No deemed manufacture in some cases as per recent circular of 16th December 2009

[C.A. DEV KUMAR KOTHARI]

Important links/ references:

Circular No. 910/30/2009 - CX F. No. 6/3/2009-DS (CX. 1 & 4) of 16^th December 2009

Chapter Note 10 to Chapter 29

Deemed manufacture:

For the purpose of levy of Central Excise some processes are deemed as 'amounting to manufacture'. If any of these processes are carried out, goods will be said to be manufactured, even though in reality and also as per some decisions of courts the process may not amount to manufacture in so far resulting in a different commercial commodity, article or thing.  In such cases it is 'deemed manufacture' is considered in the context of Central Excise.

Llabelling or relabelling 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, is one of such situations in which 'manufacture' is deemed as per Chapter Note 10.

Whether activity of receiving liquid chemicals in bulk in containers and offloading the same at the dealers' premises or godown into small drums for subsequent marketing of these materials to customers amounts to 'manufacture' within the meaning of said Chapter Note was  the issue for examination by the Board in its recent Circular dated 16.12.2009.

In many cases Show Cause Notices (SCN) have been issued by the Excise department treating such activity as 'Manufacture'. Demands have been raised and disputes are going on. To reduce such disputes, it appears that the board has issued recent circular.

Earlier Tribunals decision:

Disputes have arisen on this issues. The Tribunal l has in the case of Ammonia Supply Co. 2001 -TMI - 50513 - (CEGAT, COURT NO. III, NEW DELHI), held that "As per Note quoted above, labelling or re-labelling of the container should take place at a time when the goods are packed from bulk packs to retail packs. The assessee was not getting Ammonia in bulk packs. They were getting it in tankers. Ammonia gas brought in tankers can never be termed as brought in bulk packs. So the assessee was not repacking the goods from bulk packs to retail packs. Accordingly the activity undertaken by the assessee in filling the smaller container from bulk container namely tankers can never fall within the fiction of manufacture as envisaged by Note 10.

By the present circular it appears that the Board has accepted the logic and order of the Tribunal. It is hoped that on the other hand revenue does not file an appeal against the decision of Tribunal.   

Boards Circular: 

CBEC vide its Circular No. 910/30/2009 - CX dated 16 December, 2009 has clarified that tankers cannot be termed as bulk packs and therefore the activity of transferring the goods from tankers into smaller drums cannot be said to be covered by the said chapter note 10.

Hence, Central Excise duty is not payable on said activity. The important portions and effective contents of the Circular is reproduced below with highlights for analysis":                                

It has been brought to the notice of Board that certain dealers are receiving liquid chemicals in bulk in containers and offloading the same at the dealers' premises or godown into drums of 200 ltrs  for subsequent marketing of these materials to customers.

Doubts have been raised as to whether such activity would amount to manufacture in terms of Chapter Note 10 to Chapter 29. As the said Chapter Note has been amended in 2008 budget, it has been contested that the said activity is covered by the present wordings of the Chapter note. The relevant portions of the chapter note reads as under:

Before Amendment (1.03.2008)

10. In relation to products of this Chapter, labelling or relabelling of containers and 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'.

After amendment (1.03.2008)

10. In relation to products of this Chapter, labelling or relabelling 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'.

Whether an operation amounts to repacking from bulk packs to retail packs or not, is a question to be decided on facts. However before examining the implication of the substitution of word 'and' by 'or', it is necessary to examine whether the activity itself is covered by term repacking from bulk packs to retail packs. Hence the first issue which needs to be decided is whether the "container/ lorry tanker" can be considered as bulk pack.

3. Tribunal has in the case of Ammonia Supply Co. 2001 -TMI - 50513 - (CEGAT, COURT NO. III, NEW DELHI), held that "As per Note quoted above, labelling or re-labelling of the container should take place at a time when the goods are packed from bulk packs to retail packs. The assessee was not getting Ammonia in bulk packs. They were getting it in tankers. Ammonia gas brought in tankers can never be termed as brought in bulk packs. So the assessee was not repacking the goods from bulk packs to retail packs. Accordingly the activity undertaken by the assessee in filling the smaller container from bulk container namely tankers can never fall within the fiction of manufacture as envisaged by Note 10 quoted above."

4. Therefore the tankers cannot be termed as bulk packs and therefore the activity of transferring the goods from tankers into smaller drums cannot be said to be covered by the said chapter note 10.

5. Pending cases may be disposed of accordingly.

Views of author:

The decision of Tribunal and the Circular both are correct on legal aspect as well as general aspect of manufacture.

Containers are not bulk packages they are means for delivery of manufactured goods. They may be offloaded in containers for  subsequent sale and delivery.

In the above cases it is seen that a larger container which is usually mounted on large vehicle is used to distribute product to dealers and article or thing is offloaded in smaller containers (say drums or tanks) to whole sellers or retailers. It is not a case of smaller packing in which goods are packed for marketing. From the small packs goods are sold and delivered to customers directly in their container or in temporary container like bottles or tin containers or carry bags for short transportation. Therefore at the stage of retailer also there will be no manufacture.

Petroleum products are also transported from refineries to petrol pumps in large container mounted on truck bodies and delivered to petrol pumps. Petrol pumps sell petrol, diesel etc. to vehicles, and by pumping system such products are offloaded in the tanks mounted in vehicles. So in such cases also there will be no manufacture or deemed manufacture.

However, if the whole seller or retailer repack goods in small containers and make labelling etc. For the purpose of marketing of the product, then such repacking may amount to manufacture.

Dropping proceedings and rectification may be allowed:

The circular states that pending cases may be disposed of accordingly. It is suggested that in cases where SCN have been issued, they may be dropped and file may be closed. Where demand has already been raised, the orders may be rectified and demands may be reduced to nil. This will expedite disposal of cases and avoid piling up of disputed dues and loss of human resources in un necessary litigation on pat of revenue and tax payers.