Full Judgment Text
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 7453 OF 2008
M/s. Grasim Industries Ltd. ………….. Appellant
versus
Union of India ………..Respondent
J U D G M E N T
H.L. Dattu, J.
1) This appeal is directed against the Judgment and
Order dated 31.07.2008 of the High Court of Judicature of
Rajasthan in Central Excise Appeal No. 60/2006. By the
impugned Order, the High Court has set aside the Order
dated 09.08.2005 of the Customs, Excise and Service Tax
Appellate Tribunal [hereinafter referred to as “the Tribunal”]
whereby the Tribunal had dropped the entire duty demand
and penalty imposed on the assessee.
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2) The issue before us is: Whether the metal scrap or
waste generated whilst repairing of worn out machineries or
parts of cement manufacturing plant amounts to
manufacture, and thereby, is excisable to excise duty.
3) The assessee is the manufacturer of the white cement.
The assessee repairs worn out machineries or 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 certain
metal scrap or waste is generated. In a surprise inspection
conducted by the officials of the Central Range-II, Jodhpur,
it was found that the assessee has cleared various types of
metal scrap and waste without the payment of the excise
duty for the period from 1.10.1995 to 16.07.1999. A show
cause notice dated 05.10.2000 was issued to the assessee
demanding a duty of ` 10,81,736/- under Section 11A of the
Central Excise Act, 1944 [hereinafter referred to as “the
Act”] along with equal amount of penalty under Section
11AC of the Act and further penalty under Rule 173 Q of the
Central Excise Rules, 1944 [hereinafter referred to as “the
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Rules”] for non-payment of excise duty on clearance of said
metal scrap and waste. On the request of the assessee on two
occasions, the revenue has granted extension of time, first up
to 31.12.2000 which was further extended till 22.01.2001, in
order to reply to the said show cause notice. Thereafter, the
assessee further made a request for some more time to file
reply vide letter dated 20.01.2001, the same was rejected
whilst confirming the duty demanded and penalty proposed
in the show cause notice vide Order dated 08.02.2001 of the
Additional Commissioner. The assessee filed appeal before
the Commissioner (Appeals), Jaipur. The Commissioner
(Appeals) vide its Order dated 30.04.2004, set aside the
demand of duty along with equal amount of penalty
pertaining to scrap and waste arising out of the dismantling
of used capital goods and the packing materials to the extent
of ` 6,05,955/-. The Commissioner (Appeals) also set aside
the demand of penalty under Rule 173Q(1)(a) of the Rules,
whilst, upholding the demand of duty and equal amount of
penalty of ` 4,75,781 under Section 11AC of the Act on
metal scrap and waste generated during course of repair and
maintenance of the machinery or parts of the plant on the
ground that such metal scrap and waste has been generated
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during mechanical working of metal in the workshop, as
contemplated by the definition of the waste and scrap under
Section Note 8(a) of Section XV of the Central Excise Tariff
Act, 1985 [hereinafter referred to as “the Tariff Act”] and, in
view of the decision of the Tribunal in Budhewala Co-op.
Sugar Mills Ltd. vs. CCE, Chandigarh-I , 2002 (141) ELT
490 (Tri. Delhi). Being aggrieved by the portion of the
Order of the Commissioner (Appeals), pertaining to
confirmation of demand of duty along with equal amount of
penalty of ` 4,75,781 on the metal scrap and waste generated
during repair of machinery, the assessee preferred an appeal
before the Tribunal. The Tribunal, vide its Order dated
09.08.2005, allowed the appeal and set aside the demand of
duty and penalty confirmed by the said portion of the Order
of the Commissioner (Appeals) on the ground that metal
scrap and waste cleared by the assessee does not arise out of
any manufacturing activity and, thereby, not excisable to any
excise duty in view of the decision of the Tribunal in CCE v.
Birla Corpn. Ltd. , 2005 (181) ELT 263. The Revenue,
aggrieved by this Order, filed an appeal under Section 35G
of the Act before the High Court of Rajasthan. The High
Court, vide its Judgment and Order dated 31.07.2008,
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allowed the appeal, set aside the Order of the Tribunal and
restored the Order of the Commissioner (Appeals) on the
ground that the generation of scrap amounts to manufacture
as it is incidental or ancillary to the manufacture of spare or
replaceable part. The spare or replaceable part comes into
existence as distinct product during the repairing of the parts
of the cement plant. Also, the generation of scrap need not
be in the process of manufacture of the excisable end
product such as cement. Being aggrieved, the assessee has
filed this appeal under Section 35L of the Act against the
judgment and order of the High Court.
4) Shri. Alok Yadav, learned counsel has appeared for
the assessee and the Revenue is represented by Shri. B.
Bhattacharyya, learned Additional Solicitor of India. We
will refer to their submissions while dealing with the issue
canvassed before us.
5) Learned counsel Shri. Alok Yadav submits that the
Revenue has wrongly relied on the definition of the metal
waste and scrap under Note 8 (a) to Section XV of the Tariff
Act which states- ‘ Metal waste and scrap from the
manufacture or metal waste and scrap from mechanical
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working of metal ’ in order to establish that metal scrap and
waste arising out of the repairing and maintenance of the
various machinery or parts of the cement manufacturing
plant amounts to manufacture of such scrap and waste. He
submits that nowhere the definition of waste and scrap in the
said Note deems it to be manufacturing process. In other
words, the definition of ‘waste and scrap’ only gives
coverage of the entry ‘waste and scrap’ under Chapter 72.04
of the Schedule to the Tariff Act and does not i pso facto lead
to a conclusion that waste and scrap arising by the
mechanical working of metal amounts to a process of
manufacture in terms of Section 2(f) of the Act in order to
attract the charging Section. He further submits that unless
the particular excisable product falling under the particular
tariff entry is manufactured in the sense of Section 2 (f) of
the Act, it does not entail or attract the operation of the
charging Section under Section 3 of the Act. Learned
counsel refers to the wordings of the definition of the
manufacture under Section 2(f) of the Act and relies on the
decision of this Court in Union of India v. Delhi Cloth and
General Mills Co. Ltd. , AIR 1963 SC 791 in support of his
submission that the High Court, vide its impugned judgment,
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has grossly erred in observing that any incidental or ancillary
process to the completion of any manufactured product,
which itself need not be end product or excisable goods,
would amount to manufacture and is excisable. In other
words, such observation of the High Court creates very
anomalous situation by conferring the status of manufacture
on every process incidental and ancillary to any
manufactured product which itself need not be excisable
manufactured end product. Learned counsel submits, by
placing reliance on several decisions of this Court in order to
buttress his contention, that the excise duty mentioned under
the tariff entry for the excisable goods cannot be levied in
terms of charging Section 3 unless such excisable goods or
items are produced and manufactured. In other words, the
event of levying of excise duty under the charging Section 3
is the manufacture of the excisable goods. Learned counsel
concludes that the manufacture of the excisable goods in
terms of Section 2 (f) is the prerequisite to levy excise duty.
6) Per Contra , Shri. B. Bhattacharyya, learned ASG,
submits that the metal scrap and waste are indisputably
excisable goods under Section 2(d) of the Act falling under
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the Chapter heading 72.04 read with Note 8 (a) to the
Section XV of the Tariff Act. He further submits that metal
scrap and waste as excisable goods are generated during the
repair and replacement of the old machinery or parts of the
cement manufacturing plant, which is incidental and
ancillary to the manufactured product, that is, cement. In
other words the process of generation of scrap and waste
amount to the manufacture in terms of Section 2(f) of the
Act. In support of his contention, learned ASG has relied on
the decision of this Court in CST v. Bharat Petroleum
Corpn. Ltd., (1992) 2 SCC 579. He further submits that once
the conditions or requirements of excisable goods and
manufacture as envisaged by Section 2(d) and Section 2(f),
respectively, of the Act are satisfied, then only, such metal
scrap and waste would attract the levy of excise duty under
the charging Section 3 of the Act. Shri. B. Bhattacharyya has
cited several decisions of this Court in support of his
submission.
7) We have heard the learned counsel for the parties. In
the present case, the assessee had undertook repair and
maintenance work of his worn out old machinery or parts of
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the cement manufacturing plant for the period between 1995
to 1999. The assessee repaired machinery or capital goods
such as damaged roller, shafts and coupling by using
welding electrodes, mild steel, cutting tools, M.S. Angles,
M.S. Channels, M.S. Beams etc. In this process of repair and
maintenance, M.S. Scrap and Iron Scrap were generated in
the workshop. It is not in dispute that these M.S. Scrap and
Iron Scrap are excisable goods under Section 2(d) of the Act
falling under the Chapter heading 72.04 in the Schedule to
the Tariff Act read with Note 8 (a) to Section XV of the
Tariff Act as ‘metal scrap and waste’. We are of the opinion
that Section Note has very limited purpose of extending
coverage to the particular items to the relevant tariff entry in
the Schedule for determining the applicable rate of duty and
it cannot be readily construed to have any deeming effect in
relation to the process of manufacture as contemplated by
Section 2(f) of the Act, unless expressly mentioned in the
said Section Note. In Shyam Oil Cake Ltd. v. CCE, (2005) 1
SCC 264 , this Court has held:
“16. Thus, the amended definition enlarges the
scope of manufacture by roping in processes which
may or may not strictly amount to manufacture
provided those processes are specified in the
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section or chapter notes of the tariff schedule as
amounting to manufacture. It is clear that the
legislature realised that it was not possible to put in
an exhaustive list of various processes but that
some methodology was required for declaring that
a particular process amounted to manufacture. The
language of the amended Section 2(f) indicates that
what is required is not just specification of the
goods but a specification of the process and a
declaration that the same amounts to manufacture.
Of course, the specification must be in relation to
any goods.
…
23. We are in agreement with the submission that
under the amended definition, which is an inclusive
definition, it is not necessary that only in the
section or chapter note it must be specified that a
particular process amounts to manufacture. It may
be open to so specify even in the tariff item.
However, either in the section or chapter note or in
the tariff entry it must be specified that the process
amounts to manufacture. Merely setting out a
process in the tariff entry would not be sufficient. If
the process is indicated in the tariff entry, without
specifying that the same amounts to manufacture,
then the indication of the process is merely for the
purposes of identifying the product and the rate
which is applicable to that product. In other words,
for a deeming provision to come into play it must
be specifically stated that a particular process
amounts to manufacture. In the absence of it being
so specified the commodity would not become
excisable merely because a separate tariff item
exists in respect of that commodity.
24. In this case, neither in the section note nor in
the chapter note nor in the tariff item do we find
any indication that the process indicated is to
amount to manufacture. To start with, the product
was edible vegetable oil. Even after refining, it
remains edible vegetable oil. As actual manufacture
has not taken place, the deeming provision cannot
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be brought into play in the absence of it being
specifically stated that the process amounts to
manufacture.”
8) The goods have to satisfy the test of being produced or
manufactured in India. It is settled law that excise duty is a
duty levied on manufacture of goods. Unless goods are
manufactured in India, they cannot be subjected to payment
of excise duty. Simply because a particular item is
mentioned in the First Schedule, it cannot become exigible
to excise duty. [See Hyderabad Industries Ltd. v. Union of
India, (1995) 5 SC 338, Moti Laminates (P) Ltd. v. CCE,
(1995) 3 SCC 23 , CCE v. Wimco Ltd., (2007) 8 SCC 412]
Therefore, both on authority and on principle, for being
excisable to excise duty, goods must satisfy the test of being
produced or manufactured in India. In our opinion, the
charging Section 3 of the Act comes into play only when the
goods are excisable goods under Section 2(d) of the Act
falling under any of the tariff entry in the Schedule to the
Tariff Act and are manufactured goods in the terms of
Section 2(f) of the Act. Therefore, the conditions
contemplated under Section 2(d) and Section 2(f) has to be
satisfied conjunctively in order to entail imposition of excise
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duty under Section 3 of the Act. The manufacture in terms
of Section 2(f) includes any process incidental or ancillary to
the completion of the manufactured product. This ‘any
process’ can be a process in manufacture or process in
relation to manufacture of the end product, which involves
bringing some kind of change to the raw material at various
stages by different operations. The process in manufacture
must have the effect of bringing change or transformation in
the raw material and this should also lead to creation of any
new or distinct and excisable product. The process in
relation to manufacture means a process which is so
integrally connected to the manufacturing of the end product
without which, the manufacture of the end product would be
impossible or commercially inexpedient. This Court has in
several decisions starting from Tungabhadra Industries v.
CTO , AIR 1961 SC 412, Union of India v. Delhi Cloth &
General Mills Co. Ltd., AIR 1963 SC 791, South Bihar
Sugar Mills Ltd. v. Union of India, AIR 1968 SC 922 and in
line of other decisions has explained the meaning of the
word ‘manufacture’ thus:
“ 14. The Act charges duty on manufacture of
goods. The word ‘manufacture’ implies a change
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but every change in the raw material is not
manufacture. There must be such a transformation
that a new and different article must emerge
having a distinctive name, character or use.”
9) In Ujagar Prints (II) v. Union of India , (1989) 3 SCC 488,
this Court has laid down the test to ascertain whether
particular process amounts to manufacture:
“whether the change or the series of changes
brought about by the application of processes take
the commodity to the point where, commercially, it
can no longer be regarded as the original
commodity but is, instead, recognised as a distinct
and new article that has emerged as a result of the
processes”
10) In Hindustan Polymers v. CCE , (1989) 4 SCC 323, this
Court has observed:
“ 11. Excise duty is a duty on the act of
manufacture. Manufacture under the excise law, is
the process or activity which brings into being
articles which are known in the market as goods
and to be goods these must be different,
identifiable and distinct articles known to the
market as such. It is then and then only that
manufacture takes place attracting duty. In order
to be goods, it was essential that as a result of the
activity, goods must come into existence. For
articles to be goods, these must be known in the
market as such and these must be capable of being
sold or are being sold in the market as such. In
order, therefore, to be manufacture, there must be
activity which brings transformation to the article
in such a manner that different and distinct article
13
comes into being which is known as such in the
market.”
11) In CCE v. Rajasthan State Chemical Works, (1991) 4
SCC 473, this Court has considered the meaning of process
in relation to manufacture as thus:
“ 12. Manufacture implies a change but every
change is not manufacture, yet every change of an
article is the result of treatment, labour and
manipulation. Naturally, manufacture is the end
result of one or more processes through which the
original commodities are made to pass. The nature
and extent of processing may vary from one class
to another. There may be several stages of
processing, a different kind of processing at each
stage. With each process suffered the original
commodity experiences a change. Whenever a
commodity undergoes a change as a result of some
operation performed on it or in regard to it, such
operation would amount to processing of the
commodity. But it is only when the change or a
series of changes takes the commodity to the point
where commercially it can no longer be regarded
as the original commodity but instead is
recognised as a new and distinct article that a
manufacture can be said to take place.
13. Manufacture thus involves a series of
processes. Process in manufacture or in relation to
manufacture implies not only the production but
the various stages through which the raw material
is subjected to change by different operations. It is
the cumulative effect of the various processes to
which the raw material is subjected (sic that the)
manufactured product emerges. Therefore, each
step towards such production would be a process
in relation to the manufacture. Where any
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particular process is so integrally connected with
the ultimate production of goods that but for that
process manufacture or processing of goods would
be impossible or commercially inexpedient, that
process is one in relation to the manufacture.
14. The natural meaning of the word ‘process’ is a
mode of treatment of certain materials in order to
produce a good result, a species of activity
performed on the subject-matter in order to
transform or reduce it to a certain stage.
According to Oxford Dictionary one of the
meanings of the word ‘process’ is a ‘continuous
and regular action or succession of actions taking
place or carried on in a definite manner and
leading to the accomplishment of some result’. The
activity contemplated by the definition is perfectly
general requiring only the continuous or quick
succession. It is not one of the requisites that the
activity should involve some operation on some
material in order to (sic effect) its conversion to
some particular stage. There is nothing in the
natural meaning of the word ‘process’ to exclude
its application to handling. There may be a
process which consists only in handling and there
may be a process which involves no handling or
not merely handling but use or also use. It may be
a process involving the handling of the material
and it need not be a process involving the use of
material. The activity may be subordinate but one
in relation to the further process of manufacture.”
12) In Union of India v. Ahmedabad Electricity Co. Ltd.,
(2003) 11 SCC 129 , the issue before this Court was that
whether the process in which cinder is produced by burning
of coal as a fuel for producing steam to run machines used in
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the factory to manufacture end product amounts to
manufacture. This Court has held:
“ 19. What is the meaning of “manufacture” in the
context of excise law? We have already quoted the
definition of the word “manufacture” as contained
in Section 2(f) of the Act. According to this
definition, manufacture includes any process
incidental or ancillary to the completion of a
manufactured product. The word “manufacture”
used as a verb is generally understood to mean as
bringing into existence a new substance. It does
not mean merely to produce some change in a
substance. To quote from a passage in the
Permanent Edition of Words and Phrases, Vol.
XXVI
“manufacture implies a change, but every
change is not manufacture and yet every change
of an article is the result of treatment, labour and
manipulation. But something more is necessary
and there must be transformation: a new and
different article must emerge having a distinctive
name, character or use”.
“Manufacture” may involve various processes.
The aim of any manufacturing activity is to
achieve an end product. Depending on the nature
of manufacturing activity involved, processes
may be several or one. The natural meaning of
the word “process” is a mode of treatment of
some material in order to produce a good result.
Every process which is incidental or ancillary to
the completion of manufactured product is
included within the meaning of manufacture. The
word “process” has not been defined in the Act.
In its ordinary meaning “process” is a mode of
treatment of certain material in order to give a
desired shape to the material. It is an activity
performed on a given material in order to
transform it into something.”
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This Court further observed thus:
“27. In the case in hand also, coal which leads to
production of cinder is not used as a raw material
for the end product. It is being used only for
ancillary purpose, that is, as a fuel. Therefore,
irrespective of the fact whether any manufacture is
involved in the production of cinder it should be
held to be out of the tax net for the reason that it is
not a raw material for the end product.
28. In producing “cinder”, there is no
manufacturing process involved. Coal is simply
burnt as fuel to produce steam. Coal is not
tampered with, manipulated or transformed into the
end product. For purposes of manufacture the raw
material should ultimately get a new identity by
virtue of the manufacturing process either on its
own or in conjunction or combination with other
raw materials. Since coal is not a raw material for
the end product in all the cases before us, the
question of getting a new identity as an end product
due to manufacturing process does not arise.”
13) In Commissioner of Central Excise, Chennai II
Commissionerate v. Tarpaulin International, (2010) 9 SCC
103 , whilst addressing the issue whether the process of
preparing tarpaulin made-ups by cutting and stitching the
tarpaulin fabric and fixing the eyelets would amount to
manufacture, this Court has held:
“ 25. Is there any manufacture when tarpaulin
sheets are stitched and eyelets are made? In our
view, it does not change the basic characteristic of
the raw material and end product. The process does
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not bring into existence a new and distinct product
with total transformation in the original
commodity. The original material used i.e. the
tarpaulin is still called tarpaulin made-ups even
after undergoing the said process. Hence, it cannot
be said that the process is a manufacturing process.
Therefore, there can be no levy of Central excise
duty on the tarpaulin made-ups. The process of
stitching and fixing eyelets would not amount to
manufacturing process, since tarpaulin after
stitching and eyeleting continues to be only cotton
fabric. The purpose of fixing eyelets is not to
change the fabric. Therefore, even if there is value
addition the same is minimum. To attract duty there
should be a manufacture to result in different goods
and the goods sought to be subject to duty should
be known in the market as such.”
14) In the present case, it is clear that the process of repair
and maintenance of the machinery of the cement
manufacturing plant, in which M.S. scrap and Iron scrap
arise, has no contribution or effect on the process of
manufacturing of the cement, which is the excisable end
product, as since welding electrodes, mild steel, cutting
tools, M.S. Angles, M.S. Channels, M.S. Beams etc. which
are used in the process of repair and maintenance are not raw
material used in the process of manufacturing of the cement,
which is the end product. The issue of getting a new identity
as M.S. Scrap and Iron Scrap as an end product due to
manufacturing process does not arise for our consideration.
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The repairing activity in any possible manner cannot be
called as a part of manufacturing activity in relation to
production of end product. Therefore, the M.S. scrap and
Iron scrap cannot be said to be a by-product of the final
product. At the best, it is the by-product of the repairing
process which uses welding electrodes, mild steel, cutting
tools, M.S. Angles, M.S. Channels, M.S. Beams etc.
15) Learned ASG has placed reliance on the decision of this
Court in CST v. Bharat Petroleum Corpn. Ltd., (Supra) . In
that case, the assessee purchased sulphuric acid and cotton
for the manufacturing of kerosene and yarn/cloth. In the
manufacturing process, the acid sludge and cotton waste
emerged as a distinct product having commercial identity.
The issue before this Court was that whether the assessee
can be said to manufacture acid sludge and cotton waste.
This Court observed that where a subsidiary product is
turned out regularly and continuously in the course of a
manufacturing business and is also sold regularly from time
to time, an intention can be attributed to the manufacturer to
manufacture and sell not merely the main item manufactured
but also the subsidiary products. We are afraid, the decision
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does not help the Revenue because the metal scrap and waste
arising out of the repair and maintenance work of the
machinery used in manufacturing of cement, by no stretch of
imagination, can be treated as a subsidiary product to the
cement which is the main product. The metal scrap and
waste arise only when the assessee undertakes repairing and
maintenance work of the capital goods and, therefore, do not
arise regularly and continuously in the course of a
manufacturing business of cement.
16) In view of the above, we cannot sustain the Judgment
and Order of the High Court dated 31.07.2008.
17) In the result, the appeal is allowed and the impugned
Judgment and the Order of the High Court is set aside and
the Order dated 09.08.2005 of the Tribunal is restored.
Costs are made easy.
........................……………………J.
[H.L. DATTU]
.....…..............……..………………J.
[CHANDRAMAULI KR. PRASAD]
New Delhi,
October 13, 2011.
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