Manufacture by dilution of sulphuric acid triggers excise duty, but section 11AC penalty is not warranted on interpretive dispute.

Diluting concentrated sulphuric acid with demineralised water to produce a marketable, battery-useable product was treated as manufacture under section 2(f) of the Central Excise Act because the process resulted in a distinct product covered by the relevant tariff chapter notes. The activity therefore attracted excise registration and duty, with corresponding Cenvat credit eligibility on inputs for the relevant period. On penalty, section 11AC was not applied because the dispute centered on legal interpretation of manufacture rather than conduct justifying that statutory penalty, although the separate penalty under rule 27 was left undisturbed.

---

---

Issues: (i) Whether dilution of concentrated sulphuric acid by mixing it with demineralised water to obtain a marketable product amounts to manufacture under the Central Excise law; (ii) Whether penalty under section 11AC was warranted on the facts.

Issue (i): Whether dilution of concentrated sulphuric acid by mixing it with demineralised water to obtain a marketable product amounts to manufacture under the Central Excise law.

Analysis: Manufacture under section 2(f) of the Central Excise Act, 1944 includes a process specified in the section or chapter notes of the First Schedule to the Central Excise Tariff Act, 1985. The activity undertaken produced diluted sulphuric acid of a different concentration, which was marketable and used in battery manufacture. On that basis, the process fell within the statutory definition of manufacture.

Conclusion: The activity amounted to manufacture and the assessee was liable to excise registration and duty, with corresponding entitlement to take Cenvat credit on inputs for the relevant period.

Issue (ii): Whether penalty under section 11AC was warranted on the facts.

Analysis: The dispute turned on interpretation of whether the activity was manufacturing activity. Where the issue is one of legal interpretation and the conduct does not disclose the requisite basis for the statutory penalty, imposition of penalty under section 11AC is not justified. The separate penalty under rule 27 remained in place.

Conclusion: Penalty under section 11AC was not warranted.

Final Conclusion: The demand and duty liability were sustained on the finding of manufacture, but the statutory penalty under section 11AC was set aside, leaving the appeal only partly successful.

Ratio Decidendi: A process resulting in a marketable product and specifically covered by the tariff chapter notes constitutes manufacture under section 2(f), but penalty under section 11AC is not attracted where the dispute is one of interpretation.

---