IN THE HIGH COURT OF HIMACHAL PRADESH SHIMLA. C.E.A. No. 1 of 2004 Date of Decision : July 23, 2010 Commr. Central Excise, Chandigarh …Appellant. Versus: M/s. Ranbaxy Laboratories Ltd. ..Respondent. Coram: The Hon’ble Mr.Justice Deepak Gupta, Judge. The Hon’ble Mr.Justice Sanjay Karol, Judge. Whether approved for reporting?1 Yes For the appellant: Mr. Sandeep Sharma, Asstt. Solicitor General of India For the respondent : Mr. Janesh Gupta, Advocate Deepak Gupta, J. (Oral). This appeal by the Revenue is directed against the order of Customs Excise & Service Tax Appellate Tribunal, New Delhi, whereby the appeal of the assessee was partly accepted and the demand and penalty in respect of Histic tablets and Pen- G Acylase was quashed. The following question of law has been raised in the appeal:- “”Whether the processes of re-labelling, repacking, re- blending along with other physical processes like millig, blending, sifting, washing etc. and chemical processes like solvent treatment undertaken by the assessee in their 1 Whether reporters of Local Papers may be allowed to see the judgment? Yes 2 factory amounts to manufacture as per Chapter Note 11 of Chapter 29 of the Central Excise Tariff Act, 1985 and therefore, chargeable to Central Excise Duty?” 2. To appreciate this question, it would be pertinent to refer to Section 2(f) of the Central Excise Act, 1944 (hereinafter referred to as the ‘Act’), which at the relevant time read as follows:- “2(f) “manufacture” includes any process,- (i) incidental or ancillary to the completion of a manufactured product; (ii) which is specified in relation to any goods in the Section or Chapter notes of the Schedule to the Central Excise Tariff Act, 1985 as amounting to manufacture; and the word “manufacturer” shall be construed accordingly and shall include not only a person who employs hired labour in the production or manufacture of excisable goods, but also any person who engages in their production or manufacture on his own account.” 3. It is obvious that under clause (i) Chapter 2(f), manufacture will include any process, which is incidental or ancillary to the completion of a manufactured product. This would relate to the normally understood dictionary meaning of the word ‘manufacture’. Under the normally understood meaning of the word ‘manufacture’, a new product should come into being for any process to be called a manufacturing process. However sub clause (2) is a deeming provision which empowers the 3 Government to specify in relation to any goods the processes which would amount to manufacture. 4. Pursuant to Section 2(f)(ii), Chapter Note 11 has been added to Chapter 29 of the Central Excise Tariff Act, 1995, which reads as follows: “In relation to products of this chapter, the labeling, relabelling of containers and repacking from bulk packs to retail packs or the adoption of any treatment to render the products marketable to the consumer shall amount to “manufacture:”. 5. Therefore, by the aforesaid deeming provision of law the relabelling of containers and repacking from bulk packs to retail packs is deemed to be manufactured. Further more, this Chapter Note lays down that the adoption of any treatment to render the products marketable to the consumer shall amount to manufacture. 6. It is in the light of the aforesaid legal provisions that we have to decide the legal issues raised in the case. We shall first deal with the demand of the revenue in relation to Histic tablets. Admittedly, in this case all that happened was that wrong maximum retail price (MRP) was printed on the containers/strips containing the tablets. On noticing this, the containers/strips were sent back to the factory and the only 4 process which took place was to affix a label slip giving the correct MRP. This, in our view, would not be covered by Chapter Note 11 of Chapter 29. This does not amount to relabelling of the containers but only a part of the label is being changed. Secondly relabelling of container has to be coupled with repacking from bulk packs to retail packs because the conjunction has been used. To fall within the ambit of the first part Chapter Note quoted above, the item should not only be labelled or relabelled, but repacking should be from bulk packs to retail packs. Therefore, the order of the Tribunal insofar as it relates Histic tablets is upheld. 7. Now we come to the second issue which relates to Pen- G Acylase. The admitted case of the parties is that 140.80 kgs. of Pen-G Acylase was cleared by the assessee and delivered to its own sister unit at Mohali. This substance was received back by the assessee for rectification. According to the assessee due to some defects in the substance supplied to its own unit, the same had to be repaired. The assessee in reply to the notice stated that the rectification/repair did not amount to manufacture since the nature of goods did not change and also because of the reason that the excise duty had already been paid on this item. The assessee’s case was that it had only repaired/rectified the goods and had not carried out any process, which would amount to manufacture. The goods had never been sold but only cleared for use by a sister unit and were to be used 5 for manufacturing some other finished products. The identity of the goods after rectification remained completely unchanged and they were covered by the same nomenclature. 8. This argument of the assessee could have been accepted if we were only dealing with the dictionary meaning of the word “manufacture’. 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”. 9. In M/s. Sterling Foods v. State of Karnataka and another, 1986 (3) SCC 469, the question for determination before the Apex Court was whether shrimps, prawns and lobsters subjected to processing like cutting of heads and tails, peeling, deveining, cleaning and freezing cease to be the same commodity or become a different commodity. The Apex Court held as follows:- 6. It is clear on an application of this test that processed or frozen shrimps, prawns and lobsters are commercially regarded the same commodity as raw shrimps, prawns and lobsters. When raw shrimps, prawns and lobsters are subjected to the process of cutting of heads and tails, peeling, deveining, cleaning and freezing, they do not cease to be shrimps, prawns and lobsters and 6 become another distinct commodity. They are in common parlance known as shrimps, prawns and lobsters. There is no essential difference between raw shrimps, prawns and lobsters and processed or frozen shrimps, prawns and lobsters. The dealer and the consumer regard both as shrimps, prawns and lobsters. The only difference is that processed shrimps, prawns and lobsters are ready for the table while raw shrimps, prawns and lobsters are not, but still both are, in commercial parlance, shrimps, prawns and lobsters. It is undoubtedly true that processed shrimps, prawns and lobsters are the result of subjecting raw shrimps, prawns and lobsters to a certain degree of processing but even so they continue to possess their original character and identity as shrimps, prawns and lobsters, notwithstanding the removal of heads and tails, peeling, deveining and cleaning which are necessary for making them fit for the table. Equally it makes no difference in character or identity when shrimps, prawns and lobsters are frozen for the purpose of preservation and transfer to other places including far-off countries in the world. There can therefore be no doubt that processed or frozen shrimps, prawns and lobsters are not a new and distinct commodity but they retain the same character and identity as the original shrimps, prawns and lobsters.” 10. This judgment was followed by the Apex Court in Commissioner of Income Tax v. Relish Foods, 1999(237), 59 wherein the same definition was applied to the provisions of the Income Tax Act. 11. A Division Bench of the Madras High Court in Commissioner of Income Tax v. Sacs Eagles Chicory, 2000 (241) ITR 319 dealt with the issue as to what is ‘manufacture’. In the 7 case before the Madras High Court, chicory roots were being roasted and then changed it into powder form. The question was whether this amounted to manufacture within the meaning of Income Tax Act. The Madras High Court held as follows:- “The fact that the chicory powder is used for consumption in combination with coffee powder does not make the chicory powder any different in so far as its identity is concerned, as chicory. Chicory powder is chicory in powder form and nothing else. Mere change in the form of the same commodity does not necessarily involve change of identity. The pineapple fruit when plucked from the tree and even after it is cut into pineapple slices retains the same identity as pineapple. Chicory powder and chicory root have the common identity of being chicory. The change in the form to powder in the case of chicory and to slices in the case of pineapple does not result in a change of identity.” 12. It would be pertinent to mention here that this decision of the Madras High Court was upheld by the Apex Court in Sacs Eagles Chicory v. Commissioner of Income Tax, 2002 (255)ITR 178. 13. In Indian Hotels Co.Ltd. and others v. Income Tax Officer and others, 2000 (245) ITR 538, the Apex Court again dealt with the question as to what is the meaning to be given to the word ‘manufacture’. The Apex Court held that the processing of raw food items such as pulses, cereals, vegetables, meat etc. into edible items in the kitchen cannot be said to be process of manufacture. 8 14. In Commissioner of Income Tax v. Gem India Manufacturing Co., 2001 (249) ITR 307, the question before the Apex Court was whether the process of cutting, polishing raw diamond amounts to manufacture and produces new articles or things. The Apex Court held as follows:- “The question that the High Court and we are here concerned with is whether, in cutting and polishing diamonds, the assessee manufactures or produces articles or things. There can be little difficulty in holding that the raw and uncut diamond is subjected to a process of cutting and polishing which yields the polished diamond, but that is not to say that the polished diamond is a new article or thing which is the result of manufacture or production. There is no material on the record upon which such a conclusion can be reached.” 15. A three Judge Bench of the Apex Court in Aspinwall and Co. Ltd. v Commissioner of Income Tax 2001 (251) ITR 323, considered the question whether the process of manufacturing coffee beans from raw berries amounts to manufacture. The Apex Court after making reference to the Encyclopedia Britannica held that coffee is a beverage made from roasted seeds (beans) of the coffee plant and found that the process of coffee into roasted coffee went through nine processes. Firstly, the coffee was dried in the sunlight. Then the outer husk of the coffee been was removed, if necessary, by mechanical operation. The coffee seeds were then extracted and polishing was done. 9 Thereafter, gradation was done where the good coffee was separated by mechanical as well as manual grading. The Court held that net product is absolutely different and separate from the input. The Apex Court held as follows:- “Adverting to facts of the present case, the assessee after plucking or receiving the raw coffee berries makes it undergo nine processes to give it the shape of coffee beans. The net product is absolutely different and separate from the input. The change made in the article results in a new and different article which is recognized in the trade as a new and distinct commodity. The coffee beans have an independent identity distinct from raw material from which it was manufactured. A distinct change comes about in the finished product. The submission of the learned counsel for the Revenue that the assessee was doing only the processing work and was not involved in the manufacture and producing of a new article cannot be accepted. The process is a manufacturing process when it brings out a complete transformation in the original article so as to produce a commercially different article or commodity. That process itself may consist of several processes. The different processes are integrally connected which result in the production of a commercially different article. If a commercially different article or commodity results after processing then it would be a manufacturing activity. The assessee after processing the raw berries converts them into coffee beans which is commercially different commodity. Conversion of the raw berry into coffee beans would be a manufacturing activity.” 10 16. Similar view was taken by the Apex Court in Crane Betel Nut Powder Works vs. Commr. of Cus.& C. Ex. Tirupathi, 2007 (210) E.L.T. 171 (S.C.). In all these cases, the Apex Court was dealing only with the question as to what was meant by the word “manufacture” and not with the scope of ambit of the Chapter Note as well as clause (2)(f)(ii) of sub section (2) of the Act. 17. The Apex Court in Shyam Oil Cake Ltd. vs. Collector of Central Excise, Jaipur, 2004 (174) E.L.T. 145 (S.C.) after considering the amended provisions of the Act held as follows:- “16. Thus, the amended definition enlarges the scope of manufacture by roping in processes which may or may not strictly amount to manufacture provided those processes are specified in the Section or Chapter notes of the Tariff Schedule as amounting to manufacture. It is clear that the Legislature realised that it was not possible to put in an exhaustive list of various processes but that some methodology was required for declaring that a particular process amounted to manufacture. The language of the amended Section 2(f) indicates that what is required is not just specification of the goods but a specification of the process and a declaration that the same amounts to manufacture. Of course, the specification must be in relation to any goods.” 18. It is obvious that the Apex Court held that the amended definition enlarges the scope of manufacture by roping in processes, which may or may not strictly amount to manufacture. This was subject to the condition that these 11 processes should be specified in the Section or Chapter Notes of the Schedule. Coming to the case in hand we find that 140.80 kgs. of Pen-G Acylase was returned to the assessee by a sister unit at Mohali for rectification. The assessee was the best person to describe what was the process, which this substance underwent. It only gives a vague reply that it was repaired and rectified but did not give the entire process. The Excise Authority found that this substance, which was returned to the factory, underwent the process of milling, blending, sifting etc. It is admitted by the assessee that the rejected material which was returned to it was actually replaced by fresh production and a different batch number and lot number was given. It is urged on behalf of the assessee that this had to be done in view of the provisions of the Drugs and Cosmetics Act 1940. However, the matter does not end here. Even a new expiry date was given. The defective material which was received back from the sister unit was admittedly reprocessed. During this process of rectification indisputably the material was taken out of its original packaging, went through various stages of processing and finally repacking. Merely because the original material bore the same name does not mean that no manufacturing take place. The original defective material was virtually broken down, reprocessed and re-manufactured by following various processes described hereinabove. This matter is squarely covered by the last portion of the Chapter Note. Admittedly the defective 12 material was not marketable and, therefore, returned to the assessee. The treatment given to the material was to make it marketable so that it could be sold to the consumers and, therefore, would amount to manufacture within the meaning of Chapter Note. 19. Lastly, it was urged on behalf of the assessee that the material was only rectified in terms of Rule 173 (4) of the Central Excise Rule, 1944 and since it was merely repaired the assessee could not be directed to again pay excise duty on the same product. This argument cannot be accepted in view of Sub Rule (3) of Rule 173 which reads as follows: “(3) The goods or parts thereof retained in, or brought into, a factory or a warehouse in accordance with the provisions of sub-rule (2) may, if not subjected to any process amounting to manufacture, be removed from the factory or warehouse without payment of duty subject to such conditions as may be specified by the Collector.” 20. A bare perusal of this Rule shows that if during the process of rectification or repair any material is subjected to process amounting to manufacture then the same cannot be removed without payment of duty. As held by us the process of making the defective material suitable for marketing to the consumers was a manufacturing process by deemed fiction of Chapter Note 11 to Chapter 29 and hence there finished product was exigible to duty. 13 21. In view of the above discussion, the question is answered in favour of the assessee insofar as it relates to Histic tablets and in favour of the Revenue and against the assessee insofar as it relates to Pen-G Acylase. The appeal is disposed of accordingly. No costs. ( Deepak Gupta ) Judge. ( Sanjay Karol ), Judge. July 23, 2010. (rana)