Customs, Excise and Gold Tribunal - Delhi
Arlabs Ltd. vs Collector Of Central Excise on 24 July, 1992
Equivalent citations: 1993ECR321(TRI.-DELHI), 1992(62)ELT599(TRI-DEL)
ORDER P.K. Kapoor, Member (T)
1. The appellants are engaged in the manufacture of dyestuffs of different varieties. They were clearing certain products free of duty under Notification No. 180/61, dated 23-11-1961 on the grounds that they were "solubilised vats" manufactured out of duty paid standardised/formulated vat dyes. The appellants were also claiming exemption in respect of pastes manufactured out of duty paid standardised dyes; in terms of Tariff Ruling 13/65 dated 30-9-1965 read with Board's letter No. B/27/4/86/TRU, dated 13-6-1986.
2. On the grounds that Solubilised "vats" and Pastes manufactured by the appellants were not eligible for exemption in terms of Notification No. 181/61 and Tariff Ruling No. 13/65, dated 30-9-1965 respectively, they were served with a notice dated 29-10-1987 requiring them to show cause as to why differential duty amounting to Rs. 89,26,251.44 should not be recovered in respect of "Solubilised vats" and "Pastes" cleared during the period 1-10-1982 to 31-7-1987. As far as "pastes" were concerned the show cause notice stated that exemption in terms of Board's instructions was available only in cases where 'pastes' were produced out of formulated dyes manufactured by other parties and not when they were manufactured in the same factory. The show cause notice further alleged that the duty being recoverable on the goods in question in the form in which they were cleared from the factory, the appellants had misdeclared the value of the goods.
3. The appellants denied all the charges in the show cause notice. However, in the impugned order dated 11-5-1988, the Collector held 'Solubilised vats' when manufactured by the assessee out of duty paid intermediate product viz. formulated dyes were not eligible for exemption under Notification No. 180/61. In this regard, the Collector also observed that the weight of the "Solubilised vats" being more than the weight of the formulated dyes used as input, duty was chargeable with reference to the value of the final product viz. Solubilised vat. The Collector also held that both dyes and preparations thereof, being separately covered under Heading No. 30.04, in terms of Rule 49 paste produced out of duty paid dyes manufactured in the same factory, would also be liable to duty. Since the charge of suppression of facts was not found to be sustainable, the Collector confirmed the demand for differential duty on the products in question cleared by the appellants during a period of six months prior to the date of the show cause notice.
4. On behalf of the appellants the learned advocate Shri N.A. Dalvi with Ms. Millwala, advocate appeared before us. Shri Dalvi stated that the appellants make pastes for use in dyeing or printing of textiles by adding glycerine, water and other chemicals to duly paid formulated/standardised vat dye. He added that after conversion into paste only the physical form of the dye is changed from a powder into a paste or semi-liquid. He contended that excise duly is not attracted on pastes made from duty paid vat dyes since the process of conversion of dyestuffs from one form into another does not amount to manufacture for the purposes of Section 2(f) of the Central Excises and Salt Act. In support of his arguments he placed reliance on the decision of the Bombay High Court in the case of Sandoz (India) Ltd. v. Union of India, reported in 1980 (6) E.L.T. 696 . He contended that by the Tariff Ruling No. 18/65, the Board had also confirmed that vat paste produced by blending duty paid vat powder with glycerine could not be charged to duty as the process did not involve any chemical change. He argued that the Collector had erred in holding that the said Tariff ruling would apply only in cases where the paste was made from vat dyes purchased from the market. He contended that Board's letter dated 13-6-1986 makes it abundantly clear that conversion of vat dyes into paste does not amount to manufacture. Shri Dalvi further submitted that the Collector had erred in relying on Note-6 to Chapter 32 of the Tariff to arrive at the conclusion that the process of conversion of vat powder into paste amounted to manufacture. He contended that Note-6 was applicable only in cases where unformulated dyes were converted into their formulated, standardised or prepared forms since such conversion amounts to manufacture. He stated that the Collector's finding in regard to the Solubilised vat dyes manufactured by the appellants was also erroneous since as a result of the process of conversion of vat dyes into Solubilised vat dyes no new product emerges. He contended that such Solubilised vat dyes manufactured by the appellants out of duty paid dyes falling under Chapter 32 were exempt from duty in terms of Notification No. 1.80/61. He pointed out that in appellants own case reported in 1981 (8) E.L.T. 684, the Bombay High Court had held that Solubilised vat Dyes (Indigosol) were exempted under Notification No. 180/61 (as amended). On these grounds, Shri Dalvi prayed that the impugned order may be set aside.
5. On behalf of the Revenue, the learned S.D.R. Smt. Ananya Ray stated that Note No. 6 to Chapter 32 provides that conversion of unformulated, unstandardised or unprepared forms of synthetic organic dyes of Heading No. 32.04 into formulated, standardised or prepared form ready for use in the process of dyeing shall amount to "manufacture". She contended that the case law cited by the appellants and Tariff Ruling No. 13/65, dated 30-9-1965 being of a period prior to the introduction of the new Tariff in 1985 were not relevant to the issues involved in the case. She referred to Ministry's letter F. No. B. 27/4/86-TRU, dated 13-6-1986 and Bombay Collectorate Notice 1/86, dated 14-7-1986 and contended that having regard to Note 6 to Chapter 32 only processes such as addition of Glauber's Salt, dextrose, soda ash and other chemicals undertaken in the preparation of dye bath or dyeing or printing in relation to the use of formulated standardised/prepared dyes would not amount to manufacture. She slated that dyes used by the appellants for conversion into paste were on their own admission not ready for use for dyeing purposes in Textile Industry. She contended that under these circumstances, conversion of dyes in paste by the appellants will have to be deemed as amounting to manufacture and the appellants would be liable to pay duty on pastes in question. As regards the solubilised vats manufactured by appellants, she conceded that they would be eligible for exemption in terms of Notification No. 180/61 provided they were manufactured out of duty paid standardised/formulated vat dyes.
6. In his reply, the learned counsel Shri Dalvi denied that the dyes from which pastes were made by the appellants were not ready for use. He stated that it was an admitted fact that the Department had been classifying the dyes in question under sub-heading 3204.29. He contended that had the dyes used by the appellants for the preparation of pastes, not been ready for use in dyeing process, they would have been classified under Heading 32.01.
7. It is seen that the points that arise for consideration in this case are whether:
(i) Solubilised vats (Indigosol) manufactured by the appellants could be deemed as exempted from Central Excise duty in terms of Notification No. 180/61, dated 23-11-1961 (as amended).
(ii) The process of conversion of duty paid formulated/standardised vat dyes into a paste amounts to manufacture and thereby results into a new excisable product.
8. In order to decide the first point, we refer to the Notification No. 180/61-CE, dated 23-11-1961 (as amended) which is reproduced below:
"In exercise of the powers conferred by Rule 8(1) of the Central Excise Rules, 1944, the Central Government hereby exempts Dyes falling under Chapter 32 of the Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) and specified in the Schedule annexed hereto from the whole of duty of excise leviable thereon, if and only if such dyes are manufactured from any other dye on which excise duty or countervailing Customs duty has already been paid.
Schedule
1. Solubilised Vats
2. Rapid Fast Colours
3. Rapidogens
4. Fast Colour Salts"
It is an admitted fact that the appellants were manufacturing solubilised vats out of formulated dyes. In this regard we consider it desirable to refer to the following extract from paragraph-6 of the impugned order:
"The Solubilised vats are manufactured from formulated dyes. The said dyes are intermediate products of the assessee from which Solubilised vats are manufactured and cleared. Hence, the concession contemplated under Notification No. 180/61 is not available to the assessee as the vats have been manufactured from duty paid dyes."
It is seen that the Department did not dispute the appellants' claim that they were manufacturing Solubilised vats out of duty paid standardised/formulated vat dyes falling under Heading 3204.29. Under these circumstances, we do not find any substance at all in the Collector's finding that the solubilised dyes even when manufactured by the appellants out of duty paid standardised/formulated dyes falling under Chapter 32 were not eligible for exemption under Notification No. 180/61 (as amended). We, therefore, hold that Solubilised vats (Indigosol) manufactured by the appellants out of duty paid standardised/formulated vat dyes falling under Chapter 32 of the Central Excise Tariff were eligible for exemption from the payment of duly in terms of Notification No. 180/61 (as amended).
9. The second point to be examined is whether conversion of duty paid formulated/standardised vat dyes in the form of powder through addition of glycerine (dispersing agent) water and chemicals into paste for use in dyeing or printing of textiles, amounts to manufacture for the purposes of Section 2(1) of the Central Excises and Salt Act and whether duty would be leviable on such paste. On going through the impugned order, we cannot avoid the impression that there was a great deal of confusion in the mind of the Collector as regards the nature and form of the dyes which were used by the appellant for conversion into paste. In this regard, it is seen that while in paragraph 3 of the impugned order, the Collector has observed that duty paid formulated vat dyes in the form of powder were being used by the appellants for conversion into paste; in paragraph 7 he goes on to observe that conversion of dyes in unprepared form (powder) into prepared form (paste) by addition of dispersing agent (glycerine) in the appellants' case amounted to manufacture in terms of Note 6 to Chapter 32.
It is seen that the Collector's observation that the appellants were converting dyes in unprepared form into prepared form or paste was contrary to the facts since in the show cause notice as well it was staled that the appellants were using duly paid standardised dyes for conversion into paste. As clarified in Ministry's letter F. No. 27/4/86-TRU, dated 13-6-1986, Note-6 to Chapter 32 only provides that conversion of unformulated/unstandardised and unprepared forms of S.O. Dyes (for example wet cakes or press cakes) into their prepared forms ready for use in the process of dyeing would amount to manufacture. On a plain reading of the show cause notice and also the case records, we find that the Department's case against the appellants was that they were convening duly paid formulated/standardised vat dyes into paste and such conversion amounted to manufacture, resulting in the emergence of a new excisable product viz. paste. It was nowhere alleged that the appellants were using unprepared/unformulated dyes for conversion into paste. Having regard to these facts and taking into account the appellants' claim that they were using only duty paid formulated/standardised dyes for conversion into paste, we hold that Note-6 to Chapter 32 which has been referred to by the Collector in support of his findings, is not relevant to the issue involved in this case.
10. It is thus seen that the only point that needs examination is whether conversion by the appellants of duty paid formulated/standardised dyes into paste through addition of dispersing agents (glycerine), water and other chemicals amounts to manufacture resulting in the production of a new excisable commodity. In this regard it is seen that in the case of Sandoz India Ltd. v. Union of India, reported in 1980 (6) E.L.T. 696 , the Bombay High Court had held that conversion of a pigment from its solid state into a liquid state with the aid of solvent and dispersing agent in order to make it usable does not amount to manufacture since as a result of such processing no new article having distinctive name, character or use can be said to have been produced. Paragraph 16 of the said judgment being relevant is reproduced below:
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 duly is attracted, it must, therefore, be established that the Foron liquid was an entirely new substance and merely because the pigment from its solid stale has been convened 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 Froron liquid is obtained as a result of a manufacturing process or that it is an article which is distinctive in 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 duly on the basis that Foron liquid was a changed form of the pigment at the time of its removal from the factory."
In this regard the appellants have also drawn our attention to Board's Ruling No. 18/65 - F. No. 2/5/64-Ex. IV, dated 30th September, 1965 wherein it was clarified that vat paste produced by blending, duly paid vat powder with glycerine etc. cannot be charged to duly since in the process of conversion of 'Vat Powder' into 'Vat Paste' no chemical change occurs and glycerine and disposing agents etc. serve merely as moisture retaining and deflocculating agents.
11. On the ratio of Bombay High Court decision quoted above, we hold that the process of conversion of duly paid prepared or formulated dyes in the form of powder into paste by the appellants did not amount to manufacture.
12. It is seen that in the show cause notice issued to the appellants, the Department also sought the recovery of the difference between the duty paid on vat dyes in powder form and the duly that would have been recovered had the recovery been made when they were cleared from the factory in the form of paste. In this regard, we find that in the case of Union of India v. Ahmedabad Manufacturing and Calico Printing Co. Ltd., reported in 1985 (21) E.L.T. 633 , the Hon'ble Supreme Court has held that the nature and character of goods at intermediate stage was not relevant for determining the duty liability and goods have to be classified according to their nature and character at their final finished stage of production after completion of all integral processes of manufacture. Paragraph 4 of the said judgment being relevant is reproduced below:
"Having regard to the process involved in the manufacture of "Calikut Special" by the respondent we are of the view that it is not possible to hold that the character of the goods at the intermediate stage of production could be taken into consideration for determining the liability under the Act. The processes involved in the instant case after the intermediate stage referred to above formed an integral part of the manufacture of the product in question and the classification of the manufactured product for purposes of excise duly should depend upon its nature and character at its final stage of production unless a contrary intention appears from the statute. It is seen from clause (vii) of Section 2(f) of the Act which is, no doubt, introduced subsequently that bleaching, heat setting, etc. are incidental and ancillary processes necessary for the completion of the manufactured product falling under Item No. 22. This amendment has only attempted to explain the obvious and to put the question beyond dispute. Therefore, even though the product in question might have fallen under Item No. 19 in the First Schedule to the Act at the intermediate stage of production, at the final stage when the duly became exigible it became taxable under Item No. 22 only. We are, therefore, in agreement with the decision of the High Court that the goods in question fell under Item No: 22 and not under Item No. 19 in the First Schedule to the Act for purposes of payment of excise duly under the Act."
13. On the ratio of the Supreme Court decision quoted above, we are of the view that in cases where prepared vat dyes in powder form were used by the appellants as intermediate products for converting them into paste, duty should have been paid by them on the goods in the form in which they emerged after completion of all integral processes of manufacture. Hence, we hold that in respect of paste manufactured by the appellants out of duly paid prepared vat dyes, duly was recoverable on the goods after they had attained the form of paste after completion of all connected processes of manufacture.
14. In view of the foregoing, we hold that:
(i) Solubilised vat dyes manufactured by the appellants out of duty paid standardised/formulated vat dyes falling under Chapter 32 of the Central Excise Tariff were exempt from duty in terms of Notification No. 180/61-C.E., dated 23-11-1961 (as amended).
(ii) The process of conversion of duty paid formulated/standardised vat dyes into paste does not amount to manufacture.
(iii) Formulated/Standardised dyes converted into paste were chargeable to duty at stage when the goods attained the form of paste after completion of all related processes of manufacture and accordingly differential duty would be recoverable from the appellants on such clearances during a period of six months preceding the duty of the show cause notice.
15. The appeal is disposed of in the above terms.