As manufacture is not defined in law, recourse must be taken to various judicial interpretations to understand what it means
The burden to prove manufacture is always on the Revenue. When an item is covered by a specific entry, the Revenue is not permitted to travel to the residual entry.
Section 2(f) of the Central Excise Act, 1944 defines the term manufacture inclusively, but does not give its meaning. As the definition of manufacture is not provided so as to interpret what it actually means, one needs to refer to various judicial interpretations of the Supreme Court, High Courts and Tribunals.
In Union of India vs Parle Products 1994 (74 ELT 492 SC) it was held that processes could not amount to manufacture unless at the end of it a commercially new and distinct article emerges. In Union of India vs DCM (1977 (l) ELT J199), the Supreme Court observed that manufacture used as a verb means to bring into existence a new substance and does not mean merely to produce some change in a substance.
In other words, the produce, which arises out of the process, must be commercially a distinct commodity different from that out of which it is processed. Whether or not something results in manufacture would depend on the facts of the case. The issue of when manufacture of a product takes place within the meaning of Section 2(f) of the Act is well-settled it is based on both law and fact. The nature and the extent of processes may vary from case to case. When a change takes place and a new and distinct article comes into existence known to the consumers and the commercial community as a product, which can be no longer regarded as the original commodity, such a change constitutes manufacture.
In CCE Gujarat vs Pan Pipes Resplendents Ltd (2006 193 ELT 129 SC), it was held that the process for amounting to manufacture must be one which brings into being a new substance known to the market. Manufacture implies a change, but every change is not a manufacture and yet every change in an article is the result of some treatment, labour and manipulation. For manufacture, something more is necessary. There must be transformation and a new article must result, having a distinct name, character or use. In the instant case, it was held that decorated glazed ceramic tiles after their decoration did not result in change in basic character, that is, glazed tiles, and therefore, did not undergo a process of manufacture.
In Commissioner of Central Excise, Hyderabad II vs Aldec Corporation (2005 188 ELT 241 SC), it was held that the twin tests contemplated by excise laws for an activity to be a manufacture is that goods must not only be manufactured but they should also be capable of being marketed (as per Section 3 of Central Excise Act, 1944).
It also held that, as per Section 2 (f) of the Central Excise Act, whether an article has been manufactured or not depends on whether the article satisfies the test as laid down in relevant chapter heading or sub-heading and is known as such in the commercial community. Whether a process, taken singly or jointly, constitutes `manufacture' on first principles or under Section 2(f) is to be determined having regard to the facts and circumstances.
Processes as manufacture
The following are some more examples where the apex court interpreted `processes' to be manufacture or otherwise:
Goods manufactured are subject to excise duty in India. Two conditions have to be cumulatively satisfied, namely, that the process by which an item is obtained is a process of manufacture and that the item so obtained is commercially marketable and bought and sold in the market or known to be so in the market. Marketability is essentially a question of fact (Hindustan Zinc Ltd vs CCE, Jaipur 2005 181 ELT 170 SC).
Laminating/metalising of duty paid film does not amount to manufacture (Metalex (I) Pvt. Ltd vs CCE New Delhi 2004 165 ELT 129 SC).
Processes of affixing of rubber lining and flanges on steel pipes and subjected to chemical treatment do not amount to manufacture (Tega India vs CCE 2004 164 ELT 390 SC).
Mere repacking of medicines imported for being marketed does not amount to manufacture. Repacking has to be from bulk to retail packs so as to render the product marketable directly to consumer (CCE Mumbai vs Johnson & Johnson Ltd 2006 4 STJ 96 SC).
The preparation of transformed structural materials out of MS Rods, MS Channels and mild steel flats by cutting, punching, etc., does not amount to manufacture (CCE vs Executive Engineer, Fabrication Workshop MPSEB 2006 196 ELT A72 SC).
In the recent Hindustan Poles Corporation vs CCE Kolkata (2006 5 STT 571 SC) case, the apex court held that an activity of merely joining of three pipes, one with other, of different dimensions to obtain a desired length could by no stretch of imagination be brought within the category of `manufacture' as such process did not change the basic identity or original character of MS welded pipe to make it a new marketable product leading to `manufacture' as defined under Section 2(f).
It was also held that the burden to prove manufacture is always on the Revenue, as decided recently by the Supreme Court in Shyam Oil Cake Ltd vs Collector of Central Excise, Jaipur (2005 1 SCC 264). And it is settled law that when one particular item is covered by one specific entry, then the revenue is not permitted to travel to residual entry. Unless the Department can establish that the goods in question can by no conceivable process of reasoning be brought under any of the tariff items, resort cannot be had to the residuary item. The Department's anxiety to invoke the residuary entry was held to be improper.
The apex court finally held that in issuance of show-cause notice, the Revenue must carefully consider the settled law which has been crystallised by a series of court judgments. Also, in the endeavour to ensure that all those who have to pay excise duty must do so, the Revenue must refrain from sending show-cause notices indiscriminately without proper application of mind. This is imperative to curbing unnecessary and avoidable litigation.
(The author is a Jaipur-based chartered accountant.)