Per Shri Justice R.M.S. Khandeparkar:
Heard the learned SDR and the learned Advocate for the appellant and the respondent respectively.
2. The present appeal arises from the order dated 27th December, 2004 passed by the Commissioner (Appeals), Delhi. By the impugned order, the Commissioner (Appeals) allowed the appeal filed by the respondents against the order of the adjudicating authority and quashed the proceedings which were sought to be initiated by issuance of three show cause notices dated 2.2.99, 29.6.99 as well as 23.3.99. The adjudicating authority vide its order dated 10.9.99 had denied the benefit of exemption Notification No.167/86 dated 1.3.86 to the respondents and had confirmed the demand of Rs.1,23,552/- and had imposed penalty of Rs.50,000/-.
3. The respondents are engaged in the manufacture of Essential oil (Tarpenless or not) classifiable under Chapter heading 3301.00 of the Central Excise Tariff Act, 1985. They had been availing the modvat credit facility under Rule 57A of the Central Excise Rules, 1944. The respondents filed declaration under Rule 173B of the Central Excise Rules, 1944 to be effective from 3.8.98 in respect of the said goods claiming the benefit of the Notification No.167/86 dated 1.3.86 on the ground that no processes in relation to the manufacture of the said goods would be carried out with the aid of power. The respondents filed another declaration under Rule 173B of the said Rules to be effective from 1.9.98 declaring the goods, namely, natural essential oil concentrates and absolales resionoid, for terpenic bi-products of determination of essential oils aqueous distillation and aquous solution of essential oils and claimed the slab exemption under Notification No.9/98-CE dated 2.6.98. Pursuant to the second declaration, investigation was carried out and it was revealed that electric power was being actually used in the process of manufacture of the said product and therefore, the said show cause notices came to be issued. The same were contested by the respondents without success. The adjudicating authority confirmed the demand as stated above and imposed penalty. Being aggrieved, the respondents filed appeal before Commissioner (Appeals) which was allowed by the impugned order.
4. The adjudicating authority relying upon the decision of the decision of the Apex Court in the matter of Collector of Central Excise vs. Rajasthan State Chemical Works reported in 1991 (55) ELT 444 held that since the use of power in lifting and shifting of the raw materials has been held to amount to manufacture with the aid of power and as the manufacturing process of the product by the respondents includes the use of water drawn with the aid of power, the respondents were not entitled for the benefit of the exemption under the said Notification.
5. The Commissioner (Appeals), however, held that the process regarding drawing, lifting and shifting of water are the process prior to starting of the manufacturing process of the essential oils and obtaining and processing of water cannot be said to be any process incidental or ancillary to the manufacture of essential oils. Hence the respondents are entitled the for the benefit under the said Notification
6. Learned SDR drawing our attention to the manufacturing process in relation to the product in question and use of power during the process of manufacture as noted by the adjudicating authority submitted that electric power is used at three stages of the process of manufacture of the product in question and considering the same and relying upon the decision of the Supreme Court, the respondents were not entitled for the benefit of the said notification.
7. Learned Advocate on the other hand, submitted that the Commissioner (Appeals) having correctly construed the process of manufacture of the product in question and having observed that the process regarding drawing, lifting and shifting of water being prior to the commencement of such process, no fault can be found with the impugned order and therefore, the Commissioner (Appeals) has rightly granted the benefit of the said notification to the respondents. He also submitted that in the facts and circumstances of the case, there was absolutely no justification for imposition of penalty.
8. As rightly submitted on behalf of the appellant that the adjudicating authority in his order, on the basis of analysis of the materials on record has clearly observed that electric power was being used at three different stages in the manufacturing process - (i) the unit use deep bore tube well water which as pulled out of the ground with the help of electric water pumps (ii) to lift the water to highrise water treatment plant with the help of set of booster pump; and (iii) the boiler is fitted with an automatic pressure gauge, which automatically starts the electric motors whenever there is a decrease in the pressure/water level in the boiler during the process of generation of steam.
9. The Commissioner (Appeals) while describing the process of manufacture of the product has observed that the electric power is used by the respondents for drawing out water from the tube well and lifting the same to a high rise water treatment plant. The treated water is thereafter filled in the boiler with the help of electric motors. Thereafter, it has been observed by the Commissioner (Appeals) that The process of manufacture of essential oil starts with generation of steam by firing the husk in the boiler. Having so observed, the Commissioner (Appeals) has held that the process regarding drawing, lifting and shifting of water are the processes prior to starting of the manufacturing process of the essential oils. Apparently, the Commissioner (Appeals) has failed to take note of the use of power in the process of generation of steam which was clearly noted by the adjudicating authority while observing that boiler is fitted with an automatic pressure guage, which automatically starts the electric motor whenever there is a decrease in the pressure/water level in the boiler during the process of generation of steam. In the entire order of the Commissioner (Appeals), the said finding of the adjudicating authority has neither been disturbed nor there was any challenge to the said finding by the respondents when the matter was brought in appeal before the Commissioner (Appeals). Even in the process of hearing before us, it has not been pointed out that the said finding was either perverse or contrary to the materials on record. Apparently, therefore, it cannot be said that no process in relation to the manufacture of the said product is carried out without any aid of power. Rather, the process of generation of steam itself is carried out with the aid of power and with the help of pressure gauge which functions with the aid of power. The generation of steam obviously depends upon the contents of water in the boiler as water level being maintained with the help of pressure gauge which functions with the help of electric power. It cannot be said that the entire process of the said manufacture is without the aid of power.
10. The finding arrived at by the Commissioner (Appeals) on the process regarding lifting, shifting and drawing of water are the processes prior to starting of the manufacturing process of the essential oils is not borne out from the record. Rather, it is contrary to the materials on record.
11. The Apex Court in J.K. Cotton Spg. and Wvg. Mills Co. Ltd. vs. Sales Tax Officer, Kanpur reported in 1997 (91) ELT 34 while dealing with the expression in relation to manufacture had held that In our judgment if a process or activity is so integrally related to the ultimate manufacture of goods so that without that process or activity manufacture may, even if theoretically possible, by commercially inexpedient goods the activity thus so conducted would be one in relation to the manufacture. Generation of steam without the presence of water in the boiler is unimaginable. In other words, in order to generate steam the presence of water in the boiler is absolutely necessary and without generation of the steam, there cannot be manufacture of essential oils, the product in question. Being so, the presence of water and the activity which is necessary to heat water in the boiler was being integrally related to the process in relation to the manufacture of the said product. Being so, such process being involved in the matter, the benefit of the Notification No.167/86-CE dated 1.3.86 cannot be said to be available to the respondents. The said Notification reads thus-
“Notification: 167/86-CE, dated 01-Mar- 1986
Specified goods
In exercise of the powers conferred by sub-rule (1) of rule 8 of the Central Excise Rules, 1944, the Central Government hereby exempts goods of the description specified in column (2) of the Table hereto annexed and falling under the Schedule to the Central Excise Tariff Act, 1985 (5 of 1986), from the whole of the duty of excise leviable thereon which is specified in the said Schedule :
Provided that no process in or in relation to the manufacture of the said goods is ordinarily carried on with the aid of power :
Provided further that the exemption contained in this notification shall not apply to sandalwood oil.
THE TABLE
S. No.
Description of goods
(1)
(2)
1.
All goods falling within Chapters 14, 71, 89 and 92.
2.
All goods falling under Heading Nos. 30.01, 32.03, 33.01, 33.03, 36.02, 44.01, 44.02, 44.03, 44.04, 44.05, 46.01, 51.05, 62.02, 69.01, 69.02, 69.03, 69.04, 69.05, 83.01, 83.15, 95.01, 95.02, 95.03, 95.05, 95.06, 95.07 and 95.08.
[Notification No. 167/86-C.E., dated 1-3-1986]
12. The Apex Court in Collector of Central Excise vs. Rajasthan State Chemical Works reported in 1991 (55) ELT 444 after taking note of the definition of the term manufacture has observed as under:-
“10. Clause (f) gives an inclusive definition of the? term `manufacture. According to the dictionary, the term `manufacture means a process which results in an alteration or change in the goods which are subjected to the process of manufacturing leading to the production of a commercially new article. In determining what constitutes `manufacture no hard and fast rule can be applied and each case must be decided on its own facts having regard to the context in which the term is used in the provision under consideration.
11. Manufacture implies a change but every change is? not manufacture, yet every change of an article is the result of treatment, labour and manipulation. Naturally, manufacture is the end-result of one or more processes through which the original commodities are made to pass. The nature and extent of processing may vary from one class to another. There may be several stages of processing, a different kind of processing at each stage. With each process suffered the original commodity experiences a change. Whenever a commodity undergoes a change as a result of some operation performed on it or in regard to it, such operation would amount to processing of the commodity. 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.
12. Manufacture thus involves series of processes.? Process in manufacture or in relation to manufacture implies not only the production but the various stages through which the raw material is subjected to change by different operations. It is the cumulative effect of the various processes to which the raw material is subjected to, manufactured product emerges. Therefore, each step towards such production would be a process in relation to the manufacture. Where any particular process is so integrally connected with the ultimate production of goods that but for that process manufacture or processing of goods would be impossible or commercially inexpedient, that process is one in relation to the manufacture.
13. The natural meaning of the word `process’ is a? mode of treatment of certain materials in order to produce a good result, a species of activity performed on the subject-matter in order to transform or reduce it to a certain stage. According to Oxford Dictionary one of the meanings of the word `process’ is a continuous and regular action or succession of actions taking place or carried on in a definite manner and leading to the accomplishment of some result. The activity contemplated by the definition is perfectly general requiring only the continuous or quick succession. It is not one of the requisites that the activity should involve some operation on some material in order to its conversion to some particular stage. There is nothing in the natural meaning of the word `process to exclude its application to handling. There may be a process which consists only in handling and there may be a process which involves no handling or not merely handling but use or also use. It may be a process involving the handling of the material and it need not be a process involving the use of material. The activity may be subordinate but one in relation to the further process of manufacture”.
13. Further, after taking note of the decision of the Apex Court in the matter of M/s J.K. Cotton Spinning and Weaving Mills Co. Ltd. vs. Sales Tax Officer, Kanpur and another reported in 1965 (1) SCR 900, it was observed that the assessee in the said case was carrying on the business of manufacturing textile goods and had claimed that certain goods namely, drawing material etc. were used in the manufacture. The Apex Court had held that if the process of designing is so intimately connected with the process of manufacture of cloth, there is no reason to regard the process of designing as not being a part of the process of manufacture. The process of designing may be distinct from the actual process of turning out finished goods. But there is no warrant for limiting the meaning of the expression in the manufacture of goods to the process of production of goods only. The expression in the manufacture takes in within its compass, all processes which are directly related to the actual production.
14. After referring to the decision of the Apex Court in the case of Union of India vs. Delhi Cloth and General Mills Co. Ltd. reported in 1977 (1) ELT J 199, the Apex Court observed that the definition of the word manufacture as in Section 2(f) puts it beyond any possibility of controversy that if power is used for any of the numerous processes that are required to turn the raw material into a finished article known to the market it would be the case where in or in relation to the manufacture of which any process is ordinarily carried on with the aid of power. What is necessary in order to characterize operation as processing is that commodity must result in operation and experience some change. This act of operation on the commodity is material for the purpose of determining whether the operation constitutes processing. Having so observed it was also held by the Apex Court -
“16. Webster defines the word goods thus :-
“goods, noun, plural; (1) movables; household furniture; (2) Personal or movable estate, as horses, cattle, utensils, etc., (3) Wares; merchandise; commodities bought and sold by merchants and traders.”
17. These definitions make it clear that to become? goods an article must be something which can ordinarily come to the market to be bought and sold”.
Ultimately, it was ruled by the Apex Court -
“21. We are therefore of opinion that the High Court? was right in its conclusion that there was no legal basis for the demands of excise duty which were made on the petitioners and in directing the authorities to withdraw these demands.
22. The appeals are accordingly dismissed with?costs, one set of hearing fee”.
15. Now, the law on the point has been laid down by the Apex Court in the above referred decision. The adjudicating authority had correctly appreciated the same and had applied to the facts of the case. The Commissioner (Appeals) totally erred in ignoring the said decision and granting benefit of the said exemption under the notification, hence the impugned order cannot be sustained and is liable to be set aside.
16. The learned Advocate for the appellants however, is justified in contending that the matter relates to the interpretation and therefore, there was no justification for imposition of penalty.
17. Hence the appeal partly succeeds. The same is allowed to the extent of Commissioner (Appeals) granting the benefit of the said notification. It is held that the respondents are not entitled for the benefit under the Notification No.167/86-CE dated 1.3.86, however, the respondents are not liable to be subjected to any penalty. While allowing the appeal by setting aside the impugned order and restoring the order passed by the adjudicating authority, the order relating to the penalty is hereby set aside. The appeal accordingly stands disposed of.