Holding

The term "manufacture" under Section 2(f) is expansive and includes processes that transform a commodity into a distinct new article, but the Tribunal's third Member failed to give a proper opinion, necessitating remand for fresh consideration.

Summary

The Collector of Central Excise, Bombay appealed against the Customs, Excise and Gold Control Appellate Tribunal's decision that the distillation and recrystallisation processes undertaken by Mis. S.D. Fine Chemicals Pvt. Ltd. did not constitute "manufacture" for excise purposes. The Tribunal was divided: the technical member held the processes were merely purification, while the judicial member held they transformed the chemicals into a distinct commodity. The third member, who ultimately favored the respondent, gave a cryptic opinion without addressing the key arguments. The Supreme Court held that the definition of "manufacture" under Section 2(f) of the Central Excise Act, 1944 is expansive and includes processes that result in a new, distinct article, but found the third member's opinion inadequate. Consequently, the Court dismissed the appeal and remitted the matter to the Tribunal for a fresh, comprehensive opinion within six months.

Issues considered

Whether distillation and recrystallisation of chemicals amount to "manufacture" under Section 2(f) of the Central Excise Act, 1944.
Whether the third Member's opinion of the Tribunal was sufficient to resolve the dispute.
Interpretation of the expansive definition of "manufacture" in the Central Excise Act.

Legislation cited

Central Excise Act, 1944s. 2(f), s. 35(1)
Central Excise Tariff Act, 1985s. Schedule (section/chapter notes)

Subjects

manufactureexcise dutydistillationrecrystallisationCentral Excise Actdefinition of manufacturetribunal opinionremand

Judgment

A COLLECTOR' CENTRAL EXCISE, BOMBAY
v.
MIS. S.D. FINE CHEMICALS PVT. LTD.

MARCH 30, 1995

B (B.P. JEEVAN REDDY AND SUHAS C. SEN, JJ.)

Central Excises and Salt Act, 1944:

Section 2(f}-'Manufacture'-Meaning and scope of expression-Held
C definition is expansive.

Assessee manufacturing Chemicals and fine chemica/s-{fnde1taking
process of distillation and recrystallisatiort-Exemption from duty on the
ground that process undenaken was not manufactt1~ejectivn of claim-
Appeal-Tribunaf-DiJference of opinion between two Membe~eference
D to third Member-Disposal of issue by third-Member in a cryptic man-
nei--On Revenue's appeal matter remitted to third Member for fresh opinion.

' The respondent was manufacturing laboratory chemicals and fine
chemicals by employing the process of distillation and recrystallisation. It
claimed exemption from excise duty, under Notification No. 77 of 1983
E dated March 1, 1983, on the ground that the process under-taken by it does
not amount to manufacture. The Assistant Collector allowed the exemp-
tion but on appeal the Collector held that the respondent was liable to pay
duty because the process undertaken by it amounted to manufacture
inasmuch as a new commodity emerges out of the adopted process. On
F further appeal there was a difference of opinion between two Members of
the Customs, Excise and Gold Control Appellate Tribunal. Member (Tech-
nical) held that the process undertaken by the respondent was merely for
improving the quality of purity of the chemicals and does not amount to
manufacture; even after purification, the chemicals are known by the very
same name and that there was no change in the che'!lical formula even
G after purification. On the other hand Member (Judicial) took a contrary
view and held that the process undertaken by the respondent was not a
simple process and that the said process brings in a transformation which
will change the name, character and use making the goods excisable. In
view of this difference of opinion tlie matter was referred to a third
H Member who held in favour of the respondent-manufacturer. However he
84
C.C.E. v. FINE CHEMICALS 85
did not deal with the several aspects dealt with in the opinions of the two A
differing members. He did not also indicate whether he agreed or dis-
agreed with the findings recorded by the Member (Judicial).

Against the decision of the Tribunal, Revenue preferred an appeal
to this Court.
B
Remitting the matter for fresh opinion of the third Member of the
Tribunal, this Court

HELD: 1. The definition of the expression 'manufacture' under
Section 2(1) of the Act is not confined to the natural meaning of the
expression 'manufacture' but is an expansive definition. Certain processes, c
which may not have otherwise amounted to manufacture, are also brought
within the purview of and placed within the ambit of the said definition by
the Parliament. Not only processes which are incidental and ancillary to
the completion of manufactured product but also those processes as are
specified in relation to any goods in the section or chapter notes of the D
schedule to the Central Excise Tariff Act, 1985 are also brought within the
ambit of the definition. Though the principles enunciated are clear, it is
. their application that present difficulties and it does not help to draw "any
sharp or intrinsic distinction between. 'processing' and 'manufac:ture',
"which would only result in an oversimplification of both and tends to blur E
their interdependence in cases such as the present one". It would also be
not right to try to restrict the sweep of the definition with reference to
Entry 84 List I of the seventh Schedule to the Constitution. Since the
constitutionality of the said definition has been repeatedly upheld with
reference to both Entries 84 and 97 of List I, the definition must be
understood in terms it is couched. It should also be remembered that the F
question whether a particnlar process does or does not amount to
'manufacture' as defined under section 2(1) is always a question offact to
be determined in the facts of a given case. One of the main tests evolved
is whether on acconnt of the processes employed or applied by the assessee,
the commodity so obtained is no longer regarded as the original com- G
modity but is, instead, recognised a a distinct and new article that bas
emerged as a result of the processes. [93-F to H, 94-A to Cf

Union of India v. Delhi Cloth and General Mills, [1963] Suppl. I SCR
586; South Bihar Sugar Mills Ltd. and Anr. Etc. v. Union of India and Anr:,
[1968] 3 SCR 21; Empire Industries Ltd. and Ors. v. Union of India and Ors., H
86 SUPREME COURT REPORTS [1995] 3 S.C.R.

A [1985) 3 SCC 314; Mis. Ujagar Prims and Ors. v. Union of India and Ors.,
(1989) 3 SCC 488; Mis. Tungabhadra Industries Ltd. v. Commercial Tax
Officer, Kumool, [1961) 2 SCR l4;Union of India v. H.S. Dhillon, [1971) 2
SCC 779; Collector of Central Excise, Madras v. M/s. Kutty Flush Doors and
Furniture Co. (P) Ltd., (1988) Suppl. SCC 239 and Collector of Cemral
B Excise, Jaipur v. Rajasthan State Chemical Works, Deedwana, Rajasthan,
(1991] 4 sec 473, referred to.

2. In the instant case the third Member of the Tribunal has not dealt
with the case in a full and proper manner and has disposed of the issue
in a cryptic manner. Therefore, the matter is remitted for his fresh opinion
C which he shall do within six months from the date of this judgment and
then transmit his opinion to this Court soon after rendering it. [94-D, E)

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 2532
(NM) of 1992.

D From the Judgment and Order dated 25.6.1991 of the, Customs,
Excise and Gold (Control) Appellate Tribunal, New Delhi in A. No. EA.
No. 1566 of 1987-C.

Dr. R.R. Misra, Ashok K. Srivastava and V.K. Verma for the Appel-
Ian!.
E
V. Laxmi Kumaran and S. Muralidhar for the Re.spondents.

The Judgment of the Court was delivered by

B.P. JEEVAN REDDY, J. In this appeal preferred by the Collector,
F Central Excise, Bombay under Section 35(L) of the Central Excise Act,
1944 (hereinafter referred to as 'the Act'), the question is whether the
distillation and recrystallisation carried out by the respondent amounts to
'manufacture'? The respondent, M/s. S.D. Fine Chemical Pvt. Ltd., are
engaged in the manufacturing of laboratory chemicals and fine chemicals.
They also undertake repacking and purification of laboratory and fine
G chemicals. Jn the classification list filed by them on April 1, 1983, they
claimed that the process of purification and distillation undertaken by them
does not amount to process of manufacture and accordingly, claimed
exemption from duty in respect of such goods under Notification No. 77
of 1983 dated March 1, 1983. The Assistant Collector agreed with the
H respondent but his order was revised by the Collector (Appeals) who held
C.C.E. v. FINE CHEMICALS [JEEVAN REDDY, J.] 87
that the processes undertaken by the respondent do amount to manufac- A
ture. Inasmuch as a new commodity known to the market emerges as a
result of such processes, he held, they are liable to excise duty. The
respondent filed an appeal before the Customs, Excise and Gold (Control)
Appellate Tribunal, New Delhi which was heard in the first instance by a
Bench of two Members. The Member (Technical) agreed with the respon-
dent. He held that the process undertaken by the respondent is merely for
B
improving the quality or purity of the chemicals and does not amount to
manufacture. He observed that even after purification, the chemicals are
known by the very same name and that there was no change in the chemical
formula even after purification. The simple process of distillation and
recrystallisation of the chemicals does not amount to manufacture for the c
purposes of the Act, he held. The Member (Judicial) however, took a
contrary view. He was of the opinion that the process undertaken by the
respondent is not a simple process and that the said process "brings in a
transformation which will change the name, character and use". The Mem-
ber (Judicial) further observed, "the ordinary chemicals cannot be used in D
laboratory without it undergoing purification. They are traded in different
commercial name and has altogether different use. So long as the trade
recognises it as a different commodity and its uses are different, the item
., has to be recognised as a different goods and became excisable goods". In
view of the difference of opinion between the two Members, the matter
was referred to a third Member. The third Member held in favour of the E
respondent- manufacturer on the following reasoning:

"As can be gathered, the key test is whether the commodity which
is subjected to the process a. . · manufacture can no longer te
regarded as the original commodity. In my view in the instant case
F
this test has not been satisfied as the chemicals prior to the two
processes concerned herein continues to remain the same after
being subjected to the processes, admittedly with only a change in
increase in purity. The commodity retains its identity substantially
through the processing stage. Therefore, it carmot be said to have
been manufactured. 11
G

It would be evident from the opinion of the third Member that he
did not deal with the several aspects dealt with in the opinions of the two
+ differing members. He did not also indicate whether he agrees or disagrees
with the findings recorded by the Member (Judicial), viz., that after the H
88 SUPREME COURT REPORTS (1995) 3 S.C.R.

A processes undertaken by the respondent, the chemicals bear a different
chemical name and have an altogether different use. The third Member
did not also deal with the holding of the Member (Judicial) that after the
processes undertaken by the respondent, the chemical became a different
commercial commodity.

B The expression 'manufacture' is defined in clause (I} of Section 2 of
the Act. The definition, as substituted by Finance Act (No. 25) of 1975,
with effect from March 1, 1975 reads thus:

!!(manufacture' includes any process,- ~ -·
c (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 Schedule to the Central Excise Tariff Act,
D 1985 as amounting to manufacture,

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 ac-
E count."

The definition is thus an inclusive defmition. The purpose of the
definition is to include certain processes and activities within the ambit of
the said definition which may not otherwise amount to manufacture, as
F ordinarily understood. This inclusion is in addition to the normal meaning
and context of the expression 'manufacture'. The said expression has been
the subject matter of several decisions of this Court to which a brief
reference is necessary to bring out the principles enunciated therein. In
Union of India v. Delhi Cloth and General Mills, (1%3) Suppl. 1 SCR 586
the revenue wanted to levy a duty upon 'refined oil' which was obtained by
G the respondent-manufacturer at an intermediate stage of production of
vanaspati. The respondent cleansed the oil purchased by him by applying
certain processes and thus obtained 'refined oil'. But the respondent did
not apply the process of deodorisation before hydrogenating the refined
oil. The case of the Revenue was that even non-deodorised refined ground-
H nut/ti! oil is 'refined oil' as known to the consumers and the commercial
C.C.E. v. FINE CHEMICALS [JEEVAN REDDY, J.] 89
community. The respondent's case, however, was that the 'refined oil' as A
known to the consumers and the commercial community is necessarily the
deodorised refined oil. After referring to the material produced by both
the parties, this Court upheld the respondent's contention and held that
"without deodorisation, the oil is not 'refined oil' as is known to the
consumers and the commercial community'. This Court further held "that B
the raw oil purchased by the respondent for the purpose of manufacture
of vanaspati does not become at any stage 'refined oil' as is known to the
consumers and the commercial community". For ·this reason, it was held
that refined oil obtained by the respondent at stage anterior to
hydrogenation is not 'vegetable non-essential oil' or by 'all sorts' in or in
relation to the manufacture of which any process is ordinarily carried on C
with the aid of power within the meaning of Item 12 of the Ist Schedule
to the Act. So far as legal position is concerned, this Court stated it in the
following words:

"Excise duty is on the manufacture of goods and not on the sale. D
Mr. Pathak is therefore right in his contention that the fact that
the substance produced by them at an intermediate stage is not
put in the market would not make any difference. If from the raw
material has been brought into existence a new substance by the
' application of processes one or more of which are with the aid of
power and that substance is the same as "refined oil" as known to E
the market an excise duty may be leviable under Item 23 (the
present item 12)".

The Court then dealt with the next argument of the appellant- Union
of India that even if it is held that the respondent did not manufacture F
'refined oil' as known to the market, even so they must be held to manufac-
ture some kind of 'non-essential vegetable oil' within the meaning of Item
23. This Court rejected the said argument with reference to the meaning
i of the expressions 11manufacture" and "goods 11 , in the following words:

"The word "manufacture" used as a verb is generally understood G
to mean as 'bringing into existence a new substance' and does not
mean merely 'to produce some change in a substance, however,
minor in consequence the change may be. This distinction is well
brought about in a passage thus quoted in Permanent Edition of
Words and Phrases, Vol. 26 from an American Judgment. The H

\
SUPREME COURT REPORTS (1995) 3 S.C.R.

A passage runs thus:-

'Manufacture' implies a change, but every change is not manufac-
ture 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
B emerge having a distinctive name, character or use'."

The Court then referred to and dealt with the meaning of expression
'goods' occurring in Section 3 and observed thus:

"These definitions make it clear that to become "goods" an article
c must be something which can ordinarily come to the market to be
bought and sold.

This consideration of the meaning of the word "goods" provides
strong support for the view that "manufacture" which is liable to
D excise duty under the Central Excise and Salt act, 1944 must be
the 'bringing into existence of a new substance known to the
market'. "But", says the learned counsel, "look at the definition of
"manufacture" in the definition clause of the act and you will find
that "manufacture" is defined thus: 'Manufacture' includes any
process incidental or ancillary to the completion of a manufactured
E product. (S.2(f))."

We are unable to agree with the learned counsel that by inserting
this definition of the word "manufacture" in S.2(f) the legislature
intended to equate "processing" to "manufacture" and intended to
F make mere "processing" as distinct from "manufacture" in the same
sense of bringing into existence of a new substance known to the
market, liable to duty. The sole purpose of inserting this definition
is to make it clear that at certain places in the Act ·the word
'manufacture' has been used to mean a process incidental to the
manufacture of the article. Thus in the very item under which the
G excise duty is claimed in these cases, we find the words: 'in or in
relation to the manufacture of which any process is ordinarily
carried on with the aid of power." The definition of 'manufacture'
as in S.2(f) puts it beyond any possibility of controversy that if
power is used for any of the numerous processes that are required
H to turn the raw material into a finished article known to the market
C.C.E. v. FINE CHEMICALS [JEEVAN REDDY, J.] 91
the clause will be applicable; and an argument that power is not A
used in the whole process of manufacture using the word in its
ordinary sense, will not be available. It is only with this limited
purpose that the legislature, in our opinion, inserted this definition
of the word 'manufacture' in the definition section and not with a
view to make the mere "processing" of goods as liable to excise B
duty."

In South Bihar Sugar Mills Ltd. & Anr. Etc. v. Union of India & Anr.,
[1968} 3 SCR 21, the above interpretation was affirmed.

In Empire Industries Ltd. & Ors. v. Union of India & Ors., [1985] 3 C
sec 314 the question arose whether the process of bleaching, dyeing,
printing of grey cloth amounts to 'manufacture' as defined in the Act. It
may not be necessary to set out the reasoning in this case inasmuch as the
very same question was ·considered later by a Constitution Bench of this
Court in M/s. Ujagar Prints & Ors. v. Union of India & Ors., [1989] 3 sec D
488. We will, therefore, refer to the reasoning in Ujagar Prints. The facts
in Ujagar Prints were these: the customers supplied the grey fabric to the
appellant who carried C?Ul operations of bleaching, dyeing, printing, glaz-
ing, shrink-proofmg etc. against payment of processing charges. The
ownership of the cloth rested with the customers who got these processes
done to their specifications from the appellant on payment of processing E
charges. The question was whether the appellant can be said to have
undertaken 'manufacture' as defined in the Act. M.N. Venkatachaliah, J.,
as the then learned Judge was, dealt with several decisions of this Court
including those referred to above as well as the decisions rendered by this
Court under different Sales Tax enactments including Mis Tungabhadra F
Indust(ies Ltd. v. CommeT'Cial Tax Officer, Kumool, [1961] 2 SCR 14 and
enunciated the principle in the following words:

''The prevalent and generally accepted test to ascertain that there
is "manufacture" is whether the change or the series of changes
brought about by the application of processes take the commodity G
to the point where, commercially, it can no longer be regarded as
the original commodity but is, instead, recognised as a distinct and
new article that has emerged as a result of the processes. The
principles are clear. But difficulties arise in their application in
individual cases. There might be borderline cases wh.ere either H
92 SUPREME COURT REPORTS [1995] 3 S.C.R.

A conclusion with equal justification be reached. Insistence on any
sharp or intrinsic distinction between 'processing' and
'manufacture', we are afraid, results in an oversimplification of
both and tends to blur their interdependence in cases such as the
present one."

B The learned Judge then dealt with argument that if the expression
'manufacture' defined under Section 2(f) of the Act is understood in a
broad sense. to include processes, which in truth do not amount to
manufacture, the definition and the very Act would fall outside Entry 84
of List-I of the Seventh Schedule to the Constitution. The learned Judge
C rejected the argument holding "at all events, even if the impost on process
is not one under entry 84, List I, but is an impost on "processing" distinct
from "manufacture" the levy could yet be supported by entry 97, List-I even
without the aid of the wider principle recognised and adopted in Dhillon
Case." The learned Judge then referred to the principle of the decision in
D Union of India v. H.S. Dhillon, (1971) 2 S.C.C. 779 and observed:

"So far as the exclusive competence of the Union Parliament to
legislate is concerned all that is necessary is to find out whether
the particular topic of legislation is in List II of List III. If it is not,
it is not necessary to go any further or search for the field in List
E I. Union Parliament has exclusive power to legislate upon that
topic or field. Of course, it has concurrent power also in respect
of the subjects in List III."

In Collector of Central Excise, Madras v. M/s. Kutty Flush Doors and
F Furniture Co. (P) Ltd., [1988) Suppl. S.C.C. 239, this Court observed, after
referring to the principle of Delhi Cloth and General Mills (supra) and
"South Bihar Sugar Mills (supra), to the following effect:

"This principle is well-settled. This is a question of fact depending
upon the relevant material whether as a result of activity, new and
G different article emerges having a distinct name, character and
use."

On the meatiing of expression "process", the following statement in
the decision of this Court in Collector of Central Excise, Jaipur v. Rajasthan
ff State Chemical Works, Deedwana, Rajasthan, [1991) 4 SCC 473 is relevan~:
C.C.E. v. F1NE CHEMICALS [JEEVAN REDDY, J.] 93
"The natural meaning of the word 'process' is a mode of treatment A
of certain materials in order to produce a good result, a species
of activity performed on the subject-matter in order to transform
or reduce it to a certain stage. According to Oxford Dictionary
one of the meaning of the word 'process' is "a continuous and
regular action or succession of actions taking place or carried on B
in a definite manner and leading to the accomplishment of some
result." The activity contemplated by the definition is perfectly
general requiring only the c,ontinuous or quick succession. It is not
one of the requisites that the activity should involve some operation
on some material in order to its conversion to some particular
stage. There is nothing in the natural meaning of the word C
'process' to exclude its application to handling. There may be a
process which consists only in handling and there may be a process
which involves no handling or not merely handling but use or also
use. It may be a process involving the handling of the material and
it need not be a process involving the use of material. The activity D
may be subordinate but one in relation to the further process of
11
manufacture.

The question in the decision was whether the respondent was entitled
to the benefit of a particular exemption notification but that question in
turn raised the question what is 'manufacture' and what is 'process'? The E
Bench (S. Ranganathan, Fathima Beevi and N.D. Ojha, JJ.) expressed the
aforesaid opinion.

The decisions aforesaid make it clear that the definition of the
expression 'manufacture' under Section 2(1) of the Act is not confined to F
the natural meaning of the expression 'manclacture' but is an expansive
definition. Certain processes, which may not have otherwise amounted to
manufacture, are also brought within the purview of and placed within the
ambit of the said definition by the Parliament. Not only processes which
are incidental and ancillary to the completion of manufactur.ed product G
but also those processes as are specified in relation to any goods in the
section or chapter notes of the schedule to the Central Excise Tariff Act,
1985 are also brought within the ambit of the definition. As has been
repeatedly observed by the Court, though the principles enunciated are
clear, it is their application that presents difficulties and it does not help
to draw 11 any sharp or intrinsic di~tinction between 'processing' and H
94 SUPREME COURT REPORTS [1995] 3 S.C.R.

A 'manufacture', "which would only result in an oversimplification of both and
tends to blur their interdependence in cases such as the present one"
(Ujagar Prints). It would also be not right, as pointed out in Ujagar Prints
to try to restrict the sweep of the definition with reference to Entry 84 List-I
of the seventh Schedule to the Constitution. Since the constitutionality of
the said definition has been repeatedly upheld with ·reference to both
B Entries 84 and 97 of List-I (Empire Industries and Ujagar Prints), the
definition must be understood in terms it is couched. It should also be
remembered that the question whether a particular process does or does
not amount to 'manufacture' as defined under Section 2(f) is always a ~ v
question of fact to be determined in the facts of a given case applying the
C principles enunciated by this Court. One of the main tests envolved by this
Court is whether on account of the processes employed or applied by the
assessee, the commodity so obtained is no longer regarded as the original
commodity but is, instead, recognised as a distinct and new article that has
emerged as a result of the processes (Ujagar Prints).

D Now coming to the facts of the case before us, it is clear from the
perusal of the opinion of the third Member of the Tribunal that he has not
dealt with the case in a full and proper manner and has disposed of the
issue in a cryptic manner. It has, therefore, become necessary to remit the
matter for the fresh opinion of the third Member of the Tribuna\. The third
E Member shall not hear the parties and render his opinion afresh on the
question referred to him. He shall do so within six months from this date.
He shall transmit his opinion to this Court soon after rendering it.

If the third Member, Jyoti Balasundaram, who heard the matter is
not available, the Chairman of the Tribunal shall specify another Member
F for hearing this matter. ·

List the appeal after receipt of the finding/opinion from the Tribunal.

T.N.A. Petition disposed of.