Full Judgment
2. The brief facts of the case are that the respondents herein who are holders of Central Excise Licence to manufacture S.O. dyes falling under the erstwhile Tariff Item 14D and under Heading 32.04 of the CETA, 1985, also bring dyes from outside and carry out the process of mixing one dye with one or more other dyes and also mix the duty paid bought out dyes with diluents such as Glauber's salt, soda ash, dextrine etc., and then sell such dyes under their brand name. The Assistant Collector of Central Excise classified such dyes under sub-heading 3204.29 and ordered that they are chargeable to duty at appropriate rate on the ground that the process of conversion of concentrated dyes into standardised/prepared form ready for use is a process of manufacture. The lower appellate authority accepted the contention of the respondents (based upon the documentary evidence in the form of gate passes for the relevant period) that the dyes purchased by the respondents were standardised/formulated/prepared dyes which had been converted to reformulated dyes by addition of diluents and, therefore, conversion of such dyes would not amount to manufacture. Hence this appeal by the Revenue.
3. We have heard Shri A.K. Agarwal, learned SDR and Shri S.N. Sejpal, learned Advocate.
4. From the records, it is seen that the following operations are performed by the respondents in their factory: (a) Repacking duty paid dyes and sale to customers after affixing their own labels.
(b) Mixing/grinding/pulverising of duty paid formulated standardised/prepared dyes and addition of mixing materials such as Glauber's salt, soda ash, dextrine, etc.
In the present case, we are only concerned with the operations as set out in (b) above. In support of their contention of purchase of formulated/standardised/prepared form of S.O. dyes, the respondents had produced gate passes before the lower appellate authority who has enumerated some examples viz. GP-I No. 109, dated 12-9-1986, GP-I No.161, dated 24-1-1987, in the impugned order. Both these gate passes indicate payment of duty by their manufacturer/supplier under sub-heading 3204.29 which covers S.O. dyes other than prepared/standardised/formulated. Since Note 6 to Chapter 32 applies in relation to S.O. dyes (including pigment dyes) of Heading 32.04 only to conversion of unformulated, unstandardised or unprepared forms viz.
(wet cakes) of such dyes of (a) reduction in particle size (b) addition of dispersal of gas or diluents or (c) adoption of any other treatment into formulated/standardised/prepared forms ready for use in the process of dyeing, the lower appellate authority has rightly held that Note 6 to Chapter 32 does not cover reformulations out of formulated S.O. dyes. He has relied upon Trade Notice 48 (MP)/Synthetic Organic Dyes (1)/86, dated 14th July, 1986 containing clarifi -cation to the same effect. Further the Revenue has not been able to substantiate its case that the conversion of already formulated/prepared/standardised S.O. Dyes by mixing/grinding/adding of diluents into reformulations results in . emergence of a distinct commercial commodity having a name, character and use different from the raw material. In the light of the above discussion, we see no reason to interfere with the impugned order and accordingly uphold the same and reject the appeal as unsubstantiated.
5. While I broadly agree with my learned Colleague, however I would like to elaborate and observe as follows.
6. Learned Departmental Representative drew attention towards the order-in-original and in particular to the following observations of the Assistant Collector :- "From the process mentioned above and the percentage of diluents added, there is no doubt that the unstandardised (concentrated) dyes not ready for use are purchased by M/s. S.K. Kabbur Pvt. Ltd. from the market for conversion into standardised or prepared forms ready for use and this process amounts to manufacture as laid down in the Note 6 of Chapter No. 32. Diluents etc., are used to decrease or standardise their colouring power.
As regards applicability of the Bombay-I Collectorate's Trade Notice No. 48 (MP)/Synthetic Organic Dyes (1)/86, dated 14-7-1986, it is stated that such process are undertaken by the Textile Mills etc. in the preparation of Dye Batch which are basically in relation to the use of such dyes by the actual user.
They do not merely add the diluents but after completion of manufacturing process with the aid of power assign batch no./new shade no. and also their own brand name and market the dyes as their distinct product. Therefore, the clarification in the Trade Notice is not applicable to them." 7. It was the Department's contention that mixing the concentrated S.O.Dyes brought from the market with chemicals, Glauber's Salt or dextrine for the purpose of dilution and changing the original formulation/size by mixing, grinding and pulverising certainly amounts to manufacture since a different product comes out than the one brought from the market. The point of dispute is what is unformulated/unprepared/unstandardised form of S.O.Dyes, since the conversion of unformulated/unprepared/unstandardised form of S.O. Dyes into formulated/standardised or in prepared form ready for use certainly amounts to manufacture as the Note 5 of Chapter 32 only speaks about wet cake as an example is termed as unformulated/unprepared/unstandardised form of S.O. Dyes. In this case process involved is not a chemical one but it involved physical change in particle size or dilution of the S.O. Dyes by addition of chemicals and diluents. This conversion of unformulated/unprepared/unstandardised S.O. Dyes into formulated/standardised/prepared S.O. Dyes in ready for use form amounts to manufacture.
8. It was also his submission that Heading No. 32.04 covers synthetic organic colouring matter and a preparation based on synthetic organic colouring matter as a new product emerges by change in the particle size, strength of the dyes and make it ready for use. In this case, by adding chemicals and other ingredients to the concentrated S.O. Dyes, a product known as formulated S.O. Dyes are being manufactured, which are ready for use, after reduction of strength and change in the colour (dye) of the original dyes brought from market. In this case, what is known in the market is formulated/prepared/ standardised S.O. Dyes. The concentrated S.O. Dyes purchased by the respondents cannot become saturated/prepared dyes unless and until some process of manufacture is carried out. As such reduction in strength of con-centrated/unformated S.O. Dyes into formulated/standardised S.O. Dyes, as known in the market is certainly a process of manufacture, under Section 2(f).
Hence, it is correctly classifiable under sub-heading 3204.29 and chargeable to duty at appropriate rate.
9. Learned Counsel has opposed the department's prayer and stated that in this connection, he would like to mention that the same issue had initially arisen in 1985 and was decided in favour of the respondents by the then A.C. vide his adjudication Order No. F-H/24/85, dated 25-4-1985 in which he had recorded his findings as follows :- "The basic issue to be decided in the instant case is whether for the purpose of computation of value of clearances in terms of Notification No. 44/82, the value of the goods cleared from the duty paid premises of the assessee after subsequent mixing and blending can be taken into account or otherwise as the notification has a provision that the aggregate value of clearances from any factory by or on behalf of one or more manufacturers at the reduced rate of duty under this notification shall not exceed Rs. 15 lakhs in any financial year." "Now the point to be examined whether the goods cleared from the duty paid premises after mixing with other S.O. Dyes and further blending can be termed as excisable goods for purpose of computing the value of the clearances in terms of aforesaid notification. The activities of the assessee of mixing/diluting dyes from duty paid dyes has been within the knowledge of the department which cannot be denied inasmuch as it is on record that specific permission was granted to them for segregation the said premises from their original licenced premises." "Apart from this the said activity including diluting dyes from duty paid dyes has not yet attracted levy of excise duty within the ambit of Central Excise Law." "As such the diluted dyes manufactured by the assessee from the duty paid dyes in their duty paid premises cannot be termed as excisable goods." "Moreover, diluted S.O. Dyes made from duty paid dyes does not bring into existence a distinct product." "In view of the facts of the case discussed above, I hereby set aside the demand." 10. Again, in 1986, in response to their enquiries from the department, the A.C. DN. F-II, Bombay-I, informed them vide his letter dated 25-7-1986, inter-alia, as follows :- "This has reference to your personal enquiries with the undersigned in regard to the exdsability of the formulated and standardised S.O. Dyes. I have to communicate you and clarify the excisability as under :- As per Note 6 Chapter 32 of the New Central Excise Tariff Act, 1985, conversion of unformulated/unstandardised dyes and unprepared forms of S.O. Dyes into formulated/standardised or prepared forms ready for use in the process of dyeing could amount to 'manufacture'. To determine whether a particular process would amount to manufacture or otherwise it is to be seen whether the said process is really manufacture of dyes in the light of the Chapter Note as above. Mere repacking and/or relabelling of duty paid S.O. Dyes would not amount to manufacture. Similarly, addition of Glauber's salt, dextrine, soda ash and/or other chemicals or mixing of two or more formulated/standardised/prepared dyes, undertaken in the preparation of dye [both] for dyeing or printing purpose would not amount to 'manufacture'.
However, before deciding on the said lines, it should be ensured that the aforesaid process are undertaken on 11. Inspite of it all, the department had once again raked up the issue and issued the show cause notice dated 6-5-1992 on the basis of the impugned order passed in 1988 in spite of the fact that the same had been set aside by-Collector (Appeals) vide his order dated 27-3-1989.
It only goes to show how the respondents are being harassed. In the order dated 7-l-1988 the A.C. has held that the activity undertaken for conversion of concentrated dyes etc. not ready for use into formulated or standardised or prepared forms ready for use amounts to 'manufacture' but, learned Collector (Appeals) had observed, inter--alia, as follows :- "In view of the overwhelming evidence adduced by the appellant, the Asstt. Collector's case does not have any merit. He comes to the abrupt conclusion that the appellant do not merely add the diluents but after completion of manufacturing process with the aid of power assign batch number/new shade number and also their own brand name and market the dyes as their distinct product. This is not the issue before the Asstt. Collector. What is to be decided is whether the appellants are using as raw material formulated/standardised or prepared forms of synthetic organic dyes and whether the conversion of such dyes either by repacking or addition of mere diluents would amount to manufacture. The Asstt. Collector has failed to make his case on this vital issue. The appellants have approved that they have been bringing in formulated dyes which are ready for use and therefore in terms of Note 6 to Chapter 32, the conversion of such dyes would not amount to manufacture. The repacking of dyes, affixing their own brand name, assigning of batch number/new shade number, etc. would not constitute in itself a process of manufacture in view of the Note 6 to Chapter 32 of the schedule to the Central Excise Tariff Act, 1985." 12. I have considered the above submissions. I observe that it was incorrect on the part of the department to go on issuing show cause notices even after their own A.C. in the first instance had set aside the demand in 1985 and subsequently in 1986 yet another A.C. had also informed them that the process undertaken by them would not amount to manufacture and had advised the Supdt. to take the assistance of Dy.
Chief Chemist to ascertain the nature of process. Thereafter, the order passed by the A.C. in 1988 had been set aside by Collector (Appeals) vide his order dated 27-3-1989 and unless this order was stayed or modified, it was not open to the department to issue a further show cause notice on the same issue. On the contrary, it was bound to comply with the order of Collector (Appeals). It may also be mentioned that the order of Collector (Appeals) dated 27-3-1989 against which the department has now come up in appeal had also taken note of the earlier A.C.'s order dated 25/27-4-1985 by which the entire issue had already been examined. It is also surprising that inspite of a decision to take the advice of Dy. Chief Chemist, there is no reference to any chemical test report in the A.C.'s order and the respondents had mentioned that no chemical test had actually been undertaken and the reasons for the same have remained unexplained. Since the learned Collector has stated that sufficient evidence had been produced before him to his satisfaction by the respondents and the department has not shown that this observation of the Collector was incorrect in any manner and also not produced any evidence to the contrary, there is no reason to disbelieve or dislodge the Collector's finding that the respondents are bringing from market standard/prepared forms of synthetic organic dyes and thereafter, subjecting them to the processes already mentioned above in the nature of mixing certain materials to take care of different shades and other requirements of the customers, and are thereafter repacking them, affixing their own label and selling them to consumers. And I entirely agree with the conclusion arrived at by my learned Colleague that the department's case has remained unsubstantiated.
13. I, therefore, see no reason to interfere with the order passed by learned Collector (Appeals). I would also like to mention en-passe that it was neither fair nor proper for the field authorities to rake up the same issue again and again and cause avoidable inconvenience etc. to all concerned. The Department's appeals are, therefore, rejected as unsubstantiated, as already announted in the open court.