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M/S. I.C & E. Morton... v. Superintendent Of Ce...
Factual and Procedural Background
The petitioners operate a confectionery factory at Marhowrah, Bihar, selling products under the trade name "Morton". During manufacture, small bits and dust ("scraps") accumulated; these scraps were collected and sold at a nominal price (about Rs. 1.10 per kg, compared with about Rs. 7.50 per kg for finished confectionery). The scraps were described as not being sold or known in the market as "confectionery" and as not being covered by any item in the Schedule to the Central Excises and Salt Act, 1944. The petitioners stated the scraps were not edible or sold for consumption.
Between 19 April 1968 and 30 June 1971 the petitioners removed about 91,40,000 kgs of such scraps accumulated in the course of manufacture. The petitioners submitted returns for the relevant period showing removal of the scraps with accompanying gate passes; assessments were finalised on the basis of those returns and no objection had earlier been raised about excise duty liability on the scraps.
On 30 November 1971, three notices of demand totalling Rs. 41,312.24 were issued by the Superintendent, Central Excise, S.R.P. Range to the petitioners under Rule 9(2) of the Central Excise Rules in respect of the scraps removed during the period 19-4-68 to 30-6-71. The petitioners made a representation (dated on or about 7 February 1971) to the respondent No. 2 against the demands. By an order dated 3 July 1971, respondent No. 2 refused to withdraw the demands and held that the demands had been issued under Rule 10A of the Central Excise Rules, 1944, and not under Rule 9(2).
On or about 14 September 1972 the petitioners appealed to respondent No. 3 against respondent No. 2's order. The appeal hearing concluded on 25 November 1972. By an order dated 8 December 1972 (served on the petitioners on 21 December 1972), respondent No. 3 (the Collector) held that the confectionery in question was liable to excise under Tariff Item 1A of the First Schedule to the Central Excises and Salt Act.
Legal Issues Presented
- Whether the "scraps" accumulated in the course of manufacture are "confectionery" within the meaning of Tariff Item 1A of the First Schedule to the Central Excises and Salt Act, 1944, and therefore subject to excise duty.
- Whether the Appellate Collector's factual findings that the scraps were parts of boiled sweets (and therefore confectionery) were supported by evidence or were perverse, justifying interference by the court under Article 226.
- Whether the demand notices (two of which were said to be time-barred) were valid and whether Rule 10A of the Central Excise Rules applied to the demands.
- What procedural steps should be taken (including consideration of Rules 173-J and 10) on remand if the Appellate Collector is to re-hear the matter.
Arguments of the Parties
Petitioners' Arguments
- The scraps obtained in the course of manufacture are not "confectionery" within the meaning of Tariff Item 1A or any other item of the Schedule to the Act and therefore are non-excisable.
- The scraps are not edible and are not sold for human consumption; their consumption would be detrimental to human health.
- The Appellate Collector's findings that the scraps were parts of boiled sweets intended for consumption were perverse and without evidence.
- For convenience, a small quantity of the scraps had been shown to the Appellate Collector in a collophan bag during the appeal hearing.
- Two of the demand notices were time-barred and Rule 10A of the Central Excise Rules had no application to those demands.
Respondents' Arguments
- There is no separate tariff item for "scrap of confectionery"; the scrap confectionery is nothing but part of the main confectionery and therefore liable to excise duty.
- The scraps are broken parts of the confectionery, namely boiled sweets, and thus fall within the taxed product.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Collector Of Customs, Madras v. K. Ganga Setty, A.I.R. 1963 S.C. 1319 | Principle that taxing authorities are primarily to determine tariff classification, but the court may interfere if the construction adopted is one no reasonable person could adopt (i.e., perverse). | Used to support the proposition that the court would interfere with a taxing authority's classification only when the conclusion is perverse and unsupported by evidence. |
| V.V. Iyer of Bombay v. Jasjit Singh, Collector of Customs, (1973) 1 SCC 148 : A.I.R. 1973 S.C. 1941 | Same principle as above regarding the scope for judicial review of tax authorities' classification when findings are perverse. | Applied to reinforce the threshold for interference with the Appellate Collector's factual conclusions under Article 226. |
| South Bihar Sugar Mills Ltd. v. Union of India, A.I.R. 1968 S.C. 922 | Definition of "manufacture": not every change in raw material is manufacture; manufacture requires a transformation producing a new and different article with distinctive name, character or use. | Relied upon to evaluate whether scraps resulted from manufacture (i.e., whether they are transformed into finished confectionery) or merely represent incidental change/waste in the manufacturing process. |
| Union of India v. Delhi Cloth & General Mills, A.I.R. 1963 S.C. 791 | To equate mere processing with "manufacture" is incorrect; "manufacture" ordinarily means bringing into existence a new substance, not merely changing a substance. | Used to emphasize that the presence of processing alone does not convert scraps or intermediate changes into a finished, excisable manufacture. |
Court's Reasoning and Analysis
The court began by setting out the factual claims: that scraps are fallen bits and crusts collected during manufacture, sold cheaply and not intended or fit for consumption. The Collector (Appellate Collector) had held that the scraps were nothing but parts of the marketed boiled sweets and thus confectionery within Tariff Item 1A.
The court acknowledged the settled principle that classification under the tariff is primarily for the taxing authority. However, citing authority (Collector of Customs v. K. Ganga Setty and V.V. Iyer), the court noted that it may interfere where the construction adopted is one which no reasonable person could adopt (i.e., where the finding is perverse or unsupported by any evidence).
On the meaning of "manufacture," the court relied on South Bihar Sugar Mills and Union of India v. Delhi Cloth & General Mills to recall that not every process or minor change constitutes manufacture; there must be a transformation creating a new and different article with a distinctive name, character or use.
Applying these principles, the court observed that if the scraps were indeed broken parts of boiled sweets (finished product), they would fall within the definition of confectionery and be excisable. But the petitioners consistently maintained that the scraps were obtained "in the course of manufacture" and were unfit for human consumption. The court found the Appellate Collector's conclusions—that the scraps remained essentially boiled sweets, were sold as confectionery, were hygienically packed and marketed in the same description as the mother product—were "based on without any evidence" (the court's language) and therefore their adequacy could be questioned.
The court reiterated that the Appellate Collector is the sole judge of facts; where findings are supported by some evidence, their adequacy or reliability is generally not open to review under Article 226. Only where findings lack any evidential basis or are perverse can the court issue certiorari. The court concluded that, on the materials before it, interference was warranted.
The court noted that petitioners had argued some demands were time-barred and that Rule 10A might not apply, but the court expressly declined to decide that point. Instead, it directed that the matter be remitted for fresh hearing, and instructed the Collector to consider the impact of Rule 173-J and Rule 10 while deciding the matter. The court further directed that the petitioners be given notice and liberty to place all relevant material, and that the Collector, if necessary, should have the scraps chemically examined to determine whether they are broken parts of the confectionery.
Holding and Implications
Core Ruling: The writ was made absolute; the impugned order of the Appellate Collector of Central Excise was quashed by a Writ of Certiorari and the case was remitted to the Appellate Collector for a fresh hearing.
Direct consequences and instructions:
- The case is remitted to the Appellate Collector of Central Excise, who is directed to re-hear the matter within two months from the date of the court's order, with notice to the petitioners.
- The petitioners have liberty to place all relevant materials and evidence before the Appellate Collector.
- If necessary, the Collector should arrange for chemical examination of the scraps to determine whether they are broken parts of the confectionery.
- The Collector must consider the impact of Rule 173-J and Rule 10 in deciding the matter on remand.
- There will be no order as to costs.
- The petitioner may withdraw the Rs. 18,000 deposited pursuant to the court's order on a proper application.
Broader implications: The opinion did not purport to establish a new legal precedent beyond applying established principles on (a) when courts may interfere with tax authorities' factual classifications and (b) the proper legal meaning of "manufacture." The immediate legal effect is confined to quashing the Appellate Collector's order and directing a fresh hearing in accordance with the court's observations.
1. Petitioners carry on the business of manufacturing various kinds of confectionery in their factory at Marhowrah in Bihar and sells its products under the trade name “Morton”. In course of manufacture of confectionery, various small bits and dusts of assorted sorts fallen out into the trays and on the floor, the accumulate of which are known as “scraps”. The said scrap is, therefore, collected and sold at a nominal price of about 1.10 per Kg. (as against the average price of about 7.50 per Kg. for the actual confectionery) to the various small buyers, who usually melt the same to extract sugar for the purpose of preparing cheap syrups used in preparation of low-grade sweetmeats. The said scrap is not known or sold in the market as “confectionery” nor is the same covered by any of the items in the Schedule to the Central Excises and Salt Act, 1944 (hereinafter referred to as the “Act”).
2. The said scrap is not edible or sold for consumption as such. Between the periods of 19th April, 1968 and 30th June, 1971 the petitioners cleared a total quantity of about 91,40,000 Kgs. of the said scraps which were accumulated in the course of manufacture. According to petitioners, the said scrap is non-excisable under the Act. Without paying the duty and with the full knowledge and approval of the respondents, the scraps were removed from the Petitioners' factory. In the relevant returns for the relevant period, the petitioners duly showed the removal of the said scrap along with the said returns, copies of the Gate passes relating to the “scraps” were sent. After considering the said returns, the said Gate passes and other documents accompanying them, assessments were finalised. The returns submitted by the petitioners were accepted and no objection was raised about the payment of any excise duty on the said scraps as the same were not liable to any duty. Three notices of demand for duty all dated 30-11-71 for a total of Rs. 41,312.24 were issued by the Superintendent, Central Excise, S.R.P Range to the petitioners under Rule 9(2) of the Central Excise Rules in respect of the confectionery “scraps” removed by the petitioners during the period from 19-4-68 to 30-6-71. On or about the 7th February, 1971, the petitioner No. 1 made a representation to the respondent No. 2 against the said demands. By an order dated 3rd July, 1971, the respondent No. 2 informed the petitioner that he had no reasons to withdraw the said three demands. The said respondent No. 2 also held that the impugned demands had been issued under Rule 10A of the Central Excise Rules, 1944 and not under Rule 9(2) thereof. On or about 14th September, 1972, the petitioners preferred an appeal to the respondent No. 3 against the said order of the respondent No. 2 dated 3rd July, 1972. The hearing of the said appeal was concluded on the 25th November, 1972. On or about 21st December, 1972, the, petitioners were served with an order passed by respondent No. 3 dated 8th December, 1972 wherein the Collector held that the confectionery in question was liable to excises under Tariff Item 1A of the First Schedule to the Central Excises and Salt Act.
3. Mr Bajoria, appearing on behalf of the petitioners, contended that the scrap obtained in course of manufacture of confectionery is not “confectionery” within the meaning of item 1A of the First Schedule to the Act or any other items thereof. The findings of the Appellate Collector that the scraps were nothing but parts of boiled sweets in various forms, irregular shapes and sized and those were made for marketing purpose for the sole object of consumption by human being are perverse and without any evidence:
The tariff Item 1A reads as follows:—
“Confectionery Cocoa powder and chocolates in or in relation to the manufacture of which any process is ordinarily carried on with the aid of power, namely (1) Boiled sweets, toffees, caramels candies, nuts (including almonds) and fruit kernels coated with sweetening agent, and chewing gums”.
4. The Appellate Collector observed in his order “I find that M/s. Morton Confectionery and Milk Products Factory manufacture boiled sweets as confectionery and market them in various names. The question is whether scrap obtained out of manufacture of confectionery is a confectionery within the meaning of the tariff item 1A. The scrap is nothing else than part of these various products like boiled sweets, caramels etc. They may become broken parts of a particular shape or size of a sweet in which it is marketed but basically it remains as boiled sweets, toffees, caramels etc. It also remains as good as the sweets which are in whole form. I is sold as confectionery and for the purpose of eating it is the confectionery. I was shown the samples in the course of hearing that these are packed in polyethylene packets and does not look less attractive compared to the price on which they are sold,”
5. It is primarily for the taxing authority to determine the head or entry in tariff schedule under which any particular commodity fell; but if in doing so, these authorities adopted a construction which no reasonable person could adopt i.e if the construction is preverse then it is a case in which the Court is competent to interfere (vide Collector Of Customs, Madras v. K. Ganga Setty, A.I.R 1963 S.C 1319; V.V Iyer of Bombay v. Jasjit Singh, Collector of Customs, (1973) 1 SCC 148 : A.I.R 1973 S.C 1941).
6. Mr. Sanyal appearing on behalf of the respondents, contended that there was no item as “scrap of confectionery” in the Central Excise Tariff and the scrap confectionery was nothing but pact of the main confectionery liable to excise duty. According to Mr. Sanyal, these scraps are nothing but broken parts of the confectionery namely, the boiled sweets.
7. It is the case of the petitioners that in course of manufacture of confectionery small bits and crusts fall out at different stages of production into trays and on the floor. Such fallen bits and crusts are taken from the floor or cleared from trays and are dumped. Such waste products are known as “scraps”. The said scraps are unfit for human consumption and its consumption would be detrimental to human health.
8. It is well settled that the Central Excises and Salt Act impose excise duty on manufacture of goods. In South Bihar Sugar Mills Ltd. v. Union of India, A.I.R 1968 S.C 922, the Supreme Court observed that the word “manufacture” implies a change but every change in the raw material is not manufacture. There must be such a transformation that new and different article must emerge having a distinctive name, character or use.
9. In Union of India v. Delhi Cloth & General Mills, A.I.R 1963 S.C 791, the Supreme Court observed that to say that “manufacture” is complete as soon as the application of one or more processes the raw material undergoes some change is to equate “processing to manufacture” and for this there is no warrant in law. The word “manufacture” used as a verb is generally understood to mean as bringing into existence a new substance and does not mean merely to produce some change in a substance, however, minor in consequence the change may be.
10. In the instant case, if these scraps are broken parts of the boiled sweets, certainly, it comes within the definition of “confectionery” and excise duty is liable to be paid. But it is the case of petitioners throughout that the scraps are obtained in course of manufacture and not out of manufacture of confectionery. Appellate Collector's findings that basically these scraps remains as boiled sweets, it is sold as confectionery; these are suitably processed, hygienically packed and marketed in the same description as mother product, are based on without any evidence. The Collector is required to find out whether these scraps are parts of the product viz. confectionery manufactured by the petitioners. If the raw materials undergone some change in the process of manufacture it cannot be equated with the finished products.
11. In affidavit-in-reply it is stated by the petitioner that for the sake of convenience of handling a small quantity of the said scraps in a collophan bag were shown to the Appellate Collector at the time of hearing of appeal.
12. The Appellate Collector is the sole judge of facts and if there be some evidence or materials on which his findings can be based, the adequay of reliability of that evidence is not a matter which can be permitted to be convassed in a proceeding under Article 226 of the Constitution. Only in cases where the findings are not based on any evidence or relevant materials or no reasonable person could adopt such a conclusion on the basis of the materials placed before him or the findings are perverse only in such cases this court would be justified in issuing a Writ of Certiorari.
13. It is next contended by Mr. Bajoria that two demand notices had been time-barred and the Rule 10A of the Central Excise Rules has got n??? application with respect to the said demands.
14. At this stage, I think that is not necessary for me to decide that point, as I propose to send back the case to the Appellate Collector of Central Excise for a fresh hearing. I should point out however, that the Collector should consider the impact on Rule 173-J and Rule 10 in deciding the matter.
15. In the result, this rule is made absolute. The impugned order of the Appellate Collector of Central Excise is quashed by a Writ of Certiorari. The case it remitted back to the Appellate Collector of Central Excise and he is directed to re-hear the matter in the light of the observations made hereinabove within two months from date with notice to the petititioners. The petitioner shall have liberty to place all the relevant materials and evidence in support of their contentions before the Appellate Collector of Central Excise. If it is necessary, the Collector should get these scraps chemically examined in order to find out whether these are broken parts of the confectionery or not. After considering all the materials, he will pass the order in accordance with law.
16. There will be no order as to costs.
17. The petitioner has deposited in pursuance of the Order of this court a sum of Rs. 18,000/- with the Registrar, A.S of this Court. The petitioner shall be at liberty to withdraw that amount on a proper application.
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