SUPREME COURT OF INDIA
Messrs Crane Betel Nut Powder Works
Vs.
Commissioner of Customs and Central Excise, Tirupathi & Anr.
(Dr.Ar.Lakshmanan and Altamas Kabir,JJ.,)
19.03.2007
JUDGMENT
Altamas Kabir, J.
1. Leave granted.
2. The appellant-company is engaged in the business of marketing betel nuts in
different sizes after processing them by adding essential/non-essential oils,
menthol, sweetening agent etc. Initially, the appellant cleared the goods under
Chapter Sub-heading 2107 of the Central Excise Tariff and was paying duty
accordingly. However, the appellant filed a revised classification declaration
under Rule 173B of the Central Excise Rules, 1944, with effect from 17th July,
1997, claiming classification of its product under Chapter Sub- heading 0801.00
of the Central Excise Tariff. It was contended that the crushing of betel nuts
into smaller pieces with the help of machines and passing them through
different sizes of sieves to obtain goods of different sizes/grades and sweetening
the cut pieces did not amount to manufacture in view of the fact that mere
crushing of betel nuts into smaller pieces did not bring into existence a
different commodity which had a distinct character of its own.
3. The Assistant Collector of Central Excise, Guntur Division, who was the
Adjudicating Authority, did not accept the contention of the appellant upon
holding that the product manufactured by the assessee, namely, betel nut
powder, was a preparation containing betel nut with other permitted ingredients
which was a new product commercially known to the market with distinct name and
character. On his said finding, the Adjudicating Authority rejected the claim
of the appellant-company and held that the appellant's product had been rightly
classified under Chapter Heading 2107.00 and the appellant was liable to pay
duty at the appropriate rate specified in the chapter to the Central
Excise Tariff Act, 1985.
4. The appellant-company went up in appeal against the said order of the
Adjudicating Authority to the Commissioner of Customs and Central Excise,
(Appeals) and the same was decided in favour of the appellant-company.
5. After considering the submissions made on behalf of the respective parties,
the Commissioner came to the conclusion that the process of cutting betel nuts
into small pieces and the addition of essential/non-essential oils, menthol,
sweetening agent etc. does not result in a new and distinct product having a
different character being formed. Accordingly, there was no "manufacture"
involved therein and even according to Note 7 of Chapter 21 of the Tariff,
there was no "manufacture" involved in the production of the impugned
goods. The Commissioner further held that the item "betel nut
powder/supari" finding a place/mentioned in the tariff is of no
consequence unless the product was the result of manufacture or production,
which is not so in the instant case.
6. The Commissioner accordingly allowed the appeal filed by the appellant
herein and set aside the order passed by the Assistant Commissioner of Central
Excise, Guntur Division, with consequential relief to the appellant-company.
Aggrieved by the order of the Commissioner, the Revenue went up in appeal to
the Customs, Excise and Service Tax Appellate Tribunal, South Zonal Bench at Bangalore
(for short 'the Tribunal') by way of Appeal No. E.734/2004.
7. The Tribunal took a different view and reversed the order of the
Commissioner upon holding that the end product of the process involved in the
preparation of the appellant's product was different from the original
material. According to the Tribunal, a new and distinct product known as
"supari powder" had emerged. The Tribunal went on to observe as
follows:-
"When subjecting raw material to process of manufacture, it is not
necessary that there should be a sort of transmutation. Definitely, the 'supari
powder' will have the characteristics of 'betel nut'. We cannot say that there
is no manufacture for the reason that the 'betel nut' remains as 'betel nut'.
It may remain so but when other ingredients added to it how can we say these
processes do not bring into existence a new and distinct commodity? If we ask
for betel nut, the shopkeeper will not give supari powder. In other words, the
betel nut is different from the supari powder."
8. The Tribunal accordingly allowed the appeal filed by the Revenue and set
aside the order passed by the Commissioner on 6th May, 2004.
9. The appellant went up in appeal before the High Court of Andhra Pradesh
under Section 35 (B) of the Central Excise Act, 1944 against the said
order of the Tribunal dated 12th April, 2005. The High Court confirmed the view
taken by the Tribunal and after taking into consideration the process involved
in converting the whole betel nuts into sweetened betel nut pieces, the High
Court dismissed the appeal and chose not to interfere with the order passed by
the Tribunal. This appeal has been filed by the assessee-company impugning the
decision of the High Court dated 15th September, 2005.
10. Appearing for the assesee-company, Mr. Soli J. Sorabjee, learned senior
advocate, contended that crushing of betel nuts into smaller pieces and
sweetening the same with essential/non-essential oils, menthol and sweetening
agents did not result in the manufacture of a new product and as observed by
the Tribunal, the end product remained a betel nut. Mr. Sorabjee submitted that
once such a conclusion was arrived at, it could no longer be contended that a
new product had come into existence.
11. Referring to Chapter 8 of the Central Excise Tariff Act, 1985, Mr.
Sorabjee submitted that the product of the appellant-company fell squarely
under the said Chapter Sub- heading 0801.00 for which the rate of duty was nil.
He then referred to Note 4 of Chapter 21 which reads as follows :-
CHAPTER 21 MISCELLANEOUS EDIBLE PREPARATIONS NOTES
"4. In this Chapter "Betel nut powder known as supari" means any
preparation containing betel nuts but not containing any one or more of the
following ingredients, namely lime, katha (catechu) and tobacco, whether or not
containing any other ingredients, such as cardamom, copra and
menthol."
12. Referring to the Chapter Notes on Chapter 8, Mr. Sorabjee pointed out that
fruits and nuts included under the chapter could be whole, sliced, chopped,
shredded, stoned, pulped, grated, peeled or shelled. It was pointed out that
under Heading No. 08.02 in which other nuts are described, it has been
specifically mentioned that the said heading also covers areca (betel) nuts
used chiefly as a masticatory.
13. Mr. Sorabjee urged that the process involving manufacture did not always
result in the creation of a new product. In the instant case notwithstanding
the manufacturing process, it could not be said that a transformation had taken
place resulting in the formation of a new product.
14. In support of his aforesaid contention, Mr. Sorabjee firstly referred to a
Constitution Bench judgment of this Court in the case of Union of India vs.
Delhi Cloth & General Mills, reported in1 ,
where the change in the character of raw oil after being refined fell for
consideration. While considering the submission made that
"manufacture" is complete as soon as by the application of one or
more processes, the raw material undergoes some change, the Constitution Bench
observed that the word "manufacture" used as a verb is generally
understood to mean as bringing into existence a new substance and does not mean
merely to produce some change in a substance. In dealing with the subject,
their Lordships had occasion to refer to an extract from an American judgment
in the case of Anheuser-Busch Brewing Association vs. United States2, which
reads as follows:-
"'Manufacture implies a change, but every change is not manufacture and
yet every change of an article is the result of treatment, labour and
manipulation. But something more is necessary and there must be transformation;
a new and different article must emerge having a distinctive name, character or
use."
15. Mr. Sorabjee submitted that the aforesaid principle had been subsequently
followed by this Court in several cases and in that regard he referred to the
decision of this Court in the case of Deputy Commissioner of Sales Tax
(Law), Board of Revenue (Taxes), Ernakulam vs. M/s. PIO Food Packers, reported
in3 where the same sentiments
were expressed in the matter of processing raw pineapple slices into canned
slices for better marketing. This Court held that when the pineapple fruit is
processed into pineapple slices for the purpose of being sold in sealed cans,
there is no consumption of the original pineapple fruit for the purpose of
manufacture.
16. Similar views have been expressed by this Court in the case of Shyam Oil
Cake Ltd. vs. Collector of Central Excise, Jaipur, reported in4,
and in the case of Aman Marble Industries (P) Ltd. vs. Collector of Central
Excise, Jaipur, reported in 5.
While the first case involve the classification of refined edible oil after
refining, the second case referred to the cutting of marble blocks into marble
slabs. In the first of the said two cases, it was held that the process of refining
of raw edible vegetable oil did not amount to manufacture. Similarly, the
cutting of marble blocks into smaller pieces was also held not to be a process
of manufacture for the reason that no new and distinct commercial product came
into existence as the end product still remained the same and thus its original
identity continued.
17. Mr. Sorabjee referred to the definition of the expression
"manufacture" in Section 2 (f) of the Central Excise Act, 1944,
wherein "manufacture" has been defined to include any process
“(i) Incidental or ancillary to the completion of a manufactured product;
(ii) which is specified in relation to any goods in the section or Chapter
notes of The First Schedule to the Central Excise Tariff Act, 1985 (5
of 1986) as amounting to manufacture; or
(iii) which in relation to the goods specified in the Third Schedule, involves
packing or repacking of such goods in a unit container or labelling or relabeling
of containers including the declaration or alteration of retail sale price on
it or adoption of any other treatment on the goods to render the product
marketable to the consumer; and the word "manufacture" shall be
construed accordingly and shall include not only a person who employs hired
labour in the production or manufacture of excisable goods, but also any person
who engages in their production or manufacture on his own account;"
Mr. Sorabjee pointed out from the above that "manufacture" had to be
incidental or ancillary to the completion of a manufactured product. In the instant
case, the product continued to be pieces of betel nut and hence it would not
come within the definition of "manufacture" as used in the Central
Excise Act, 1944.
Mr. Sorabjee urged that although initially the appellants' product had been
classified under Chapter Heading 2107.00, after subsequent reconsideration of
the matter, it was found to fall squarely under Chapter Sub-heading 0801.00
referred to in Chapter 8 of the Central Excise Tariff Act, 1985 and
an application was accordingly made to the Assistant Collector of Central
Excise, Guntur for re-determination.
18. Mr. Sorabjee submitted that while the Commissioner of Customs and Central
Excise (Appeals) had correctly decided the matter, both the Tribunal as also
the High Court took an erroneous view that on account of processing of the
betel nuts a new and distinct product had emerged, thereby attracting tax
payable in respect of products classified under Chapter Heading 2107.00. Mr.
Sorabjee submitted that the orders passed by the High Court as also the
Tribunal were required to be set aside and that of the Commissioner of Customs
and Central Excise (Appeals) was liable to be restored.
19. Appearing for the Revenue, Mr. B. Datta, learned Addl. Solicitor General,
reiterated the stand taken by the Department before the Tribunal as also the
High Court. He reiterated that the very process of crushing the betel nuts into
different gradable sizes and adding certain ingredients to the same resulted in
the manufacture of a new product which attracted Chapter Sub-heading 2107.00 of
the Tariff instead of Sub-heading No.0801.00 of the Schedule to the Central
Excise Tariff Act, 1985.
20. Dr. R.G. Padia, learned senior advocate, who also appeared for the
respondents in the other appeal (Civil Appeal No.6659/2005) submitted that
neither the Tribunal nor the High Court had committed any error in holding that
a new product emerged after the manufacturing process resorted to by the
assessee which substantially altered the character of the original product. It
was submitted that though it was true that betel nut remained betel nut even in
the final product, the same did not retain its original character and was
converted into a product where one of the components was betel net or supari.
Distinguishing the view taken by the Constitution Bench in the Delhi Cloth and
General Mills Ltd. (supra), Dr. Padia contended that while in the said case no
new product had emerged and only raw oil had been subjected to processing which
could not be equated with manufacture, in the instant case, the raw material
itself, which was otherwise inedible, underwent a change and was transformed
into a product which was edible with the addition of essential/non- essential
oils, menthol, sweetening agents etc. resulting in the manufacture of a
completely new product which was different from the original raw material.
21. Dr. Padia also referred to Section 2 (f) of the Central Excise Act,
1944 and submitted that the definition of the expression
"manufacture" squarely covered the process involved in the conversion
of raw betel nut into sweetened betel nut powder and/or pieces.
22. In support of his aforesaid contention, Dr. Padia referred to a decision of
this Court in O.K.Play (India) Ltd. vs. Commissioner of Central Excise-II,
New Delhi, reported in6 where
the expression "manufacture" had been considered in the process of
conversion of low density polyethylene (LDPE) and high density polyethylene
(HDPE) granules into moulding powder for using the same as inputs to
manufacture plastic water-storage tanks and toys. It was held that such
processing amounted to "manufacture" within Section 2 (f) of the
Central Excise Act, 1944. It was also held that such moulding powder is a
marketable commodity and is, therefore, excisable under Section 2 (d) of the aforesaid
Act. Dr. Padia referred to paragraph 11 of the said judgment which refers to
the two clauses contained in Section 2 (f) of the 1944 Act and instead of
setting out the activities in respect of different tariff items, Sub-clause
(ii) simply states that any process, which is specified in Section/Chapter
Notes of the Schedule to the Tariff Act, shall amount to
"manufacture". It was also held that under Sub-clause (ii), the
Legislature intended to levy excise duty on activities that do not result in
any new commodity. In other words, if a process is declared to be
"manufacture" in the Section or Chapter Notes, it would come within
the definition of "manufacture" under Section 2 (f) and such process
would become liable to excise duty. Dr. Padia then referred to the decision of
this Court in Kores India Ltd., Chennai vs. Commissioner of Central Excise,
Chennai, reported in  , which involved the cutting of duty-paid
typewriter/telex ribbons in jumbo rolls into standard predetermined lengths. It
was held that such cutting brought into existence a commercial product having
distinct name, character and use and that both the Commissioner of Central
Excise and the Tribunal had rightly held that the same amounted to
"manufacture" and attracted the liability to duty.
23. The next decision referred to by Dr. Padia was that this Court in Brakes
India Ltd. vs. Superintendent of Central Excise and Ors., reported in7,
where the process of drilling, trimming and chamfering was said to amount to
"manufacture" within the meaning of Section 2 (f) of the 1944 Act.
While deciding the matter, this Court quoted the observations of the High Court
as under:-
"If by a process, a change is effected in a product, which was not there
previously , and which change facilitates the utility of the product for which
it is meant, then the process is not a simple process, but a process incidental
or ancillary to the completion of a manufactured product."
24. Dr. Padia also referred to the various judgments of the Tribunal in support
of his aforesaid contention which merely repeat what has been explained in the
decisions of this Court cited by him.
25. Dr. Padia concluded on the note that both the Tribunal and the High Court
had correctly held that the appellant was engaged in the manufacture of a new
product from betel nuts and the same had been correctly classified under
Chapter Sub-heading 2107.00 and was liable to duty at the appropriate rate
specified in the Schedule to the Tariff Act.
26. Despite the elaborate submissions made on behalf of the respective parties,
the issue involved in this appeal boils down to the question as to whether by
crushing betel nuts and processing them with spices and oils, a new product
could be said to have come into being which attracted duty separately under the
Schedule to the Tariff Act.
27. In our view, the process of manufacture employed by the appellant-company
did not change the nature of the end product, which in the words of the
Tribunal, was that in the end product the 'betel nut remains a betel nut'. The
said observation of the Tribunal depicts the status of the product prior to
manufacture and thereafter. In those circumstances, the views expressed in the
D.C.M. General Mills Ltd.(supra) and the passage from the American Judgment
(supra) become meaningful. The observation that manufacture implies a change ,
but every change is not manufacture and yet every change of an article is the
result of treatment, labour and manipulation is apposite to the situation at
hand. The process involved in the manufacture of sweetened betel nut pieces
does not result in the manufacture of a new product as the end product
continues to retain its original character though in a modified form.
28. In our view, the Commissioner of Customs and Central Excise (Appeals) has
correctly analysed the factual as well as the legal situation in arriving at
the conclusion that the process of cutting betel nuts into small pieces and
addition of essential/non-essential oils, menthol, sweetening agent etc. did
not result in a new and distinct product having a different character and
use.
29. The decision of this Court in the case of O.K. Play (India) Ltd. (supra),
relied on by Dr. Padia, does not also help his submission that any form of
manufacture would attract payment of excise duty, since the said decision was
dealing with Note 6 to Chapter 39 of the 1985 Act where the expression
"manufacture" has been categorically included, whereas in the instant
case, Note 4 of Chapter 21 which deals with Betel Nut Powder, does not do so.
30. In the circumstances, we allow the appeal and set aside the orders passed
by the High Court dated 15th September, 2005 and the Tribunal dated 12th April,
2005, respectively, and restore that of the Commissioner of Customs and Central
Excise dated 6th May, 2004.
31. The decision in this appeal will govern Civil Appeal No.6659/2005 as the
facts of which are similar to those of the present appeal.
32. There will be no order as to costs.
Judgment Referred.
1(1963) SCR Supl. (1) 0586
2(1980) Supp. SCC 0174
3(2005) 1 SCC 0264
4(2005) 1 SCC 0279
5(2005) 2 SCC 0555
6C.A.No.4322 of 1999
7(1997) 10 SCC 0717