23 November 2004
Supreme Court


Case number: C.A. No.-004322-004322 / 1999
Diary number: 9882 / 1999



CASE NO.: Appeal (civil)  4322 of 1999

PETITIONER: M/s. Kores India Ltd., Chennai

RESPONDENT: Commissioner of Central Excise, Chennai

DATE OF JUDGMENT: 23/11/2004




[C.A. Nos. 2682-2690 of 2000]


                These appeals are inter-linked. In Civil Appeal No.4322 of 1999  M/s Kores India Ltd., Chennai (hereinafter referred to as the  ’assessee’) calls in question legality of the judgment rendered by the  Customs, Excise and (Gold) Control Appellate Tribunal, South Zonal  Bench, Chennai (in short the ’Tribunal’) holding that demand for duty  raised in respect of typerwriter/telex ribbons is in order.  In the  connected appeals Commissioner of Central Excise, Indore calls in  question legality of the New Delhi Bench of CEGAT taking a divergent  view in holding that duty was not payable.   

       Background facts in a nutshell are as follows:

       So far as civil appeal no.4322/1999 is concerned, show cause  notice was issued by the Collector of Central Excise, Chennai (in short  the ’Commissioner’) on 22.3.1993, inter alia, proposing levy of duty on  the typewriter ribbons cleared by the assessee during the period  1.3.1988 to 30.9.1992 by invoking extended period of limitation under  proviso to Section 11A of the Central Excise and Salt Act, 1944 (in  short the ’Act’).  In the reply to the show cause notice, assessee took  the stand that no process of manufacturing is involved in the concerned  transaction.  Assessee receives excise duty paid on typewriter/telex  ribbons in jumbo rolls of 210 mtrs. or more length from two small scale  units in Madras. In the assessee’s factory typewriter rolls are fed  into cutting and spooling machines wherein the ribbons of standard  length of 10 mtrs. and 5 metrs. are cut and spooled into metal spoons.   The ribbons in spools are packed and sold by the assessee.  With  reference to Heading 96.12 of the Schedule to the Central Excise Tariff  Act, 1985 (in short the ’Tariff Act’) it was submitted that since  appropriate central excise duty had been levied on the rolls there is  no question of paying any further duty.  Apart from cutting of ribbons  into standard pre-determined lengths, the assessee does not take any  activity on the ribbons received.  It is to be noted that by order-in- original no.40/93 dated 19.8.1993 passed by the Collector of Central  Excise, duty of Rs.2,89,76000/- was levied on clearance of carbon  papers and typewriter ribbons from the assessee’s factory at Madras.  Duty was affirmed under Rule 9(2) of the Central Excise Rules, 1944 (in  short the ’Rules’) read with proviso to sub-section (1) of Section 11A  of the Act. Further demand of Rs.2,14,066/- was confirmed on seized  carbon papers and ribbons. Seized goods of both varieties valued at  Rs.5,36,276.36 were held to be liable for confiscation and were



released by enforcing the Bank Guarantee furnished to the extent of  Rs.50,000/-.  Collector also levied penalty of Rs.30 lakhs under Rule  173Q of the Rules.

       Show cause notice related to the two products i.e. carbon papers  for the period 1.3.88 to September, 1992 and typewriter/Telex ribbons  for the period 1.4.88 to September, 1992.  The present dispute relates  only to typewriter/telex ribbons.

       The CEGAT held that the cutting of ribbons in smaller size and  spooling them into on the automatic spooling machines amounts to  manufacture and, therefore, duty is payable on these ribbons. The  conversion is done as per requirement of consumers in different spools  to suit Typewriter machines of different brand names. Ribbons received  by the Madras Unit cannot be supplied to the customers in the form  received by merely reducing the length by cutting. It is further held  that the product becomes saleable commodity only after it is spooled  according to the desired sizes and, therefore, excise duty is payable  as a new and distinct identity is acquired.  The factual findings  recorded by the Collector were affirmed.

       In the connected appeals the stand of the assessee was accepted  and the levy of duty by the Collector of Central Excise, Indore was  deleted. While the Chennai Bench observed that manufacturing process  was involved the New Delhi Bench held otherwise. It was concluded that  manufacturing of ink ribbon is complete without process of cartridges  and that Chapter Heading 96.12 does not make any distinction in  Cartridges and the cassettes.   

       In support of civil appeal no.4322/1999 Mr. V. Lakshmikumaran,  learned counsel submitted that CEGAT was not justified in holding that  any manufacturing process was involved.  According to him cutting the  jumbo rolls into the smaller size may amount to processing but by no  stretch of imagination it amounts to manufacturing.  Reference was made  to Prince Khadi Woollen Handloom Prod. Coop. Indl. Society  v. C.C.E.  [1996 (88) ELT 637 (SC)] and Union of India v. J.G. Glass Industries  Ltd. [1998 (97) ELT 5 (SC)] to buttress the plea. It was submitted that  whenever the intention was to include a particular activity within the  manufacturing activity it was specifically provided.  Reference was  made to Chapters 37, 48 and 85 of the Tariff Act, as position stands in  2002-2003. In any event, according to him, the extended period of  limitation was not available to be applied because to infer suppression  of facts something more than mere bonafide mistake was necessary to be  established by the Revenue.  As a matter of fact, various authorities  have entertained doubt as to whether the activities in question  involved manufacturing process. Particular reference was made to the  New Delhi Bench judgment of CEGAT which is the subject matter of appeal  in civil appeal nos.2682-2690/2000.   

Burden is on the Revenue to prove manufacture.  Strong reliance  was placed on Aman Marble Industries Pvt. Ltd. v.  Collector of C.Ex.,  Jaipur [2003 (156) ELT 396 (SC)] which involves cutting of marble  blocks into slabs. It was pointed out that if cutting of the blocks of  marble into slabs does not amount to manufacturing, as was held by this  Court, there is no reason to adopt a different yardstick so far as  cutting of typewriter rolls of ribbons into smaller sizes is concerned.  

At this juncture it is necessary to note that the duty component  involved in the present dispute after grant of revenue by the CEGAT in  respect of carbon paper is Rs.42,72,308.03. This was in addition to  Rs.54,335/- which related to seized articles. Penalty was limited to  Rupees 5 lakhs.  In civil appeal nos.2682-2690/2000 the duty involved  is Rs.70,22,974.46/-, which was deleted by the impugned judgment.

In response, Mr. M. Parasaran, learned ASG, submitted that nature



of activity has been analysed in great detail by the Collector and  CEGAT. Taking note of the factual position it has been concluded that  manufacturing activity is involved.  It has been clearly established  that different commercial commodity has come into existence and the  commodity which was already in existence serves no purpose and no  commercial use after the process.  A new name and character has come  into existence.  The original commodity after processing does not  possess original identity.  It is pointed out that there cannot be  bonafide doubt in the mind of assessee in not obtaining licence and not  disclosing the turnovers. With clear knowledge that the process  involved manufacture, the activity was undertaken and, therefore, duty  was payable. It is the legal duty of the assessee to take out the  licence and pay duty.  It has been deliberately avoided to be done with  malafide intention and, therefore, there was clear case of suppression  of facts attracting extended period of limitation.   

In Black’s Law Dictionary, (5th Edition), the word ’manufacture’  has been defined as, "the process or operation  of making goods or any  material produced by hand, by machinery or by other agency; by the  hand, by machinery, or by art.  The production of articles for use from  raw or prepared materials by giving such materials new forms,  qualities, properties or combinations, whether by hand labour or  machine". Thus by process by manufacture something is produced and  brought into existence which is different from that out of which it is  made in the sense that the thing produced is by itself a commercial  commodity capable of being sold or supplied. The material from which  the thing or product is manufactured may necessarily lose its identity  or may become transformed into the basic or essential properties.  (See  Deputy Commissioner of Sales Tax (Law), Board of Revenue (Taxes),  Ernakulam v. M/s. Coco Fibres (1992 Supp. (1) SCC 290).

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 recognized as a new and distinct  article that a manufacture can be said to take place. Process in  manufacture or in relation to manufacture implies not only the  production but also 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  to (sic that the) manufactured product emerges. Therefore, each step  towards such production would be a process in relation to the  manufacture. Where any particular process is so integrally connected  with the ultimate production of goods that but for that process  processing of goods would be impossible or commercially inexpedient,  that process is one in relation to the manufacture.  (See Collector of  Central Excise, Jaipur v. Rajasthan State Chemical Works, Deedwana,  Rajasthan (1991 (4) SCC 473).

’Manufacture’ is a transformation of an article, which is  commercially different from the one, which is converted.  The essence  of manufacture is the change of one object to another for the purpose  of making it marketable. The essential point thus is that in  manufacture something is brought into existence, which is different  from that, which originally existed in the sense that the thing  produced is by itself a commercially different commodity whereas in the



case of processing it is not necessary to produce a commercially  different article. (See M/s. Saraswati Sugar Mills and others v.  Haryana State Board and others (1992 (1) SCC 418).

The prevalent and generally accepted test to ascertain that there  is ’manufacture’ is 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, recognized as a distinct and new article  that has emerged as a result of the process.  There might be borderline  cases where either conclusion with equal justification can be reached.  Insistence on any sharp or intrinsic distinction between ’processing  and manufacture’, results in an oversimplification of both and tends to  blur their interdependence.  (See Ujagar Prints v. Union of India (1989  (3) SCC 488).

To put differently, the test to determine whether a particular  activity amounts to ’manufacture’ or not is: Does new and different  goods emerge having distinctive name, use and character. The moment  there is transformation into a new commodity commercially known as a  distinct and separate commodity having its own character, use and name,  whether be it the result of one process or several processes  ’manufacture’ takes place and liability to duty is attracted.  Etymologically the word ’manufacture’ properly construed would  doubtless cover the transformation.  It is the transformation of a  matter into something else and that something else is a question of  degree, whether that something else is a different commercial commodity  having its distinct character, use and name and commercially known as  such from that point of view is a question depending upon the facts and  circumstances of the case.  (See Empire Industries Ltd. v. Union of  India (1985 (3) SCC 314).                                           Keeping in view the aforesaid principles it has to be examined  whether the Collector and CEGAT were justified in holding that  manufacturing activities were made out.  As appears from the order of  the Collector, reference was made to the statements given by two  officials of the assessee.  Ribbon in rolls of 210 mtrs. and above in  length are purchased from M/s Solar Packaging (P) Ltd., Madras and M/s  Saket Stationery Mfg. Co. Bombay. The said Jumbo rolls were fed into  cutting and splitting machines in their premises and ribbons of  standard lengths of 10 mtrs. and 5 mtrs. were cut/slit and subsequently  wound/spooled on the metal spools and 10 such spools are blister packed  and sealed with aluminium foil. It was categorically observed that the  assessee produced ribbons in spools out of Jumbo rolls and the  resultant product is a distinct, identifiable article having distinct  name, function and use. The resultant product is also commercially  distinct as understood in commercial parlance and has a separate  market. Their function and use are also completely different and both  products are not inter-changeable. The ribbon in Jumbo rolls cannot be  used in a typewriter and similarly a person who requires 30 pieces of  spool ribbon will not be satisfied if he is offered Jumbo rolls of  equal length. In fact, assessee has a separate unit, machinery and work  force to manufacture in spool form. In that view of the matter, it was  held that the process involved amounted to manufacturing.  

At this juncture it is relevant to point out that the assessee  had contended before the Collector that the inputs/raw materials used  have suffered excise duty and if any duty is payable, they should be  allowed Modvat credit and the proportionate amount on account of such  credit should be deducted from the proposed demand.  This plea was  turned out as required documentary evidence to show that entire  quantity of inputs used have suffered tax was not produced. Before  CEGAT it was accepted that there was possibility that manufacturers  were operating under exemption available to SSI Units and the goods  would have discharged "nil" duty. It was also accepted that since the



goods were received from the depots and not directly received from one  factory, therefore, any duty (paying documents) were not available. It  is to be noted that once the Jumbo rolls are cut into smaller sizes,  they completely lost their earlier identity and cannot be used for the  same purpose as was done before cutting.  In a hypothetical case, even  if the smaller sized ribbons are stitched together or fixed together in  any manner, there is no possibility of its use as Jumboo rolls.  The  factual findings recorded that the processing resulted in coming into  existence of a commercial product having distinct name, character, and  use are on terra firma. No case is made out for interference with the  factual findings.        

Coming to the plea of limitation CEGAT noticed that there was  manufacturing and removal under Rule 9(1) at the Madras unit and,  therefore, demand of duty under Rule 9(2) read with Section 11A was  applicable.  It was concluded that there was clear contravention of  Rule 9(1) with the intention to evade. Therefore, the contention that  the assessee harboured bonafide and germine belief of the non- exciseability of the product was not acceptable. No clarification from  the department was sought for and accordingly extended period of  limitation was applicable.   

In M/s Padmini Products v. Collector of Central Excise, Bangalore   (1989 (4) SCC 275) it was observed with reference to earlier judgment  in CCE v. Chmphar Drugs and Liniments, Hyderabad (1989 (2) SCC 127)  that in order to avail limitation beyond a period of six months and up  to a period of five years, in view of the proviso to sub-section (1) of  Section 11A of the Act, it had to be established that the duty of  excise had not been levied or paid or short-levied or short-paid, or  erroneously refunded by reason of either fraud or collusion or wilful  mis-statement or suppression of facts or contravention of any provision  of the Act or Rules made thereunder, with intent to evade payment of  duty. It was observed that something positive other than mere inaction  or failure on the part of the manufacturer or producer or conscious or  deliberate withholding of information which the manufacturer knew  otherwise, is required to be established before it is saddled with any  liability beyond the period of six months. Whether, in a particular set  of facts and circumstances, there was any fraud or collusion or wilful  mis-statement or suppression of facts contravention of any provision of  the Act, is a question of fact depending upon the facts and  circumstances of a particular case.

It is to be noted that strong reliance was placed on Government  Order passed in 1982 ELT 4840 A (GOI), dated 16.1.1982 to contend that  there was bona fide plea about non-exciseability. Reference was also  made to the order passed by the New Delhi Bench which is the subject  matter of challenge in the connected appeals and the order dated  12.4.1996 passed by a Collector who dropped the proceedings initiated.  Except the Government of India’s order, all other orders were passed  subsequent to the issuance of the show cause notice.  In this case the  assessee could not have anticipated any such adjudication at the  relevant point of view.  Further, Government of India’s order did not  relate to ribbons.  In any event, the Collector factually focussed on  the conduct of the assessee to conclude lack of bonafides.  At no point  of time the Department was informed about manufacturing activity  undertaken at their unit at Madras as required under law and, there was  suppression of facts relating to manufacturing and removal of such  goods.  In this context, the Collector observed as follows:

"Further perusal of invoices prepared for sale  effected from Madras indicate that the price quoted is  inclusive of excise duty whereas in reality they did not  pay for Central Excise duty at all for the goods produced  at Madras.  This apart, perusal of copies of Price Lists;  and certain gate passes seized from the Make up Depot



disclosed that KIL, were manufacturing identical goods in  question in their Thane Unit apart from other varieties.   The goods in question have been appropriately classified as  goods falling under 48.16 and 96.12 respectively and  cleared on payment of duty.  The copies of price list  clearly indicate that KIL have filed price list and sought  approval of assessable value for the goods in question.   These factors goes to show that M/s KIL had clear knowledge  that the subject goods are excisable goods and are eligible  to duty under Chapter 48.16 and 96.12 respectively.   Knowing fully well about the classification and the  obligation, they have deliberately suppressed the materials  facts in so far as their Madras Unit is concerned and have  evaded payment of Central Excise duty.  In the  circumstances, I have no hesitation to hold that the charge  of suppression of fact and removal of goods in  contravention of Rules with intent to evade payment of duty  is fully established and the extended time limit under Rule  9(2) read with proviso to Section 11A is invokable for  demand duty."

In view of the factual position as noted by the Collector and  affirmed by the CEGAT there is no substance in the plea that the  extended period of limitation was not applicable.  

It is noted in the Collector’s order with reference to the price  lists, and some gate-passes seized from the Make up depot, that the  assessee was manufacturing identical goods in their Thane unit apart  from other varieties. Additionally, with reference to sales invoices it  was noted that the price quoted is inclusive of excise duty, though no  excise duty was paid in respect of the goods which according to Revenue  was manufactured at Madras.       

As noted above, looked from any angle order of the Collector as  affirmed on the point involved by CEGAT does not warrant any  interference being based factual conclusions which cannot be termed as  perverse.  The conclusions are based on relevant materials. Civil  Appeal No. 4322/1999 is dismissed.   

Coming to the other appeals, in view of the position indicated in  detail in civil appeal No. 4322/1999, these appeals deserve to be  allowed and are accordingly allowed. There shall be no order as to  costs in these appeals.