Manufacture test for nail enamel turns on creation of a new marketable product, preserving area-based exemption eligibility.

Processing base lacquer with colour solution, including testing, shade adjustment, fluidity measurement and occasional addition of pearls, was treated as manufacture because the process brought into existence a new commercially marketable product, namely nail enamel. The decisive test was not packaging or labelling but whether the inputs were transformed into a distinct marketable commodity under the relevant definition of manufacture and Chapter Note. On that reasoning, the area-based exemption under the notification dated 10.06.2003 remained available, and denial of exemption could not support demand, penalty or interest.

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Issues: Whether the activity of making nail polish from base lacquer and colour solution amounted to manufacture so as to disentitle the appellant from the area-based exemption under the notification dated 10.06.2003.

Analysis: The process undertaken by the appellant involved testing the inputs, mixing base lacquer with colour solution, adding colours to achieve the required shade, measuring fluidity, and in some cases adding pearls to produce glitter and shine. Read with the definition of manufacture and the relevant Chapter Note, the treatment applied to the inputs resulted in a product that became marketable to consumers as nail enamel. The decisive consideration was not mere packaging or labelling, but whether the process brought into existence a new marketable product. The reasoning adopted in the earlier Tribunal decision on the same question was followed.

Conclusion: The activity amounted to manufacture and the appellant was entitled to the benefit of the area-based exemption.

Final Conclusion: The demand, penalty, and interest founded on denial of exemption could not be sustained.

Ratio Decidendi: Where processing of inputs results in a new commercially marketable product, the activity constitutes manufacture and the assessee remains eligible for the exemption, notwithstanding the Department's characterisation of the process as mere packing or labelling.

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