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2015 (5) TMI 292 - SUPREME COURT

2015 (5) TMI 292 - SUPREME COURT - 2015 (319) E.L.T. 578 (SC) - Manufacture - process of sterilization of medical equipments - change in the character of the final product - Revenue assumed that the activity is in the nature of manufacturing activity since new marketable commodity emerged and three is enhancement in value - held that:- This is a case of manufacture of disposable syringes and needles which are used for medical purposes. These syringes and needles, like in the J.G. Glass case and .....

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nt has suffered a process which amounts to manufacture in which case excise duty would be liable to be paid on such instruments five times over on any given day of use. Further, what is to be remembered here is that the disposable syringe and needle in question is a finished product in itself. Sterilization does not lead to any value addition in the said product. All that the process of sterilization does is to remove bacteria which settles on the syringe's and needle's surface, which process do .....

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retains its essential character as such even after sterilization. - Decided in favour of assessee. - Civil Appeal No. 583 of 2005 - Dated:- 7-5-2015 - A. K. Sikri And R. F. Nariman,JJ. For the Petitioner : Mr. Rajesh Kumar JUDGMENT R. F. Nariman,J. 1. Between June 1995 and March 1997, the appellants purchased syringes and needles in bulk from the open market. They would then sterilize the syringes and the needles and put one syringe and one needle in an unassembled form in a printed plastic pou .....

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hands of their manufacturers), be made to pay excise duty again as a result of sterilization. The show cause notice alleged that sterilization brings about a change in the character of the final product, which now becomes disposable syringes and needles. Therefore, a new commodity having a different character has come into existence. In their reply to the show cause notice dated 1.10.1996, the petitioners claimed that the activity of sterilization would not amount to manufacture. They said that .....

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ntegral and inextricable part of the manufacturing process to make the product marketable. It was further held that the process of sterilization brings about a transformation of the product by making something non-sterile sterile. 4. By his order dated 25.2.1999, the Commissioner of Central Excise (Appeals) set aside the said order, reasoning that the process of sterilization does not bring about any change in the basic structure of syringes and needles even though post-sterilization the value o .....

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was brought and which emerged has changed. While the goods brought were not fit for use on Humans Medical Needles as made were not usable till sterilized. The commercial identity nature use and understanding has changed, manufacturing has taken place, excise levy is attracted." 6. Shri Lakshmikumaran, learned advocate appearing on behalf of the appellant has argued before us that the judgment of the Tribunal is wrong on first principles. The Tribunal has failed to appreciate that a disposa .....

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d said that it was clear that the articles in question could not be used commercially until a process of sterilization had been undergone. This being so, it is clear that the process of sterilization is an important integrated and/or ancillary process without which the end product had no commercial use and, therefore, applying the said test, it is clear that the process of sterilization leads to manufacture. She cited a number of judgments which we will refer to presently. 8. Regard being had to .....

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om sale-ability. Manufacture takes place on the application of one or more processes. Each process may lead to a change in the goods, but every change does not amount to manufacture. There must be something more - there must be a transformation by which something new and different comes into being, that is, there must now emerge an article which has a distinctive name, character or use. When transformation does not take place. 10. When a finished product cannot conveniently be used in the form i .....

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ins, facial tissues and toilet rolls. This Court held that there was no manufacture as the character and the end use of the tissue paper in the jumbo roll and the tissue paper in the table napkin, facial tissue and toilet roll remains the same. 11. Another example of when transformation does not take place is when foreign matter is removed from an article or additions are made to the article to preserve it or increase its shelf life. 12. In MMTC v. Union of India, 1983 (13) E.L.T. 1542 (S.C.), t .....

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rocesses for removal of impurities therefrom, is again made usable as transformer oil. Both before and after the said processes, transformer oil remained as transformer oil. That being so, it was held that no new and distinct commodity has come into existence consequent to the process undertaken. The test for determining whether manufacture can be said to have taken place is whether the commodity which is subjected to the process of manufacture can no longer be regarded as the original commodity .....

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Union of India, 1995 (75) ELT 35 (S.C.), soap treatment of grey cotton duck/canvas was held not to be a process which amounted to manufacture. The judgment states: "3. The process has been described in the impugned order in the following words - For processing on soap treatment the party uses soaps/soap flakes which are diluted in plain water in a tank. This solution is transferred to a Soaping Machine operated by power where different colours are added. The fabrics are then dipped in the s .....

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a manufacturing process. We find that the Central Government itself, in another matter relating to M/s. Premier Tyres Ltd. has passed an Order on 17-5-1977 (page 83 of Paper Book) wherein, it has been held that the transformation brought about the dipping of cotton fabrics in a soap solution is not a permanent one; it is not an operation which results in the production of a new article which could be bought and sold as such in the market." 15. In Dalmia Industries Limited v. CCE, Jaipur, 1 .....

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n would not bring into existence any new product as each of the items had already come into existence as individual items. It was further held that sterilization was only to improve the hygiene of the product and that since no change occurs in the name, character or use of the product, a new product does not come into existence. This Court dismissed the civil appeal filed against the aforesaid judgment on 1.3.2005. 16. Examples of additions made to the article to preserve it or increase its shel .....

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such hydrogenated oil continued to be groundnut oil. The process of hydrogenation only increased the shelf life of the said oil. 17. Similarly in the Maruti Suzuki case, it was held that bumpers and grills of motor vehicles continue to be the same commodity after ED coating which would increase the shelf life of the said bumpers and grills and provide anti rust treatment to the same. No new commodity known to the market as such had come into being merely on account of the value addition of the .....

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espite the addition of dehydrated vegetables and certain spices. Further, the rice remained in raw form and in order to make it edible it had to be cooked like any other cereal. As we have already seen, the same test was applied in Tungabhadra case (supra) and in Deputy Commissioner of Sales Tax (Law), Board of Revenue (Taxes), Ernakulam v. Pio Food Packers, (1980) 3 SCR 1271. In that case, the process undertaken was to remove the inedible portions of Pineapple together with its outer cover and .....

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ry 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 essen .....

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as been placed before us by the parties, and in each of them the same principle has been applied: Does the processing of the original commodity bring into existence a commercially different and distinct article? Some of the cases where it was held by this Court that a different commercial article had come into existence include Anwarkhan Mehboob Co. v. The State of Bombay and Ors. (where raw tobacco was manufactured into bidi patti), A. Hajee Abdul Shukoor and Co. v. The State of Madras (raw hid .....

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rnool v. Commercial Tax Officer, Kurnool (where hydrogenated groundnut oil was regarded as groundnut oil) and Commissioner of Sales Tax, U.P., Lucknow v. Harbiles Rai and sons (where bristles plucked from pigs, boiled, washed with soap and other chemicals and sorted out in bundles according to their size and colour were regarded as remaining the same commercial commodity, pigs bristles)." Test of no commercial user without further process 20. In Brakes India Ltd. v. Superintendent of Centra .....

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of whether there was a single process or several processes. 21. Similarly in Union of India v. J.G. Glass, 1998 (97) E.L.T. 5 (S.C.), this Court held that plain bottles are themselves commercial commodities which can be sold and used as such. By the process of printing names or logos on the said bottles, the basic character of the commodity does not change, they continue to be bottles. The Court said: "16. On an analysis of the aforesaid rulings, a two-fold test emerges for deciding whether .....

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odities and can be sold and used as such. By the process of printing names or logos on the bottles, the basic character of the commodity does not change. They continue to be bottles. It cannot be said that but for the process of printing, the bottles will serve no purpose or are of no commercial use." 22. Similarly in Sterling Foods v. State of Karnataka, (1986) 26 ELT 3 (S.C.), raw shrimps/prawns/lobsters after various processes became fit for human consumption. Prior to such processing, t .....

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n. It was held that the aforesaid process would not amount to manufacture as betel nuts continued to be the same even after the aforesaid process resulting in no transformation of the commodity in question. 24. It is important to understand the correct ratio of the judgment in the J.G.Glass case. This judgment does not hold that merely by application of the second test without more manufacture comes into being. The Court was at pains to point out that a twofold test had emerged for deciding whet .....

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akes the said product commercially usable that the second test laid down in the judgment leads to manufacture. Thus understood, this judgment does not lead to the result that merely because the unsterilized syringe and needle is of no commercial use without sterilization, the process of sterilization which would make it commercially usable would result in the sterilization process being a process which would amount to manufacture. If the original commodity i.e. syringes and needles continue as s .....

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tral Excise, Jaipur v. Rajasthan State Chemical Works, (1991) 4 SCC 473 needs explanation. This Court was concerned with the language of a certain notification which read as follows: "In exercise of the powers conferred by sub-rule (1) of Rule 8 of the Central Excise Rules, 1944, the Central Government hereby exempts all goods falling under Item 68 of the First Schedule to the Central Excises and Salt Act, 1944 (1 of 1944) in or in relation to the manufacture of which no process is ordinari .....

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, 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. 15. In J.K. Cotton Spg. & Wvg. Mills Co. Ltd. v. STO [(1965) 1 SCR 900 : AIR 1965 SC 1310 : (1965) 16 STC 563], this Court in construing the expression & .....

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entire process carried on by the dealer of converting raw materials into finished goods. 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 commercially inexpedient, goods required in that process would, in our judgment, fall within the expression 'in the manufacture of goods'." 21. The transfer of raw material to the reacting vessel is a preliminary operation but it is .....

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ith the aid of power and that activity is in relation to the manufacture. It is not correct to say that the process of manufacture starts only when evaporation starts. The preliminary steps like pumping brine and filling the salt pans form integral part of the manufacturing process even though the change in the raw material commences only when evaporation takes place. The preliminary activity cannot be disintegrated from the rest of the operations in the whole process of manufacture. Similarly, .....

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s is impossible to be completed. Therefore, if power is used in any one of these operations or any one of the operations is carried on with the aid of power, it is a case where in or in relation to the manufacture the process is carried on with the aid of power. 25. Thus "processing" may be an intermediate stage in manufacture and until some change has taken place and the commodity retains a continuing substantial identity through the processing stage, we cannot say that it has been ma .....

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s to allow exemption from duty only when in relation to the manufacture of goods no process is ordinarily carried on with the aid of power. It was observed that cutting of steel wires or the treatment of the papers is a process for the manufacture of goods in question. 26. We are, therefore, of the view that if any operation in the course of manufacture is so integrally connected with the further operations which result in the emergence of manufactured goods and such operation is carried on with .....

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these appeals. In the facts and circumstances of the case, we make no order as to costs." 26. It is clear that the said judgment does not deal with manufacture alone. It deals with various processes carried on without the aid of power in relation to manufacture. The Court's ultimate holding was that the use of diesel pump sets to fill pans with brine is an activity which occurred with the aid of power and is in relation to manufacture. That is why it held that the process of manufacture .....

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but for that process, the manufacture of such goods would be impossible or commercial inexpedient. Two things need to be noticed here. One is that what is spoken about is raw material which is subjected to several processes after which a final manufactured product emerges and two that the test of integral connection of a particular process with the ultimate production of goods that but for such process manufacture of goods would become impossible or commercially inexpedient was applied in the co .....

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n there can be no manufacture. This is for the reason that the original article continues as such despite the said process and the changes brought about by the said process. (3) Where the goods are transformed into something different and/or new after a particular process, but the said goods are not marketable. Examples within this group are the Brakes India case and cases where the transformation of goods having a shelf life which is of extremely small duration. In these cases also no manufactu .....

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ase, are finished or complete in themselves. They can be used or sold for medical purposes in the form in which they are. The fact that medically speaking they are only used after sterilization would not bring this case within the ratio of the Brakes India case. All articles used medically in, let us say, surgical operations, must of necessity first be sterilized. 29. The Encyclopedia and Dictionary of Medicine, Nursing, and Allied Health, Fourth Edition by Benjamin F. Miller and Claire Brackman .....

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y that heat, in the form of flame, steam, or hot water, kills bacteria made possible the advances of modern surgery, which is based on freedom from microorganisms, or asepsis, and prevention of contamination. Sterilization of all equipment used during an operation, and of anything that in any way may touch the operative area, is carried out scrupulously in hospitals. Physicians and nurses wear sterile clothing. Instruments are sterilized by boiling, by chemical antiseptics, or by autoclaving. In .....

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mean that such articles are not complete articles in themselves or that the process of sterilization produces a transformation in the original articles leading to new articles known to the market as such. A surgical equipment such as a knife continues to be a surgical knife even after sterilization. If the Department were right, every time such instruments are sterilized, the same surgical instrument is brought forth again and again by way of manufacture and excisable duty is chargeable on the .....

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that the Secretary of State had an absolute and unfettered discretion to bring in or not to bring in the said Sections. This argument was rejected stating that it was not only constitutionally dangerous but also flies in the face of common sense (at page 253).). If a surgical instrument is being used five times a day, it cannot be said that the same instrument has suffered a process which amounts to manufacture in which case excise duty would be liable to be paid on such instruments five times .....

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rs from a product complete in itself would not amount to manufacture but would only be a process which is for the more convenient use of the said product. In fact, no transformation of the original articles into different articles at all takes place. Neither the character nor the end use of the syringe and needle has changed post-sterilization. The syringe and needle retains its essential character as such even after sterilization. 31. Ms. Shirin Khajuria then cited a few other judgments. The ju .....

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150: 1989 SCC (Tax) 42: (1988) 37 ELT 480] We are, therefore, of the opinion that by process of lamination of kraft paper with polyethylene different goods come into being. Laminated kraft paper is distinct, separate and different goods known in the market as such from the kraft paper. 5. Counsel for the appellant sought to contend that the kraft paper was duty paid goods and there was no change in the essential characteristic or the user of the paper after lamination. The fact that the duty has .....

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