2002 (12) TMI 85 - SC - Central Excise

Whether cigarettes removed for the purposes of tests in the quality control laboratory situated within the factory premises could be treated to be excisable goods manufactured and consequently liable to payment of excise duty under the provisions of the Act? Whether excise duty is leviable on the cigarettes that are destroyed during the process of testing in the laboratory? Held that - The cigarette, which is the end product of tobacco, is fit for consumption before the same is removed for test. Packing of the cigarette cannot be said to be incidental or ancillary to the manufacturing process, but the same may be incidental or ancillary to its sale only. In case it is laid down that packing of cigarette is incidental or ancillary to the completion of manufactured products, the same may result into evasion of excise duty as before packing the cigarettes the same may be regularly supplied to each and every employee for his consumption without payment of excise duty thereon. The definition of manufacture under Section 2(f) very clearly includes process which is incidental or ancillary to the completion of manufactured product. Manufacture of cigarette is completed when the same emerges in the form of sticks of cigarettes which are sent to the laboratory for quality control test. Sticks of cigarettes can be consumed and manufacture of the end-product, i.e., cigarette, which is commercially known in the market as such, is completed before its removal for test and after testing only packing of the same, which is the requirement of Rule 93 of the Rules, is done. Thus, we hold that sticks of cigarette which are removed for the purpose of test in the quality control laboratory located within the factory premises of the appellant-Company are liable to excise duty. Coming now to the second question, it may be stated that learned counsel appearing on behalf of the Revenue could not dispute the proposition that the quantity of cigarette sticks that is destroyed in the course of quality control test is not liable to excise duty. In view of the non-maintenance and non-production of accounts in relation to the destruction of cigarette sticks during the course of testing, we are of the opinion that excise duty was leviable on the entire stock of cigarette sticks sent to the laboratory for quality control test. Appeal dismissed.

Issues Involved:
1. Whether cigarettes removed for tests in the quality control laboratory within the factory premises are liable to excise duty.
2. Whether excise duty is leviable on cigarettes destroyed during the testing process.

Detailed Analysis:

1. Liability of Excise Duty on Cigarettes Removed for Testing:

The appellant-company, a cigarette manufacturer, received show cause notices alleging that it cleared 20 sticks of cigarettes daily from each machine for quality testing without paying excise duty. The company did not submit any classification list or maintain accounts for these cigarettes. The assessing authorities imposed excise duty and penalties, concluding that the manufacturing process was complete when cigarettes emerged as sticks, and packing was incidental to sale, not manufacture.

The appellant contested, arguing that the manufacturing process was incomplete until packing, as required by Rule 93 of the Central Excise Rules, 1944. The Tribunal upheld the excise duty on samples but remitted the matter to reassess the duty on disputed quantities.

The court examined Sections 2(d), 2(f), and 3(1)(a) of the Central Excise Act, 1944, and Rule 93. It emphasized that excise duty is levied on "excisable goods" produced or manufactured in India, and marketability is a key test for determining liability. The court cited precedents where intermediate products were not marketable and thus not liable to duty.

In this case, the court held that cigarettes are marketable once they emerge as sticks, fit for consumption. Packing is incidental to sale, not manufacture. Therefore, cigarettes removed for testing are liable to excise duty as they are considered manufactured goods.

2. Excise Duty on Cigarettes Destroyed During Testing:

The appellant argued that cigarettes destroyed during testing should not incur excise duty. However, the Revenue pointed out that the appellant did not maintain or produce any records of destruction. Despite being specifically asked in the show cause notice, the appellant failed to provide evidence of the quantity destroyed.

The court agreed that excise duty is not leviable on destroyed cigarettes but noted the appellant's failure to maintain or produce relevant accounts. Given the lack of evidence, the court concluded that excise duty was applicable to the entire stock sent for testing.

Conclusion:

The court dismissed the appeals, affirming that:
1. Cigarettes removed for quality control testing within the factory premises are liable to excise duty as they are considered manufactured goods.
2. Excise duty is applicable to the entire stock sent for testing due to the appellant's failure to provide evidence of destruction.

No costs were awarded in the dismissal of the appeals.

← Previous Next →