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CASE NO.: Appeal (civil)  1453 of 2007

PETITIONER: M/S. CRANE BETEL NUT POWDER WORKS

RESPONDENT: COMMISSIONER OF CUSTOMS & CENTRAL EXCISE, TIRUPATHI & ANR

DATE OF JUDGMENT: 19/03/2007

BENCH: Dr.AR. Lakshmanan & Altamas Kabir

JUDGMENT: J U D G M E N T (Arising out of SLP (C) No.20185/2005) WITH CIVIL APPEAL NO.6659  OF 2005 M/S. CRANE BETEL NUT POWDER WORKS           ..Appellant  Versus COMMISSIONER OF CUSTOMS & CENTRAL EXCISE, TIRUPATHI                                           ..Respondent

ALTAMAS KABIR, J.

       Leave granted.         The appellant-company is engaged in the business of  marketing betel nuts in different sizes after processing  them  by adding essential/non-essential oils, menthol, sweetening  agent  etc.  Initially, the appellant cleared the goods under  Chapter Sub-heading 2107 of the Central Excise Tariff and  was paying duty accordingly.  However, the appellant filed a  revised classification declaration under Rule 173B of the  Central Excise Rules, 1944, with effect from 17th July, 1997,  claiming  classification of its product under Chapter Sub- heading 0801.00 of the Central Excise Tariff.  It was  contended that the crushing of betel nuts into smaller pieces  with the help of machines and passing them through  different sizes of sieves to obtain goods of different  sizes/grades and sweetening the cut pieces did not amount  to manufacture in view of the fact that mere crushing of betel  nuts into smaller pieces did not bring into existence a  different commodity which had a distinct character of its  own.         The Assistant Collector of Central Excise, Guntur  Division, who was the Adjudicating Authority, did not accept  the contention of the appellant upon holding that the product  manufactured by the assessee,  namely, betel nut  powder,  was a  preparation  containing  betel nut  with other  permitted ingredients which was a new product   commercially known  to the market with  distinct name and  character.  On his said finding, the Adjudicating Authority  rejected the claim of the appellant-company and held that  the appellant’s product had been rightly classified under  Chapter Heading 2107.00 and the appellant  was liable to  pay  duty at the appropriate rate specified in the chapter to  the Central Excise Tariff Act, 1985.         The appellant-company went up in appeal against the  said order of the Adjudicating Authority to the Commissioner  of Customs and Central Excise, (Appeals) and the same was  decided in favour of the appellant-company.

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       After considering the submissions made on behalf of the  respective parties, the Commissioner came to the conclusion  that the process of cutting betel nuts into small pieces and  the  addition of essential/non-essential  oils, menthol,   sweetening agent etc. does not result in a new and distinct   product having a different character being formed.   Accordingly, there was no  "manufacture" involved therein  and even according to Note 7 of Chapter 21 of the Tariff,  there was no "manufacture" involved in the production of the  impugned goods.  The Commissioner further held that the  item "betel nut powder/supari" finding a place/mentioned in  the tariff is of no consequence unless the product was the  result of manufacture or production, which is not so in the  instant case.         The Commissioner accordingly allowed the appeal filed  by the appellant herein and set aside the order passed by the  Assistant Commissioner of Central Excise, Guntur Division,  with consequential relief to the appellant-company.   Aggrieved by the order of the Commissioner, the  Revenue went up in appeal to the Customs, Excise and  Service Tax Appellate Tribunal, South Zonal Bench at  Bangalore (for short ’the Tribunal’) by way of Appeal No.  E.734/2004.   The Tribunal took a different view and reversed the  order of the Commissioner upon holding that the end  product of the process involved in the preparation of the  appellant’s product was different from the original material.   According to the Tribunal, a new and distinct product known  as "supari powder" had emerged.  The Tribunal went on to  observe as follows :-

"When subjecting raw material to process  of manufacture, it is not necessary that  there should be a sort of transmutation.   Definitely, the ’supari powder’ will have  the characteristics of ’betel nut’.  We  cannot say that there is no manufacture  for the reason that the ’betel nut’ remains  as  ’betel nut’.    It may remain so but  when other ingredients added to it how  can we say these processes do not bring  into existence a new and distinct  commodity?  If we ask for betel nut, the  shopkeeper will not give supari powder.     In other words, the betel nut is different  from the supari powder."  

The Tribunal accordingly allowed the appeal filed by the  Revenue and set aside the order passed by the Commissioner  on 6th May, 2004.         The appellant went up in appeal  before the High Court of  Andhra Pradesh  under Section 35 (B)  of  the Central Excise  Act, 1944 against  the said order of the Tribunal dated 12th  April, 2005.  The High Court  confirmed the view  taken by the  Tribunal  and after  taking into consideration the process  involved in  converting the whole betel nuts into sweetened  betel nut pieces, the High Court  dismissed the appeal and   chose not  to interfere with the order passed by the Tribunal. This appeal has been filed by the  assessee-company   impugning the decision of the High Court  dated 15th  September, 2005.         Appearing for the assesee-company, Mr. Soli J. Sorabjee,  learned senior advocate, contended that  crushing of betel  nuts into smaller pieces and sweetening the same with

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essential/non-essential oils, menthol and sweetening agents  did not result in the manufacture of a new product and as  observed by the Tribunal, the end product remained a betel  nut.  Mr. Sorabjee submitted that once such a conclusion was  arrived at, it could no longer be contended that a new product  had come into existence.         Referring to Chapter 8 of the Central Excise Tariff Act,  1985, Mr. Sorabjee submitted that the product of the  appellant-company fell squarely under the said Chapter Sub- heading 0801.00 for which the rate of duty was nil.  He then  referred to Note 4 of Chapter 21 which reads as follows :-

CHAPTER 21 MISCELLANEOUS  EDIBLE PREPARATIONS  NOTES   "4.  In this Chapter  "Betel nut powder  known as supari" means any preparation  containing betel nuts but not containing  any one or more of the following  ingredients, namely lime, katha (catechu)  and tobacco, whether or not containing  any other ingredients, such as  cardamom, copra and menthol."

       Referring to the Chapter Notes on Chapter 8, Mr.  Sorabjee pointed out that fruits and nuts included under the  chapter   could be whole, sliced, chopped, shredded, stoned,  pulped, grated, peeled or shelled.  It was pointed out that  under Heading No. 08.02 in which other nuts are described, it  has been specifically mentioned that the said heading also  covers areca (betel) nuts used chiefly as a  masticatory.         Mr. Sorabjee urged that the process involving  manufacture did not always result in the creation of a new  product.  In the instant case notwithstanding the  manufacturing process, it could not be said that a  transformation had taken place resulting in the formation of a  new product.         In support of  his aforesaid  contention, Mr. Sorabjee  firstly referred to  a Constitution Bench   judgment of  this   Court  in the case of Union of India vs.  Delhi Cloth  &   General Mills, reported in  (1963)  Supp.  1 SCR 586, where  the change in the character of  raw oil after being  refined fell  for consideration.  While considering the  submission made  that "manufacture" is complete  as soon as  by the  application  of one or more  processes, the raw material undergoes some  change, the Constitution Bench observed that the word  "manufacture" used as a verb is generally understood to mean  as bringing  into existence a new substance and does  not  mean  merely to produce some change  in a substance.   In  dealing with the  subject, their Lordships had occasion  to  refer to an extract from an American judgment in the case of  Anheuser-Busch Brewing Association vs.  United States,  52 L.Ed. 336-338,  which reads as follows:- "’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."

Mr. Sorabjee submitted that the aforesaid principle had

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been subsequently followed  by this Court  in  several cases  and in that regard he referred to the decision of this Court in  the case of  Deputy Commissioner of Sales Tax (Law),  Board  of Revenue (Taxes), Ernakulam  vs.  M/s. PIO Food  Packers, reported in  1980 Supp. SCC 174, where the same  sentiments were expressed in the matter of processing  raw  pineapple slices into  canned slices  for  better marketing.   This Court held that when the pineapple fruit is processed into  pineapple slices for the purpose of  being sold in  sealed cans,  there is no consumption of the original pineapple fruit for the  purpose of manufacture. Similar views have been expressed by this Court in the  case of  Shyam Oil Cake Ltd. vs.  Collector of Central  Excise, Jaipur, reported in (2005) 1 SCC 264, and in the case  of  Aman Marble Industries (P) Ltd. vs. Collector of Central  Excise, Jaipur, reported in  (2005) 1 SCC 279.  While the first  case involve the   classification of refined edible oil  after  refining, the second case referred  to the cutting of marble  blocks  into marble slabs.  In the first of the said two cases, it   was held that the process of refining of  raw edible  vegetable  oil did not amount to manufacture.  Similarly, the cutting of  marble blocks into smaller pieces was also held not to be  a  process of manufacture for the reason that no new and  distinct commercial  product  came into existence as the end  product still remained the same and thus  its original identity  continued. Mr. Sorabjee referred to the definition of the expression  "manufacture" in Section 2 (f) of  the Central Excise  Act,  1944, wherein "manufacture" has been defined to include any  process\027

(i)     incidental or ancillary to the completion  of a manufactured  product;

(ii)    which is specified  in relation to any  goods in the section or Chapter notes of   The First Schedule to the Central Excise  Tariff Act, 1985 (5 of 1986) as amounting  to  manufacture; or

(iii)   which in relation  to the goods specified  in the Third Schedule, involves packing  or repacking of such goods in a unit  container or labelling or re-labelling of  containers including the declaration or  alteration of retail sale price on it or  adoption of any other treatment on the  goods  to render the product marketable  to the consumer;

And the word "manufacture" 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;"

Mr. Sorabjee pointed out from the above that   "manufacture" had to be  incidental or ancillary to the  completion of  a  manufactured product.  In the instant case,  the product continued to be  pieces of betel nut and hence it  would  not come within  the  definition of  "manufacture" as  used in the Central Excise Act, 1944. Mr. Sorabjee urged that although initially the appellants’

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product had been classified under  Chapter Heading 2107.00,  after subsequent  reconsideration of the matter, it  was found  to  fall squarely under Chapter Sub-heading  0801.00 referred  to in Chapter 8 of the Central Excise Tariff Act, 1985 and an  application was  accordingly made to the Assistant Collector of  Central Excise, Guntur   for re-determination. Mr. Sorabjee submitted that while the Commissioner of  Customs and Central Excise (Appeals) had correctly decided  the matter, both the Tribunal as  also the High Court took an  erroneous view  that on account of processing of the betel nuts  a new and distinct product had emerged, thereby attracting  tax payable  in respect of products classified under Chapter  Heading 2107.00.  Mr. Sorabjee submitted that the orders  passed by the High Court as also the Tribunal were required to  be set aside and that of the Commissioner of Customs and  Central Excise (Appeals) was  liable to be restored. Appearing for the Revenue, Mr. B. Datta, learned Addl.  Solicitor General, reiterated the stand taken by the  Department before the Tribunal  as also the High Court.  He  reiterated that  the very process of crushing the betel nuts into  different gradable   sizes and adding  certain  ingredients to  the same resulted  in the manufacture of a new product which  attracted Chapter Sub-heading 2107.00 of the Tariff instead of   Sub-heading No.0801.00 of the Schedule to the Central Excise  Tariff  Act, 1985. Dr. R.G. Padia, learned  senior advocate, who also  appeared for the respondents in the other appeal (Civil Appeal  No.6659/2005) submitted that  neither the  Tribunal nor the  High Court had committed any error in holding  that a new  product emerged after the manufacturing  process  resorted to   by the assessee which substantially altered  the character of  the original product.  It was submitted that though it was true  that betel nut remained betel nut even in the final product, the  same did not retain its original character and was converted  into a product where one of the components was betel net or  supari.  Distinguishing the view taken by the Constitution  Bench in the  Delhi Cloth and General  Mills Ltd. (supra),  Dr.  Padia contended that while in the said case no new product  had emerged and only  raw oil had been subjected to  processing  which could not be  equated with manufacture, in  the instant case, the raw material itself, which was  otherwise   inedible, underwent a change  and was  transformed into a  product which was edible with the addition of  essential/non- essential oils, menthol, sweetening agents etc.  resulting  in  the manufacture  of a  completely   new product which was  different from the original raw material. Dr. Padia also referred to Section 2 (f) of the Central  Excise Act, 1944 and submitted  that the definition of the  expression "manufacture"  squarely covered the process   involved in the conversion of  raw betel nut into  sweetened  betel nut  powder and/or pieces.   In support of  his aforesaid contention, Dr. Padia referred  to a decision of  this Court  in  O.K. Play (India) Ltd. vs.  Commissioner of Central Excise-II, New Delhi, reported in   (2005) 2 SCC 555, where the expression "manufacture" had  been considered in the process of conversion of  low density  polyethylene (LDPE) and high density polyethylene (HDPE)  granules into moulding powder for using the same as inputs to  manufacture plastic water-storage tanks and toys.   It was  held  that such processing amounted to "manufacture"  within  Section 2 (f) of  the Central Excise  Act, 1944.  It was also held  that such moulding powder is a marketable commodity and is,  therefore, excisable  under Section 2 (d) of the aforesaid Act.    Dr. Padia referred to paragraph 11 of the said judgment which  refers to the two clauses contained in Section 2 (f) of the 1944

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Act and instead of setting out the activities in respect of  different  tariff items,  Sub-clause (ii)  simply states that  any  process, which is specified in Section/Chapter Notes of the  Schedule to the Tariff  Act, shall amount to "manufacture".  It  was also held that  under Sub-clause (ii),   the Legislature  intended to  levy excise duty on activities that do not result in  any new commodity.  In other words, if a process is declared   to be  "manufacture" in the  Section or Chapter Notes, it would  come within  the definition of "manufacture" under Section 2  (f)  and such process would  become   liable to  excise duty.                  Dr. Padia then referred to the decision of this Court in   Kores India Ltd., Chennai   vs.  Commissioner of Central  Excise, Chennai,  reported  in  (2005) 1 SCC 385, which  involved  the cutting of duty-paid  typewriter/telex ribbons in   jumbo rolls into standard  predetermined lengths.  It was held   that such cutting  brought   into existence a commercial  product having distinct name, character and use and that  both the Commissioner of Central Excise and the Tribunal had  rightly held   that the same amounted to "manufacture" and  attracted the liability to duty. The next decision referred to by   Dr. Padia was that this  Court in  Brakes India Ltd.  vs.  Superintendent of Central  Excise And Ors., reported in (1997) 10 SCC 717, where the  process of drilling,  trimming and chamfering was  said to  amount to "manufacture" within the meaning of Section 2 (f) of  the 1944 Act.   While deciding the matter, this  Court quoted   the observations of  the High Court as under:-

"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."  

Dr. Padia also referred to  the various  judgments of the  Tribunal in support of  his aforesaid contention which merely   repeat what has been explained in the decisions of  this Court  cited by him.            Dr. Padia  concluded on the note  that both the Tribunal  and the High Court  had correctly held that the appellant was  engaged  in the manufacture of a new product from  betel nuts  and the same had been correctly classified under Chapter  Sub-heading  2107.00 and was liable to duty at the  appropriate rate specified in the Schedule to the Tariff Act.         Despite the elaborate submissions made on behalf of the  respective parties,  the issue involved in this appeal boils down  to the  question  as to whether by crushing betel nuts and  processing  them with spices and oils, a new product could be  said to have come  into  being  which attracted duty separately  under the Schedule to the Tariff Act.         In our view, the process of manufacture employed by the  appellant-company did not change the nature of the end  product, which in the words of the Tribunal, was that in the  end  product the  ’betel nut remains  a betel nut’.   The  said  observation of the Tribunal  depicts the status of the product  prior to manufacture and thereafter.   In those circumstances,  the  views expressed  in the D.C.M. General Mills Ltd.(supra)  and the passage from the American Judgment (supra) become  meaningful.  The observation that 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  is apposite  to the situation at hand.  The

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process  involved in the manufacture of sweetened betel nut  pieces does not  result in the manufacture of a new product as  the end  product  continues to retain its original character  though in  a modified form.         In our view, the Commissioner of Customs and  Central  Excise (Appeals)  has correctly analysed  the factual  as well as  the legal  situation in arriving at the  conclusion that the  process of  cutting betel nuts into small pieces  and  addition  of essential/non-essential  oils, menthol, sweetening agent etc.  did not result   in a  new and distinct  product having a  different character and use.         The decision of this Court  in the case of  O.K. Play  (India) Ltd. (supra), relied on by Dr. Padia, does not also help  his submission  that any form of  manufacture would  attract  payment of excise duty, since the said decision was dealing    with Note 6 to Chapter 39 of the 1985 Act where the  expression "manufacture" has been  categorically included,  whereas in the instant case,   Note 4 of Chapter 21 which  deals with Betel Nut Powder,  does  not  do so.         In the circumstances, we allow   the appeal and set aside  the orders passed by the High Court  dated 15th September,  2005 and the Tribunal dated 12th April, 2005, respectively,   and restore  that of the Commissioner of Customs and Central  Excise dated 6th May, 2004.         The decision  in this appeal  will  govern Civil Appeal  No.6659/2005  as the facts  of which are  similar to those of   the present appeal.           There will be no order as to costs.