2023 (2) TMI 729 - AT - Central Excise

Process amounting to manufacture or not - activity of aerosol packing of products on job work basis, undertaken by the job worker - classification of goods - Diesel Engine Conditioner - Fuel System Cleaner - Intake System Cleaner - classifiable under CTH 3403 as lubricating preparations as contended by the department or under CTH 3811 or alternatively under CTH 3402 as contended by the appellant and the job worker? Whether the activity undertaken by the job worker would amount to manufacture under section 2(f)(ii) of the Excise Act? - HELD THAT - The present appeal concerns only the activity undertaken by the job worker involving repacking from bulk containers received from the appellant into retail packs in respect of three IE coded products, namely (i) Diesel Engine Conditioner; (ii) Fuel System Cleaner; and (iii) Intake System Cleaner, for which the appellant pays job charges to the job worker and the purchase orders placed on the job worker indicate that NIL excise duty would be payable and service tax @ 12.36% would be payable - Section 2(f) of the Excise Act defines manufacture . In terms of section 2(f)(ii) manufacture would include any process which is specified in relation to any goods in the Section or Chapter notes of the First Schedule to the Central Excise Tariff as amounting to manufacture. Chapter note 6 of Chapter 34 and Chapter note 10 of Chapter 38 provide that in relation to products of the concerned Chapter, labeling or relabeling of containers or repacking from bulk packs to retail packs or the adoption of any other treatment to render the product marketable to the consumer, shall amount to manufacture. The impugned order holds that the activity undertaken by the job worker of repacking raw material received from the appellant into retail packs would amount to manufacture. There is no finding that the job worker undertakes the activity of repacking from bulk packs to retail packs nor does the appellant undertake such an activity. With regard to the activity of adopting any treatment to render the product marketable to the consumer, it is the case of the appellant and the job worker that such a treatment has not been undertaken on the raw materials supplied by the appellant in bulk containers to the job worker, as the raw materials are injected into aerosol cans and thereafter plastic caps are fitted and labels are affixed on the cans. This activity of injecting the raw materials into aerosol cans would not amount to adopting any treatment on the raw materials to render the product marketable - This is what was held by the Supreme Court in Vadilal Gases Ltd. 2017 (1) TMI 1311 - SUPREME COURT . The inevitable conclusion, therefore, is that the process undertaken by the job worker would not amount to manufacture in terms of section 2(f)(ii) of the Excise Act read with note 6 of Chapter 34 or note 10 of Chapter 38 of the Central Excise Tariff. The second issue that requires to be examined is about the classification of the products said to have been manufactured by the job worker. As the first issue has been decided in favour of the job worker, namely that the process undertaken by the job worker would not amount to manufacture , it would not be necessary to decide this issue. Penalties - HELD THAT - Once it is held that the activity undertaken by the job worker would not amount to manufacture under section 2(f)(ii) of the Excise Act, penalties could not have been imposed either upon the employees of the appellant or the employee of the job worker. Appeal allowed.

Issues Involved:
1. Whether the activity undertaken by the job worker amounts to 'manufacture' under section 2(f)(ii) of the Central Excise Act, 1944.
2. Classification of the products manufactured by the job worker.
3. Imposition of penalties under rule 26 of the Central Excise Rules, 2002.

Detailed Analysis:

1. Whether the activity undertaken by the job worker amounts to 'manufacture' under section 2(f)(ii) of the Central Excise Act, 1944:

The appellant contended that the activities performed by the job worker, involving repacking from bulk containers to retail packs and labeling, did not constitute 'manufacture' under section 2(f)(ii) of the Excise Act. The job worker received raw materials in bulk containers and repacked them into aerosol cans, which were then labeled. The appellant argued that this process did not amount to repacking from bulk packs to retail packs as defined under Chapter note 6 of Chapter 34 of the Central Excise Tariff.

The Department, however, supported the Commissioner's order, arguing that the activities of aerosol filling/packing/labeling amounted to manufacture under section 2(f)(ii) read with Chapter note 6 of Chapter 34, which includes labeling or relabeling of containers, repacking from bulk packs to retail packs, or any other treatment to render the product marketable.

The Tribunal examined the relevant provisions and noted that the job worker did not undertake labeling or relabeling of the containers in which raw materials were received nor did they repack from bulk packs to retail packs. The Tribunal emphasized the distinction between 'containers' and 'bulk packs' and concluded that the activity of packing raw materials from 200-liter containers into retail aerosol cans did not constitute repacking from bulk packs to retail packs.

Furthermore, the Tribunal referred to the Supreme Court's decision in Vadilal Gases Ltd., which held that repacking from tankers to retail packs did not amount to manufacture. The Tribunal also distinguished the present case from the Tribunal's decision in Nestle India Ltd., where mixing of vitamins was considered a treatment to render the goods marketable.

Conclusion:
The Tribunal concluded that the activities undertaken by the job worker did not amount to manufacture under section 2(f)(ii) of the Excise Act read with Chapter note 6 of Chapter 34 or Chapter note 10 of Chapter 38 of the Central Excise Tariff.

2. Classification of the products manufactured by the job worker:

Since the Tribunal decided that the activities did not amount to manufacture, it was unnecessary to determine the classification of the products. The appellant had argued that the products should be classified under CTH 3811 or alternatively under CTH 3402, while the Department contended that they should be classified under CTH 3403.

3. Imposition of penalties under rule 26 of the Central Excise Rules, 2002:

Given the Tribunal's finding that the activities did not amount to manufacture, the imposition of penalties under rule 26 of the Rules could not be sustained. The Tribunal noted that penalties could not be imposed on the employees of the appellant or the job worker when the primary demand itself was not sustainable.

Conclusion:
The Tribunal set aside the order dated January 19, 2016, passed by the Commissioner and allowed the appeals. The penalties imposed under rule 26 of the Rules were also set aside.

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