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REPORTABLE

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 8958    OF 2003

M/s. Satnam Overseas Ltd. Appellant(s) VERSUS

Commnr. Of Central Excise, New Delhi. Respondent(s)

J U D G M E N T

A.K.SIKRI,J.

The appellant/assessee challenges the correctness and  validity of the final order dated 10.10.2002 passed by the  Customs,  Excise  and  Gold  (Control)  Appellate  Tribunal  (CEGAT), New Delhi in the appeal which was preferred by the  assessee against the order of Commissioner (Appeals) who had  upheld the Order-in-Original dated 17.3.1999 passed by the  Additional Commissioner pursuant to show cause notice dated  4.8.1997 issued by him.  In the said show cause notice the  Additional Commissioner had proposed to classify the product  of the appellant/assessee under Heading 2108 of the Central  Excise Tariff Act, 1985, as Miscellaneous Edible preparation  not  elsewhere specified or included.

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It  may  be  stated  that  assessee  is  engaged  in  the  packing  combination  of  mixture  of  raw  rice,  dehydrated  vegetables and spices in the name of 'Rice and Spice'. The  exact process which is taken note of by the Tribunal as  explained by Cl. R.L. Mehta, Deputy General Manager of the  assessee is as follows:

“This product i.e. Rice Spice is a  combination  of  Raw  Rice,  Dehydrated  vegetables and certain spices and condiments  mixed in a pre-determined proportion and that  blended together in a mixer for uniformity  and the blended mixer is heated, if required,  to sterlize the product. The mixed product is  the packed in pouches with Nitrogen flushing  for a longer shelf life”.

The defence putforth by the assessee to the show cause  notice issued by the Additional Commissioner was that the  aforesaid process does not amount to `manufacture' within  the meaning of Section 2(f) of the Central Excise Act, 1944.  It was also argued that, in any case, the product was not  classifiable under Heading 2108 of the Central Excise Tariff  Act, 1985 as claimed by the Revenue but it should be covered  under Heading 11.01. That Heading applies to products of the  milling industry, including  flours, groats, meal and grains  of cereals, and flour, meal or flakes of vegetables on which  nil duty is payable. It was, thus, contended that in no case  the assessee was under any obligation to pay the duty on the  aforesaid process.

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The Additional Commissioner did not agree with the  contention of the assessee holding it to be a manufacturing  process,   and  opinion  of  the  Additional  Commissioner  is  accepted by the Commissioner (Appeals) as well as by CEGAT.

Ms. Charanaya, the Learned counsel appearing for the  appellant argued before us that the authorities committed  serious  error  in  holding  the  aforesaid  process  of  the  assessee as “manufacturing process”.  Her arguments was that  from the reading of  the process described above, it would  be  manifest  that  it  only  involved  mixing  of  raw  rice,  dehydrated vegetable with some spice and did not bring about  any  new  product.   It  was  submitted  that  the  aforesaid  mixture, which is sold in a packaged form, is raw food and  still needs to be cooked to make it edible.  She pointed out  that on the packing/pouch of the product even the cooking  instructions are mentioned in the following manner:

“All  cooking  appliances  vary  in  performance,  these  are  guidelines  only.  Empty contents into 375 ml (2/3 pints) of  cold water, stir well.  Add I tablespoon of  butter  or  margarine.   Bring  to  boil,  uncovered,  in  a  small  saucepan.   Reduce  heat, cover the saucepan and simmer gently  for  approximately  15  minutes  or  until  all  water is absorbed.”

     It was further submitted that there was no new product  which came into existence as that product was still known as

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rice  which  did  not  lose  its  essential  character  and  therefore  it  could  not  be  treated  as  `manufacture'.   In  support the aforesaid submission Ms. Charanya referred to  certain  judgments  which  shall  be  discussed  by  us  at  the  later stage.   

In  support  of  her  other  submission  viz.  that  the  product would still be classified under Heading 11.01, the  learned  counsel  referred  to  the  `Rule  of  Interpretation'  contained in the Schedule of Excise Tariff known as “Rules  for the Interpretation of this Schedule”. In this behalf  Rule 3 and in particular clause (b) thereof was pressed into  service.  Therefore it would be apposite to take note of  this clause as well  which we reproduce below:

“When by application of sub-rule (b) of rule 2 or for  any other reason, goods are, prima facie, classifiable under  two or more headings, classification shall be effected as  follows:

(a) The heading which provides the most  specific description shall be preferred to  headings  providing  a  more  general  description.   However,  when  two  or  more  headings  each  refer  to  part  only  of  the  materials or substances contained in mixed  or composite goods or to part only of the  items  in a  set, those  headings are  to be  regarded as equally specific in relation to  those  goods, even  if one  of them  gives a  more complete or precise description of the  goods.

(b) Mixtures,  composite  goods  consisting of different materials or made up  of different components, and goods put up in  sets,  which  cannot  be  classified  by

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reference to (a), shall be classified as if  they consisted of the material or component  which gives them their essential character,  insofar as this criterion is applicable. (c) When  goods  cannot  be  classified  by  reference  to  (a)  or  (b),  they  shall  be  classified  under  the  heading  which  occurs  last  in  the  numerical  order  among  those  which equally merit consideration.”

Mr. A.K. Sanghi learned senior counsel appearing on  behalf of the Revenue, countered the aforesaid submission by  pointing out that a specific finding was arrived at by the  Tribunal,  affirming  the  finding  of  the  quasi-judicial  authorities below to the effect that a new product had come  into existence as a result of the processes undertaken by  the assessee.  It was specifically held by the CEGAT that  rice  did  not  remain  rice  at  all  as  a  mixed  product  containing  rice,  vegetable  and  spices  emerges  after  the  specific process was undertaken by the assessee.  He also  referred to those observations of the CEGAT where it has  remarked that there is a transformation of a new commodity  commercially  known  as  distinct  and  separate  commodity  having its own character, use and name. Be it the result of  one process or several processes in fact ' manufacture' had  taken place.  He, thus, argued that when  a new commodity  had  come  into  existence  as  held  by  CEGAT,  this  was  the  trigger point for the levy of excise duty under the Excise  Act.  He further submitted that in view of the aforesaid,

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viz. coming into existence a new product, that particular  edible product had to be fallen under Chapter 11 of the  Tariff  as  it  is  not  a  product  of  milling  industry  not  classifiable under Chapter 11 of the Tariff.

From the aforesaid arguments advanced by counsel on  the either side, it is clear that there is no dispute about  the legal proposition that the process would be treated as  “manufacture” only if new product known to the market comes  into  existence  with  original  product  losing  its  original  character.

The  only  question  is  as  to  whether  this  test  is  satisfied  on  the  facts  of  the  present  case.   Before  we  embark on the discussion on this issue and answer the same,  it would be advisable to take note of few judgments wherein  legal position that prevails on this subject is stated with  elaboration.

The first judgment which we want to mention, which was  cited by Ms. Charanya, is Crane Betel Nut Powder Works  vs.  Commissioner  of  Customs,  Central  Excise,  Tirupathi (2007  (210) ELT, 171 (S.C.). In the said case the assessee was  engaged in the business of marketing betel nuts in different  sizes  after  processing   them  by  adding  essential/non- essential oils, menthol, sweetening agent  etc.  Initially,  the  assessee  cleared  the  goods  under  Chapter  Sub-heading

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2107  of  the  Central  Excise  Tariff  and  was  paying  duty  accordingly.   However,  the  assessee  filed  a  revised  classification declaration under Rule 173B of the Central  Excise  Rules,  1944,  with  effect  from  17th  July,  1997,  claiming  classification of its product under Chapter Sub- heading  0801.00  of  the  Central  Excise  Tariff.   It  was  contended by the assessee that the crushing of betel nuts  into smaller pieces with the help of machines and passing  them through different sizes of sieves to obtain goods of  different sizes/grades and sweetening the cut pieces did not  amount to manufacture in view of the fact that mere crushing  of  betel  nuts  into  smaller  pieces  did  not  bring  into  existence  a  different  commodity  which  had  a  distinct  character of its own.

Though the authorities below had decided against the  assessee, this Court reversed the said view holding that the  said  process  would  not  amount  to  `manufacture'  as  the  process involving manufacture does not always result in the  creation  of  a  new  product.   In  the  instant  case  notwithstanding the manufacturing process, it could not be  said that a transformation had taken place resulting in the  formation  of  a  new  product.  The  relevant  portion  of  the  judgment is reproduced below:

“.30.   In  our  view,  the  process  of  manufacture employed by the appellant-company

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did not change the nature of the end product,  which in the words of the Tribunal, was that  in the end product the `betel nut remains a  betel  nut’.   The  said  observation  of  the  Tribunal depicts the status of the product  prior  to  manufacture  and  thereafter.   In  those circumstances, the views expressed in  the D.C.M. General Mills Ltd. (supra) and the  passage  from  the  American  Judgment  (supra)  become  meaningful.   The  observation  that  manufacture  implies  a  change,  but  every  change  of  not  manufacture  and  yet  every  change  of  an  article  is  the  result  of  treatment,  labour  and  manipulation  is  apposite  to  the  situation  at  hand.   The  process  involved  in  the  manufacture  of  sweetened betel nut pieces does not result in  the manufacture of a new product as the end  product  continues  to  retain  its  original  character though in a modified form.”

What is to be highlighted is that even after the betel  nut which had been  cut to different sizes and had undergone  the process, the Court did not treat it as 'manufacture'  within the meaning of Sec.2(f) of the Act on the ground that  the  end  product  was  still  a  betel  nut  and  there  was  no  change in the essential character to that article even when  it was the result of treatment, labour and manipulation,  inasmuch  as  even  after  employing  the  same  it  had  not  resulted in the manufacture of a new product as the end  product continued to retain its original character.  

Another  judgment  which  was  referred  to  by  learned  counsel for the appellant is Commissioner of Central Excise  vs. Laljee Godhoo & Co. (2007 (216) ELT 514 (S.C). Vide this  judgment the Court affirmed the view taken by  the CEGAT,

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holding that the process of subjecting raw asafoetida (hing)  resulting  in  formation  of  compounded  asafoetida  does  not  amount to manufacture,  even when this process has undergone  chemical  change,  because  of  the  reason  that  the  said  chemical change had not brought even after it underwent a  process, any new product as the product remained the same at  starting  and  terminal  points  of  the  process.  Though  the  exact  process  undertaken  is  not  discernible  from  the  judgment, the learned counsel pointed out that this process  is described in the order passed by the CEGAT against which  the appeal was preferred by the Department.  The order of  the  CEGAT  is  reported  in  Laljee  Godhoo  &  Co. vs.  Commissioner of Central Excise, Mumbai  (2001 (132) ELT 287  (S.C.).  The process noted in the judgment of the CEGAT runs  thus:  

“The gum Arabic and wheat flour are blended  in the sigma mixers.  Filtered water mixed  asafoetida is then poured slowly into the  mixer over the gum and wheat flour.  This  gets  the  product  ready.   Further  the  resultant product is given a heat treatment  by suction in pipes through which a heater  is attached and the moisture is sucked out.  The powder is then passed through a hammer  mill where it is crushed thoroughly.  This  powder  is  then  passed  through  a  sieve,  which contains magnet balls absorbing any  fine  iron  particles.   The  compounded  asafoetida in powder form is then packed in  different  grammage  bottles.   In  case  of  lump form, the gum and wheat flour along  with filtered water mixed with asafoetida  is  poured  into  the  sigma  mixer.   This  process takes about 40 minutes.  After this  the  mixture,  which  has  by  now  made  into  lumps  is  extracted  and  put  into  the

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aluminium trays and dried for a day before  it is packed in cartons.”

We would like to reproduce para 5 of the order of the  CEGAT, since this judgment was upheld by this Court in the  said case.  This para is to the following effect:

“It  is  common  ground  that  the  processes  to  which  the  raw  asafoetida  is  subjected, resulting in the lump or powder  which  is  sold  does  not  bring  about  any  chemical  change  in  the  asafoetida.The  process, as we have seen, is nothing more  than the addition to the asafoetida of wheat  flour and gum arabic.It is stated that gum  Arabic is added in order that the particles  of the asafoetida and wheat flour adhere to  each other. Neither the gum arabic nor the  wheat  flour  reacts  chemically  with  the  asafoetida.The contention is that while the  raw asafoetida itself is used in cases where  its  very  strongly  pungent  flavour  is  required,  for  example,  in  the  making  of  pickles and papad, it is compounded in order  to render it more suitable for use in day- to-day  cooking  where  a  lighter  flavour  is  desired.  The  essential  character  of  the  product  therefore  does  not  change.  It  is  used  in  both  its  concentrated  and  blended  form  only  as  an  addition  to  food  preparation,  flavouring  agent  or  for  the  medicinal properties that it is reputed to  possess.”  

Again the  test which was applied was that essential  character of the product did not change and, therefore, it  would not amount to manufacture.  It was so held even when  gum arebic as well as wheat flour were mixed in the process.  A pertinent aspect which was noted was that mixing of these  articles  did  not  result  in  chemical  reaction  with

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asafoetida.

Last judgment to which we would like to refer to is  Deputy  Commissioner  Sales  Tax  (Law),  Board  of  Revenue  (Taxes), Ernakulam Vs. PIO Food Packers  (1980 (6) ELT 343  (S.C.). In that case, the process undertaken by the assessee  was to wash the pineapple, after purchase, and then remove  inedible portion, the end crown as well as skin and inner  core.  After removing those inedible portions the pineapple  fruit used to be sliced and the slices were filled in canes  after adding sugar as preservative.  Thereafter, canes would  be sealed under temperature and then put in a boiled water  for sterlisation.  Identical question was posed viz. whether  this process amounted to `manufacture'.  Giving the answer  in the negative, the Court held that even when with each  process  suffered,  the  original  commodity  experienced  a  change,  such  a  change  would  not  amount  to  `manufacture'  unless it seized to be the original commodity and a new and  distinct article was produced therefrom.  This is explained  in  detail  in  paras  4  and  5  of  the  said  judgment   and  therefore we would like to reproduce the same as under:

4. Section 5-A(1)(a) of the Kerala General  Sales Tax Act envisages the consumption of a  commodity  in  the  manufacture  of  another  commodity.  The  goods  purchased  should  be  consumed, the consumption should be in the  process of manufacture, and the result must

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be the manufacture of other goods. There are  several  criteria for  determining whether  a  commodity is consumed in the manufacture of  another.  The  generally  prevalent  test  is  whether the article produced is regarded in  the  trade,  by  those  who  deal  in  it,  as  distinct  in  identity  from  the  commodity  involved  in  its  manufacture.  Commonly,  manufacture is the end result of one or more  processes  through  which  the  original  commodity is made to pass. The nature and  extent of processing may vary from one case  to another, and indeed there may be several  stages of processing and perhaps a different  kind of processing at each stage. With each  process  suffered,  the  original  commodity  experiences a change. But it is only when the  change,  or  a  series  of  changes,  take  the  commodity to the point where commercially it  can no longer be regarded as the original  commodity but instead is recognised as a new  and distinct article that a manufacture can  be  said  to  take  place.  Where  there  is  no  essential difference in identity between the  original commodity and the processed article  it is not possible to say that one commodity  has  been  consumed  in  the  manufacture  of  another. Although it has undergone a degree  of processing, it must be regarded as still  retaining its original identity.

5. A large number of cases has been placed  before us by the parties, and in each of them  the same principle has been applied: Does the  processing  of the  original commodity  bring  into existence a commercially different and  distinct article ? Some of the cases where it  was  held  by  this  Court  that  a  different  commercial  article had  come into  existence  include Anwarkhan Mehboob Co. v. The State of  Bombay  and  Others (where  raw  tobacco  was  manufactured into bidi patti), A Hajee Abdul  Shukoor and Co. v. The State of Madras (raw  hides  and  skins  constituted  a  different  commodity from dressed hides and skins with  different physical properties), The State of  Madras  v.  Swasthik  Tobacco  Factory (raw  tobacco  manufactured  into  chewing  tobacco)  and  Ganesh Trading Co. Karnal v. State of  Haryana  and  Another, (paddy  dehusked  into  rice). On the other side, cases where this  Court  has  held  that  although  the  original

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7. While  on  the  point,  we  may  refer  to  East Taxes Motor Freight Lines vs. Frosen  Food Express, where the U.S.  Supreme Court  held that dressed and frozen chicken was  not  a  commercially  distinct  article  from  the original chicken.  It was pointed out: “killing,  dressed  and  freezing  a  chicken  is  certainly a change in the commodity.  But it is no  more drastic a change than the change which takes  place  in  milk  from  pasteurising,  homogenizing,  adding  vitamin  concentrates,  standardizing  and  bottling”.

It was also observed: “……………………there  is  hardly  less  difference  between cotton in the

field and cotton at the gin or in the bale or  between cotton seed in the field and cotton seed at  the gin, than between a chicken in the pen and one  that is dressed.  The ginned and baled cotton and  the cotton seed, as well as the dressed chicken,  have gone through a processing stage.  But neither  has been ‘manufactured’ in the normal sense of the  word.

Referring  to  Anheuser-Busch  Brewing- Association  v.  United  States  the  Court  said:  

”Manufacture implies a change but every change  is  not  manufacture  and  yet  every  change  in  an  article  is  the  result  of  treatment,  labour  and  manipulation.   But  something  more  is  necessary…..There must be transformation; a new and  different  article  must  emerge  having  distinctive  name, character on use.”

And further: “At  some  point  processing  and  manufacturing  

will  merge.   But  where  the  commodity  retains  a  continuing  substantial  identity  through  the  processing  stage  we  cannot  say  that  it  has  been  manufactured.”

The  comment  applies  fully  in  the  case  before  us.   Although   a  degree  of  processing  is  involved  in  preparing  pineapple slices from the original fruit,

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the  commodity  continues  to  possess  its  original  identity,  notwithstanding  the  removal of inedible portions, the slicing  and thereafter canning it on adding sugar  to  preserve  it.  It  is  contended  for  the  Revenue that pineapple slices have a higher  price in the market than the original fruit  and that implies that the slices constitute  a  different  commercial  commodity.  The  higher price, it seems to us, is occasioned  only because of the labour put into making  the  fruit  more  readily  consumable  and  because of the cane employed to contain it.  It is not as if the higher price is claimed  because  it  is  a  different  commercially  commodity.   It  is  said  that  pineapple  slices appeal to a different sector of the  trade and that when a customer asks for a  cane  of  pineapple  slices  he  had  in  mind  something  very  different  from  fresh  pineapple  fruit.   Here  again,  the  distinction  in  the  mind  of  the  consumer  arises  not  from  any  difference  in  the  essential  identity  of  the  two,  but  is  derived  from  the  mere  form  in  which  the  fruit is desired.   Learned counsel for the  Revenue  contends  that  even  if  no  manufacturing  process  involved,  the  case  still falls within Section 5(1)(a) of the  Kerala General Sales Tax Act, because the  statutory  provision  speaks  not  only  of  goods consumed in the manufacture of other  goods  for  sale  but  also  goods  consumed  otherwise.   There  is  a  fallacy  in  the  submission.  The clause, truly read, speaks  of  goods  consumed  in  the  manufacture  of  other goods for sale or goods consumed in  the manufacture of other goods for purposes  other than sale.”

It follows from the above that mere addition in the  value,  after  the  original  product  has  undergone  certain  process,  would  not  bring  it  within  the  definition  of  'manufacture' unless its original identity  also under goes  transformation  and  it  becomes  a  distinctive   and  new

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product.

When we apply the aforesaid principle to the facts of  this  case,  it  is  clear  that  mere  addition  of  dehydrated  vegetables and certain spices to the raw rice, would not  make  it a different product.  Its  primary and essential  character still remains the same as it is  continued to be  known in the market as rice and is  sold as rice only.  Further, this rice, again, remains in raw form and in order  to  make  it  edible,  it  has  to  be  cooked  like  any  other  cereal.  The  process  of  cooking  is  even  mentioned  on  the  pouch which contains cooking instructions.  Reading thereof  amply demonstrates that it is to be cooked in the same form  as any other rice is to be cooked. Therefore,  we  do  not  agree with the CEGAT that there is a transformation into  a  new commodity, commercially known as distinct and separate  commodity.

Since we are holding that the activity undertaken by  the assessee does not amount to manufacture, this appeal is  liable  to  succeed  on  this  ground  itself  inasmuch  in  the  absence of any manufacture there is no question of payment  of  any  excise  duty.   We  may,  however,  remark  that  even  otherwise the classification of the product by the Revenue  under sub-heading 21.08 may not be correct.  In fact, the  CEGAT has accepted that classification only on the ground

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that the product after mixing of raw rice with dehydrated  vegetable and spice, has become a new product as it amounts  to `manufacture' and on that basis it has held that it no  longer remains product of milling industry.  As we have held  that it does not amount to `manufacture' as the essential  characteristics  of  the  product,  still  remains  the  same,  namely,  rice,  a  natural  corollary  would  be  that  it  continues  to  be  the  product  of  the  milling  industry  and  would be classifiable under sub-heading 11.01.  Rate of duty  on this product, in any case, is 'nil'.

This appeal,  accordingly, succeeds and is allowed.  The order of the CEGAT as well as demand of excise duty by  the Revenue are hereby set aside.

No costs.

…........................J. (A.K.SIKRI)

…........................J. (ROHINTON FALI NARIMAN)

New Delhi; Date: 18.3.2015.

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ITEM NO.105               COURT NO.13               SECTION III                S U P R E M E  C O U R T  O F  I N D I A                        RECORD OF PROCEEDINGS Civil Appeal  No(s).  8958/2003 M/S. SATNAM OVERSEAS LTD.                          Appellant(s)                                 VERSUS COMMNR. OF CENTRAL EXCISE, NEW DELHI               Respondent(s) (with appln. (s) for ex-parte stay and office report) Date : 18/03/2015 This appeal was called on for hearing today. CORAM :           HON'BLE MR. JUSTICE A.K. SIKRI          HON'BLE MR. JUSTICE ROHINTON FALI NARIMAN For Appellant(s)  M/s. L.Charanaya, V.Lakshmikumaran,M. P.  

Devanath,Vivek Sharma,Aditya Bhatacharya,   Prashanth S.Shivadass,R.Ramachandran and Mr.   Rajesh Kumar,Advs.

                     For Respondent(s)  Mr. A.K.Sanghi,Sr.Adv.

Ms. Nisha Bagchi,Adv.  Ms. Shweta Garg,Adv.

                    Mr. B. Krishna Prasad,Adv.                               UPON hearing the counsel the Court made the following                              O R D E R

 The appeal succeeds and is allowed in terms of the  

signed judgment.

  (SUMAN WADHWA)          AR-cum-PS

        (SUMAN JAIN)          COURT MASTER

(SIGNED REPORTABLE JUDGMENT IS PLACED ON THE FILE)