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PETITIONER: M/S. MOTI LAMINATES PVT. LTD. ETC.

       Vs.

RESPONDENT: THE COLLECTOR OF CENTRAL EXCISE, AHMEDABAD

DATE OF JUDGMENT14/02/1995

BENCH: SAHAI, R.M. (J) BENCH: SAHAI, R.M. (J) SINGH N.P. (J) PARIPOORNAN, K.S.(J)

CITATION:  1995 SCC  (3)  23        JT 1995 (2)   324  1995 SCALE  (1)713

ACT:

HEADNOTE:

JUDGMENT: 1.   The   question  of  law,  the  adjudication  of   which ultimately shall be decisive of the issues arising in  these appeals  filed under Section 35-L of the Central  Excises  & Salt  Act,  1944 (in brief ’the Act’),  is  whether  various goods  mentioned  in  the  Schedule  of  Excise  Tariff  are dutiable  as  such or they would be,  ’excisable  goods’  as defined in the Act, only when they are marketable or capable of being marketed. 2.   Law  on  this  issue  appears  to  be  fairly  settled. Recently a Three Judge bench of this Court speaking  through one of us (Hon’ble K.S. Paripoornan, J.) in Indian Cable Co. Ltd.  vs.  Collector of Central Excise, Calcutta, 1994  (74) ELT  22 while reversing the order of the Tribunal that  "the conversion of PVC resin’ into PVC compound by the  processes employed  by the assessee, amounts to  "manufacture"  within the meaning of Section 2(f) of the Act", therefore, it  "was to be charged with excise duty" held, "the provisions of the Act mandate that a finding that the goods are marketable  is a pre-requisite or "sine qua non" for the levy of duty". 3.   But  prior to adverting to it and notice in  brief  how the law on this aspect has developed, it is but  appropriate to mention that the precise dispute before the Tribunal  was whether the appellants who are manufacturers and sellers  of laminated sheets which fell under tariff item no. 68 of  the tariff  schedule prior to 28th February 1986 were liable  to pay duty on such intermediate products produced by them,  as were  solutions  of resin and water which were  not  stable, merely,  because  they were captively consumed.   Since  the question  of  law is common and has arisen in more  or  less similar  circumstances  in  all  the  appeals,  it  is   not necessary to give facts of each case. 4.   The  appellants  manufactured laminated sheets  out  of various raw materials including paper and other chemicals, 327

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namely,, phenol, formaldehyde, hexamine etc., purchased from the  open  market  after paying duty.   In  the  process  of manufacturing  laminated sheets the appellants used the  raw material  by processing them with each other and with  other materials  like  caustic soda,  methanol  and  hydro-chloric acid.  In this process Phenol Formaldehyde was produced  out of  Melamine, Formaldehyde, phenol, methanol, caustic  soda, hexamine and hydrochloric acid.  The process of  manufacture of  phenol,  formaldehyde  as  found  by  the  Tribunal   is described thus:’               "Formaldehyde is pumped into a reaction vessel               and   thereafter  Me  is  added.   These   two               material  are  stirred and  thereafter  Hydro-               Chloric Acid is added, in required quantity to               accelerate  the reaction. The  temperature  is               thereafter increase upto 80 degree  Centigrade               and  is thereafter brought down to  60  degree               Centigrade.   At  this time  Caustic  Soda  or               Methanol in prescribed quantity are added.  At               times  water is separated  from  Formaldehyde.               The   solution  which  so  emerges  is   under               constant  and  continuing  reaction  at   this               stage.  However, this solution is removed from               the  reaction vessel and is used in its  semi-               processed   condition   in   Manufacture    Of               laminated sheets." From  the  process  of manufacture, narrated  above,  it  is apparent  that  what  emerged was solution as  a  result  of continuous reaction and was taken out from the vessel in its semi-processed  condition  and  was  used  without   further processing in manufacture of laminated sheets.  Since it was not marketed or sold by the appellants and the solution  was captively consumed only the Department did not levy any duty on it. In 1979, Rules 9, 49 and 173(1) of the Central Excise Rules  1944 were amended the result of which was  that  even captively  consumed  goods produced or  manufactured  became dutiable.  Consequently the Superintendent of Central Excise issued  Notice  that  in view of  the  amendments  in  Rules phenol,  formaldehyde and melamine formaldehyde were  liable to  duty.   The  appellants contested the  notice.   It  was claimed  that the reacting mixtures were not  only  unstable having  short life but they were not marketable in the  form they  were  obtained in intermediate stage in  a  continuous process, The appellants claimed that the reacting mixture in manufacture  went  on and it was complete  on  formation  of laminated  sheets  by application of heat  and  pressure  to these  goods.   The  Assistant  Collector  found  that   the mixture,  namely,  solution of the resin and water  was  not stable.  But he did not agree that merely because  solutions were not stable it did not mean that the resins produced  by the  appellants  were not goods as if some,  stabiliser  was used to lower down continuous reaction the same could be put in  the  market  for the purpose  of  sale.   The  Collector (Appeals) agreeing with the finding that solutions were  not stable  allowed  the appeals and held that  an  intermediate product in order to be excisable must be a product known  to the  market  or commercial community.  In  other  words  the intermediate  product which came into existence should  have been a complete product known as such to the market.  But if something  more  was to be done on the product to  bring  it into a form known to the commercial community then it  could not be treated  as excisable goods.  The Collector (Appeals) held  that even though it was not disputed that Ox  products used  for  the manufacture of plastic laminated  sheets  and synthetic resin was formed as an in     intermediate product

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but  it  being unstable in a  non-marketable  condition  the resin mixture   could not be considered as 328 excisable under tariff item ISA(1) of Central Excise Tariff. In further appeal filed by the Department the Tribunal  held that even though it was not claimed by the Department before the  subordinate  authorities that  the  intermediate  goods produced  by the appellants were ’resols’ but  resins  which occurred in three stages was nothing but resol at ’A’  stage and  resol  being  mentioned  in item  15-A  of  the  Tariff Schedule it was covered by the ’chemical nomenclature’,  And once  the product answered the chemical description  in  the entry, it was eligible to duty.  The claim of the appellants that  it  was  not goods was thus  rejected.   The  Tribunal further  held  that since, "the  products  manufactured  by" appellants, fell under 15-A (1) the fact that these were not marketed  or  sold did not make any difference.   The  claim that the goods were incapable of being marketed was rejected as  there  was no evidence, ’that the  product  resol’  was, ’unstable and not capable of storage even for a short time’. The Tribunal held, "that in the case of resins there were so many  varieties  and  these have  wide-ranging  shelf  lives ranging from a few days to a couple of months or even more". Since  it was not made out, "that the product" was  required to  be taken into immediate use or otherwise it  would  have been  rendered useless or it would cease to be a  resin"  it was  hold that the product even though capable of,  "further condensation  or  polymerization" had  reached,  a  definite stage of manufacture for a definite end-use and,  therefore, "had  to be held to be goods".  Reason for this finding  was concession  of  the  appellants  counsel  that  the   resins obtained by the appellants could, "be kept for as long as 15 days". 5.   What arises for determination, therefore, in the  first instance, is whether resin or resol     produced   by    the appellants  can  be considered to be goods for  purposes  of levy under     the Act.  Even though the Department did  not claim  either in the notice issued to the appellants  or  at any stage before the appeals were heard by the Tribunal that resins  produced  by the appellants were nothing  else  than what  is chemically known as ’resols’ but the  necessity  to examine its correctness is obviated as Sri Dave, the learned counsel  for  the  appellants  fairly  did  not  assail  the findings   rather  accepted  it.   Resols  is   specifically mentioned as one of the items in entry no. 15A of the tariff schedule.   ’The  main entry and Explanation II  of  it  are extracted below. "Item  No. 15A - PLASTICS ------------------------------------------------------------ Item No.Tariff                                  Rate of duty ------------------------------------------------------------ 15A.    Artificial or Synthetic resins and      Fifty per         plastics    and Other                   cent ad         materials and articles specified        valorem.         below:         (1) .............         (2) .............         (3) .............         Explanation 1: ............... 329               Explanation   II.-  In  sub-item  (1),   "con-               densation    polycondensation    polyaddition,               polymerisation and co-polymerisation products"               are  to be taken to apply only to goods  of  a               kind produced by chemical synthesis  answering

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             to one of the following descriptions:-               (a)   artificial      plastics,      including               artificial resins;               (b)   silicones;               (c)   resols,   liquid  polyisobutylene,   and               similar    artificial   polycondensation    or               polynkerisation products." Resols, according to Tribunal, is chemical name of resin  at ’A’  stage.   It  was held that phenol resin  in  course  of manufacture  due  to reaction of mixture occurred  at  three stages:               1.    Resol    or   A-Stage   (beginning    of               Condensation); the resin as fluid soluble  and               still contains much water.               2.    Resitol     or    B-Stage     (continued               condensation,   slight   cross-lingking(   in-               soluble, rubber.               3.    Resite  or C-Stage (final  condition  of               the cured product); infusible and insoluble." In the Glossary of Chemical Terms: Second Edition:  Clifford A.   Hampel,  Consulting  Chemical  Engineer   and   Gessner G.Hawley,  Editor:  Condensed  Chemical  Dictionary  ’Phenol formaldehyde resin’ are described as under:-                     "Polymerization  occures in three  steps               or states.  The first (A-Stage) is an alcohol-               soluble liquid, the second (B-Stage) is  semi-               solid and less soluble: the third (C-stage) is               hard, cross-linked solid.  The               A-Stage form is called a resol. Resol  thus  obtained  in fluid state at  ’A’  stage  was  a solution  which could be retained only by addition  of  some stabliser   or  retarder.   The  appellants  used   it   for manufacturing   laminated  sheets  in  semi-finished   stage without any processing or adding any stabliser or  retarder. Even  the  Tribunal  found that resin at  ’A’  stage  was  a solution  obtained during process which by itself could  not be used unless some stabiliser was added to it.  It was  not disputed that its life, according to appellants, was for two or  three  days.  But even assuming what was stated  by  the counsel  before the Tribunal that its life was for 15  days. it   could   survive  only  if  regulated   and   controlled temperature was maintained.  Otherwise, as has been observed by  the  Chemical Examiner it gets itself converted  into  a jelly which was incapable of any use.  Therefore, it is very doubtful  if on the facts found by the Assistant  Collector, affirmed by the Collector and not differed by the  Tribunal, the   resin  or  resols  obtained  during  the   course   of manufacture by the appellants could be held to be goods. 6.   The duty of excise is leviable under Entry 84 of List I of  the  VIIth Schedule on goods manufactured  or  produced. That is why the charge under Section 3 of the Act is on all, ’excisable   goods’,   ’produced  or   manufactured’.    The expression ’excisable goods’ has pl64 been defined by clause (d) of Section 2 to mean, ’goods’ specified in the Schedule. The  scheme  in the Schedule is to divide the goods  in  two broad categories - one, for which rates are mentioned  under different entry and other the residuary.  By this method all goods are excisable either under the specific or 330 the residuary entry.  The word ’goods’ has not been  defined in the Act.  But it has to be understood in the sense it has been used in Entry 84 of the Schedule.  That is why  Section 3  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

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they  are  excisable  goods but whether such  goods  can  be subjected to duty would depend on whether they were produced or manufactured by the person on whom duty is proposed to be levied.   The  expression  ’produced  or  manufactured’  has further been explained by this Court to mean that the  goods so  produced must satisfy the test of  marketability.   Con- sequently  it  is always open to an assessee to  prove  that even  though the goods in which he was carrying on  business were  excisable  goods being mentioned in the  Schedule  but they  could not be subjected to duty as they were not  goods either because they were not produced or manufactured by  it or  if they had been produced or manufactured they were  not marketed or capable of being marketed. 7.   The duty of excise being on production and  manufacture which  means  bringing out a new commodity, it  is  implicit that  such  goods  must be usable,  moveable,  saleable  and marketable.   The duty is on manufacture or  production  but the production or manufacture is carried on for taking  such goods  to the market for sale.    The obvious rationale  for levying   excise   duty  linking  it  with   production   or manufacture is that the goods so produced must be a distinct commodity  known as such in common parlance or to  the  com- mercial community for purposes of buying and selling.  Since the  solution  that was produced could not be used  as  such without  any  further processing or application of  heat  or pressure,  it could not be considered as goods on which  any excise duty could be levied. 8.   But the learned Additional Solicitor General urged that resin  or solution which was produced by the  appellant  was technically  known  as resols.  Reliance was placed  on  its meaning  in the dictionary.  The learned  counsel  submitted that the tariff schedule has divided the items into specific and  general.   Resols being one of the A)  items  mentioned under  item 15A it was a specific item, therefore,  once  it was  found  that  the intermediate  goods  produced  by  the appellants  were resols then it was exigible to duty and  it could not further be required to satisfy the common parlance test specially because this was a chemical and not a product which  is  commonly  bought and sold  in  the  market.   The learned  counsel  urged that once it was found that  it  was manufactured  or produced then it should be deemed to  have, satisfied the test of marketability and consequently it  was excisable  goods within meaning of the Act and the  Tribunal was  justified in levying duty on it.  The  learned  counsel submitted  that  marketing capability depends on  nature  of goods.   The  test  of marketability and  capable  of  being marketed  could not be applied to such goods as  resol  and, therefore,  the  submission  of  the  learned  counsel   for appellants  that  the resin or resol could be  subjected  to duty  only if it was         found that from  raw  materials some new substance was brought out and it was known as  such was  not correct as once the intermediate goods produced  by the  appellants  was found to be resols and it  having  been mentioned in item no.15A the burden of the Department  stood discharged. 331 9.   Although  the  duty  of excise  is  on  manufacture  or production of the goods, but the entire concept of  bringing out  new  commodity etc. is linked with  marketability.   An article does not become goods in the common parlance  unless by production or manufacture something new and different  is brought out which can be bought and sold.  In Union of India & Anr. vs.  Delhi Cloth & General Mill Co. Ltd., AIR 1963 SC 791, a Constitution Bench of this Court while construing the word ’goods’ held as under:-

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             "These  definitions  make  it  clear  that  to               become  "goods" an article must  be  something               which can ordinarliy come to the market to  be               bought and sold". Therefore, any good to attract excise duty must satisfy  the test  of marketability.  The tariff schedule by placing  the goods  in specific and general category does not  alter  the basic  character of leviability.  The duty is attracted  not because  an  article is covered in any of the  items  or  it falls  in residuary category but it must further  have  been produced  or manufactured and it is capable of being  bought and  sold.In  South Bihar Sugar Mills Ltd. &  Anr.  etc.  v. Union  of India & Anr. etc., AIR 1968 SC 922 it was held  by this Court:               "The Act charges duty on manufacture of goods.               The  word ’manufacture’ implies a  change  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.   The duty  is  levied  on               goods.  As the Act does not define goods,  the               legislature  must be taken to have  used  that               word in its ordinary, dictionary meaning.  The               dictionary meaning is that to become goods  it               must be something which can ordinarily come to               the market to be bought and sold and Is  known               to  the  market.   That it would  be  such  an               article  which  would  attract  the  Act   was               brought out in Union of India vs.  Delhi Cloth               and General Mills Ltd., 1963 Supp. (1) SCR 586               = AIR 1963 SC In  A.P. State Electricity Board vs.  Collector  of  Central Excise, Hyderabad, JT 1994 (1) SC 545 this Court  reiterated the same principle and observed that marketability was  must irrespective  of whether it was marketed or not.   Reference has  already. been made to Indian Cable (Supra).   Thus  any good mentioned in the tariff schedule does not attract  duty unless  it is marketable or capable of being marketed.   The test  of  marketability was relaxed in Union  Carbide  India Ltd.  vs.  Union of India & Ors., 1986 (24) ELT 169  and  it was held that, "in order to attract ’excise duty the article manufactured  must be capable of sale to a consumer"’.   The question that arose, was whether aluminium cans produced  by the  appellants for the flashlights manufactured by it  were goods.  It was held:               "The  question  here is whether  the  alumimum               cans manufactured by the appellant are capable               of sale to a consumer. it appears on the facts               before   us   that   there   are   only    two               manufacturers  of  flashlights in  India,  the               appellant being one of them.  It appears  also               that  the  aluminium  cans  prepared  by   the               appellant  are employed entirely by it in  the               manufacture  of flashlights, and are not  sold               as  aluminium cans in the market.  The  record               discloses  that  the aluminium  cans,  at  the               point  at which excise duty has  been  levied,               exist in a crude and elementary form incapable               of being employed at that stage as a component               in  a flashlight.  The cans have sharp  uneven               edges and in order to use them as a  component               in making flashlight cases               332               the  cans  have to undergo  various  processes

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             such  as  trimming, threading  and  redrawing.               After  the  cans  are  trimmed,  threaded  and               redrawn  they are reeded, beaded and  anodised               or  painted.   It is at that point  only  that               they become a distinct and complete component,               capable of being used as a flashlight case for               housing battery cells and having a bulb fitted               to the case.  We find it difficult to  believe               that  the  elimentary and unfinished  form  in               which  they exist immediately after  extrusion               suffices to attract a market". It  was  explained in Bhor Industries Ltd. v.  Collector  of Central Excise 1989(40) ELT 280 SC:               "It  appears  to  us that  under  the  Central               Excise Act, as it stood at the relevant  time,               in order to be goods as specified in the entry               the  first condition was that as a  result  of               manufacture  goods must come  into  existence.               For  articles to be goods these must be  known               in the market as such or these must be capable               of being sold in the market as goods.   Actual               sale  in the market is not necessary, user  in               the  captive consumption is not  determinative               but the articles must be capable of being sold               in  the  market  or known  in  the  market  as               goods." It  was  reiterated in Hindustan Polymers  v.  Collector  of Central Excise 1989 (43) E.L.T. 165               "Excise  duty,  as  has  been  reiterated  and               explained,  is  a  duty on the  act  of  manu-               facture.  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 being sold in the market as such. The  submission of the learned counsel for  the  Department, therefore,  that  merely because  the  intermediate  product manufactured  by the appellants was resols and it is one  of the  items mentioned under item 15A it was exigible to  duty ignores the basic  and primary test for exigibility of duty. The  precise  argument  advanced by  the  learned  Solicitor General of India was rejected in Bhor Industries (supra) and the   order  of the Tribunal in that case was set  aside  as "the  test of marketability or capable of  being  marketed", was not applied  by the Tribunal. 10.Having  traced  the  development of law  that  any  goods produced  or  manufactured ipso facto do  not  attract  duty unless they are marketable or capable of being marketed,  we may now examine the dutiability of goods captively consumed. Prior  to  1979 no duty was levied on such goods.   But,  as stated earlier, after amendment of rules 9 and 49  captively consumed  goods become exigible to duty.  The rationale  for not  treating  such goods as excisable was same  that  since such  goods  were not brought to the market for  buying  and selling  they could not be subjected to duty.  But when  the Rules  were amended a fiction was created that  any  article produced   or   manufactured  if  captively   consumed   was

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statutorily  presumed to satisfy the test of  marketability. But  this presumption can be rebutted if it  is  established that the article produced and captively consumed was neither goods  nor  marketable nor capable of being  marketed.   The duty is attracted not by captive consumption of any article 333 but  it must be a good within the meaning of the  Act  which apart from having a distinctive name and known as such  must be  marketable  or  capable  of  being  marketed.  In   Bhor Industries  (supra)  crude  PVC films  manufactured  by  the appellants as intermediate product used for captive consump- tion  in manufacture of leather cloth, jute matting and  PVC tapes  were  held not to be excisable goods on the  test  of marketability.   In Collector of Central Excise  v.  Amhalal Sarahhai  Enterprises  1989(43) ELT  214  the  manufacturers produced starch hydrolysate which was captively consumed and fell under item 1-E of the Central Excise Tariff It was held to  be  goods,  no doubt, but it was observed  that  from  a practical point of view it was apparent that the goods  were not marketable consequently they were not exigible to duty. 11.It  cannot  thus  be  disputed that  even  if  the  resin produced  by the appellants are resols as mentioned in  item 15A  it  could  not be subjected to duty.   The  purpose  of specifying  the goods in the Schedule is twofold,  one,  the rate  on which the duty would be charged and other  that  if the  goods  satisfy the description and arc covered  in  the Entry then they are liable to pay excise duty.  But even  in respect  of specified goods it could be established that  it was not marketable or capable of being marketed,  therefore, no duty was leviable on it.  The finding on this aspect  has been  extracted earlier.  The Assistant  Collector  (Excise) found that unless some retarder or stabiliser was added  the unstable  solution was not marketable.  Even  assuming  that such  solution  could  last  for 15 days  as  found  by  the Tribunal  that  would not help the Department unless  it  is further found that it was a produce which was marketable  or capable  of being marketed.  The Collector had  agreed  with the finding of Assistant Collector that without any  further process  the  solution was incapable of being used  for  any other purpose.  It further cannot be disputed that even  the life  for  15  days depended on  maintenance  of  particular temperature  and heat.  It cannot, therefore, be  said  that the  goods  were marketable or capable  of  being  marketed. Since  the  test  of  marketability  or  capable  of   being marketable  applies even to those goods which are  mentioned in  the tariff item the intermediate resin produced  by  the appellants  which are mentioned as resols under tariff  item no.  15A  were  not exigible to duty.  The  finding  of  the Tribunal   that  once  the  product  manufactured   by   the appellants answered the chemical description of the  product under  tariff item 15A it was assessable to duty whether  it was marketable or not was pa thus not well founded. 12.  In the result, these appeals succeed and  are  allowed. The  question of law raised by the appellants is decided  by saying that resin at ’A’ stage which are chemically known as ’resols’  could  not be subjected to duty.   The  appellants shall be entitled to their costs. 334