ORDER
M. Santhanam, Member (J)
1. This appeal has been referred to the Larger Bench by the Hon’ble President of the Tribunal, Before referring to the main disputes referred to the Larger Bench it would De necessary to set out the facts of the case.
2. On 10.9.1971 the Preventive Staff of the Central Excise Division, Faridabad, visited the premises of the appellants. They seized certain woollen yarn on the ground that in processing the yam power had been used, The appellants were found processing and dyeing hand-knitting worsted woollen yarn with the aid of power. A hydro-extractor, working with the aid of power and a small qty. of processed and dyed hand-knitting worsted woollen yarn was found installed and was functioning in the said premises in a small room. The processed and dyed worsted woollen yarn kept on bamboos, sticks was being dried. The blower was found fitted with an electric motor. The stock of processed and dyed woollen yarn was verified and it was found that the appellants had 2780.650 kgs. of woollen worsted yarn in their factory premises. The appellants did not have any Central Excise Licence for processing and dyeing woollen worsted yarn with the aid of power. On enquiry it was found that the appellants had sent a hydro-extractor for repair on 6.7.1971. The partner of the appellants admitted before the authorities that electric blower was used for drying the woollen yarn.
3. A show cause notice was issued on 16.2.1972 calling upon the appellants to show cause as to why penalty should not be imposed upon them under Rule 173Q read with Rules 9 (2), 52-A and 210 of the Central Excise Rules, 1944, and, also, as to why the seized goods should not be confiscated. Central Excise duty was demanded on 12067.180 kgs. which had been processed, dyed and cleared without payment of duty. The appellants replied that they were not carrying on any process in or in relation to the manufacture of the yarn. The cleansing and colouration of the yarn were done without the aid of power. The act of dyeing yarn could not be said to be a process involving manufacture. The cleansing, dyeing and colouration did not change the chemical or other character of the yarn and would not convert it into a new substance. With regard to the hydro-extractor the appellants contended that the same was used for purposes of drying the wet yarn which cannot be characterised as a manufacturing activity. The hydro-extractor removed the moisture content and electricity was used for the purpose of reeling the dry yarn. The Collector held that grey yarn if bleached or dried or otherwise chemically processed with the aid of power was intended to attract higher rate of duty prescribed for hand-knitting yarn. Drying wet yarn with the aid of power was considered as a process ancillary to the completion of the processed, woollen yarn. He ordered confiscation of the seized goods with an option for redemption on payment of fine of Rs. 7,500/-. Appropriate Central Excise Duty was also directed to be charged. A penalty of Rs. 10.000/- was imposed. Appropriate Central Excise Duty was also directed to be charged on the goods cleared unauthorisedly as the appellants did not possess Central Excise Licence.
4. The appellants preferred an appeal before the Central Board. Identical questions were raised before the Board. The Board held that grey hand-knitting and dyed and bleached hand-knitting wool were different sorts and were known to the trade as different goods. The Board also found that the physical processes like squeezing and drying are incidental or ancillary to the manufacture of dyed yarn. The appeal was rejected. The appellants preferred a revision application before the Government of India which has been transferred to the Tribunal. In the revision application they contended that the only processes wherein the question of use of power arose was the use of hydro-extractor the function whereof was to squeeze out the excess water soaked in the dyed yarn. The electric blower was used for passing hot air on dyed yarn which had earlier passed through the hydro-extractor. The emergence of dyed yarn out of grey yarn could not be regarded as an emergence of a new product inasmuch as both the grey and dyed yarn are known to the trade and commerce as knitting wool.
5. A Bench of the Tribunal which heard the matter found that the two main disputes in the appeal would relate to (i) whether the use of the hydro-extractor and electrically operated blower could be regarded as manufacture of yarn with the aid of power; and (ii) dyeing of grey yarn to coloured yarn would amount to manufacture so as to invite imposition of duty afresh.
6. On the first question whether use of hydro-extractor would amount to a process incidental or ancillary to the completion of the manufactured product, the Tribunal in 1985 (6) ETR 495 : 1985 ECR 925 (Moti Dye Works, Thane v. Collr. of C.E., Thane) has held by a majority view that drying was part of the process of bleaching and dyeing. The use of power in the process of hydro-extraction would make the process of dyeing and bleaching carried out, one with the use of power. There was a dissenting view in the judgment and the Learned Member held that the hydro-extraction was not a process incidental or ancillary to the completion of the manufactured product. This judgment referred to an earlier judgment of the Kerala High Court in Metro Readyware Co. v. Collector of Customs 1978 ELT J-520.
7. On the second question the Tribunal in (Lal Woollen and Silk Mills Pvt. Ltd., Amritsar v. Collector of Central Excise, Chandigarh) has held by a majority following a decision of the Hon’ble Supreme Court in Empire Industries Ltd. and Ors. v. UOI and Ors. , that the several processes including dyeing with reference to the etymological meaning would amount to process of manufacture. One of the Members gave a differing judgment. In its minority judgment, the Learned Member has held that the judgment of the Supreme Court relating to cotton fabrics could not be automatically applied to cases of dyeing of woollen yarn.
8. As there is a conflict in respect of both the main issues and in view of the dissent in both the judgments the Bench considered it appropriate and proper to have the issues considered by a Larger Bench. Accordingly, this Larger Bench came to be constituted to decide the main issues and also the appeal.
9. Shri Dushyant Dave appeared for the appellants and urged that the use of power in hydro-extraction or blower could not be considered as use of power in the process of manufacture. He stated that the process of manufacture was complete when the yarn was dyed and the further process was not incidental or ancillary. Power was not used in the dyeing of yarn. The appellants merely purchased duty paid yarn, washed it and dyed it. The dyed yarn could have been put in the open yard for drying. But during season the hydro-extractor machine was used for squeezing the excess water and the blowers were used for drying the yarn before they could be packed into small packets. The learned Counsel submitted that as a result of the hydro-extraction the finished product did not undergo any change. In 1981 ELT 617 : 1981 ECR 459D (Nirma Chemical Works and Ors. v. UOI and Ors.), the Hon’ble Gujarat High Court had to consider the phraseology that in or in relation to the manufacture and packing…no process is ordinarily carried on with the aid of power. In paragraph 14 the Hon’ble High Court has held that before any activity could amount to processing, it must be found that the commodity, as a result of the operation, experienced some change. It is observed that ‘if there is no change there cannot be said to be any process involved in that particular activity’. On the question whether dyeing of grey yarn to coloured yarn would amount to manufacture, Shri Dushyant submitted that the process of dyeing duty-paid yarn was not manufacture as it did not bring into existence a commercial commodity with distinct name, character and use. He endeavoured to distinguish the decision in Lal Woollen and Silk Mills Pvt, Ltd. (supra). He submitted that that decision was based on the decision of the Hon’ble Supreme Court which in itself was made after the amendment of the definition of manufacture in relation to fabrics. The learned Counsel stated that the decision in Empire Industries would not be applicable as the Hon’ble Supreme Court gave the judgment in view of the amending Act. There was no finding in the judgment of the Hon’ble Supreme Court that dyeing would amount to manufacture in all cases. In the present case there was no legislative change and there was no warrant to justify the finding that the process of dyeing would amount to manufacture. He placed reliance on the decisions (Allenbury Engineers Pvt. Ltd. v. Shri Ram Krishna Dalmia and Ors.) where the expression ‘manufacturing process” in Section 106 of the Transfer of Property Act was examined. It was held therein that the expression meant processes for making or fabricating articles or materials by physical labour or skill, or by mechanical power, vendible and useful as such. It was also observed therein that ‘such making or fabricating does not mean merely a change in an already existing article or material but transforming it into a different article or material having a distinctive name, character and use or fabricating a previously known article by a novel process’;
(Tungabhadra Industries Ltd. Kurnool v. The Commercial Tax Officer, Kurnool, where the Hon’ble Supreme Court repelled the contention of the Advocate-General that ‘the processing of the oil in order to render it more acceptable to the customer by improving its quality would render the oil a commodity other than “groundnut oil” within the meaning of rules under the Madras General Sales Tax (Turnover and Assessment) Rules, 1939’;
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.
In (Chowgule & Co. Pvt. Ltd. and Anr. v. Union of India and Ors.), The Hon’ble Supreme Court has considered a question of blending holding that what was produced as a result of blending was commercially the same article, namely, ore, though with different specifications than the ore which was blended and hence it cannot be said that any process of manufacture was involved in blending of ore.
10. The learned Counsel argued that by the process of dyeing no new product would come into existence and there was no evidence by the Department to show that coloured yarn was known in the trade as a distinct commodity, Even grey yarn which is the natural colour is also used for knitting. Grey yarn is used for manufacture of under-garments in the Army. There is no proof that grey yarn and dyed yarn are two distinct commercial commodities,
11. Shri Dushyant argued that as a result of dyeing no distinct taxable goods had come into existence. The Statute was amended to get over the difficulty in relation to processing of cotton fabrics and artificial silk fabrics only. The learned Counsel relied on (State of Tamil Nadu v. Pyare Lal Malhotra etc.), and urged that unless a new commercial commodity had come into existence, knitting wool continued to be knitting wool even after dyeing.
12. The learned Counsel further argued that in the absence of the applicability of Items 18E or 68 no liability would arise. He placed reliance on Cen-Cus 1976 (25-D) (Guj.) Ahmedabad Mfg. and Calico Ptg. Co. for the proposition that there is no manufacture unless there is a clear classification for warranting the levy of tax. The learned Counsel placed reliance on the following rulings:
(i) 1978 (42) STC 201 (The Deputy Commissioner of Sales-Tax (Law), Board of Revenue (Taxes), Ernakulam v. O. Sadasivan) where the question arose in respect of an entry under the Sales Tax Act. The Kerala High Court held that the commodity mentioned in the entry did not undergo any process of transformation, so as to make Sales Tax exigible separately on the said commodity after the process of dyeing and colouring of yarn;
(ii) 1979 ELT (J-380) : 1974 Cen-Cus Apr.13C Guj. Extrusion Process Pvt. Ltd. v. N.R, Jadav, Supdt., of Central Excise, which held:
Printing and Lacquering change the form of extruded tubes but they did not bring into existence a new substance altogether which can be put to an use different from one to which a plain extruded tube is put.;
(iii) 1980 ELT 164 (Guj.) (Swasttc Products, Baroda v. Supdt., of Central Excise,) which held:
If the colouring was in the process of the “manufacture” of the paper, then it would come within the expression of paper all sorts. No manufacturing process is involved by printing on white paper or colouring manufactured product, namely, the paper.
(iv) 1980 ELT 268 : 1979 Cen-Cus 439D (Colgate Palmolive (India) Ltd. v. Union of India and Ors.), which held:
Merely by reason of the fact that the petitioner added water, perfume and colour, it cannot be said that the petitioner undertook a process of manufacture resulting in an altogether new and different substance with a distinet name, character and use and which is or can be said to be known commercially as ‘soap’.;
(v) 1981 ELT 867 (Shreenivas Cotton Mills Ltd. and Anr. v. Union of India and Ors.) which held:
Sizing is neither a pre-manufacturing process nor an inherent part of the manufacturing process but by its very nature is a process after manufacture or a post-manufacture process.;
(SLP filed by the deptt. appears to have been dismissed in this case).
(vi) 1982 ELT 145 : 1982 ECR 40D Bombay (Piramal Spg. and Wvg, Mills Ltd. v. Union of India and Ors.), where it was held that:
Twinkling of yarn did not amount to manufacture.
(vii) 1983 ELT 239 : 1983 ECR 117D Delhi (J.K. Cotton Spg. and Wvg. Mills and Anr. v. Union of India and Ors.) which held:
Sizing is only a process in manufacturing fabrics and does not amount to manufacture of new products.
(viii) 1983 (t) E.T.R. 444 : 1983 ECR 1.049D Cegat (New Era Hindustan Woollen Mills, Lutlhtana v. Collector of Central Excise, Chandigarh), where the Tribunal held that:
Blended yarn became exciseable for the first time on 17th March, 1972 when the legislature introduced item No. 18F. The impugned goods were not liable to excise duty during the material time.;
(ix) 1983(2) ETR 692 (Kolhapur Steel Ltd. v. Collector of Central Excise, Pune) where the Tribunal’s West Regional Bench held:
There cannot be a levy of duty on scrap unless there is production of a new article satisfying the definition of “manufacture” as per Section 2(f) of the Central Excises Act.; and
(x) 1983 ELT 1123 : 1983 ECR 799D (Golden Paper Udyog (P) Ltd., Faridabad v. Collector of Central Excise, Delhi) where the Tribunal held:
It is not the legislative intent to levy duty twice over, once on paper and paper boards and again when “Paper and Paper Boards” are subjected to any of the processes adverted to in the said sub-item during the relevant period.
13. It was further contended that double taxation of the same item was not permissible. The ruling (Alladi Venkateswara and Ors. etc. v. Govt. of Andhra Pradesh and Anr.) was relied on; the Hon’ble Supreme Court held therein:
that an item may be taxed once as raw-material, and, after it is manufactured and converted into separately taxable goods, taxed again as another taxable item altogether. But, in such cases, the identity of the goods sold would be deemed to be different even through the raw materials may have been taxed already in a different form earlier.
Relying on 1970 SC 1734 (Commissioner of Income Tax, Punjab v. Kulu Valley Transport Co. (P) Ltd.), Shri Dushyant further submitted that if two views are possible the one which is favourable to the assessee should be taken into consideration.
14. Smt. D. Saxena, SDR appeared for the department. According to her, the hydro-extraction was an essential process and was incidental or ancillary to the completion of the manufactured product. Marketability of the product would be the criterion and the yarn would become marketable only after it was hydro-extracted and dried. She placed reliance on Union Carbide. On the second question she stated that coloured yarn was distinct from grey woollen yarn and relied on several passages of the majority judgment in the Lal Woollen and Silk Mills’ case (supra). The process of dyeing is a process of manufacture and she laid emphasis on the decision of the Hon’ble Supreme Court in Empire Industries (supra). She urged that there are separate markets for grey wool and coloured wool and that the duty at the two stages cannot be questioned.
15. The two issues that arise for consideration before this Larger Bench are:
(i) whether the use of hydro-extractor and electrically operated blower, the former for squeezing out the excess water and the latter for drying dyed yarn, be regarded as manufacturing the yarn with the aid of power; and
(ii) Whether the dyeing of grey yarn to coloured yarn would amount to manufacture under Section 2(f) of the Central Excises and Salt Act, 1944 as to invite imposition of duty afresh.
On the first question, it is common case that the appellants purchase duty paid yarn in grey condition known as knitting wool. They undertake certain processes and dye the yarn in different shades and colours. After application of the dye, there should be squeezing and drying. The appellants are using hydro-extractor to squeeze out the excess water from the soaked yarn. The electrical blower is also used by them by which hot air is passed on the dyed yarn for the purpose of drying the yarn. Thereafter, the yarn is packed in different packets. Description of Item 18B reads as follows:
Woollen Yarn, all sorts, including knitting wool in or in relation to the manufacture of which any process is ordinarily carried on with the aid of power.
The contention of the department is that since the hydro-extraction and the drying of wet yarn are carried on with the aid of power, they would be manufacturing activities and that the product would be liable to duty again. Per contra, if the process of hydro-extraction of the woollen yarn and drying it with the aid of power are not manufacturing activities, then the fresh imposition of duty under Tariff Item 18B would not be attracted. The process of manufacture has already been set out above. It is clear therefrom that the knitting woollen (dyed) had come into existence even before the stage of hydro-extraction and drying. The manufacture is complete and grey knitting wool is also a product known to the market as such. If the yarn is allowed to let itself dry in the sun light and the squeezing of water from the soaked yarn is carried on manually, then the duty would not be attracted. In this background one has to find out whether the use of mechanical contrivance either for hydro-extraction or for drying would themselves constitute process of manufacture of dyed yarn. The use of these mechanical equipments is for the purpose of accelerating the removal of excess water and drying of the yarn. It is in evidence that the factory was started in 1965 and that the appellants were drying woollen yarn with the aid of steam. The present machines have been used due to heavy rains in the seasons as they were experiencing difficulties in squeezing out the water and in drying the yarn. It is emphasised by the Department that the process of extraction of water and drying would constitute manufacture If this argument is accepted, then drying the yarn in open yards should also be considered as a process of manufacture and the manufacture should be held, to be not completed unless all these processes are carried out. It cannot be that a particular type of activity would remain outside the ambit of a process of manufacture if done manually, or by natural process, but would become a process of manufacture, if it is carried on otherwise. If it is a process then it should have the same connotation throughout. We do not accept the argument of the Department that the manufacture of the dyed yarn is not complete without extraction of water or drying the same.
16. It was argued that Section 2(f) contemplated incidental or ancillary process to the completion of the manufactured product and that in this case the manufacture would be complete only after the yarn is dried and packed in small packets. There is a fallacy in this argument. The term ‘incidental’ has been defined in the Oxford Dictionary as anything that occurs incidentally. In other words, it refers to an occasional or casual process. The word ‘ancillary’ has been defined as auxiliary. To be an ancillary process, it must be established that it is a subsidiary process. In other words, it must be established that unless these processes are pursued, the manufacture of the products would not be complete. Can we say that the Dyed Knitting Wool has not been manufactured merely because the yarn has not been dried or the water had not been extracted ? The answer would be in the negative, because the manufacture of the yarn is complete before it is dried. The other activities cannot be called incidental or ancillary processes to the completion’ of the manufactured product. There is no proof that the manufacture of dyed yarn would not be complete without these processes. On the other hand, the appellants have used this extraction and blowers during the particular season to accelerate the drying of the yarn which had already been manufactured.
17. Can we say that the packing of the yarn in the packets alone would be the stage at which the duty liability should be determined ? The liability of duty arises once the manufacture is complete. The Excise duty is payable immediately on the manufacture of the goods which are per se marketable. It must be mentioned that Section 2(f) has prescribed in the case of certain items (which do not include woollen yarn) activities like labelling, packing, wrapping and such other processes would be manufacture for the purpose of this Section.
18. The Tribunal had an occasion, to consider the question of extraction in Order No. 418/83. Taking into account earlier order of the Central Board, the Tribunal has held that the hydro-extraction had resulted in removing the moisture from the fabric and it cannot be said to be a process. No doubt, the order of the Board referred to in that decision was with reference to the Notification 212/77 dt. 6.7.1977 and called for a finding whether the processes of hydro-extraction could be deemed to be a finishing process. Hydro-extraction merely resulted in the extraction of moisture from the bleached fabric and as observed by the Board it did not in any way result in the improvement in the quality of the fabrics so processed. We do not agree that the process of hydro-extraction and drying would bring into existence a different commercial commodity or transformed the dyed yarn into another product.
19. We notice that in 1985 (6) ETR 495, the majority of the Tribunal has held a contrary view. In paragraph 7 of the judgment, it is observed that:
But, admittedly, the appellants had carried out the process of drying (hydro-extraction) with the use of power. Such drying was part of the process of bleaching and dyeing. Even though power may not have been used upto that stage, the use of power in the process of hydro-extraction would make the process of dyeing and bleaching carried out by the appellants one with the use of power, since the process of hydro-extraction would at least be a process incidental and ancillary to the completion of the manufactured product i.e., the bleached and dyed product.
We are unable to accept the above view and it cannot be said that hydro-extraction drying after the yarn is dyed would also form part of the process involved in the manufacture of yarn. If the manufacture is complete and removal of excess water or the drying of the yarn are carried on subsequently, one cannot say that the manufacture is not complete unless that operation is completed.
20. We are of the view that examining the matter from the basic concept of hydro-extraction, the view of the majority in 1985 (6) ETR 495 cannot be supported. We also notice that in 1973 Allahabad 165 : 1985 ECR 925 (Mewa Lal and Ors. v. Smt. Tara Rani), the question arose whether the drying of paddy in an open yard would be a manufacturing process. That litigation arose under Section 131 of the Transfer of Property Act and the issue was whether the lease was for a manufacturing process. The Allahabad High Court has held:
In order to prove that there was a manufacturing process, it is also essential to prove that the article must change its nature and it becomes an altogether a different commercial article. In that case, it was held that by spreading wheat partly husked and allowing it to dry on the land one neither changes husk into something different nor a commodity other than what it originally was. Therefore, in the eye of law, the drying of the husk on the land in dispute cannot be said to be a manufacturing process.
This decision supports our view that drying would not constitute process of manufacture. Hence we hold that the use of hydro-extraction and electrically operated blower cannot be regarded as amounting to manufacture of yarn with the aid of power.
21. Our decision on the first point would suffice to dispose of the appeal. Nevertheless, the question would arise whether dyeing of grey yarn to coloured yarn would amount to manufacture inviting imposition of fresh duty on the duty paid grey yarn. The learned Counsel for the appellants submitted that the tariff entry read as follows:
WOOLLEN YARN, ALL SORTS INCLUDING KNITTING WOOL:
In or in relation to the manufacture of which any process is ordinarily carried on with the aid of power.
(1) Worsted yarn:
(a) of 48s counts and more ... 20 per cent ad valorem
(b) of less than 48s counts ... 15 per cent ad valorem
(2) Others ... 7 1/ 2 per cent ad valorem
Explanation :--'Count' means the size of single yarn expressed as the number of 560 yards hanks per pound.
22. He stated that from 10.8.1981, the relevant portion of the Entry reads as follows:
----------------------------------------------------------------------
SI. No. Description Duty
----------------------------------------------------------------------
(1) (2) (3)
----------------------------------------------------------------------
1. Worsted Yarn :---
(a) Hand-Knitting--
(i) Grey 3.5 per cent ad valorem.
(ii) Processed and/
or dyed 9.5 per cent ad valorem,
(b) ...
(c) ...
----------------------------------------------------------------------
23. The learned Counsel urged that applying the colour to grey yarn would not amount to manufacture. He cited several decisions in support of his contention and they have been adverted to in the course of the arguments. The term ‘manufacture’ has not been defined in the Central Excises and Salt Act. It is an inclusive definition, rightly so, because the concept of manufacture depends upon the varied mechanical application, technological advancement, scientific development. The term has been construed in different forms in various enactments. The Law Lexicon of British India of P. Iyer (Page-785) furnishes the various meanings of the word ‘manufacture’ but the most relevant is the one as follows:
To constitute a manufacture, within the Customs Duty Acts, there must be a transformation. Mere labour bestowed on an article, even if the labour is applied through machinery, will not make it a manufacture, unless it has progressed so far that a transformation ensues and the article becomes commercially known as another and different article from that as which it began its existence.”
“Every alteration in an article does not confer on it a new character as a manufacture. To constitute a new and different article, it must be changed as to have a positive and specific use in its new state.
24. This definition provides a safe guide as to the meaning of the term ‘manufacture’. The essence of manufacture is the change of the one subject into another for the purpose of making it marketable. If the substance remains the same despite the process, then it would not amount to manufacture. Something must be brought into existence which is different from the originally existing material. It is not necessary that the subsequent article must lose its character, or identity or that it should become transformed even in its basic or essential properties. One of the important factors that govern the issue would be whether on the application of labour, the article suffers the transformation and a new and different article emerges. This basic concept of manufacture has been the test laid down in all the judgments relating to manufacture or processing. To repeat, the well known criteria laid down in the Delhi Cloth Mills case (ECR C 216 SC), “every manufacture implies change but every change is not manufacture and yet that change in an article is a result of treatment, labour and manipulation. But something is necessary and there must be transformation and a new and different article must emerge having a distinctive name, character and use”.
25. On the facts of the present case, it is an instance where the appellants purchased grey knitting wool and dyed them with colours. The uncoloured grey yarn has a market by itself. The dyed grey yarn is known in the trade circles as “coloured yarn”. A housewife who goes to a shop for purchasing knitting wool for her coloured sweaters will not be satisfied if she is shown the uncoloured grey yarn. She would insist on the supply of the coloured material according to her own choice and specification. It as thus obvious that grey yarn is a distinct commercial commodity different from coloured knitting wool. The coloured knitting wool is the result of the application of certain mechanical process of colouring on the grey yarn. The manufacture of grey wool is complete when uncoloured material is produced. The further processing brings into existence, or transforms the grey wool into a coloured knitting wool by the process of bleaching and dyeing the yarn. Section 2(f) of the Central Excises and Salt Act contemplates manufacture and Section 3 of the Act provides for the levy of duty on the manufactured product. If the two goods are different and distinct and are so known in the market, then it cannot be said that the two cannot be taxed at the different stages. The latest pronouncement of the Supreme Court (cited supra) concludes the issue. In that case, the question arose regarding the excisability of dyed, bleached and printing of cotton fabrics. The fabrics received in the factory underwent various processes and the question arose whether the processed fabrics are liable to duty. No doubt, the tariff entry had undergone certain amendments. The Supreme Court had to consider not only about the effect of the amendments but also the question whether the process of bleaching, mercerising, dyeing etc., would amount to manufacture. The Hon’ble Supreme Court examined the matter with reference to several judgments on the subject and also the etymological derivation of the term. In paragraph 33, the Court observed:
It appears in the light of the several decisions under the construction of the expression that the process of bleaching, dyeing and printing, etymologically also means manufacturing process.
In paragraph 30 it is observed that
The taxable event under the Excise Law is “manufacture’. The moment there is transformation into a new commodity commercially known as a distinct and separate commodity having its own character, use and name, whether be it the result of one process or several processes ‘manufacture’ takes place and liability to duty is attracted.
We do not agree with the contention of the learned Counsel for the appellants that this view of the Supreme Court was circumscribed by the amendment of the Tariff Item. The entire concept of manufacture has been decided from basic principles. This decision indicates that the dyed knitting wool would be a different commercial article from the grey yarn and the liability to excise duty at the later stage cannot be avoided.
26. Among the decisions cited by the learned Counsel the one which is directly on the issue of dyeing is 1978 (42) STC 201. But that decision will have no application to the present facts because that was a ruling on the provisions of the Sales Tax and the decision was rendered in view |of the particular terminology used in the Sales Tax provisions. We also notice that that ruling was based on an earlier ruling of the Supreme Court in Kailash Nath v. State of U.P. 1957 (8) STC 358. We observe that in the recent decision of the Supreme Court this decision has been considered in paragraph 34 and it was held that the decision turned on the construction of the Notification and would not be of any assistance in disposing the present case. The decision of the Supreme Court in 1968 (22) STC 160 is not relevant because the Tobacco in paste form retained its character of a preparation of powdered tobacco and retained its use as such. In the present case the use for which the coloured yarn is utilised is different from the use to which grey yarn could be put. The question of sizing yarn 1981 ELT 867 : 1983 ECR 117D : 1983 ELT 239 or the colouring of soap by adding perfumes 1980 ELT 268 or bituminising kraft paper 1983 (2) ELT 147 have no application to the present facts because in the present case there is a transformation of grey yarn into coloured yarn and the goods are distinctly known in the market.
27. We are also not impressed with the contention that no distinct taxable goods had come into existence. Grey knitting wool is a distinct taxable commodity. We do not agree that the term ‘all sorts’ should be read with the term ‘woollen yarn’. There is no justification to resort to such an interpretation especially in a taxing statute. We also do not agree that there is no clear clarification in the entry. It is not a case where two views are possible–one in favour of the assessee and the other to the contrary. In this connection we also refer the decision of the Tribunal in . In that case the identical question whether dyeing of grey woollen yarn amounted to manufacture came up for decision. In a well-reasoned judgment the Tribunal held that the dyeing of grey yarn would amount to manufacture for the purpose of levy of Central Excise Duty. On a consideration of the several decisions now placed before us, we are of the view that the majority decision in Lall Woollen & Silk Mills Pvt. Ltd. should be accepted. In the minority view, it is stated that no evidence was led to conclude that dyed woollen yarn was a new substance different from grey woollen yarn in name, character and use. But in our view the use to which the grey woollen yarn could be put is totally different than the use to which dyed woollen yarn could be used. They are two different goods with distinct name, character and use. Hence on a careful consideration of all the materials, we approve of the majority view in 1986 (24) ELT 98 and hold that the dyed yarn is a distinct exciseable commodity.
28. In the result, in view of our finding on the first issue, the appeal is allowed.
Sd/- I.J. Rao Sd/- K.L. Rekhi Sd/- M. Santhauam Member (T) Member (T) Member (J) Dated : 26th Dec., 1986. K.L. Rekhi, Member (T)
29. Concurring with brother Santhanam on the first point, I hold that since no power had been used by the appellants upto the stage of dyeing and since the process of hydro-extraction and blowing of hot air on the dyed yarn for quickening its drying, did not bring into existence a different commercial commodity or transform the dyed yarn into another product, they did not amount to manufacture so as to invite a fresh imposition of excise duty. A process, to be called a process of manufacture, must bring at least some change in the nature, form or shape of the article. No such change occurred just by accelerating the drying of wet dyed yarn. Dyed yarn remained dyed yarn only. In normal fair weather, it would have dried by itself in an open yard or on the terrace. 1 allow the appeal on the first point. 1 do not go into the second point.
Sd/- K.L. Rekhi
Member (T)
I.J. Rao, Member (T)
30. After careful consideration of the arguments advanced during the course of hearing and after respectful perusal of the (sic)’er drafted by learned Brother Shri M. Santhanam, 1 concur with the judgments in so far as the first point is concerned and hold that since no power had been used by the appellants up-to the stage of dyeing, and since the process of hydro-extraction and blowing of hot air on the dyed yarn for accelerating its drying did not bring into existence a different commercial commodity or transform the dyed yarn into another product, these did not amount to manufacture so as to invite imposition of excise duty afresh. The dyed yarn continued to remain dyed yarn only. I would allow the appeal on this ground.
In view of this, I do not go into the second point.
Sd/-I.J. Rao
Member (T)
Dissenting opinions:
V.T. Raghavachari, Member (J)
1. I have perused carefully the order dictated by Brother Santhanam and concurred with by Brothers Rekhi and Rao. While I am in agreement with the order of Shri Santhanam on issue No. 2 posed by him, 1 am unable to agree with him on his finding on issue No. 1. It has, therefore, become necessary for me to record this separate order.
2. On the facts there is no dispute. The appellants admittedly received grey woollen yarn and after bleaching the same dyed the said yarn. It is in extracting moisture after dyeing that hydro-extractor and blower are used, the said hydro-extractor and blower being operated with the aid of power. The conclusion in the order of Brother Santhanam is that use of power in the hydro-extractor and blower would not amount to use of power in the manufacture of dyed yarn. Reference had been made in the said order itself to the earlier order of this Tribunal in the case of M/s Moti Dye Works [1985 (6) ETR 495]. The decision of the majority in the said case was that use of power in the process of drying (hydro-extraction) would amount to use of power in the process of dyeing of fabrics since the process of hydro-extraction would be a process incidental or ancillary to the completion of manufacture of the dyed fabrics. The view expressed by the majority has been dissented from in the order prepared by Shri Santhanam. The main reason stated for the same is that the process of hydro-extraction and drying does not bring into existence a different commercial commodity or transform the dyed yarn into another product (para 18). It appears to me that this reasoning is not correct. The question is not whether hydro-extraction, or drying through a blower, would themselves amount to a complete manufacturing process. The manufacturing process of the appellants is that of conversion of grey yarn into dyed yarn. It has been accepted in the order of Shri Santhanam (and 1 agree with him) that this would amount to manufacture as would call for imposition of excise duty. Therefore the manufacturing process is that of conversion of grey yarn into dyed yarn. It was not the mere process of hydro-extraction or drying that constituted the manufacturing process of conversion of grey yarn into dyed yarn. Therefore, the observation that the process of hydro-extraction and drying would not bring into existence a different commercial commodity appears to be beside the point. Equally so the observation that the said two processes do not transform the dyed yarn into another product.
3. Reference had been made in para 20 of the order to a judgment of the Allahabad High Court in . The question in that case was whether drying of paddy in an open, yard would be a manufacturing process for purposes of attracting the provisions of Section 131 of the Transfer of Property Act. The High Court observed that merely by drying the paddy does not undergo any change in its nature. Therefore, that decision only held that the process of drying would not by itself be a process of manufacture so far as it dealt with the drying of paddy. In the present instance, as earlier noted, the question is not whether hydro-extraction and drying would by themselves amount to manufacture in converting the wet dyed yarn into dry dyed yarn. Therefore, the observations of the Allahabad High Court do not appear to be relevant for the issue before us.
4. Similarly in paragraph 15 it has been observed as follows:
It is emphasized by the Department that the process of exit action of water and drying would constitute manufacture. If this argument is accepted, then drying the yarn in the open yards should also be considered as a process of manufacture and the manufacture should be held to be not completed unless all these processes are carried out. It cannot be that a particular type of activity would remain outside the ambit of a process of manufacture if done manually, or by natural process, but would become a process of manufacture if it is carried on otherwise. If it is a process then it should have the same connotation throughout. We do not accept the argument of the Department that the manufacture of the dyed yarn is not complete without extraction of water or drying the same.
It may be noted that the judgment in the case of Moti Dye Works (supra) was not on the ground that the process of hydro-extraction was itself a complete manufacturing process in the circumstances of the said case but that it was a process incidental and ancillary to the completion of the manufactured product and was therefore part of the manufacturing process as defined in Section 2(f) of the Central Excises and Salt Act. It would appear to me to be unnecessary to go into the question whether hydro-extraction or drying would in no case amount to manufacture. There may be cases such as concentration of chemical products in which the extraction of moisture may bring into existence a new and different commercial product. That question may have to be reserved for consideration on a future occasion in a proper case requiring a finding on that issue. In the present instance we are only concerned with the question whether hydro-extraction and drying would be processes incidental or ancillary to the completion of the manufactured product i.e. dyed yarn.
5. It can admit of no dispute that the wet dyed yarn would not be accepted by the customer as a marketable product. The customer who requires dyed yarn would insist on dry dyed yarn being delivered to him. Equally so any person who had delivered grey yarn to the processor for being converted into dyed yarn would reject wet dyed yarn. It would, therefore, be clear that it is only after drying that dyed yarn becomes a separate marketable commodity and therefore the process of manufacture of dyed yarn is complete only after the wet yarn is dried. It is therefore clear that the processes of removal of moisture, firstly by hydro-extraction and then by drying, are parts of the manufacturing process leading to the manufacture of dyed yarn. While colour may be imparted by the application of the dye to the bleached yarn the manufacture of dyed yarn would be complete only after the yarn is thereafter dried.
6. Reference is made in paragraph 17 to certain activities like labelling, packing, wrapping etc. as process of manufacture under Section 2(f) with reference to certain other commodities, the inference being that the absence of any such reference in Section 2(f) to hydro-extraction or drying with reference to woollen yarn would take such processes outside the process of manufacture of dyed yarn. It may be noted that labelling, packing, wrapping etc. are normally carried out after the usual process of manufacture is complete and that is why with reference to particular commodities, these processes had to be specifically enumerated under Section 2(f) to constitute them processes of manufacture. Since dyed yarn cannot be marketed in the wet stage but only in the dried stage there was no need to enumerate this process of drying in Section 2(f).
7. In view of what I have stated above my answer to point No. 1 enumerated in paragraph 15 is that the use of power operated hydro-extractor and blower would amount to use of power by the appellants in the manufacture of dyed yarn. As earlier stated, I agree with the conclusion of Shri Santhanam on issue No. 2 enumerated in paragraph 15. In the result the appeal, in my opinion, deserves dismissal and is accordingly to be dismissed.
dt. 15,1.1987 Sd/- Sh. V.T. Raghavachari
Member (J)
G.P. Agarwal, Member (J)
1. I have had the advantage of going through the judgment written by my Learned Brother Shri M, Santhanam, Member (J) in which Brother K.L. Rekhi and I.J. Rao have concurred and the dissenting judgment written by Brother V.T. Raghavachari, Member (J). I am in complete agreement with the view expressed by Shri V.T. Raghavachari, Member (J) and feel unable to persuade myself into agreeing with the judgment proposed by Brother M. Santhanam, Member (J) in which other Brothers have concurred as stated above. However, I would like to add as follows:
2. Regarding issue No. (1) : The use of hydro-extractor for squeezing out the excess water and electrically operated blower for drying dyed yarn certainly amounts to use of power by the appellants in the manufacture of dyed yarn in the facts and circumstances of the instant case. In the Memorandum of Appeal (which was originally a Revision Petition before the Government of India) the appellants have stated in ground No. 1 that ‘the petitioners however undertook certain processes for dyeing the yam in different shades and colours. These processes include scouring (washing with soap), dyeing followed by squeezing and drying. The yarn so cleaned, dyed and dried was then packed in different packings. Thus, from these admitted facts it is clear that squeezing out the excess water is not an independent) process, but is a part of process for dyeing the yarn in different shades and colours. In other words, it is not purely a case where an article has merely been dried, but is a case where an article with the aid of power is dried for the purpose of completing the entire process of dyeing the yarn. This view of mine is further supported from the Tariff Item No. 18-B which inter alia provides that
Morever, for the purpose of levy of Central Excise Duty, ‘manufacture’ includes any process incidental or ancillary to the completion of a manufactured product. Drying of wet yarn with the aid of power Is a process ancillary to the completion of processed woollen yarn conforming to the definition of Central Excise Tariff Item No, 18-B
(emphasis supplied)
3. Regarding the second issue : I am also in complete agreement with the view expressed by my Learned Brothers (Judicial) S/s M. Santhanam and V.T. Raghava chari and would like to add that this view finds support from the recent judgment rendered by a Division Bench of the Andhra Pradesh High Court in the case of U Foam Ltd. v. Union of India and Ors. . In that case their Lordships while repelling the contention advanced by the appellant U Foam Ltd., therein that process of insulation foaming by “one shot” process in ship resulting in polyurethane foam does not amount to manufacture observed as follows:
Now, the expression ‘excisable goods’ is defined in Section 2(d) of the Central Excise Act as to mean goods specified in the First Schcdule as being subjected to duty of excise. Prima facie, therefore, polyurethane foam produced in the ship through ‘one shot’ process should be regarded as an excisable commodity subject to the levy and collection of duties of excise. But, the argument of the learned Counsel for the petitioner is that before a commodity can be called an excisable goods it should have been brought into existence by process of manufacture and that, it should be an economical commodity as understood in the popular parlance. In examining this matter without reference to any decided cases, it must be held that polyurethane foam which is produced in the ship by ‘one shot’ process is clearly a result of manufacturing operation. In the manufacture of Polyurethane Foam in the ship various chemicals were used and were subjected to different chemical processes which alone could produce the above mentioned Polyurethane foam. It cannot, therefore, be denied that Polyurethane Foam had been produced by following the method of manufacture. But what is even more important in this aspect to note is the fact that the statute not only has the word ‘manufacture’ but also ,the word ‘produce’. According to the literal meaning of this word occurring in Section 3 of the Act, excisable goods which is produced, though not manufactured, is still liable to be levied duties of excise. In view of the fact that Polyurethane Foam has been produced by the result of chemical and physical operation it cannot be denied that Polyurethane Foam is the produce of that process or that operation. Accordingly, the argument of the learned Counsel that the resulting Polyurethane Foam is not manufactured within the meaning of Section 3 of the Act, cannot be accepted. It is not a case where an article has merely undergone a process of purification. It is a case of chemical action taking place among various articles and resulting in a new produce. If that is not a manufacturing process and if that is not an activity producing a commodity it is difficult to see what else would answer description of manufacturing activity.
(emphasis supplied)
4. In the result, the appeal, in my opinion, deserves to be dismissed.
Sd/- Sh. G.P. Agarwal
Member (J)
Dated 30.1.1987
In view of the majority decision on the first issue, the appeal is allowed.