1

Reportable

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.3169 OF 2009 [Arising out of SLP(C) No.5861/2007]

Jai Bhagwan Oil & Flour Mills … Appellant

Vs.

Union of India & Ors. … Respondents

J U D G M E N T

R.V.RAVEENDRAN, J.

Leave granted. Heard counsel.

2. By notification dated 23.7.1971 the Government of India formulated a  

‘Transport  Subsidy  Scheme’  for  grant  of  subsidy  on  the  transport  of  raw  

materials and finished goods to and from certain selected areas with a view to  

promote growth of industries in such areas. Clause 6 contains the details of the  

Scheme. Sub-clause (i) thereof provided that “a transport subsidy will be given

2

to the industrial units located in selected areas in respect of raw materials which  

are brought into  and finished goods which are taken out of such areas.” Sub-

clause (iv) specified the north-eastern region including the State of Assam as  

one of the selected areas to which the scheme was made applicable. Sub-clause  

(xii)  required  the  State  Government  to  set  up  a  Committee  consisting  of  

Director of Industries,  a  representative of the State  Industries Department,  a  

representative of the State Finance Department, and a nominee of the Central  

Government (Ministry of Industrial Development), to scrutinize and settle all  

claims  for  transport  subsidy  arising  in  the  State.  The  said  Committee  was  

required  to  call  upon  the  applicants  for  subsidy,  to  provide  proof  of  raw  

materials imported into the State and finished goods exported out of the State  

by their  industrial  units,  to decide their  eligibility for transport  subsidy. The  

Committee was also required to scrutinize and settle the claims in the manner  

indicated  in  the  scheme.    The  words  ‘industrial  unit’,  ‘raw  material’  and  

‘finished goods’ were defined in sub-clauses (a), (h) and (i) of clause (4) of the  

scheme, as follows :-  

“(a) ‘Industrial  Unit’  means  an  industrial  unit  where  a  manufacturing  programme is carried on.

(h) ‘Raw material’ means any raw material actually required and used by  an  industrial  unit  in  its  manufacturing  programme  as  approved  by  the  Government of India and/or by the Government of State/Union Territory in  which the industrial unit is located.”

(i) ‘Finished goods’ means the goods actually produced by an industrial  unit  in  accordance  with  the  manufacturing  programme  approved  by  the

3

Government of India and/or the Government of the State/union Territory in  which the industrial unit is located.”

3. The appellant claimed that it has its industrial unit at Tinsukia, Assam;  

that it was engaged in the manufacturing activity of crushing mustard seeds and  

producing two distinct products namely mustard oil and oil cake, as finished  

goods;  and  that  it  was  registered  under  the  transport  subsidy  scheme,  after  

verification as provided in the Scheme. It  was also claimed that crushing of  

mustard seeds yielded 30-34% mustard oil and 60-64% oil cake, each product  

having a separate identity and different markets.  

4. The  appellant  made  several  claims  for  grant  of  transport  subsidy  in  

respect  of  raw materials,  oil  cake and oil,  from time to  time.  According to  

appellant, after giving credit to Rs.5,88,421/- released as subsidy, the amount  

due towards subsidy claim till August, 1993, was Rs.58,44,531/-. As there was  

inordinate delay in settling the claims, the appellant filed a writ petition in the  

year 1996, seeking a direction for release of the said transport subsidy amount.  

The  said  writ  petition  was  disposed  of  on  15.5.1996  with  a  direction  to  

scrutinize  appellant’s  claim  and  if  found  eligible, disburse  the   amount.  

The  State  Government  scrutinized  and  recommended  to  the  Government  of  

India,  the  release  of  Rs.58,44,531 as  transport  subsidy  to  the  appellant.  On  

18.6.1997, the Government of India sanctioned and released Rs.44,14,922 as

4

transport  subsidy  as  against  the  recommended  claim of   Rs.58,44,531.   On  

14.7.1997  the  Government  of  India  issued  a  clarification  that  the  transport  

subsidy under the said scheme would not be applicable in regard to oil cake as it  

was only a by product. Aggrieved by the disallowance of transport subsidy for  

oil cake, appellant filed another writ petition (C.R. No.376/1997) for release of  

subsidy in respect of oil cake, as sanctioned by the State Level Committee. A  

learned Single Judge of the Guwahati  High Court  by order  dated 4.10.1982  

rejected  the  writ  petition.   The  writ  appeal  filed  by  the  appellant  was  also  

dismissed on 27.10.2008. The said order is challenged in this appeal.  

5. The learned Single Judge and the Division Bench have held that the term  

‘finished goods’ used in the Scheme would not include oil cake, which was  

only  a  by-product  or  waste  produced  while  manufacturing  mustard  oil;  and  

transport subside was available only in regard to the finished product intended  

to be produced by the process of manufacture, which in this case was mustard  

oil. The High Court held that ‘finished goods’ refers to goods produced in an  

industrial  unit  by  a  process  of  manufacture  and  “manufacture”  means  

production of an item distinct  and different from the raw material,  having a  

separate  identity;  and that  the appellant  had failed to place before the court  

necessary material to explain (i) the process and technology in the manufacture  

of oil cake; (ii) the composition of the oil cake; (iii) the purpose and use of oil

5

cake; and (iv) the product name in the market and the marketability of oil cake  

as a finished goods. The High Court held that in the absence of such material, it  

will not be possible to decide whether ‘oil cake’ was a ‘finished goods’ for the  

purpose of the Scheme, or merely the residuary waste generated as a by-product  

while producing mustard oil as the finished goods.

6. We are  of  the  considered  view that  the  learned  single  Judge  and the  

Division Bench missed the real issue. The question was not whether oil cake  

was a by-product or not. There are several manufacturing processes which yield  

or  produce  more  than  one  finished  product  or  manufactured  item.  When  

considering whether the ‘finished goods’ is a marketable product, distinct and  

different  from the raw material  from which it  is  produced,  the fact  that  the  

finished goods is the main product, or is a parallel main product or is a by-

product  of  the  manufacturing  process,  may  not  make  any  difference.  The  

question to  be considered is  whether  oil  cake can be said to be a ‘finished  

goods’  produced  by an  industrial  unit  in  accordance  with  its  manufacturing  

programme approved by the state government.

7. The  object  of  the  Transport  Subsidy  Scheme  is  not  augmentation  of  

revenue, by levy and collection of  tax or  duty.  The object of the Scheme is to  

improve trade  and commerce  between the  remote  parts  of  the  country  with

6

other parts, so as to bring about economic development of remote backward  

regions. This was sought to be achieved by the Scheme, by making it feasible  

and attractive to industrial entrepreneurs to start and run industries in remote  

parts, by giving them a level playing field so that they could compete with their  

counterparts  in  central  (non-remote)  areas.  The  huge  transportation  cost  for  

getting the raw materials to the industrial unit and finished goods to the existing  

market outside the side, was making it unviable for industries in remote parts of  

the country to compete with industries in central  areas.  Therefore, industrial  

units in remote areas were extended the benefit of subsidized transportation. For  

industrial units in Assam and other north-eastern States, the benefit was given  

in the form of a subsidy in respect of a percentage of the cost of transportation  

between a point in central area (Siliguri in West Bengal) and the actual location  

of  the  industrial  unit  in the  remote area,  so that  the  industry could become  

competitive and economically viable. So when the Scheme refers to finished  

goods coming out of or being exported from the State (remote area), it refers to  

any  goods  manufactured  or  produced  by  an  industrial  unit  in  the  State  in  

accordance  with  the  manufacturing  programme  approved  by  the  central  

government and/or the state government. So long as the goods coming out is  

something  identifiable,  something  which  has  undergone  a  process  of  

manufacture,  something  which  is  marketable  and  tradable  as  a  commodity,  

something  that  is  completely  different  and  distinct  from raw  material  as  a

7

product, something that was intended to be a definite product of manufacture by  

the industrial unit, the product had to be considered as ‘finished goods’ from the  

industrial unit. Any goods which goes in as a raw material required/used in the  

manufacturing programme of an industrial  unit  situated in a notified remote  

area, or any finished goods that is produced in the industrial unit situated in  

such area and exported out of the State, was eligible for the transport subsidy  

under the scheme.

8. The scheme itself specifically defines ‘finished goods’ as goods actually  

produced  by  an  industrial  unit  in  accordance  with  the  manufacturing  

programme as approved by the Central Government and/or the Government of  

the State  where the industrial  unit  is  located. Two certificates  issued by the  

State Government (District Industries Centre, Dibrugarh) dated 13.11.1987 and  

28.8.1992 clearly state that oil cake was produced by the appellant’s industrial  

unit  in  accordance  with  its  manufacturing  programme  from  1984  and  the  

appellant’s  industrial  unit  was  engaged in  the  production of  two products  -  

mustard oil and oil cake. It was further certified that the appellant was capable  

of  manufacturing,  with its  existing machinery,  1440 MT of mustard  oil  and  

2880 MT of oil  cake.  Further,  the State  Level  Committee  formed under the  

scheme and the State Government have consistently opined that oil cake was  

finished goods, entitled to transport subsidy. Until the Central Government gave

8

a clarification  on 14.7.1997 stating that  oil  cake should not  be treated  as  a  

finished goods for the purpose of subsidy, the State Level Committee,  State  

Government as also the Central Government had proceeded on the basis that oil  

cake was finished goods eligible for transport subsidy. It is not disputed that the  

transport  subsidy  had  been  sanctioned  and  disbursed  in  regard  to  oil  cake  

produced by other industrial units in the notified remote areas. The position was  

explained in the following communication dated 7.2.2005 from the Government  

of Assam (Directorate of Industries & Commerce) to the Ministry of Commerce  

and Industry, Government of India:  

“Government of Assam agrees to the fact that in crushing of mustard seeds  oil cake is a finished product as it constitutes 64% whereas mustard oil  percentage is 32% (4% loss in manufacturing process).  If oil cake is not   considered  eligible  for  transport  subsidy  the  oil  mills/mustard  seed   crushing units  will  not  be economically  viable  and the  purpose  of  the   transport subsidy scheme will be defeated as the units located in Assam   will  not  be  able  to  compete  with  similar  units  located  outside  north   eastern  region. Accordingly  State  Level  Committees  at  different  dates/meetings approved the claims for import of Mustard Seeds (RM) and  export of oil cake as finished product as eligible for transport subsidy.”

(emphasis supplied)

9. In spite of the above, the High Court denied the benefit on the ground  

that  the  appellant  had  failed  to  place  relevant  material  to  establish  the  

process/technology  of  manufacture,  the  composition  and  product  name,  and  

purpose,  use  and  marketability  of  the  oil  cake,  so  as  to  recognize  it  as  a  

‘finished goods’. What is contained in reference works/technical Journals, or  

well known in trade/industrial circles, need not be established by independent  

‘evidence’. It is well known that oil cake is the coarse solid residue obtained

9

when oil is extracted from various types of oil seeds like peanuts, soyabeans,  

linseed, mustard, sesame and sunflower seeds. Oil cake is produced not only in  

oil  mills/industries,  but  also  in  village  level  Ghanis.  The  standard  

preservation/detoxification  procedure  for  oil  cakes  is  sun-drying,  controlled  

mechanical heating or by chemical processing. Oil cake is rich in proteins and  

minerals  and  commonly  used  as  cattle  feed  and  poultry  feed.  Oil  cake  

containing toxic elements (as for example oil cake from castor beans) is used as  

fertilizer.  Oil  cake  has  a  wide  ready  market.  It  is  bulk-purchased  by  

cattle/poultry  feed  manufacturers  who  grind  it  and  mix  it  with  other  feed  

articles  to  make  cattle/poultry  feed.  Farmers  and  owners  of  cattle/poultry  

purchase it in retail, break it or grind it and feed them to cattle/poultry, with or  

without additives. It is also used as boiler fuel in some areas. Serious research is  

in  progress  to  make  it  fit  for  human  consumption.  The  name,  method  of  

manufacture,  uses  and  marketability  are  well  known  in  trade,  industrial,  

agricultural and village circles. When any reference book can authenticate these  

facts within common knowledge, the High Court was not justified in rejecting  

the claim on the ground that special evidence in regard to these aspects was not  

placed.  

10.  The true test to ascertain whether a process is a manufacturing process  

producing a new and distinct article is whether the article produced is regarded

10

in the trade, by those who deal in it, as a marketable product distinct in identity  

from the commodity/raw material  involved in the manufacture.  (See  Deputy  

Commissioner  of  Sales  Tax (Law),  Ernakulam v.  Pio Food Packers –  1980  

Supp. (1) SCC 174 and Sterling Foods v. State of Karnataka – 1986 (3) SCC  

469). When mustard oil and oil cake are produced from mustard seeds, it is a  

process of manufacture. It is certainly not a mere process of cleaning, repairing,  

reconditioning, recycling or assembling. A new marketable article distinct from  

the raw material,  emerges when oil cake is produced from oil  seeds. In this  

context, we may refer to the century old decision in  Dean Linseed Oil Co. v.  

United States [78 (1897) Federal Reporter 467] relating to availment of customs  

duty  drawback.  A  provision  of  a  Tariff  Act  provided  that  where  imported  

materials,  on  which  duties  have  been  paid,  are  used  in  the  manufacture  or  

production  of  articles  in  the  United  States,  there  shall  be  allowed  on  the  

exportation of such articles, a drawback equal in amount to the duties paid on  

the  material  used,  less one per  centum of such duties.  The issue before the  

American court was whether production of oil cake from linseed, by separation  

of linseed into linseed oil and oil cake, was manufacture entitled to the benefit  

of duty drawback. The court answered the question by the following brief but  

classic analysis:  

“…..the linseed was not oil cake, and did not contain oil cake, as such.  The linseed had to be treated, and from this treatment the linseed oil was  produced as one thing, and this oil cake as another thing. The oil cake was  made from the linseed, and was a new article of manufacture.”

11

We may also refer  to the decision in  Devi Das Gopal Krishnan v.  State of   

Punjab [1967 (3) SCR 557],  where this  Court negatived the contention that  

when oil is extracted from oil seeds, oil was produced and not manufactured.  

This  Court  held  that  ‘when  oil  is  produced  out  of  the  seeds,  the  process  

certainly transforms raw material into a different article for use”. What is stated  

about oil produced from oil seeds, will apply equally to the other product of the  

manufacturing process, namely oil cake.

11. There can therefore be no doubt that when mustard seeds are subjected to  

the process of extraction whereby mustard oil and oil cake are produced, the  

process involves manufacture of mustard oil as also the manufacture of oil cake.  

Oil  cake  is  a  distinct  and  different  entity  from mustard  seeds  and  it  has  a  

separate name, character and use different from mustard seed. Oil cake is not a  

waste to be thrown away, but a valuable product with a distinct name, character,  

use  and  marketability.  There  can  thus  be  no  doubt  that  the  oil  cake  was  a  

finished goods eligible for transport subsidy, until it was specifically excluded  

by the central  government in the year 1997. We are not however concerned  

with the validity or correctness of such exclusion from 1997, in this case.

12

12. We therefore allow this appeal, set aside the orders of the Division Bench  

and single judge of the High Court and allow the writ petition before the High  

Court by declaring that oil cake is ‘finished goods’ for the purpose of transport  

subsidy  scheme and consequently  the  appellant  was  entitled  to  the  subsidy.  

Respondents are directed to verify and release the subsidy amount due to the  

appellant in regard to oil cake exported out of the State. Compliance within six  

months.  

…………………………J. (R V Raveendran)

New Delhi; ………………………..J. May 4, 2009. (Harjit Singh Bedi)