1 wp-1740-89(2) jpc IN THE HIGH COURT OF JUDICATURE OF BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION WRIT PETITION NO. 1740 OF 1989. M/s Godrej Soap Ltd. .. Petitioner. Versus The Union of India and others .. Respondents. .... Mr. V. Sridharan a/w Mr. Prakash Shah i/by PDS Legal, for the Petitioner. Mr. R.V. Desai, Senior Advocate a/w. Mr. R. B. Pardeshi, for the Respondents. CORAM: V. C. DAGA, & S. J. KATHAWALLA, JJ. DATED: 24 th June, 2010. JUDGMENT (Per S.J.Kathawalla, J.) : 1. Heard learned counsel for the Petitioner as well as learned counsel for the Respondents. 2. By this Writ Petition, the Petitioner has challenged an order passed by the Collector of Central Excise (Appeals) 2 wp-1740-89(2) (Respondent No.2) dated 23.3.1989, denying the Petitioner the benefit of exemption under Notification No.119/75 dated 30.4.1975. The facts: 3. During the period 1977-1980, the Petitioner received tallow from the State Trading Corporation of India (STC) on job work basis. The Petitioner undertook the process of splitting the said tallow, into fatty acid and glycerin. This was done in order to remove glycerin from the Tallow so that fatty acid could be used by soap manufacturers. After undertaking the said process of splitting, the Petitioner returned the fatty acid and glycerin back to State Trading Corporation of India (STC for short). The Petitioner was paid only job charges by STC for undertaking the aforesaid process. 4. Similar to splitting of tallow, the Petitioner also received groundnut oil and coconut oil for job work. By the aforementioned process of splitting, groundnut fatty acid and coconut fatty acid respectively were obtained. The Petitioner also received a small quantity of castor oil on job work, which was subjected to a process of hydrogenation for making the oil semi solid in ambient temperature. 3 wp-1740-89(2) 5. All the above disputed products attracted central excise duty under Item 68 of the erstwhile First Schedule to the Central Excise & Salt Act, 1944. Broadly speaking Item No.68 of the Schedule covered all other goods not elsewhere specified in the said schedule. 6. In exercise of the powers conferred under Rule 8 of the Central Excise Rules, 1944, the Central Government issued exemption under Notification No.119/75 dated 30.4.1975(the said Notification), which is reproduced below : “In exercise of the powers conferred by sub-rule (1) rule 8 of the Central Excise Rules, 1944, the Central Government hereby exempts goods falling under Item No.68 of the First Schedule to the Central Excise and Salt Act, 1944 (1 of 1944), manufactured in a factory as a job work, from so much of the duty of excise leviable thereon as is in excess of duty calculated on the basis of the amount charged for the job work. Explanation: For the purpose of this Notification the expression ‘job work’ shall mean such items of work where an article intended to undergo manufacturing process is supplied to the job worker and that article is returned by the job worker to the suppliers, after the article has undergone the intended manufacturing process, on charging only for the job work done by him.” 4 wp-1740-89(2) 7. The Petitioner mistakenly paid duty on full value without availing the benefit of the Notification and subsequently filed three claims for refund for the period April 1975 to January 1978. For the period after January 1978, the Petitioner paid excise duty only on the job charges received by it from its customers. The Petitioner was served with series of show cause notices for the period January 1978 onwards. In the notices, it was alleged that the Petitioner’s activity is not covered by the said Notification and therefore the notices demanded duty by taking the full value. 8. The three refund claims filed by the Petitioner were rejected by three separate orders all dated 24.11.1979. In respect of the said three orders rejecting the Petitioner’s application for refund, the Petitioner filed appeals before the Collector of Central Excise (Appeals) which were dismissed vide impugned order dated 23.3.1989 (Exhibit I to the Petition), on the ground that the Petitioner did not carry out the job work while processing the said tallow. The benefit of the said Notification cannot be claimed when a new commodity comes into existence as a result of the job work. The Petitioner thereafter filed the present Writ Petition inter alia challenging the impugned order dated 23.3.1989 (Exh.I to the Petition). 5 wp-1740-89(2) Submissions : 9. According to the Petitioner, the process of manufacture is as described below: “The inputs viz. the tallow or the groundnut oil or as the case may be, the coconut oil, are fed into a stainless steel autoclave and subjected to high pressure and temperature by means of steam. The process is semi- continuous. The tallow or the oil gets converted into fatty acids. The glycerin which separates in the process gets mixed with the water pumped into the autoclave and is separately discharged from the bottom of the autoclave as dilute glycerin or sweet water. After the splitting reaction is completed, fatty acid is discharged into a storage tank. If the customer needs the fatty acid to be further distilled the fatty acid is passed through a distillation column. The fatty acids are heated and through a process of distillation and condensation distilled fatty acid is obtained. No raw material or other input belonging to the client is used in the entire process. Where the customers want the product as a stearic acid, the fatty acid as obtained from the autoclave is hydrogenated and supplied to the party. The process of hydrogenation involves passing hydrogen gas in a high pressure autoclave.” 6 wp-1740-89(2) 10. The Petitioner has pointed out that the basis on which the show cause notice is issued to the Petitioner by the Respondent No.2 is as stated below: As per the explanation appended to the Notification, where an article is supplied to job worker for undergoing certain manufacturing process, “that article (i.e. the same article) is to be supplied back to the customer by the job worker, after carrying out the job work thereon. Thus the article supplied back should basically remain same. In the present case what is supplied to Godrej Soaps Ltd. by its customers as raw materials are different types of tallows, Acid oils etc. out of which are manufactured different types of fatty acids and stearic acids etc. and it is these new manufactured products having different utility which are supplied back to its customers by M/s. Godrej Soaps Ltd. and not the materials which were originally received for job work whose identity stand completely lost during the process of manufacture of the above finished products. Thus the products returned to the customers by the company are altogether different from those received for job work. Consequently, the provisions of exemption Notification No. 119/75 are not applicable to the clearances of the goods.” 11. It is submitted that in the impugned order dated 23.3.1989, (Exhibit-I to the Petition), the Commissioner (Appeals) relied upon the judgment of the CEGAT in the National Organic 7 wp-1740-89(2) Chemical Industrial Ltd. Vs. Collector of Central Excise, Bombay, 1985 (21) ELT 252 (Tribunal) and concluded as under : “The Appellants would not be job worker in carrying out the conversion of various oils into the fatty acids of various types. The process of manufacturing hardened caster oil from caster oil would not be merely incidental or ancillary to the completion of manufactured product. The benefit of the Notification cannot be claimed with reference to the activities in which an article or articles received from a customer are subjected to chemical process and undergo reaction amongst themselves or with another commodity provided by the assessee resulting in the emergence of another chemical product or product in which identity of the original article would be totally merged or lost resulting in physical, chemical and other properties different from these of the article /articles supplied by the customer. The appeals have therefore no merits.” 12. It is submitted that in the case of Prestige Engineering (India) Ltd. Vs. Collector of Central Excise, Meerut, reported in 1994 (73) E.L.T. 497 (S.C.), the Hon’ble Supreme Court interpreted the very same Notification No.119/75 dated 30.4.1975. By the said Judgment, the Hon’ble Supreme Court disposed off several appeals concerning the said Notification. The Hon’ble Supreme Court considered the decisions of the different High Courts and various benches of the CEGAT qua the meaning and the purport of the said 8 wp-1740-89(2) Notification vide paragraphs 10 to 15 of the said judgment. It is submitted that the Hon’ble Supreme Court, by its said decision, has rejected the contention raised on behalf of the revenue that only, where the manufactured product is subjected to, an incidental or an ancillary process with a view to make it a marketable product then alone the said Notification is attracted and not where a totally new article is manufactured. It is submitted that the Hon’ble Supreme Court has in its said decision inter alia held that the idea behind the said Notification is to help the job-workers/persons who contributed mainly their labour and skill, with the help of tools, gadgets or machinery, as the case may be. The said Notification is not intended to benefit those who contribute their own material to the articles supplied by the customers and manufacture different goods. It is submitted that in the present case the Petitioner only works on the articles given to it by its client merely by using its own tools/machines. However in the process, the Petitioner is not contributing any of its own material to the articles supplied by the customers. The work carried out by the Petitioner for its clients is therefore strictly in the nature of job work. Therefore, as held by the Hon’ble Supreme Court, even if the activity undertaken by the Petitioner results in the emergence of a new commercial commodity, the Petitioner is entitled to the benefit of the said Notification. It is 9 wp-1740-89(2) therefore submitted that the present case is squarely covered by the decision of the Hon’ble Supreme Court in Prestige Engineering (India) Ltd. (supra) wherein the grounds on which the appeals filed by the Petitioner and dismissed by the Commissioner (Appeals) vide impugned order dated 23.3.1989, have already been considered and rejected by the Hon’ble Supreme Court. 13. It is submitted that even otherwise the activity undertaken by the Petitioner, only splits the tallow/oil into its two ingredients present in the raw material given by customers. Thus the identity of the article supplied by the customers and the article returned to the customers after processing are preserved, entitling the Petitioner to the benefit of the said Notification. 14. According to the Petitioner, the decision of the Hon’ble Supreme Court in Harrison Synthetic Bristles Vs. Collector of Central Excise, Bombay, reported in 1997 (95) E.L.T. 9 (S.C.) and the decision in the case of Appellate Collector of Central Excise Vs. Wadpack Pvt. Ltd. reported in 1997 (89) E.L.T. 24(S.C.) supports the contention of the Petitioner that it is entitled to the benefit of the said Notification. 10 wp-1740-89(2) 15. The Petitioner has therefore submitted that the above Writ petition be allowed. Per Contra: 16. It is submitted on behalf of the Respondents that the explanation to the said Notification makes it clear in no uncertain terms that a job worker, in order to be entitled to the benefit of the said Notification, is required to carry out the manufacturing process on the article supplied to him by the supplier and return “that article to the suppliers after the article has undergone the intended manufacturing process”. In the present case, it is an admitted position that the Petitioner has received different types of tallow and have, from it, manufactured different types of fatty acids. Therefore, in terms of the said Notification, the job worker has not returned the article, meaning thereby “that article” which has been supplied for processing. By the process carried out by the Petitioner (job worker) the identity of the article supplied has been lost. The said Notification is therefore not applicable to the Petitioner in the present case. 17. It is submitted on behalf of the Respondents that the Judgment of the Hon’ble Supreme Court in the case of Prestige 11 wp-1740-89(2) Engineering (India) Ltd. (supra) does not deal with the above issue, viz. Whether the Petitioner is entitled to the benefit of the said Notification as a job worker even if he does not return “that article” which he has received for process. The Judgment of the Hon’ble Supreme Court in the case of Prestige Engineering (India) Ltd. (supra), therefore, on the principle of sub silentio, does not govern the issue raised by the Respondents and therefore has no binding effect on the issue raised by them. 18. Relying on the decision in the case of Navopan Industries Ltd. Vs. CCE and others Hyderabad, reported in 1994 (74) ELT 769 and Mak Laboratory Vs. CCE Bombay, reported in 1994 (74) ELT, 769, it is submitted that it is well settled that the exemption Notification is in the nature of exception and the same has to be construed strictly. If there is any ambiguity therein the same has to be held in favour of the State. 19. It is submitted that in Paragraph 24 of the Judgment of Prestige Engineering (India) Ltd.(supra), the Hon’ble Supreme Court has endorsed the view of CESTAT that if a new commercial commodity emerges, Notification No.119/75 will not apply. It is further submitted that the benefit of the said Notification is to be 12 wp-1740-89(2) given to the small scale industries as observed by the Hon’ble Supreme Court in Paragraph 17 of the said decision in the Prestige Engineering (India) Ltd.(supra). 20. It is submitted that the facts of the present case squarely fall within the ratio laid down by this Court in the case of Shalimar Wires and Industries Vs. Union of India, reported in 1992 (58) ELT 44. Conclusion: 21. We have considered the above submissions advanced on behalf of the Petitioner and also on behalf of the Respondents. We have also considered the decisions cited by both sides, more particularly, the Judgment of the Hon’ble Supreme Court in the case of Prestige Engineering (India) Ltd.(supra), which judgment according to the Petitioner squarely covers the issue raised for determination of this Court in the present case. 22. It is not in dispute that the show cause notice issued to the Petitioner is based on the premise that as per the explanation appended to the said Notification where an article is supplied to the job worker for undergoing certain manufacturing process, “that 13 wp-1740-89(2) article” (i.e. the same article) is to be supplied back to the customer by the job worker, after carrying out the job work thereon. The show cause notice records that in the present case the articles/materials supplied to the Petitioner by its client for carrying out the process on the said articles/materials are not the same articles/materials which are returned to the client after completion of the job work, but the products returned to the client have lost its identity and are altogether different from those supplied for job work. Consequently, the provisions of exemption under Notification No.119/1975 are not applicable to the clearance of the goods. 23. Even in the impugned order dated 23.3.1999, (Exh.I to the Petition), the Commissioner (Appeals) has held as under: “The Appellants would not be job worker in carrying out the conversion of various oils into the fatty acids of various types. The process of manufacturing hardened caster oil from caster oil would not be merely incidental or ancillary to the completion of manufactured product. The benefit of the Notification cannot be claimed with reference to the activities in which an article or articles received from a customer are subjected to chemical process and undergo reaction amongst themselves or with another commodity provided by the assessee resulting in the emergence of another chemical product or product in which identity of the original article would be totally merged or lost resulting in physical, chemical and other properties different from 14 wp-1740-89(2) these of the article /articles supplied by the customer. The appeals have therefore no merits.” Therefore, in the present case, the Revenue has throughout been consistent in their stand that the Notification 119/1975 will not be applicable to the Petitioner because the material supplied to the Petitioner by the STC is not subjected to an incidental or an ancillary process, but the Petitioner is in fact manufacturing a totally new article from the article/material supplied to it by its customer i.e. S.T.C. 24. The said Notification is interpreted by the Hon’ble Supreme Court in detail in Prestige Engineering (India) Ltd. (supra). The contention raised by the Revenue before the Hon’ble Supreme Court in the said decision are recorded in Paragraph 8 of the judgment and reproduced hereunder: “8. On the other hand, the contention of the learned counsel for the Union of India runs thus: it is true that the main limb of the Notification uses the words “manufacture in a factory” but those words are qualified by the immediately following words “as a job work”. The expression “job work” is defined in the Explanation contained in the Notification itself. According to the explanation, “job work” means such items of works where an article intended to undergo manufacturing process is supplied to the job worker 15 wp-1740-89(2) and that very article is returned by the job worker to the supplier after the article has undergone the intended manufacturing process. The word “manufactured” in the main limb of the Notification has to be read along with and harmonised with the Explanation. The definition of ‘manufacture’ shows that “any process incidental or ancillary to the completion of a manufactured product” is also manufacture. The manufacturing contemplated by the Notification is this kind of manufacture alone and not manufacturing in its ordinary sense. This is the only way of reconciling the word “manufactured” with the Explanation contained in the Notification. Only where the manufactured product is subjected to an incidental or any ancillary process with a view to make it a marketable product is the Notification attracted but not where a totally new article is manufactured. If the extended meaning, contended for by the appellant, is placed upon the said Notification, it would tend to defeat and nullify the main charging section contained in Section 3 which levies duty upon all excisable goods produced or manufactured in India. The Notification did not and could not have intended to exempt the manufactured goods from the excise duty but only those processes undertaken as job works, which but for the said Notification would have obliged the appellant to pay duty upon the entire value of the manufactured product including the value of the steel pipes supplied by Modipon.” 16 wp-1740-89(2) The above submissions advanced by the Revenue before the Hon’ble Supreme Court in the decision of Prestige Engineering (India) Ltd. (supra) are similar to those advanced by the Revenue in the present case. 25. The Hon’ble Supreme Court, after noting in paragraph 16 of its judgment that the term “manufacture” is defined in Section 2(f) of the Act and once an expression is defined in the Act, that expression wherever it occurs in the Act, Rules or Notifications issued thereunder, should be understood in the same sense, further proceeded to deal with the contentions of the Revenue, in Paragraphs 17 and 18 of its judgment which are reproduced hereunder: “17......................................At the same time, we find it difficult to agree with the learned counsel that the expression “manufacture” contemplated by the Notification is confined to those processes alone which are “incidental or ancillary to the completion of manufactured product” - processes contemplated by clause (i) of Section 2(f). We do not see any warrant for restricting the meaning of the expression “manufactured” occurring in the Notification only to the aforesaid processes. In our opinion, the stress in the Notification is rather upon the word “job work”. Now, what does the expression ‘job work’ mean ? On this question, the Explanation is not of much assistance. 17 wp-1740-89(2) The Concise Oxford Dictionary assigns several meanings to the expression ‘job’ but the relevant meaning having regard to the present context is “a piece of work especially one done for hire or profit”. The expression ‘job work’ is assigned the following meaning : “Work done and paid for the job”. The Notification, it is evident, was conceived in the interest of small manufacturers undertaking job-works. The idea behind the Notification was to help the job- workers - persons who contributed mainly their labour and skill, though done with the help of tools, gadgets or machinery, as the case may be. The Notification was not intended to benefit those who contributed their own material to the articles supplied by the customer and manufactured different goods. We must hasten to add that addition or application of minor items by the job-worker would not detract from the nature and character of his work. For example, a tailor entrusted with a cloth piece and asked to stitch a shirt, a pant or a suit piece may add his own thread, buttons and lining cloth. Similarly, a factory may be supplied the shoe uppers, soles etc. by the customer and the factory applies its own thread or bonding material and manufactures shoes therefrom and supplies them back to the customer, charging only for its work. The nature of its work does not cease to be job-work. Indeed, this aspect has been stressed in all the decisions of High Courts referred to hereinbefore.” “18. The interpretation placed by us does not render the Explanation in the Notification redundant in any manner, while at the same time it advances the object 18 wp-1740-89(2) of the Notification, viz., helping factories undertaking manufacturing processes in the nature of job-work. The restricted interpretation contended for by the Revenue unduly curtails the operating field of the Notification. True it is that processes incidental or ancillary to the completion of the manufactured product are within the purview of the Notification, but it may not be correct to say that the Notification refers only to those processes and to nothing else. In the two illustrations given in Anup Engineering, viz., where the brass sheet is moulded into a brass pot and where the cloth piece is stitched into a suit, or in the illustration given by us, viz., where shoe uppers and soles etc. are supplied by the customer and the factory prepares shoes out of them, it cannot be said that the article that is entrusted to the factory (undertaking job-work) and the article that is supplied back to the customer are totally different. They are the same articles though in a different form. Insisting upon the same article being returned to the customer after undergoing the manufacturing process at the hands of the job-worker may rob the Notification of any substance whatsoever. The Special Bench evidently laid more emphasis upon the Explanation which led it to confine the operation of the Notification only to those processes which are incidental or ancillary to the completion of the manufactured product. That in our view amounts to undue curtailment of the ambit of the Notification. If that were the intention of the Central Government in issuing the Notification, it would have said so clearly. It must be remembered that the Notification was issued simultaneously with the introduction of Tariff Item 68 in Schedule-I to the Act and was intended to help those 19 wp-1740-89(2) factories undertaking job works, who were charging their customers only for the work done by them. In their hands, the value of the article would be the value of the job-work done by them - and not the total value of the article which would have been the case but for the Notification. According to the restricted view contended for by the Revenue, a tailoring factory stitching clothes out of