whether the Revenue’s allegation is tenable in law?

[RTP Nov. 2009 (Old Syllabus)] BLOW PLAST LTD.-2009-DELHI HC: It was held therein that -

(a) Clearance of parts in disassembled condition by the supplier is clearance of ‘furniture’ itself: As per Rule 2 of the Interpretative Notes to the Tariff, the parts cleared by the suppliers in disassembled condition had been classified as Office Furniture System/Work Stations and duty had been paid on such furniture system. The assessee (PFL) had acquired such duty paid furniture; not duty paid ‘parts’.

(b) Activity carried out by PFL doesn’t amount to manufacture: The assessee was simply required to assemble various components

at the customers’ premises in fulfillment of the orders placed by them. When complete OFS/WS had been manufactured by the suppliers and suppliers had been charged to duty accordingly, then, nothing new has come into existence so as to bring the activities of the assessee within the ‘manufacture’. What the assessee received was complete OFS/WS and what it left on its clients’ sites was also complete OFS/WS. Nothing new had come into existence.

Hence, the allegation of the Revenue was not tenable in law. Thus, the allegation made by the Revenue is not justifiable.

22. Parsvnath Music System Ltd imported recorded audio and video discs in boxes each containing 50 discs. Each individual disc was then packed and placed in transparent plastic cases known as jewel boxes. An inlay card containing details of the content of the compact disc was also placed in jewel box. The whole thing was then shrink wrapped and sold in wholesale. The department contended that the said process amounted to manufacture on first principle.

Discuss, with reference to a decided case law, if any, whether the Department’s contention is justified in law. [RTP May 2010 (Old/New Syllabus)]

The issue for consideration before us is whether packing of recorded audio and video discs in jewel boxes will amount to manufacture within the meaning of Sec 2(f) of Central Excise Act.

The identical issue arose for consideration before Bombay HC in case of SONY MUSIC ENTERTAINMENT (P) LTD- 2010. It was held therein that the activity of packing in the instant case cannot be held as manufacture on first principle as no new goods have come into existence.

23. Assessee purchased duty paid M.S. tubes from its manufacturers and cut into requisite length and were put into the swaging

machine for undertaking swaging process whereby dies fitted in the machine imparted 'folds' to flat surface of M.S. Tube/Pipe. Department's view is that 'swaging process' amounts to manufacture whereas assessee denies. Discuss whether the Department's contention is correct by referring to section 2(f) of the Central Excise Act, 1944. You can take the help of decided case law, if any.

(May 2009 5 Marks) Swaging is a forging process in which the dimensions of an item are altered using a die or dies, into which the item is forced. As per the facts of the case, the assessee is engaged in swaging operations on MS Tubes. Assessee is

purchasing MS tubes, cutting them into requisite length and then doing swaging on them which resulted into folds on the flat MS tubes. Department has demanded duty from the assessee holding his activity as “manufacturing activity”

The issue for consideration before us is whether the activity undertaken by assessee which has resulted into emergence of swaged pipe can be held to be “manufacturing activity”

http://en.wikipedia.org/wiki/Forging

http://en.wikipedia.org/wiki/Die_(manufacturing)


Under excise, excise duty is leviable on production/manufacture of goods. So far as concept of “manufacture” is concerned, Hon’ble SC in landmark case of EMPIRE INDUSTRIES has held that any process will amount to manufacture if as a result of said process the object is transformed to such a degree that it is commercially known differently. Applying that test to the facts of case, swaging is manufacturing process as swaged pipe is a new and distinct product commercially different from M.S. Tubes. On identical facts, very recently, Hon’ble SC held the same in case of PRACHI INDUSTRIES-2008-SC.

In light of above discussion, Department’s contention as to holding “swaging process” as manufacturing process, is right. 24. Briefly explain any two of the following with reference to the provisions of Central Excise Act, 1944: (i) Manufacture and processing (ii) Labelling and branding activities. (Nov 2007 2x2=4 Marks)

(i) Manufacture and Processing: Manufacture means a process which results into value addition to such an extent that it results into transformation, i.e., which results in emergence of a new distinctive commodity having a different name and use. On the other hand, processing refers to simple value addition. Hon’ble SC has made a remarkable observation in this context “manufacture implies a change, but every change is not manufacture. Though every change is a result of treatment, labour, skills and manipulation --- but that is not sufficient for holding a process as manufacture”.

(ii) Labelling and branding activities: Given the definition of “manufacture” in Sec 2(f) of the Central Excise Act, 1944, it would be

incorrect to state that labeling or branding does not amount to manufacture. The Act defines the expression “manufacture” as inclusive of any process which has been defined in Section or Chapter Notes in Schedules to CETA as process amounting to manufacture {Sec 2(f)(ii)}. Thus, in relation to specified goods, process of labeling or branding may amount to manufacture if it has been so specified in the related Section /Chapter Notes. Further, in relation to MRP based goods, the activity of branding and labeling shall amount to manufacture [Sec 2(f)(iii)].

25. Discuss briefly with reference to the provisions of Central Excise Act, 1944 whether the following would amount to “manufacture:-- XYZ Corporation is engaged in the process of mixing aluminum paste, metal lacquer and thinner resulting in the production of

aluminum paint having a shelf-life of 8-10 hours. (3 Marks)

For the purposes of Central Excise Act, 1944, SC has defined the term “manufacture” to mean any process as a result of which a the object gets transformed to such a degree that it is commercially known differently[Empire Industries – 1985- SC].

Under the facts before us, XYZ Corporation is mixing aluminium paste, metal lacquer and thinner resulting into “aluminum paint”. On identical facts, the Apex Court (SC) in T.N. STATE TRANSPORT CORPN. LTD. – 2004 – SC has held that “after the aluminum paste, metal lacquer and thinner are mixed in exact proportions, a separate and distinct product with a distinct identity comes into existence. It is a paint which is known in the market as ‘Aluminum Paint’.” Therefore, the mixing process in the aforesaid situation would amount to manufacture.

26. Blending of tea amounts to manufacture. Discuss the correctness or otherwise of this statement with the help of a decided case law.

[RTP May 2008 (Old Syllabus)] “Manufacture” means processing of goods resulting in an alteration or change in them leading to production of a commercially new

article. In other words, it means bringing into existence a new commercial commodity. Blending of different varieties of tea so as to obtain requisite taste (as per the demands of customers) is not “manufacture” as blending

does not bring into existence any new commercial commodity. [TARA AGENCIES- 2007-SC] 27. TCL purchases duty paid mental rods and draws them into wire of a thinner gauge. Both the items fall under different tariff

headings. The assessee claims that the process undertaken by him does not amount to manufacture. You are required to advise with reference to the present position of law in this regard.

(3 Marks) Tutorial Note: Let us understand process of WIRE DRAWING: Wire drawing is a metalworking process used to reduce the diameter of a wire by pulling the wire through a single, or series of, drawing die(s). The wire drawing process is quite simple in concept. The wire is prepared by shrinking the beginning of it, by hammering, filing, rolling or swaging, so that it will fit through the die; the wire is then pulled through the die. As the wire is pulled through the die, its volume remains the same, so as the diameter decreases, the length increases. Usually the wire will require more than one draw, through successively smaller dies, to reach the desired size. Also note: Wire gauge is a measurement of how large a wire is, either in diameter or cross-sectional area. This determines the amount of electric current a wire can safely carry, as well as its electrical resistance and weight per unit of length. Wire gauge is applicable to both electrical and non-electrical wires, being important to electrical wiring and to structural cable.

http://en.wikipedia.org/wiki/Metalworking

http://en.wikipedia.org/wiki/Wire

http://en.wikipedia.org/wiki/Die_(manufacturing)

http://en.wikipedia.org/wiki/Swaging

http://en.wikipedia.org/wiki/Measurement

http://en.wikipedia.org/wiki/Wire

http://en.wikipedia.org/wiki/Diameter

http://en.wikipedia.org/wiki/Electric_current

http://en.wikipedia.org/wiki/Safety

http://en.wikipedia.org/wiki/Weight

http://en.wikipedia.org/wiki/Units_of_measurement

http://en.wikipedia.org/wiki/Length

http://en.wikipedia.org/wiki/Electrical_wiring

http://en.wikipedia.org/wiki/File:Wiredrawing.svg


The activity of TCL is that of drawing wire from the wire rods/metal rods. The metal rods/wire rods fall in a heading different from the heading in which the resultant wire falls. Assessee is claiming that though his product is falling into an altogether different heading of Central Excise Tariff Act, his activity doesn’t amount to “manufacture” within the meaning of Central Excise Laws.

For the purposes of Central Excise Act, 1944, SC has defined the term “manufacture” to mean any process as a result of which object gets transformed to such a degree that it is commercially known differently [Empire Industries – 1985- SC]. Accordingly, it has to be checked that whether the process of drawing satisfies this criteria, i.e., whether “wires of thinner gauge drawn from the wire rods” can be considered as a different commercial commodity. On identical facts, the Apex Court (SC) in case of TECHNOWELD INDUSTRIES-2003, hold out that wire drawn from wire rods is not a different commercial commodity, the difference in the two only being of gauge and finishing. However, it shall be noted that under excise, the meaning of the term “manufacture” is not just restricted to its normal meaning rather an extended meaning has been assigned to it in excise. Sec 2(f) of CEA, 1944 has defined it to include, inter alia, any process which in relation to any goods has been specified in the Section or Chapter notes as amounting to manufacture. By FA, 2004, the process of drawing in relation to metal rods has been specified the Section/Chapter as amounting to manufacture. Since the process of drawing as been deemed to be a manufacturing process under Excise, the earlier decision of Hon’ble SC as given in case of TECHNOWELD INDUSTRIES is of no help to the assessee (TCL).

EXAMINATION TIP The use of words/expressions “answer keeping in mind latest provision of law / present position of law” is indirect hint from Examiner’s side that question is amendment based question.

28. A company X procures duty-paid kraft paper and then laminates it in its own factory with a coating of polyethylene resulting in

polyethylene laminated kraft paper. In reply to show-cause-demand notice, X has challenged the demand of duty on the following the demand of duty on the following two grounds: i. Lamination with polyethylene does not amount to ‘Manufacture’. ii. Both un-laminated and laminated kraft papers admittedly fall under the same entry under the Central Excise Tariff.

As the jurisdictional Assistant Commissioner of Central Excise, you have to give a reasoned decision on the sustainability or otherwise of the duty demand on X. (5 Marks)

Points for consideration: In this case, we are concerned with the 2 questions which are as follows:

i) Whether process of lamination is manufacturing process or not”? ii) Whether the fact that both un-laminated kraft-paper and laminated kraft-paper falls in the same tariff entry can have any impact

on the decision in relation to the above point?

Findings: (Reasoned Order) So far the first point is concerned, the Apex Court (SC) in scores of decisions has already held that lamination, undisputedly, is a

manufacturing process as it results into change in name, nature and use of the product. Thus, the first contention of assessee company is unsustainable (not tenable).

Now, adverting (coming) to the second point, it has been argued on behalf of the assessee company that absence of change in tariff entry shall be taken as an natural implication that no manufacturing activity was involved as such. We find no merit in this contention/argument. In the case of LAMINATED PACKINGS PVT. LTD. -1990-SC has already settled the law as regards that by holding out that change in tariff entry is not germane (relevant) in deciding whether a process is manufacturing process or not.

In view of what is stated above, duty liability as such is confirmed. EXAMINATION HINT Whenever question requires you to answer in the capacity of “AC of Excise”, it is indicative of fact that the answer of question is favourable to the Department. Students shall accordingly think and write their answer.

Author: There is no such general rule that a process would or would not amount to manufacture in all situations. A process may amount to manufacture in one situation, it may not amount to manufacture in another situation. The final answer depends upon facts and circumstances of each case which shall be considered and analyzed independently. e.g., Lamination of “I-Card” is not manufacture (as no new product emerges) But lamination of “Poster” may amount to manufacture (as new product, namely, “table mat” emerges)

29. “The manufacture and production of goods is the event attracting the levy of excise duty.” Briefly examine whether a change in

Tariff Heading/ sub-heading under the Central Excise Tariff Act, 1985 is also required between the input material and the resultant finished product so as to render such finished products liable to duty?

(5 marks) The taxable event for levy of excise duty is manufacture and production of goods. A process tantamount to manufacturing process if as

a result of said process the product is transformed to such a degree that it is known commercially differently, i.e., its nature, name and use gets changed. Generally, the resultant final product falls in tariff heading/sub-heading different from the one in which the input material falls. But sometimes both input and final product fall under same tariff heading/sub-heading. The issue that whether a process


can be called manufacturing process when it results into commercial differentiated product without change in the tariff-heading/sub-heading, has been a disputed point.

Though a number of judgments have covered up the said issue but a judgment of SC in LAMINATED PACKINGS PVT. LTD. – 1990 – SC settled the law. In the said judgment, it was laid down that “change in tariff heading / sub-heading is not necessary in order to qualify as any process amounting to manufacture. A process would amount to manufacture when input and output material are differentiated in the commercial/trade parlance and the fact that same heading/sub-heading govern both the input and output is not germane /relevant to the issue.’

To conclude, levy stands attracted on manufacture and for holding any process manufacturing process, the relevant test is test of “commercial differentiation” and not “change in tariff heading/sub-headings”.

(Imp) 30. State briefly whether the following circumstances would constitute "manufacture" under Central Excise:

i. Both inputs and the final product fall under the same tariff heading under the First Schedule to the Central Excise Tariff Act, 1985 (Tariff Act).

ii. Inputs and final product fall under different tariff headings of the Tariff Act. (May 2008 3 * 2 = 6 Marks)

i. 'Manufacture' is bringing into goods known in the market having distinctive name, character or use and separate and identifiable function. Once a new commodity having a definite and distinct commercial identity in market is produced nd the same has been specified in the tariff, it is exigible to duty. It is irrelevant whether the new article falls into the same tariff heading as the duty paid raw material from which it is manufactured or belongs to a separate tariff heading.

It was held in LAMINATED PACKINGS (P) LTD- 1990-SC that change in tariff heading is not germane (relevant) in deciding whether a process is manufacture or not.

ii. As held in S R TISSUES- 2005-SC, ‘just because the raw-material and the finished product came under 2 different headings, it

cannot be presumed that the process of obtaining the finished product from such raw-material automatically constituted manufacture’.

The real test is whether there is a transformation by the said process – if the process transformed the product into a different product which has distinct name and use, then only activity will amount to ‘manufacture’

Note: Tariff (CETA) is an authority on question of manufacture. Tariff is merely for classification of goods. Question of manufacture is to be

determined on the facts of each case [NATIONAL METAL WORKS- 2005- TRI]

31. Write short notes on : Dutiability of Waste and Scrap (5 Marks) Waste and scrap often results during the course of production of desired final product. Though waste and scrap are not produced

intentionally but nevertheless they are necessary incident of manufacturing process. Whether they can be said to be “manufactured” so as to being subject to levy of excise duty, has been a contentious issue.

In landmark case of KHANDELWAL METAL & ENGG WORKS LTD. – 1989, the Apex Court (SC) settled the law as regards the excisability of waste and scrap. Therein it was held that “notwithstanding the fact that waste/scrap arose as intermediate or by-products of final products, nevertheless such waste/scrap if marketable would be charged to excise duty.” SC also observed that it may be true to say that no prudent businessman will intentionally produce or manufacture waste/scrap but it is equally true that they are the by-products of the manufacturing process. Intention is not the gist of manufacturing process.

In view of aforesaid decision of SC, waste and scrap are also exigible(*liable) to excise duty if they otherwise find a place in tariff.

Exemption to ‘waste/scrap’ E/N 67/95 exempts ‘waste and scrap’ arising in course of manufacture of 100% Exempted goods or Nil-rated goods (Condition: no other

excisable goods are manufactured by assessee in the factory). .

Waste / Scrap arising in manufacture of 'exempted final product' is exempt, even if duty is wrongly paid on 'exempted final product'

INTEGRAL COACH FACOTRY - 2015- MADRAS HC [IMP] Facts ASSESSEE = Manufacturer of Railway Coaches, which stands exempted from duty (absolute full exemption)

However, assesse wrongly paid the excise duty thereon.

Assessee: Assessee claimed exemption for 'waste and scrap' under Notification 89/95 on ground that main product 'coaches' were 'exempted'.

Dept: Department denied exemption to 'waste and scrap' on ground that since duty was paid on main product 'coaches', hence, coaches were 'not exempted' goods could not be exempt.

.

Issue Whether exemption in respect of waste under E/N 89/95 can be claimed even if duty paid wrongly on final product?


Held Yes, exemption can be claimed • Absolute full exemption is mandatory. Thus, FP was ‘exempted goods’. Erroneous payment thereon will not make them non-

exempted goods. • Thus, coaches continued to be ‘exempted goods’ and therefore, ‘waste and scrap’ remained exempt.

. Exemption to ‘waste/scrap’ is not extendable to ‘by-products / joint products’

A.P. SOLVEX LTD- 2014-SC [IMP] Facts ASSESSEE = Manufacturer of Refined vegetable Oil and vanaspati, which stands exempted from duty

During course of manufacture of refined vegetable oil and vanaspati, fatty acid, waxes and gums are also getting produced.

Assessee: Fatty acid, waxes and gum stand exempted from duty under E/N 89/95. Dept: E/N 89/95 exempts ‘WASTE’ and ‘ NOT BY-PRODUCTS’.

-- Fatty acid, waxes and gum are not in nature of waste and thus, benefit of E/N 89/95 not available to them?

Issue Whether fatty acid, waxes and gum are ‘waste’ and hence, covered by E/N 89/95? Held NO

• Since refining of vegetable oil amounts to manufacture, not only main product, but all by-products obtained by that process would be manufactured product;

• Fatty acid (also known as ‘soap stock’), waxes and gums, etc. were products and not 'waste, as 'waste' is of no value or negligible value, but said products being valuable were by-products;

• Being by products and not waste, they were not exempt under Notification No. 89/95. .

[Imp] 32. M/s. Amar Ltd. is manufacturer of cement. It carried out repair and maintenance of its worn out cement manufacturing plant by use

of welding electrodes, mild steel, cutting tools, angles etc. In this process of repair / maintenance, some metal scrap and waste were generated, which were cleared by the assessee without paying any excise duty.

The Department issued is notice demanding excise duty on such metal scrap and waste contending that these were 'excisable goods' as these were marketable and movable and since it arose during a process incidental / ancillary to manufacture viz. repair of plant, the process of generation of scrap and waste amounted to manufacture in terms of section 2 (f) of the Central Excise Act, 1944. i. What is 'manufacture' in Central Excise as per section 2(f)(i) and (ii) of the Act ?

(Nov 2013 2 Marks) ii. What are the major conditions for levy of duty on waste &scrap ?

(Nov 2013 2 Marks) iii. Whether waste & scrap resulting from repair / maintenance of plant is excisable and liable to duty?

(Nov 2013 2 Marks) Answer briefly citing case law, if any.

(i) Sec 2(f) defines the term ‘manufacture’ in an inclusive manner. It defines it to include following:

Sec 2(f)(i): it includes any process which is incidental or ancillary to the completion of a manufactured product. Sec 2(f)(ii): It includes any process which in relation to any goods has been specified in Section or Chapter Notes to CETA as

amounting to manufacture.

(ii) Sec 3 is the charging section for levy of excise duty on any goods, be it normal or waste/scrap. In terms of Sec 3, excise duty can be levied on waste/scrap only if all of the following conditions are satisfied: i. Waste and scrap ought to be ‘excisable goods’ as defined u/ 2(d) of the Central Excise Act, 1944(i.e., it should be

movable and marketable artice and covered in CETA); and ii. Waste and scrap should be manufactured goods i.e., they should arise as a result of manufacture in terms of section 2(f)

of the Central Excise Act, 1944. iii. The activity which resulted into waste/scrap must be carried out in India.

(iii) Presuming that metal waste/scrap is covered by CETA and considering that concept of ‘deemed marketability’ has been introduced in CETA, such waste/scrap is marketable excisable goods. But, judiciary has time and again held that still duty can be demand on waste/scarp only if it is a ‘manufactured waste/scrap’. ‘Manufactured waste/scrap’ is one which arises as a result of manufacturing process.

Hon’ble SC in case of GRASIM INDUSTRIES LTD-2011-SC, held waste arising in activity of repair or maintenance of machinery cannot be said to be ‘manufactured waste’ and hence, cannot be made subject to excise duty.

Considering aforesaid principles and judgment of GRASIM INDUSTIRES, waste and scrap resulting from repair / maintenance of plant is not liable to excise duty.

** In GRASIM INDUSTRIES LTD case, SC noted that: ‘a process incidental or ancillary to manufacture can be a process in manufacture or process in relation to manufacture of the excisable end product, which involves bringing some kind of change to the raw material at various stages by different operations. Since the repair and maintenance of plant has no contribution / effect on the process of manufacturing of cement (the end product),


the same cannot be called as part of manufacturing activity in relation to the production of end-product. Thus, the metal scrap and waste generated from repair / maintenance of plant cannot be said to be a by-product of the final product but the by-product of repairing process.

33. Kaavya 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. Kaavya cleared this metal scrap and waste without paying any excise duty. The Department issued a SCN 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.

Briefly discuss, with reference to case law, whether the show cause notice is sustainable in law. [ICAI RTP NOV, 2012]

[Refer discussion above]

Author: Under excise, after KHANDELWAL’s case, it is undisputable and settled that even waste/scrap arising out of manufacturing process shall be liable to excise duty. However, it shall be noted that not all waste/scrap can be made liable to excise duty. Only manufactured waste/scrap (i.e., waste/scrap arising out of manufacturing process) is liable to excise duty.

34. Explain briefly whether duty liability under the Central Excise Act, 1944 will be attracted in the following case: MN & Co. engaged in the manufacture of Vanaspati Oil used activated clay for deodoring, bleaching and decolouring of oil. As a

result of this processing the activated clay was transformed into “spent earth” which was nothing but the residue of activated clay. The activated clay residue has lost its absorbent character during the course of refining and bleaching of oil. Excise department sought to classify the “spent earth” under the Central Excise Tariff Chapter Heading No. 5.07, which reads as:

“Residues resulting from treatment of fatty substances or animals or vegetable waxes” (3 Marks)

As per the given facts, assessee is using activated clay in process of manufacture of vanaspati oil. After being used for the processing, the activated clay gets transformed into “spent earth”, mentioned in the Scheduled to CETA. Department has demanded duty on such spent earth considering “spent earth” as a manufactured item on account of its being specifically covered in the CETA.

The issue for consideration before us is whether an item can be presumed (taken) to be a manufactured item just because of the reason that it is specified in the Schedule to CETA.

On facts identical to the facts before us, the Apex Court (SC) considered the same issue in case of MARKFED VANASPATI & ALLIED INDUSTRIES – 2003- SC held that merely because an item falls in the Tariff Entry it shall not be deemed that it must have come into existence as a result of process amounting to manufacture. Manufacture can be said to be taken place only when as a result of said process the object has been transformed to such a degree that it is commercially known differently. Since “spent earth” remains “earth” even after processing with only difference that its absorbent capacity gets reduced due to such processes, it can’t be said to have come into existence as a result of the manufacturing process.”

Thus, excise duty demand is not attracted in the given facts. BORDERLINE CASE

35. The assessee M/s T & Co. Ltd. were engaged in the manufacture of ‘TARPAULIN MADE UPS’. This was nothing but tarpaulin cloth prepared by making a solution of wax, aluminum stearate and pigments that were mixed. The solution was heated in a vessel and was transferred to a tank. Grey cotton canvas fabric was then dipped into the solution and passed through two rollers, where after the canvas was dried by exposure to sun. The tarpaulin made ups prepared by means of cutting, stitching and fixing eyelets amounts to manufacture under the Central Excise Act, 1944. Write a brief note with reference to decided case law if any whether the department’s view in the matter is legally sustainable.

(Marks 6) TARPAULIN: A tarpaulin is a large sheet of strong, flexible, water-resistant or waterproof material, often cloth such as canvas or made of plastics

such as polyethylene. It is a material, such as waterproofed canvas, used to cover and protect things from moisture.

[Waterproof Canvas- made out of tarpaulin] [Eyelets: which are stitched to tarapaulin to make canvas]

http://en.wikipedia.org/wiki/Waterproof

http://en.wikipedia.org/wiki/Cloth

http://en.wikipedia.org/wiki/Canvas

http://en.wikipedia.org/wiki/Plastic

http://en.wikipedia.org/wiki/Polyethylene


As per given facts, M/s T & Cowere engaged in manufacture of ‘tarpaulin made ups’. It is manufactured by dipping grey cotton canvas and fixing eyelets to it. The department has demanded ED on assessee holding that the process carried out by T & Co amounted to manufacture.

The issue for consideration before us is whether the activity carried out by this amounts to manufacture as per normal meaning. The same issue arose for consideration before Hon’ble SC in case of TARPAULIN INTERNATIONAL-2010. On identical facts,

Honb’le SC held that stitching of tarpaulin sheets and affixing eyelets to it did not change basis characteristics of the raw material and end product. It does not bring into existence a new product with total transformation in the original commodity.

In view of aforesaid discussion, the stand taken by department is not legally sustainable. INCIDENTAL/ANCIALLRY PROCESS—SEC 2(f)(i)

36. M/s. Super Pipes Ltd. is engaged in the manufacture of M.S. galvanized pipes. The excise department has required the assessee to include the cost of galvanization in the assessable value of the M.S. galvanized pipes for the purpose of determination of excise duty. The assessee claims that as the process of galvanization does not amount to manufacture, the cost of galvanization is not includible in the assessable value of the said pipes made from H.R. coils.

Briefly discuss whether the stand taken by the assessee is correct with reference to the provisions of the Central Excise Act, 1944.

(6 Marks) As per the given facts, M/s Super Pipes Ltd is manufacturing M.S. galvanized pipes. Department has demanded excise duty on value

including the cost of galvanization. The assessee has contested the inclusion of cost of galvanization in the assessable value of pipes on the ground that the process of galvanization does not amount to manufacture.

The issue for consideration before us is whether stand of assessee as to non-inclusion of cost of galvanization into the assessable value is correct or not. In simple words, issue is whether value addition by a process which is done following the main manufacturing process shall also form part of the assessable value even though that process doesn’t amount to manufacture on its own.

The said issue has been considered by Hon’ble SC in the celebrated case of SIDHARTHA TUBES LTD. – 2000. In that case, it was held that “even if manufacture is complete at some stage and excise duty is leviable at that stage, but if the assessee subjects the goods to some further process before putting them into the market, then duty shall be payable on value of goods being cleared for marketing and not just on the value when the manufacture was technically complete.” Very recently, the issue was again reconsidered in case of SIDHARTHA TUBES LTD.– 2006- SC and SC reiterated(*reconfirmed) that galvanization added to quality of product and increased the value of pipes and process of galvanization was incidental to manufacture of M.S. galvanized pipes and, therefore, cost of that process rightly included in assessable value.

In view of the aforesaid discussion, the assessee’s stand as to non-inclusion of value addition by galvanization in the assessable value of galvanized pipes is not correct.

DEEMED MANUFACTURE – SEC 2(f)(ii) 37. Explain briefly with reference to the provisions of the Central Excise Act the term “deemed manufacture”.

(3 Marks) As per general understanding, whenever an activity results in emergence of new marketable commodity with a distinctive name,

character or use, it will amount to manufacturing activity (DCM-1977-SC). But so far as excise law is concerned, for the purpose of levy of excise duty wide meaning has been given to the term

“manufacture”. Certain processes which though don’t amount to manufacture in terms of the normal/natural meaning have been accorded (granted) the status of “manufacturing process” by way of specific coverage thereof in terms of Sec 2(f)(ii) and Sec 2(f)(iii). Such processes are popularly known as “Deemed Manufacture”. The deemed manufacture can be classified into 2 categories:

a) Sec 2(f)(ii) Deemed Manufacture: It covers up such processes which have been specified in relation to specified goods in the Schedules to CETA as process amounting to manufacture. To state a few: 1. Repacking into small containers/packs from bulk packs (in relation to Pan Masala, Garments) 2. Labeling / Re-labelling of containers (in relation to milk and dairy products, Garments, Pan masala) 3. Process of affixation/ embossing trade name or brand name (in relation to Articles of Jewellery) 4. Refining of Oil (in relation to edible oil); 5. Process of drawing (in relation to wires/wires rods of iron and steel or Aluminum Tubes/Pipes) 6. Process of REFINING of ‘Gold Dore Bars’ (in relation to Gold) 7. Process of oiling and pickling (in relation to product of Iron or Steel)-- Added by FA, 2012 8. Process of matching, batching and charging of Lithium Ion Batteries (in relation to Lithium Ion Batteries)-- Added by FA,

2012 9. Process of making BATTERY PACK of Lithium Ion Batteries (in relation to Lithium Ion Batteries)-- Added by FA, 2012 10. Process of cutting, slitting and printing of Aluminum Foils (in relation to Aluminum Foils) -- Added by FA, 2012


Note: • Applicability of old judgments to present day position shall be considered carefully as many processes held by Courts as not

amounting to manufacture have now been brought into purview of ‘manufacture’.

• Some examples of old Judgment which is no longer applicable: • In AMRITLAL CHEMAUX LTD. -2015 -SC it was held that the expression "labelling or relabelling of containers and repacking from bulk to

retail packs" would mean that both labelling or relabelling of containers "and" repacking from bulk to retail packs would be necessary to constitute deemed manufacture. However, since said word "and" has been substituted by word "or" in Tariff, now, labelling or relabelling of containers would constitute deemed manufacture; and similarly, repacking from bulk to retail packs would also constitute deemed manufacture.

• In ARS & CO. -2015 -SC it was held that Scented Betal Nuts (Supari) made by crushing dried betel nuts into pieces and treating those pieces with vanaspathy, sugar, saccharin, glucose syrup, cloves, cardamom, menthol, etc. is not manufacture, as product remains same. HOWEVER, at present it is ‘deemed manufacture’ since as per Chapter Note 6 to Chapter 21, ‘n relation to Betal nut product known as "Supari", the process of adding or mixing cardamom, copra, menthol, spices, sweetening agents ro any such ingredients other than lime, katha (catechu) or tobacco ot betel nut, in any form, shall amount to "manufacture"’.

b) Sec 2(f)(iii) Deemed Manufacture: In relation to goods covered by MRP levy, it covers up processes of repacking from bulk packs

to small packs, labeling/re-labelling of unit containers, declaration or alteration of retail sale price or adoption of any other treatment to render the goods marketable to consumer.

38. Prakhat Manufacturers was a manufacturer of cigarettes. It used duty paid paperback ALUMINUM FOIL in the roll form for the

purpose of packing cigarettes. In the process, the roll of aluminum 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. An aluminium foil being resistant to moisture was used as a protector for the cigarettes and to keep them dry.

Revenue issued a SCN to Prakhat Manufacturers alleging that the process of cutting and embossing aluminum foil amounted to manufacture. Since the aluminum foil was used as a shell for cigarettes to protect from them moisture; the nature, form and purpose of foil were changed.

Briefly discuss, with reference to case law, whether the SCN is sustainable in law. [ICAI RTP May, 2012]

Earlier, this issue arose for consideration before SC in case of GTC INDUSTRIES LTD. -2011 -Bom. HC**. The High Court hold out that cutting and embossing did not transform aluminum 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 exists no evidence to suggest that cut to shape/embossed aluminum foils used for packing cigarettes were distinct marketable commodity. Hence, process did not amount to manufacture on first principle.

However, the aforesaid decision of Bombay HC stands overruled by FA, 2012. FA, 2012 has inserted a Chapter Note in CETA specifying that process of cutting, slitting and printing of aluminum foils shall amount to manufacture within the meaning of Sec 2(f)(ii) of CEA, 1944.

Thus, as per present legal position, the SCN is sustainable in law. 39. Examine (with the help of decided cases wherever available), the validity of the following proposition: -- Labeling or branding of goods does not amount to “manufacture”.

(3 Marks) Given the definition of “manufacture” in Sec 2(f) of the Central Excise Act, 1944, it would be incorrect to state that labeling or branding does not amount to manufacture. The Act defines the expression “manufacture” as inclusive of any process which has been defined in Section or Chapter Notes in Schedules to CETA as process amounting to manufacture {Sec 2(f)(ii)}. Thus, in relation to specified goods, process of labeling or branding may amount to manufacture if it has been so specified in the related Section /Chapter Notes.

40. You are required to test the veracity* or otherwise of the following assertions*, in the context of Central Excise law, supporting your

arguments with case law (if any) and statutory provisions applicable: “Branding/ labeling of packed spices is manufacture, but branding/labeling of stainless Steel screws is not manufacture.”

(2 Marks) [*VERACITY: Truthfulness, ASSERTION*: Statement/ declaration]

The given statement is true. This is due to the reason that generally, labelling / branding are not considered as “manufacturing” activity as these don’t result into emergence of any new commercially different product. But in relation to spices, the said activity has been defined in the Section and Chapter notes to CETA as a process amounting to manufacture and therefore, is becomes “manufacturing activity” in relation to spices falling within the sweep of Sec 2(f)(ii) of the Central Excise Act, 1944.


41. Discuss whether the following processes amount to manufacture -

(i) Purchase of aluminium foil with backing of the white paper and cutting the same in pieces and embossing the word “PULL” on one side so as to be used in packaging of cigarettes.

(ii) Process of picking and oiling of iron & steel. Picking involves chemical removal of surface oxides (scale) and other contaminants such as dirt from metal by immersion in an aqueous acid solution.

Manufacture implies a change/transformation resulting into emergence of a product with different name, character or use. However ,

every change is not manufacture, But, any process specified in Section or Chapter Notes to First Schedule to CETA as amounting to manufacture is covered u/s 2(f)(ii) of CEA, 1944.

The said processes are discussed below- (i) Yes, deemed manufacture: Earlier, in case of GTC INDUSTRIES LTD. (2011) it was held by SC that cutting and embossing of aluminum foil do not transform

such aluminium foil into distinct and dentifiable commodity and doesn’t amount to manufacture. However, FA, 2012 has inserted Chapter Note to CETA (Ch Note 3 in Chapter 76 of First Schedule to CETA w.e.f. 17-3-2012), the process of cutting, slitting and printing of aluminium foils shall amount to “manufacture”.

(ii) Yes, deemed manufacture Earlier, on this issue CBEC clarified vide Circular No.927/17/2010 that the process of pickling is only a chemical clearing process

to remove scales and dirt from the metal by immersion in chemical solution and does not results in emergence of any new commercially different commodity, hence , the same doesn’t amount to manufacture. However, FA, 2012 has inserted Chapter Note to CETA (Ch Note 6 in Chapter 72 of First Schedule to CETA -w.e.f. 17-3-2012), the process of oiling and pickling shall amount to manufacture.

DEEMED MANUFACTURE – SEC 2(f)(iii) 42. Whether activity of packing of blank or recorded audio cassettes amounts to manufacture under Excise?

At present, "Unrecorded audio cassettes; recorded or unrecorded video cassettes; recorded or unrecorded magnetic discs" are covered in THIRD SCHEDULE to the CEA, 1944 (i.e., these are subject to ED on MRP basis as stipulated u/Sec 4-A). Hence, in relation to them, any process of repacking them from bulk packs to retail packs or labelling / re-labelling or affixation / alteration of retail sale price or any other treatment, so as to render them marketable to consumer amounts to manufacture u/s 2(f)(iii). This aspect should also be considered.

MANUFACTURER – SEC 2(f) 43. Briefly describe whether a raw material supplier can be treated as manufacturer? Are there any exceptions to aforestated

preposition? [ICAI Practice Manual]

The person carrying out the actual manufacturing process is the manufacturer even if the raw material is supplied by someone else and the goods have been manufactured as per his specifications as the relationship between the raw material supplier and the job worker is on a principal to principal basis. Merely by supplying the raw material, the supplier thereof cannot be construed as the manufacturer. Therefore, it is not relevant as to whether the raw material belongs to the manufacturer or not. Situation when raw-material supplier can be considered as manufacturer: 1. If the relationship between the raw material supplier and the job-worker is that of a principal and agent, the raw material supplier

will be the manufacturer. It may be noted that a person supplying the raw material cannot be considered as hiring the job worker if he does not supervise and control the activities of the job worker.

2. Similarly, if job-worker is found to be a dummy or fake unit, then the raw material supplier will be considered as actual manufacturer.

3. If raw-material supplier and job-worker are real units and working on principal to principal basis, but the goods manufactured on job-work basis are goods falling under Chapter 62, 62 or 63 of the First Schedule of the CETA, 1985, then in such case raw-material supplier shall be treated as manufacturer. Provision to that effect has been laid down under Rule 4(1A) of CER, 2002.

44. “Papadwala” supplied certain raw material and inputs to several households’ ladies for making “Papads”. The said ladies at their

own premises, using their labour force made Papads’ and received job-charges. ”Papadwala” did not supervise their undertakings.


The Central Excise Department raised huge demand of duty on “Papadwala”, alleging he is the manufacturer. You are engaged by the notice as counsel to represent him in the adjudication proceedings.

State, giving reasons, the tenability of the Department’s notice/claim. You make take the help of decided cases on the point. (6 Marks)

Based upon the facts presented to us, “Papadwala” can’t be said to be engaged in manufacturing of papads on his own account so as to fall under the definition of term “manufacturer” as given u/s 2(f) of the Central Excise Act, 1944. He is mere a “raw-material supplier” and not the real manufacturer. The household ladies to whom material has been supplied are the real manufacturers of the papads. The reason being that they, though not having ownership over the material supplied, are doing the manufacturing activity in their own premises, using their own labour force, according to their own schedules and without any supervision of “Papadwala”, the raw-material supplier. In connection with this, reliance may be placed on the judgment of the Apex Court in case of M.M.KHAMBATWALA-1996-SC wherein, on identical facts, SC held house-hold ladies as real manufacturers and liable for payment of excise duty. Further, absence of ownership of ladies over the raw-material will not tilt (change) the issue as the Apex Court (SC) has in case of UJJAGAR PRINTS- 1988-SC held that liability of manufacturer for payment of excise duty is not dependent on the ownership over the raw-material. Since in the facts and circumstances of case, it is house-hold ladies who are the real manufacturers, the duty demand from the Papadwala, the raw-material supplier, is invalid in law and hence, unsustainable.

Accordingly, the assessee is advised to represent his case to the Department on the above lines. 45. A merchant manufacturer gets the goods manufactured according to his design and specifications from a job-worker. Who will be

called as manufacturer under the Central Excise law? . (Nov 2008 2 Marks)

If a person gets his goods manufactured from job-worker, then the job-worker who actually manufactures the goods under his direction, control and supervision is treated as manufacturer under the Central Excise Law Just because a person is getting the goods manufactured according to his design and specification, he cannot be treated as manufacturer under central excise law. Thus, merchant manufacturer cannot be treated as manufacturer under central excise law. The job-worker will be treated as ‘manufacturer’ for purposes of excise [UJJAGAR PRINTS – 1988-SC]

Person manufacturing the goods can only be considered as manufacturer under Excise

COSME FARMA LABORATORIES LTD.- 2015-SC Facts Cosme Farma gets certain medicaments manufactured through others (job-workers).

For manufacturing drugs from others, it needs to obtain LOAN LICENSE in terms of Drugs and Cosmetics Act, 1940. It has that license and accordingly, it is known as ‘loan licensee’ .

Loan License = license issued under the provisions of the Drugs and Cosmetics Act, 1940 under which you can get drugs manufactured from others on job-work for sale in market in your name)

Dept: Cosme Farma is manufacturer and liable to pay ED since

it has supplied raw-material and packing materials. Under Drugs and Cosmetics Act/ Rules, it is responsible for quality of goods/drugs Goods were being manufactured under its brand name.

Issue Whether Cosme Farma shall be considered as manufacturer of goods/drugs? Held NO

• Job-Worker shall be manufacturer for purposes of excise as production activity has been carried out by them only; • provisions of Drugs and Cosmetics Act' making 'licensee' liable for quality, are irrelevant for excise law.

. MANUFACTURER – SEC 2(e) 46. Define - Factory

. Factory means ANY PREMISES, including the precincts thereof, wherein or in any part of which excisable goods are manufactured

or wherein or in any part of which any manufacturing process connected with the production of these goods is ordinarily carried on.

ANALYSIS 1. Whether entire plot or only manufacturing area is treated as factory?

The meaning of 'Factory' is not restricted to the part in which the excisable goods are manufactured, but includes the whole of the premises in the part of which the excisable goods are manufactured. [DCM- 1978- SC] o The entire premises is treated as a factory, even if the excisable goods are made in a portion or a corner of the premises. [GROUER

AND WEIL – 1994-SC] 2. Whether open land is included in the phrase 'Premises'?

'Premises' is not restricted to buildings, but it covers open land also. .


o Premises means a piece of land including its buildings or buildings together with its grounds or appurtenances and precincts mean the areas surrounding a place. Any premises including the precincts thereof is wide enough to cover all buildings with its surroundings, which form part of one unit. [GROUER AND WEIL – 1994-SC]

CBEC's Manual. • Separate registration is required in respect of separate premises except in cases where two or more premises are actually part

of the same factory (where processes are interlinked), but are segregated by public road, canal or railway-line. • The fact that the two premises are part of the same factory will be decided by the Commissioner of Central Excise based on

certain factors, such as: o Interlinked process product manufactured/produced in one premises are substantially used in other premises for manufacture

of final products. o Large numbers of raw materials are common and received /proposed to be received commonly for both /all the premises. o Common electricity supplies. o There is common labour/work force- o Common administration/work management. o Common sales tax registration and assessment o Common Income Tax assessment o Any other factor as may be indicative of Inter-linkage of the manufacturing processes.

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excise - dg education basics new.pdf · as per section 2(d) of central excise act, 1944, excisable...

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