Finance Bill, 2009 - Adding bitterness to sweet Supari

Finance Bill, 2009- Adding bitterness to sweet Supari

Introduction:-

The Excise duty is levied on the manufacture of goods. The term “Manufacture” has been a matter of interpretation. Every manufacture is a process but every process is not manufacture. There has been a lot of litigation on the point whether a process can be said to be manufacture in terms of the definition of manufacture given in the Central Excise Act, 1985.

The same manufacturing issue came up for the manufacturers of Supari and went upto Apex Court. What was the fate of this decision is the subject matter of this article. Before starting on the subject, we will shortly discuss what is meant by the term “manufacture” in Central Excise law.

Definition of ‘Manufacture’

The definition of manufacture has been given in Section 2 (f) of the Central Excise Act, 1944, which reproduced hereunder for ready reference:-

(f) "manufacture" includes any process,—

(i) incidental or ancillary to the completion of a manufactured product; and

(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 re-labelling 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.

The definition is an inclusive definition and provides for what will constitute “manufacture” under the Central Excise Law. The definition leaves much scope for interpretation. Therefore, there has been a continuous struggle between the Revenue and the Assessee to define what will constitute manufacture and what will not.

Meaning of Manufacture:-

There are number of judicial pronouncements which have defined the magic term of “manufacture”. As per judicial pronouncement the term “manufacture” takes place when the raw materials undergo a process by which they are transformed and become a new and distinct product having a different name, different use and is marketable.

Thus, as per verdicts of various Courts and Tribunals, it is a settled principle that a new product with a different name, character and use should emerge by virtue of manufacturing process. Since this is not subject matter of our article, as such we are not going in much detail about the same in this article.

Deemed Manufacture:-

But the Government has power to declare any process as ‘manufacture’. It has done so by defining the various processes in various chapters as manufacture. In addition to that the products attracting MRP based valuation under Section 4A are listed in the third schedule. For these products, the Government has used the deemed manufacture definition and held in Section 2(f) that the packing or repacking or labeling or relabeling or declaration or alteration of retail sale price will amount to manufacture. Even the Government has power to declare any process as manufacture in terms of the Chapter Notes to the First Schedule to the Central Excise Tariff Act, 1985. This is because sometimes a process cannot be said to be strictly a manufacture. But by virtue of these provisions they fall under the category of manufacture like the processes of labeling and re-labeling under certain chapters. Now, we go directly to our topic of “manufacture of Supari”.

Apex Court decision in relation to Supari

In the case of “Crane Betel nut Powder Works v/s Commissioner of Central Excise & Customs, Tirupati” [2007 (210) ELT 0171 (S.C.)], the issue before the Supreme Court was that “whether by crushing betel nuts and processing them with spices and oils, a new product could be said to have come into existence”.

The assessee was engaged in the business of marketing betel nuts in different sizes. The betel nuts were first processed by adding essential/non-essential oils, menthol, sweetening agent etc. Initially they were clearing the betel nuts under Chapter sub-heading 2107 but after some time they sought classification of betel nuts under Chapter sub-heading 0801.00. They were contending that crushing of betel nuts into smaller pieces with the help of machinery and sweetening the pieces with spices and oils did not amount to manufacture.

The head note of Supreme Court verdict is as under:-

Manufacture - Crushing betel nuts into smaller pieces and sweetening the same with essential/non-essential oils, menthol, sweetening agents etc. did not result in manufacture of a new and distinct product having a different character and use as end product continues to retain its original character though in a modified form - Tribunal’s and High Court’s order set aside - Section 2(f) of Central Excise Act, 1944 - Note 4 to Chapter 21 of Central Excise Tariff.

Thus, the Apex Court held that the process of manufacture employed by the appellant did not change the nature of the end product and that in the end “betel nut remained a betel nut”. Therefore, nothing was being manufactured by the process undertaken by the assessee.

Finance Bill, 2009

The Finance Bill introduced by Budget 2009 however poured water on all the labour done by the assessee in the case of “Crane Betel nut Powder Works”.

Following amendments in the First Schedule to the Central Excise Tariff Act, 1985 were affected by clause 111 of the Finance Bill, 2009:-

In Chapter 8, for NOTE 1, the following NOTE has been substituted:—

‘1. This Chapter does not cover:

(a) inedible nuts or fruits; or

(b) betel nut product known as “Supari” of tariff item 2106 90 30.’;

In Chapter 21, after NOTE 5, the following NOTE has been inserted, namely,-—

‘6. In relation to product of tariff item 2106 90 30, the process of adding or mixing cardamom , copra, menthol, spices, sweetening agents or any such ingredients other than lime, katha (catechu) or tobacco to betel nut, in any form, shall amount to “manufacture”.’.

Thus, two things were done by the Legislature. Firstly, betel nuts were expressly excluded from Chapter 8. Secondly, it was included in Chapter 21 and lastly it was provided in the chapter note that the process of crushing betel nuts into smaller pieces and mixing them with oils or spices would amount to manufacture. The changes are effective immediately under the Provisional Collection of Taxes Act, 1931.

Conclusion:-

The effect of the judgment of the Apex Court has been nullified. The assessee had fought a long legal battle and the effect of the judgment was undone with this amendment. The Legislature rendered the ruling of the highest judicial court of the country as ineffective by amending the legislative enactment.

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Finance Bill, 2009 - Adding bitterness to sweet Supari

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