1. The point of dispute involved in the above-mentioned two appeals is a common one, the appeals relate to the same respondents and were argued before us together. They are, therefore, being disposed of by us by this combined order.
2. The respondents purchase raw bones of animals, break and crush these bones in a mechanical device called disintegrator in their three factories located at different places and sort the resultant products into- (1) crushed bones (i.e. bones of dimensions ranging from 3/8" to 5/8", They export some of the above products and sell the rest in India. The common issue involved in the two appeals before us is whether the above products were classifiable under Item 68 of the Central Excise Tariff or not. The period of dispute is between 1977 and 1979.
68. In his order relating to the second appeal mentioned above, he imposed a penalty of Rs. 50 also on the respondents for breach of rules. In appeal, the Appellate Collector decided the matter in favour of the respondents, holding that the process undertaken by the respondents on raw bones did not amount to manufacture. The Central Government was tentatively of the opinion that the orders passed by the Appellate Collector were not proper, legal and correct and, accordingly, the Central Government issued the two impugned show cause notices under the then Section 36(2) of the Central Excises and Salt Act, 1944 proposing to set aside the orders of the Appellate Collector and restore the orders of the Assistant Collector. On transfer of the proceedings to this Tribunal, the two impugned show cause notices issued by the Central Government have been taken up by us as if they were appeals filed by the department.
(1) that their operation of crushing the bones did not amount to manufacture and hence no duty was attracted, and (2) even if it was held that the duty was attracted, they would be entitled to exemption under Notification No. 176/77-Central Excises, dated 18-6-1977.
Regarding the first submission, they stated that they had given an affidavit to the effect that they did not chemically treat the bones before crushing them and that the statement made in the show cause notices of the Central Government that they crushed chemically treated bones had no basis. All that they did, they argued, was to crush the raw bones into bones of smaller dimensions and the raw bones remained raw bones. They relied on the Supreme Court judgment in the sales tax case of M/s. Pio Food Packers in which it was held that processing of pine apples into canned slices did not amount to a process of manufacture. They also relied on two High Court judgments, both under the Sales Tax law, one by the Allahabad High Court (26 STC 118)-Tilok Chand Prasan Kumar v. The Sales Tax Officer, Hathras, District Aligarh-and the other of the Madras High Court in their own case (47 STC 30). In the Allahabad case, it was held that broken Arhar Dal purchased by the petitioner from dal mills could not be said to be a commodity essentially different from the Arhar Dal purchased by the dal mills and accordingly the purchases effected by the petitioner could not be regarded as the first purchase under the U.P. Sales Tax Act, 1948, Section 3-D. In the Madras case relating to the respondents, it was held that the raw bones purchased by the respondents could not be said to have been consumed in the process of bringing into existence the crushed bones, bone grist, bone meal, fluff or horn and hoof for the purposes of Section 7-A(l) (a), (b) of the Tamil Nadu General Sales Tax Act, 1959. Regarding their claim to exemption under the notification, the respondents argued that if the value of their clearances of crushed bones etc, for export was ignored, the total value of their clearances from all the three units belonging to them as well as the total value of the machinery installed in all the three units remained well within the respective value ceilings set out in the Notification No. 176/77-C.E., dated 18-6-1977, which entitled them to complete exemption from duty.
5. The learned representative of the department stated that the products of the respondents were bought and sold in India as well as they were exported. They were, therefore, "goods" and, being not specified elsewhere in the Central Excise Tariff, they fell under the residuary Item No. 68 of the tariff. He relied on the Delhi High Court judgment in the case of Hyderabad Asbestos Cement Products Ltd. [1980 E.L.T. 735 (Del.)] in which it had been held that the processes of crushing rock asbestos and subsequent sieving and grading into asbestos fibre amounted to "manufacture". He stated that the respondents were converting bones into distinct commercial products by application of human labour and energy. He also relied on the recent judgment of the Supreme Court in the case of Empire Industries Ltd. etc. [1985 (20) E.L.T. 179 (S.C.)] in which it had been held that bleaching, dyeing and printing of cotton fabrics amounted to a process of manufacture. He argued that these processes in relation to fabrics were also physical processes in the same way as the processes undertaken by the respondents were. Regarding the second plea of the respondents, the learned representative of the department stated that Notification No.176/77-C.E., dated 18-6-1977 made no distinction between export clearances and local clearances. There was, therefore, no warrant for excluding the value of export clearances. By including the export value, the respondents became ineligible to the exemption. He mentioned, however, that the question of exemption under this notification had not been gone into fully by the lower authorities.
6. We have given the matter our earnest consideration. We do not find it laid down anywhere that the processes of crushing and sorting cannot amount to "manufacture" in relation to any commodity. It could happen that the same process may result into new goods in the case of one commodity while it may not be so in the case of another commodity. What is really important is the end result of the process and not the nature of the process itself. It has been so held by the Supreme Court in their recent judgment in the case of M/s. Empire Industries Ltd. cited by the learned departmental representative. We quote from paragraph 31 of this judgment:- "Whatever may be the operation, it is the effect of the operation on the commodity that is material for the purpose of determining whether the operation constitutes such a process which will be part of 'manufacture'. Any process or processes creating something else having distinctive name, character and use would be manufacture." Applying the aforesaid test laid down by the Supreme Court, we observe that the products turned out by the respondents have distinct names, character and use which is different from those of the raw bones purchased by them. Bone meal is used as a fertiliser or soil nutrient.
Crushed bones, bone grist, bone sinews etc. are used for the manufacture of gelatin, glue etc. Raw bones purchased by the respondents cannot be put to any of these uses without subjecting them to the processes which the respondents undertake. The products coming out as a result of these processes are bought and sold not only in the Indian market, but also in the international market. These products are, therefore, distinct commercial items, each having a definite name, character and use. We hold, therefore, that according to the well-known test laid down by the Supreme Court, the products of the respondents are "goods" and processes undertaken by the respondents amount to manufacture. The two High Court judgments relied on by the respondents were under different enactments- Purchase Tax and Sales Tax-and dealt with issues which are different from the one under consideration before us. The issue in the Allahabad High Court case was whether the petitioner in that case could be regarded as the first purchaser or the second purchaser. The commodity-dal-itself was one which is used as a pulse or food for cooking by human beings in the whole form as well as in the split form. Pine apples too can be used similarly in fresh fruit form or in processed slices form. Their case is also, therefore, distinguishable from that of animal bones. In the Madras High Court case relating to the respondents themselves, the issue was whether raw bones could be said to have been consumed in the process undertaken by the respondents; in other words, whether the raw bones had lost their identity as such. We agree with the learned representative of the department that the High Court judgment relevant to the issue before us is the judgment of the Delhi High Court in the case of M/s. Hyderabad Asbestos Cement Products Ltd. This case was under the same Act, i.e., Central Excises and Salt Act, 1944 and the processes undertaken by the party in this case were also broadly similar to the processes undertaken by the present respondents. However, as already stated by us, the issue is conclusively decided by the well-known test laid down by the Supreme Court and we hold that according to that test, the processes undertaken by the respondents amounted to manufacture and the end products of these processes were "goods" which fell under Item 68 of the Central Excise Tariff.
7. Regarding the respondents' plea of exemption, we find that Notification No. 176/77-C.E., dated 18-6-1977 contained various conditions as to the value of plant and machinery installed, the total value of clearances in the preceding financial year etc. The question whether the respondents fulfilled these conditions or not have not been gone into fully by the lower authorities even though the respondents have been agitating this issue throughout. In fact, there was no occasion for the Appellate Collector to go into this aspect since he decided the appeals before him in favour of the respondents on the substantive issue itself. Now that we have held otherwise on the substantive issue, we feel that the claim of the respondents to exemption under the aforesaid notification requires to be gone into fully by the lower authorities.
8. In the light of the aforesaid discussion, we set aside the impugned orders passed by the Appellate Collector and restore the orders of the Assistant Collector with the modification that the Assistant Collector will decide afresh the respondents' claim to exemption under Notification No. 176/77-C.E., dated 18-6-1977. The two appeals are allowed in these terms.