1989 (1) TMI 122 - SC - Central Excise

Processing Activities Deemed 'Manufacture' under Excises Act; Amendment Valid; Additional Duties Levied; Assessable Value Computation Upheld

The court upheld that processes like bleaching, dyeing, etc., constitute 'manufacture' under the Central Excises and Salt Act even before its amendment. ... Manufacture - assessable value for excise - factory-gate valuation - post-manufacturing profit exclusion - retrospective validation of taxing statute - legislative competence under entry 84, List I - residuary legislative power under entry 97, List I - application of Central Excises Act definitions to Additional Duties Act via procedural incorporation - classification lists under rule 173BManufacture - legislative competence under entry 84, List I - Whether processing operations (bleaching, dyeing, printing, sizing, mercerising, shrink proofing, tentering, heat setting, crease resistant processing, organdie processing, etc.) carried out by processors on grey cotton or man made fabric amount to 'manufacture' for the purposes of the Central Excises Act prior to the 1980 amendment and whether Empire Industries' decision requires reconsideration. - HELD THAT: - On consideration of precedent and the material before the Court, the processes in question were held to produce a commercially different commodity with its own price structure and commercial incidents; therefore such processing amounts to 'manufacture' within section 2(f) even as unamended. The Court found the view in Empire Industries' case to be a plausible and correct application of the relevant legal tests and declined to reopen that conclusion. The Court rejected arguments that mere enhancement of quality or retention of basic identity precludes manufacture where, commercially, a distinct article emerges after processing.Processing as described amounts to 'manufacture'; Empire Industries' decision stands and is affirmed.Legislative competence under entry 84, List I - residuary legislative power under entry 97, List I - Whether the 1980 amendment expanding the concept of 'manufacture' is ultra vires entry 84, List I, or otherwise sustainable under entry 97, List I. - HELD THAT: - Entries in the legislative lists are to be construed liberally but not artificially. The Court held that the extended definition was not alien to the concept of 'manufacture' and thus fell within entry 84. Even if not, the levy could properly be sustained under the residuary entry 97. The Court emphasised that, in challenges to legislative competence, a statute may be upheld under any entry within the Legislature's power and that composite or supplemental taxation legislation is permissible.The amendment is within Parliament's competence; in any event the levy is supportable under entry 97.Application of Central Excises Act definitions to Additional Duties Act via procedural incorporation - assessable value for excise - Whether the Additional Duties of Excise (Goods of Special Importance) Act, 1957 can sustain additional duties on processing when it does not itself contain the expanded definition of 'manufacture' and whether section 3(3) imports necessary provisions of the Central Excises Act. - HELD THAT: - The Court held that section 3(3) of the Additional Duties Act, which makes the provisions of the Central Excises Act apply 'so far as may be' to levy and collection, must be given a wide meaning. Given the supplemental and in pari materia relationship between the Acts and the practical incompleteness of the 1957 Act without reference to the 1944 Act (e.g., assessable value and rates), the procedural incorporation also attracts substantive provisions including relevant definitions. Therefore the Additional Duties Act levy is sustainable with the imported definition and valuation principles.Additional duty levy is supportable; the Central Excises Act definitions and valuation rules apply to the Additional Duties Act by virtue of section 3(3).Retrospective validation of taxing statute - Article 19(1)(g) - Whether retrospective operation of the Amending Act (validating past levies) is an unreasonable restriction on the processors' fundamental right under Article 19(1)(g). - HELD THAT: - The Court observed that a competent Legislature may validate a law previously declared invalid, including with retrospective effect, provided it cures the defects identified. In the taxing context, retrospective validation is an accepted legislative technique and, absent extraordinary circumstances, does not violate Article 19(1)(g). The Court agreed with the reasoning in Empire Industries' case that the retrospective effect here did not produce such unfairness or unforeseeable burden as to be unconstitutional.Retrospective validation is not violative of Article 19(1)(g); the retrospective provisions are valid.Assessable value for excise - factory-gate valuation - post-manufacturing profit exclusion - classification lists under rule 173B - Proper basis for computation of assessable value of processed grey fabric (including whether assessable value may be limited to job work charges or may include trader's subsequent selling price declared under classification lists). - HELD THAT: - The Court applied section 4 and relevant rules and held the assessable value is not confined to processing charges. The correct value is the wholesale cash price at the factory gate - practically expressed as the value of the grey cloth in the hands of the processor plus the value of the job work plus manufacturing profit and manufacturing expenses that would be included in the factory gate price. Post manufacturing selling profits of traders are extraneous and must be excluded. A declaration by the trader under rule 173B may be taken as the assessable value only if it reflects the factory gate price (i.e., grey cloth value + job work + manufacturing profit/expenses) and does not include subsequent selling profits.Assessable value = value of grey cloth (in processor's hands) + job work value + manufacturing profit and manufacturing expenses (factory gate price); trader's post manufacturing profits excluded; rule 173B declarations accepted only to the extent they represent factory gate value.Final Conclusion: The Court affirmed that the processing operations constitute 'manufacture', upheld the validity and retrospective effect of the 1980 amendments (and their support under entry 84 or, alternatively, entry 97), held that additional duties are sustainable by incorporating relevant provisions of the Central Excises Act, and clarified that assessable value is the factory gate value (grey cloth value + job work + manufacturing profit/expenses) excluding post manufacturing trader profits. Consequently, appeals by the Union are allowed, appeals and writ petitions by the processors are dismissed; the Union may recover arrears and enforce guarantees; no orders as to costs. Issues Involved:1. Whether the processes of bleaching, dyeing, printing, sizing, etc., amount to 'manufacture' under section 2(f) of the Central Excises and Salt Act, 1944, prior to its amendment.2. Whether the amendment to section 2(f) and tariff items Nos. 19 and 22 of the Central Excises Act is ultra vires entry 84, List I, and whether it can be supported by entry 97, List I.3. Whether the levy of additional duties under the Additional Duties of Excise Act is valid without a corresponding amendment to the definition of 'manufacture' in that Act.4. Whether the retrospective operation of the Amending Act is an unreasonable restriction on the fundamental right under article 19(1)(g) of the Constitution.5. Whether the computation of the assessable value of processed grey fabric based on the wholesale cash selling price declared under the classification list under rule 173B is justified.Detailed Analysis:Issue 1: Whether the processes of bleaching, dyeing, printing, sizing, etc., amount to 'manufacture' under section 2(f) of the Central Excises and Salt Act, 1944, prior to its amendment.The court upheld the view from *Empire Industries Ltd. v. Union of India* [1986] 162 ITR 846, that 'grey fabric' after undergoing processes like bleaching, dyeing, etc., becomes a commercially different commodity with its own price structure and commercial incidents. This transformation constitutes 'manufacture' within the meaning of section 2(f) even before its amendment. The court found that these processes result in a new article with a distinctive character and use, thus meeting the criteria for 'manufacture.'Issue 2: Whether the amendment to section 2(f) and tariff items Nos. 19 and 22 of the Central Excises Act is ultra vires entry 84, List I, and whether it can be supported by entry 97, List I.The court held that the processes specified in the amendment were not so alien to the concept of 'manufacture' that they could not fall within entry 84, List I. Even if the concept of 'manufacture' was expanded beyond entry 84, the levy could still be supported by entry 97, List I. The court emphasized that legislative entries should be construed liberally, and the term 'levy' includes both the imposition of a tax and its quantification and assessment.Issue 3: Whether the levy of additional duties under the Additional Duties of Excise Act is valid without a corresponding amendment to the definition of 'manufacture' in that Act.The court found that section 3(3) of the Additional Duties Act, which states that the provisions of the Central Excises Act shall apply to the levy and collection of additional duties, was sufficient to incorporate the definition of 'manufacture' from the Central Excises Act. The court noted that the term 'levy' includes the entire process of taxation, and thus the expanded definition of 'manufacture' under the Central Excises Act applies to the Additional Duties Act as well.Issue 4: Whether the retrospective operation of the Amending Act is an unreasonable restriction on the fundamental right under article 19(1)(g) of the Constitution.The court held that the retrospective operation of the Amending Act was not an unreasonable restriction on the fundamental right under article 19(1)(g). The court stated that a competent Legislature can validate a law retrospectively to cure defects identified by courts, and such validation is particularly significant in taxing statutes. The court found no extraordinary circumstances to override the legislative judgment on the need for retrospective legislation.Issue 5: Whether the computation of the assessable value of processed grey fabric based on the wholesale cash selling price declared under the classification list under rule 173B is justified.The court upheld the method of determining the assessable value as laid down in *Empire Industries' case* [1986] 162 ITR 846, which includes the value of the grey fabric, the processing charges, and the manufacturing profit and expenses. The court rejected the contention that the assessable value should be limited to the processing charges alone, stating that such a method would create anomalies and inconsistencies. The court clarified that the assessable value must reflect the price at which the processed fabric leaves the factory gate, including all relevant costs and profits but excluding post-manufacturing profits.Conclusion:The court allowed the appeals by the Union of India, setting aside the judgment of the Gujarat High Court, and dismissed the appeals and writ petitions filed by the processors. The assessable value of processed fabric includes the value of the grey cloth, job work done, manufacturing profit, and manufacturing expenses, but excludes post-manufacturing profits.