REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 7152 OF 2004

M/S FLEX ENGINEERING LIMITED — APPELLANT

                                                   VERSUS

COMMISSIONER OF CENTRAL EXCISE,  U.P.

— RESPONDENT

WITH  

CIVIL APPEAL NO.429 OF 2012 (Arising out of S.L.P. (C) No. 875 of 2008),

CIVIL APPEAL NO.430 OF 2012 (Arising out of S.L.P. (C) No. 10759 of 2010)

AND CIVIL APPEAL NO.431 OF 2012

(Arising out of S.L.P. (C) No. 6501 of 2011)

J U D G M E N T

D.K. JAIN, J.:

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1. Leave granted in S.L.P. (C) Nos. 875 of 2008, 10759 of 2010  

and 6501 of 2011.

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, 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 questions  

referred  by  the  Customs,  Excise  and  Gold  (Control)  

Appellate  Tribunal,  as  it  then  existed,  (for  short  “the  

Tribunal”) have been answered in favour of the revenue.  

3. In  order  to  comprehend  the  controversy  at  hand,  a  few  

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.

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The appellant –assessee, a body corporate, claiming to be  

pioneers in the concept of flexible packaging, is engaged 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  

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  

pouches, for which the F&S machine is required, are provided  

by the customer.   The  purchase  order  contains  the following  

inspection clause:  

“Inspection/Trial will be carried out at your works  in  the  presence  of  (sic)  our  Engineer  before  dispatch of equipment for the performance of the  machine.”

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Flexible Laminated Plastic Film in roll form & Poly Paper  

which are duty paid, falling under chapter headings 3920.38 and  

4811.30 of the Schedule to the Tariff  Act, are used for testing,  

tuning and adjusting various parts of the F&S machine in terms  

of the afore-extracted condition in 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  

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  

clearance.

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  

assessee to show cause as to why the benefit of Modvat credit  

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on the above goods be not denied, on the ground that they  

have used the said material for the 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 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 on the said items.  Appeals preferred by the  

assessee  before  the  Commissioner  (Appeals)  and  the  

Tribunal were also dismissed.  

5. Aggrieved thereby, the assessee filed applications 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.

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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,  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/  excisability would be eligible to be taken as  credit  (sic)  under  rule  57-A  read  with  relevant notification?  

Q2) 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?”

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  credit.  According  to  the  High  Court,  

anything required to make the goods marketable must form a  

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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  F&S  machine,  is  

complete, is only to detect the deficiency in the final product  

and therefore, could not be the goods used in 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 High Court,  Mr. Rajesh 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 manufacture” of finished excisable goods.  It  

was argued that since the machines are tailor made, as per  

the  specifications  provided  by  a  customer  to  achieve  a  

distinct  and  different  result,  it  is  of  no  use  to  any  other  

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customer.  Therefore,  unless  each  individual  machine  is  

tested by using the flexible plastic films 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  

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&S machines.  It was stressed that to avail of  

the Modvat credit in 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 manufacture,  

learned  counsel  placed  reliance  on  the  decisions  of  this  

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Court  in  Commissioner  of  Income  Tax,  Kerala,  Vs.  Tara  

Agencies1, Maruti Suzuki Ltd. Vs. Commissioner of Central   

Excise,  Delhi-III2,  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., Pune4.

10. Per  contra,  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  can  take  place  only  after  the  manufacture  of  the  

machine  is  complete  and  therefore,  any  goods  used  in  a  

process  subsequent  to  the  completion  of  the  process  of  

manufacture cannot be termed as inputs within the meaning  

of Rule 57A of the Rules.

1 (2007) 6 SCC 429 2 (2009) 9 SCC 193 : 2009 (240) E.L.T. 641 (S.C.) 3 (2010) 12 SCC 218 : 2010 (256) E.L.T. 321 (S.C.) 4 2010 (256) E.L.T. 56 (Bom.)

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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 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  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 Section 3 of the Customs Tariff Act, 1975 (51  of  1975),  as  may be specified in  the  said notification  (hereinafter referred to as the “specified duty”) paid on  the goods used in or in relation to the manufacture of  the  said  final  products  whether  directly  or  indirectly  and  whether  contained  in  the  final  product  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 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:

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

Explanation.—For  the  purposes  of  this  rule,  “inputs”  includes—

(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,

(c) inputs used as fuel,

(d) inputs  used  for  generation  of  electricity,  used  within the factory of production for manufacture of  final 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,

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 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  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 products under section 4 of the Act; and  

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

(2) Notwithstanding  anything  contained  in  sub-rule  (1), the 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  may be specified in the said notification and allow the  credit of such 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 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 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.

Rule 57C.  Credit of duty not to be allowed if final  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  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  (Department  of  Revenue)  No.108/95-Central  Excises,  dated the 28th August, 1995 shall be allowed if the final  

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product is exempt from the whole of the duty of excise  leviable thereon or is chargeable to nil rate of duty.”

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  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 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 the manufacture of the final  

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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.”

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.  Vs.  Solaris Chemtech Ltd. & Ors.5,  

this  Court  while examining  the  scope  and  purport  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 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  

5 (2007) 7 SCC 347 : 2007 (214) E.L.T. 481 (S.C.)

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the  Department  one  needs  to  interpret  the  expression “in or in relation to the 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, 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 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. 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 final product and inputs used in relation to  the manufacture 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  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  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  

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final 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.  STO6  

this 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  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 doubt  is set at rest by use of the words “used in relation to  manufacture”.                                                               (Emphasis supplied by us)

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 ambit  of  the term manufacture.   This is  because of  the  

6 AIR 1965 SC 1310 7 (1991) 4 SCC 473 : 1991 (55) E.L.T. 444 (S.C.)

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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 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.

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 -

(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  admissible  whether  such  input  is  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  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)”  

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17. It is trite to state that “manufacture” takes place when 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 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  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 on the question of marketability, as this Court  has dealt with all relevant cases in A.P. SEB case9. In  that  case,  the  question  was whether  electric  poles  manufactured  with  cement  and  steel  for  the  appellant Board were marketable. After considering  

8 (2002) 7 SCC 435 9 (1994) 2 SCC 428

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various  cases  on  the  question  of  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 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 of India11 or aluminium cans  with  rough  uneven  surface  in  Union  Carbide  India  Ltd. v.  Union  of  India12 or  PVC films in  Bhor Industries Ltd. v.  CCE13  

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 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  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 marketable” are different, however,  they are not exhaustive. It is difficult to lay down a  precise  test  to  determine  marketability  of  articles.  Marketability  of  goods  has  certain  attributes.  The  

10 AIR 1963 SC 791 11 AIR 1968 SC 922 12 (1986) 2 SCC 547 13 (1989) 1 SCC 602 14 (1989) 4 SCC 112

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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 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  is  having  a  different  plastic  body to  suit  its  design  and requirement.  If  one goes to the market to purchase the plastic 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. For  these reasons,  the plastic  body, which is  a  part  of  EMR of the respondents, is not “goods” so as to be  liable to duty as parts of EMR under para 5(f) of the  said exemption notification.”

                          (Emphasis supplied by us)

18. In Collector of Central Excise, Calcutta-II Vs. M/s Eastend  

Paper  Industries  Ltd.15,  the  assessee  was  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 manufactured  

product under Section 2 (f) of Act. Thus, the Court held that,  

15 (1989) 4 SCC 244

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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.

19. In Dharampal  Satyapal Vs. Commissioner  of  Central   

Excise, Delhi-I, New Delhi16,  the term marketable has been  

held to mean saleable, as under:

“18……Marketability is an attribute of manufacture.  It is an 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  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.  CCE17, Union  of  India v. Delhi   Cloth  &  General  Mills  Co.  Ltd.18 and  Cadila  Laboratories (P) Ltd. v. CCE19.”

20. Thus, if  a product is not saleable, it will  not be marketable  

and consequently the process of manufacture would not be  

16 (2005) 4 SCC 337. 17 (1995) 3 SCC 23 18 (1997) 5 SCC 767 19 (2003) 4 SCC 12

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held to be complete and duty of excise would not 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  

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  

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  Zinc  Ltd.  Vs. Commissioner  of   

Central  Excise,  Jaipur20,  the  burden of  proving whether  a  

20 (2005) 2 SCC 662;  

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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 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  

revenue cannot be accepted.

21. Thus,  in  our  opinion the process  of  testing the 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  

purchase order, the manufacturing process is not complete;  

the machines are not fit for sale and hence not marketable 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-stated  

goods  viz.  the flexible plastic films used for testing the F&S  

machines are inputs used in relation to the manufacture of the  

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final product and would be eligible for Modvat credit under  

Rule 57A of the Rules.

22.  In view of the aforegoing discussion, the opinion 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  

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.

.……………………………………               (D.K. JAIN, J.)  

                             .…………………………………….   (ASOK KUMAR GANGULY, J.)

NEW DELHI; JANUARY 13, 2012.

ARS

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