Captive use and incidental waste under central excise do not create manufacture absent a new marketable product.

Mere mixing of water with purchased gum powder to obtain liquid gum for captive use did not amount to manufacture under central excise law, because no new distinct marketable product emerged and the activity did not make an otherwise unmarketable product marketable under Chapter Note 3 of Chapter 35. A duty demand could not be sustained by relying on a note not invoked in the show cause notice. Paper cutting waste generated incidentally during corrugated box manufacture was not independently manufactured goods, so no separate excise duty arose on that waste. The connected penalties, including the manager's penalty, also failed once the duty demands were set aside.

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Issues: (i) whether conversion of gum powder into liquid gum by adding water amounted to manufacture and attracted duty under the Central Excise law, including Chapter Note 3 of Chapter 35 of the Central Excise Tariff Act, 1985; (ii) whether duty was leviable on paper cutting waste generated during manufacture of corrugated boxes and whether the related duty demand and penalties could survive.

Issue (i): whether conversion of gum powder into liquid gum by adding water amounted to manufacture and attracted duty under the Central Excise law, including Chapter Note 3 of Chapter 35 of the Central Excise Tariff Act, 1985.

Analysis: The conversion involved only mixing water with purchased gum powder, without any chemical process, to obtain a form used captively in manufacture. The basic product remained an adhesive and no new distinct marketable product came into existence. The material was already marketable in powder form, and the activity did not render an otherwise unmarketable product marketable within the meaning of Chapter Note 3. The demand could not also be sustained by introducing a new case based on an uninvoked note in the show cause notice.

Conclusion: The activity did not amount to manufacture, and the duty demand on liquid gum was not sustainable.

Issue (ii): whether duty was leviable on paper cutting waste generated during manufacture of corrugated boxes and whether the related duty demand and penalties could survive.

Analysis: The waste arose incidentally in the course of manufacturing corrugated boxes. The assessee was not engaged in the independent manufacture of paper cutting waste, so no separate excisable manufacture could be attributed to that waste. Once the duty demands failed, the penalties based on those demands and the consequential penalty on the manager also could not stand.

Conclusion: The duty demand on paper cutting waste and the connected penalties were not sustainable.

Final Conclusion: The order confirming duty and penalties was set aside in full, and the appeals were allowed with consequential relief.

Ratio Decidendi: Mere mixing of water with an already marketable input, resulting only in a change of form for captive use without emergence of a new distinct marketable product, does not constitute manufacture under central excise law; incidental waste generated in the course of manufacture is not separately dutiable absent independent manufacture.

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