Manufacture of packaged drinking water for excise purposes upheld, while penalty was further reduced on the facts.

Treating, bottling and packing packaged drinking water after chemical processing to make it fit for sale was treated as manufacture under Note 2 to Chapter 22 of the Central Excise Tariff Act, so excise duty was upheld. The Tribunal separately held that penalty could be moderated on the facts, and further reduced the penalty while leaving the duty demand undisturbed. The decision confirms that where a tariff chapter note deems a market-preparation process to be manufacture, levy follows, but penalty may still be adjusted according to the circumstances.

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Issues: (i) Whether the process of treating, bottling and packing packaged drinking water amounted to manufacture under Note 2 to Chapter 22 of the Central Excise Tariff Act. (ii) Whether the penalty imposed on the appellant warranted further reduction.

Issue (i): Whether the process of treating, bottling and packing packaged drinking water amounted to manufacture under Note 2 to Chapter 22 of the Central Excise Tariff Act.

Analysis: The product was subjected to treatment with chemicals at different stages and then packed in varying sizes with brand name for sale in the market. The Chapter Note specifically treats such activity, when undertaken to make water fit for sale to consumers, as manufacture for levy purposes. The appellant's contention that only minimal packing was involved was therefore not accepted.

Conclusion: The process amounted to manufacture and the levy of excise duty was upheld against the appellant.

Issue (ii): Whether the penalty imposed on the appellant warranted further reduction.

Analysis: The original penalty was equal to the duty amount under Rule 173Q read with Section 11AC of the Central Excise Act, 1944, and the appellate authority had already reduced it to Rs. 2 lakhs. Considering the facts and circumstances, the Tribunal found that a further moderation of penalty was justified.

Conclusion: The penalty was reduced to Rs. 1,00,000/-.

Final Conclusion: The demand of duty was sustained, while the penalty was further reduced, and the appeal succeeded only to that limited extent.

Ratio Decidendi: Where a tariff chapter note deems a specified process as manufacture for marketable goods, excise duty is attracted, and penalty may be moderated on the facts without disturbing the levy.

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