Budget 2016 is just around the corner and despite the fact that the ‘seamless’ tax regime of GST passes through political rough weather, the government is intent on implementing it from next fiscal. But the age old excise concepts like those on taxable event of manufacture continue to evolve even at this hour with new light being thrown on certain grey areas by the judiciary when confronted with new set of facts having the potential to upset the settled principles to determine as to what amounts to manufacture or to put it broadly, what is that activity which will trigger tax or duty liability. Given the significance of ‘taxable event’ per se, this article attempts to highlight the concept or test of manufacture in the light of recent key decisions of the Supreme Court and give an overview of the possible outcomes consequently.
Definition of manufacture vis-à-vis-marketability
The definition of manufacture provided under Section 2(f) of the Central Excise Act, 1944 is an inclusive one. It includes any process, incidental or ancillary to the completion of a manufactured product and also those activities specified in relation to any goods in the Section or Chapter notes of the First Schedule to the Central Excise Tariff Act as amounting to manufacture. This definition further covers those goods specified in the Third Schedule on which certain activities are undertaken like packing or repacking of such goods in a unit container or labelling or re-labelling of containers including declaration or alteration of retail sale price or adoption of any other treatment on the goods to render them marketable to the consumer.
The above definition apart, it is the landmark case of UOI v. Delhi Cloth and General Mills Co. Ltd. [1977 (1) E.L.T. (J 199) (S.C.)] that chartered the course of excise jurisprudence in great measure for decades to come. In this case while determining the excisability of an intermediate product, the Apex Court held manufacture as ‘bringing into existence of a new substance known to the market’ and that merely applying a process to a substance would not amount to manufacture if there was nothing new and marketable created. The definition was further refined in later decisions to clarify that excisable goods are required to be capable of being bought and sold and actual sale in market is not necessary. Further, even if there is a tariff entry provided under the Central Excise Tariff Act, 1985, it would first need to pass test of manufacture. The second test on marketability became the indivisible criterion to attract excise duty liability.
Essential Character test & Two-fold test
In the case of UOI v. JG Glass [1998 (97) E.L.T. 5 (S.C.)], while determining whether printing of brand names and logos on bottles amounts to manufacture, the Supreme Court propounded a two-fold test for cases where only a process was applied to an existing item. The Court said that two aspects need to be checked, i.e., first, whether by the said process a different commercial commodity comes into existence or whether the identity of the original commodity ceases to exist; secondly, whether, the commodity which was already in existence will serve no purpose but for the said process. Applying the test, the Court found that the plain bottles are themselves commercial commodities and can be sold and used as such.
Recently, answering the issue of whether preparing mixtures of substances can amount to manufacture, the Supreme Court relied on the essential character test in the case of Satnam Overseas v. CCE, New Delhi [2015 (318) E.L.T. 538 (S.C.)] where a mixture of dried rice, dehydrated vegetables and spices was being sold. It was held that the said product in its primary and essential character was sold in the market as rice only, despite the addition of dehydrated vegetables and certain spices. Further, the rice remained in raw form and in order to make it edible it had to be cooked like any other cereal.
Landmark ruling in Servo-Med case
The Supreme Court was again called upon to decide on the question of manufacture in the recent case of ServoMed Industries Pvt Ltd v. CCE, Mumbai [2015 (319) E.L.T. 578 (S.C.)]. In this case, the appellant was purchasing excise duty paid syringes and needles in bulk from the open market and such syringes and needles were sterilized and then one syringe and one needle in an unassembled form were put in a printed plastic pouch. The Department contended that sterilization brings about a change in the character of the product, as the resultant product becomes disposable syringes and needles. Therefore, a new commodity having a different character has come into existence and excise duty is payable.
If the second limb of two-fold test of JG Glass was to be strictly applied here then the non-sterilized syringes not being usable but for sterilization could have led to yet another judgment without the distinction being a landmark one. From the point of view of medical professional, it is only after sterilization that such goods are considered fit for use by a person thus a new commercial commodity coming into existence. In fact one can even stretch the argument to say that once sterilized, the identity of an ordinary syringe and needle ceases to exist.
However, Supreme Court felt it was necessary to write a fresh chapter in excise jurisprudence and thus laid down four categories to ascertain as to what amounts to manufacture. These are:
- Where the goods remain exactly the same even after a particular process, which only remove foreign matter from goods complete in themselves and/or processes which clean goods that are complete in themselves.
- Where the goods remain essentially the same after the particular process and the original article continues as such despite the said process and the changes brought about.
- Where the goods are transformed into something different and/or new after a particular process, but the said goods are not marketable.
- Where the goods are transformed into goods which are different and/or new after a particular process, such goods being marketable as such.
Out of the 4 categories the Apex Court concluded that it is only when the activity falls under the last category, the same would amount to manufacture and invite excise duty liability. The Court took note of the decision in JG Glass however it found in the present case as falling under the first category and held that it would not matter the goods in question are only used after sterilization as all medical items must of necessity first be sterilized. What triggered the Supreme Court to rule in favour of the assesse was the fact that if sterilization would amount to manufacture, then if an item is sterilized five times in a day by a doctor, then the same item would be chargeable to excise duty again and again and such a scenario would lead to an absurdity and ‘fly in the face of common sense’. Thus, Servo-Med has expanded and refined JG Glass ratio by emphasizing on quantum of change or transformation brought about before one proceeds to fasten excise duty liability.
Keeping the debate open
In the case of CCE, Mumbai-IV v. Fitrite Packers [2015 (324) E.L.T. 625 (S.C.)], the Supreme Court seems to have deviated from the established position as evolved through its rulings. In the said case, the assesse was purchasing blank GI paper and printing brand names and logos of customers as per the specifications. The Court took note of JG Glass which was specific to scenarios of printing logos and brand, a decision on which the lower authority had already relied on to order in favour of the assessee.
However, the Supreme Court chose to instead rely on the 4 tests in the decision of Servo-Med to hold that the paper was meant for wrapping and this end use remained the same even after printing. But the product in question was no more an ordinary paper but a ‘special paper’ that could only be used by the assessee and for packing specific goods and therefore the end use became restricted. Thus the Court seems to be of opinion that it is not sufficient that the end use largely remains the same but it should be vis-à-vis the person or the user for whom such activity is undertaken. Further the said decision has re-opened the settled position of JG Glass and now whether printing of logo would amount to manufacture would indeed depend on factors like the extent of embellishment and the product in question on which logo is printed.
Value addition not necessarily means manufacture
In another recent case [Maruti Suzuki India v. CCE, New Delhi - 2015 (318) E.L.T. 353 (S.C.)], while answering the issue of whether ED coating on bumpers and grills to increase their shelf life would amount to manufacture, the Supreme Court took note of its rulings in the cases of DCM and JG Glass and held that the bumpers and grills were already of commercial use whether the ED coating is put or not. Further value addition was not a sufficient criterion if there was no change in the character of the goods.
The above write-up leads us to the conclusion that however rounded the language of statute be, the discussion on ‘taxable event’ always remains a factual question. Whenever a new set of facts arise, it tends to upset the settled position and it is for this reason that the issue of excisability has been scrutinized over and over again in innumerable decisions till date. Similar debates will arise when GST is implemented as the taxable event of ‘manufacture’ would be replaced by ‘supply’ and various shades of interpretation that will be placed on the definition of supply will be interesting to watch.
[The authors are respectively Associate & Joint Partner, Lakshmikumaran & Sridharan, New Delhi]