TWIN REQUIREMENTS FOR LEVY OF CENTRAL EXCISE DUTY

[Mr. M. GOVINDARAJAN]

REQUIREMENTS FOR LEVY OF EXCISE DUTY

Central Excise is a tax on act of manufacture or production. Excise duty is collected at the time of removal of the goods from the factory. The Central excise duty can be imposed on any article if it is satisfied the following requirements:

• the articles should be goods; and
• it should have come into existence as a result of manufacture.

The Supreme Court in ‘Hindustan Zinc Limited V. Commissioner of Central Excise’ – 2005 (2) TMI 119 - SUPREME COURT OF INDIA held that if either of the above two conditions is not satisfied the Central Excise duty cannot be levied. 

EXCISABLE GOODS

Sec. 2(d) of the Central Excise Act, 1944 (‘Act’) defines the term ‘excisable goods’ as the goods specified in the First Schedule and the Second Schedule to the Central Excise Tariff Act, 1985 as being subject to a duty of excise and includes salt. The explanation to this section provides that the term ‘goods’ include any article, material or substance which is capable of being bought and sold for a consideration and such goods shall be deemed to be manufacture.

In ‘Delhi Cloth and General Mills Co. Limited V. Union of India’ – 1962 (10) TMI 1 - SUPREME COURT OF INDIA the Supreme Court held that an article can be called as ‘goods’ if it is known to the market as such and can ordinarily come to the market of being bought and sold. Actual sale of the article is not important but it must be capable of being bought and sold. Once marketability of an article is established the fact that it is not actually sold but is entirely consumed captively or that it is sold only a few customers is not an important.  The onus to establish that an article is marketable and is ‘goods’ is on the department. 

MANUFACTURE

The term ‘manufacture’ includes any process-

• incidental or ancillary to the completion of a manufactured product;
• which is specified in relation to any goods in the Section or Chapter Notes of the First Schedule to the Central Excise Tariff Act, 1985 as amounting to ‘manufacture’; or
• which, in relation to the goods specified in the Third Schedule, involves packing or repacking of such goods in a unit container or labelling of re-labelling of containers including the declarations or alteration of retail sale price on it or adoption of any other treatment on the goods to render the product marketable to the consumer;

and the word ‘manufacture’ shall be construed accordingly and shall include not only a person who employs hired labour in the production or manufacture of excisable goods, but also any person who engages in their production or manufacture of his own account.

The term ‘manufacture’ implies a change but every change is not manufacture and yet every change of an article is the result of treatment, labour and manipulation.   But something more is necessary and there must be transformation; a new and different article must emerge having a distinctive name, character and use.

In ‘Ujgar Prints V. Union of India’ – 1988 (11) TMI 106 - SUPREME COURT OF INDIA it was held that manufacture is the event of levy and ownership of goods does not decide the taxability under central excise Act.

In ‘Commissioner of Central Excise, Chandigarh V. Markfed Vanaspati and Allied Industries’ – 2003 (4) TMI 98 - SUPREME COURT OF INDIA the Supreme Court rejected the contention that merely because an item falls in the Tariff entry it must be deemed that there is manufacture.

In ‘Commissioner of Central Excise, Bangalore – II V. Osnar Chemical Private Limited’ – 2012 (1) TMI 27 - SUPREME COURT OF INDIA the Supreme Court held that it is trite to state that ‘manufacture’ can be said to have taken place only when there is transformation of raw materials into a new and different article having a different identity, character and use. It is well settled that mere improvement in the quality does not amount to manufacture.

Process

Next we may see whether any process amounts to manufacture? In ‘Commissioner of Central Excise, Mumbai V. GTC Industries Limited’ – 2011 (2) TMI 64 - BOMBAY HIGH COURT the High Court held that manufacturing as defined in Section 2(f) of the Central Excise Act would include any process enumerated therein. However all the process would not amount to manufacturing under the Act. Process is not defined under the Act. So it is understood in common parlance. The process may be a flow, progress, movement, transformation, change continuation, a link, an action, happening etc., Any process which produces distinct and identifiable commodity and renders marketable value can be called manufacture. A commodity whether manufactured or not necessarily depends on the context and the factors of the production/process of the commodity.

In ‘Union of India V. M/s Parle Products Limited’ – 1993 (1) TMI 100 - SUPREME COURT OF INDIA it has been held that activity or process in order to amount to ‘manufacture’ must lead the emergence of a new commercial product different from the one which the process was started and the new product should have a different name, character and use.

In ‘M/s Meltex (I) Private Limited V. Commissioner of Central Excise, New Delhi’ – 2004 (2) TMI 387 - SUPREME COURT OF INDIA it was held that the process of mere lamination or metallisation of duty paid film was considered as not amounting to manufacture, as there is no distinct product which come into existence.

In ‘Union of India V. J.G. Glass Industries Limited’ – 1997 (12) TMI 110 - SUPREME COURT OF INDIA the Supreme Court held that two fold tests to decide that the process is a manufacture or not is that whether by the said process a different commodity comes into existence and whether the identity of the original commodity cease to exist.

Burden of proof

For levy of excise duty it is to proved that the goods in question are manufactured.  It is the burden on the department to prove the same.  In ‘Karnataka Co-operative Sugar Mills Limited V. Commissioner of Central Excise, Panchkula’ – 2011 (256) ELT 236 (Tri Del) it was held that it suffices to say that in respect of allegation regarding manufacture of excisable goods, the burden of proof is on the department to adduce the evidence.

Thus manufacture of the goods is one of the requirements for levy of excise duty.  Next we may see the marketability of the goods.

MARKETABILITY

The term ‘marketability’ is not defined in the Act or in the Rules.  In ‘Union of India V. Sonic Electrochem (P) Limited and another’ – 2002 (9) TMI 104 - SUPREME COURT OF INDIA the Supreme Court held that the marketability of goods has certain attributes. The essence of marketability is neither in the form nor in the shape or condition in which the manufactured articles are to be found, it is the commercial identity of the articles known to the market for being bought and sold. The ‘marketability’ is essentially a question ot fact to be decided on the facts of each case. There can be no generalisation. The fact that the goods are not in fact marketed is of no relevance.

In ‘Flex Engineering Limited V. Commissioner of Central Excise, UP’ – 2012 (1) TMI 17 - SUPREME COURT OF INDIA it was held by the Supreme Court that if a product is not saleable, it will not be marketable and consequently the process of manufacture would not held to be complete and duty of excise would not be leviable on it.

In ‘Collector of Central Excise, Calcutta – II V. M/s Eastend Paper Industries Limited’ – 1989 (8) TMI 81 - SUPREME COURT OF INDIA it was held that anything required to make goods marketable, must form part of a manufacture and any raw material used for same would be a component part of any product.

In ‘Dharampal Satyapal, Delhi V. Commissioner of Central Excise’ – 2005 (4) TMI 66 - SUPREME COURT OF INDIA the Supreme Court held that marketability is an attribute of manufacture. It is an essential criterion for charging duty. Identity of the product and marketable are the twin aspects to decide chargeability.  Dutiability of the product depends on whether the product is known to the market. The test of the marketability is that the product which is made liable to duty must be marketable in the condition in which it emerges. Marketability means saleable.

In ‘Tamil Nadu State Transport Corporation Limited  V. Commissioner of Central Excise, Madurai’ – 2004 (4) TMI 74 - SUPREME COURT OF INDIA it was held that the product having shelf life of 8 to 10 hours are considered as marketable and hence chargeable to duty.

In ‘Union of India V. Sonic Electronics Private Limited’ – 2002 (9) TMI 104 - SUPREME COURT OF INDIA the Apex Court held that the essence of marketability is neither in the form nor in the shape or condition in which the manufactured articles are to be produced.

In ‘Gillooram Gowrishankar V. Commissioner of Central Excise, Jamshedpur’ – 2000 (10) TMI 152 - CEGAT, KOLKATA it was held by the Tribunal that the marketability is essentially to be looked into for holding the excisability of the product, however it is not the factum or actual marketing of the product which is required to be satisfied. As long as the goods are capable of being marketed, they have to held as excisable goods.

In A.P. State Electricity Board V. Collector of Central Excise, Hyderabad’ – 1994 (2) TMI 56 - SUPREME COURT OF INDIA it was held that the marketability is essentially a question of fact to be decided in the facts of each case. There can be no generalization. The fact that the goods are not in fact marketed is of no relevance. So long the goods are marketable, they are goods for the purpose of the Act. It is also not necessary that the goods in question should be generally available in the market. Even if the goods are available from only one source or from a specified market it makes no difference so long as they are available for purchase. The marketability of the article does not depend upon the number of purchasers nor in the market confined to the territorial limits of the country.

In ‘Bhor Industries Limited, Bombay V. Collector of Central Excise, Bombay’ – 1989 (1) TMI 128 - SUPREME COURT OF INDIA it was held that unless the product is capable of being marketed and is known to those who are in the market as having an identity as a distinct identifiable commodity that the article is subject to excise duty. Simply because certain articles fall within the schedule does not make them marketable.

Burden of Proof

In ‘Nestle India Limited V. Commissioner of Central Excise, Chandigarh’ – 2011 (4) TMI 675 - CESTAT, NEW DELHI it was held that undoubtedly the burden to prove the issue of marketability lies upon the department. But the mode of discharging this burden may not necessarily be by producing evidence in that regard by department itself. When the burden lies upon a party to prove any fact in support of its case, the same can be discharged by leading evidence by the same party on whom the burden lies as well as by pointing out the evidence led by the opposite party which can establish such fact. To discharge the burden of proof, the party on whom the burden lies need not necessarily lead evidence by himself. The burden can be discharged even by relying upon the evidence produced by the other party. It can also be discharged by relying upon the admitted facts or undisputed fact. Bearing this in mine one has to analyze the materials on record to ascertain whether the issue of marketability of the product in question stands established or not.

The law on the point of marketability of a product is well settled. Merely because a product is not carried to the market that itself will not be criteria to pronounce the produce to be non-marketable. It is also not necessary that the product should have more than one purchase for consumption. Even a single consumer can determine the product to be marketable. It is not actual marketing of a product that would decide whether the product is marketable or not but its possibility of the product can be marketed which factor assumes importance while deciding the issue of marketability of a product.

MARKETABLE TO CONSUMER

In ‘Air Liquide North India Private Limited V. Commissioner of Central Excise, Jaipur’ – 2011 (8) TMI 93 - SUPREME COURT OF INDIA the phrase ‘marketable to the consumer’ in Chapter Note 10 of the Chapter 28 of the Act, the word ‘consumer’ refers to the person who purchases the product for his consumption, as distinct from a purchases who trades in it. The marketability of the product to the purchaser trading in it is distinguishable from the marketability of the product to the purchaser purchasing the same for final consumption as in the latter case, the person purchases the product for his own consumption and in that case he expects to product to be suitable for his own purpose and the consumer might purchase a product having marketability which did not process earlier. Therefore the phrase ‘marketable to the consumer’ would naturally means the ‘marketability of the product to the person who purchases the product for his own consumption’.

CONCLUSION

For conclusion we may refer the Supreme Court judgement in ‘Moti Laminates Limited V. Collector of Central Excise, Ahmedabad’ – 1995 (2) TMI 67 - SUPREME COURT OF INDIA the Supreme Court held that Sec. 3 levies duty on all excisable goods provided they are manufactured or produced.

Therefore where the goods are specified in the Schedule they are excisable goods, but whether goods can be subjected to duty would depend on whether they are produced or manufactured by the person on whom duty is proposed to be levied. The expression ‘produced or manufactured’ has been explained to mean that the goods so produced must satisfy the test of marketability. Therefore it is pen to an assessee to prove that even though the goods in which he is carrying on business is excisable being mentioned in schedule it could not be subjected to duty if it does not constitute ‘goods’ either because they are not produced or manufactured or if they have been produced or manufactured they were not marketed or capable of being marketed. In short, the twin test contemplated by the excise law is that the goods must not only be manufactured but they also should be capable of being marketed. Thus levy of excise duty the twin conditions of ‘manufacture’ and ‘marketability’ have to be established cumulatively.