M/S FLEX ENGINEERING LIMITEDversusCOMMISSIONER OF CENTRAL EXCISE, U.P

                     [2012] 1 S.C.R. 209


             M/S FLEX ENGINEERING LIMITED                          A
                               v.
       COMMISSIONER OF CENTRAL EXCISE, U.P
            (Civil Appeal No. 7152 of 2004)
                     JANUARY 13, 2012.
                                                                B
      [D.K. JAIN AND ASOK KUMAR GANGULY, JJ.]

     Central Excise Rules, 1944:

      Rule 57-A - Modvat credit - Inputs used 'in relation to c
  manufacture' offinal product - Manufacturing process -Testing
  of machines - Flexible laminated plastic film in roll form and
 poly paper used for testing the automatic form f111 and seal
 machines (F & S Machines) manufactured by the assessee
 - Held: The process of testing the customised machines is 0
 integrally connected with the ultimate production of the final
product viz. the F&S machines and, therefore, that process
 is one in relation to the manufacture, falling within the sweep
of r. 57A - The manufacturing process in the instant case gets
completed on testing of the F&S machines and, therefore, the E
flexible plastic films and poly paper used for testing the said
machines are inputs used in relation to the manufacture of
the final product and would be eligible for Modvat credit under
r. 57A - Central Board of Excise and Customs Circular No.
33133194/CX.8 dated 4.5.1994 - Notification No. 28195-
C.E.(N. T) dated 29.6.1995.                                      F

     The appellant-assessee, engaged in the manufacture
of various types of packaging machines, marketed as
automatic form fill and seal machines ("F&S machines"),
classified under chapter heading 8422.00 of the Schedule       G
to the Central Excise Tariff Act, 1985, filed declarations
and availed of the benefit of Modvat credit in respect of
the flexible laminated plastic film in roll form and poly
paper (falling under chapter headings 3920.38 and
                            209                                H
     210      SUPREME COURT REPORTS          [2012] 1 S.C.R.


A 4811.30 of the Schedule to the Tariff Act), which,
   according to the assessee was used for testing the F&S
   machines. It was the case of the assessee that the F&S
   machines manufactured by it were 'made to order'
   inasmuch as all the dimensions of the packaging/sealing
B pouches, for which the F&S machine was required, were
   provided by the customer as per the purchase order
   which contained an inspection clause to the effect that
   inspection/trial would be carried out by purchaser's
    Engineer before dispatch of equipment for the
c performance of the machine. The adjudicating authority
    did not accept the stand of the assessee and denied the
    benefit of Modvat credit as claimed. The appeals of the
    assessee were dismissed by the Commissioner (Appeals)
    as also by the Customs, Excise and Gold (Control)
    Appellate Tribunal. The reference was also answered by
 0
    the High Court against the assessee opining that testing
    the performance of a final product was not a process of
    manufacture and, therefore, materials used for testing the
    performance of the F&S machines could not be termed
    as 'inputs' for the purpose of allowing Modvat credit.
 E
           Allowing the appeals, the Court

        HELD: 1.1. Rule 57A of the Central Excise Rules,
   1944 entitles a manufacturer to take credit of the Central
 F Excise duty paid on the inputs used in or in relation to
   the manufacture of the final product, provided that the
   input and the finished product are excisable goods and
   fall under any of the specified chapters in the tariff
   schedute. Circular No.33/33/94/CX.8, dated 4.5.1994,
 G issued by the Central Board of Excise and Customs,
   relating to the Modvat scheme stipulates, "Modvat credit
   is available for all excisable goods used as inputs in or
   in relation to the manufacture of finished goods. It is, ·
    therefore, clarified that the input credit is admissible
 H whether such input is physically present in the finished
FLEX ENGINEERING LIMITED v. COMMISSIONER OF 211
           CENTRAL EXCISE, U.P.
excisable goods or not so long such inputs are used in         A
or in relation to the manufacture of finished excisable
goods". By Notification No.28195-C.E. (N.T.), dated
29.6.1995, r.57-A was amended and the phrase "whether
directly or indirectly and whether contained in the final
product or not" was inserted. There is no dispute that in      B
the instant case, both the F&S machines and the flexible
laminated plastic film and poly paper are excisable. [para
13 and 16] [221-D-H; 224-C]

      Collector of Central Excise & Ors. Vs. So/aris Chemtech
                                =
 Ltd. & Ors. 2001 (8) SCR 501 (2007) 7 sec 347: 2001 C
 (214) E.L.T. 481 (S.C.); Collector of Central Excise, Jaipur
 Vs. Rajasthan State Chemical Works, Deedwana, Rajasthan,
                            =
 1991 (1) Suppl. SCR 124 (1991) 4 sec 473: 1991 (55)
 E.L.T. 444 (S.C.) - relied on
                                                                D
      1.2. The process of manufacture is complete only
when the product is rendered marketable. Thus,
manufacture is intrinsically integrated with marketability.
If a product is not saleable, it will not be marketable and
consequently the process of manufacture would not be E
held to be complete, and duty of excise would not be
leviable on it. The corollary to this is that till the time the
step of manufacture continues, all the goods used in
relation to it will be considered as inputs and thus, entitled
to Modvat credit under r. 57 A of the Rules. In the instant F
case, each machine is tailor made according to the
requirements of individual customers. If the results are
not in conformity with the order, then the machine loses
its marketability and is of no use to any other customer.
Thus, the process of manufacture will not be said to be
complete till the time the machines meet the contractual G
specifications and that will not be possible unless the
machines are subjected to individual testing. [para 17 and
20] [225-B-C; 228-B-D]

    Union of India & Ors. Vs. Sonic Electrochem (P) Ltd. &    H
   212     SUPREME COURT REPORTS.            [2012] 1 S.C.R.


A Anr. 2002 (2) Suppl. SCR 475   =(2002) 7 SCC 435; Collector
   of Central Excise. Calcutta-II Vs. Mis Eastend Paper
   Industries Ltd. 1989 (3) SCR 1017 = (1989) 4 SCC 244
   Dharampal Satyapal Vs. Commissioner of Central Excise,
   Delhi-/, New Delhi 2005 (3 ) SCR 746 =(2005) 4 SCC 337
8 - relied on.
      1.3. Even though the revenue has alleged that the
  process of manufacture is complete as soon as the
  machine is assembled, yet it has not discharged the onus
  of proving the marketability of the machines thus
C assembled, prior to the stage of testing. In the absence
  of the revenue having adduced any such evidence or
  contorted the assessee's claim that the machines cannot
  be sold unless testing is done with some alternative
  evidence as to their marketability, the stand of the
D revenue cannot be accepted. [para 20] [228-D-F]

       Hindustan Zinc Ltd. Vs. Commissioner of Central Excise,
   Jaipur 2005 {2) SCR 391  =  (2005) 2 SCC 662 - relied on.

       1.4. This Court holds that the process of testing the
E customised F&S machines is inextricably connected with
  the manufacturing process, in as much as, until this
  process is carried out in terms of the covenant in the
  purchase order, the manufacturing process is not
  complete, the machines are not fit for sale and, as such,
F not marketable at the factory gate. Therefore, the process
  of testing, in the instant case, ;s one in relation to the
  manufacture, falling within the sweep of r. 57A of the
  Rules. Accordingly, the flexible plastic films used for
  testing the said machines are inputs used in relation to
G the manufacture of the final product and would be eligible
  for Modvat credit under r. 57A of the Rules.[para 21-22]
  [228-G; 229-A-D]

      Commissioner of Income Tax, Kera/a, Vs. Tara Agencies
                      =
H 2007 (8) SCR 136 2007 (6) SCC 429; Maruti Suzuki Ltd.
FLEX ENGINEERING LIMITED v. COMMISSIONER OF 213
           CENTRAL EXCISE, U.P.
Vs. Commissioner of Central Excise, Delhi-Ill 2009 (13) SCR A
301 = 2009 (9) sec 193=2009 (240) E.L.T. 641 (S.C.);
National Leather Cloth Manufacturing Company Vs. Union of
India & Anr (2010) 12 SCC 218: 2010(256) ELT 321(SC);
Tata Engineering & Locomotive Co. Ltd. Vs. Commr. Of C.
Ex., Pune 2010 (256) E.L.T. 56 (Born.) - cited.             B
                     Case Law Reference:
    -
    (2010) 12 sec 218               cited         para 9
    2007 (8) SCR 136                cited         para 9
                                                               c
    2009 (13) SCR 301               cited         para 9
    2010 (256) E.L.T. 321 S.C       cited         para 9
    2007 (8) SCR 501                relied on     para 14
                                                               D
    1991 (1) Suppl. SCR 124         relied on     para 15
    2002 (2) Suppl. SCR 475         relied on     para 17
    1989 (3) SCR 1017               relied on     para 18
    2005 (3) SCR 746                relied on     para 19      E

    2005 (2) SCR 391                relied on     para 20
    CIVIL APPELLATE JURISDICTION : Civil Appeal No.
7152 of 2004 etc.
                                                               F
    From the Judgment & Order dated 26.08.2002 of the High
Court of Judicature at Allahabad in Central Excise Reference
No. 11 of 2001.
                           WITH
                                                               G
C.A. Nos. 429, 430 & 431 of 2012.

    Rajesh Kumar, R.K. Srivastava, P.N. Srivastava for the
Appellant.
                                                               H
    214       SUPREME COURT REPORTS               [2012] 1 S.C.R.


A       Mukl'I Gupta, Rashmi Malhotra, Som Prakash, B. Krishna
    Prasad for the Respondent.

          The .Judgment of the Court was delivered by

      D.K. JAIN, J.: 1. Leave granted in S.L >-·. (C) Nos. 875 of
B 2008, 10759of2010and6501 of2011.

        2. This batch of appeals, by grant of leave, arises out of
  judgments dated 26th August, 2002 in C.E.R. No. 11 of 2001,
   11th April, 2007 in C.E.A. No. 10 of 2004, 8th September,
C 2009 in C.E.A. No. 6 of 2003 and 25th October, 2010 in C.E.R.
  No. 51 of 2002 passed by the High Court of Judicature at
  Allahabad. By the impugned judgments, rendered in the
   reference applications filed by the assessee, under Section
  35H of the Central Excise Act, 1944 (for short "the Act"), the
D questions referred by the Customs, Excise and Gold (Control)
  Appellate Tribunal, as it then existed, (for short "the Tribunal")
   have been answered in fav0ur of the revenue.

       3. In order to comprehend the controversy at hand, a few
E material facts may be noticed. At the outset, it may be noted
  that these appeals relate to the period between August 1992
  to June 1996.

       The appellant -assessee, a body corporate, claiming to
  be pioneers in the concept of flexible packaging, 1s engaged
F in the manufacture of various types of packaging machines,
  marketed as Automatic form fill and seal machines (for short
  "F&S machines"), classified under chapter heading 8422.00 of
  the Schedule to the Central Excise Tariff Act, 1985 (for short
  "the Tariff Act"). The literature placed on record shows that the
G assessee has prototype models of F&S machines with
  technical details like web width, Roll diameter, Core diameter,
  typical material range, the type of material to be packed, etc.
  According to the assessee, the machines are 'made to order',
  inasmuch as all the dimensions of the packaging/sealing
H
 FLEX ENGINEERING LIMITED.'. COMMISSIONER OF 215
       CENTRAL EXCISE, U.P. [D.K JAIN, J.)
 pouches, for which the F&S machine is required, are provided     A
 by the customer. The purchase order contains the following
 inspection clause:
     "lnspectionffrial will be carried out at your works in the
     presence of (sic) our Engineer before dispatch of            8
     equipment for the performance of the machine."

      Flexible Laminated Plastic Film in roll form & Poly Paper
which are duty paid, falling under chapter headings 3920.38
anci 4811.30 of the Schedule to the Tariff Act, are used for
testing, tuning and adjusting various parts of the F&S machine C
in terms of the afore-extracted condition :n the purchase order.
As the machine ordered is customer specific, if after inspection
by the customer it is found deficient in respect of its operations
for being used for a particular specified packaging, it cannot
be delivered to the customer, till it is re-adjusted and tuned to D
make it match with the required size of the pouches as per the
customer's requirement. On completion of the above process
and when the customer is satisfied, an entry is made in the RG
1 register declaring the machine as manufactured, ready for
~ra~.                                                             E
     4. The. assessee filed declarations and availed of the
 benefit of Modvat credit in respect of the Flexible Laminated
 Plastic Film in roll form & Poly Paper used for testing the F&S
 machine. On 4th March, 1993, a notice was issued to the F
assessee to show cause as to why the benefit of Modvat credit
on the above goods be not denied, on the ground that they
have used the said material for !he purpose of testing the final
product i.e. the F&S machine which cannot be treated as inputs
as stipulated in Rule 57A of the Central Excise Rules, 1944 (for G
short "the Rules"). On a similar ground, a number of show
cause notices were issued to the assessee covering the period
from August 1992 to June 1996. The assessees' reply to the
show cause notices did not find favour with the adjudicating
authority, who accordingly, denied the benefit of Modvat credit H
    216       SUPREME COURT REPORTS                 (2012] 1 S.C.R.


A on the said items. Appeais preferred by the assessee before
  the Commissioner (Appeals) and the Tribunal were also
  dismissed.

       5. Aggrieved thereby, the assessee filed applications
8 seeking reference to the High Court on the questions
  proposed. However, having failed to persuade the Tribunal that
  its orders gave rise to questions of law, the assessee moved
  the Allahabad High Court, praying for a direction to the Tribunal
  for reference.
c        6. The High Court partly allowed the application and
    directed the Tribunal to draw a statement of the case and refer
    the following questions of law for its opinion:

          "Q1) Whether, in the circumstances of the present case,
D         facts of which are not in dispute, duties paid on material,
          namely, plastic films/poly paper used for testing machines
          for forming commercial/technical opinion as to their
          marketability/ e~cisability would be eligible to be taken as
          credit (sic) under rule 57-A read with relevant notification?
E         02) Whether such use of material in testing in view of the
          purposes mentioned above, could be said to be used (sic)
          in the manufacture of or use in relation to the manufacture
          of the final products viz., Machines as assembled?"

F       7. As aforesaid, the High Court has answered both the
  questions in the negative, opining that testing the performance
  of a final product is not a process of manufacture and therefore,
  materials used for testing the performance of the F&S machine
  cannot be termed as 'inputs' for the purpose of allowing Modvat
G credit. According to the High Court, anything required to make
  the goods marketable must form a part of the manufacture and
  any raw material or any materials used for the same would be
  a component part of the end product. It has observed that
  materials used after manufacture of the final product, viz. the
H F&S machine, is complete, is only to detect the deficiency in
FLEX ENGINEERING LIMITED v. COMMISSIONER OF 217
      CENTRAL EXCISE, U.P. [D.K. JAIN, J.]
the final product and therefore, could not be the goods used in       A
or in relation to the manufacture of the final product within the
meaning of Rule 57A of the Rules. Hence the present appeals
by the assessee.

       8. Assailing the opinion of the Hjgh Court, Mr. Rajesh B
 Kumar, learned counsel appearing on behalf of the assessee
 submitted that the expression "in or in relation to" used in Rule
 57A of the Rules is very wide and is used to expand the scope,
 meaning and content of the expression 'inputs' so as to include
 all inputs so long as these are used "in or in relation to the c
manufacture" of finished excisable goods. It was argued that
 since the machines are tailor made, as per the sp.ecifications
 provided by a customer to achieve a distinct and different result,
it is of no use to any other customer. Therefore, unless each
individual machine is tested by using the flexible plastic films 0
in the presence of the customer or his representative, as per
the terms of the contract, to satisfy him that it is capable of
being used for a particular packing as specified by him, the
process of manufacture of the final product cannot be said to
be complete. It was contended that the testing of the machine E
being an integral process of the manufacture and marketability
of the final product, particularly in terms of the specific condition
in the contract, the claim for Modvat credit was admissible on
flexible plastic films consumed in the testing of the F&3
machines. It was stressed that to avail of the Modvat credit in
                                                                      F
respect of an input, it is not necessary that such input must be
physically present in the finished product.

      9. In support of the proposition that the material used in
testing, for the purpose of verification of certain characteristics
of the final product, is an input in or in relation to the            G
manufacture, learned counsel placed reliance on the decisions
of this Court in Commissioner of Income Tax, Kera/a, Vs. Tara
Agencies1, Maruti Suzuki Ltd. Vs. Commissioner of Central

1.   (2001) s sec 429 ..                                              H
    218         SUPREME COURT REPORTS                        [2012] 1 S.C.R.


A Excise, Delhi-11/2, National Leather Cloth Manufacturing
  Company Vs. Union of India & Anr. 3 and a decision of the
  Bombay High Court in Tata Engineering & Locomotive Co. Ltd.
  Vs. Commr Of C. Ex., Pune•.

8      10. Percontra, Mr. Mukul Gupta, learned senior counsel
  appearing for the revenue, supporting the decision of the High
  Court, contended that Modvat credit is available only on the
  inputs which are actually used in the manufacture of the final
  product. According to the learned counsel, testing of a machine
C can take place only after the manufacture of the machine is
  complete and therefore, any goods used in a process
  subsequent to the completior1 of the process of manufacture
  cannot be termed as inputs within the meaning of Rule 57A of
  the Rules.
D       11. Before analysing the rival submissions, it would be
    appropriate to refer to the relevant statutory provisions.

        12. The Modvat scheme, introduced with effect from 1st
  March 1986, was aimed at allowing credit to the manufacturers
E for the excise duty paid by them in respect of the inputs used
  in the manufacture of the finished product. Rules 57A and 57C
  of the Rules, which make a manufacturer eligible to avail of the
  credit for the duty paid on the inputs read as follows:

          "RULE 57A : Applicability.- (1) The provisions of this
F
          section shall apply to such finished excisable goods
          (hereinafter referred to as the "final products") as the
          Central Government may, by notification in the Official
          Gazette, specify in this behalf, for the purpose of allowing
          credit of any duty of excise or the additional duty under
G         Section 3 of the Customs Tariff Act, 1975 (51of1975), as
          may be specified in the said notification (hereinafter
    2.    (2009) 9 sec 193 : 2009 (240) E.L.T. 641 (S.C.)
    3.    c201oi 12 sec 21a : 2010 (256) E.L.T. 321 cs.c.)
H   4.    2010 (256) E.L.T. 56 (Born.)
FLEX ENGINEERING LIMITED v. COMMISSIONER OF 219
      CENTRAL EXCISE, U.P. [D.K. JAIN, J.]
   referred to as the "specified duty") paid on the goods used       A
   in or in relation to the manufacture of the said final products
   whether directly or indirectly and whether contained in the
   final oroduct or not (hereinafter referred to as the "inputs")
   and for utilising the credit so allowed towards payment of
   duty of excise leviable on the final products, whether under      B
   the Act or under any other Act, as may be specified in the
   said notification, subject to the provisions of this section
   and the conditions and restrictions that may be specified
   in the notification:

         Provided that the Central Government may specify            C
   the goods or classes of goods in respect of which the
   credit of specified duty may be restricted.

   Exp/anation.-For the purposes of this rule, "inputs"
   includes-                                                         D

    (a)   inputs which are manufactured and used within the
          factory of production, in or in relation to, the
          manufacture of final products,
    (b)   paints and packaging materials,'                           E

    (c)   inputs used as fuel,

    (d)   inputs used for generation of electricity, used within
          the factory of production for manufacture of final         F
          products or for any other purpose, and

    (e)   accessories of the final product cleared alongwith
          such final product, the value of which is included in
          the assessable value of the final product,
                                                                     G
   but does not include-

   (i)    machines, machinery, plant, equipment, apparatus,
          tools, appliances or capital goods as defined in rule
          57Q used for producing or processing of any goods          H
    220            SUPREME COURT REPORTS              (2012] 1 S.C.R.


A                   or for bringing about any change in any substance
                    in or in relation to the manufacture of the final
                    products;

           (ii)     packaging materials in respect of which any
8                   exemption to the extent of the duty of excise payable
                    on the value of the packaging materials is being
                    availed of for packaging any final products;

           (iii)    packaging materials or containers, the cost of which
                    is not included in the assessable value of the final
c                   products under section 4 of the Act; and

           (iv)     crates and glass bottles used for aerated waters.

          (2) Notwithstanding anything contained in sub-rule (1), the
D         Central Government may, by notification in the official
          Gazette, declare the inputs on which declared duties of
          excise or additional duty (hereinafter referred to as
          'declared duty') paid shall be deemed to have been paid
          at such rate or equivalent to such amount as m;:iy be
          specified in the.said notification and allow the credit of such
E         declared duty deemed to have been paid in such manner
          and subject to such condition as may be specified in the
          said notification even if the declared inputs are not used
          directly by the manufacturer of final products declared in
          the said notification, but are contained in the said final
F         products.

                 Explanation. - For the purposes of this sub-rule, it
          is clarified that even if the declared inputs are used directly
          by a manufacturer of final products, the credit of the
G         declared duty shall, notwithstanding the actual amount of
          duty paid on such declared inputs, be deemed to be
          equivalent to the amount specified in the said notification
          and the credit of the declared duty shall be allowed to such
          manufacturer.
H
 FLEX ENGINEERING LIMITED v. COMMISSIONER OF 221
       CENTRAL EXCISE, U.P. [D.K. JAIN, J.]   .

        Rule 57C. Credit of duty not to be allowed if final A
        products are exempt.-No credit of the specified duty
        paid on the inputs used in the manufacture of a final
        product (other than those cleared either to a unit in a Free
        Trade Zone or to a hundred per cent Export-Oriented Unit)
        or to a unit in an Electronic Hardware Technology Park or B
       to a unit in Software Technology Parks -or supplied to the
        United Nations or an international organisation for their
       official use or supplied to projects funded by them, on
       which exemption of duty is available under notification of
       the Government of India in the Ministry of Finance C
       (Department of Revenue) No.108/95-Central Excises,
       dated the 28th August, 1995 shall be allowed if the final
       product is exempt from the whole of the duty of excise
       leviable thereon or is chargeable to nil rate of duty."
                                                                        D
       13. It is manifest that Rule 57A of the Rules entitled a
 manufacturer to take credit of the Central Excise duty paid on
 the inputs used in or in relation to the manufacture of the final
 product provided that the input and the finished product are
 excisable goods and fall under any of the specified chapters
 in the tariff schedule. It is pertinent to note that vide Notification E
 No.28/95-C.E. (N.T.), dated 29th June 1995, the said Rule was
 amended and the phrase "whether directly or indirectly and
whether contained in the final product or not" was inserted.
There is no dispute that in the instant case, both the F&S
machines and the flexible laminated plastic film and poly paper F
are excisable. Therefore, the short question for consideration
is whether the said material on which Modavt credit is claimed
by the assessee, not physically used in the manufacture of the
said machine but used for testing the F&S machines would be
covered within the sweep of the expression "in or in relation to G
the manufacture of the final products", as appearing in Rule 57A
of the Rules. In short, the bone of contention is as to what
meaning is to be assigned to the expression "in relation to the
manufacture of final products."
                                                                        H
     222        SUPREME COURT REPORTS                         [2012] 1 S.C.R.


A      14. In our opinion, apart from the fact that the amended
  Rule itself contemplates that physical presence of the input, in
  respect of which Modvat credit is claimed, in the final product
  is not a pre-requisite for such a claim, even otherwise this issue
  is no longer res-integra. In Collector of Central Excise & Ors.
B Vs. Solaris Chemtech Ltd. & Ors. 5 , this Court while examining
  the scope and purP.ort of the expression "in or in relation to the
  manufacture of the final products" observed that these words
  have been used to widen and expand the scope, meaning and
  content of the expression "inputs" so as to attract goods which
C do not enter into finished goods. Speaking for the Bench, S.H.
   Kapadia, J. {as his Lordship then was) held as follows:

           "11. Lastly, we may point out that in order to appreciate
           the arguments advanced on behalf of the Department one
           needs to interpret the expression "in or in relation to the
D
           manufacture of final products". The expression "in the
           manufacture of goods" indicates the use of the input in the
           manufacture of the final product. The said expression
           normally covers the entire process of converting raw
           materials into finished goods such as caustic soda,
E          cement, etc. However, the matter does not end with the
           said expression. The expression also covers inputs "used
            in relation to the manufacture of final products". It is
            interesting to note that the said expression, namely, "in
            relation to" also finds place in the extended definition of
F           the word "manufacture" in Section 2(f) of the Central
            Excises and Salt Act, 1944 (for short "the said Act"). It is
            for this reason that this Court has repeatedly held that the
            expression "in relation to" must be given a wide
            connotation.
G
            12. The Explanation to Rule 57-A shows an inclusive
            definition of the word "inputs". Therefore, that is a
            dichotomy between inputs used in the manufacture of the

 H   s.    (2007) 7 sec 347 : 2007 (21) E.. L.T. 481 (S.c.)
 FLEX ENGINEERING LIMITED v. COMMISSIONER OF 223
       CENTRAL EXCISE, U.P. [D.K. JAIN, J.]
      final product and inputs used in relation to the manufacture    A
      of final products. The Department gave a narrow meaning
      to the word "used" in Rule 57-A. The Department would
      have been right in saying that the input must be raw
      material consumed in the manufacture of final product,
      however, in the present case, as stated above, the              8
      expression "used" in Rule 57-A uses the words "in relation
      to the manufacture of final products".

      13. The words "in relation to" which find place in Section
      2(f) of the said Act have been interpreted by this Court to     c
      cover processes generating intermediate products and it
      is in this context that it has been repeatedly held by this
      Court that if manufacture of final product cannot take place
      without the process in question then that process is an
      integral part of the activity of manufacture of the final       D
      product. Therefore, the words "in relation to the
      manufacture" have been used to widen and expand the
      scope, meaning and content of the expression "inputs" so
      as to attract goods which do not enter into finished goods.

       14. In J.K. Cotton Spg. & Wvg. Mills Co. Ltd. v. ST06 this E
      Court has held'that Rule 57-A refers to inputs which are
      not only goods used in the manufacture of final products
      but also goods used in relation to the manufacture of final
      products. Where raw material is used in the manufacture
      of final product it is an input used in the manufacture of final F
      product. However, the doubt may arise only in regard to
      use of some articles not in the mainstream of
      manufacturing process but something which is used for
      rendering final product marketable or something used
      otherwise in assisting the process of manufacture. This G
      doubt is set at rest by use of the words "used in relation
      to manufacture''.

                                      (Emphasis supplied by us)
6.   AIR 1965 1310.                                                   H
          224          SUPREME COURT REPORTS                [2012] 1 S.C.R.


      A      15. In Collector of Central Excise, Jaipur Vs. Rajasthan
        State Chemical Works, Deedwana, Rajasthan7, to which a
        reference was made in Solaris Chemtech Limited (supra), this
        Court had held that any operation which results in the
        emergence of the manufactured goods would come within the
      B ambit of the term manufacture. This is because of the words
        used in Rule 57A, namely, goods used in or in relation to the
        manufacture of final products.

"'!          16. At this juncture, it would also be apposite to refer to
      C Circular No.33/33/94/CX.8, dated 4th May 1994, issued by the
        Central Board of Excise and Customs, relating to the Modvat
        scheme. The relevant part of the Circular reads as under:

                "Subject: Instruction regarding Modvat Scheme.

      D         1.....
                2.   With a view to consolidate the instructions and
                streamline of procedures, the following instructions are
                issued in supersession of all the instructions issued on or
                before 31st December, 1993, in relation to Modvat -
      E
                 (i)     Modvat credit is available for all excisable goods
                         used as inputs in or in relation to the manufacture
                         of finished goods. It is, therefore, clarified that the
                         input credit is admi13sible whether such input is
      F                  physically present in the finished excisable goods
                         or not so long such inputs are used in or in
                         relation to the manufacture of finished excisable
                         goods. In this connection definition of the term
                         manufacture as propounded by the Supreme Court
      G                  in the Empire Industry's case-1985 (20) E.L.T. 179
                         and C.C.E. v. Rajasthan State Chemical case -
                         1991 (55) E.L.T. 444, 448 (S.C.) are quite relevant.
                                                        (Emphasis supplied)"
      H 7. (1991) 4 sec 473 : 1991 (55) E.LT. 444 cs.c.J
 FLEX ENGINEERING LIMITED v. COMMISSIONER OF 225
       CENTRAL EXCISE, U.P. [D.K. JAIN, J.]
        17. It is trite to state that "manufacture" takes place when    A
 the raw materials undergo a series of changes and
 transformation that result in the formation of a commercially
distinct commodity having a different name, character and use.
 It is equally well settled that physical presence of an input in the
final finished excisable goods is not a pre-requisite for claiming      B
Modvat credit under Rule 57A of the Rules. It may very well be
indirectly related to manufacture and still be necessary for the
completion of the manufacture of the final product. It needs little
emphasis that the process of manufacture is complete only
when the product is rendered marketable. Thus, manufacture              c
is intrinsically integrated with marketability. In this regard it
would be profitable to refer to the following observations of this
Court in Union of India & Ors. Vs. Sonic Electrochem (P) Ltd.
& Anr. 8 :

      "8. We do not consider it necessary to discuss the cases          D
      on the question of marketability, as this Court has dealt             I
      with all relevant cases in AP. SEB case9 • In that case, the
      question was whether electric poles manufactured with
      cement and steel for the appellant Board were marketable.
      After considering various cases on the question of                E
      marketability of goods, Jeevan Reddy, J., speaking for the
      Court, summed up the position thus: (SCC p. 434, para
      10)

             "10. It would be evident from the facts and ratio of F
             the above decisions that the goods in each case
             were found to be not marketable. Whether it is
             refined oil (non-deodorised) concerned in Union of
             India v. Delhi Cloth and General Mills Co. Ltd. 10
             or kiln gas in South Bihar Sugar Mills Ltd. v. Union G
             of lndia 11 or aluminium cans with rough uneven
a.   (20020 r sec 435.
9.   (1994) 2 sec 428.
10. AIR 1963 SC 791.
11. AIR 1968 SC 922.                                                    H
    226       SUPREME COURT REPORTS                 [2012) 1 S.C.R.


A                 surface in Union Carbide India Ltd. v. Union of
                  lndia 12 or PVC films in Bhor Industries Ltd. v.
                · CCE' 3 or hydrolysate in CCE v. Ambalal Sarabhai
                  Enterprises (P) Ltd. 14 the finding in each case on
                  the basis of the material before the Court was that
B                 the articles in question were not marketable and
                  were not known to the market as such. The
                 'marketability' is thus essentially a question of fact
                 to be decided on the facts of each case. There can
                 be no generalisation. The fact that the goods are
c                not in fact marketed is of no relevance."

          9. It may be noticed that in the cases referred to in the
          passage, quoted above, the reasons for holding the
          articles "not m:irketable" are different, however, they are
          not exhaustive. It is difficult to lay down a precise test to
D         determine marketability of articles. Marketability of goods
          has certain attributes. The essence of marketability is
          neither in the form nor in the shape or condition in which
          the manufactured articles are to be found, it is the
          commercial identity of the articles known to the market
E         for being bought and sold. The fact that the product in
          question is generally not being bought and sold or has
          no demand in the market would be irrelevant. The plastic
          body of EMR does not satisfy the aforementioned criteria.
          There are some competing manufacturers of EMR. Each
F         is having a different plastic body to suit its design and
          requirement. If one goes to the market to purchase the
          plasiic body of EMR of the respondents either for
          replacement or otherwise one cannot get it in the market
          because at present it is not a commercially known product.
G         For these reasons, the plastic body, which is a part of
          EMR of the respondents, is not "goods" so as to be liable

    12. (1986) 2 sec 547.
    13. (1989) 1 sec 602.
H 14. (1989) 4 sec 112.
 FLEX ENGINEERING LIMITED v. COMMISSIONER OF 227
       CENTRAL EXCISE, U.P. (D.K. JAIN, J.]
      to duty as parts of EMR under para 5(1) of the said             A
      exemption n.:>tification. •

                                      (Emphasis supplied by us)

     18. In Collector of Central Excise, Calcutta-I/ Vs. Mis
Eastend Paper Industries Ltd. 15, the assessee was                    B
manufacturing different kinds of paper. A question arose
whether the wrapping paper manufactured and used for
wrapping the finished product is a part of manufacture. It was
held that wrapping of finished product by wrapping paper is
process incidental and ancillary to completion of the                 C
manufactured product under Section 2 (f) of Act. Thus, the Court
held that, anything required to make goods marketable, must
form a part of manufacture and any raw material or any material
used for same would be a component part of the final product.
                                                                      D
     19. In Dharampal Satyapal Vs. Commissioner of Central
Excise, Delhi-I, New Delhi, 16 the term marketable has been held
to mean saleable, as under:

     "18 ...... Marketability is an attribute of manufacture. It is an E
     essential criteria for charging duty. Identity of the product
     and marketability are the twin aspects to decide
     chargeability. Dutiability of the product depends on whether
     the product is known to the market. The test of marketability
     is that the product which is made liable to duty must be F
     marketable in the condition in which it emerges.
     Marketable means saleable. The test of classification is,
     how are the goods known in the market. These tests have
     been laid down by this Court in a number of judgments
     including Moti Laminates (P). Ltd. v. CCE 17, Union of
     India v. Delhi Cloth & General Mills Co. Ltd. 18 and Cadila G

15. (1989) 4 sec 244.
16. (2005) 4 sec 337.
11. (1995) 3 sec 23.
18. (1997) 5 sec 767.                                                H
    228       SUPREME COURT REPORTS               [2012] 1 S.C.R.


A         Laboratories (P) Ltd. v. CCE 19 ."

         20. Thus, if a product is not saleable, it will not be
  marketable and consequently the process of manufacture
  would not be held to be complete and duty of excise would not
8 be leviable on it. The corollary to the above is that till the time
  the step of manufacture continues, all the goods used in relation
  to it will be considered as inputs and thus, entitled to Modvat
  credit under Rule 57A of the Rules. In the present case, as
  aforesaid, each machine is tailor made according to the
C requirements of individual customers. If the results are not in
  conformity with the order, then the machine loses its
   marketability and is of no use to any other customer. Thus, the
   process of manufacture will not be said to be complete till the
  time the machines meet the contractual specifications and that
   will not be possible unless the machines are subjected to
0
   individual testing. Even though the revenue has alleged that the
   process of manufacture is complete as soon as the machine
   is assembled, yet it has not discharged the onus of proving the
   marketability of the machines thus assembled, prior to the stage
   of testing. Moreover, as has been held in the case of Hindustan
E Zinc Ltd. Vs. Commissioner of Central Excise, Jaipur, 20 the
   burden of proving whether a particular product is marketable
   or not is on the department and in the absence of such proof it
    cannot be presumed to be marketable. In the absence of the
F revenue having adduced any :;uch evidence or contorted the
   assessee's claim that the machines cannot be sold unless
    testing is done with some alternative evidence as to their
    marketability, the stand of the revenue cannot be accepted.
       21. Thus, in our opinion the process of testing the
G customised F&S machines is inextricably connected with the
  manufacturing process, in as much as, until this process is
  carried out in terms of the afore-extracted covenant in the

               sec 12.
    19. c2003) 4
H 20. c2oos> 2 sec 662.
 FLEX ENGINEERING LIMITED v. COMMISSIONER OF 229
       CENTRAL EXCISE, U.P. [D.K. JAIN, J.]
purchase order, the manufacturing process is notcomplete; the         A
machines are not fit for sale and hence not mar~etable at the
factory gate. We are, therefore, of the opinion that the
manufacturing process in the present case gets completed on
testing of the said machines and hence, the afore-s_tated goods
viz. the flexible plastic films used for testing the F&S machines     B
are inputs used in relation to the manufacture of the final product
and would be eligible for Modvat credit under Rule· 57A of the
Rules.

      22. In view of the aforegoing discussion, tha opinion c
rendered by the High Court on the questions referred by the
Tribunal cannot be sustained. We hold that the process of"
testing the customised machines is integrally connected with
the ultimate production of the final product viz. the F&S
machines and therefore, that process is one in relation to the 0
manufacture, falling within the sweep of Rule 57A of the Rules.
Consequently, the appeals are allowed and the impugned
orders are set aside, leaving the parties to bear their own costs.
R.P.                                           Appeals allowed.