2010 (4) TMI 535 - HC - Central Excise

Manufacture - conversion of wet blue leather into finished leather - whether process by which the wet blue leather is turned into finished leather amounts to manufacture ? Held that - conversion of wet blue leather into finished leather through several process such as splitting, shaving, neutralizing, bleaching, dyeing, fat-liquoring, stuffing, setting out, samming, drying, staking, and finishing. Wet blue leather loses its identity as wet blue leather and becomes a different commodity with a distinct identity in the market and in the industry concerned. Activity amounts to a manufacturing activity.

Issues Involved:

1. Whether the process of converting wet blue leather into finished leather amounts to 'manufacture' under Section 3(3) of the Tamilnadu General Sales Tax Act.
2. The applicability of concessional tax rates under Section 3(3) based on the nature of the manufacturing process.
3. The distinction between 'processing' and 'manufacture' in the context of leather conversion.
4. The relevance of commercial identity and market recognition in determining 'manufacture'.

Detailed Analysis:

1. Whether the process of converting wet blue leather into finished leather amounts to 'manufacture' under Section 3(3) of the Tamilnadu General Sales Tax Act:
The petitioner, a manufacturer of finished leather, argued that the conversion of wet blue leather into finished leather involves several processes such as splitting, shaving, neutralizing, bleaching, dyeing, fat-liquoring, stuffing, setting out, samming, drying, staking, and finishing. These processes, according to the petitioner, qualify as 'manufacture' under Section 3(3) of the Act. The Appellate Authority supported this view, recognizing that the leather industry comprises different units, including those converting raw skins to wet blue leather and wet blue leather to finished leather, and concluded that such processing amounts to manufacture. However, the Tribunal disagreed, stating that wet blue leather and finished leather are commercially the same commodity, thus not constituting a manufacturing activity. The High Court, referencing various Supreme Court decisions, concluded that the transformation of wet blue leather into finished leather involves significant changes, resulting in a new and distinct commodity, thus qualifying as 'manufacture'.

2. The applicability of concessional tax rates under Section 3(3) based on the nature of the manufacturing process:
The petitioner purchased chemicals, dyes, and pigments at a concessional tax rate under Section 3(3) of the Act, which requires the goods to be used for manufacturing goods for sale. The Tribunal's decision to deny the concessional rate was based on the interpretation that converting wet blue leather to finished leather does not constitute manufacture. However, the High Court overturned this, recognizing the significant transformation involved in the process, thereby validating the use of concessional rates for purchasing chemicals necessary for the manufacturing process.

3. The distinction between 'processing' and 'manufacture' in the context of leather conversion:
The Tribunal's decision was influenced by the distinction between 'processing' and 'manufacture', concluding that the conversion of wet blue leather to finished leather is merely processing. The High Court, however, emphasized that the processes involved in converting wet blue leather to finished leather are extensive and result in a product that is commercially distinct from the original material. Citing Supreme Court rulings, the High Court clarified that 'manufacture' involves a transformation resulting in a new and distinct commodity, which applies to the leather conversion process in question.

4. The relevance of commercial identity and market recognition in determining 'manufacture':
The High Court highlighted that the commercial identity and market recognition of the end product are crucial in determining whether a manufacturing process has taken place. The Court noted that finished leather is recognized as a distinct commodity in the market, different from wet blue leather. This aligns with the Supreme Court's interpretation that a manufacturing process results in a product with a new identity, use, and character, distinct from the original material.

Conclusion:
The High Court allowed the writ petition, setting aside the Tribunal's order. The Court concluded that the processes involved in converting wet blue leather to finished leather constitute 'manufacture' under Section 3(3) of the Tamilnadu General Sales Tax Act. Consequently, the petitioner is entitled to the concessional tax rate for purchasing chemicals used in the manufacturing process. The Court emphasized the importance of the transformation resulting in a commercially distinct product, aligning with the principles laid down by the Supreme Court.

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