1999 (6) TMI 308 - AT - Central Excise

Issues Involved:
1. Denial of License under Rule 174 of the Central Excise Rules, 1944
2. Definition and Scope of 'Manufacture' under Section 2(f) of the Central Excise Act, 1944
3. Eligibility for Modvat Credit

Detailed Analysis:

1. Denial of License under Rule 174 of the Central Excise Rules, 1944:
The central issue revolves around the denial of a license by the Assistant Commissioner to the respondents, who are manufacturers of paper and paper boards, under Rule 174 of the Central Excise Rules, 1944. The respondents had set up a "Paper cut to size Unit" due to increased demand and inadequate space in their existing factory. They obtained necessary approvals from various authorities and applied for a registration certificate. However, the Range Superintendent rejected the application, stating that the conversion of reels into sheets was not covered under any provisions of Central Excise law, a view upheld by the Assistant Commissioner. The Collector (Appeals) reversed this decision, directing the Assistant Commissioner to grant the registration, which led to the Revenue's appeal.

2. Definition and Scope of 'Manufacture' under Section 2(f) of the Central Excise Act, 1944:
The Revenue argued that the process of cutting paper reels into sheets does not amount to manufacture as per Section 2(f) of the Central Excise Act, 1944. They cited the Andhra Pradesh High Court's judgment in the case of M/s. Bhadrachalam Paper Boards, which stated that the value addition is not the criterion to decide whether an activity amounts to manufacture. The respondents, however, contended that the processes of trimming, cutting, sorting, and packing are integral to making the paper marketable and should be considered as manufacture. They supported their argument with several Supreme Court judgments, including Eastend Paper Industries and Standard Fire Works Industry, which recognized ancillary processes as part of manufacturing.

3. Eligibility for Modvat Credit:
The Revenue expressed concern that granting a license would make the respondents eligible for Modvat credit on capital goods under Rule 57Q and inputs under Rule 57A, despite no manufacturing activity being carried out at the unit. The respondents argued that the department itself had fixed the RG1 stage for paper at the post-packing stage, indicating that cutting paper reels into sheets and packing is considered a process incidental to manufacture. The Tribunal noted that the Revenue's argument against granting Modvat credit is not a valid ground for denying a license or duty levy if the processes result in the manufacture of excisable goods.

Conclusion:
The Tribunal found that both the Assistant Commissioner and the Collector (Appeals) failed to fully appreciate the provisions related to licensing and the charging Section 3 of the Central Excise Act. It emphasized that the term 'manufacture' includes processes incidental or ancillary to the completion of a manufactured product, and such processes should result in the production of specified goods subject to duty. The Tribunal remanded the matter to the Assistant Commissioner for re-examination, directing that a fair opportunity of hearing be granted to the respondents to determine if the processes carried out resulted in the manufacture of excisable goods, thus necessitating the issuance of a license and duty payment.

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