Full Judgment Text
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PETITIONER:
M/S. MOTI LAMINATES PVT. LTD. ETC.
Vs.
RESPONDENT:
THE COLLECTOR OF CENTRAL EXCISE, AHMEDABAD
DATE OF JUDGMENT14/02/1995
BENCH:
SAHAI, R.M. (J)
BENCH:
SAHAI, R.M. (J)
SINGH N.P. (J)
PARIPOORNAN, K.S.(J)
CITATION:
1995 SCC (3) 23 JT 1995 (2) 324
1995 SCALE (1)713
ACT:
HEADNOTE:
JUDGMENT:
1. The question of law, the adjudication of which
ultimately shall be decisive of the issues arising in these
appeals filed under Section 35-L of the Central Excises &
Salt Act, 1944 (in brief ’the Act’), is whether various
goods mentioned in the Schedule of Excise Tariff are
dutiable as such or they would be, ’excisable goods’ as
defined in the Act, only when they are marketable or capable
of being marketed.
2. Law on this issue appears to be fairly settled.
Recently a Three Judge bench of this Court speaking through
one of us (Hon’ble K.S. Paripoornan, J.) in Indian Cable Co.
Ltd. vs. Collector of Central Excise, Calcutta, 1994 (74)
ELT 22 while reversing the order of the Tribunal that "the
conversion of PVC resin’ into PVC compound by the processes
employed by the assessee, amounts to "manufacture" within
the meaning of Section 2(f) of the Act", therefore, it "was
to be charged with excise duty" held, "the provisions of the
Act mandate that a finding that the goods are marketable is
a pre-requisite or "sine qua non" for the levy of duty".
3. But prior to adverting to it and notice in brief how
the law on this aspect has developed, it is but appropriate
to mention that the precise dispute before the Tribunal was
whether the appellants who are manufacturers and sellers of
laminated sheets which fell under tariff item no. 68 of the
tariff schedule prior to 28th February 1986 were liable to
pay duty on such intermediate products produced by them, as
were solutions of resin and water which were not stable,
merely, because they were captively consumed. Since the
question of law is common and has arisen in more or less
similar circumstances in all the appeals, it is not
necessary to give facts of each case.
4. The appellants manufactured laminated sheets out of
various raw materials including paper and other chemicals,
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namely,, phenol, formaldehyde, hexamine etc., purchased from
the open market after paying duty. In the process of
manufacturing laminated sheets the appellants used the raw
material by processing them with each other and with other
materials like caustic soda, methanol and hydro-chloric
acid. In this process Phenol Formaldehyde was produced out
of Melamine, Formaldehyde, phenol, methanol, caustic soda,
hexamine and hydrochloric acid. The process of manufacture
of phenol, formaldehyde as found by the Tribunal is
described thus:’
"Formaldehyde is pumped into a reaction vessel
and thereafter Me is added. These two
material are stirred and thereafter Hydro-
Chloric Acid is added, in required quantity to
accelerate the reaction. The temperature is
thereafter increase upto 80 degree Centigrade
and is thereafter brought down to 60 degree
Centigrade. At this time Caustic Soda or
Methanol in prescribed quantity are added. At
times water is separated from Formaldehyde.
The solution which so emerges is under
constant and continuing reaction at this
stage. However, this solution is removed from
the reaction vessel and is used in its semi-
processed condition in Manufacture Of
laminated sheets."
From the process of manufacture, narrated above, it is
apparent that what emerged was solution as a result of
continuous reaction and was taken out from the vessel in its
semi-processed condition and was used without further
processing in manufacture of laminated sheets. Since it was
not marketed or sold by the appellants and the solution was
captively consumed only the Department did not levy any duty
on it. In 1979, Rules 9, 49 and 173(1) of the Central Excise
Rules 1944 were amended the result of which was that even
captively consumed goods produced or manufactured became
dutiable. Consequently the Superintendent of Central Excise
issued Notice that in view of the amendments in Rules
phenol, formaldehyde and melamine formaldehyde were liable
to duty. The appellants contested the notice. It was
claimed that the reacting mixtures were not only unstable
having short life but they were not marketable in the form
they were obtained in intermediate stage in a continuous
process, The appellants claimed that the reacting mixture in
manufacture went on and it was complete on formation of
laminated sheets by application of heat and pressure to
these goods. The Assistant Collector found that the
mixture, namely, solution of the resin and water was not
stable. But he did not agree that merely because solutions
were not stable it did not mean that the resins produced by
the appellants were not goods as if some, stabiliser was
used to lower down continuous reaction the same could be put
in the market for the purpose of sale. The Collector
(Appeals) agreeing with the finding that solutions were not
stable allowed the appeals and held that an intermediate
product in order to be excisable must be a product known to
the market or commercial community. In other words the
intermediate product which came into existence should have
been a complete product known as such to the market. But if
something more was to be done on the product to bring it
into a form known to the commercial community then it could
not be treated as excisable goods. The Collector (Appeals)
held that even though it was not disputed that Ox products
used for the manufacture of plastic laminated sheets and
synthetic resin was formed as an in intermediate product
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but it being unstable in a non-marketable condition the
resin mixture could not be considered as
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excisable under tariff item ISA(1) of Central Excise Tariff.
In further appeal filed by the Department the Tribunal held
that even though it was not claimed by the Department before
the subordinate authorities that the intermediate goods
produced by the appellants were ’resols’ but resins which
occurred in three stages was nothing but resol at ’A’ stage
and resol being mentioned in item 15-A of the Tariff
Schedule it was covered by the ’chemical nomenclature’, And
once the product answered the chemical description in the
entry, it was eligible to duty. The claim of the appellants
that it was not goods was thus rejected. The Tribunal
further held that since, "the products manufactured by"
appellants, fell under 15-A (1) the fact that these were not
marketed or sold did not make any difference. The claim
that the goods were incapable of being marketed was rejected
as there was no evidence, ’that the product resol’ was,
’unstable and not capable of storage even for a short time’.
The Tribunal held, "that in the case of resins there were so
many varieties and these have wide-ranging shelf lives
ranging from a few days to a couple of months or even more".
Since it was not made out, "that the product" was required
to be taken into immediate use or otherwise it would have
been rendered useless or it would cease to be a resin" it
was hold that the product even though capable of, "further
condensation or polymerization" had reached, a definite
stage of manufacture for a definite end-use and, therefore,
"had to be held to be goods". Reason for this finding was
concession of the appellants counsel that the resins
obtained by the appellants could, "be kept for as long as 15
days".
5. What arises for determination, therefore, in the first
instance, is whether resin or resol produced by the
appellants can be considered to be goods for purposes of
levy under the Act. Even though the Department did not
claim either in the notice issued to the appellants or at
any stage before the appeals were heard by the Tribunal that
resins produced by the appellants were nothing else than
what is chemically known as ’resols’ but the necessity to
examine its correctness is obviated as Sri Dave, the learned
counsel for the appellants fairly did not assail the
findings rather accepted it. Resols is specifically
mentioned as one of the items in entry no. 15A of the tariff
schedule. ’The main entry and Explanation II of it are
extracted below.
"Item No. 15A - PLASTICS
------------------------------------------------------------
Item No.Tariff Rate of duty
------------------------------------------------------------
15A. Artificial or Synthetic resins and Fifty per
plastics and Other cent ad
materials and articles specified valorem.
below:
(1) .............
(2) .............
(3) .............
Explanation 1: ...............
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Explanation II.- In sub-item (1), "con-
densation polycondensation polyaddition,
polymerisation and co-polymerisation products"
are to be taken to apply only to goods of a
kind produced by chemical synthesis answering
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to one of the following descriptions:-
(a) artificial plastics, including
artificial resins;
(b) silicones;
(c) resols, liquid polyisobutylene, and
similar artificial polycondensation or
polynkerisation products."
Resols, according to Tribunal, is chemical name of resin at
’A’ stage. It was held that phenol resin in course of
manufacture due to reaction of mixture occurred at three
stages:
1. Resol or A-Stage (beginning of
Condensation); the resin as fluid soluble and
still contains much water.
2. Resitol or B-Stage (continued
condensation, slight cross-lingking( in-
soluble, rubber.
3. Resite or C-Stage (final condition of
the cured product); infusible and insoluble."
In the Glossary of Chemical Terms: Second Edition: Clifford
A. Hampel, Consulting Chemical Engineer and Gessner
G.Hawley, Editor: Condensed Chemical Dictionary ’Phenol
formaldehyde resin’ are described as under:-
"Polymerization occures in three steps
or states. The first (A-Stage) is an alcohol-
soluble liquid, the second (B-Stage) is semi-
solid and less soluble: the third (C-stage) is
hard, cross-linked solid. The
A-Stage form is called a resol.
Resol thus obtained in fluid state at ’A’ stage was a
solution which could be retained only by addition of some
stabliser or retarder. The appellants used it for
manufacturing laminated sheets in semi-finished stage
without any processing or adding any stabliser or retarder.
Even the Tribunal found that resin at ’A’ stage was a
solution obtained during process which by itself could not
be used unless some stabiliser was added to it. It was not
disputed that its life, according to appellants, was for two
or three days. But even assuming what was stated by the
counsel before the Tribunal that its life was for 15 days.
it could survive only if regulated and controlled
temperature was maintained. Otherwise, as has been observed
by the Chemical Examiner it gets itself converted into a
jelly which was incapable of any use. Therefore, it is very
doubtful if on the facts found by the Assistant Collector,
affirmed by the Collector and not differed by the Tribunal,
the resin or resols obtained during the course of
manufacture by the appellants could be held to be goods.
6. The duty of excise is leviable under Entry 84 of List I
of the VIIth Schedule on goods manufactured or produced.
That is why the charge under Section 3 of the Act is on all,
’excisable goods’, ’produced or manufactured’. The
expression ’excisable goods’ has pl64 been defined by clause
(d) of Section 2 to mean, ’goods’ specified in the Schedule.
The scheme in the Schedule is to divide the goods in two
broad categories - one, for which rates are mentioned under
different entry and other the residuary. By this method all
goods are excisable either under the specific or
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the residuary entry. The word ’goods’ has not been defined
in the Act. But it has to be understood in the sense it has
been used in Entry 84 of the Schedule. That is why Section
3 levies duty on all excisable goods mentioned in the
Schedule provided they are produced and manufactured.
Therefore, where the goods are specified in the Schedule
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they are excisable goods but whether such goods can be
subjected to duty would depend on whether they were produced
or manufactured by the person on whom duty is proposed to be
levied. The expression ’produced or manufactured’ has
further been explained by this Court to mean that the goods
so produced must satisfy the test of marketability. Con-
sequently it is always open to an assessee to prove that
even though the goods in which he was carrying on business
were excisable goods being mentioned in the Schedule but
they could not be subjected to duty as they were not goods
either because they were not produced or manufactured by it
or if they had been produced or manufactured they were not
marketed or capable of being marketed.
7. The duty of excise being on production and manufacture
which means bringing out a new commodity, it is implicit
that such goods must be usable, moveable, saleable and
marketable. The duty is on manufacture or production but
the production or manufacture is carried on for taking such
goods to the market for sale. The obvious rationale for
levying excise duty linking it with production or
manufacture is that the goods so produced must be a distinct
commodity known as such in common parlance or to the com-
mercial community for purposes of buying and selling. Since
the solution that was produced could not be used as such
without any further processing or application of heat or
pressure, it could not be considered as goods on which any
excise duty could be levied.
8. But the learned Additional Solicitor General urged that
resin or solution which was produced by the appellant was
technically known as resols. Reliance was placed on its
meaning in the dictionary. The learned counsel submitted
that the tariff schedule has divided the items into specific
and general. Resols being one of the A) items mentioned
under item 15A it was a specific item, therefore, once it
was found that the intermediate goods produced by the
appellants were resols then it was exigible to duty and it
could not further be required to satisfy the common parlance
test specially because this was a chemical and not a product
which is commonly bought and sold in the market. The
learned counsel urged that once it was found that it was
manufactured or produced then it should be deemed to have,
satisfied the test of marketability and consequently it was
excisable goods within meaning of the Act and the Tribunal
was justified in levying duty on it. The learned counsel
submitted that marketing capability depends on nature of
goods. The test of marketability and capable of being
marketed could not be applied to such goods as resol and,
therefore, the submission of the learned counsel for
appellants that the resin or resol could be subjected to
duty only if it was found that from raw materials
some new substance was brought out and it was known as such
was not correct as once the intermediate goods produced by
the appellants was found to be resols and it having been
mentioned in item no.15A the burden of the Department stood
discharged.
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9. Although the duty of excise is on manufacture or
production of the goods, but the entire concept of bringing
out new commodity etc. is linked with marketability. An
article does not become goods in the common parlance unless
by production or manufacture something new and different is
brought out which can be bought and sold. In Union of India
& Anr. vs. Delhi Cloth & General Mill Co. Ltd., AIR 1963 SC
791, a Constitution Bench of this Court while construing the
word ’goods’ held as under:-
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"These definitions make it clear that to
become "goods" an article must be something
which can ordinarliy come to the market to be
bought and sold".
Therefore, any good to attract excise duty must satisfy the
test of marketability. The tariff schedule by placing the
goods in specific and general category does not alter the
basic character of leviability. The duty is attracted not
because an article is covered in any of the items or it
falls in residuary category but it must further have been
produced or manufactured and it is capable of being bought
and sold.In South Bihar Sugar Mills Ltd. & Anr. etc. v.
Union of India & Anr. etc., AIR 1968 SC 922 it was held by
this Court:
"The Act charges duty on manufacture of goods.
The word ’manufacture’ implies a change 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. The duty is levied on
goods. As the Act does not define goods, the
legislature must be taken to have used that
word in its ordinary, dictionary meaning. The
dictionary meaning is that to become goods it
must be something which can ordinarily come to
the market to be bought and sold and Is known
to the market. That it would be such an
article which would attract the Act was
brought out in Union of India vs. Delhi Cloth
and General Mills Ltd., 1963 Supp. (1) SCR 586
= AIR 1963 SC
In A.P. State Electricity Board vs. Collector of Central
Excise, Hyderabad, JT 1994 (1) SC 545 this Court reiterated
the same principle and observed that marketability was must
irrespective of whether it was marketed or not. Reference
has already. been made to Indian Cable (Supra). Thus any
good mentioned in the tariff schedule does not attract duty
unless it is marketable or capable of being marketed. The
test of marketability was relaxed in Union Carbide India
Ltd. vs. Union of India & Ors., 1986 (24) ELT 169 and it
was held that, "in order to attract ’excise duty the article
manufactured must be capable of sale to a consumer"’. The
question that arose, was whether aluminium cans produced by
the appellants for the flashlights manufactured by it were
goods. It was held:
"The question here is whether the alumimum
cans manufactured by the appellant are capable
of sale to a consumer. it appears on the facts
before us that there are only two
manufacturers of flashlights in India, the
appellant being one of them. It appears also
that the aluminium cans prepared by the
appellant are employed entirely by it in the
manufacture of flashlights, and are not sold
as aluminium cans in the market. The record
discloses that the aluminium cans, at the
point at which excise duty has been levied,
exist in a crude and elementary form incapable
of being employed at that stage as a component
in a flashlight. The cans have sharp uneven
edges and in order to use them as a component
in making flashlight cases
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the cans have to undergo various processes
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such as trimming, threading and redrawing.
After the cans are trimmed, threaded and
redrawn they are reeded, beaded and anodised
or painted. It is at that point only that
they become a distinct and complete component,
capable of being used as a flashlight case for
housing battery cells and having a bulb fitted
to the case. We find it difficult to believe
that the elimentary and unfinished form in
which they exist immediately after extrusion
suffices to attract a market".
It was explained in Bhor Industries Ltd. v. Collector of
Central Excise 1989(40) ELT 280 SC:
"It appears to us that under the Central
Excise Act, as it stood at the relevant time,
in order to be goods as specified in the entry
the first condition was that as a result of
manufacture goods must come into existence.
For articles to be goods these must be known
in the market as such or these must be capable
of being sold in the market as goods. Actual
sale in the market is not necessary, user in
the captive consumption is not determinative
but the articles must be capable of being sold
in the market or known in the market as
goods."
It was reiterated in Hindustan Polymers v. Collector of
Central Excise 1989 (43) E.L.T. 165
"Excise duty, as has been reiterated and
explained, is a duty on the act of manu-
facture. 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 being sold in the market as such.
The submission of the learned counsel for the Department,
therefore, that merely because the intermediate product
manufactured by the appellants was resols and it is one of
the items mentioned under item 15A it was exigible to duty
ignores the basic and primary test for exigibility of duty.
The precise argument advanced by the learned Solicitor
General of India was rejected in Bhor Industries (supra) and
the order of the Tribunal in that case was set aside as
"the test of marketability or capable of being marketed",
was not applied by the Tribunal.
10.Having traced the development of law that any goods
produced or manufactured ipso facto do not attract duty
unless they are marketable or capable of being marketed, we
may now examine the dutiability of goods captively consumed.
Prior to 1979 no duty was levied on such goods. But, as
stated earlier, after amendment of rules 9 and 49 captively
consumed goods become exigible to duty. The rationale for
not treating such goods as excisable was same that since
such goods were not brought to the market for buying and
selling they could not be subjected to duty. But when the
Rules were amended a fiction was created that any article
produced or manufactured if captively consumed was
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statutorily presumed to satisfy the test of marketability.
But this presumption can be rebutted if it is established
that the article produced and captively consumed was neither
goods nor marketable nor capable of being marketed. The
duty is attracted not by captive consumption of any article
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but it must be a good within the meaning of the Act which
apart from having a distinctive name and known as such must
be marketable or capable of being marketed. In Bhor
Industries (supra) crude PVC films manufactured by the
appellants as intermediate product used for captive consump-
tion in manufacture of leather cloth, jute matting and PVC
tapes were held not to be excisable goods on the test of
marketability. In Collector of Central Excise v. Amhalal
Sarahhai Enterprises 1989(43) ELT 214 the manufacturers
produced starch hydrolysate which was captively consumed and
fell under item 1-E of the Central Excise Tariff It was held
to be goods, no doubt, but it was observed that from a
practical point of view it was apparent that the goods were
not marketable consequently they were not exigible to duty.
11.It cannot thus be disputed that even if the resin
produced by the appellants are resols as mentioned in item
15A it could not be subjected to duty. The purpose of
specifying the goods in the Schedule is twofold, one, the
rate on which the duty would be charged and other that if
the goods satisfy the description and arc covered in the
Entry then they are liable to pay excise duty. But even in
respect of specified goods it could be established that it
was not marketable or capable of being marketed, therefore,
no duty was leviable on it. The finding on this aspect has
been extracted earlier. The Assistant Collector (Excise)
found that unless some retarder or stabiliser was added the
unstable solution was not marketable. Even assuming that
such solution could last for 15 days as found by the
Tribunal that would not help the Department unless it is
further found that it was a produce which was marketable or
capable of being marketed. The Collector had agreed with
the finding of Assistant Collector that without any further
process the solution was incapable of being used for any
other purpose. It further cannot be disputed that even the
life for 15 days depended on maintenance of particular
temperature and heat. It cannot, therefore, be said that
the goods were marketable or capable of being marketed.
Since the test of marketability or capable of being
marketable applies even to those goods which are mentioned
in the tariff item the intermediate resin produced by the
appellants which are mentioned as resols under tariff item
no. 15A were not exigible to duty. The finding of the
Tribunal that once the product manufactured by the
appellants answered the chemical description of the product
under tariff item 15A it was assessable to duty whether it
was marketable or not was pa thus not well founded.
12. In the result, these appeals succeed and are allowed.
The question of law raised by the appellants is decided by
saying that resin at ’A’ stage which are chemically known as
’resols’ could not be subjected to duty. The appellants
shall be entitled to their costs.
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