2003 (10) TMI 47 - SC - Central Excise

Cinder not liable to excise duty as it lacks manufacturing process in India under Tariff Act

UNION OF INDIA Versus AHMEDABAD ELECTRICITY CO. LTD.

The SC held that mere inclusion of an item in the First Schedule to the Tariff Act does not automatically make it liable to excise duty. The court ruled ... Whether inclusion of an item in the entries to the First Schedule to the Tariff Act per se makes the item exigible to excise duty ? Held that:- In the present case it is not possible to say that cinder satisfies the requirement of being manufactured in India. It is clear that to be subjected to levy of excise duty 'excisable goods' must be produced or manufactured in India. For being produced and manufactured in India the raw material should have gone through the process of transformation into a new product by skilful manipulation. Excise duty is an incidence of manufacture and, therefore, it is essential that the product sought to be subjected to excise duty should have gone though the process of manufacture. Cinder cannot be said to have gone through any process of manufacture, therefore, it cannot be subjected to levy of excise duty. The onus to show that particular goods on which excise duty is sought to be levied have gone through the process of manufacture in India is on the revenue. They have done nothing to discharge this onus. For this reason alone they must fail. Thus as cinder cannot be subjected to levy of excise duty because it is not an item of goods which has been subjected to process of manufacture, it is not necessary for us to go into any other point.The result is that the contention of the revenue that cinder is liable to payment of excise duty is hereby rejected. The core legal questions considered by the Court in this batch of appeals are:(1) Whether the mere inclusion of an item such as 'cinder' in the First Schedule to the Central Excise Tariff Act automatically renders it exigible to excise duty;(2) Whether 'cinder' satisfies the twin tests of being 'manufactured in India' and 'marketable' so as to attract excise duty;(3) Whether the High Court erred in entertaining a writ petition under Article 226 of the Constitution challenging departmental circulars and trade notices relating to excise liability on cinder.Issue 1: Whether inclusion in the First Schedule to the Tariff Act makes 'cinder' automatically exigible to excise dutyThe relevant statutory framework is Section 3 of the Central Excise Act, 1944, which levies excise duty on 'all excisable goods other than salt which are produced or manufactured in India' as specified in the First Schedule to the Tariff Act. Section 2(d) defines 'excisable goods' as goods specified in the First Schedule and includes salt. The learned Additional Solicitor General (ASG) argued that since 'cinder' falls under Entry 26.21 ('Other slag and ash, including seaweed ash (kelp) - 8%') in the First Schedule, it is per se exigible to excise duty.The Court examined this contention closely and held that the charging section (Section 3) qualifies excisable goods by requiring that they be 'produced or manufactured in India.' Thus, mere mention in the First Schedule does not automatically attract excise duty unless the goods are produced or manufactured in India. The Court distinguished this from customs law where such a qualification is absent. The Court rejected reliance on precedents concerning customs duty and held that excise duty is a duty on manufacture, and goods must satisfy the production/manufacture test to be exigible.The Court further noted that 'cinder' is not ash but an unburnt or partly burnt residue of coal, which is not listed separately in the Schedule. The Revenue's attempt to equate cinder to ash to bring it under Entry 26.21 was rejected as unsustainable. The Court emphasized that the onus lies on the Revenue to prove that the goods are manufactured in India, which was not discharged.Issue 2: Whether 'cinder' satisfies the tests of being 'manufactured in India' and 'marketable'The Court analyzed the meaning of 'manufacture' under Section 2(f) of the Central Excise Act and relevant judicial precedents. Manufacture involves a process or activity that transforms raw material into a new and distinct article having a different name, character, or use. Mere change or treatment is insufficient unless a new product emerges. The Court cited several precedents emphasizing that manufacture requires transformation resulting in a new and distinct product known in the market.Applying these principles, the Court held that burning coal as fuel to produce steam does not amount to manufacture of cinder. Coal is used only as fuel, an ancillary purpose, and not as raw material for the end product. Cinder is an unburnt residue and does not acquire a new identity or character. The Court relied on precedents where waste or scrap generated during manufacturing was held not to be exigible to excise duty unless transformed into a new product.The Court also noted that the Revenue had earlier taken a consistent stand that cinder is not exigible to excise duty as no manufacturing process is involved, as reflected in a 1975 circular. The subsequent withdrawal of exemption in 1996 and departmental clarifications were held to be unjustified and contrary to law, especially since the fundamental nature of cinder's emergence had not changed.Regarding marketability, although cinder is sold, the Court doubted whether it qualifies as 'marketable goods' in the legal sense since it is essentially waste that must be removed to avoid accumulation. The fact that cinder is sold at a price does not automatically make it a marketable commodity for excise purposes.Issue 3: Whether the High Court erred in entertaining a writ petition under Article 226The Revenue contended that the High Court should not have entertained the writ petition challenging departmental circulars and trade notices. The Court observed that only one appeal in the batch arose from an Article 226 petition, the rest being statutory appeals under Section 35L of the Central Excise Act. The Court found no merit in the objection, noting no preliminary objection was taken before the High Court regarding maintainability and that the High Court was justified in entertaining the petition since departmental circulars could not be challenged before authorities bound by them.Significant holdings and core principles established:'Section 3 of the Central Excise Act shows that the words 'excisable goods' have been qualified by the words 'which are produced or manufactured in India'. Therefore, simply because goods find mention in one of the entries of the First Schedule does not mean that they become liable for payment of excise duty.''Excise duty is a duty on manufacture. Unless goods are manufactured in India, they cannot be subjected to payment of excise duty.''Manufacture implies a change, but every change is not manufacture. There must be such a transformation that a new and different article must emerge having a distinctive name, character or use.''Coal is used as fuel and not as raw material for the end product. Cinder is an unburnt or partly burnt residue of coal and does not acquire a new identity or character. Burning of coal for producing steam is not a manufacturing activity.''Waste or scrap obtained in the course of manufacture which is not transformed into a new and distinct article is not exigible to excise duty even if it has some saleable value.''The Department's volte-face in declaring cinder exigible to excise duty after having earlier exempted it is unjustified and contrary to law.''The High Court was justified in entertaining the writ petition under Article 226 challenging departmental circulars and trade notices.'Final determinations:The Court dismissed all appeals filed by the Revenue and held that cinder is not exigible to excise duty because:It is not a manufactured product as it does not undergo any process of manufacture resulting in a new and distinct article;It is not produced or manufactured in India in the sense required under the Central Excise Act since it is a residue of coal burnt as fuel;Its mere inclusion under an entry for ash in the First Schedule does not make it exigible to excise duty;Marketability alone is insufficient to attract excise duty if the manufacturing test is not satisfied;The High Court rightly entertained the writ petition challenging departmental notifications and circulars.