M/S Grasim Industries Ltd vs Union Of India

M/s. Grasim Industries Ltd. .............. Appellant

versus

Union of India ...........Respondent

J U D G M E N T

H.L. Dattu, J.

1) This appeal is directed against the Judgment and

Order dated 31.07.2008 of the High Court of Judicature of

Rajasthan in Central Excise Appeal No. 60/2006. By the

impugned Order, the High Court has set aside the Order

dated 09.08.2005 of the Customs, Excise and Service Tax

Appellate Tribunal [hereinafter referred to as "the Tribunal"]

whereby the Tribunal had dropped the entire duty demand

and penalty imposed on the assessee.

1 2) The issue before us is: Whether the metal scrap or

waste generated whilst repairing of worn out machineries or

parts of cement manufacturing plant amounts to

manufacture, and thereby, is excisable to excise duty.

3) The assessee is the manufacturer of the white cement.

The assessee repairs worn out machineries or parts of the

cement manufacturing plant at its workshop such as

damaged roller, shafts and coupling with the help of welding

electrodes, mild steel, cutting tools, M.S. Angles, M.S.

Channels, M.S. Beams, etc. In this process of repair certain

metal scrap or waste is generated. In a surprise inspection

conducted by the officials of the Central Range-II, Jodhpur,

it was found that the assessee has cleared various types of

metal scrap and waste without the payment of the excise

duty for the period from 1.10.1995 to 16.07.1999. A show

cause notice dated 05.10.2000 was issued to the assessee

demanding a duty of ` 10,81,736/- under Section 11A of the

Central Excise Act, 1944 [hereinafter referred to as "the

Act"] along with equal amount of penalty under Section

11AC of the Act and further penalty under Rule 173 Q of the

Central Excise Rules, 1944 [hereinafter referred to as "the

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Rules"] for non-payment of excise duty on clearance of said

metal scrap and waste. On the request of the assessee on two

occasions, the revenue has granted extension of time, first up

to 31.12.2000 which was further extended till 22.01.2001, in

order to reply to the said show cause notice. Thereafter, the

assessee further made a request for some more time to file

reply vide letter dated 20.01.2001, the same was rejected

whilst confirming the duty demanded and penalty proposed

in the show cause notice vide Order dated 08.02.2001 of the

Additional Commissioner. The assessee filed appeal before

the Commissioner (Appeals), Jaipur. The Commissioner

(Appeals) vide its Order dated 30.04.2004, set aside the

demand of duty along with equal amount of penalty

pertaining to scrap and waste arising out of the dismantling

of used capital goods and the packing materials to the extent

of ` 6,05,955/-. The Commissioner (Appeals) also set aside

the demand of penalty under Rule 173Q(1)(a) of the Rules,

whilst, upholding the demand of duty and equal amount of

penalty of ` 4,75,781 under Section 11AC of the Act on

metal scrap and waste generated during course of repair and

maintenance of the machinery or parts of the plant on the

ground that such metal scrap and waste has been generated

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during mechanical working of metal in the workshop, as

contemplated by the definition of the waste and scrap under

Section Note 8(a) of Section XV of the Central Excise Tariff

Act, 1985 [hereinafter referred to as "the Tariff Act"] and, in

view of the decision of the Tribunal in Budhewala Co-op.

Sugar Mills Ltd. vs. CCE, Chandigarh-I, 2002 (141) ELT

490 (Tri. Delhi). Being aggrieved by the portion of the

Order of the Commissioner (Appeals), pertaining to

confirmation of demand of duty along with equal amount of

penalty of ` 4,75,781 on the metal scrap and waste generated

during repair of machinery, the assessee preferred an appeal

before the Tribunal. The Tribunal, vide its Order dated

09.08.2005, allowed the appeal and set aside the demand of

duty and penalty confirmed by the said portion of the Order

of the Commissioner (Appeals) on the ground that metal

scrap and waste cleared by the assessee does not arise out of

any manufacturing activity and, thereby, not excisable to any

excise duty in view of the decision of the Tribunal in CCE v.

Birla Corpn. Ltd., 2005 (181) ELT 263. The Revenue,

aggrieved by this Order, filed an appeal under Section 35G

of the Act before the High Court of Rajasthan. The High

Court, vide its Judgment and Order dated 31.07.2008,

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allowed the appeal, set aside the Order of the Tribunal and

restored the Order of the Commissioner (Appeals) on the

ground that the generation of scrap amounts to manufacture

as it is incidental or ancillary to the manufacture of spare or

replaceable part. The spare or replaceable part comes into

existence as distinct product during the repairing of the parts

of the cement plant. Also, the generation of scrap need not

be in the process of manufacture of the excisable end

product such as cement. Being aggrieved, the assessee has

filed this appeal under Section 35L of the Act against the

judgment and order of the High Court.

4) Shri. Alok Yadav, learned counsel has appeared for

the assessee and the Revenue is represented by Shri. B.

Bhattacharyya, learned Additional Solicitor of India. We

will refer to their submissions while dealing with the issue

canvassed before us.

5) Learned counsel Shri. Alok Yadav submits that the

Revenue has wrongly relied on the definition of the metal

waste and scrap under Note 8 (a) to Section XV of the Tariff

Act which states- `Metal waste and scrap from the

manufacture or metal waste and scrap from mechanical

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working of metal' in order to establish that metal scrap and

waste arising out of the repairing and maintenance of the

various machinery or parts of the cement manufacturing

plant amounts to manufacture of such scrap and waste. He

submits that nowhere the definition of waste and scrap in the

said Note deems it to be manufacturing process. In other

words, the definition of `waste and scrap' only gives

coverage of the entry `waste and scrap' under Chapter 72.04

of the Schedule to the Tariff Act and does not ipso facto lead

to a conclusion that waste and scrap arising by the

mechanical working of metal amounts to a process of

manufacture in terms of Section 2(f) of the Act in order to

attract the charging Section. He further submits that unless

the particular excisable product falling under the particular

tariff entry is manufactured in the sense of Section 2 (f) of

the Act, it does not entail or attract the operation of the

charging Section under Section 3 of the Act. Learned

counsel refers to the wordings of the definition of the

manufacture under Section 2(f) of the Act and relies on the

decision of this Court in Union of India v. Delhi Cloth and

General Mills Co. Ltd., AIR 1963 SC 791 in support of his

submission that the High Court, vide its impugned judgment,

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has grossly erred in observing that any incidental or ancillary

process to the completion of any manufactured product,

which itself need not be end product or excisable goods,

would amount to manufacture and is excisable. In other

words, such observation of the High Court creates very

anomalous situation by conferring the status of manufacture

on every process incidental and ancillary to any

manufactured product which itself need not be excisable

manufactured end product. Learned counsel submits, by

placing reliance on several decisions of this Court in order to

buttress his contention, that the excise duty mentioned under

the tariff entry for the excisable goods cannot be levied in

terms of charging Section 3 unless such excisable goods or

items are produced and manufactured. In other words, the

event of levying of excise duty under the charging Section 3

is the manufacture of the excisable goods. Learned counsel

concludes that the manufacture of the excisable goods in

terms of Section 2 (f) is the prerequisite to levy excise duty.

6) Per Contra, Shri. B. Bhattacharyya, learned ASG,

submits that the metal scrap and waste are indisputably

excisable goods under Section 2(d) of the Act falling under

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the Chapter heading 72.04 read with Note 8 (a) to the

Section XV of the Tariff Act. He further submits that metal

scrap and waste as excisable goods are generated during the

repair and replacement of the old machinery or parts of the

cement manufacturing plant, which is incidental and

ancillary to the manufactured product, that is, cement. In

other words the process of generation of scrap and waste

amount to the manufacture in terms of Section 2(f) of the

Act. In support of his contention, learned ASG has relied on

the decision of this Court in CST v. Bharat Petroleum

Corpn. Ltd., (1992) 2 SCC 579. He further submits that once

the conditions or requirements of excisable goods and

manufacture as envisaged by Section 2(d) and Section 2(f),

respectively, of the Act are satisfied, then only, such metal

scrap and waste would attract the levy of excise duty under

the charging Section 3 of the Act. Shri. B. Bhattacharyya has

cited several decisions of this Court in support of his

submission.

7) We have heard the learned counsel for the parties. In

the present case, the assessee had undertook repair and

maintenance work of his worn out old machinery or parts of

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the cement manufacturing plant for the period between 1995

to 1999. The assessee repaired machinery or capital goods

such as damaged roller, shafts and coupling by using

welding electrodes, mild steel, cutting tools, M.S. Angles,

M.S. Channels, M.S. Beams etc. In this process of repair and

maintenance, M.S. Scrap and Iron Scrap were generated in

the workshop. It is not in dispute that these M.S. Scrap and

Iron Scrap are excisable goods under Section 2(d) of the Act

falling under the Chapter heading 72.04 in the Schedule to

the Tariff Act read with Note 8 (a) to Section XV of the

Tariff Act as `metal scrap and waste'. We are of the opinion

that Section Note has very limited purpose of extending

coverage to the particular items to the relevant tariff entry in

the Schedule for determining the applicable rate of duty and

it cannot be readily construed to have any deeming effect in

relation to the process of manufacture as contemplated by

Section 2(f) of the Act, unless expressly mentioned in the

said Section Note. In Shyam Oil Cake Ltd. v. CCE, (2005) 1

SCC 264, this Court has held:

"16. Thus, the amended definition enlarges the

scope of manufacture by roping in processes which

may or may not strictly amount to manufacture

provided those processes are specified in the

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section or chapter notes of the tariff schedule as

amounting to manufacture. It is clear that the

legislature realised that it was not possible to put in

an exhaustive list of various processes but that

some methodology was required for declaring that

a particular process amounted to manufacture. The

language of the amended Section 2(f) indicates that

what is required is not just specification of the

goods but a specification of the process and a

declaration that the same amounts to manufacture.

Of course, the specification must be in relation to

any goods.

...

23. We are in agreement with the submission that

under the amended definition, which is an inclusive

definition, it is not necessary that only in the

section or chapter note it must be specified that a

particular process amounts to manufacture. It may

be open to so specify even in the tariff item.

However, either in the section or chapter note or in

the tariff entry it must be specified that the process

amounts to manufacture. Merely setting out a

process in the tariff entry would not be sufficient. If

the process is indicated in the tariff entry, without

specifying that the same amounts to manufacture,

then the indication of the process is merely for the

purposes of identifying the product and the rate

which is applicable to that product. In other words,

for a deeming provision to come into play it must

be specifically stated that a particular process

amounts to manufacture. In the absence of it being

so specified the commodity would not become

excisable merely because a separate tariff item

exists in respect of that commodity.

24. In this case, neither in the section note nor in

the chapter note nor in the tariff item do we find

any indication that the process indicated is to

amount to manufacture. To start with, the product

was edible vegetable oil. Even after refining, it

remains edible vegetable oil. As actual manufacture

has not taken place, the deeming provision cannot

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be brought into play in the absence of it being

specifically stated that the process amounts to

manufacture."

8) The goods have to satisfy the test of being produced or

manufactured in India. It is settled law that excise duty is a

duty levied on manufacture of goods. Unless goods are

manufactured in India, they cannot be subjected to payment

of excise duty. Simply because a particular item is

mentioned in the First Schedule, it cannot become exigible

to excise duty. [See Hyderabad Industries Ltd. v. Union of

India, (1995) 5 SC 338, Moti Laminates (P) Ltd. v. CCE,

(1995) 3 SCC 23, CCE v. Wimco Ltd., (2007) 8 SCC 412]

Therefore, both on authority and on principle, for being

excisable to excise duty, goods must satisfy the test of being

produced or manufactured in India. In our opinion, the

charging Section 3 of the Act comes into play only when the

goods are excisable goods under Section 2(d) of the Act

falling under any of the tariff entry in the Schedule to the

Tariff Act and are manufactured goods in the terms of

Section 2(f) of the Act. Therefore, the conditions

contemplated under Section 2(d) and Section 2(f) has to be

satisfied conjunctively in order to entail imposition of excise

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duty under Section 3 of the Act. The manufacture in terms

of Section 2(f) includes any process incidental or ancillary to

the completion of the manufactured product. This `any

process' can be a process in manufacture or process in

relation to manufacture of the end product, which involves

bringing some kind of change to the raw material at various

stages by different operations. The process in manufacture

must have the effect of bringing change or transformation in

the raw material and this should also lead to creation of any

new or distinct and excisable product. The process in

relation to manufacture means a process which is so

integrally connected to the manufacturing of the end product

without which, the manufacture of the end product would be

impossible or commercially inexpedient. This Court has in

several decisions starting from Tungabhadra Industries v.

CTO, AIR 1961 SC 412, Union of India v. Delhi Cloth &

General Mills Co. Ltd., AIR 1963 SC 791, South Bihar

Sugar Mills Ltd. v. Union of India, AIR 1968 SC 922 and in

line of other decisions has explained the meaning of the

word `manufacture' thus:

"14. The Act charges duty on manufacture of

goods. The word `manufacture' implies a change

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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."

9) In Ujagar Prints (II) v. Union of India, (1989) 3 SCC 488,

this Court has laid down the test to ascertain whether

particular process amounts to manufacture:

"whether the change or the series of changes

brought about by the application of processes take

the commodity to the point where, commercially, it

can no longer be regarded as the original

commodity but is, instead, recognised as a distinct

and new article that has emerged as a result of the

processes"

10) In Hindustan Polymers v. CCE, (1989) 4 SCC 323, this

Court has observed:

"11. Excise duty is a duty on the act of

manufacture. 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 are being sold in the market as such. In

order, therefore, to be manufacture, there must be

activity which brings transformation to the article

in such a manner that different and distinct article

13

comes into being which is known as such in the

market."

11) In CCE v. Rajasthan State Chemical Works, (1991) 4

SCC 473, this Court has considered the meaning of process

in relation to manufacture as thus:

"12. Manufacture implies a change but every

change is not manufacture, yet every change of an

article is the result of treatment, labour and

manipulation. Naturally, manufacture is the end

result of one or more processes through which the

original commodities are made to pass. The nature

and extent of processing may vary from one class

to another. There may be several stages of

processing, a different kind of processing at each

stage. With each process suffered the original

commodity experiences a change. Whenever a

commodity undergoes a change as a result of some

operation performed on it or in regard to it, such

operation would amount to processing of the

commodity. But it is only when the change or a

series of changes takes the commodity to the point

where commercially it can no longer be regarded

as the original commodity but instead is

recognised as a new and distinct article that a

manufacture can be said to take place.

13. Manufacture thus involves a series of

processes. Process in manufacture or in relation to

manufacture implies not only the production but

the various stages through which the raw material

is subjected to change by different operations. It is

the cumulative effect of the various processes to

which the raw material is subjected (sic that the)

manufactured product emerges. Therefore, each

step towards such production would be a process

in relation to the manufacture. Where any

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particular process is so integrally connected with

the ultimate production of goods that but for that

process manufacture or processing of goods would

be impossible or commercially inexpedient, that

process is one in relation to the manufacture.

14. The natural meaning of the word `process' is a

mode of treatment of certain materials in order to

produce a good result, a species of activity

performed on the subject-matter in order to

transform or reduce it to a certain stage.

According to Oxford Dictionary one of the

meanings of the word `process' is a `continuous

and regular action or succession of actions taking

place or carried on in a definite manner and

leading to the accomplishment of some result'. The

activity contemplated by the definition is perfectly

general requiring only the continuous or quick

succession. It is not one of the requisites that the

activity should involve some operation on some

material in order to (sic effect) its conversion to

some particular stage. There is nothing in the

natural meaning of the word `process' to exclude

its application to handling. There may be a

process which consists only in handling and there

may be a process which involves no handling or

not merely handling but use or also use. It may be

a process involving the handling of the material

and it need not be a process involving the use of

material. The activity may be subordinate but one

in relation to the further process of manufacture."

12) In Union of India v. Ahmedabad Electricity Co. Ltd.,

(2003) 11 SCC 129, the issue before this Court was that

whether the process in which cinder is produced by burning

of coal as a fuel for producing steam to run machines used in

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the factory to manufacture end product amounts to

manufacture. This Court has held:

"19. What is the meaning of "manufacture" in the

context of excise law? We have already quoted the

definition of the word "manufacture" as contained

in Section 2(f) of the Act. According to this

definition, manufacture includes any process

incidental or ancillary to the completion of a

manufactured product. The word "manufacture"

used as a verb is generally understood to mean as

bringing into existence a new substance. It does

not mean merely to produce some change in a

substance. To quote from a passage in the

Permanent Edition of Words and Phrases, Vol.

XXVI

"manufacture implies a change, but every

change is not manufacture and yet every change

of an article is the result of treatment, labour and

manipulation. But something more is necessary

and there must be transformation: a new and

different article must emerge having a distinctive

name, character or use".

"Manufacture" may involve various processes.

The aim of any manufacturing activity is to

achieve an end product. Depending on the nature

of manufacturing activity involved, processes

may be several or one. The natural meaning of

the word "process" is a mode of treatment of

some material in order to produce a good result.

Every process which is incidental or ancillary to

the completion of manufactured product is

included within the meaning of manufacture. The

word "process" has not been defined in the Act.

In its ordinary meaning "process" is a mode of

treatment of certain material in order to give a

desired shape to the material. It is an activity

performed on a given material in order to

transform it into something."

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This Court further observed thus:

"27. In the case in hand also, coal which leads to

production of cinder is not used as a raw material

for the end product. It is being used only for

ancillary purpose, that is, as a fuel. Therefore,

irrespective of the fact whether any manufacture is

involved in the production of cinder it should be

held to be out of the tax net for the reason that it is

not a raw material for the end product.

28. In producing "cinder", there is no

manufacturing process involved. Coal is simply

burnt as fuel to produce steam. Coal is not

tampered with, manipulated or transformed into the

end product. For purposes of manufacture the raw

material should ultimately get a new identity by

virtue of the manufacturing process either on its

own or in conjunction or combination with other

raw materials. Since coal is not a raw material for

the end product in all the cases before us, the

question of getting a new identity as an end product

due to manufacturing process does not arise."

13) In Commissioner of Central Excise, Chennai II

Commissionerate v. Tarpaulin International, (2010) 9 SCC

103, whilst addressing the issue whether the process of

preparing tarpaulin made-ups by cutting and stitching the

tarpaulin fabric and fixing the eyelets would amount to

manufacture, this Court has held:

"25. Is there any manufacture when tarpaulin

sheets are stitched and eyelets are made? In our

view, it does not change the basic characteristic of

the raw material and end product. The process does

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not bring into existence a new and distinct product

with total transformation in the original

commodity. The original material used i.e. the

tarpaulin is still called tarpaulin made-ups even

after undergoing the said process. Hence, it cannot

be said that the process is a manufacturing process.

Therefore, there can be no levy of Central excise

duty on the tarpaulin made-ups. The process of

stitching and fixing eyelets would not amount to

manufacturing process, since tarpaulin after

stitching and eyeleting continues to be only cotton

fabric. The purpose of fixing eyelets is not to

change the fabric. Therefore, even if there is value

addition the same is minimum. To attract duty there

should be a manufacture to result in different goods

and the goods sought to be subject to duty should

be known in the market as such."

14) In the present case, it is clear that the process of repair

and maintenance of the machinery of the cement

manufacturing plant, in which M.S. scrap and Iron scrap

arise, has no contribution or effect on the process of

manufacturing of the cement, which is the excisable end

product, as since welding electrodes, mild steel, cutting

tools, M.S. Angles, M.S. Channels, M.S. Beams etc. which

are used in the process of repair and maintenance are not raw

material used in the process of manufacturing of the cement,

which is the end product. The issue of getting a new identity

as M.S. Scrap and Iron Scrap as an end product due to

manufacturing process does not arise for our consideration.

18 The repairing activity in any possible manner cannot be

called as a part of manufacturing activity in relation to

production of end product. Therefore, the M.S. scrap and

Iron scrap cannot be said to be a by-product of the final

product. At the best, it is the by-product of the repairing

process which uses welding electrodes, mild steel, cutting

tools, M.S. Angles, M.S. Channels, M.S. Beams etc.

15) Learned ASG has placed reliance on the decision of this

Court in CST v. Bharat Petroleum Corpn. Ltd., (Supra). In

that case, the assessee purchased sulphuric acid and cotton

for the manufacturing of kerosene and yarn/cloth. In the

manufacturing process, the acid sludge and cotton waste

emerged as a distinct product having commercial identity.

The issue before this Court was that whether the assessee

can be said to manufacture acid sludge and cotton waste.

This Court observed that where a subsidiary product is

turned out regularly and continuously in the course of a

manufacturing business and is also sold regularly from time

to time, an intention can be attributed to the manufacturer to

manufacture and sell not merely the main item manufactured

but also the subsidiary products. We are afraid, the decision

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does not help the Revenue because the metal scrap and waste

arising out of the repair and maintenance work of the

machinery used in manufacturing of cement, by no stretch of

imagination, can be treated as a subsidiary product to the

cement which is the main product. The metal scrap and

waste arise only when the assessee undertakes repairing and

maintenance work of the capital goods and, therefore, do not

arise regularly and continuously in the course of a

manufacturing business of cement.

16) In view of the above, we cannot sustain the Judgment

and Order of the High Court dated 31.07.2008.

17) In the result, the appeal is allowed and the impugned

Judgment and the Order of the High Court is set aside and

the Order dated 09.08.2005 of the Tribunal is restored.

Costs are made easy.

................................................J.

[H.L. DATTU]

................................................J.

[CHANDRAMAULI KR. PRASAD]

New Delhi,

October 13, 2011.

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