http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 5  

PETITIONER: THE GRAMOPHONE CO.  OF INDIA LTD.

       Vs.

RESPONDENT: THE COLLECTOR OF CUSTOMS, CALCUTTA

DATE OF JUDGMENT:       25/11/1999

BENCH: S.P.Bharucha R.C.Lahoti, N.Santosh Hegde

JUDGMENT:

----------------

R.C.  Lahoti, J.

     The  appellant  is a company engaged in  manufacturing electronic  goods.   It  is a scheduled industry  under  the First   Schedule   of  the   Industrial   (Development   and Regulation) Act, 1951.  One of the products of the appellant company  is pre-recorded audio cassettes which is  excisable under  Chapter Heading 8524.22 of the Central Excise  Tariff Act,  1985  which  reads as ‘audio cassettes’.   Though  the appellant is not required to pay central excise duty on pre- recorded  cassettes  by  virtue  of  exemption  provided  by Notification  No.117/90  dated 16.5.90 nonetheless it  files classification  lists in respect of such pre-recorded  audio cassettes consistently with the statutory obligation cast on the  appellant.  Under the industrial licence granted to the appellant  by  the Government of India in the year 1977  for manufacture  of  pre-recorded audio cassettes  the  licensed capacity  as endorsed was 1.2 million pre-recorded cassettes per  annum.  The capacity was increased from time to time by expanding  the  same  under  the   licences  issued  by  the Government of India.  In April 1987 the existing capacity of the  appellant company was 10 million audio cassettes  which was  permitted by the Government of India to be increased to 30 million pre-recorded audio cassettes per annum.

     The  appellant  placed two orders  respectively  dated 6.11.1989  and 21.12.1989 on M/s Audiomatic Corporation, New York for import of tape to tape sound transfer equipment and electric sound E.S.1850 cassette loaders and spare parts.

     In  exercise of the power conferred by sub-section (1) of  Section  25 of the Customs Act, 1962 on  26.11.1983  the Government  of  India  issued  a  notification  granting  an exemption  from  payment  of customs duty on  goods  falling under  Heading  No.   98.01  of the First  Schedule  to  the Customs  Tariff  Act, 1975 when imported into India for  the initial setting up of an industrial unit for the manufacture of  electronic equipment or the substantial expansion of  an existing industrial unit manufacturing electronic items.

     Heading  No.98.01,  referred  to   in  the   abovesaid notification reads ad under:-

     98.01  9801.00 All items of machinery including  prime

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 5  

movers,  instruments, apparatus and appliances, control gear and  transmission  equipment, auxiliary equipment  including those  required  for  research   and  development  purposes, testing  and  quality  control) as well  as  all  components (whether  finished  or  not)  or   raw  materials  for   the manufacture  of  the  aforesaid items and  their  components required  for  the  initial  setting up of  a  unit  or  the substantial expansion of an existing unit, of a specified:

     (1) industrial plant, xxx xxx xxx

     and  spare  parts,  other   raw  materials  (including semi-finish material) or consumable stores not exceeding 10% of the value of the goods specified above provided that such spare parts, raw material or consumable stores are essential for  the maintenance of the plant or project mentioned in  1 to 6 above."

     In  view  of Chapter 98 Heading No.98.01 of the  First Schedule  to the Customs Tariff Act, 1975 and the  Exemption Notification  No.315/83,  the  import  contract  has  to  be registered   under   clause  5  of   the   Projects   Import Regulations,  1986  (hereinafter ‘Regulations’, for  short). The  appellant  moved two applications before the  Assistant Collector  of Customs, Calcutta for the registration of  the two  contracts  referred to hereinabove.   The  applications were  accompanied  by  the requisite certificates  from  the Department  of  Electronics, Government of India  certifying that  the  goods intended to be imported were  required  for effecting substantial expansion of the appellant’s industry. By  order dated 20.2.1990 the Assistant Collector of Customs refused   to  register  the   appellant’s   contract   dated 6.11.1989.    Appeals  preferred   successively  before  the Collector  (Appeals)  and  Central Excise Gold  Control  and Appellate  Tribunal  having failed, the aggrieved  appellant has  come up to this Court filing this appeal under  Section 130-E of the Customs Act.

     A perusal of the order of the Tribunal dated 17.9.1990 shows  that  in  the opinion of the Tribunal  the  appellant industry  was  engaged in the activity of duplicating  music recorded  on  audio cassettes which was a  service  activity akin  to photo-processing industry and could not be called a manufacturing  activity and therefore the appellant was  not entitled  to  have  the contract  registered  under  Project Import Regulation, 1986.

     The  sole question arising for decision is whether the activity  in  which  the appellant is engaged amounts  to  a process  necessary  for  manufacture  or  production  of   a commodity  or  its  activity  is designed  merely  to  offer services of any description.

     Paras  3, 4 and 5 of Project Import Regulations,  1986 which  are  relevant  for the decision of  this  appeal  are extracted and reproduced hereunder:-

     3.    Definitions   -  For   the  purposes  of   these regulations :

     (1)  "industrial  plants" means an  industrial  system designed  to be employed directly in the performance of  any process  or  series of processes necessary for  manufacture, production  or  extraction  of  a commodity,  but  does  not include -

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 5  

     (i)  establishment  designed to offer services of  any description such as hotels, hospitals, photographic studios, photographic  film  processing  laboratories.   photocopying studios, laundries, garages and workshops;  or

     (ii)  a single machine or a composite machine,  within the  machine assigned to it, in Notes 3 and 4 to Section XVI of the said First Schedule;

     4.   Eligibility  -  The  assessment  under  the  said heading  No.98.01  shall  be available only to  those  goods which  are  imported  (whether  in  one  or  more  than  one consignment)  against one or more specific contracts,  which have  been registered with the appropriate Customs House  in the  manner  specified in regulation 5 and such contract  or contracts has or have been so registered.

     5.   Registration  of contracts.  (1)  Every  importer claiming  assessment  of  the goods falling under  the  said heading No.98.01 on or before their

     importation  shall  apply  in writing  to  the  proper officer  at  the port where the goods are to be imported  or where  the  duty  is  to be paid  for  registration  of  the contract or contracts as the case may be."

     It  is  not disputed that the machine forming  subject matter  of  the contract in question enables duplicating  of audio  cassettes  from  the  mother  cassette.   The  mother cassette  is loaded in the machine and on being operated the machine  multiplies  the  audio recording on  several  audio cassettes  of a specified number at a high speed.  The blank audio  cassettes  are  converted   into  pre-recorded  audio cassettes.  This activity is systematically carried on large scale  and such pre-recorded audio cassettes are offered  in bulk sale to the traders who in turn offer the same for sale to  consumers.   According  to  the  appellant  the  various activities  involved  in the manufacture of  a  pre-recorded audio-cassette are as under:

     (i) Preparation of a master tape in the studio;

     (ii)  Manufacture  of  plastic cassettes  parts,  like cassette body, leather case, etc.  from plastic raw material with the help of injection moulding facility;

     (iii)Assembly of cassette parts to make a C-O tape;

     (iv)  High  Speed transfer of music signals from  1/2" master tape to 1/8" pancakes;

     (v) Assembly of recorded pancakes into cassettes;

     (vi) Polymeric plate making for printing machines;

     (vii)Printing of information on cassette body;

     (viii) Printing of inlay cards;

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 5  

     (ix)  testing  and  cellowrapping   of  the   finished cassettes.

     The  machines  which were the subject of the  Contract dated  6.11.1989  were required for the 4th mentioned  item, namely,  high  speed  transfer of music  signals  from  1/2" Master Tape to 1/8" pancakes.

     The  term ‘manufacture’ is not defined in the  Customs Act.  In the allied Act, namely the Central Excise Act, 1944 also,  the  term  ‘manufacture’ is not to be  found  defined though  vide clause (f) of Section 2 an inclusive definition is  given of the term ‘manufacture’ so as to include certain processes also therein.

     ‘Manufacture’  came  up  for   the  consideration   of Constitution  Bench in M/s Ujagar Prints Vs.  Union of India 1988 (38) ELT 353 SC.  It was held that if there should come into  existence  a new article with a distinctive  character and  use,  as  a  result of the  processing,  the  essential condition

     justifying  manufacture  of goods is  satisfied.   The following  passage  in the Permanent Edition of  "Words  and Phrases"  was  referred to with approval in Delhi Cloth  and General Mills AIR 1963 SC 791, 795 :-

     "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."

     In a series of decisions [to wit, Decorative Laminates (India)  Pvt.Ltd.   - (1996) 88 ELT 186, Union of India  Vs. Parle  Products  Pvt.  Ltd.  - (1994) 74 ELT  492,  Laminate Packing  (P)  Ltd.  - 1990 (49) ELT 326,  Empire  Industries Limited  - (1985) 20 ELT 179] the view taken consistently by this Court is that 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 it be  the  result  of  one   process  or  several   processes, manufacture  takes  place;  the transformation of the  goods into  a new and different article should be such that in the commercial  world  it  is  known as  another  and  different article.   Pre-recorded audio cassettes are certainly  goods known  in  the market as distinct and different  from  blank audio  cassettes.   The  two have different  uses.   A  pre- recorded  audio  cassette is generally sold by reference  to its name or title which is suggestive of the contents of the audio recording on the cassette.  The appellant is indulging in  a mass production of such pre-recorded audio  cassettes. It  is  a manufacturing activity.  The appellant’s  activity cannot  be  compared  with a person sitting  in  the  market extending facility of recording any demanded music or sounds on  a  blank audio cassette brought by or made available  to the  customer, which activity may be called a service.   The Tribunal  was not right in equating the appellant’s activity with  photo-processing  and holding the appellant a  service industry.

     For  the foregoing reasons we are of the opinion  that the  Assistant  Collector  of   Customs,  Calcutta  was  not

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 5  

justified  in  rejecting  the  appellant’s  application  for registration  of the contract dated 6.11.1989 on the  ground on  which  it  did.  The impugned orders  of  the  Assistant Collector,   the  Collector  (Appeals)   and  the   Tribunal respectively dated 20.2.1990, 6.3.1990 and 17.9.1990 are set aside.   The appellant’s application is restored on the file of  Assistant  Collector  of  Customs,  Calcutta  who  shall expeditiously   hear   and  dispose   of   the   appellant’s application  afresh  treating the appellant’s activity as  a manufacturing activity.  No order as to the costs.