PROCESS AMOUNTING TO MANUFACTURE OR PRODUCTION OF GOODS

[Dr. Sanjiv Agarwal]

Meaning

"process amounting to manufacture or production of goods" means a process on which duties of excise are leviable under section 3 of the Central Excise Act, 1944 or any process amounting to manufacture of alcoholic liquors for human consumption, opium, Indian hemp and other narcotic drugs and narcotics on which duties of excise are leviable under any State Act for the time being in force (Clause 40of section 65B as inserted by Finance Bill, 2012)

Earlier, there was no such definition but ‘manufacture’ was defined to mean the same as per section 2(f) of Central Excise Act, 1944.

The definition applies to any process which amounts to both, manufacture of goods or production of goods which implies that there will be difference between ‘production’ and ‘processing’ and both are used in juxtaposition.

It implies –

a)      any process

b)      process a which excise duty is tenable under section 3 of Central Excise Act, 1944, or

c)      any process amounting to manufacture of alcoholic liquor meant for humor consumption / opium / Indian hemp / other narcotic drugs.

d)      any process amounting to manufacture of narcotic on which excise duty is leviable under any State Act.

According to TRU clarification dated 16.03.2012, the phrase ‘processes amounting to manufacture or production of goods’ has been defined in section 65B of the Act as a process on which duties of excise are leviable under section 3 of the Central Excise Act, 1944 (1 of 1944) or any process amounting to manufacture of alcoholic liquors for human consumption, opium, Indian hemp and other narcotic drugs and narcotics on which duties of excise are leviable under any State Act. This entry, therefore, covers manufacturing activity carried out on contract or job work basis provided duties of excise are leviable on such processes under the Central Excise Act, 1944 or any of the State Acts.

Service tax would be levied on processes, unless otherwise specified in the negative list, not amounting to manufacture or production of goods carried out by a person for another for consideration. Some of such services relating to processes not amounting to manufacture are exempt under Notification No. 12/2012-ST dated 17.03.2012.

If Central Excise duty is leviable on a particular process as the same amounts to manufacture then such process would be covered in the negative list even if there is a central excise duty exemption for such process.

Section 3 of Central Excise Act, 1944 reads as follows –

“Duties specified in First Schedule and the Second Schedule to the Central Excise Tariff Act, 1985 to be levied. —

(1) There shall be levied and collected in such manner as may be prescribed, -

(a)a duty of excise to be called the Central Value Added Tax (CENVAT)] on all excisable goods (excluding goods produced or manufactured in special economic zones) which are produced or  manufactured in India as, and at the rates, set forth in the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986);

(b) a special duty of excise, in addition to the duty of excise specified in clause (a) above, on excisable goods excluding goods produced or manufactured in special economic zones specified in the Second Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) which are produced or manufactured in India, as, and at the rates, set forth in the said Second Schedule.

Provided that the duties of excise which shall be levied and collected on any excisable goods which are produced or manufactured, -

(i)  Omitted.

(ii) by a hundred per cent export-oriented undertaking and brought to any other place in India, shall be an amount equal to the aggregate of the duties of customs which would be leviable under  the Customs Act, 1962 (52 of 1962) or any other law for the time being in force, on like goods produced or manufactured outside India if imported into India, and where the said duties of customs are chargeable by reference to their value; the value of such excisable goods shall, notwithstanding anything contained in any other provision of this Act, be determined in accordance with the provisions of the Customs Act, 1962 (52 of 1962) and the Customs Tariff Act, 1975 (51 of 1975).

Explanation 1. — Where in respect of any such like goods, any duty of customs leviable for the time being in force is leviable at different rates, then, such duty shall, for the purposes of this proviso, be deemed to be leviable at the highest of those rates.

Explanation 2. — In this proviso, -

(i)     Omitted.

 (ii)  “hundred per cent export-oriented undertaking” means an undertaking which has been approved as a hundred per cent export-oriented undertaking by the Board appointed in this behalf by the Central Government in exercise of the powers conferred by section 14 of the Industries (Development and Regulation) Act, 1951 (65 of 1951), and the rules made under that Act.;

(iii)  “Special Economic Zone” has the meaning assigned to it in clause (za) of section 2 of the Special Economic Zones Act, 2005 (28 of 2005).

(1A) The provisions of sub-section (1) shall apply in respect of all excisable goods other than salt which are produced or manufactured inIndiaby,  or on behalf of, Government, as they apply in respect of goods which are not produced or manufactured by Government.

(2) The Central Government may, by notification in the Official Gazette, fix, for the purpose of levying the said duties, tariff values of any articles enumerated, either specifically or under general headings, in the First Schedule and the Second Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) as chargeable with duty ad valorem and may alter any tariff values for the time being in force.

(3)  Different tariff values may be fixed -

(a)  for different classes or descriptions of the same excisable goods; or

(b)  for excisable goods of the same class or description –

      (i)    produced or manufactured by different classes of producers or manufacturers; or

      (ii)   sold to different classes of buyers :

  Provided that in fixing different tariff values in respect of excisable goods falling under sub-clause (i) or sub-clause (ii), regard shall be had to the sale prices charged by the different classes of producers or manufacturers or, as the case may be, the normal practice of the wholesale trade in such goods”.

To attract excise duty under section 3 of the Central Excise Act, the article must satisfy the twin attributes of excisable goods- mobility and marketability – or it should find a place by that name in the Schedule to the Act; Commissioner of Central Excise, Mumbai v Josts Engineering Co. Ltd 2002 -TMI - 46354 – (SUPREME COURT OF INDIA).

The expression duty of excise is limited in its connotation only to basic duty of excise levied under the Act or it also covers special duty of excise levied under various Finance Bills and Acts, additional duty of excise levied under the Additional Duty of Excise (Goods of Special Importance) Act, 1957 and any other kind of duty of excise levied under a central enactment; Union of India v Modi Rubber Limited, (1986) 3 SCJ 447.

Prior to Finance Act, 2012 amendment, ‘production or processing of goods for, or on behalf of, client, was taxable under clause (v) of section 65(19) under business auxiliary services.

Manufacture also gets explained by some judicial decisions. In Union of India v. Parle Products 1993 -TMI - 43858 – (SUPREME COURT OF INDIA), it was held that processes could not amount to manufacture unless at the end of it a commercially new and distinct article emerges. Supreme Court in Union of India v. DCM 1977 (l) ELT J199 observed that manufacture used as a verb means to bring into existence a new substance and does not mean merely to produce some change in a substance. In other words, the produce which arises out of the process must be commercially a distinct commodity different from that out of which it is processed. Whether or not something results in manufacture would depend on the facts of the case. It is well settled that a question as to when a manufacture of product takes place within the meaning of Section 2(f) of the Act is a mixed question of law and fact. The nature and the extent of processes may vary from case to case. When a change takes place and a new and distinct article comes into existence known to the consumers and the commercial community as a commercial product, which can be no longer regarded as the original commodity, such a change constitutes manufacture.

Processing of Goods and Production

Mere processing of goods cannot be called as production of goods. There should be a new identifiable goods must be come into existence to say that production has taken place. This processing work will be amount to production only if a new and identifiable product comes into existence. However the manufacture is exempted from Service Tax net hence it is assumed that the intermediary process in relation to manufacture will be covered.

If the service provider undertaking any activity in relation to production and the following tests are satisfied, then it will qualify for the production-

• The activity should amount to  production or manufacture.

• The service provider shall be engaged in any process of the production.

• The activity has to be undertaken on behalf of / for another person (the client.)

Following points may also be noted in relation to processing and production —

• Mere processing of goods is not production of goods

• If new identifiable goods come into existence, then it can be called as production

• Processing would lead to production of new and identifiable product comes into existence

• Processing may be an activity in relation to production

• For taxability, processing should not lead to manufacture.

Processing and Manufacture

In Kores India Ltd v. CCE, Chennai 2004 -TMI - 47076 – (SUPREME COURT OF INDIA), it was held that 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 takes the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognized as a new and distinct article that a manufacture can be said to take place. Process in manufacture or in relation to manufacture implies not only the production but also 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 (sic that the) 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 processing of goods would be impossible or commercially inexpedient, that process is one in relation to the manufacture. [See Collector of Central Excise, Jaipur v. Rajasthan State Chemical Works, Deedwana, Rajasthan 1991 -TMI - 42997 – (SUPREME COURT OF INDIA)].

The distinction between ‘manufactured’ and ‘processed’ may not in all situation depend upon the nature of the Statue involved. It must pass the requisite test, namely, as to whether it is a completely new item. Raw material of a manufactured product has to be distinguished from the manufactured product. The distinction between ‘processing’ and ‘manufacturing’ is well known. When a new thing comes into being, the steps which are taken for manufacture may be relevant but may not be decisive. [See Commissioner of Central Excise, Tamil Nadu Vinayaga Body Building Industries Ltd. [(2008) 3 see 666].

In CCE v. Karam Chand (2009) 2008 -TMI - 48374 – (HIGH COURT OF HIMACHAL PRADESH AT SHIMLA), it was held that mere processing of goods is not manufacture and to fall within the definition of manufacture, a new substance should be formed. When a concentrate is diluted and packaged under a different name, there is no new substance created.

 

= = = = = = = =