ORDER
V.K. Ashtana, Member (T)
1. In this appeal against Order-in-Appeal No. 137/99 (M-II), dated 24-9-99 passed by Commissioner (Appeals), the case of the facts are that appellants import jumbo rolls of un-exposed cinematographic film. They clear the same on payment of CVD and take Modvat credit against the said CVD paid after filing declaration under Rule 57F (3)/(4). They clear the goods to job worker indicated in the said declaration. The job worker slit the jumbo rolls to 35 mm to size, cut them to suitable lengths, and then wound them in the reels etc. provided by the appellants themselves. Thereafter, the goods are returned to the appellants premises where they are subject to the following :-
(a) random testing of about 10% by using Sensitometer to determine the sensitivity of the unexposed cinematographic film to ensure that the desired level of sensitivity for exposure when the said film is used has been maintained during this slitting and cutting operations. (b) Thereafter, the films are labelled and suitably packed before being sold from the ex-factory gate.
2. It is the contention of the Revenue that neither this testing nor the labelling and packing is a process of manufacture and that process of manufacture of 35 mm unexposed cinematographic film and reels is already complete when the goods need these two job work. Therefore, the Revenue had alleged that the appellants would not be undertaking any manufacturingactivity in this matter and hence they would not qualify under the Modvat scheme at all. On this ground, the lower authorities have demanded duty of the Modvat credit alleged to have been erroneously taken.
3. Heard Shri K. Sankararaman, ld. Advocate for appellants and ld. DR Shri M. Kunhikannan, Ld. DR., for Respondents.
4. Ld. Advocate submits that the peculiar nature of these goods require that after the job work is completed, their sensitivity should be tested by a sensitometer. Thereafter, the goods are not marketed unless they are labelled indicating the technical specifications thereof on the packing. He submits that since the goods have low sensitivity, the customer cannot open the packing to see what is inside it. Therefore, he has to go by the detailed labelling available on the packing material. Thus, both test of sensitivity randomly and labelling of the product is absolutely necessary to make the goods marketable. He submits that the Tribunal has held in the case of C.C.E. v. Rolls Prints (Packaging) Ltd. as in 1998 (104) E.L.T. 712 (Tri.) that test for deciding whether a process would be ancillary or incidental to the completion of a manufacture or not would be whether a particular packings done in order to put the goods in the condition in which they are generally sold in the wholesale market at the factory gate. Ld. Advocate submits that since both the testing and labelling and further packing is necessary to make the goods saleable, therefore, these processes have to be considered as an incidental and ancilliary to the completion of the manufactured product. Therefore, the appellants clearly are manufacturers of this product and hence credit taken under Modvat scheme was rightly taken. He further submits that there is no charge that duty paid on the final product has not been rightly paid. He also submits that there is no other charge regarding any violations that the entire inputs which had gone for job work and had not been returned back to the factory and accounted for properly. Therefore, he submits that the findings arrived at by the ld. Commissioner (Appeals) is totally against the spirit of the law on manufacture under Central Excise as well as the Modvat scheme.
5. He further submits that Rule 57F(3) [later Rule 57F(4)] has been discussed in para 9 of the order impugned as follows :-
“9. Under Rule 57F(3)/(4), a manufacturer may after intimating the Assistant Commissioner having jurisdiction over the factory and obtaining a dated acknowledgement of the same, remove the inputs as such or after the inputs have been initially processed during the course of manufacture of final products, to a place outside the factory for the purpose of testing, re-packing, refining, reconditioning, or carrying out any other operations necessary for the manufacture of final product and return the same to the factory for further use in the manufacture of final product or remove the same without payment of duty under bond for export or remove the same after payment of duty for home consumption.”
He submits that a plain reading of the rule shows that job worker himself could have cleared the goods on payment of duty if the manufacturing process was over at his end. Since the manufacturing process was not over, the goods had to necessarily go back to the present appellants factory for testing and labelling. Presuming without admitting that the manufacture was over at the job worker stage, as held by Revenue, nothing in this rule prevents the goods to be cleared on payment of duty either from the premises of the job worker or from the premises of the appellants. If the goods can be cleared from the job worker premises, they can as well be also cleared on payment of duty from the appellants factory. In fact, when the goods are cleared on payment of duty at the appellants factory gate, the quantum of duty is increased due to value addition. Therefore, to that extent, the procedure that had been followed by appellants has only resulted in Revenue gain to the department.
6. Ld. DR Shri M. Kunhikannan relies on the findings of both the original authority as well as the ld. Commissioner (Appeals). He submits that since there is no chapter notes in the relevant Chapter 37 in the Central Excise Tariff, indicating that merely testing and labelling would also amount to manufacture, therefore as soon as the goods are converted into 35 mm unexposed reels by the job worker, the manufacturing process is completed at the job worker as such. Merely random testing and affixing of preprinted labells would therefore not amount to manufacture. In this connection, he points out that random testing done has not led to rejection of any lot. He also submits that use of the Sensitometer for testing the sensitivity of the product has no real value as the sensitivity has already been finalised when the jumbo rolls themselves were manufactured and no [new] process would be available to recondition the same.
7. We have carefully considered the rival submissions and records of the case and we find as follows :-
(a) It is not disputed that the procedure under Rule 57F (3)/(4) was followed. (b) It is not disputed that this credit has been rightly used for payment of duty when the final packed and labelled films were cleared from the factory gate. (c) Only what is in dispute is whether the testing of sensitivity randomly and of labelling the products before they are cleared constitutes manufacture or not. In this connection, we find that the only test to be applied as the case stands today is that whether such operations would be necessary to make the goods marketable or not. We are of the view that quality control is an important facet of manufacturing activity where the goods manufactured are of sensitive nature which cannot be even exposed to sunlight. Merely because the test results of the said quality control showed that there was no rejection, that by itself would not lead to the logical conclusion that such testings were not required at all. At best, the only conclusion would be high quality of the job work done by the job worker. Further, the goods are such that a customer who has to buy them cannot open them in sunlight to see what it inside. Therefore, in this context, the label affixed on the container declaring the technical specifications of the unexposed cinematographic film contained inside becomes absolutely necessary before the same could be marketed.
8. We also find great force in the submission of ld. Advocate that Rule 57F(3)/(4) allows removal of the manufactured goods from the job worker’s premises. Therefore, if the goods were brought back to the appellants factory and were then cleared on payment of duty after testing and labelling, then Revenue only gains as the assessable value increases due to the value addition by such operations.
9. Under these circumstances, we find that both testing and lebelling of the goods were procedure which were incidental and ancillary to the completion of the manufacture of these films because without such operations, they would not be capable of being marketed or sold. Hence, we find that procedure followed by appellants is correct in law and the order impugned is set aside. The appeal is allowed with consequential relief, if any, as per law.