The Supreme Court has ruled that the labelling or re-labelling or putting additional labels to the containers amounted to ‘Manufacture’ for Cenvat Credit and rebate under Central Excise Act, 1944. The apex court, by this ruling, stopped the recovery of Rs. 36,24,84,120.
Justices Abhay S. Oka and Ujjal Bhuyan, upholding the CESTAT decision, observed that post the 01.03.2008 amendment, Note 3 has changed significantly. The substitution of ‘or’ for ‘and’ between ‘labelling or re-labelling of containers’ and ‘repacking from bulk packs to retail packs’ has split the previously composite process into two independent processes. Now, ‘labelling or re-labelling of containers’ is considered one process, and ‘repacking from bulk packs to retail packs’ is another. Consequently, Note 3 now recognizes three separate activities instead of two.
The appeal was filed by the Excise department (appellant) against the respondent – Jindal Drugs. The respondent exports cocoa butter and cocoa powder, manufacturing these products at their Jammu factory and sending them to their Taloja unit in Maharashtra.
At Taloja, the respondent affixed two labels on the packages from Jammu, exported the goods, and claimed a rebate on the duty paid, while also availing Cenvat credit for the duty paid at Jammu. Additionally, the respondent imported cocoa products from China and Malaysia to Taloja.
Upon inspection, officials found that the respondent only added labels to both Jammu-made and imported goods. Since the goods were already marketable, the additional labeling did not constitute manufacturing.
The appellant issued a show cause cum demand notice on 09.10.2012, questioning why the respondent’s labelling of cocoa butter received from Jammu and imported goods should not be considered non-manufacturing under Note 3 to Chapter 18 of the Central Excise Tariff Act.
It alleged that the respondent wrongly availed Cenvat credit of Rs. 23,02,53,752 from June 2008 to July 2012, which should be recovered under Rule 14 of the Cenvat Credit Rules and Section 11A(1) of the Central Excise Act. It also claimed that rebate claims of Rs. 13,22,30,368 from June 2008 to July 2011 were erroneously sanctioned and should be recovered.
The respondent denied the allegations in a reply on 08.02.2013. Upon adjudication, the appellant’s order on 25.02.2013 held that the respondent’s labelling did not constitute manufacturing, making the Cenvat credit and rebates availed irregular and recoverable. The respondent was also found to have suppressed information, leading to a penalty under Rule 15(2) of the Cenvat Credit Rules and Section 11AC of the Central Excise Act.
Aggrieved by the appellant’s order, the respondent appealed to the CESTAT. On 05.01.2015, separate orders were passed by the Judicial and Technical Members. The Judicial Member held that labelling at Taloja amounted to manufacture under Note 3 to Chapter 18 of the Central Excise Tariff Act, thus allowing Cenvat credit and rebate claims.
Conversely, the Technical Member found no manufacture occurred at Taloja and deemed the respondent’s actions misrepresentation, justifying the original order and extended limitation period. Due to their differing views, the President of CESTAT assigned a third member.
On 16.04.2015, the third member concurred with the Judicial Member, affirming that labelling constituted manufacture and rejecting claims of suppression or misrepresentation by the respondent, thus validating the Cenvat credit and rebate claims and negating any penalties.
The third member observed that “Parliament has consciously substituted the word ‘or’ in place of ‘and’ appearing between the words ‘labelling or re-labelling of containers’ and ‘repacking from bulk packs to retail packs’ to widen the scope of Note 3. According to the third member, any one of the three activities referred to in Note 3 i.e. (i) labelling or relabelling, (ii) packing or repacking from bulk and retail packing and (iii) adoption of any other treatment to render a product marketable would be deemed to be manufacture. He held that the activity undertaken by the respondent at its Taloja unit i.e. labelling amounted to manufacture.”
The appellant’s counsel, before the apex court, argued that the respondent’s activity of adding labels to already labelled cartons at the Taloja unit does not constitute manufacturing under Note 3 to Chapter 18 of the Central Excise and Tariff Act.
They contended that the original order was justified and pointed out that the CESTAT was divided on this issue. The Technical Member had valid reasons to reject this activity as manufacturing, which the third member wrongly overruled by agreeing with the Judicial Member. Therefore, they urged that the CESTAT’s majority decision be overturned and the original order reinstated.
The apex court noted that ‘manufacture’ includes any process incidental or ancillary to completing a manufactured product, any process specified in the Section or Chapter notes of the Central Excise Tariff Act as manufacturing, or any process involving packing, repacking, labelling, re-labelling, or altering the retail sale price to make the product marketable to consumers, as specified in the Third Schedule.
The court added that the amendment replaced ‘and’ with ‘or’ between ‘labelling or re-labelling of containers’ and ‘repacking from bulk packs to retail packs.’ Before 01.03.2008, both processes were required to constitute manufacture. After the amendment, these became two separate processes. Now, Note 3 identifies three independent activities as manufacturing: (i) labelling or re-labelling of containers, (ii) repacking from bulk to retail packs, and (iii) any treatment rendering the product marketable. Any of these alone constitutes manufacture under Section 2(f)(ii) of the Central Excise Act.
Since the respondent’s relabelling at Taloja meets this criterion, the Supreme Court ruled in favour of the respondent and CESTAT’s decision, affirming its order. Consequently, the department’s appeal was dismissed, along with the demands for rebate recovery and the reversal of Cenvat credit.
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