2000 (2) TMI 338 - AT - Central Excise

Tribunal Rules Reprocessing of Pan Masala Not 'Manufacture'; Appellants Prevail

The Tribunal held that the reprocessing of Pan Masala did not constitute 'manufacture' as there was no creation of a new substance, and the same ... Manufacture - repair or rectification of defect - Rule 173H of the Central Excise Rules - Chapter Note 3 of Chapter 21 (Central Excise Tariff) - D-3 declaration - applicability of Rule 173H where original identity is lost - omission of 'remaking' from Rule 173HManufacture - Chapter Note 3 of Chapter 21 (Central Excise Tariff) - Section 2(f) of the Central Excises and Salt Act - Whether the reprocessing of returned pan masala amounted to 'manufacture' attracting central excise duty - HELD THAT: - The Tribunal accepted the appellants' uncontradicted account that the same principal ingredients (betel nut, catechu and lime) were reused and that reprocessing involved de-flavouring followed by reflavouring to rectify poor flavour. The addition of a fresh quantity of flavouring agent was held to be a minor change which did not produce a new commercially distinct product. Relying on the reasoning of the Supreme Court and Tribunal precedents, the reconditioning involved no material change in name, character or use and therefore did not amount to 'manufacture' within the meaning of Section 2(f) or under Chapter Note 3 of Chapter 21. The omission of the word 'remaking' from Rule 173H(1)(b) during the period in dispute was held to be inconsequential to this conclusion. The Department produced no evidence to rebut the appellants' consistent plea about reuse of the same ingredients or to show labelling, relabelling or repacking that would render the process a manufacture. [Paras 9, 10]The reprocessing of the returned pan masala was repair/rectification of defect and not 'manufacture'; consequently the clearances did not attract excise duty as manufacture.Rule 173H of the Central Excise Rules - applicability of Rule 173H where original identity is lost - D-3 declaration - Whether the benefit of Rule 173H is lost because the reprocessed goods were cleared to parties other than those from whom they were received - HELD THAT: - The Tribunal relied on earlier Tribunal authority to hold that Rule 173H could apply even if the original identity of repaired goods was lost, provided no commercially distinct article was brought into existence. There was no stipulation in Rule 173H requiring clearance after reprocessing to the same party, and no legal prohibition against clearing to different parties. The appellants had filed D-3 declarations for goods received for reprocessing and the circumstances fell within the ambit of Rule 173H as interpreted by the Tribunal precedents. The Revenue's contention that Rule 173L should have been resorted to was rejected in light of the Tribunal's view that the assessee could choose the procedure under Rule 173H or Rule 173L. [Paras 11]Benefit of Rule 173H was available despite clearance to parties other than those who returned the goods; the Revenue's plea based on Rule 173L and requirement to clear only to original parties was unsustainable.Final Conclusion: The orders of the lower authorities confirming demands of central excise duty were set aside; the appeal is allowed in favour of the assessee. Issues Involved:1. Demand and recovery of Central Excise duty on reprocessed Pan Masala.2. Applicability of Rule 173H of the Central Excise Rules.3. Whether reprocessing amounts to 'manufacture' under Section 2(f) of the Central Excises and Salt Act.4. Impact of the omission of the word 'remaking' from Rule 173H(1)(b).5. Whether reprocessed goods must be cleared to the same parties from whom they were received.Detailed Analysis:1. Demand and Recovery of Central Excise Duty on Reprocessed Pan Masala:The appellants were engaged in manufacturing Pan Masala and received show cause notices from the Department demanding recovery of Central Excise duty for clearances made without payment of duty. The Department alleged that the goods were fresh goods cleared under the pretense of being reprocessed goods received under D-3s, intending to evade duty. The total amount of duty sought was Rs. 3,07,024.07.2. Applicability of Rule 173H of the Central Excise Rules:The appellants argued that Rule 173H did not require goods received for reprocessing to be cleared to the same parties from whom they were received. They cited the Tribunal's decision in Antifriction Bearings Corporation Limited v. Collector of Central Excise, Pune, which supported their interpretation. The Department contended that accepting this interpretation would render Rule 173L redundant, arguing that the appellants should have followed Rule 173L instead.3. Whether Reprocessing Amounts to 'Manufacture' Under Section 2(f) of the Central Excises and Salt Act:The appellants contended that their reprocessing did not amount to 'manufacture' as defined under Section 2(f) of the Act. They explained that the process involved de-flavouring and re-flavouring the same mixture without any material change. They relied on Supreme Court decisions in Union of India v. Delhi Cloth and General Mills Co. Ltd., Collector of Central Excise v. Jayanth Oil Mills Pvt. Ltd., and Collector of Central Excise, Mumbai v. Kiran Spinning Mills, which held that no new substance emerged from such reprocessing. The Department, however, argued that the reprocessing amounted to 'manufacture' as per Chapter Note 3 of Chapter 21 of the Central Excise Tariff Act.4. Impact of the Omission of the Word 'Remaking' from Rule 173H(1)(b):The Department pointed out that the word 'remaking' was omitted from Rule 173H(1)(b) by Notification No. 5/89 dated 22-2-1989, arguing that this omission meant the reprocessing did not fall under Rule 173H. The appellants countered that the omission was inconsequential as their reprocessing did not amount to 'manufacture' and thus did not require the word 'remaking' to be present in the Rule.5. Whether Reprocessed Goods Must Be Cleared to the Same Parties from Whom They Were Received:The Department alleged that the appellants cleared reprocessed goods to parties other than those from whom they were received, thus disqualifying them from the benefits of Rule 173H. The appellants argued that Rule 173H did not stipulate such a requirement, and the Tribunal's decision in Antifriction Bearings Corporation Ltd. supported their stance. The Tribunal held that Rule 173H could apply even if the original identity of the repaired goods was lost, provided no commercially distinct article was created.Conclusion:The Tribunal found that the reprocessing did not amount to 'manufacture' as no new substance was created, and the same ingredients were used in the reprocessed Pan Masala. The omission of the word 'remaking' from Rule 173H(1)(b) was deemed inconsequential. The Tribunal also held that Rule 173H did not require reprocessed goods to be cleared to the same parties from whom they were received. Consequently, the orders of the lower authorities were set aside, and the appeal was allowed.