What is manufacture? Supreme Court Explains - again
SOMETIME back I met an IRS probationer from NACEN. She had just joined NACEN three days ago. I asked her what she learnt in NACEN in the three days. She told me that she understood what manufacture is. I told her that this was something that many of her seniors in the Department, the lawmakers and even the highest courts were not very clear about.
Like here is an Assistant Commissioner who way back in 1997 held that the process of sterilization of syringes and needles amounted to manufacture as it was essential to complete manufacture before the products are sold in the market. This being so, he found the process of sterilization to be an integral and inextricable part of the manufacturing process to make the product marketable. He further held that the process of sterilization brings about a transformation of the product by making something non-sterile sterile, sterile.
This case travelled all the way up to the Supreme Court and yesterday the Supreme Court delivered a detailed judgement explaining the concept of manufacture once again - not deciding anything new, but just elucidating the concept based on earlier landmark decisions of the Court.
What is the difference between manufacture and marketability?: Elementary my dear….
A duty of excise is levied on the manufacture of excisable goods. "Excisable goods" are those goods which are included in the schedules of the Central Excise Tariff Act, 1985. "Excisable goods" brings in the concept of goods that are marketable, that is goods capable of being sold in the market. On the other hand, manufacture is distinct from sale-ability. Manufacture takes place on the application of one or more processes. Each process may lead to a change in the goods, but every change does not amount to manufacture. There must be something more - there must be a transformation by which something new and different comes into being, that is, there must now emerge an article which has a distinctive name, character or use.
'Manufacture' as tested in the Supreme Court laboratory:
When transformation does not take place.: Toilet paper remains the same whether in rolls or cut in different shapes: When a finished product cannot conveniently be used in the form in which it happens to be, and it is required to be changed into various shapes and sizes so that it can conveniently be used, no transformation takes place if the character and the end use of the first product continue to be the same. An illustration of this principle is jumbo rolls of tissue paper cut into various shapes and sizes so that they could be used as table napkins, facial tissues and toilet rolls. The Supreme Court held that there was no manufacture as the character and the end use of the tissue paper in the jumbo roll and the tissue paper in the table napkin, facial tissue and toilet roll remains the same. Bumpers and grills of motor vehicles continue to be the same commodity after ED coating which would increase the shelf life of the said bumpers and grills and provide anti rust treatment to the same. No new commodity known to the market as such had come into being merely on account of the value addition of the ED coating. - No manufacture
Retaining of essential character test: In a recent case M/s. Satnam Overseas Ltd. v. Commissioner of Central Excise, New Delhi reported in , it was held that as the essential character of the product had not changed, there would be no manufacture. In that case, the product was a combination of raw rice, dehydrated vegetables and spices in the name of rice and spice. It was held that the said product in its primary and essential character was sold in the market as rice only, despite the addition of dehydrated vegetables and certain spices.
Test of no commercial user without further process: In Brakes India Ltd. v. Superintendent of Central Excise - , the commodity in question was brake lining blanks. It was held on facts that such blanks could not be used as brake linings by themselves without the processes of drilling, trimming and chamfering. It was in this situation that the test laid down was that if by adopting a particular process a transformation takes place which makes the product have a character and use of its own which it did not bear earlier, then such process would amount to manufacture irrespective of whether there was a single process or several processes.
The test of integrated process without which manufacture would be impossible or commercially inexpedient: In J.K. Cotton Spg. & Wvg. Mills Co. Ltd. case - the Supreme Court held that where any particular process is so integrally connected with the ultimate production of goods that but for that process, the manufacture of such goods would be impossible or commercially inexpedient.
The Four way Test:
(1) Where the goods remain exactly the same even after a particular process, there is obviously no manufacture involved.
(2) Where the goods remain essentially the same after the particular process, again there can be no manufacture.
(3) Where the goods are transformed into something different and/or new after a particular process, but the said goods are not marketable. No manufacture of goods takes place.
(4) Where the goods are transformed into goods which are different and/or new after a particular process, such goods being marketable as such. It is in this category that manufacture of goods can be said to take place.
The Supreme Court commented on the fallacy of the Department's manufactured argument - 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. If a surgical instrument is being used five times a day, it cannot be said that the same instrument has suffered a process which amounts to manufacture in which case excise duty would be liable to be paid on such instruments five times over on any given day of use.
In this case, the Supreme Court noted that 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.
We bring you today this highly educative judgement of the Supreme Court delivered yesterday.