Full Judgment Text
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CASE NO.:
Appeal (civil) 6402-05 of 1995
PETITIONER:
I.T.C.Limited
RESPONDENT:
Collector of Central Excise, Patna
DATE OF JUDGMENT: 10/12/2002
BENCH:
S.N. VARIAVA & B.N. AGRAWAL.
JUDGMENT:
J U D G M E N T
B.N.AGRAWAL, J.
The order impugned in these appeals was passed by Customs, Excise
and Gold (Control) Appellate Tribunal (hereinafter referred to as ‘the Tribunal’) in
appeals preferred against the orders of assessing authorities whereby excise
duty was levied and penalty imposed.
The short facts are that four show cause notices were issued to the
appellant-Company, which was manufacturer of cigarette, alleging therein that it
had been clearing without payment of excise duty 20 sticks of cigarette from
each cigarette making machine in the cigarette making department on each
working day as samples for test in their quality control laboratory within the
factory premises, total quantity each day being 65 packets of cigarettes of each
brand manufactured in the factory. It was further alleged that the company
neither submitted any classification list nor maintained any account in respect of
quantity of cigarettes removed, which was liable to excise duty. Out of the
aforesaid show cause notices, first show cause notice was issued by the
Collector of Central Excise, Patna on 25th July, 1990 and the appellant company
was required to pay excise duty to the tune of Rs. 65,45,630.32 besides penalty
in relation to the period from March 1973 to April 1990 under the provisions of
Central Excise Act, 1944 (hereinafter referred to as ’the Act’) and the rules
framed thereunder which was issued in case No. 6-MP of 1991. Other three
notices were issued in the months of January and February, 1991 by the
Additional Collector of Central Excise, Patna, in relation to period between May
and December, 1990 in case Nos. E-522, E-523 and E-524 of 1992 and total
amount of excise duty leviable upon the appellant company was Rs. 6,14,278.48
besides penalty.
The appellant company contested the demand on grounds, inter alia, that
no duty was leviable on samples of cigarettes drawn for test purposes in the
quality control laboratory within the factory since the process of manufacture of
cigarettes is not completed until the same are packed as packing is a process
incidental or ancillary to the process of manufacture of cigarettes and packing of
cigarettes is done after the samples sent are tested in the laboratory. According
to it, some quantity of cigarettes is destroyed in the process of testing.
The assessing authorities by two separate orders disposed of the
proceedings. In one case, excise duty was levied to the tune of Rs. 65,45,630.32
and penalty to the tune of Rs. 5 lacs and in another case, Rs. 6,14,278.48 apart
from penalty of Rs. 15,000/-. The assessing authorities passed the orders after
holding that the manufacturing process in respect of the cigarettes is completed
at the stage when they emerge in the form of sticks of cigarettes and excise duty
under the provisions of Section 3 of the Act on the manufacture or production of
the final article, i.e., in the case of cigarette, was attracted at that very stage even
though collection was deferred until clearance. It was further held that the
process of packing of cigarettes was not incidental or ancillary to manufacture
but it was incidental or ancillary to the sale of the end products.
Challenging orders passed by the assessing authorities, four
separate appeals were filed on behalf of the appellant company before the
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Tribunal which have been disposed of by a common order whereby the Tribunal
has decided the question of law raised against the assessee holding that excise
duty is leviable on the samples of cigarettes sent to the laboratory for the
purposes of test within the factory premises but remitted the matter to the
assessing authorities for a limited purpose for working out the effective excise
duty recoverable on the disputed quantity of cigarettes. Hence these appeals.
Shri S.Ganesh, learned Senior Counsel appearing in support of the
appeals, submitted that in terms of rule 93 of the Central Excise Rules, 1944
(hereinafter referred to as ’the Rules’), no excisable tobacco products can be
delivered from any factory unless the same are made into separate packets and
enclosed in a wrapper bearing, inter alia, the name of the factory and the licence
number which can be done only after the completion of testing and thus as the
process of manufacture of cigarette was not completed, no excise duty is leviable
thereon. Alternatively, it was submitted that certain quantity of cigarette is
destroyed during the process of testing whereupon no excise duty is leviable.
Shri Mukul Rohtagi, learned Additional Solicitor General, appearing
on behalf of the respondent, on the other hand, submitted that manufacture of
cigarette within the meaning of Section 2(f) of the Act is completed no sooner
they are converted into sticks of cigarettes and the process of packing into
separate packets and wrapping the same is neither incidental nor ancillary to the
completion of manufacture of cigarette, but the same may, at the highest, be
incidental or ancillary to its sale. Learned Additional Solicitor General further
submitted that it is not known as to whether any quantity of cigarette was at all
destroyed during the process of testing and if at all there was any destruction,
what was its quantum as no account in this regard was either maintained or
produced either before the assessing authority or the Tribunal.
In view of the submissions made on behalf of the parties, questions that
fall for consideration of this Court are: -
1. Whether cigarettes removed for the purposes of tests in the
quality control laboratory situated within the factory premises
could be treated to be excisable goods manufactured and
consequently liable to payment of excise duty under the
provisions of the Act.
2. Whether excise duty is leviable on the cigarettes that are
destroyed during the process of testing in the laboratory.
In order to appreciate the points raised, it may be useful to refer to the
provisions of Sections 2(d), 2(f) and 3(1)(a) of the Act and rule 93 of the Rules
which run thus:-
"S.2.- Definitions.- In this Act, unless there is anything
repugnant in the subject or context, -
(d) "excisable goods" means goods specified in the First
Schedule and the Second Schedule to the Central
Excise Tariff Act, 1985 (5 of 1986) as being subject to
a duty of excise and includes salt;
(f) "manufacture" includes any process
(i) incidental or ancillary to the completion of
manufactured product;
(ii) which is specified in relation to any goods in
the section or Chapter notes of the Schedule to
the Central Excise Tariff Act, 1985 (5) of 1986)
as amounting to manufacture,
and the word "manufacturer" shall be construed
accordingly and shall include not only a person who
employs hired labour in the production or manufacture
of excisable goods, but also any person who engages
in their production or manufacture on his own
account."
"S.3. Duties specified in the Schedule to the Central
Excise Tariff Act, 1985 to be levied.- (1) There shall be
levied and collected in such manner as may be prescribed, -
(a) a duty of excise, to be called the Central Value Added
Tax (CENVAT) on all excisable goods which are
produced or manufactured in India as, and at the
rates, set forth in the First Schedule to the Central
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Excise Tariff Act, 1985 (5 of 1986)".
"R.93. Manufacture and disposal of excisable tobacco
products.- No exciseable tobacco products shall be
delivered from any factory except under the following
conditions:-
(a) Such products shall be made into separate packets.
(b) Each such packet, whether retail or wholesale, shall
be enclosed by, and at the expense of, the
manufacturer, in a wrapper or other outer covering,
and, unless exempted by the Central Board of Excise
and Customs, by general or special order, each such
packet, or the manufacturer’s label affixed thereto,
shall bear in clearly discernible characters, the
following particulars
(i) the name of the factory or a distinguishing
mark which may take the form of a special
design whereby the origin of the products can
be traced;
(ii) the number of his licence in Form L4; and
(iii) the trade brand of the product, Specimens of
all such wrappers, outer covering or labels
shall be submitted to the Collector for his
approval before they are brought into use.
(c) An application for clearance in the proper form shall
be delivered to the officer-in-charge of the factory at least 12
hours (or such other period as the Collector may in any
particular case require or allow before it is intended to
remove the goods:
Provided that where removals from a factory are
frequent and the manufacturer maintains a sufficient credit
balance in his account-current maintained under rule 9 for
payment of duty, the Assistant Collector may, on a request
by the manufacturer permit, by an order in writing, removal
of goods on presentation of a gate-pass as prescribed under
rule 52A, subject to the observance of such procedure as
may be prescribed in this regard by the Collector.
(d) No cigars and cherrots mentioned in Heading No.
24.02 of the Schedule to the Central Tariff Act 1985 (5
of 1986) shall be delivered from any factory unless
(1) they are put into packets containing 5, 10, 25,
50 or 100 cigars or cheroots, as the case may
be;
(2) each such packet consists of a wooden, tin or
cardboard box opening only at the top or of a
paper wrapper top completely closed on all
sides and with all sides and with all outer
edges gummed down".
Excise duty is leviable under Section 3 of the Act on all excisable goods
which are produced or manufactured in India at the rates, set forth in the First
Schedule to the Central Excise Tariff Act, 1985 (hereinafter referred to as ‘the
Tariff Act’). The expression ‘Excisable goods’ has been defined under Section
2(d) of the Act to mean goods specified in the First Schedule and the Second
Schedule appended to the Tariff Act as being subject to a duty of excise.
‘Tobacco’ has been enumerated as excisable good as Item No. 1 in Second
Schedule to the Tariff Act. The expression ‘manufacture’ has been defined
under Section 2(f) of the Act to include any process incidental or ancillary to the
completion of a manufactured product. Under rule 93 of the Rules excisable
tobacco products, which include cigarette, shall be delivered from the factory
after the products are made into separate packets after affixing manufacturer’s
label thereon and wrapping in a wrapper or other outer covering.
According to Shri Ganesh, excisable goods contemplated by Section
3(1)(a) of the Act are those goods which are marketable inasmuch as the
cigarettes removed for the purposes of testing in the quality control laboratory
situated within the factory premises are not marketable as the process of its
manufacture was not completed, the same having not been kept in packets as
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required under rule 93 of the Rules.
The requirement of "marketability" has been evolved by a process of
judicial interpretation for which it would be necessary to refer to the relevant
decisions hereinafter.
In the case of Union of India vs. Delhi Cloth & General Mills, 1963 Supp.
(1) SCR 586, the respondent-Mills were engaged in the manufacture of
vegetable product known as ‘Vanaspati’. Vanaspati was subject to duty. It was
the common case of both the parties that for the purpose of manufacturing
vanaspati, the respondent-Mills purchased groundnut and ‘til’ oil from the market
and subjected them to different processes before applying hydrogenation to
produce vanaspati. The stand of the Union of India was that in the course of
manufacture of vanaspati, the respondent-Mills produced at an intermediate
stage what is known as ‘refined oil’ in the market and although the respondent
may not sell it as such, still it being a marketable product, it was liable to excise
duty under Tariff Item 23 of the Schedule which levied duty on "Vegetable, non-
essential oils, all sorts, in or in relation to the manufacture of which any process
is ordinarily carried on with the aid of power". This stand was negatived by this
Court holding that there could be no refined oil as known to the market without
deodorisation. In other words, non-deodorised refined oil is not known to market
whereas the ‘refined oil’ obtained by the respondent at an intermediate stage of
production of vanaspati is not deodorised. The respondent, it was held, applied
the process of deodorisation only after hydrogenation. The Court relied upon the
specification by the Indian Standards Institution to hold that "without
deodorisation, the oil is not ‘refined oil’ as is known to the consumers and the
commercial community". Accordingly, it held that the ‘refined oil’ which was
obtained by the respondent at an intermediate stage of production/manufacture
of vanaspati was not liable to duty. The ratio of this judgment is that inasmuch
as the ‘refined oil’ obtained by the respondent at an intermediate stage of
production of vanaspati cannot be treated as ‘refined oil’ known to the market
and consumers because no refined oil is ever marketed unless it is deodorised, it
is not ‘goods’ for the purpose of the Act. It was found as a fact that the
respondent did not deodorise the ‘refined oil’ at any stage; it applied the said
process only after hydrogenation.
In the case of Union Carbide India Ltd., vs. Union of India, 1986 (2) SCC
547, the appellant-Company was engaged in the manufacture and sale of
flashlights (torches). For that purpose, it used to purchase aluminium slugs and
produced aluminium cans or torch bodies at its factory by a process of extrusion.
The Superintendent of Central Excise called upon the appellant-company to
submit a price-list in respect of the aluminium cans for the purposes of levying
excise duty thereon. While complying with the said demand, the appellant
protested that the said aluminium cans cannot be described as ‘goods’ for the
purpose of levying excise duty inasmuch as they are not marketable and that
they are prepared only for the purpose of flashlights manufactured by the
appellant. It was also submitted that preparation of aluminium cans out of
aluminium slugs did not amount to manufacture and that aluminium cans are
merely intermediate products in the manufacture of flashlights. The aluminium
cans prepared by the appellant, it submitted, were manufactured by it entirely for
its own purposes, viz., for the manufacture of flashlights. The aluminium cans at
the point at which the excise duty was sought to be levied were in a crude and
elementary form incapable of being employed in that State as components in
flashlights. The cans had sharp uneven edges and before they could be used
as a component in making the flashlight, these cans had to undergo various
processes such as trimming, threading and redrawing. After trimming, threading
and redrawing, they were reeded, beaded and anodised or painted. It is at that
point that they became distinct and complete components capable of being used
as flashlight cans for housing battery cells and for having a bulb fitted thereto.
On the said facts, it was held by this Court that the aluminium cans in their
aforesaid elementary and unfinished form were not capable of sale to a
consumer and hence not marketable nor were they ever marketed. This Court
accepted the affidavit filed by the appellant that the aluminium cans in that State
are not known to the market because the Revenue could not produce any
material to the contrary. The ratio of this decision is that the aluminium cans
which were sought to be taxed were, in that State not marketable. They were not
capable of being sold to a consumer nor were they ever sold in that State.
In the case of Bhor Industries Ltd. vs. CCE, (1989) 1 SCC 602, the
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question that fell for consideration of this Court was whether the crude PVC films
manufactured by the appellant therein were ‘goods’ within the meaning of
Section 3. The crude PVC films represented an intermediate product used for
captive consumption in manufacture of leather cloth, laminated jute mattings and
PVC tapes. It was found by the appellate collector on the material produced by
the appellants that crude PVC films were not marketable products. The Revenue
could not produce any material establishing the contrary. On that basis it was
held by this Court that the crude PVC films are not marketable and not being
‘goods’ known to market, they cannot be treated as ‘goods’ for the purposes of
Section 3. It was observed that marketability is an essential ingredient in order to
be dutiable under the Schedule to the Act. It was further observed that excise
duty is leviable if the goods are capable of being sold, though its actual sale is
not necessary.
In the case of Union of India vs. Delhi Cloth & General Mills Co. Ltd., 1997
(92) E.L.T. 315 (SC), reliance whereupon has been heavily placed on behalf of
the appellant-Company, question that had arisen was whether excise duty was
leviable on calcium carbide that was manufactured by the assessee-company not
for its marketing, but for captive consumption, i.e., the same used to be utilised
further in the production of acetylene gas for being marketed. On these facts, it
was held that excise duty was not leviable on the manufacture of calcium carbide
which was manufactured only for the captive consumption as one of the raw
materials for production of acetylene gas and the same was leviable on the end
product, i.e., acetylene gas which was marketable. This decision cannot be of
any avail to the appellant as the same is clearly distinguishable.
From a conspectus of the aforesaid decisions, it would be clear that for
the purposes of levy of excise duty, the test to be applied is whether the goods
manufactured are marketable or not. In the present case, the cigarette, which
is the end product of tobacco, is fit for consumption before the same is removed
for test. Packing of the cigarette cannot be said to be incidental or ancillary
to the manufacturing process, but the same may be incidental or ancillary to
its sale only. In case it is laid down that packing of cigarette is incidental
or ancillary to the completion of manufactured products, the same may result
into evasion of excise duty as before packing the cigarettes the same may be
regularly supplied to each and every employee for his consumption without
payment of excise duty thereon. The definition of ‘manufacture’ under Section
2(f) very clearly includes process which is incidental or ancillary to the completion
of manufactured product. Manufacture of cigarette is completed when the same
emerges in the form of sticks of cigarettes which are sent to the laboratory for
quality control test. Sticks of cigarettes can be consumed and manufacture of
the end-product, i.e., cigarette, which is commercially known in the market as
such, is completed before its removal for test and after testing only packing of
the same, which is the requirement of rule 93 of the Rules, is done. Thus, we
hold that sticks of cigarette which are removed for the purpose of test in the
quality control laboratory located within the factory premises of the appellant-
Company are liable to excise duty.
Coming now to the second question, it may be stated that learned counsel
appearing on behalf of the Revenue could not dispute the proposition that the
quantity of cigarette sticks that is destroyed in the course of quality control test is
not liable to excise duty. He, however, submitted that no evidence whatsoever
was adduced on behalf of the appellant-Company either before the assessing
authorities or the Tribunal to show that any cigarette stick was destroyed in the
process of quality control test, much less cigarette sticks of any particular
quantity inasmuch as, undisputedly, for major period no account at all was
maintained and for some period, though account was maintained in relation to
the quantity of cigarette sticks sent to the laboratory for testing, but no account
was maintained as to how much quantity was destroyed during the process of
testing. It was pointed out by learned Additional Solicitor General that though in
the show cause notice the appellant -Company was specifically called upon to
show cause for non-maintenance of account in relation to the sticks of cigarette
sent for quality control test, but in spite of that it failed to produce any account
whatsoever to show as to how much quantity of cigarette sticks was sent for
quality control test during different periods, much less producing any account in
relation to the destruction of the cigarette sticks during the course of testing. At
this stage, Shri Ganesh submitted that the matter should be remitted either to the
Tribunal or the assessing authority for affording opportunity to the appellant to
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produce the accounts and then record a finding as to how many cigarette sticks
were destroyed during the course of testing. In our view, no useful purpose will
be served by remitting the matter on this question, firstly, because even
according to the show cause reply filed by the appellant-Company before the
assessing authorities, it had not maintained any account in relation to the
destruction of cigarette sticks during the course of quality control test and,
secondly, no reason was assigned for not producing any account either before
the assessing authority or before the Tribunal in spite of the fact that it was
clearly stated in the show cause notice that the appellant -Company was not
maintaining any such account. In view of the non-maintenance and non-
production of accounts in relation to the destruction of cigarette sticks during the
course of testing, we are of the opinion that excise duty was leviable on the entire
stock of cigarette sticks sent to the laboratory for quality control test.
For the foregoing reasons, we do not find any merit in these appeals,
which are accordingly dismissed, but in the facts and circumstances of the case,
there shall be no order as to costs.