Manufacture and penalty rules in excise: in-factory denaturing is taxable, but suppression needs proof of intent to evade duty.

Mixing denaturant with impure spirit inside the factory premises, even in the buyer's tanker, was treated as manufacture because the process took place within the factory precincts, produced a distinct excisable product, and occurred under excise supervision; the duty demand and denial of small scale exemption were therefore sustained. Penalties for suppression and misdeclaration were not sustained because the facts did not show a deliberate intent to evade duty, and where two views were possible the absence of fraud, wilful misstatement or suppression was accepted; the penalties were cancelled.

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Issues: (i) Whether mixing of denaturant with impure spirit in the buyer's tanker within the factory premises amounted to manufacture, making the assessee liable to central excise duty and denial of small scale exemption; (ii) Whether penalties were sustainable on the ground of suppression of facts and misdeclaration with intent to evade duty.

Issue (i): Whether mixing of denaturant with impure spirit in the buyer's tanker within the factory premises amounted to manufacture, making the assessee liable to central excise duty and denial of small scale exemption

Analysis: The process of denaturing was carried out in the buyer's tanker, but the tanker was inside the factory premises and the denatured spirit could not be removed without such mixing taking place there. The premises and precincts of the factory formed part of the factory for excise purposes. The process resulted in a new product and was carried out under the required excise supervision, so the plea that no manufacture took place because the tanker belonged to the buyer was not accepted.

Conclusion: The process amounted to manufacture and the duty demand was upheld against the assessee.

Issue (ii): Whether penalties were sustainable on the ground of suppression of facts and misdeclaration with intent to evade duty

Analysis: The facts showed that the tanker and denaturant were brought by the buyer and the assessee merely carried out the mixing in the tanker. On that basis, the conduct was found not to indicate a deliberate intention to evade duty. As two views were possible on the activity, the finding of the appellate authority that suppression, fraud or wilful misstatement was not established was accepted.

Conclusion: The penalties were not sustainable and their deletion was upheld.

Final Conclusion: The assessee's challenge to duty liability failed, while the Revenue's challenge to deletion of penalties also failed, leaving the duty demand intact and the penalties cancelled.

Ratio Decidendi: A process carried out within the factory premises that brings into existence a distinct excisable product amounts to manufacture, and penalties for suppression or misdeclaration require proof of a deliberate intent to evade duty.

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