Custom, Excise & Service Tax Tribunal
Hindustan Unilever Ltd vs Commissioner, Cgst, Central ... on 12 September, 2022
Author: Dilip Gupta
Bench: Dilip Gupta
CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL
NEW DELHI
PRINCIPAL BENCH
Excise Appeal No. 50769 of 2020
(Arising out of Order-in-Original No. 06/2020-ST dated 29.01.2020 passed by
Additional Director General (Adjudication), New Delhi)
M/s. Hindustan Unilever Ltd, (Unit-I) ....Appellant
Plot No.1, Sector 1A,
Integrated Industrial Estate,
Raipur, Haridwar, Uttrakhand
versus
Commissioner of Central Goods &
Service Tax, Dehradun ....Respondent
'E' Block, Nehru Colony, Haridwar Road, Dehradun- 248001 APPEARANCE:
Shri M.H. Patil Advocate, Shri J.M. Sharma, Consultant, Ms. Mansi Patil, Shri Viraj Reshamwala, Ms. Shatabadi Chhatterjee, Advocates for the Appellant Shri Sanjay Kumar Singh, Authorized Representative for the Department CORAM:
HON'BLE MR. JUSTICE DILIP GUPTA, PRESIDENT HON'BLE MR. C.J. MATHEW MEMBER (TECHNICAL) Date of Hearing: 06.09.2022 Date of Decision: 12.09.2022 FINAL ORDER NO. _50829 /2022 JUSTICE DILIP GUPTA:
Hindustan Unilever Ltd. (Unit -I)1 has filed this appeal to assail the order dated January 29, 2020 passed by the Additional Director General (Adjudication), New Delhi2 confirming the central excise duty of Rs. 38,70,96,458/- proposed in the show cause notice with penalty and interest by invoking the extended period of limitation contemplated under section 11A(4) of the Central Excise Act 19443.
1. the appellant
2. the Additional Director General
3. the Excise Act 2 E/50769/2020
2. The benefit of the area based exemption Notification dated 10.06.2003 that exempted the goods specified in the First and the Second Schedule to the Central Excise Tariff Act 19854 and cleared from a unit located in the Industrial Growth Centre or Industrial Infrastructure Development Centre or Export Promotion Industrial Park or Industrial Estate or Industrial Area or Commercial Estate from the whole of the duty of excise or additional duty of excise leviable thereon subject to certain specified conditions, has been denied to the appellant. The said exemption notification was to apply to new industrial units which had commenced commercial production on or after the 7th day of January, 2003 but not later than the 31st day of March, 2010 and was to apply for a period not exceeding ten years from the date of publication of the notification in the Official Gazette or from the date of commencement of commercial production, whichever was later. The condition stipulated in paragraph 4 of the notification, which is the relevant clause, is reproduced below:
"4. The exemption contained in this notification shall not apply to such goods which have been subjected to only one or more of the following processes, namely, preservation during storage, cleaning operations, packing or repacking o f such goods in a unit container or labeling or re-labelling of containers, sorting, declaration or alteration of retail sale price and have not been subjected to a n y other process or processes amounting to manufacture in the States of Uttarakhand or Himachal Pradesh."
(emphasis supplied)
3. The processes, namely, preservation during storage, cleaning operations, packing or repacking of such goods in a unit container or
4. the Tariff Act 3 E/50769/2020 labelling or re-labelling of containers, sorting, declaration or alteration of retail sale price can be called peripheral activities.
4. "Manufacture" is defined in section 2(f) of the Excise Act 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 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 labeling 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 'manufacturer' 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."
(emphasis supplied)
5. A perusal of the aforesaid paragraph 4 of the exemption notification and the definition of 'manufacture' contained in section 2(f) of the Excise Act will show that if a manufacturer is engaged in only the aforesaid peripheral activities, the exemption would not be available to it. The exemption would be available only if the goods have "been subjected to any other process or processes amounting to manufacture in the State of Uttarakhand or Himachal Pradesh".
6. The appellant is engaged in the manufacture of Nail Polish and Nail Polish Remover in the factory situated at Haridwar. According to the appellant, since the unit is located in the State of Uttarakhand and it 4 E/50769/2020 fulfilled all the conditions stipulated in the notification dated June 10, 2003, it opted for area based exemption for the Nail Polish and Nail Polish Remover manufactured and cleared by it from the factory. The appellant, by a letter dated April 19, 2007, filed an application in Form A-1 for registration of the proposed new Unit No.5 for manufacture of Nail Polish. The appellant also expressed its intention for availing exemption under the notification for the stipulated period of ten years. It also provided the list of goods proposed to be manufactured in the said new Unit No.5. Accordingly, Central Excise Registration Certificate dated April 27, 2007 was issued to the appellant. By a letter dated May 28, 2008, the appellant informed the Assistant Commissioner that the commercial production would commence from April 05, 2008.
7. For the purpose of manufacturing nail enamel, the appellant claims that it purchased two raw materials, namely, colour solution and thixo lacquer from Fiabila. The colour solution raw material is paint & varnish which is available in 5kgs/10kgs/25kgs. packages but since it is of high viscosity, it cannot be filled in small bottles in which nail enamel has to be mandatorily sold in the market under the provisions of the Drugs and Cosmetics Act, 19405 read with the Bureau of Indian Standards Act, 20166. The appellant claims that the colour solution is neither known commercially or to the consumers as nail enamel and they are not marketable as nail enamel. It is only because of the processes that are undertaken by the appellant that the manufacture of nail enamel takes place and the goods are rendered marketable to the consumer. The thixo lacquer is received in specially built cannisters of 10kgs
5. the Cosmetics Act
6. the BIS Act 5 E/50769/2020
8. According to the appellant, Nail Polish is manufactured by mixing predetermined quantity of base solution, colouring solutions and pearls. The mixture of Nail Polish is kept for a period of seven days for maturation. After quality control clearance, the Nail Polish is filled in small glass bottles, labeled/coded, packed and cleared. The manufacture of Nail Polish involves mainly two stages. The primary stage is preparation of Nail Polish mixture; and the secondary stage is labeling/ coding, packing, declaration of retail sale price, etc. The Nail Polish mixture is manufactured by the appellant in the factory by mixing the predetermined quantity of base solutions, colour solutions and pearls. The secondary stage activities include labeling/coding (which includes printing of details like name of the manufacturer, batch number, date/month of manufacture, MRP, shade code, etc.), packing unit packs containing six bottles and, thereafter, packing 12 such unit packs in cartons. After the said process is undertaken in the factory, the semi-finished goods, along with packing materials, bar codes and laser coding machine, are sent to the job workers like M/s. S.M. Sivam & Sons and M/s. Maxima Solutions, under transfer challans. The said job workers carry out the activities of inject coding, bar coding, labeling and packing of the Nail Polish bottles with materials provided by appellant. The job-workers claim rent, electricity charges and security charges, from appellant along with service tax. For the purpose of job work, all the machines, equipment installed and available in the factory are provided by the appellant under returnable/ non-returnable gate passes. Waste generated during the process is also returned to the appellant. The process of job work includes laser/ink printing of MRP on products as per the directions issued by the appellant. The finished products are then returned to the appellant.
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9. The appellant, therefore, believed that the process carried out on the raw material amounted to 'manufacture' under section 2(f) of the Excise Act.
10. However a demand cum show cause notice dated October 30, 2017 was issued to the appellant, mentioning therein:
21. Whereas the crux of the para 4 of above-said notification is that the assessee is not entitled for benefit of exemption if they merely engage themselves in one or more of the following processes viz. preservation during storage, cleaning operations, packing or repacking of such goods in a unit Container or labeling or re-labeling of containers, sorting, declaration or alteration of retail sale price. As per chapter note 5 of chapter 33 of Central Excise Tariff, labeling or relabeling of containers intended for consumers or repacking from bulk to retail pack amounts to manufacture. The party is doing storage, packing or repacking of goods in unit container, labeling or relabeling of containers declaration of MRP on the bottles. The party is packing, re-packing, labeling /relabeling and the said activity is covered under the definition of "manufacture" as per section 2(f) of the Central Excise Act, 1944 thus, Central Excise duty is chargeable on the said activities. Further, as the party is undertaking process of storage, repacking from bulk to retail and labeling & re-labelling of retail containers and do not undertake any other process which amounts to manufacture, the benefit of central excise duty exemption under notification no. 50/2003-CE dated 10.06.2003 seems not admissible to them. Thus, from the above it appears that Central Excise duty is leviable on the manufacture and clearances of Nail Enamel by the party.
(emphasis supplied)
11. The show cause notice also invoked the extended period of limitation since the period of dispute is from July 01, 2012 up to June 30, 2017 under section 11A (4) of the Excise Act. The appellant filed a reply to the aforesaid show cause notice denying the allegations mentioned therein and stated that it was entitled to benefit of the exemption notification.
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12. The Additional Director General however, did not agree with the submissions made by the appellant in the reply filed to the show cause notice and denied the benefit of the exemption notification to the appellant. The relevant paragraphs of the order are reproduced below:
"34.5. The facts emerging from the paragraph 34.1 to 34.5. clearly establish that the activity carried out by the said Noticee is a mere mixing of Nitro Cellulose Base solution and Colourants and no product with any significant change in character emerges. Now it remains to be seen as to whether such mixing of Nitro Cellulose and Colour solution shall amount to manufacture as envisaged in sub clauses (i) to (iii) of Clause (f) of Section 2 (which defines the term "manufacture") of Central Excise Act, 1994.
35.4 The information and facts discussed/ found at paragraph 35.1 to 35.3. show that essential characteristics of the raw materials, semi finished goods and the final products remain same.
36. The further contentions of the said "Noticee" are as follows (also reproduced in page 21 and 22 hereinabove);-
3.7 There are three essential ingredients for manufacture of such nail polish. These are (a) Nitro Cellulose base (b) colouring solutions and
(c) pearls. The first two ingredients are also known as Thixo base and colour solution and are classified under 32089019.
3.8 It is an admitted position that neither of these three ingredients are ever bought and sold as nail polish or ever regarded as nail polish in the market. They are and have always been known as ingredients for manufacture of nail polish, classified under Chapter 32 and not nail polish themselves. It is also not in dispute that these ingredients have never been used or commercially regarded as nail polish.
3.9 We bought these raw materials after appropriate duty on them was paid by its manufacturers.
The manufacturers classified these ingredients under 32089019 and this classification being 8 E/50769/2020 correct, has been accepted by the jurisdictional excise authorities. We blend these raw materials in desired proportion as per technical requirements and ensure that a coloured nail polish, conforming to technical specifications and parameters of colour, coverage, glass, viscosity and drying time is obtained. The resultant product so obtained is sold by us as nail polish in the market and is classified under 33049920.
3.10 It is not disputed that as a result of such blending and mixing in appropriate proportion a new and commercially identifiable product known as 'nail polish' emerges and that prior to such deft and skilled mixing and colour and viscosity monitoring, the ingredients were not regarded and sold as nail polish in the market.
36.1. In this regard, I find that the facts involved in the present case are similar, to the facts involved in the decision of the Hon'ble Supreme Court in the case, Commissioenr of Central Excise v. M/s. Osnar Chemical Pvt Ltd. reported in 2012 (276) ELT 0162 (S.C.).
36.1.1. On a careful reading of the portion of the judgment reproduced hereinabove it becomes clear that even if the resultant product achieves superior quality after the activities and even if the resultant product has different viscosity from that of the product before the activity carried out by the manufacturer, even if the penetration becomes different after the activity carried out by the manufacture, these activities cannot be considered to be amounting to manufacture for the purpose of levying Central Excise Duty.
36.4. As regards the Noticee's contention that the viscosity of the raw-materials is different from that of the final product, it is common knowledge that Nail polish users are advised to shake well the container before use. This is one of the properties of thixotropic solution. On shaking, the solution becomes less viscous and can be applied smoothly and evenly. The reason is that the denser ingredients collect at the bottom and in order to have uniform thickness of the contents (that is to have uniform viscosity) the end users, before applying the nail polish shake the bottles before use. This shows that the desirable viscosity is achieved even manually by the ultimate end users long after buying the product from the retailers. This significant aspect only proves that in real terms no manufacturing activity/ expert 9 E/50769/2020 activity has been carried out by the noticee. As an example, one may cite the case of various syrups in Pharmaceuticals where the end users are advised to shake the bottle well before use (just to achieve the desired density).
36.6 On the basis of the discussion in paragraph 36.2 to 36.5 hereinabove, I hold that the contentions mentioned in paragraph 36. have not merit and these four contentions are rejected."
13. The Additional Director General also observed that the extended period of limitation had been correctly invoked and, therefore, confirmed the demand of penalty and interest.
14. Shri M.H.Patil, learned counsel appearing for the appellant made the following submissions:
(i) The processes carried out by the appellant on the raw material (i.e. paint and varnish) resulted into emergence of a new product known commercially and to the consumers as nail enamel, which product was marketable and had a name, character and use distinct from the raw material used, which had lost its identity. The processes carried out by the appellant on the raw material, therefore, amounted to manufacture under section 2(f) of the Excise Act;
(ii) The processes undertaken by the appellant on their raw materials being incidental and ancillary to the completion of the manufactured product, namely, nail enamel, amounted to manufacture in terms of s. 2(f)(i) of the Excise Act;
(iii) The processes undertaken by the appellant would also result in the goods being "subjected to any other process or processes amounting to manufacture in the State of 10 E/50769/2020 Uttarakhand or Himachal Pradesh" and, therefore, the appellant would be entitled to the benefit of the area based exemption notification. In this connection the learned counsel submitted that the treatment adopted on the goods (colour solution) by the appellant rendered the product marketable to the consumers as nail enamel;
(iv) Nail enamel manufactured by the appellant is packed in less than 10 ml bottles and, therefore, is not subject to MRP based assessment under section 4A of the Excise Act; and
(v) The extended period of limitation, in the facts and circumstances of the case, could not have been invoked nor could penalty or interest could have been imposed on the appellant.
15. Shri Sanjay Kumar Singh learned authorised representative appearing for the Department however, supported the impugned order and submitted that:
(i) The only change brought about by the appellant is mixing the colouring matter (liquid) to a solvent of similar nature so as to reduce the viscosity;
(ii) The appellant is not justified in asserting that by mixing the colouring matter to a solvent of similar nature so as to reduce the viscosity would amount to adoption of any other treatment on the goods to render the product marketable to the consumer and, therefore, the appellant would not be entitled to the benefit of exemption notification;11
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(iii) Even if the resultant product achieves superior quality after the activities and even if the resultant product is in different viscosity, it would not amount to "manufacture".
(iv) The appellant is only conducting peripheral activities contemplated under paragraph 4 of the exemption notification and, therefore, the appellant is not entitled to the benefit of the exemption notification;
(v) Just because the raw material and the finished goods fall under different headings, it cannot be presumed that process of obtaining finished product from such raw material would automatically constitute "manufacture";
(vi) The valuation could only have been done under section 4A of the Excise Act; and
(vii) The Additional Director General was justified in invoking the extended period of limitation in the facts and circumstances of the case.
16. The submissions advanced by the learned counsel for the appellant and the learned authorized representatives appearing for the Department have been considered.
17. The main issue that arises for consideration is whether the appellant had undertaken any other process or processes amounting to 'manufacture' in the State of Uttarakhand or Himachal Pradesh, which is a condition contemplated in paragraph 4 of the exemption notification.
18. There is no dispute that the appellant had undertaken the peripheral processes mentioned in paragraph 4 of the notification. Whether any other process or processes, apart from peripheral processes, had been undertaken by the appellant so as to amount to 12 E/50769/2020 'manufacture' contemplated in section 2(f) of the Excise Act would have to be examined. The adoption of any other treatment on the goods to render the product marketable to the consumer is one of the requirement set out under section 2(f) of the Excise Act for the process to result in 'manufacture'. Thus, what has to be seen is whether in the present case, adoption of any other treatment on the goods had rendered the product marketable to the consumers.
19. The appellant has stated that it had purchased two raw materials namely, colour solution and thixo lacquer from Fiabila for the manufacture of nail enamel. The colour solution, being paint and varnish was obtained by the appellant in packages of 5kgs/10kgs/25Kgs. The several processes undertaken by the appellant after receipt of the raw material have been enumerated above. They include not only testing as per the requirement of the Cosmetics Act and the 2016 Act but also homogenization of the colour solution by stirring it with the help of pneumatic stirrer and mixing of thixo lacquer in predetermined quantity with the colour solution in the kettle so as to adjust the viscosity of the resultant product so that it can be filled in small bottles as mandatorily prescribed for packing nail polish, with brush attached to the cap of the bottle for application on the nails. Thereafter, the nail enamel is filled in small bottles and labelled with the declaration of the retail sale price. This treatment adopted on the goods, according to the appellant renders the product marketable to the consumers.
20. At this stage it would be useful to refer to Chapters 32 and 33 contained in the Schedule to the Tariff Act. Chapter 32 deals with tanning or dyeing extracts, tannins and their derivatives, dyes, pigments and other colouring matter, paints and varishes, putty and 13 E/50769/2020 other mastics, inks, whereas Chapter 33 deals with essential oils and resinoids, perfumery, cosmetic or toilet preparations.
21. The appellant had purchased thixo lacquer solution from Fiabila and the invoices mention the Central Excise Tariff Item classification as 3208 90 19. Excise Tariff Heading7 3208 deals with paints and varnishes (including enamels and lacquers). ETH 3304 deals with Beauty or make- up preparations and preparations for the care of the skin (other than medicaments), including sunscreen or suntan preparations; manicure or pedicure preparations and Nail Polish or lacquers is mentioned against the relevant Excise Tariff Item 3304 99 20.
22. It would also be pertinent to refer to Chapter 33 of HSN and the relevant portion is reproduced below:
"Chapter 33 Essential Oils and Resinoids, Perfumery, Cosmetic or Toilet Preparatons Chapter Notes:
1. xxxxxxxx
2. Heading Nos. 33.03 to 33.07 apply, inter alia, to products, whether or not mixed (other than aqueous distillates and aqueous solutions of essential oils), suitable for use as goods of these headings and put up in packings of a kind sold by retail for such use.
3. xxxxxxxx GENERAL Headings 33.03 to 33.07 include products, whether or not mixed (other than aqueous distillates and aqueous solutions of essential oils), suitable for use as goods of these headings and put up in packings of a kind sold by retail for such use (see Note 2 to this Chapter).
The products of headings 33.03 to 33.07 remain in these headings whether or not they contain subsidiary pharmaceutical or disinfectant constituents, or are held out as having subsidiary therapeutic or prophylactic value (see Note 1 (d) to Chapter
30). However, prepared room deodorizers remain classified in
7. CTH 14 E/50769/2020 heading 33.07 even if they have disinfectant properties of more than a subsidiary nature.
Preparations (e.g. varnish) and unmixed products (e.g., unperfumed powdered talc, fuller's earth, acetone, alum) which are suitable for other uses in addition to those described above are classified in these heading only when they are:
(a) In packings of a kind sold to the consumer and put up with labels, literature or other indications that they are for use as perfumery, cosmetic or toilet preparations, or as room deodorizers; or
(b) Put up in a form clearly specialised to such use (e.g., nail varnish put up in small bottles furnished with the brush required for applying the varnish)."
23. It needs to be noted that Chapter Note 2 of HSN is the same as Chapter Note 3 of Chapter 33 to the Excise Tariff Act.
24. It clearly transpire from the aforesaid General Explanatory Notes that the preparations (e.g. varnish), which are suitable for other uses in addition to use as varnish (that is applied on wood) are classified as cosmetics under Chapter 33 only when they are - (a) in packings of a kind sold to the consumer and put up with labels, literature or other indications that they are for use as cosmetics; or put up in a form clearly specialized to such use (e.g. nail varnish put up in small bottles furnished with the brush required for applying the varnish). Thus, it is more than apparent that the colour solution supplied in 20/50 Kg drums from Fiabila cannot be regarded as nail enamel. The packing of nail enamel as contemplated in HSN General Explanatory Notes and the Cosmetics Act has special significance, as without the goods being packed in the specified packing they will not be classifiable or commercially known as nail enamel. The nail enamel takes its name, character and use as such only after being packed in the manner provided.
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25. A conjoint reading of the definition of manufacture in section 2(f)
(iii) of the Excise Act and Chapter Note 5 of Chapter 33 of the First Schedule to the Excise Act and the aforesaid treatment adopted on the goods (colour solution) by the appellant would render the product marketable to the consumer as nail enamel and, therefore, the appellant would be covered by the exemption notification dated 10.06.2003 since the appellant has adopted such a treatment to the goods that rendered them marketable to the consumer.
26. In this connection reference can be made to the decision of the Tribunal in Lakme Lever Limited vs. Commissioner of Central Excise, Mumbai-III8 and the relevant portion of the decision is reproduced below:
"3. The goods manufactured by the appellant or obtained by it, all fall under chapter 33 of the tariff. Note 4 to this chapter at the relevant time (1996-97) reads as follows:
"In relation to products of heading nos. 33.03, 33.04 and 33.05, conversion of powder into tablets, labelling or relabelling of containers intended for consumers or repacking from bulk packs to retail packs or the adoption of any other treatment to render the products marketable to the consumer, shall be construed as 'manufacture'.
The notice issued to the appellant alleged, and the Commissioner agrees that the repacking done in the depot of the appellant falls within the scope of "adoption of any other treatment to render the product marketable to the consumers". Therefore the goods have been manufactured.
4. One of the meaning of the word 'rendering' the one that would obviously apply, to the phrase of the note under consideration is "cause to be or become; make of a certain
8. 2001 (127) E.L.T. 790 (Tri.-Mim.) 16 E/50769/2020 nature, quality, condition etc." (New Shorter Oxford English Dictionary). From this meaning and indeed by common usage of this word, it is only the treatment which makes a product marketable to the consumer which was so rendered. That is to say, the process to fall within the scope of the "any other treatment" it must be one which confers upon a product the attributes of marketability which it did not possess earlier. We must note here the significance of the word 'consumer' in the note. Thus the product must be referred to must be rendered marketable to the consumer. Although this word is not defined it evidently refers to one who purchase the product for consumption by him, as distinct from a purchaser who trades in it. Therefore for any treatment to fall within the scope of the note to the chapter it must be one that confers upon a product a quality as a result of which the product, which was otherwise not marketable is now rendered marketable. If the product were already marketable any amount of treatment to enhance its marketability would not amount to manufacture within the meaning of this note. That treatment does not render it marketable when it earlier was not. That is the object of the note is also clear from the fact that the processes which is specified in it as manufacture conversion of powder into tablets, labelling or re-labelling of containers intended for consumers, re-packing bulk drugs to retail packs are all activities which result in the products being made marketable to the individual consumers."
27. It is, therefore, not possible to accept the contention advanced by learned authorised representative appearing for the Department that the only change brought about by the appellant when the colouring matter is mixed to a solvent is to reduce the viscosity and this would not amount to manufacture. It cannot also be accepted that when the resultant product achieves superior quality, a new product marketable to the consumers as nail enamel does not come into existence as in the present case it has been found as a fact that a new marketable product comes into existence.
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28. The decision of the Tribunal in British Cosmetics vs. Collector of Central Excise, New Delhi9, on which reliance has been placed by learned authorised representative appearing for the Department, does not help the Department. The issue that arose was regarding classification of 'thinner' under sub-Heading 3814 00. The contention of the appellant therein that thinner was different from nail polish remover could not be substantiated nor could it be established that thinner manufactured by them was capable of being used elsewhere than as nail polish remover/diluter.
29. The appellant would, therefore, clearly be entitled to the benefit of the area based exemption notification dated 10.06.2003.
30. The order dated January 29, 2020, passed by the Additional Director General cannot, therefore, be sustained and is set aside. The appeal is, accordingly, allowed.
(Order Pronounced on 12.09.2022) (JUSTICE DILIP GUPTA) PRESIDENT (C.J.MATHEW) MEMBER (TECHNICAL) Archana
9. 1999 (105) E.L.T. 667 (Tribunal)