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CASE NO.: Appeal (civil)  5293-5294 of 2001

PETITIONER: Commissioner of Central Excise-I,New Delhi

RESPONDENT: M/s S.R. Tissues Pvt. Ltd. & Anr.        

DATE OF JUDGMENT: 05/08/2005

BENCH: B.P. SINGH & S.H. KAPADIA

JUDGMENT: J U D G M E N T WITH

C.A. Nos.8436-8438 OF 2001, C.A. Nos.194-195 &  6535 OF 2002, C.A. Nos.9274-9275 OF 2003, C.A.  Nos.4682, & 5709-5710 OF 2004 AND C.A.  Nos.2408-2409 & 3001 OF 2005.  

KAPADIA, J.

       A short question which arises for determination in these  civil appeals filed by the department under section 35-L(b) of  the Central Excise Act, 1944 (for short "the said Act") is \026  whether the process of unwinding, cutting and slitting to sizes  of jumbo rolls of tissue paper would amount to "manufacture"  on first principles or under section 2(f) of the said Act?

       The above question arises in this batch of civil appeals.   For the sake of convenience, we mention herein below the facts  in Civil Appeal Nos.5293-5394 of 2001.  

The assessee was engaged in the activity of  cutting/slitting of jumbo rolls of tissue paper of a width  exceeding 36 cms.  The jumbo rolls were purchased on  payment of excise duty from various suppliers like M/s Ellora  Paper Mills and M/s Padamjee Paper Mills etc., who are the  manufacturers of such jumbo rolls.  The duty was paid under  tariff heading 48.03 Central Excise Tariff Act, 1985 (hereinafter  referred to as "the Act, 1985").  The jumbo rolls purchased by  the assessee were of a kind normally used for household or  sanitary purposes.  All that the assessee was doing was to  reduce the width to less than 36 cms.  On such reduction of the  width, the department sought to assess and demand duty under  tariff sub-heading 4818.90.

       For the sake of convenience, we quote herein below tariff  headings 48.03 and 48.18.  Heading  No. Sub-Heading  No. Description of Goods Rate of  Duty 1 2 3 4

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48.03 4803.00 Toilet or facial tissue stock, towel or  napkin stock and similar paper of a  kind used for household or sanitary  purposes, cellulose wadding and  webs of cellulose fibres, whether or  not creped, crinkled, embossed,  perforated, surface-coloured, surface- decorated or printed in rolls of a width  exceeding 36 cm. or in rectangular  (including square) sheets with at least  one side exceeding 36 cm. in  unfolded state. 18% 48.18

Toilet paper and similar paper,  cellulose wadding or webs of  cellulose fibres, of a kind used for  household or sanitary purposes, in  rolls of a width not exceeding 36  centimeters, or cut to size or shape;  handkerchiefs, cleansing tissues,  towels, table cloths, serviettes,  napkins for babies, tampons, bed  sheets and similar household,  sanitary or hospital articles, articles of  apparel and clothing accessories of  paper pulp, paper, cellulose wadding  or webs of cellulose fibres.

4818.10 Sanitary towels and tampons, napkins  and napkin liners for babies and  similar sanitary articles. 13%

4818.90 Other 18%

       On 14.10.1998, proceedings were initiated against the  assessee by the department on the ground that cutting and  slitting of jumbo rolls of tissue paper falling under heading  48.03 amounted to manufacture.  On 12.4.1999, a show-cause  notice was issued to the assessee by the department in which it  was alleged that the assessee was engaged in the manufacture  and storage of tissue paper rolls, napkins and facial tissues,  which were liable to be seized and confiscated for non- compliance of the provisions of the said Act.  On 12.7.1999,  another show-cause notice was issued to the assessee by the  department alleging that during the period 1.8.1997 to  14.10.1998, the assessee was engaged in the manufacture of  toilet rolls, napkins and facial tissue papers, from jumbo rolls of  tissue paper, falling under tariff sub-heading 4818.90 of the  Act, 1985.  

       The assessee replied to the said show-cause notices.  The  assessee submitted that cutting and slitting of jumbo rolls of  tissue paper into specific width and different shapes did not  amount to manufacture.  According to the assessee, there was  no change in the characteristics or the end-use of the tissue  paper.  According to the assessee, such a reduction in the width

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on the duty-paid jumbo rolls cannot amount to manufacture.   The assessee also denied the allegations of the department that  they were manufacturing / making tissues of wet type.  The  assessee also denied the allegations of the department that they  were imparting fragrance to the napkins made by them.  The  assessee pointed out that there was no allegation in the show- cause notice that wet tissues or tissues having fragrance were  being made by the assessee.                    By order dated 22.11.1999, the commissioner adjudicated  the above show-cause notices and confirmed the demand.  He  also imposed a penalty.  It was held that the assessee was the  manufacturer of table napkins, toilet rolls and ordinary wet and  fragranted facial tissues with distinct brands/trademark.   Accordingly, the commissioner confirmed the aforestated  demand.  

       Aggrieved by the order dated 22.11.1999, the assessee  filed an appeal before the Customs, Excise & Gold (Control)  Appellate Tribunal, New Delhi (hereinafter referred to as "the  Tribunal").

       By judgment and order dated 10.11.2000, the appeal  preferred by the assessee was allowed.  It was held that the  assessee was purchasing duty-paid jumbo rolls of tissue paper;  that, thereafter they used to cut/slit the tissue paper to various  sizes suitable for use as toilet papers, table napkins or facial  tissues and that this activity did not alter the name, character or  end-use of the material and, therefore, the said activity / process  did not amount to manufacture, both on first principles as well  as in terms of section 2(f) of the said Act.  In this connection,  the tribunal placed reliance on the judgment of the Madras High  Court in the case of Computer Graphics Pvt. Ltd. v. Union of  India reported in 1991 (52) ELT 491.  It was further held by the  tribunal that the mere existence of a separate tariff entry (48.18)  for the tissue paper product of a smaller size obtained by  cutting/slitting of jumbo rolls of tissue paper (48.03) would not  necessarily lead to inference that such activity/process on the  duty-paid jumbo rolls of tissue paper amounted to manufacture.   Moreover, there was no section or chapter note in the tariff  defining the activity of cutting/slitting of tissue paper as a  process amounting to manufacture and, therefore, section 2(f)  of the said Act was not applicable.  On facts, the tribunal found  that the assessee used to purchase jumbo rolls from the market  and they used to cut and slit the same to smaller sizes of  required dimensions suitably in use as table napkins, facial  tissues etc.  It was not disputed before the tribunal that the duty  paid jumbo rolls of tissue paper were bought by the assessee  from M/s Ellora Paper Mills and M/s Padamjee Paper Mills etc.   It was also not in dispute before the tribunal that the jumbo rolls  of tissue paper were classifiable under tariff heading 48.03.  It  was also not disputed before the tribunal that the table napkins  and facial tissues obtained by cutting and slitting of jumbo rolls  fell in tariff heading 48.18.  The only dispute before the tribunal  was \026 whether conversion of duty-paid jumbo rolls of tissue  paper into table napkins and facial tissues by the process of  unwinding, cutting & slitting and packing constituted  "manufacture".  The tribunal held that the above process of  cutting/slitting of jumbo rolls of tissue paper into facial tissues  and table napkins did not constitute "manufacture"; that there  was no section note/chapter note in chapter 48 to bring in the  activity of slitting and cutting of jumbo rolls of tissue paper into  smaller sizes within the ambit of section 2(f) of the said Act;  that a mere existence of a separate tariff entry 48.18 would not,  by itself, make facial tissues and table napkins excisable.  The

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tribunal further held that by the said activity of slitting and  cutting, no new commodity with different name, character, end- use or commercial identity emerged and, therefore, there was  no "manufacture" both in terms of first principles as well as in  terms of section 2(f) of the said Act.  Accordingly, the appeals  filed by the assessee stood allowed. Hence, these civil appeals.

       Mr. Dutta, learned senior counsel appearing on behalf of  the department submitted that the activity of cutting/slitting of  jumbo rolls of tissue paper into smaller sizes amounted to  "manufacture" under section 2(f) of the said Act.  It was further  submitted that the definition of the word "manufacture" in  section 2(f) was inclusive and, therefore, the normal meaning of  the term could be ascertained for judicial interpretation.  He  submitted that on cutting/slitting of jumbo rolls, several  different products emerged, namely, table napkins, toilet rolls,  facial tissues etc. and, therefore, cutting/slitting constituted  "manufacture" and, therefore, the department was right in  raising the demand under sub-heading 4818.90.  It was urged  that in the present case, the test of  character or end-use have to  be applied and on applying the said test one finds that on  cutting/slitting of the tissue paper from the jumbo rolls, a new  product with a distinct character and with the distinct end-use  known to the market and to the buyers had emerged and,  therefore, even on first principles the process of cutting/slitting  amounted to manufacture.  It was submitted that in the present  case, the tribunal ought to have referred the matter to the larger  bench particularly when the co-ordinate bench of the tribunal in  the case of Foils India Laminates Pvt. Ltd. v. Commissioner of  Central Excise, Jaipur reported in 1999 (111) ELT 728 had  taken a contra view.  Lastly, it was urged on behalf of the  department that the tribunal had ignored the findings of the  commissioner that there was a value addition of 180% in the  final product on account of the price difference between price  of the jumbo roll and the price of the final product; that when  the jumbo roll of tissue paper was subjected to the process of  cutting/slitting, rewinding and packing, the resultant products  namely, table napkins, facial tissues, toilet paper rolls emerged  as products of different varieties and for specific purposes and  in the circumstances, cutting/slitting amounted to  "manufacture".  

       At the outset, it may be pointed out that according to the  commissioner, the assessee on its own admission was engaged  in the manufacture of various items from tissue paper like table  napkins, toilet rolls and dry, wet and fragranted facial tissues.   However, in their counter affidavit, the assessee has stated that  they are not having any infrastructure to carry out the process of  making wet and fragranted type of facial tissues.  This issue has  not been examined by the tribunal.  Therefore, we are confining  our judgment only to the question of conversion of jumbo rolls  of tissue paper into tissue paper napkins, tissue rolls, toilet rolls  and facial tissues excluding wet and fragranted facial tissues.  

       At the outset, we may point out that the assessee is one of  the downstream producers.  The assessee buys duty-paid jumbo  rolls from M/s Ellora Paper Mills and M/s Padamjee Paper  Mills.  There are different types of papers namely, tissue paper,  craft paper, thermal paper, writing paper, newsprints, filter  paper etc.  The tissue paper is the base paper which is not  subjected to any treatment.  The jumbo rolls of such tissue  papers are bought by the assessee, which undergoes the process  of unwinding, cutting/slitting and packing.  It is important to  note that the characteristics of the tissue paper are its texture,  moisture absorption, feel etc.  In other words, the characteristics

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of table napkins, facial tissues and toilet rolls in terms of  texture, moisture absorption capacity, feel etc. are the same as  the tissue paper in the jumbo rolls.  The said jumbo rolls cannot  be conveniently used for household or for sanitary purposes.   Therefore, for the sake of convenience, the said jumbo rolls are  required to be cut into various shapes and sizes so that it can be  conveniently used as table napkins, facial tissues, toilet rolls  etc.  However, the end-use of the tissue paper in the jumbo rolls  and the end-use of the toilet rolls, the table napkins and the  facial tissues remains the same, namely, for household or  sanitary use.  The predominant test in such a case is whether the  characteristics of the tissue paper in the jumbo roll enumerated  above is different from the characteristics of the tissue paper in  the form of table napkin, toilet roll and facial tissue.  In the  present case, the tribunal was right in holding that the  characteristics of the tissue paper in the jumbo roll are not  different from the characteristics of the tissue paper, after  slitting and cutting, in the table napkins, in the toilet rolls and in  the facial tissues.   

       In the case of Brakes India Ltd. v. Supdt. of Central  Excise & Others reported in (1997) 10 SCC 717, this Court has  very aptly brought out the test of character or end-use by  observing as follows:         "If by a process, a change is effected in a  product, which was not there previously, and  which change facilitates the utility of the product  for which it is meant, then the process is not a  simple process, but a process incidental or  ancillary to the completion of a manufactured  product.  It will not be safe solely to go by a test as  to whether the commodity after the change takes in  a new name, though in stated circumstances, it  may be useful to resort to it.  This may prove to be  deceptive sometimes, for it will suit the  manufacturer to retain the same name to the end  product also.  The ’character or use’ test has been  given due importance by pronouncements of the  Supreme Court.  When adopting a particular  process, if a transformation takes place, which  makes the product have a character and use of its  own, which it did not bear earlier, then the process  would amount to manufacture under section 2(f)  irrespective of the fact whether there has been a  single process or have been several processes."

       Applying the above tests, we hold that no new product  had emerged on winding, cutting/slitting and packing.  The  character and the end-use did not undergo any change on  account of the abovementioned activities and, therefore, there  was no manufacture on first principles.  

       Similarly, there was no deemed manufacture under  section 2(f) of the said Act.  In order to make section 2(f)  applicable, the process of cutting/slitting is required to be  recognized by the legislature as a manufacture under the  chapter note or the section note to chapter 48.  For example, the  cutting and slitting of thermal paper is deemed to be  "manufacture" under note 13 to chapter 48.  Similarly, note 3 to  chapter 37 refers to cutting and slitting as amounting to  manufacture in the case of photographic goods.  However,  slitting and cutting of toilet tissue paper on aluminium foil has  not been treated as a manufacture by the legislature.  In the  circumstances, section 2(f) of the Act has no application.  

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       In the case Shyam Oil Cake Ltd. v. Collector of Central  Excise, Jaipur reported in 2004 (174) ELT 145, this Court held  that if a process is indicated in a tariff entry without specifying  that the same amounts to manufacture then indication of such  process is merely for identifying the product.  For a deeming  provision to come into play, it must be specifically stated that a  particular process amounts to manufacture and in its absence,   the commodity would not become excisable merely because a  separate tariff item exists in respect of that commodity.  In that  matter, the question which arose for determination was -  whether refining of edible vegetable oil, as a process,  constituted "manufacture".  It was held that the product even  after refining continued to remain an edible vegetable oil.  It  was further held that neither in the section note nor in the  chapter note, refining as a process was indicated as amounting  to manufacture.  In the circumstances, it was held that refining  of edible vegetable oil did not amount to "manufacture".  In our  view, the ratio of the said judgment is squarely applicable to the  facts of the present case.  As stated above, the characteristics of  the tissue paper in the jumbo roll are not different from the  characteristics of the tissue paper in the toilet rolls, table  napkins, facial tissues etc.  Moreover, cutting/slitting of tissue  paper is not indicated in the section note or in the chapter note  as amounting to "manufacture" and, therefore, section 2(f) of  the Act was also not applicable to the facts of this case.

       In the case of Moti Laminates Pvt. Ltd. v. Collector of  Central Excise, Ahmedabad reported in 1995 (76) ELT 241,  this Court held that section 3 of the Act levies duty on all  excisable goods mentioned in the schedule provided they are  produced and manufactured.  Therefore, where the goods are  specified in the schedule, they are excisable goods but whether  such goods can be subjected to duty would depend on whether  they were produced or manufactured by the assessee on whom  duty is proposed to be levied.  Consequently, it is always open  to an assessee to prove that even though the goods in which he  was carrying on his business were excisable as they are  mentioned in the schedule, they could not be subjected to duty  as they were not goods either because they were not  manufactured or having been produced or manufactured, they  were not marketed or capable of being marketed.

       In the case of Union of India v. J.G. Glass Industries  Ltd. reported in 1998 (97) ELT 5, this Court has succinctly  drawn a distinction between manufacture vis-‘-vis process and  in the course of the judgment, it has been observed as follows: "16.    On an analysis of the aforesaid rulings, a  two-fold test emerges for deciding whether the  process is that of "manufacture".  First, whether by  the said process a different commercial commodity  comes into existence or whether the identity of the  original commodity ceases to exist; secondly,  whether the commodity which was already in  existence will serve no purpose but for the said  process.  In other words, whether the commodity  already in existence will be of no commercial use  but for the said process.  In the present case, the  plain bottles are themselves commercial  commodities and can be sold and used as such. By  the process of printing names or logos on the  bottles, the basic character of the commodity does  not change.  They continue to be bottles. It cannot  be said that but for the process of printing, the  bottles will serve no purposes or are of no  commercial use."

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       Applying the above tests to the facts of the present case,  we hold that mere mention of a product in a tariff heading does  not necessarily imply that the said product was obtained by the  process of manufacturing.  That, just because the raw-material  and the finished product came under two different headings, it  cannot be presumed that the process of obtaining the finished  product from such raw-material automatically constituted  manufacture.  In the present case, merely because tissue paper  in the jumbo roll of the size exceeding 36 cms. fell in one entry  and the toilet roll of a width not exceeding 36 cms. fell in a  different entry, it cannot be presumed that the process of slitting  and cutting of jumbo rolls of toilet tissue paper into various  shapes and sizes amounted to manufacture.   

The above tests would also apply to cutting and slitting  of jumbo rolls of aluminium foils (which item is the subject  matter of some of the civil appeals herein).  

Lastly, in the instant case, the commissioner as an  adjudicating authority has held that there was a value addition  of 180%.  He found that jumbo rolls of tissue papers were  purchased by the assessee @ Rs.30/- to 70/- per kg. and the  final product i.e. the toilet tissue paper was sold by the assessee  @ Rs.85/- to Rs.100/- per kg. and, therefore, there was a value  addition of around 180% i.e. between the range of Rs.30/- to  Rs.85/- per kg.  This finding of the commissioner is erroneous.   Under the excise law, value addition based on a process is  certainly a relevant criteria to decide as to what constitutes  "manufacture".  Such value addition should be on account of  change in the nature or characteristics of the product.  In the  present case, as stated above, there is no change in the nature or  characteristics of the tissue paper in the jumbo roll and the  nature and characteristics of the tissue paper in the table napkin,  facial tissues etc.  Therefore, without such change in the nature  or characteristics of the tissue paper, value addition on account  of transport charges, sales tax, distribution and selling expenses  and trading margin cannot be an indicia to decide what is  manufacture.  Thus, value addition without any change in the  name, character or end-use by mere cutting or slitting of jumbo  rolls cannot constitute criteria to decide what is "manufacture".   

In the case of Decorative Laminates (India) Pvt. Ltd. v.  Collector of Central Excise, Bangalore reported in 1996 (86)  ELT 186, this Court held that the process of application of  phenol resin on duty paid plywood under 100% heat amounts to  manufacture and in that connection observed that value addition  and separate use are also relevant factors which the Courts  should consider in deciding the applicability of section 2(f) of  the Act.  Therefore, value addition based on price difference  only without any change in the name, character or end-use is a  dangerous criteria to be applied in judging what constitutes  "manufacture".  Lastly, the end-use in both the entries 4803 &  4818.90 is the same, namely, for sanitary or household  purposes.  In the circumstances, value addition criteria as  applied by the commissioner is erroneous.  

In the present case, learned counsel for the department  has vehemently urged that the tribunal should have referred the  dispute to a larger bench particularly in view of the fact that the  co-ordinate bench of the tribunal in the case of Foils India  Laminates (supra) had held that the process of cutting/slitting  of jumbo rolls of films into flats constituted manufacture.  We  do not find any merit in this argument.  While deciding the case  of Foils India Laminates (supra), the tribunal has failed to

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consider the clarifications issued by the central board dated  5.9.1988 as well as the judgment of the Madras High Court in  the case of Computer Graphics Pvt. Ltd. v. Union of India  reported in 1991 (52) ELT 491 (Mad.), which had taken the  view that the process of cutting of jumbo roll into the smaller  sizes of flats did not amount the manufacture.  Therefore, in the  present case, the tribunal was right in not following the  judgment in the case of Foils India Laminates (supra).  

We reiterate that the department is right in its contentions  that the tribunal has not examined the question as to whether  the assessee had the requisite machinery, infrastructure and  facility to manufacture wet tissues and fragranted tissues and,  therefore, we remit this question to the commissioner to be  decided afresh in accordance with law, after giving opportunity  to the assessee who has stated before us that they do not possess  such facility.   

We express no opinion on wet and fragranted facial  tissues.

We accordingly hold that the process of slitting/cutting of  jumbo roll of plain tissue paper/aluminium foil into smaller size  will not amount to "manufacture" on first principles as well as  under section 2(f) of the said Act.  As regards the manufacture  of wet tissues and fragranted tissues, the matter is remitted to  the commissioner to ascertain whether the assessee has the  requisite infrastructure, facility, machines etc. for  manufacturing fragranted and wet tissues and, if so, whether the  process amounts to "manufacture".  

Subject to above, civil appeals filed by the department  are dismissed, with no order as to costs.