Bombay High Court
Sandoz India Limited vs Union Of India And Others on 1 January, 1800
Equivalent citations: 1980(6)ELT696(BOM)
ORDER Chandurkar, J.
1. The question raised in this petition is whether a formulation of a synthetic organic dye is independently liable to levy of excise due under the Central Excises and Salt Act, 1944 (hereinafter referred to as the Act).
2. The petitioners are manufactures of synthetic organic dyes since the year 1963 and those days are then formulated into a liquid solution. This formulation involves the addition of dispersing agents or diluents which, according to the petitioners, does not change the dye already manufactured. In one of the letters addressed to the Deputy Collector of Central Excise, Bombay, on 9th December 1960, the process of formulation has been briefly described. The petitioners informed the Deputy Collector that they were formulating Foron Liquids from imported concentrated dispersible insoluble Azo dyestuffs. According to the petitioners, the process of formulation is only to break the pigment particles for physical and using dispersing agent nd water without any chemical change taking place. The diluents used for the formulation were stated to be (1) Belloid TD, (2) Sodium Lingo Sulphonate and (3) Water. The petitioners also informed the Deputy Collector that the company was manufacturing some of the concentrated dispersible insoluble Azo Dyestuffs locally.
3. Now, according to the petitioners, excise duty which is levied on synthetic dyestuff under item 14D of the Central Excise Tariff is being said by them on the synthetic organic dyestuff manufactured by them and, according to the petitioners, no excise duty is payable on the formulation made from dyes, as such formulation did not constitute manufacturing. The organic dues, according to the petitioners, were purchased as such from the market and the formulated dyes were made by the petitioners using either the dyes manufactured by them or dues purchased by them. The petitioners had, however, paid the excise duty on the dye formulation of which the petitioners claimed refund and the petitioners were told that the excise duty paid by them was not paid on the formulations but on the dyes used therein. Later the petitioners asked for the reconsideration of this view of the Excise Department and by letter dated 25th September 1963 the Collector of Central Excise allowed the petitioners to (1) clear dyes manufactured by them after payment of the duty at the concentrated stage and thereafter to formulate them and (2) to claim refund of excise duty as requested by the petitioner. Later, it appears that the petitioners continued to manufacture and purchase dyes and make formulations thereform but no excise duty was ever demanded from the petitioners on the formulations made and sold.
4. In the year 1968 the petitioners desired to formulate and sell certain formulations under the trade name "Foron" and the petitioners wanted to see that no excise duty would be payable on the said formulations. The Assistant Collector, however, informed the petitioners that they should give a declaration that the excise duty would be paid if it is decided that the duty is payable thereon. Accordingly the petitioners started manufacturing the said dyes, namely, Disperse Orange G. Cone., Disperse Red G. Conc., and Disperse Blue BL Conc. and excise duty was paid thereon.
5. In April 1973, the petitioners received a letter from the Assistant Collector of Central Excise stating that excise duty was payable on the formulation prepared by the petitioners. This decision of the Assistant Collector was appealed by the petitioners. This decision of the Assistant Collector was appealed by the petitioners in an appeal to the Appellate Collector, but the appeal came to be dismissed by the Appellate Collector of Central Excise. The relevant part of the decision of the appellate authority in Exhibit `I' indicates that according to it what was cleared by the petitioners from the factory was Foron Liquids and excise duty was leviable on these liquids. The appellate authority, holding that what was cleared from the factory was not Foron pigments but Foron Liquids observed in the relevant part of the order as follows :
"It is admitted that the appellants clear from their factory Foron Liquids and not Foron pigments. Excise duty is chargeable on the excisable goods at the time of their clearances from the factory. In the present case the excisable goods at the stage of their clearance from the factory are Foron liquids and, therefore, duty is correctly leviable on Foron liquids. Since Foron pigments fall under the same tariff item as Foron liquids, duty cannot be recovered on Foron pigments, otherwise it would amount to double taxation under the same tariff item. Even assuming that conversion of Foron pigments into Foron liquids is not "manufacture" and that no new product having distinct characteristic is brought into existence, it is clear that duty is correctly leviable on Foron liquids which are the excisable goods cleared from the appellants factory".
These observations clearly indicate that the main circumstances which weighed with the Appellate Collector was that the form in which the dye was taken out of the factory was different from the form in which the Foron pigment was manufactured and since at the time when the goods were cleared they were in different form the liquid or the formulation of the dye attracted excise duty.
6. We wish to point out at this stage that there is no finding recorded by the Appellate Collector that the process by which the Foron pigment was formulated into a Foron liquid was a manufacturing process. On the other hand, the Appellate Collector proceeded to decided the liability of the petitioners on the footing that no new products having distinct characteristic have been brought into existence. But what was important, according to the Appellate Collector, was that what was cleared was not a pigment but a liquid. It is this order which has been challenged by the petitioners in this petition.
7. There was another dispute which the petitioners seem to have with the Department and that dispute related to the determination of the assessable value of the formulations and the questions was whether the petitioners were entitled to "exclude from the selling price (1) post- manufacturing expenses" and the "trade discount" and according to the petitioners, no credit whatever was given, in respect of large amounts of excise duty admittedly paid by the petitioners on the dyes. During the pendency of this petition the appeal in which this dispute had become the subject- matter had come to be disposed of by the Appellate Collector of Central Excise by an order dated 31st October 1975, a copy of which has been produced on behalf of the respondents. We are, however, not concerned with that dispute because Mr. Bhabha appearing on behalf of the petitioners has fairly stated that so far as the principle relating to the deduction of post-manufa cturing costs is concerned, that had been decided in favour of the petitioners by the said appellate order but that on merits it was found that the petitioners had not produced any material to indicate what, according to the petitioners, constituted the element of post-manufacturing expenses in the price-list declared by them. In view of this appellate decision, the argument in this petition is how restricted only to the limited question as to whether the process of formulation of synthetic organic dye which is manufactured or purchased by the petitioners can be said to be a manufacturing process so that anew article comes into being as a result of such manufacture.
8. The contention raised on behalf of the petitioners is that the process of formulation is different from manufacturing process and the process described earlier is resorted to with a view to only disperse the dye which is in the concentrated form or in the wet cake form, as it is called, and when dispersing agents are added and a solvent is added in order to emulsify the dye, the dye continues to remain the same without any change in its composition or in its characteristic. Mr. Bhabha has relied on trade notice in support of his arguments that where some dispersing agents are added to a dye, the formulation does not bring about any new product. This trade notice which is in the form of Tariff Rulings No. 18/65 deals with the question as to whether "Vats-Paste" produced by mixing duty-paid "Vat Powder" with glycerine and dispersing agents, etc. is assessable to duty under Item 14D of the Central Excise Tariff and the decision of the board was stated to be as follows :
"Vat Powders are assessable to duty as synthetic Organic Dyestuff under Tariff Item 14D of the First Schedule of Central Excise Act, 1944. The conversion of "Vats, Powder" into "Vats, Paste" does not involve any chemical change, the gleyerine and dispersing agents etc. serving merely as moisture retaining and deffocculating agents. The Board have therefore decided that where "Vats Paste" is produced by blending "Vats, Powder" on which duty has been paid, with Glycerine etc. the "Vat Paste" is not chargeable to duty".
Relying on this it is contended by Mr. Bhabha that even, according to the Excise Department, addition of a dispersing agent was permissible and there is no reason why the formulation of the Foron pigment which undisputedly is a synthetic organic dyestuff should be treated differently.
9. The relevant entry in the First Schedule is Item No. 14D which reads as follows :
"Synthetic organic dyestuffs (including pigment dyestuffs) and synthetic organic derivatives used in any dyeing process'. There is no dispute that this entry takes within it the synthetic organic material which is used for dyeing and described as dyestuff. It also includes pigment. The petitioners are manufacturing Foron pigment which is undisputedly a synthetic organic dyestuff as contemplated by entry 14D".
10. It is now well-known that the charge to excise duty under Section 3 of the Act is attracted in case of manufacture of an excisable goods. What is meant by the word "manufacture" as used in S. 3 of the Act was considered by the Supreme Court originally in Union of India v. Delhi Cloth and General Mills Co. Ltd., , where it has been observed as follows :
`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 changes in a substance "however minor in consequence the change may be".' The Supreme Court has quoted with approval a passage from Permanent Edition of Words and Phrases, Vol. 26, which runs 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".
This concept was reiterated by the Supreme Court in South Bihar, Sugar Mills Ltd. v. Tata Chemicals Ltd., where it was clearly observed that the Act changes duty on manufacture of goods and the word "manufacture though it implies a change, every change in the raw material is not manufacture. In paragraph 14 of the judgment, it has been observed :
"The Act charges duty on manufacture of goods. The word `manufacture' implies a change but every change in the raw material is not manufacture. There must be such a transformation that new and different article must emerge having a distinctive name, character or use".
The law settled by these two decisions of the Supreme Court will clearly indicate that the Appellate Collector was labouring under a complete misapprehension that merely because a change has been brought about in the state of the pigment and it has been converted into a liquid state by the addition of the diluent and the dispersing elements, the article in its liquid state, i.e., Foron liquid, is liable to excise duty.
11. It is settled law that in a case of taxation the burden of proving that the necessary ingredients prescribed by the taxing provision are satisfied is entirely upon the taxing authority. It was primarily, therefore, for the taxing authority to satisfy the Court that the formulation of the Foron pigment in the form of Foron liquid is an entirely distinct commodity having entirely a distinct name, character and use as compared with the pigment itself. The argument which is advanced on behalf of the Union of India that Foron dyestuff in the form of wet cake is not a fully manufactured item or a product and that it is really the Foron liquid which is a final manufactured product need not detain us for long because we seen no reason to disbelieve the petitioners' positive statement in paragraph 6 of the petition that the petitioners also purchase synthetic organic dyes and that the dyestuff in the form of wet cake is a commercial commodity as such.
12. Now we would have expected the Department to put on record some satisfactory material on which it could base its contention that the dyestuff in the form of wet cake is not available as such in the market at all. We are constrained to remark that the return filed in this petition is extremely unsatisfactory and no attempt has been made by the Department to investigate into the question as to whether as a result of the addition of the diluent and the dispersing agents any new substance with new characteristic and use comes into being. The Department has made no efforts to find out whether any chemical change takes place as a result of the addition of the dispersing agent. As usual, the Department is satisfied with filing an affidavit of denial and the affidavit is so drafted that it is not even possible to ascertain as t on what information collected from what source the denial with regarded to the technical data made available by the petitioners, has been made. With the resources at the disposal of the Union of India one would have expected a much better return with better particulars especially when the Excise Department has often to deal with such industries which carry on the manufacture of dyes and other chemical products. We have, therefore, no alternative in this case but no accept the statement made by the petitioners that the synthetic organic dyes are purchased by the petitioners and then used for the purpose of formulation apart from the dyes manufactured by them.
13. In order to show the synthetic dyestuff of the kind with which we are dealing is a marketable commodity, Mr. Bhabha has drawn our attention to the Import Trade Control Policy where at Item X in Appendix 24 the general entry mentioned is disperse dyes' and it is stated that all disperse dyes are permitted for imports excluding certain dyes which are enumerated. Appendix 24 clearly mentions that "Licence for import of permissible coal tar dyes as specified in this Appendix will be granted to registered exporters in terms of the policy indicated in Vol. II of this Book". Therefore, a disperse dye which appears to be a known category of dyes is clearly allowed to be imported. This would itself indicate that even the Government of India has recognised the marketability of disperse dyes and it is not in dispute that Foron pigment is a kind of a disperse dye. It will, therefore, be no argument to say that the petitioners could not have sold the Foron dyestuff in the wet cake form at all and that the real finished product is the formulation of the said dye. There is also the statement of the petitioners in paragraph 2 of the petition where it is stated that there are diverse agencies in India which purchase dyes and formulate them. This averment has also been denied and as already pointed out, it is stated that "Foron pigment manufactured by the petitioners from which Foron liquids are manufactured by the petitioners are in the form of wet cake, are not treated within emulsifier and standard dyes, are not fully (sic) and the same are not known or sold in the market as dyes" and "in fact Foron pigments are not marketed or sold in wet cake conditions unless treated with emulsifier and standardised or converted into Foron liquids by a process of manufacturing, namely by breaking up the pigment particle, adding emulsifier and water and stirring with the aid of power". This bare statement made on behalf of the Union of India cannot be accepted as the affidavits does not disclose the source of information on which these statements are based. The main question which has to be decided in the instant case is whether when Foron pigment, which is a synthetic dye, is formulated, it is subjected to any manufacturing process or is formulation merely a process which changes its form without bringing about any change in its qualities or in its character. With the assistance of the learned Counsel for the petitioners we have been able to collect some information with regard to the rile that a dispersing agent plays in the case of a synthetic dye. This information we have been able to collect from the Condensed Chemical Dictionary, Ninth Edition, revised by Gessner G. Hawley. A synthetic dye has been described in the Dictionary as an organic colorant, derived from coal-tar and petroleum-based intermediates and applied by a variety of methods to impart bright, permanent colours to textile fibre, leather, plastics, rubber, aluminium and other industrial product. Giving characteristics of these dyes it is observed as follows :
`The central problem is the affinity for a fibre, and this involves both the chemical nature and the product state of the dye i.e., whether acidic or basic, and whether colloidal, molecular or ionic. Neither colloidal particles nor dissoicated ions are accepted by the dye must be in molecular dispersion to be effective. Further details will be found in the following entries : acetate dye, alizarin, aniline, fiber, reactive dye, eosin, intermediate, resist, stilbene dye'.
14. The dye with which we are concerned, namely, Foron pigment, is an azo dye and with regard to azo dues, it is stated in the Dictionary that over half of the commercial dyestuffs in this general category. Now all these dyes are dispersible dyes which concept has been explained in the Dictionary as follows :
"A dye that may be in any of three clearly defined chemical classes : (a) nitroroarylamine; (b) azo and (3) anthraquinene, and almost all contain amino or substituted amino groups. They are water insoluable dyes introduced as a dispersion or colloidal suspension in water and are absorbed by the fiber after which they may remain untreated or be after-treated (dianzetized) to produce the final colour. Their use is primarily for cellulose acetate and nylon, polyester and other synthetic fibres and thermoplastics".
Therefore, one of the essential characteristics of a dispersible dye is that it is to be introduced as a dispersion or a colloidal suspension in water. What is meant by `dispersion' is also explained in the same Dictionary as follows :
"A two-phase system of which one phase consists of finely divided particles (often in the colloidal size range) distributed throughout a bulk substance, the particles being the disperse or internal phase and the bulk substance the continuous or external phase. Under natural conditions the distribution is seldom uniform, but under controlled conditions the uniformity can be increased by addition of wetting or dispersing agents (surfactants such as a fatty acid... Larger particles will either gradually coalesce and rise to the top or settle out, depending upon their specific gravity".
"Dispersion", therefore, is a phenomenon as a result of which a certain amount of uniformity with regard to the distribution of the particles is achieved. This is done by a dispersing agent, the meaning of which is given as follows :
"A surface-active agent (q.v) added to a suspending medium to promote uniform and maximum separation of extremely fine solid particles, often of colloidal size. Applications include west- grinding of pigments and sulfar, preparation of ceramic glazes;...."
The role of a dispersing agent in the case of an organic dyestuff is, therefore, to promote uniform and maximum separation of extremely fine solid particles. The petitioners have already informed the Department that thee dispersing agents are being used, one of them being sodium lignesulfonate, which has been described in the Dictionary as being useful as a dispersant, emulsion stabilizer, chelating agent. We are also informed that selloid TD is a trade name of another dispersing agent supplied by Suhrid-Geigy (India) Limited. It, therefore, appears that when Foron liquid is obtained, it is a result of the Foron pigment being subjected to certain processing by the addition of dispersing agents which have the effect of stabilising the emulsion which is made. There is nothing to indicate that these dispersing agents result in any chemical reaction resulting in a change in the chemical composition of the Foron pigment. In any case, on the material which is made available to us, it is not possible for us to hold that any such chemical change occurs resulting in formation of a new article having distinctive name, characteristics and use. The whole process as it appears to us, is of converting dyestuff, which is in the wet cake form, into an emulsified form. As already pointed out, the form itself is not material. If Foron dyestuff or pigment does not cease to be Foron dyestuff or pigment even after the addition of the dispersing agent, then Foron liquid cannot be treated as a different articles manufactured from the Foron pigment itself.
15. The different between a processing and a manufacturing has been pointed out in the decision of the Gujarat High Court in Vijay Textile v. Union of India, 1979 E.L.T. (j 181), on which reliance was placed by Mr. Bhabha for the petitioners. The question which arose there was whether grey cloth in the case of cotton fabrics which comes out from the production by power-looms or other weaving textile mills which have no processing houses of their own and which is processed by independent processors, can be said to be a newly manufactured cotton fabrics or man-made fabric, as the case may be, when it is processed by the processing house either by bleaching, dyeing or printing carried out in the processing house. The two relevant entries in that case were Items 19 and 22 of the First Schedule to the Act, which are as follows :
"19. Cotton Fabrics-`Cotton fabrics' means all varieties of fabrics manufactured either wholly or partly from cotton and includes dhoties, sarees, chadders, bed-sheets, bed-spreads,...."
"22. `Man-made fabrics' means all varieties of fabrics manufactured either wholly or partly from man-made fibres or yarn and includes embroidery in the piece, in strips or in motifs and fabrics impregnated, coated or laminated with preparations of cellulose derivatives or of other artificial plastic materials, in each of which man-made (i) cellulosic fibre or yarn, or (ii) non-cellulosic fibre or yarn, predominates in weight".
The processors who were the petitioners before the Gujarat High Court carried on the business of bleaching, dyeing and printing, so as to make the fabric more attractive to the consumers after the fabric was woven on powerlooms which did not belong to the processors themselves. After referring to the meaning given to the word "manufacture" by the Supreme Court in South Bihar Sugar Mills' case cited supra, the Gujarat High Court pointed out that it may be that from the point of view of market, a new substance has been brought in existence, but the question is whether it falls within the meaning of Item 19 or Item 22 of the First Schedule to the Act. Using the phraseology of justice Bray in Monical v. Pinch (1906) 2 KB 352, the Gujarat High Court held that the petitioners began with cotton fabrics or man-made fabrics before they started processing, and ended with cotton fabrics or man- made fabrics and no specified item is to be found so far as the process is concerned and, therefore, the processing of cotton fabrics or man-made fabrics cannot amount to manufacturing of any variety of cotton fabrics or man-made fabric. It was pointed out that processing did not involve any further manufacture of the woven stuff or woven substance and unlike embroidery and coated or laminated fabrics, there is no specific mention in the inclusive definition so far as processed cloth is concerned, either in Item 19 or 22.
16. It will, therefore, appear that merely a change in the form of substance or a commodity would not by itself lead to the conclusion that a new article has been manufactured. before a charge of excise duty is attracted, it must, therefore, be established that the Foron liquid was an entirely new substance and merely because the pigment from its solid state has been converted into a liquid state by the use of the solvent and made properly usable with the aid of the dispersing agent, an inference that a new product or commodity has been manufactured cannot be drawn. On the material that is available in this case, it is not possible for us to hold that the Foron liquid is obtained as a result of a manufacturing process or that it is an article which is distinctive on name, character and use. Foron liquid is merely a trade name but with the substance with its chemical composition. We are not, therefore, satisfied that the Department was justified in making a demand for excise duty on the basis that Foron liquid was a changed form of the pigment at the time of its removal from the factory.
17. We may at this stage mention that a contention which is taken in the return and which has been pressed by the learned Counsel appearing on behalf of Union of India is that the petitioners have alternative remedy in the form of a suit in which they can challenge the demand made by the Department. However, when the provisions of Section 40 of the Act were pointed out to the learned Counsel, it must be said in all fairness that this argument was not further pursued, apart from the fact that in such a case there is a recurring liability in respect of a tax, a suit can hardly be treated as an adequated remedy.
18. In the view which we have taken the petition is allowed and the orders and demand contained in Exhibits `G', `I' and `J' made by the Department are quashed. In view of the fact that the petition is allowed, the bank guarantee given by the petitioners shall stand cancelled. Petitioners to get the costs of this petition.
19. Petition allowed.