REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO.583 OF 2005
M/S. SERVO-MED INDUSTRIES
PVT. LTD. …APPELLANT
VERSUS
COMMISSIONER OF CENTRAL EXCISE,
MUMBAI. ...RESPONDENT
J U D G M E N T
R.F. Nariman, J.
1. Between June 1995 and March 1997, the appellants purchased
syringes and needles in bulk from the open market. They would then
sterilize the syringes and the needles and put one syringe and one
needle in an unassembled form in a printed plastic pouch. The syringe
and the needle were capable of use only once and, hence, were
disposable. The plastic pouches so packed were sold to an industrial
customer, namely, M/s. Hoechst Marion Roussel Ltd. The pouches bore
the brand name ‘Behring’. The brand name ‘Behring’ belonged to the
purchaser.
2. By a show cause notice dated 25.1.1996, the Department asked the
assessee to show cause as to why the said syringes and needles, (which
had already borne the payment of excise duty in the hands of their
manufacturers), be made to pay excise duty again as a result of
sterilization. The show cause notice alleged that sterilization
brings about a change in the character of the final product, which now
becomes disposable syringes and needles. Therefore, a new commodity
having a different character has come into existence. In their reply
to the show cause notice dated 1.10.1996, the petitioners claimed that
the activity of sterilization would not amount to manufacture. They
said that no new product comes into existence by merely sterilizing
disposable syringes and needles which continue to be disposable
syringes and needles post-sterilization. No new product, therefore,
came into existence as a result of sterilization.
3. By an order dated 31.12.1997, the Assistant Commissioner Central
Excise held that the process of sterilization was essential to
complete manufacture before the products are sold in the market. This
being so, the process of sterilization was found to be an integral and
inextricable part of the manufacturing process to make the product
marketable. It was further held that the process of sterilization
brings about a transformation of the product by making something non-
sterile sterile.
4. By his order dated 25.2.1999, the Commissioner of Central Excise
(Appeals) set aside the said order, reasoning that the process of
sterilization does not bring about any change in the basic structure
of syringes and needles even though post-sterilization the value of
the product gets enhanced. He further held that under Section 2(f) of
the Central Excise Act, there is no mention of the test of integral or
inextricable process and found that the wrong test had been applied to
arrive at the wrong result.
5. The CESTAT in turn set aside the order of the Commissioner of
Central Excise (Appeals) observing:
“An Article with distinct brand name and separate end
use/quality has emerged by the activity undertaken. The
use/character of a ‘syringe’ which was brought and which emerged
has changed. While the goods brought were not fit for use on
Humans Medical Needles as made were not usable till sterilized.
The commercial identity nature use and understanding has
changed, manufacturing has taken place, excise levy is
attracted.”
6. Shri Lakshmikumaran, learned advocate appearing on behalf of the
appellant has argued before us that the judgment of the Tribunal is
wrong on first principles. The Tribunal has failed to appreciate that
a disposable syringe and needle continues to be a disposable syringe
and needle even after the process of sterilization and, therefore, the
basic test of a new article emerging as a result of a process, being a
transformation of an article into something new, which has a
distinctive name, character or use is clearly absent in the present
case. He cited a number of judgments to buttress his submissions.
7. Ms. Shirin Khajuria, learned counsel who appeared for the
respondent, countered these submissions and said that it was clear
that the articles in question could not be used commercially until a
process of sterilization had been undergone. This being so, it is
clear that the process of sterilization is an important integrated
and/or ancillary process without which the end product had no
commercial use and, therefore, applying the said test, it is clear
that the process of sterilization leads to manufacture. She cited a
number of judgments which we will refer to presently.
8. Regard being had to the issue being a ticklish one, we need
first to delve into a few basic principles.
Distinction between manufacture and marketability
9. A duty of excise is levied on the manufacture of excisable
goods. “Excisable goods” are those goods which are included in the
schedules of the Central Excise Tariff Act, 1985. “Excisable goods”
brings in the concept of goods that are marketable, that is goods
capable of being sold in the market. On the other hand, manufacture
is distinct from sale-ability. Manufacture takes place on the
application of one or more processes. Each process may lead to a
change in the goods, but every change does not amount to manufacture.
There must be something more – there must be a transformation by which
something new and different comes into being, that is, there must now
emerge an article which has a distinctive name, character or use.
When transformation does not take place.
10. When a finished product cannot conveniently be used in the form
in which it happens to be, and it is required to be changed into
various shapes and sizes so that it can conveniently be used, no
transformation takes place if the character and the end use of the
first product continue to be the same. An illustration of this
principle is brought out by the judgment in CCE, New Delhi v. S.R.
Tissues, 2005 (186) E.L.T. 385 (S.C.). On facts, in the said case,
jumbo rolls of tissue paper were cut into various shapes and sizes so
that they could be used as table napkins, facial tissues and toilet
rolls. This Court held that there was no manufacture as the character
and the end use of the tissue paper in the jumbo roll and the tissue
paper in the table napkin, facial tissue and toilet roll remains the
same.
11. Another example of when transformation does not take place is
when foreign matter is removed from an article or additions are made
to the article to preserve it or increase its shelf life.
12. In MMTC v. Union of India, 1983 (13) E.L.T. 1542 (S.C.), this
Court dealt with the separating of wolfram ore from rock to make it
usable. It was held that the process of separation and sorting out
pieces of wolfram or by washing or magnetic separation would not
amount to a manufacturing process. Wolfram ore does not cease to be
an ore even though by the aforesaid processes it may become
concentrated wolfram ore.
13. In Mineral Oil Corporation v. CCE, Kanpur, 1999 (114) E.L.T.
166 (Tribunal), the facts were that used transformer oil, which by
applying processes for removal of impurities therefrom, is again made
usable as transformer oil. Both before and after the said processes,
transformer oil remained as transformer oil. That being so, it was
held that no new and distinct commodity has come into existence
consequent to the process undertaken. The test for determining
whether manufacture can be said to have taken place is whether the
commodity which is subjected to the process of manufacture can no
longer be regarded as the original commodity but is recognized by the
trade as a new and distinct commodity. This Court dismissed the civil
appeal from the aforesaid judgment. This case is instructive in that
it is clear that transformer oil, in its used stage, could not be used
owing to the impurities therein. Any process of rendering such
article usable would not be a manufacturing process, as there is no
change in the essential character of the goods which remain as
transformer oil which now becomes usable.
14. In Dunlop India Ltd. v. Union of India, 1995 (75) ELT 35 (S.C.),
soap treatment of grey cotton duck/canvas was held not to be a process
which amounted to manufacture. The judgment states:
“3. The process has been described in the impugned order in the
following words -
For processing on soap treatment the party uses soaps/soap
flakes which are diluted in plain water in a tank. This solution
is transferred to a Soaping Machine operated by power where
different colours are added. The fabrics are then dipped in the
solution which is heated with steam. After the colouring
treatment and soap impregnation the wet fabrics are dried up
with the aid of steam on passing the fabrics through rollers
fitted with the aforesaid Soaping Machine.
4. In our opinion the said process cannot be said to be one
which results in changing the identity of the cloth which is
subject to the said treatment and the said process does not give
rise to a new product which is marketable. The said process
cannot, therefore, be regarded as a manufacturing process. We
find that the Central Government itself, in another matter
relating to M/s. Premier Tyres Ltd. has passed an Order on 17-5-
1977 (page 83 of Paper Book) wherein, it has been held that the
transformation brought about the dipping of cotton fabrics in a
soap solution is not a permanent one; it is not an operation
which results in the production of a new article which could be
bought and sold as such in the market.”
15. In Dalmia Industries Limited v. CCE, Jaipur, 1999 (112) E.L.T.
305 (Tribunal), different articles of feeding bottles were put
together in a single pack. Thus, bottles, feeder nipples, bottle
lids and plastic parts were put together in a combined pack and the
product was sold in the brand name of “Milk care Designer Feeder”. All
these parts were put together only after sterilization by ultra violet
rays. The Tribunal held that the various parts that had been put
together were already finished products and packing after
sterilization would not bring into existence any new product as each
of the items had already come into existence as individual items. It
was further held that sterilization was only to improve the hygiene of
the product and that since no change occurs in the name, character or
use of the product, a new product does not come into existence. This
Court dismissed the civil appeal filed against the aforesaid judgment
on 1.3.2005.
16. Examples of additions made to the article to preserve it or
increase its shelf life are to be found in Tungabhadra Industries Ltd.
v. CTO, (1961) 2 SCR 14 and M/s. Maruti Suzuki India Ltd. v. CCE,
2015 (318) E.L.T. 353 (S.C.). In the Tungabhadra case, it was held
that hydrogenated oil continued to be groundnut oil despite there
being an intermolecular change in the content of the substance of the
oil due to hydrogenation. It was held that oil made from groundnut
continued as such despite the hardening process of hydrogenation. In
its essential character, it was held that such hydrogenated oil
continued to be groundnut oil. The process of hydrogenation only
increased the shelf life of the said oil.
17. Similarly in the Maruti Suzuki case, it was held that bumpers
and grills of motor vehicles continue to be the same commodity after
ED coating which would increase the shelf life of the said bumpers and
grills and provide anti rust treatment to the same. No new commodity
known to the market as such had come into being merely on account of
the value addition of the ED coating.
Retaining of essential character test.
18. In M/s. Satnam Overseas Ltd. v. Commissioner of Central Excise,
New Delhi (Civil Appeal No.8958 of 2003), it was held that as the
essential character of the product had not changed, there would be no
manufacture. In that case, the product was a combination of raw rice,
dehydrated vegetables and spices in the name of rice and spice. 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. As we have already seen, the same test was applied
in Tungabhadra case (supra) and in Deputy Commissioner of Sales Tax
(Law), Board of Revenue (Taxes), Ernakulam v. Pio Food Packers, (1980)
3 SCR 1271. In that case, the process undertaken was to remove the
inedible portions of Pineapple together with its outer cover and then
slice such Pineapple and can the same after adding sugar as a
preservative. It is important to note that the cans were sealed under
high temperature and then put into boiling water for sterilization.
It was held that there was no manufacture inasmuch as the essential
character of the Pineapple had not changed. The Court said:
“Commonly, manufacture is the end result of one or more
processes through which the original commodity is made to pass.
The nature and extent of processing may vary from one case to
another, and indeed there may be several stages of processing
and perhaps a different kind of processing at each stage. With
each process suffered, the original commodity experiences a
change. But it is only when the change, or a series of changes,
take the commodity to the point where commercially it can no
longer be regarded as the original commodity but instead is
recognised as a new and distinct Article that a manufacture can
be said to take place. Where there is no essential difference in
identity between the original commodity and the processed
Article it is not possible to say that one commodity has been
consumed in the manufacture of another. Although it has
undergone a degree of processing, it must be regarded as still
retaining its original identity.”
19. Interestingly, a line was drawn between cases in which the
essential character had changed and those in which no such change had
taken place in the following terms:
“5. A large number of cases has been placed before us by the
parties, and in each of them the same principle has been
applied: Does the processing of the original commodity bring
into existence a commercially different and distinct article?
Some of the cases where it was held by this Court that a
different commercial article had come into existence
include Anwarkhan Mehboob Co. v. The State of Bombay and
Ors. (where raw tobacco was manufactured into bidi patti), A.
Hajee Abdul Shukoor and Co. v. The State of Madras (raw hides
and skins constituted a different commodity from dressed hides
and skins with different physical properties), The State of
Madras v. Swasthik Tobacco Factory (raw tobacco manufactured
into chewing tobacco) and Ganesh Trading Co. Karnal v. State of
Haryana and Anr., (paddy dehusked into rice). On the other side,
cases where this Court has held that although the original
commodity has under gone a degree of processing it has not lost
its original identity include Tungabhadra Industries Ltd.,
Kurnool v. Commercial Tax Officer, Kurnool (where hydrogenated
groundnut oil was regarded as groundnut oil) and Commissioner of
Sales Tax, U.P., Lucknow v. Harbiles Rai and sons (where
bristles plucked from pigs, boiled, washed with soap and other
chemicals and sorted out in bundles according to their size and
colour were regarded as remaining the same commercial commodity,
pigs bristles).”
Test of no commercial user without further process
20. In Brakes India Ltd. v. Superintendent of Central Excise, (1997)
10 SCC 717, the commodity in question was brake lining blanks. It was
held on facts that such blanks could not be used as brake linings by
themselves without the processes of drilling, trimming and chamfering.
It was in this situation that the test laid down was that if by
adopting a particular process a transformation takes place which makes
the product have a character and use of its own which it did not bear
earlier, then such process would amount to manufacture irrespective of
whether there was a single process or several processes.
21. Similarly in Union of India v. J.G. Glass, 1998 (97) E.L.T. 5
(S.C.), this Court held that plain bottles are themselves commercial
commodities which can be sold and used as such. By the process of
printing names or logos on the said bottles, the basic character of
the commodity does not change, they continue to be bottles. The Court
said:
“16. On an analysis of the aforesaid rulings, a two-fold test
emerges for deciding whether the process is that of
"manufacture". 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. In other words, whether the
commodity already in existence will be of no commercial use but
for the said process. In the present case, the plain bottles are
themselves commercial commodities and can be sold and used as
such. By the process of printing names or logos on the bottles,
the basic character of the commodity does not change. They
continue to be bottles. It cannot be said that but for the
process of printing, the bottles will serve no purpose or are of
no commercial use.”
22. Similarly in Sterling Foods v. State of Karnataka, (1986) 26 ELT
3 (S.C.), raw shrimps/prawns/lobsters after various processes became
fit for human consumption. Prior to such processing, they could not
be used as articles of food. However, the aforesaid processes did not
lead to a finding that there was manufacture inasmuch as
shrimps/prawns/lobsters identity continued as such even after the
aforesaid processes.
23. In Crane Betel Nut Powder Works v. Commissioner, 2007 (210)
E.L.T. 171 (S.C.), whole betel nuts could not be consumed by human
beings. It is only after a process of cutting them into smaller
pieces and sweetening them with oil that they become fit for human
consumption. It was held that the aforesaid process would not amount
to manufacture as betel nuts continued to be the same even after the
aforesaid process resulting in no transformation of the commodity in
question.
24. It is important to understand the correct ratio of the judgment
in the J.G.Glass case. This judgment does not hold that merely by
application of the second test without more manufacture comes into
being. The Court was at pains to point out that a twofold test had
emerged for deciding whether the process is that of manufacture. The
first test is extremely important – that by a process, a different
commercial commodity must come into existence as a result of the
identity of the original commodity ceasing to exist. The second test,
namely that the commodity which was already in existence will serve no
purpose but for a certain process must be understood in its true
perspective. It is only when a different and/or finished product comes
into existence as a result of a process which makes the said product
commercially usable that the second test laid down in the judgment
leads to manufacture. Thus understood, this judgment does not lead to
the result that merely because the unsterilized syringe and needle is
of no commercial use without sterilization, the process of
sterilization which would make it commercially usable would result in
the sterilization process being a process which would amount to
manufacture. If the original commodity i.e. syringes and needles
continue as such post-sterilization, the second test would not lead to
the conclusion that the process of sterilization is a process which
leads to manufacture. This is because, in all cases, there has first
to be a transformation in the original article which transformation
brings about a distinctive or different use in the article.
The test of integrated process without which manufacture would be
impossible or commercially inexpedient.
25. It is at this point that the decision contained in Collector of
Central Excise, Jaipur v. Rajasthan State Chemical Works, (1991) 4 SCC
473 needs explanation. This Court was concerned with the language of
a certain notification which read as follows:
“In exercise of the powers conferred by sub-rule (1) of Rule 8
of the Central Excise Rules, 1944, the Central Government hereby
exempts all goods falling under Item 68 of the First Schedule to
the Central Excises and Salt Act, 1944 (1 of 1944) in or in
relation to the manufacture of which no process is ordinarily
carried on with the aid of power, from whole of the duty of
excise leviable thereon.”
It was held:
“13. Manufacture thus involves series of processes. Process in
manufacture or in relation to manufacture implies not only the
production but the various stages through which the raw material
is subjected to change by different operations. It is the
cumulative effect of the various processes to which the raw
material is subjected to (sic that the) manufactured product
emerges. Therefore, each step towards such production would be a
process in relation to the manufacture. Where any particular
process is so integrally connected with the ultimate production
of goods that but for that process manufacture or processing of
goods would be impossible or commercially inexpedient, that
process is one in relation to the manufacture.
15. In J.K. Cotton Spg. & Wvg. Mills Co. Ltd. v. STO [(1965) 1
SCR 900 : AIR 1965 SC 1310 : (1965) 16 STC 563] , this Court in
construing the expression ‘in the manufacture of goods’ held
thus: (SCR pp. 906-07)
“But there is no warrant for limiting the meaning of the
expression ‘in the manufacture of goods’ to the process of
production of goods only. The expression ‘in the manufacture’
takes in within its compass, all processes which are directly
related to the actual production.”
16. The Court further held thus: (SCR p. 905)
“The expression ‘in the manufacture of goods’ would normally
encompass the entire process carried on by the dealer of
converting raw materials into finished goods. Where any
particular process is so integrally connected with the ultimate
production of goods that but for that process, manufacture or
processing of goods would be commercially inexpedient, goods
required in that process would, in our judgment, fall within the
expression ‘in the manufacture of goods’.”
21. The transfer of raw material to the reacting vessel is a
preliminary operation but it is part of a continuous process but
for which the manufacture would be impossible. The handling of
the raw materials for the purpose of such transfer is then
integrally connected with the process of manufacture. The
handling for the purpose of transfer may be manual or mechanical
but if power is used for such operation, it cannot be denied
that an activity has been carried on with the aid of power in
the manufacturing process. The use of diesel pump sets to fill
the pans with brine is an activity with the aid of power and
that activity is in relation to the manufacture. It is not
correct to say that the process of manufacture starts only when
evaporation starts. The preliminary steps like pumping brine and
filling the salt pans form integral part of the manufacturing
process even though the change in the raw material commences
only when evaporation takes place. The preliminary activity
cannot be disintegrated from the rest of the operations in the
whole process of manufacture. Similarly, when coke and lime are
taken to the platform in definite proportions for the purpose of
mixing, such operation is a step in the manufacturing process.
It precedes the feeding of the mixture into the kiln where the
burning takes place. The whole process is an integrated one
consisting of the lifting of the raw materials to the platform
mixing coke and lime and then feeding into the kiln and burning.
These operations are so interrelated that without any one of
these operations manufacturing process is impossible to be
completed. Therefore, if power is used in any one of these
operations or any one of the operations is carried on with the
aid of power, it is a case where in or in relation to the
manufacture the process is carried on with the aid of power.
25. Thus “processing” may be an intermediate stage in
manufacture and until some change has taken place and the
commodity retains a continuing substantial identity through the
processing stage, we cannot say that it has been manufactured.
That does not, however, mean that any operation in the course of
such process is not in relation to the manufacture. While
interpreting the same exemption notification in Standard
Fireworks Industries v. Collector of Central Excise [(1987) 1
SCC 600 : 1987 SCC (Tax) 138 : (1987) 28 ELT 56] , it was held
that manufacture of fireworks requires cutting of steel wires
and the treatment of papers and, therefore, it is a process for
manufacture of goods in question. The notification purports to
allow exemption from duty only when in relation to the
manufacture of goods no process is ordinarily carried on with
the aid of power. It was observed that cutting of steel wires or
the treatment of the papers is a process for the manufacture of
goods in question.
26. We are, therefore, of the view that if any operation in the
course of manufacture is so integrally connected with the
further operations which result in the emergence of manufactured
goods and such operation is carried on with the aid of power,
the process in or in relation to the manufacture must be deemed
to be one carried on with the aid of power. In this view of the
matter, we are unable to accept the contention that since the
pumping of the brine into the salt pans or the lifting of coke
and limestone with the aid of power does not bring about any
change in the raw material, the case is not taken out of the
notification. The exemption under the notification is not
available in these cases. Accordingly, we allow these appeals.
In the facts and circumstances of the case, we make no order as
to costs.”
26. It is clear that the said judgment does not deal with
manufacture alone. It deals with various processes carried on without
the aid of power in relation to manufacture. The Court’s ultimate
holding was that the use of diesel pump sets to fill pans with brine
is an activity which occurred with the aid of power and is in relation
to manufacture. That is why it held that the process of manufacture of
common salt from brine in salt pans is an integrated one whose
operations are so inter-related that without any one of these
operations the manufacturing process could not be completed. If,
therefore, any one of several processes in relation to manufacture is
carried on with the aid of power, the exemption under the notification
would not apply. It was in that context that this Court held that
where any particular process is so integrally connected with the
ultimate production of goods that but for that process, the
manufacture of such goods would be impossible or commercial
inexpedient. Two things need to be noticed here. One is that what is
spoken about is raw material which is subjected to several processes
after which a final manufactured product emerges and two that the test
of integral connection of a particular process with the ultimate
production of goods that but for such process manufacture of goods
would become impossible or commercially inexpedient was applied in the
context of a process being in relation to manufacture.
Conclusion:
27. The case law discussed above falls into four neat categories.
(1) Where the goods remain exactly the same even after a
particular process, there is obviously no manufacture involved.
Processes which remove foreign matter from goods complete in
themselves and/or processes which clean goods that are complete
in themselves fall within this category.
(2) Where the goods remain essentially the same after the
particular process, again there can be no manufacture. This is
for the reason that the original article continues as such
despite the said process and the changes brought about by the
said process.
(3) Where the goods are transformed into something different
and/or new after a particular process, but the said goods are
not marketable. Examples within this group are the Brakes India
case and cases where the transformation of goods having a shelf
life which is of extremely small duration. In these cases also
no manufacture of goods takes place.
(4) Where the goods are transformed into goods which are
different and/or new after a particular process, such goods
being marketable as such. It is in this category that
manufacture of goods can be said to take place.
28. The instant case falls within the first category aforementioned.
This is a case of manufacture of disposable syringes and needles which
are used for medical purposes. These syringes and needles, like in
the J.G. Glass case and unlike the Brakes India case, are finished or
complete in themselves. They can be used or sold for medical purposes
in the form in which they are. The fact that medically speaking they
are only used after sterilization would not bring this case within the
ratio of the Brakes India case. All articles used medically in, let
us say, surgical operations, must of necessity first be sterilized.
29. The Encyclopedia and Dictionary of Medicine, Nursing, and Allied
Health, Fourth Edition by Benjamin F. Miller and Claire Brackman Keane
defines ‘sterilization’ as follows:
“In sterilizing objects or substances, the high resistance
of bacterial spore cells must be taken into account. Most
dangerous bacteria are destroyed at a temperature of 50° to 60°C
(122° to 140°F). Therefore, pasteurization of a fluid, which is
the application of heat at about 60°C, destroys disease-causing
bacteria. However, temperatures almost twice as high are
usually required to destroy the spore cells.
The discovery that heat, in the form of flame, steam, or hot
water, kills bacteria made possible the advances of modern
surgery, which is based on freedom from microorganisms, or
asepsis, and prevention of contamination. Sterilization of all
equipment used during an operation, and of anything that in any
way may touch the operative area, is carried out scrupulously in
hospitals. Physicians and nurses wear sterile clothing.
Instruments are sterilized by boiling, by chemical antiseptics,
or by autoclaving.
In a physician’s office needles for injections and any
instruments used for treatment of wounds or other surgical
procedures are also carefully sterilized, and other aseptic
techniques are observed.”
In the Oxford Dictionary of Nursing, ‘sterilization’ is defined
as:
“the process by which all types of micro-organisms (including
spores) are destroyed. This is achieved by the use of heat,
radiation, chemicals, or filtration.”
30. The added process of sterilization does not mean that such
articles are not complete articles in themselves or that the process
of sterilization produces a transformation in the original articles
leading to new articles known to the market as such. A surgical
equipment such as a knife continues to be a surgical knife even after
sterilization. If the Department were right, every time such
instruments are sterilized, the same surgical instrument is brought
forth again and again by way of manufacture and excisable duty is
chargeable on the same. This would lead to an absurd result and fly
in the face of common sense[1]. If a surgical instrument is being
used five times a day, it cannot be said that the same instrument has
suffered a process which amounts to manufacture in which case excise
duty would be liable to be paid on such instruments five times over on
any given day of use. Further, what is to be remembered here is that
the disposable syringe and needle in question is a finished product in
itself. Sterilization does not lead to any value addition in the said
product. All that the process of sterilization does is to remove
bacteria which settles on the syringe’s and needle’s surface, which
process does not bring about a transformation of the said articles
into something new and different. Such process of removal of foreign
matters from a product complete in itself would not amount to
manufacture but would only be a process which is for the more
convenient use of the said product. In fact, no transformation of the
original articles into different articles at all takes place. Neither
the character nor the end use of the syringe and needle has changed
post-sterilization. The syringe and needle retains its essential
character as such even after sterilization.
31. Ms. Shirin Khajuria then cited a few other judgments. The
judgment in Laminated Packings (P) Ltd. v. CCE, 1990 (49) ELT 326
held:
“4. Lamination, indisputably by the well settled principles of
excise law, amounts to ‘manufacture’. This question, in our
opinion, is settled by the decisions of this Court. Reference
may be made to the decision of this Court in Empire Industries
Ltd. v. Union of India [(1985) 3 SCC 314: 1985 SCC (Tax) 416] .
Reference may also be made to the decision of this Court
in CCE v. Krishna Carbon Paper Co. [(1989) 1 SCC 150: 1989 SCC
(Tax) 42: (1988) 37 ELT 480] We are, therefore, of the opinion
that by process of lamination of kraft paper with polyethylene
different goods come into being. Laminated kraft paper is
distinct, separate and different goods known in the market as
such from the kraft paper.
5. Counsel for the appellant sought to contend that the kraft
paper was duty paid goods and there was no change in the
essential characteristic or the user of the paper after
lamination. The fact that the duty has been paid on the kraft
paper is irrelevant for consideration of the issue before us. If
duty has been paid, then benefit or credit for the duty paid
would be available to the appellant under Rule 56-A of the
Central Excise Rules, 1944.
6. The further contention urged on behalf of the appellant that
the goods belong to the same entry is also not relevant because
even if the goods belong to the same entry, the goods are
different identifiable goods, known as such in the market. If
that is so, the manufacture occurs and if manufacture takes
place, it is dutiable. ‘Manufacture’ is bringing into being
goods as known in the excise laws, that is to say, known in the
market having distinct, separate and identifiable function. On
this score, in our opinion, there is sufficient evidence. If
that is the position, then the appellant was liable to pay duty.
We are, therefore, clearly of the opinion that the order of the
CEGAT impugned in this appeal does not contain any error. The
appeal, therefore, fails and is accordingly dismissed.”
32. This judgment again does not take us any further. It was found
on the evidence led in that case that laminated kraft paper is a
distinct and separate product known in the market as such and is apart
from kraft paper.
33. CCE, Meerut, v. Kapri International (P) Ltd., (2002) 4 SCC 710,
is a judgment in which cotton fabrics from a running length were cut
into pieces which formed new articles like bed sheets, bed spreads and
table clothes. On facts there, it was held that new commodities had
emerged which had a definite commercial identity in the market and
that the raw material (that is cotton fabrics) having suffered payment
of excise duty would make no difference to the finished products also
being liable for payment of excise duty.
34. Judged therefore from the view point of the law discussed in
this judgment, it is clear that the cryptic judgment dated 18.6.2004
has not applied the law correctly. The appeal is allowed and the
impugned judgment is hereby set aside.
……………………….J.
(A.K. Sikri)
……………………….J.
(R.F. Nariman)
New Delhi;
May 7, 2015
-----------------------
[1] The expression “Flies in the face of common sense” is taken
from an interesting judgment of the House of Lords reported in R v.
Secretary of State for the Home Department, (1995) 2 All ER 244. Lord
Browne Wilkinson was faced with an argument that Section 171 of the
Criminal Justice Act of 1988 vests in the Secretary of State a
discretion for bringing into force certain sections of the said Act.
It was argued that the Secretary of State had an absolute and
unfettered discretion to bring in or not to bring in the said
Sections. This argument was rejected stating that it was not only
constitutionally dangerous but also flies in the face of common sense
(at page 253).
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO.583 OF 2005
M/S. SERVO-MED INDUSTRIES
PVT. LTD. …APPELLANT
VERSUS
COMMISSIONER OF CENTRAL EXCISE,
MUMBAI. ...RESPONDENT
J U D G M E N T
R.F. Nariman, J.
1. Between June 1995 and March 1997, the appellants purchased
syringes and needles in bulk from the open market. They would then
sterilize the syringes and the needles and put one syringe and one
needle in an unassembled form in a printed plastic pouch. The syringe
and the needle were capable of use only once and, hence, were
disposable. The plastic pouches so packed were sold to an industrial
customer, namely, M/s. Hoechst Marion Roussel Ltd. The pouches bore
the brand name ‘Behring’. The brand name ‘Behring’ belonged to the
purchaser.
2. By a show cause notice dated 25.1.1996, the Department asked the
assessee to show cause as to why the said syringes and needles, (which
had already borne the payment of excise duty in the hands of their
manufacturers), be made to pay excise duty again as a result of
sterilization. The show cause notice alleged that sterilization
brings about a change in the character of the final product, which now
becomes disposable syringes and needles. Therefore, a new commodity
having a different character has come into existence. In their reply
to the show cause notice dated 1.10.1996, the petitioners claimed that
the activity of sterilization would not amount to manufacture. They
said that no new product comes into existence by merely sterilizing
disposable syringes and needles which continue to be disposable
syringes and needles post-sterilization. No new product, therefore,
came into existence as a result of sterilization.
3. By an order dated 31.12.1997, the Assistant Commissioner Central
Excise held that the process of sterilization was essential to
complete manufacture before the products are sold in the market. This
being so, the process of sterilization was found to be an integral and
inextricable part of the manufacturing process to make the product
marketable. It was further held that the process of sterilization
brings about a transformation of the product by making something non-
sterile sterile.
4. By his order dated 25.2.1999, the Commissioner of Central Excise
(Appeals) set aside the said order, reasoning that the process of
sterilization does not bring about any change in the basic structure
of syringes and needles even though post-sterilization the value of
the product gets enhanced. He further held that under Section 2(f) of
the Central Excise Act, there is no mention of the test of integral or
inextricable process and found that the wrong test had been applied to
arrive at the wrong result.
5. The CESTAT in turn set aside the order of the Commissioner of
Central Excise (Appeals) observing:
“An Article with distinct brand name and separate end
use/quality has emerged by the activity undertaken. The
use/character of a ‘syringe’ which was brought and which emerged
has changed. While the goods brought were not fit for use on
Humans Medical Needles as made were not usable till sterilized.
The commercial identity nature use and understanding has
changed, manufacturing has taken place, excise levy is
attracted.”
6. Shri Lakshmikumaran, learned advocate appearing on behalf of the
appellant has argued before us that the judgment of the Tribunal is
wrong on first principles. The Tribunal has failed to appreciate that
a disposable syringe and needle continues to be a disposable syringe
and needle even after the process of sterilization and, therefore, the
basic test of a new article emerging as a result of a process, being a
transformation of an article into something new, which has a
distinctive name, character or use is clearly absent in the present
case. He cited a number of judgments to buttress his submissions.
7. Ms. Shirin Khajuria, learned counsel who appeared for the
respondent, countered these submissions and said that it was clear
that the articles in question could not be used commercially until a
process of sterilization had been undergone. This being so, it is
clear that the process of sterilization is an important integrated
and/or ancillary process without which the end product had no
commercial use and, therefore, applying the said test, it is clear
that the process of sterilization leads to manufacture. She cited a
number of judgments which we will refer to presently.
8. Regard being had to the issue being a ticklish one, we need
first to delve into a few basic principles.
Distinction between manufacture and marketability
9. A duty of excise is levied on the manufacture of excisable
goods. “Excisable goods” are those goods which are included in the
schedules of the Central Excise Tariff Act, 1985. “Excisable goods”
brings in the concept of goods that are marketable, that is goods
capable of being sold in the market. On the other hand, manufacture
is distinct from sale-ability. Manufacture takes place on the
application of one or more processes. Each process may lead to a
change in the goods, but every change does not amount to manufacture.
There must be something more – there must be a transformation by which
something new and different comes into being, that is, there must now
emerge an article which has a distinctive name, character or use.
When transformation does not take place.
10. When a finished product cannot conveniently be used in the form
in which it happens to be, and it is required to be changed into
various shapes and sizes so that it can conveniently be used, no
transformation takes place if the character and the end use of the
first product continue to be the same. An illustration of this
principle is brought out by the judgment in CCE, New Delhi v. S.R.
Tissues, 2005 (186) E.L.T. 385 (S.C.). On facts, in the said case,
jumbo rolls of tissue paper were cut into various shapes and sizes so
that they could be used as table napkins, facial tissues and toilet
rolls. This Court held that there was no manufacture as the character
and the end use of the tissue paper in the jumbo roll and the tissue
paper in the table napkin, facial tissue and toilet roll remains the
same.
11. Another example of when transformation does not take place is
when foreign matter is removed from an article or additions are made
to the article to preserve it or increase its shelf life.
12. In MMTC v. Union of India, 1983 (13) E.L.T. 1542 (S.C.), this
Court dealt with the separating of wolfram ore from rock to make it
usable. It was held that the process of separation and sorting out
pieces of wolfram or by washing or magnetic separation would not
amount to a manufacturing process. Wolfram ore does not cease to be
an ore even though by the aforesaid processes it may become
concentrated wolfram ore.
13. In Mineral Oil Corporation v. CCE, Kanpur, 1999 (114) E.L.T.
166 (Tribunal), the facts were that used transformer oil, which by
applying processes for removal of impurities therefrom, is again made
usable as transformer oil. Both before and after the said processes,
transformer oil remained as transformer oil. That being so, it was
held that no new and distinct commodity has come into existence
consequent to the process undertaken. The test for determining
whether manufacture can be said to have taken place is whether the
commodity which is subjected to the process of manufacture can no
longer be regarded as the original commodity but is recognized by the
trade as a new and distinct commodity. This Court dismissed the civil
appeal from the aforesaid judgment. This case is instructive in that
it is clear that transformer oil, in its used stage, could not be used
owing to the impurities therein. Any process of rendering such
article usable would not be a manufacturing process, as there is no
change in the essential character of the goods which remain as
transformer oil which now becomes usable.
14. In Dunlop India Ltd. v. Union of India, 1995 (75) ELT 35 (S.C.),
soap treatment of grey cotton duck/canvas was held not to be a process
which amounted to manufacture. The judgment states:
“3. The process has been described in the impugned order in the
following words -
For processing on soap treatment the party uses soaps/soap
flakes which are diluted in plain water in a tank. This solution
is transferred to a Soaping Machine operated by power where
different colours are added. The fabrics are then dipped in the
solution which is heated with steam. After the colouring
treatment and soap impregnation the wet fabrics are dried up
with the aid of steam on passing the fabrics through rollers
fitted with the aforesaid Soaping Machine.
4. In our opinion the said process cannot be said to be one
which results in changing the identity of the cloth which is
subject to the said treatment and the said process does not give
rise to a new product which is marketable. The said process
cannot, therefore, be regarded as a manufacturing process. We
find that the Central Government itself, in another matter
relating to M/s. Premier Tyres Ltd. has passed an Order on 17-5-
1977 (page 83 of Paper Book) wherein, it has been held that the
transformation brought about the dipping of cotton fabrics in a
soap solution is not a permanent one; it is not an operation
which results in the production of a new article which could be
bought and sold as such in the market.”
15. In Dalmia Industries Limited v. CCE, Jaipur, 1999 (112) E.L.T.
305 (Tribunal), different articles of feeding bottles were put
together in a single pack. Thus, bottles, feeder nipples, bottle
lids and plastic parts were put together in a combined pack and the
product was sold in the brand name of “Milk care Designer Feeder”. All
these parts were put together only after sterilization by ultra violet
rays. The Tribunal held that the various parts that had been put
together were already finished products and packing after
sterilization would not bring into existence any new product as each
of the items had already come into existence as individual items. It
was further held that sterilization was only to improve the hygiene of
the product and that since no change occurs in the name, character or
use of the product, a new product does not come into existence. This
Court dismissed the civil appeal filed against the aforesaid judgment
on 1.3.2005.
16. Examples of additions made to the article to preserve it or
increase its shelf life are to be found in Tungabhadra Industries Ltd.
v. CTO, (1961) 2 SCR 14 and M/s. Maruti Suzuki India Ltd. v. CCE,
2015 (318) E.L.T. 353 (S.C.). In the Tungabhadra case, it was held
that hydrogenated oil continued to be groundnut oil despite there
being an intermolecular change in the content of the substance of the
oil due to hydrogenation. It was held that oil made from groundnut
continued as such despite the hardening process of hydrogenation. In
its essential character, it was held that such hydrogenated oil
continued to be groundnut oil. The process of hydrogenation only
increased the shelf life of the said oil.
17. Similarly in the Maruti Suzuki case, it was held that bumpers
and grills of motor vehicles continue to be the same commodity after
ED coating which would increase the shelf life of the said bumpers and
grills and provide anti rust treatment to the same. No new commodity
known to the market as such had come into being merely on account of
the value addition of the ED coating.
Retaining of essential character test.
18. In M/s. Satnam Overseas Ltd. v. Commissioner of Central Excise,
New Delhi (Civil Appeal No.8958 of 2003), it was held that as the
essential character of the product had not changed, there would be no
manufacture. In that case, the product was a combination of raw rice,
dehydrated vegetables and spices in the name of rice and spice. 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. As we have already seen, the same test was applied
in Tungabhadra case (supra) and in Deputy Commissioner of Sales Tax
(Law), Board of Revenue (Taxes), Ernakulam v. Pio Food Packers, (1980)
3 SCR 1271. In that case, the process undertaken was to remove the
inedible portions of Pineapple together with its outer cover and then
slice such Pineapple and can the same after adding sugar as a
preservative. It is important to note that the cans were sealed under
high temperature and then put into boiling water for sterilization.
It was held that there was no manufacture inasmuch as the essential
character of the Pineapple had not changed. The Court said:
“Commonly, manufacture is the end result of one or more
processes through which the original commodity is made to pass.
The nature and extent of processing may vary from one case to
another, and indeed there may be several stages of processing
and perhaps a different kind of processing at each stage. With
each process suffered, the original commodity experiences a
change. But it is only when the change, or a series of changes,
take the commodity to the point where commercially it can no
longer be regarded as the original commodity but instead is
recognised as a new and distinct Article that a manufacture can
be said to take place. Where there is no essential difference in
identity between the original commodity and the processed
Article it is not possible to say that one commodity has been
consumed in the manufacture of another. Although it has
undergone a degree of processing, it must be regarded as still
retaining its original identity.”
19. Interestingly, a line was drawn between cases in which the
essential character had changed and those in which no such change had
taken place in the following terms:
“5. A large number of cases has been placed before us by the
parties, and in each of them the same principle has been
applied: Does the processing of the original commodity bring
into existence a commercially different and distinct article?
Some of the cases where it was held by this Court that a
different commercial article had come into existence
include Anwarkhan Mehboob Co. v. The State of Bombay and
Ors. (where raw tobacco was manufactured into bidi patti), A.
Hajee Abdul Shukoor and Co. v. The State of Madras (raw hides
and skins constituted a different commodity from dressed hides
and skins with different physical properties), The State of
Madras v. Swasthik Tobacco Factory (raw tobacco manufactured
into chewing tobacco) and Ganesh Trading Co. Karnal v. State of
Haryana and Anr., (paddy dehusked into rice). On the other side,
cases where this Court has held that although the original
commodity has under gone a degree of processing it has not lost
its original identity include Tungabhadra Industries Ltd.,
Kurnool v. Commercial Tax Officer, Kurnool (where hydrogenated
groundnut oil was regarded as groundnut oil) and Commissioner of
Sales Tax, U.P., Lucknow v. Harbiles Rai and sons (where
bristles plucked from pigs, boiled, washed with soap and other
chemicals and sorted out in bundles according to their size and
colour were regarded as remaining the same commercial commodity,
pigs bristles).”
Test of no commercial user without further process
20. In Brakes India Ltd. v. Superintendent of Central Excise, (1997)
10 SCC 717, the commodity in question was brake lining blanks. It was
held on facts that such blanks could not be used as brake linings by
themselves without the processes of drilling, trimming and chamfering.
It was in this situation that the test laid down was that if by
adopting a particular process a transformation takes place which makes
the product have a character and use of its own which it did not bear
earlier, then such process would amount to manufacture irrespective of
whether there was a single process or several processes.
21. Similarly in Union of India v. J.G. Glass, 1998 (97) E.L.T. 5
(S.C.), this Court held that plain bottles are themselves commercial
commodities which can be sold and used as such. By the process of
printing names or logos on the said bottles, the basic character of
the commodity does not change, they continue to be bottles. The Court
said:
“16. On an analysis of the aforesaid rulings, a two-fold test
emerges for deciding whether the process is that of
"manufacture". 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. In other words, whether the
commodity already in existence will be of no commercial use but
for the said process. In the present case, the plain bottles are
themselves commercial commodities and can be sold and used as
such. By the process of printing names or logos on the bottles,
the basic character of the commodity does not change. They
continue to be bottles. It cannot be said that but for the
process of printing, the bottles will serve no purpose or are of
no commercial use.”
22. Similarly in Sterling Foods v. State of Karnataka, (1986) 26 ELT
3 (S.C.), raw shrimps/prawns/lobsters after various processes became
fit for human consumption. Prior to such processing, they could not
be used as articles of food. However, the aforesaid processes did not
lead to a finding that there was manufacture inasmuch as
shrimps/prawns/lobsters identity continued as such even after the
aforesaid processes.
23. In Crane Betel Nut Powder Works v. Commissioner, 2007 (210)
E.L.T. 171 (S.C.), whole betel nuts could not be consumed by human
beings. It is only after a process of cutting them into smaller
pieces and sweetening them with oil that they become fit for human
consumption. It was held that the aforesaid process would not amount
to manufacture as betel nuts continued to be the same even after the
aforesaid process resulting in no transformation of the commodity in
question.
24. It is important to understand the correct ratio of the judgment
in the J.G.Glass case. This judgment does not hold that merely by
application of the second test without more manufacture comes into
being. The Court was at pains to point out that a twofold test had
emerged for deciding whether the process is that of manufacture. The
first test is extremely important – that by a process, a different
commercial commodity must come into existence as a result of the
identity of the original commodity ceasing to exist. The second test,
namely that the commodity which was already in existence will serve no
purpose but for a certain process must be understood in its true
perspective. It is only when a different and/or finished product comes
into existence as a result of a process which makes the said product
commercially usable that the second test laid down in the judgment
leads to manufacture. Thus understood, this judgment does not lead to
the result that merely because the unsterilized syringe and needle is
of no commercial use without sterilization, the process of
sterilization which would make it commercially usable would result in
the sterilization process being a process which would amount to
manufacture. If the original commodity i.e. syringes and needles
continue as such post-sterilization, the second test would not lead to
the conclusion that the process of sterilization is a process which
leads to manufacture. This is because, in all cases, there has first
to be a transformation in the original article which transformation
brings about a distinctive or different use in the article.
The test of integrated process without which manufacture would be
impossible or commercially inexpedient.
25. It is at this point that the decision contained in Collector of
Central Excise, Jaipur v. Rajasthan State Chemical Works, (1991) 4 SCC
473 needs explanation. This Court was concerned with the language of
a certain notification which read as follows:
“In exercise of the powers conferred by sub-rule (1) of Rule 8
of the Central Excise Rules, 1944, the Central Government hereby
exempts all goods falling under Item 68 of the First Schedule to
the Central Excises and Salt Act, 1944 (1 of 1944) in or in
relation to the manufacture of which no process is ordinarily
carried on with the aid of power, from whole of the duty of
excise leviable thereon.”
It was held:
“13. Manufacture thus involves series of processes. Process in
manufacture or in relation to manufacture implies not only the
production but the various stages through which the raw material
is subjected to change by different operations. It is the
cumulative effect of the various processes to which the raw
material is subjected to (sic that the) manufactured product
emerges. Therefore, each step towards such production would be a
process in relation to the manufacture. Where any particular
process is so integrally connected with the ultimate production
of goods that but for that process manufacture or processing of
goods would be impossible or commercially inexpedient, that
process is one in relation to the manufacture.
15. In J.K. Cotton Spg. & Wvg. Mills Co. Ltd. v. STO [(1965) 1
SCR 900 : AIR 1965 SC 1310 : (1965) 16 STC 563] , this Court in
construing the expression ‘in the manufacture of goods’ held
thus: (SCR pp. 906-07)
“But there is no warrant for limiting the meaning of the
expression ‘in the manufacture of goods’ to the process of
production of goods only. The expression ‘in the manufacture’
takes in within its compass, all processes which are directly
related to the actual production.”
16. The Court further held thus: (SCR p. 905)
“The expression ‘in the manufacture of goods’ would normally
encompass the entire process carried on by the dealer of
converting raw materials into finished goods. Where any
particular process is so integrally connected with the ultimate
production of goods that but for that process, manufacture or
processing of goods would be commercially inexpedient, goods
required in that process would, in our judgment, fall within the
expression ‘in the manufacture of goods’.”
21. The transfer of raw material to the reacting vessel is a
preliminary operation but it is part of a continuous process but
for which the manufacture would be impossible. The handling of
the raw materials for the purpose of such transfer is then
integrally connected with the process of manufacture. The
handling for the purpose of transfer may be manual or mechanical
but if power is used for such operation, it cannot be denied
that an activity has been carried on with the aid of power in
the manufacturing process. The use of diesel pump sets to fill
the pans with brine is an activity with the aid of power and
that activity is in relation to the manufacture. It is not
correct to say that the process of manufacture starts only when
evaporation starts. The preliminary steps like pumping brine and
filling the salt pans form integral part of the manufacturing
process even though the change in the raw material commences
only when evaporation takes place. The preliminary activity
cannot be disintegrated from the rest of the operations in the
whole process of manufacture. Similarly, when coke and lime are
taken to the platform in definite proportions for the purpose of
mixing, such operation is a step in the manufacturing process.
It precedes the feeding of the mixture into the kiln where the
burning takes place. The whole process is an integrated one
consisting of the lifting of the raw materials to the platform
mixing coke and lime and then feeding into the kiln and burning.
These operations are so interrelated that without any one of
these operations manufacturing process is impossible to be
completed. Therefore, if power is used in any one of these
operations or any one of the operations is carried on with the
aid of power, it is a case where in or in relation to the
manufacture the process is carried on with the aid of power.
25. Thus “processing” may be an intermediate stage in
manufacture and until some change has taken place and the
commodity retains a continuing substantial identity through the
processing stage, we cannot say that it has been manufactured.
That does not, however, mean that any operation in the course of
such process is not in relation to the manufacture. While
interpreting the same exemption notification in Standard
Fireworks Industries v. Collector of Central Excise [(1987) 1
SCC 600 : 1987 SCC (Tax) 138 : (1987) 28 ELT 56] , it was held
that manufacture of fireworks requires cutting of steel wires
and the treatment of papers and, therefore, it is a process for
manufacture of goods in question. The notification purports to
allow exemption from duty only when in relation to the
manufacture of goods no process is ordinarily carried on with
the aid of power. It was observed that cutting of steel wires or
the treatment of the papers is a process for the manufacture of
goods in question.
26. We are, therefore, of the view that if any operation in the
course of manufacture is so integrally connected with the
further operations which result in the emergence of manufactured
goods and such operation is carried on with the aid of power,
the process in or in relation to the manufacture must be deemed
to be one carried on with the aid of power. In this view of the
matter, we are unable to accept the contention that since the
pumping of the brine into the salt pans or the lifting of coke
and limestone with the aid of power does not bring about any
change in the raw material, the case is not taken out of the
notification. The exemption under the notification is not
available in these cases. Accordingly, we allow these appeals.
In the facts and circumstances of the case, we make no order as
to costs.”
26. It is clear that the said judgment does not deal with
manufacture alone. It deals with various processes carried on without
the aid of power in relation to manufacture. The Court’s ultimate
holding was that the use of diesel pump sets to fill pans with brine
is an activity which occurred with the aid of power and is in relation
to manufacture. That is why it held that the process of manufacture of
common salt from brine in salt pans is an integrated one whose
operations are so inter-related that without any one of these
operations the manufacturing process could not be completed. If,
therefore, any one of several processes in relation to manufacture is
carried on with the aid of power, the exemption under the notification
would not apply. It was in that context that this Court held that
where any particular process is so integrally connected with the
ultimate production of goods that but for that process, the
manufacture of such goods would be impossible or commercial
inexpedient. Two things need to be noticed here. One is that what is
spoken about is raw material which is subjected to several processes
after which a final manufactured product emerges and two that the test
of integral connection of a particular process with the ultimate
production of goods that but for such process manufacture of goods
would become impossible or commercially inexpedient was applied in the
context of a process being in relation to manufacture.
Conclusion:
27. The case law discussed above falls into four neat categories.
(1) Where the goods remain exactly the same even after a
particular process, there is obviously no manufacture involved.
Processes which remove foreign matter from goods complete in
themselves and/or processes which clean goods that are complete
in themselves fall within this category.
(2) Where the goods remain essentially the same after the
particular process, again there can be no manufacture. This is
for the reason that the original article continues as such
despite the said process and the changes brought about by the
said process.
(3) Where the goods are transformed into something different
and/or new after a particular process, but the said goods are
not marketable. Examples within this group are the Brakes India
case and cases where the transformation of goods having a shelf
life which is of extremely small duration. In these cases also
no manufacture of goods takes place.
(4) Where the goods are transformed into goods which are
different and/or new after a particular process, such goods
being marketable as such. It is in this category that
manufacture of goods can be said to take place.
28. The instant case falls within the first category aforementioned.
This is a case of manufacture of disposable syringes and needles which
are used for medical purposes. These syringes and needles, like in
the J.G. Glass case and unlike the Brakes India case, are finished or
complete in themselves. They can be used or sold for medical purposes
in the form in which they are. The fact that medically speaking they
are only used after sterilization would not bring this case within the
ratio of the Brakes India case. All articles used medically in, let
us say, surgical operations, must of necessity first be sterilized.
29. The Encyclopedia and Dictionary of Medicine, Nursing, and Allied
Health, Fourth Edition by Benjamin F. Miller and Claire Brackman Keane
defines ‘sterilization’ as follows:
“In sterilizing objects or substances, the high resistance
of bacterial spore cells must be taken into account. Most
dangerous bacteria are destroyed at a temperature of 50° to 60°C
(122° to 140°F). Therefore, pasteurization of a fluid, which is
the application of heat at about 60°C, destroys disease-causing
bacteria. However, temperatures almost twice as high are
usually required to destroy the spore cells.
The discovery that heat, in the form of flame, steam, or hot
water, kills bacteria made possible the advances of modern
surgery, which is based on freedom from microorganisms, or
asepsis, and prevention of contamination. Sterilization of all
equipment used during an operation, and of anything that in any
way may touch the operative area, is carried out scrupulously in
hospitals. Physicians and nurses wear sterile clothing.
Instruments are sterilized by boiling, by chemical antiseptics,
or by autoclaving.
In a physician’s office needles for injections and any
instruments used for treatment of wounds or other surgical
procedures are also carefully sterilized, and other aseptic
techniques are observed.”
In the Oxford Dictionary of Nursing, ‘sterilization’ is defined
as:
“the process by which all types of micro-organisms (including
spores) are destroyed. This is achieved by the use of heat,
radiation, chemicals, or filtration.”
30. The added process of sterilization does not mean that such
articles are not complete articles in themselves or that the process
of sterilization produces a transformation in the original articles
leading to new articles known to the market as such. A surgical
equipment such as a knife continues to be a surgical knife even after
sterilization. If the Department were right, every time such
instruments are sterilized, the same surgical instrument is brought
forth again and again by way of manufacture and excisable duty is
chargeable on the same. This would lead to an absurd result and fly
in the face of common sense[1]. If a surgical instrument is being
used five times a day, it cannot be said that the same instrument has
suffered a process which amounts to manufacture in which case excise
duty would be liable to be paid on such instruments five times over on
any given day of use. Further, what is to be remembered here is that
the disposable syringe and needle in question is a finished product in
itself. Sterilization does not lead to any value addition in the said
product. All that the process of sterilization does is to remove
bacteria which settles on the syringe’s and needle’s surface, which
process does not bring about a transformation of the said articles
into something new and different. Such process of removal of foreign
matters from a product complete in itself would not amount to
manufacture but would only be a process which is for the more
convenient use of the said product. In fact, no transformation of the
original articles into different articles at all takes place. Neither
the character nor the end use of the syringe and needle has changed
post-sterilization. The syringe and needle retains its essential
character as such even after sterilization.
31. Ms. Shirin Khajuria then cited a few other judgments. The
judgment in Laminated Packings (P) Ltd. v. CCE, 1990 (49) ELT 326
held:
“4. Lamination, indisputably by the well settled principles of
excise law, amounts to ‘manufacture’. This question, in our
opinion, is settled by the decisions of this Court. Reference
may be made to the decision of this Court in Empire Industries
Ltd. v. Union of India [(1985) 3 SCC 314: 1985 SCC (Tax) 416] .
Reference may also be made to the decision of this Court
in CCE v. Krishna Carbon Paper Co. [(1989) 1 SCC 150: 1989 SCC
(Tax) 42: (1988) 37 ELT 480] We are, therefore, of the opinion
that by process of lamination of kraft paper with polyethylene
different goods come into being. Laminated kraft paper is
distinct, separate and different goods known in the market as
such from the kraft paper.
5. Counsel for the appellant sought to contend that the kraft
paper was duty paid goods and there was no change in the
essential characteristic or the user of the paper after
lamination. The fact that the duty has been paid on the kraft
paper is irrelevant for consideration of the issue before us. If
duty has been paid, then benefit or credit for the duty paid
would be available to the appellant under Rule 56-A of the
Central Excise Rules, 1944.
6. The further contention urged on behalf of the appellant that
the goods belong to the same entry is also not relevant because
even if the goods belong to the same entry, the goods are
different identifiable goods, known as such in the market. If
that is so, the manufacture occurs and if manufacture takes
place, it is dutiable. ‘Manufacture’ is bringing into being
goods as known in the excise laws, that is to say, known in the
market having distinct, separate and identifiable function. On
this score, in our opinion, there is sufficient evidence. If
that is the position, then the appellant was liable to pay duty.
We are, therefore, clearly of the opinion that the order of the
CEGAT impugned in this appeal does not contain any error. The
appeal, therefore, fails and is accordingly dismissed.”
32. This judgment again does not take us any further. It was found
on the evidence led in that case that laminated kraft paper is a
distinct and separate product known in the market as such and is apart
from kraft paper.
33. CCE, Meerut, v. Kapri International (P) Ltd., (2002) 4 SCC 710,
is a judgment in which cotton fabrics from a running length were cut
into pieces which formed new articles like bed sheets, bed spreads and
table clothes. On facts there, it was held that new commodities had
emerged which had a definite commercial identity in the market and
that the raw material (that is cotton fabrics) having suffered payment
of excise duty would make no difference to the finished products also
being liable for payment of excise duty.
34. Judged therefore from the view point of the law discussed in
this judgment, it is clear that the cryptic judgment dated 18.6.2004
has not applied the law correctly. The appeal is allowed and the
impugned judgment is hereby set aside.
……………………….J.
(A.K. Sikri)
……………………….J.
(R.F. Nariman)
New Delhi;
May 7, 2015
-----------------------
[1] The expression “Flies in the face of common sense” is taken
from an interesting judgment of the House of Lords reported in R v.
Secretary of State for the Home Department, (1995) 2 All ER 244. Lord
Browne Wilkinson was faced with an argument that Section 171 of the
Criminal Justice Act of 1988 vests in the Secretary of State a
discretion for bringing into force certain sections of the said Act.
It was argued that the Secretary of State had an absolute and
unfettered discretion to bring in or not to bring in the said
Sections. This argument was rejected stating that it was not only
constitutionally dangerous but also flies in the face of common sense
(at page 253).
