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Metlex (I) (P) Ltd. v. Commissioner Of Central Excise, New Delhi .
Factual and Procedural Background
The appeals arise from two orders of the Customs, Excise and Gold (Control) Appellate Tribunal (CEGAT) dated 19-12-1997 and 4-6-1998. The appellants manufacture plastic films that are later lacquered, metallised or laminated. For the periods 1987-88 to January 1990 they filed classification lists under Tariff Sub-Headings 3920.36 and 3920.38 and claimed the concessional duty rate provided by Notification No. 53/88-CE (Sl. No. 35 — “Films”). The Department issued show-cause notices asserting that the goods were covered by Sl. No. 32.3 of the same notification (“All goods … other than polymers of vinyl chloride and regenerated cellulose”) and were therefore chargeable at a higher rate.
The Assistant Collector accepted the Department’s view, rejected the appellant’s plea of “no manufacture,” and confirmed the demand. The Collector (Appeals) reversed this, classifying the product under Sl. No. 35. On further appeal, the Tribunal reinstated the Assistant Collector’s order, holding both that (i) the correct classification was under Sl. No. 32.3, and (ii) a distinct manufacturing process occurred. The present Supreme Court decision reviews those findings.
Legal Issues Presented
- Whether the lacquered/metallised/laminated plastic film produced by the appellants is classifiable under Sl. No. 35 (“Films”) or Sl. No. 32.3 of Notification No. 53/88-CE.
- Whether the processes of lacquering, metallising or laminating pre-duty-paid plastic film constitute “manufacture” so as to attract excise duty.
- Which party bears the burden of proof on the question of manufacture under Central Excise law.
Arguments of the Parties
Appellants' Arguments
- The operations of metallising, lacquering or laminating do not amount to manufacture because no new, distinct commercial commodity emerges; the product remains “film”.
- They are therefore entitled to the concessional rate under Sl. No. 35 of Notification 53/88-CE, or, alternatively, to complete exemption because there is no manufacture.
- Reliance was placed on an earlier Central Board of Excise & Customs circular stating that metallising or laminating does not amount to manufacture.
Respondent (Revenue) Arguments
- The finished product falls under Sl. No. 32.3 of Notification 53/88-CE because it is distinct from plain film.
- A process of manufacture is involved, evidenced by the existence of separate tariff sub-headings for lacquered, metallised or laminated film.
- The appellants led no evidence to prove absence of manufacture; therefore duty is payable.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Garware Plastics & Polyester Ltd. v. Union of India, (1991) 52 ELT 506 (Bom) | Lacquering/metallising polyester film does not create a new commercial commodity; hence, no manufacture. | Relied upon to reject the Tribunal’s view that a new product emerged. |
| Rexor India Ltd. v. CCE, (1991) 52 ELT 392 (CEGAT) – SLP dismissed 17-8-1995 | Same principle as Garware – no manufacture occurs. | Cited as consistent appellate authority supporting appellants. |
| Chemicoat Ltd. v. CCE, (1992) 57 ELT 128 (CEGAT) – SLP dismissed (1997) 94 ELT A151 (SC) | No manufacture in metallising/laminating processes on plastic film. | Treated as additional confirmation that Revenue’s stand lacked merit. |
| Collector of Central Excise v. Technoweld Industries, (2003) 11 SCC 798; 155 ELT 209 | Drawing thinner gauge wire from duty-paid wire rods is not manufacture; separate tariff entries do not by themselves create excisability. | Used to rebut the Tribunal’s reasoning that separate sub-headings automatically imply manufacture. |
| Tega India Ltd. v. CCE, (2004) 2 SCC 727 | Mere fixing of rubber linings does not amount to manufacture. | Supports the broader doctrine that physical alteration without emergence of a new product is not manufacture. |
Court's Reasoning and Analysis
1. Classification: The Court examined Notification 53/88-CE. Sl. No. 35 applies only to films “produced out of” goods falling under Headings 39.01-39.15. Because the appellants begin with duty-paid film rather than those headings, the finished goods cannot qualify under Sl. No. 35; the Tribunal was correct on this narrow point.
2. Manufacture Test: The dispositive issue is whether any manufacture occurs. The Court reiterated settled law that the onus to establish manufacture lies wholly on the Revenue. Simply filing a classification list cannot estop an assessee from disputing liability if, in law, no manufacture occurs.
3. Failure of Proof: Despite the appellants’ express plea of “no manufacture” in reply to the show-cause notice, the Assistant Collector avoided the issue and produced no evidence. The Tribunal wrongly shifted the burden to the assessee, contrary to precedent.
4. Precedential Support: A consistent line of authority (Garware Plastics, Rexor India, Chemicoat, Technoweld Industries, Tega India) establishes that processes which do not yield a commercially distinct commodity do not amount to manufacture, even if tariff sub-headings differ.
5. Application to Facts: The input is plastic film; after lacquering or metallising, the output remains plastic film. No new name, character or use emerges. Accordingly, no manufacture occurs and excise duty cannot be levied.
Holding and Implications
Holding: The Supreme Court set aside the Tribunal’s orders and ruled that no process of manufacture had taken place; the appellants are therefore not liable to pay excise duty on the impugned products. The appeals were allowed with no order as to costs, and the Court clarified that the appellants are not entitled to claim refunds merely because duty was earlier paid on a mistaken footing.
Implications: The judgment reaffirms that (i) the Revenue bears the burden to prove manufacture, and (ii) classification into distinct tariff sub-headings does not, by itself, establish excisability. While directly affecting only the parties, the decision strengthens existing precedent limiting excise duty to cases where a genuinely new commercial product emerges.
Order
1. These appeals are against the orders of the Customs, Excise and Gold (Control) Appellate Tribunal (CEGAT) dated 19-12-1997 and 4-6-1998. They are being disposed of by this common judgment as except for the period under consideration the law points are the same.
2. Briefly stated, the facts are as follows:
In Civil Appeals Nos. 3224-25 of 1998 the period under consideration is 1-3-1988 to 30-9-1989 and 1-10-1989 to January 1990. In Civil Appeal No. 5176 of 1998 the period under consideration is 1987-88 and 1988-89. In Civil Appeal No. 5176 of 1998, the appellant is also urging that during that period they were doing job work for one M/s Flex Laminators and are thus not liable to pay excise. In the view we are taking it is unnecessary to deal with this aspect.
3. The appellants filed a classification list showing the item as falling under Tariff Items 3920.36 and 3920.38 The appellants claimed benefit of Notification No. 53/88-CE dated 1-3-1988. The appellants were issued show-cause notices on the basis that their goods did not fall under Item 35 of the notification but that they fell under Item 32.3 of the notification.
4. In reply to the show-cause notice, amongst other contentions, the appellants contended that merely by metallising/lacquering/laminating films no process of manufacture is undertaken so as to attract duty. Reliance was placed on a Board circular to this effect. Of course the circular relied upon was for an earlier period.
5. The Assistant Collector held against the appellants. It was held that their goods fell under Item 32.3 The Assistant Collector brushed aside the argument that there was no manufacture by concluding that the circular relied upon was in respect of an earlier tariff item. The Assistant Collector, therefore, avoided going into the question whether or not there was manufacture. The appeal filed by the appellants was allowed by the Collector (Appeals) who held that the appellants' product fell under Item 35 of the said circular.
6. The Tribunal has disposed of the appeal of the respondents by concluding that the appellants' product cannot fall under Item 35 of the circular and that it would fall under Item 32.3 The Tribunal has held that there was manufacture. The Tribunal has concluded that the appellants had not led any evidence to prove that there was no manufacture and that in the tariff they are recognised as distinct items classifiable under different sub-headings.
7. We have heard the parties at great length. To decide the question whether the product manufactured by the appellants falls under Item 35 or Item 32.3, one would have to look at the circular. The circular reads as follows:
“Notification No. 53/88-CE dated 1-3-1988
Effective rates of duty on specified plastics and articles thereof.—In exercise of the powers conferred by sub-rule (1) of Rule 8 of the Central Excise Rules, 1944, and in supersession of the notification of the Government of India, in the Ministry of Finance (Department of Revenue) No. 132/86 — Central Excises, dated 1-3-1986, the Central Government hereby exempts goods of the description specified in column (3) of the Table hereto annexed and falling under heading numbers or sub-heading numbers of the Schedule to the Central Excise Tariff Act, 1985 (5 of 1986), as are 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 rate specified in the corresponding entry in column (4) of the said Table, subject to the conditions, if any, laid down in the corresponding entry in column (5) of the said Table.
Sl. No. Heading No./ Sub-Heading No. Description of goods Rate Conditions (1) (2) (3) (4) (5) * * * 32. 39.20 (iii) All goods (other than of polymers of vinyl chloride and regenerated cellulose) 35% ad valorem If the strips are not intended for use in the weaving of fabrics or for manufacture of sacks. * * * 35. 39.20 Films (other than of regenerated cellulose) 25% ad valorem If produced out of goods falling under Headings 39.01 to 39.15, on which the duty of excise leviable thereon under the Central Excises and Salt Act, 1944 (1 of 1944) or the additional duty under Section 3 of the Customs Tariff Act, 1975 (51 of 1975), as the case may be, has already been paid.”
8. For the product to fall under Item 35, the product must be a “film” which has been produced out of the goods falling under Headings 39.01 to 39.15 The appellants purchase “film” on which duty has been paid and thereafter laminate or metallise that film. Thus, presuming that a process of manufacture is undertaken, the product which the appellants produce is not produced out of any goods falling under Items 39.01 to 39.15 Therefore, in our view, the Assistant Collector and the Tribunal were right in concluding that the appellants' product could not fall under Item 35.
9. However, the more important aspect is whether there can be said to be any manufacture. Undoubtedly, the appellants had filed the classification list. But merely because a party mistakenly files a classification list does not mean that he has to pay duty, if in law, he is not bound to pay duty. If there is no manufacture then the mere fact that a classification list has been filed would not make them liable to pay duty.
10. In reply to the show-cause notice it was clearly contended that there was no manufacture. Once this contention was taken, it had to be dealt with by the Assistant Collector. It is settled law that if the Revenue claims that there is manufacture, then the burden of proving the fact is entirely on the Revenue. In this case even though the point was specifically taken, the Assistant Collector skirts the issue and does not decide the same. Thus, there is no evidence on record to show that manufacture has taken place.
11. The Tribunal whilst dealing with this aspect has held as follows:
“Insofar as the alternative prayer for considering whether any process of manufacture is involved in converting the plain plastic films into flexible metallised plastic films or laminated plastic films on the ground that all of them fall under Heading 39.20 is concerned, while it is true that Heading 39.20 covers plain plastic films as well as lacquered or metallised or laminated films it is noteworthy that they fall under separate sub-headings. Furthermore it is a well-settled point of law by now that two items falling under the same heading may also attract excise duty if in the process of or as a result of production on conversion of one form into another a new product known to the market emerges. Hence the mere fact that both input and output are classifiable under the same heading does not make any difference in this respect. Furthermore, the respondents have not filed any evidence in support of their contention that no manufacture is involved or no new product emerges. Whereas in the tariff they are recognised as distinct items classifiable under different sub-headings.”
12. In our view, this finding is clearly unsustainable.
13. It has been held by the Bombay High Court in the case of Garware Plastics & Polyester Ltd. v. Union of India (1991) 52 ELT 506 (Bom) that the process of lacquering/metallising of polyester film does not amount to manufacture, there being no new distinct commercial commodity having a different identity or name. Thereafter, the Tribunal has in the case of Rexor India Ltd. v. CCE (1991) 52 ELT 392 (cegat) held the same. It must be mentioned that a special leave petition filed against this judgment, by the Department, was dismissed on 17-8-1995. The Tribunal again in the case of Chemicoat Ltd. v. CCE (1992) 57 ELT 128 (cegat) relied on the Bombay High Court judgment and held that there was no manufacture. Special leave petition filed against this judgment was also dismissed by this Court [reported in 1997 (94) ELT p. A 151].
14. This Court has in the case of CCE v. Technoweld Industries (2003) 11 SCC 798, (2003) 155 ELT 209 held that there is no manufacture when wire of a thinner gauge is drawn out of duty-paid wire rods. It was held that the initial product was a wire rod and the ultimate product was also a wire. In this case it was also held that merely because there are two separate tariff entries does not mean that the product is excisable. It was held that the product becomes excisable only if there is manufacture.
15. Thereafter in Tega India Ltd. v. CCE (2004) 2 SCC 727 this Court has held, on a consideration of a number of other decisions, that merely fixing rubber lining on paper, tanks and other such articles does not amount to manufacture.
16. In this case the appellants purchase duty-paid film. They merely laminate or metallise it. The product is a film to start with and remains a film after process of lamination or metallisation. Thus there is no new distinct product which has come into existence and it would have to be concluded that there is no manufacture.
17. It was, however, submitted that the case has proceeded on the admitted footing that there was a manufacture. It was submitted that the matter must be remitted back to decide whether there is manufacture. It was submitted that this aspect will have to be decided in terms of Note 12 to Chapter 39 and after looking at the process adopted by the appellants. It was submitted that under the present tariff there are separate sub-headings and thus after examining the process of the appellants it may be possible to contend that a new and distinct product has come into existence.
18. We are unable to accept this submission. The question is whether an individual and distinct product has come into existence. It is settled law that the burden is on the Department to prove that a new and distinct product has come into existence. The appellants, in reply to the show-cause notice, took up the contention that there was no manufacture. If the Department still wanted to contend that manufacture had been undertaken, the Department had to prove it by cogent evidence. The Tribunal was clearly in error in seeking to cast the burden on the appellants to show that there was no process of manufacture.
19. Note 12 to Chapter 39 reads as follows:
“12. In Headings 39.20 and 39.21, the expression ‘flexible’ means an article which has a modulus of elasticity either in flexture or in tension of not over 700 kilograms per square centimetre at 23°C and 50 per cent relative humidity when tested in accordance with the method of test for stiffness of plastics (ASTM Designation D-747-63), for flexural properties of plastics (ASTM Designation D-790-63), for tensile properties of plastics (ASTM Designation D-638-64T), or for tensile properties of thin plastic sheeting (ASTM Designation D-882-64T) and ‘rigid’ means all articles other than ‘flexible’ as defined above.”
20. Tariff Item 39.20 reads as follows:
“Heading Sub-Heading Description of goods Rate of duty 39.20 Other plates, sheets, film, foil and strip, a plastic, non-cellular, whether lacquered or metallised or laminated, supported or similarly combined with other materials or not —Of polymers of vinyl chloride: 3920.11 -Rigid, plain 60% 3920.12 -Flexible, plain 60% 3920.13 -Rigid, lacquered 60% 3920.14 -Flexible, lacquered 60% 3920.15 -Rigid, metallised 60% 3920.16 -Flexible, metallised 60% 3920.17 -Rigid, laminated 60% 3920.18 -Flexible, laminated 60% 3920.19 -Other 60% —Of regenerated cellulose: 3920.21 -Film, plain 60% 3920.22 -Film, lacquered 60% 3920.23 -Film, metallised 60% 3920.24 -Film, laminated 60% 3920.25 -Sheet, plain 60% 3920.26 -Sheet, lacquered 60% 3920.27 -Sheet, metallised 60% 3920.28 -Sheet, laminated 60% 3920.29 -Other 60% —Of other plastics: 3920.31 -Rigid, plain 60% 3920.32 -Flexible, plain 60% 3920.33 -Rigid, lacquered 60% 3920.34 -Flexible, lacquered 60% 3920.35 -Rigid, metallised 60% 3920.36 -Flexible, metallised 60% 3920.37 -Rigid, laminated 60% 3920.38 -Flexible, laminated 60% 3920.39 -Other 60%”
Thus this entry makes no distinction between ordinary film and film which is lacquered or metallised or laminated, of course Sub-Headings 3920.31 to 3920.38 classify as “rigid plain, flexible plain, rigid lacquered, flexible lacquered, etc.” Note 12 only sets out what is “flexible”. But we are not concerned with any dispute as to whether the appellants' product is rigid or flexible. It is an accepted position that the appellants' products are “flexible lacquered film” and/or “flexible metallised film”. As stated above, the product remains a “film”.
21. In the above view, we set aside the order of the Tribunal and hold that no process of manufacture has taken place and, therefore, the appellants are not liable to pay any duty on the product.
22. Accordingly, the appeals are allowed. There will be no order as to costs.
23. We, however, clarify that in view of the fact that the appellants had initially proceeded on the footing (of course mistakenly) that there was manufacture, they will not be entitled to claim any refund on the basis of this judgment.
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