I.T.C.Limited
Vs. Collector of Central Excise, Patna [2002] Insc 526 (10
December 2002)
S.N.
Variava & B.N. Agrawal.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 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 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 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 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 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.
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