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Union Of India And Others v. Sonic Electrochem (P) Ltd. And Another
Factual and Procedural Background
The Central Excise authorities issued show-cause notices to the assessees under Section 11-A of the Central Excise Act, 1944, demanding duty on (i) the plastic body used in electro-mosquito repellents (EMR) and (ii) “fragrant mats.” The Revenue contended that the plastic body was dutiable as a “part” of EMR under clause 5(f) of Notification No. 160/86-CE and that the fragrant mat fell under Sub-Heading 3307.49 of the Central Excise Tariff Act, 1985.
The assessees in two matters challenged the show-cause notices before the Madhya Pradesh High Court by way of writ petitions, while a third assessee replied to the notice and litigated through the departmental hierarchy and the Customs, Excise and Gold (Control) Appellate Tribunal (CEGAT). The High Court held that the plastic body was not “goods” and that the fragrant mat was classifiable under Sub-Heading 3307.41. The Union of India (Revenue) appealed to the Supreme Court in two civil appeals arising from the writ petitions, and a third appeal reached the Court from the CEGAT order which had followed the High Court’s view.
Legal Issues Presented
- Whether the plastic body, a component of the electro-mosquito repellent, is “goods” and therefore dutiable under clause 5(f) of Notification No. 160/86-CE.
- Whether the fragrant mat is classifiable under Sub-Heading 3307.41 (“agarbatti, dhoop and similar preparations”) or under the residual Sub-Heading 3307.49 of the Central Excise Tariff Act, 1985.
Arguments of the Parties
Revenue’s Arguments
- The plastic body is a finished product and cannot be regarded as a mere intermediate item; lack of actual sales does not negate marketability.
- Under clause 5(f) of Notification No. 160/86-CE, parts of EMR are taxable at 20% ad valorem.
- The fragrant mat, being a mosquito repellent, cannot be equated with “agarbatti” or “dhoop” used in religious rites; it should therefore fall under Sub-Heading 3307.49.
Assessees’ Arguments
- The plastic body is custom-made for the assessees’ own EMR design, is not a standard commercial item, and is unknown in the open market; hence it lacks the attribute of marketability required to be “goods.”
- The fragrant mat is manufactured by a process analogous to agarbatti production and releases perfume on heating; it is therefore similar to agarbatti/dhoop and should be classified under Sub-Heading 3307.41.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| A.P. State Electricity Board v. CCE, (1994) 2 SCC 428 | Comprehensive statement of the test of “marketability” under excise law | Relied upon as the governing authority on marketability; Court adopted its summary of prior case-law to decide that the plastic body lacked marketability. |
| Union of India v. Delhi Cloth & General Mills Co. Ltd., AIR 1963 SC 791 | Earlier illustration of goods held non-marketable (refined oil) | Cited within the A.P. SEB passage; forms part of the composite reasoning that marketability is a fact-specific inquiry. |
| South Bihar Sugar Mills Ltd. v. Union of India, AIR 1968 SC 922 | Non-marketability of kiln gas | Referenced via A.P. SEB to reinforce that absence of market demand can establish non-marketability. |
| Union Carbide India Ltd. v. Union of India, (1986) 2 SCC 547 | Non-marketability of aluminium cans with rough surface | Included in the quotation to exemplify situations where articles were found non-marketable. |
| Bhor Industries Ltd. v. CCE, (1989) 1 SCC 602 | Marketability test for PVC films | Part of the illustrative list consolidating the principle that goods must have commercial identity. |
| CCE v. Ambalal Sarabhai Enterprises (P) Ltd., (1989) 4 SCC 112 | Marketability determination for hydrolysate | Cited as another example supporting the marketability framework applied by the Court. |
Court's Reasoning and Analysis
Plastic Body of EMR: The Court noted that although EMR itself is exempt under clause 5(d) of the notification, its parts are taxable only if they qualify as “goods.” Applying the two-fold test—(a) manufacture and (b) marketability—the Court accepted that manufacture occurred but focused on marketability. The plastic body was designed exclusively for the assessees’ EMR, was neither standardised nor known by any commercial name, and had no presence in the open market. Quoting the marketability principles consolidated in A.P. SEB v. CCE, the Court held that the absence of a commercial identity and the captive, customised nature of the item deprived it of marketability; it therefore did not constitute “goods,” and clause 5(f) could not apply.
Fragrant Mat Classification: The tariff structure places “agarbatti, dhoop and similar preparations” in Sub-Heading 3307.41 with NIL duty. The Court examined the assessees’ manufacturing process, which substitutes a paper mat for the traditional agarbatti stick but otherwise burns perfumes to emit vapour. Concluding that the mat is a preparation similar to agarbatti—capable of releasing fragrance upon burning—the Court found it squarely within Sub-Heading 3307.41. Consequently, the Revenue’s attempt to classify it under the residuary 3307.49 was rejected.
Holding and Implications
HOLDING: The civil appeals filed by the Revenue are DISMISSED.
Implications: The plastic body used in EMRs is not dutiable because it lacks marketability and therefore is not “goods.” The fragrant mat is entitled to the NIL duty applicable to Sub-Heading 3307.41. The decision affirms the High Court and CEGAT orders and underscores that customised, captive-consumption items may fall outside excise duty if they are not commercially marketable; no new legal doctrine was announced beyond reiteration of existing marketability principles.
Order
1. In these appeals, the short question that arises for consideration is: whether plastic body, a part of electro mosquito repellent, and “fragrant mat” are chargeable to excise duty under clause 5(f) of Notification No. 160/86-CE dated 1-3-1986 and Sub-Heading 3307.49, respectively, of the Central Excise Tariff Act, 1985.
2. Show-cause notices were issued to the appellants under Section 11-A of the Central Excise Act, 1944 (for short “the Excise Act”) by the Superintendent, Central Excise, Range II, Pithampur, raising demand of excise duty on plastic body of electro mosquito repellent (for short “EMR”) (which falls within “domestic electrical appliances”) classifiable under Sub-Heading 85.16 of the Central Excise Tariff Act, 1985 (for short “the Tariff Act”) and on fragrant mat. The respondents in Civil Appeals Nos. 182 and 108 of 1995 filed writ petitions, under Article 226 of the Constitution, before the High Court of Madhya Pradesh challenging the validity of the show-cause notices. However, the respondent in Civil Appeal No. 1649 of 1996 filed reply before the authorities concerned. The Collector of Customs and Central Excise, Indore, confirmed the demand which was assailed before the Customs, Excise and Gold (Control) Appellate Tribunal in appeal. The High Court, in writ petitions, held that the “plastic body” is not “goods” within the meaning of the Tariff Act and, therefore, it is not liable to excise duty and that the fragrant mat, did not answer the description of Sub-Heading 3307.49 and, therefore, it quashed the show-cause notices. Against the judgment and order of the High Court dated 24-3-1994, allowing in the writ petitions, the aforesaid two appeals, being Civil Appeals Nos. 182 and 108 of 1995, are filed by the Revenue. Civil Appeal No. 1649 of 1996 arose from the order of the Customs, Excise and Gold (Control) Appellate Tribunal dated 6-4-1995, allowing the appeal in the light of the said judgment of the High Court of Madhya Pradesh.
3. Mr Mukul Rohatgi, learned Additional Solicitor-General, argues that, so far as the plastic body is concerned, it is a finished product; it cannot be termed as an intermediate product and the fact that it is not being bought and sold in the market, will not militate against the marketability of the goods, therefore, it is liable to excise duty under clause 5(f) of Notification No. 160/86-CE. In support of his contention, he relies upon the judgment of this Court in A.P SEB v. CCE (1994) 2 SCC 428.
4. Mr A.R Madhav Rao, learned counsel appearing for the respondent assessees submits that the plastic body is manufactured to cater to the requirements of the respondents' EMR. The plastic body is not a standardised item and is not known by any name in the market and as such the High Court has rightly found that it is not marketable.
5. It is a common ground that EMR is exempt under clause 5(d) of Notification No. 160/86-CE dated 1-3-1986. The case of the Revenue is that under clause 5(f) of the said notification, the plastic body, a part of EMR, is liable to excise duty.
6. To appreciate the contentions of the learned counsel, it would be apt to read the notification in question, insofar as it is relevant, here:
“Electric motors, generators, appliances, etc., falling under specified headings of Chapter 84 or 85.
In exercise of the powers conferred by sub-rule (1) of Rule 8 of the Central Excise Rules, 1944, the Central Government hereby exempts the goods specified in column (3) of the table hereto annexed and falling under the Heading No. or Sub-Heading No. of the Schedule to the Central Excise Tariff Act, 1985 (5 of 1986), specified in the corresponding entry in column (2) of the said table, from so much of the duty of excise leviable thereon, which is specified in the said Schedule, as is in excess of the amount calculated at the rates specified in the corresponding entry in column (4) of the said table.
Sl. No. Heading No. or Sub-Heading No. of the Schedule to the Central Excise Tariff Act, 1985 Description of goods Rate 1 2 3 4 5. 85.16 (a)-(c) * * * (d) Other domestic electrical appliances (e) * * * (f) Parts Nil 20% ad valorem”
7. As can be seen from the excerpts of the notification in question, EMR has been exempted from the payment of excise duty but the parts of EMR are liable to duty at the rate of twenty per cent ad valorem. There is no dispute that the plastic body is a part of EMR but for the purpose of sub-clause (f) a part will be liable to duty only if it satisfies the attributes of “goods” within the meaning of the Tariff Act. The twin requirements of “goods” under the Tariff Act are: (a) manufacture, and (b) marketability. Insofar as the first requirement is concerned, there is no dispute that plastic body is being manufactured by the respondents. The germane question is whether it has marketability. The plastic body is being manufactured to suit the requirements of EMR of the respondents and is not available in the market for being bought and sold. It is not a standardised item or goods known and generally dealt with in the market. It is being manufactured by the respondents for its captive consumption. It is not a product known in the market with any commercial name.
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 case (1994) 2 SCC 428. 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 marketability of goods, Jeevan Reddy, J., speaking for the Court, summed up the position thus:
“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. AIR 1963 SC 791, 1963 Supp (1) SCR 586 or kiln gas in South Bihar Sugar Mills Ltd. v. Union of India AIR 1968 SC 922, (1968) 3 SCR 21 or aluminium cans with rough uneven surface in Union Carbide India Ltd. v. Union of India (1986) 2 SCC 547 or PVC films in Bhor Industries Ltd. v. CCE (1989) 1 SCC 602 or hydrolysate in CCE v. Ambalal Sarabhai Enterprises (P) Ltd. (1989) 4 SCC 112 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 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.
10. The next point relates to the classification of the fragrant mat: whether it is classifiable under Sub-Heading 3307.41 or 3307.49 The Revenue's case is that the mat, being mosquito repellent, cannot be brought under Sub-Heading 3307.41 as by no stretch of imagination can it be said to be “agarbatti” or “dhoop” and it cannot also be used during religious rites.
11. The sub-headings read as follows:
“Heading No. Sub-Heading No. Description of goods Rate of duty 1 2 3 4 33.07 3307.41 ‘Agarbatti’, ‘dhoop’ and similar preparations in whatever form Nil 3307.49 Other 15%”
12. Sub-Heading 3307.30 refers to “preparations for perfuming or deodorising rooms, including odoriferous preparations used during religious rites”. Under Sub-Heading 3307.30 is a further Sub-Heading 3307.41 in which are grouped “agarbatti”, “dhoop” and similar preparations in whatever form. A careful reading of Sub-Heading 3307.41 shows that preparations similar to that of “agarbatti” and “dhoop” also fall under it. Does the fragrant mat of the respondents fall under it? The process of preparation of the fragrant mat is given by the respondents in the writ petitions filed before the High Court as follows:
“On the same pattern the petitioner also planned to innovate conventional agarbatti — a concept of JETAGE Agarbatti. In first place the petitioner has changed the body i.e instead of woodflour and charcoal dough which forms the body of agarbatti, the petitioner developed a paper mat. Secondly, the perfumes and spreading agents like DEP, fragrances, alcohol etc. are put in the dough and sticks made. In petitioner's came (sic) the perfume and the same chemicals are put in paper mats. Thirdly, perfumes and spreading chemicals get the heat through turning of woodflour and charcoal stick when stick is burnt with the matchstick. The perfumes and chemicals in traditional agarbatti burn and spread perfume. If finer burning media are used there will be less smoke. Therefore, smoke and ash do not identify the agarbatti. Finer the burning chemicals, finer will be smoke added to it, if finer the burning media (regular heat) finer will be smoke or vapours.”
13. It is further stated that to repel mosquitoes with insecticides, coil insecticides are used to be spread through fire with its natural concomitants with smoke and ash of which mosquito mat is the latest development technology, but the one manufactured by the respondents is different and is a fragrant mat. This is not specifically denied by the Revenue. What is stated in the counter-affidavit filed by the Revenue, is that “mat” cannot be said to be “agarbatti” by any stretch of imagination and the mat cannot be used in substitution of “agarbatti” in religious rites.
14. We have already mentioned above that not merely “agarbatti” and “dhoop” but preparations which are akin to “agarbatti” and “dhoop” and which can produce vapour on burning and spread perfume would fall within the meaning of that entry. From the process of manufacture of fragrant mat, noted above, it cannot but be held that preparation in mat form is similar to that of “agarbatti”. Therefore, fragrant mats are classifiable under Sub-Heading 3307.41 and not under Sub-Heading 3307.49 of the Tariff Act.
15. In this view of the matter, we do not find any illegality in the orders under challenge. The civil appeals are, therefore, dismissed. There shall be no order as to costs.
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