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Devi Dayal Electronics and Wires Ltd. and Another Vs. Union of India and Others - Court Judgment

LegalCrystal Citation
SubjectExcise
CourtDelhi High Court
Decided On
Case NumberCivil Writ Nos. 219 and 220 of 1978
Judge
Reported in1982(10)ELT33(Del)
ActsCentral Excise Rules, 1944 - Rules 9, 47, 49 and 173G; Central Excise Act, 1944 - Sections 3 and 4
AppellantDevi Dayal Electronics and Wires Ltd. and Another
RespondentUnion of India and Others
Cases ReferredGeep Flashlight Industries Ltd. v. Union of India
Excerpt:
the case questioned whether the petitioner was liable to pay excise duty in respect of resins on the intermediate product obtained by it - in the instant case the petitioner was manufacturing polyester resin and phenolic resin - the resin was an intermediate product emerged by chemical reaction and was used for manufacturing the end product - it was held that the petitioner was not liable to pay excise duty in respect of resins on the intermediate product obtained by it - he was not even required to take out a separate license for the manufacture of resins under item 15 a of the central excise act, 1944. - - , as well as the decision of this court in case of caltex oil refinery (india) ltd. rule 49 is a direction to the excise authorities that the payment of excise duty shall not be.....s. ranganathan, j.1. these are two writ petitions filed by devi dayal electronics and wires ltd., and its executive director and raise a common question as to the interpretation of section 3 of the central excises and salt act, 1944 and rules 9 and 49 framed there under (hereinafter referred to respectively as 'the act' and rules) which we think is practically concluded by the decision of this court in the case of caltex oil refinery (india) ltd. (1979 e.l.t. j 581). we shall, however, first set out the relevant facts to understand the context in which this question comes up for consideration. 2. the petitioner company, inter alia, manufactures different types of electrical wires, for this purpose the petitioner company purchases copper wire bars and aluminium rods/ingots. these wires.....
Judgment:

S. Ranganathan, J.

1. These are two writ petitions filed by Devi Dayal Electronics and Wires Ltd., and its Executive Director and raise a common question as to the interpretation of Section 3 of the Central Excises and Salt Act, 1944 and Rules 9 and 49 framed there under (hereinafter referred to respectively as 'the Act' and Rules) which we think is practically concluded by the decision of this Court in the case of Caltex Oil Refinery (India) Ltd. (1979 E.L.T. J 581). We shall, however, first set out the relevant facts to understand the context in which this question comes up for consideration.

2. The petitioner company, inter alia, manufactures different types of electrical wires, for this purpose the petitioner company purchases copper wire bars and aluminium rods/ingots. These wires bars, rods and ingots, after being processed, are coated with varnish for insulation. The varnish was being manufactured by the petitioner from resin. The petitioner held separate licenses for the manufacture of insulated wires, varnish and synthetic resins. We are concerned in this petition with the assessed's process of manufacturing varnish.

3. The petitioner manufactured two types of varnish, one known as TERMEX and the other as FORMADEV. The former was manufactured from POLYESTER RESIN and the latter from PHENOLIC RESIN. Prior to July 1972 POLYESTER RESIN was manufactured by the following process. D.M.T. Ethylone, Glycol, Glycerine and Adipic Acid were first mixed in a reactor with zinc salt as a catalyst and the reaction was carried out gradually increasing the temperature to 235 Degree C. Temperature between 225 Degree C and 235 Degree C was maintained till the process known as alcholists was complete. Thereafter, butyl titanate, which is called a cross linking agent, was added and the reaction was continued at the same temperature. After a particular stage was reached the material was cooled to about 180 Degree C and thereafter transferred to trays manually and then this liquid was allowed to solidify. After room temperature was reached the solid substance was broken in lumps and then packed in drums. The solidified substances is known in the market as polyester resin. This was entered in the register kept for excise purpose and was cleared on payment of duty for further use in the manufacture of the type of varnish known as 'toremex'. PHENOLIC RESIN was manufactured by the following process :

Metacresol and Formalin were first mixed in a reactor with a particular catalyst and the reaction was carried to a temperature of 90 Degree C. The water element was then removed by a vacuum process of dehydration at a temperature between 70 Degree C and 80 Degree C. Thereafter, cross linking agent was added and the reaction continued till a particular molecular weight was reached. When that stage was reached a little more metacresol was added and the solution was collected in drums. This solution was called and known in the market as phenolic resin. This solution was entered in the excise register and cleared on payment of excise duty and utilised in the manufacture of Formadev varnish.

4. It will thus be seen that prior to 1972 the assessed's manufacture of varnish was carried out in two stages. In the first stage, the petitioner obtained the substance which was known in the market as polyester resin or phenolic resin and on the manufacture of this substance excise duty was paid. Thereafter, the resin either in solid or solution form was utilised for manufacture of varnish which constituted the second stage of manufacture.

5. We are, however, concerned here with the period subsequent to July 1972 when the petitioner decided to manufacture the varnish by a single continuous process instead of in the above two stages. The process now employed to obtain Termex varnish was the same as it was prior to July 1972 till the point of completion of the process known as alcholists. However, thereafter, instead of adding the cross linking agent to obtain the resin in solid form the previous reaction was continued in a kettle till a particular molecular weight was reached. Thereafter, a small amount of metacresol was added and the whole solution which was still at a temperature of 200 Degree C was directly transferred to a bigger kettle where further quantities of was directly transferred to a bigger kettle where further quantities of metacresol and other ingredients (namely solvent naphtha or equivalents and phenol) were added. After homogeneity was obtained certain other ingredients namely Desmodur CT stable, butyl titanate and zinc naphthanate or octoate were added. The resultant product was taken off in the form of liquid varnish. In other words, the two stages of production of resin and the manufacture of varnish were integrated and some changes made so that there was one continuous manufacturing process leading to the end product, (namely, varnish) without any intermediate product (namely, resin) being collected in trays or drums for being used for the manufacture of varnish. On the other hand, in the new process the material which was boiled for the purposes of the first stage was transferred as a hot molten liquid to a bigger kettle in which the second stage of the manufacture was carried out.

6. In the same manner there was also a modification of the process of manufacture of formadev varnish. As before Metacresol and Formalin were put in a reactor with catalyst, heated to the temperature of 90 Degree C and then subjected to a process of dehydration. At this stage metacresol was added and the temperature was maintained at 70 Degree C till a particular molecular weight was reached. Thereafter, desmodur AP stable solution was added and the mixture was transferred manually to another kettle in which the other ingredients for varnish making were already there. The cross linking agent was then added and the resulting product was the varnish. Here the difference between the old and new process is that the solution which is obtained at the intermediate stage in the old process was the commercial product known as phenolic resin while in the new process the intermediate product contained a component referred to above as Desmodur AP which is a Volatile Solvent and which is not present in Phenolic resin as known to the market.

7. Varnish is one of the items liable to excise duty under Tariff Item 14-II of the First Schedule to the Act. However, by a notification dated 18th January, 1964, the Government had exempted varnish from excise duty where the same was manufactured out of ingredients on which excise duty had been paid and where it was used for insulating electrical wires produced within the same factory. As the petitioner was paying excise duty on resins, it was not being required to pay any excise duty on the varnish which it was manufacturing.

8. The controversy between the parties arose when on 1st July, 1972, the petitioner addressed a letter to the Superintendent of Central Excise stating that it had decided to discontinue the manufacture of resins and to manufacture varnish by a direct process from various raw materials and so would no longer be paying any excise duty on synthetic resins. The petitioner, thereforee, requested the officer to cancel the classification list filed by it earlier. This was followed up by another letter dated 2nd October, 1972 by which the petitioner company intimated the Excise Authorities that from 2nd September, 1972 it had discontinued the manufacture of resins and had started manufacturing of varnish by a direct process. It again requested the officer for the cancellation of the earlier classification list and also forwarded the license for manufacture of resins for cancellation.

9. There followed some correspondence, the details of which are not relevant for our present purpose. Ultimately, by an order dated 6th June, 1974 the Assistant Collector of Central Excise held that, during its manufacture of varnish the petitioner was manufacturing polyester resin and phenolic resin which were liable to excise duty under Tariff Item No. 15A(1)(i). The petitioner was advised to apply for a license in Form L-4 to be in a position to manufacture the synthetic resin dutiable and to furnish details regarding the clearance since 2nd September, 1974 of the aforesaid item. The assessed filed an appeal which was rejected on 5th March, 1975 after a hearing. The petitioner company filed a revision petition to the Government of India and relied in support of the petition on the decision of the Bombay High Court in the case of Nirlon Synthetic Fibres & Chemicals Ltd., as well as the decision of this Court in case of Caltex Oil Refinery (India) Ltd. (supra). However, the petition was rejected by an order dated 6th December, 1977.

10. In the meanwhile, on 4th November, 1974, the Superintendent of Excise called upon the petitioner to show cause why excise duty should not be paid and recovered on the Polyester resin and Phenolic Resin manufactured by it between 3rd September, 1972 and June 1974. The petitioner filed a reply pointing out, in particular, that the appeal from the order dated 6th June, 1974 was pending. However, by an order dated 11th February, 1975, the Assistant Collector of Central Excise called upon the petitioner to pay Central Excise Duty amounting to Rs. 1,55,974/- on the basis that the assessed had manufactured polyester resin and phenolic resin which were dutiable items basing himself, in this regard, on a report of the Deputy Chief Chemist dated 19th July, 1974. The petitioner filed an appeal to the Appellate Collector of Central Excise, who rejected the appeal on 30th September, 1975. A revision petition was dismissed by the Government on 17th November, 1977. Similar demands also arose in respect of subsequent periods between July 1974 and 15th February, 1978 and the petitioner was called upon to pay and paid under protest excise duty amounting to Rs. 5,00,283.17, as per the details set out in Annexure S to the writ petition. In these circumstances, the petitioner came to this Court and C-W 219 of 1978 by which it sought for appropriate reliefs against the orders of the respondents dated 6th June, 1974, 11th February, 1975, 5th March, 1975, 30th September, 1975 and 17th November, 1977, for orders restraining the respondents from removing excise duty amounting to Rs. 1,55,974.73 and for further directions to the respondents to refund the excise duty of Rs. 5,00,213.17 illegally collected in respect of the period between July 1974 and 15th February, 1978. A specific prayer for relief in respect of the order dated 6th December, 1977, however, appears to have been omitted from the prayer clause in para 33, of this writ petition, apparently because a prayer for quashing the order dated 6-12-1977 has been made in C.W. 220/78 as pointed out in the following paragraph.

11. We have earlier referred to the fact that on 6th June, 1974 the Assistant Collector of Central Excise called upon the petitioner to take out a license for the manufacture of synthetic resin in the factory, that this order had been confirmed by the Appellate Collector on 5th March, 1975 and that the petitioner had filed a revision petition before the Central Government against the order of the Appellate Collector. But in the meanwhile, to avoid the controversy created by the department because the Termex varnish was being manufactured by, what can be described as, a two kettle process the petitioner proposed to change the process. It wrote to the Assistant Collector on 10th September 1975 informing him that instead to two kettles the petitioner company proposed to employ a single kettle process in which the varnish would be produced in a single continuous process. It is not necessary once again to repeat the process employed by the assessed. It is sufficient to mention that it was now proposed that, after the initial process of boiling certain materials with a catalyst up to a particular temperature the material would be allowed to cool about to 170 Degree C and all the other raw materials necessary for the manufacture of varnish would be added in the same vessel or kettle so that only the finished varnish emerged from the process for being packed in drums after testing. The idea was that the whole reaction from the beginning to the end should take place in only one kettle and that there should be no removal of the product in containers or the transfer from one kettle to another at any intermediate stage. The company informed the Assistant Collector that they proposed to start the new process from 9th October, 1975. However, on 3rd October, 1975 the Superintendent of Central Excise wrote to the petitioners stating that the liability to pay central excise duty on synthetic resin would continue till written permission to the effect that no duty was chargeable was obtained from the Assistant Collector and so the new process was not started. Thereafter, certain correspondence between the parties followed and the factory premises of the petitioners was visited by the deputy Chief Chemist on 11th May, 1976. On that date, the petitioner company for the first and last time employed the single kettle process to enable the Deputy Chief Chemist to carry out this test. Eventually, on 25th June, 1976 the Assistant Collector passed an order stating that, except for the difference that the two stages of the manufacturing process were carried out in the same reaction vessel in the revised process, the new method of manufacturing was basically the same as the earliest process of manufacture and that, thereforee, 'the petitioner's product, namely termex resin, is correctly classifiable as synthetic resin as at stage 1 and is, thereforee, chargeable to excise duty under Item 15A. This was confirmed on appeal by the Appellate Collector on 31st August, 1976 and a further revision petition of the company was disposed by the Government on 6th December, 1977 along with the earlier revision petition, which had been preferred by the petitioner against the order of the Appellate Collector dated 5th March, 1975. The petitioner has stated that, in view of the instructions issued by the Assistant Collector to maintain the status quo, the Company did not employ the one kettle process except on 11th May, 1976. On that date 120 kg. of termex varnish had been produced by that process and cleared after payment of Rs. 871.93 as excise duty under protest. The Company, however, has come to this Court with C.W. 220 of 1978 praying that the orders dated 25th June, 1976, 31st August, 1976 and 6th December, 1977 be quashed and that the respondents be directed to refund the excise duty of Rs. 871.93 illegally collected from the petitioner.

12. We have set out the facts at some length because two types of processes were being employed by the assessed and it is necessary to understand these in order to answer the question that comes up for consideration in these writ petitions. The petitioner's case is that it is engaged in the manufacture of varnish which is being utilised by it for insulating the wires, rods and other electrical materials. This process of manufacture begins at the earliest stage when the raw materials are first fed into the plant. According to the petitioner it makes no difference whether the varnish finally emerges as a result of Chemical reactions in one kettle but there is only one end product manufactured by the petitioner viz. varnish. It may be that in plant and there is only one the course of this single process of manufacture, a product is obtained which may perhaps fall within the description in Item 15A. The petitioner's case is that it does not but that even assuming for purposes of argument that this interim product can be described as polyester or phenolic resin it is not liable to duty because the interim product is only an 'in process' product which is neither intended to be, nor is in fact, removed from the place of manufacture. In the single kettle process there is no removal at all and in the two kettle process what is transferred from one kettle to another is a hot molten liquid which passes on to the second kettle as a step or stage in the integrated process of manufacture of varnish carried out by the petitioner. In, these circumstances, it is submitted that, other questions apart, there is no removal of the resin so as to attract duty within the meaning of Rule 9 read with Rule 49 of the Central Excise Rules.

13. It will be necessary for the present discussion, to start with a somewhat detailed reference to the decision of this court in the Caltex case (supra), because that decision deals with the basic issues involved in this writ petition.

(a) In that case, which was decided as far back as 3-4-1972 the facts were as follows : The petitioner had a refinery to process Crude Oil for production of various petroleum products. To run this refinery a plant had been installed at Visakhapatnam which commenced production in May 1975. The plant of the petitioner at Visakhapatnam, generally speaking, worked in the following manner : There was a Crude Unit in which Crude Oil is First processed resulting in six basic products, namely (i) Gas, (ii) Naphtha Base Stock/Motor Gasoline, (iii) Kerosene Base stock, (iv) Diesel Base Stock, (v) Fluid Catalytic Cracking Unit Feed Stock, and (vi) Intermediate non-marketable Fuel Oil. The Court was concerned with the sixth product. This oil was then transmitted through pipelines to all or any of the three units of the plant, namely, (a) P.D. Unit, or (b) Bonded Tank, or (c) Tanks 170 and 171. The contention of the petitioner was that this intermediate non-marketable fuel oil, if sent to the P.D. Unit, was for the purpose of further processing but it might be sent from the P.D. Unit to Tank 170 and 171 for storage. If this oil was directly sent to Tanks 170 and 171, it was only for the purpose of storing the same for being transmitted there from either to the furnace for heating the P.D. unit or to the furnace for heating the Crude unit. The intermediate non-marketable Fuel Oil might also be sent to the bonded tank via the P.D. Unit either for being transmitted as such to Tanks 170 and 171 or for marketing the same after adding to it what was called Cutter stock, without adding which, according to the petitioner, the oil was not marketable, due to high viscosity, but could be used and had been used internally for heating the plant of the petitioner to produce various marketable products. According to the petitioner it paid excise duty on such oil stored in Tanks 170 and 171 on its transmission either directly from the Crude Unit or from the P.D. Unit or from the bonded tank, which it was not liable to pay inasmuch as in that state the oil was what is described as Burner Fuel oil and not Furnace Oil.

(b) Several contentions were urged on behalf of the petitioner. For our purposes, it is sufficient to refer to contentions Nos. 2 and 3 which have been set out at page 585 of the report :

'2. Excise duty is on production and not on stages of production. Burner Fuel Oil is an intermediate product derived at an intermediate stage in the process of manufacture of finished petroleum product. Burner Fuel Oil is not marketable as such without further processing or blending with other oil, i.e. cutter stock. thereforee, Burner Fuel Oil is not excisable goods and there is no manufacture of goods within the meaning of the said Act.

3. There is no removal of Burner Fuel Oil within the meaning of Rule 49 of the said Rules. Rule 49 is a condition precedent to the recover of excise duty.'

On the other hand, the case of the respondent was that the oil in question was not consumed by the petitioner as an inseparable part of an unbroken continuous and uninterrupted process of manufacturing and that what the petitioner describes as Burner Fuel Oil was actually Furnace Oil, the process of manufacture of which had ended prior to removal for consumption. It was argued that once the said oil had been separated from the crude oil it was a finished product liable to excise duty whether it was used in the refinery or was marketed by edition of cutter stock or otherwise.

(c) The judgment of the court was delivered by one of us (Prakash Narain J.) At the outset it explained the scope of Section 3 of the Act read with Rules 9, 47 and 49 as follows :-

'The legislative intent for levy and collection of excise duty, on a reading of the Excise Act and the Excise Rules, appears to be that no duty is payable on intermediate products if the intermediate products by themselves are not the end products being manufactured by a particular factory provided, however, the intermediate products and the end products are obtained by one continuous uninterrupted integrated process as opposed to distinct or independent processes. We find force in Mr. Palkhiwala's contention that the concept of making assessment only at the stage of removal supports this legislative intent. Indeed through a particular article produced may attract levy of excise duty, as contemplated by section 3 of the Act, which is the charging section, removal is the essence of the crystallisation of the charge as would be apparent from a reading of section 4 of the Act and Rule 49 of the Excise Rules. The quantum of the charge is one the value at the time of removal and the value at the time of removal if the yard-stick for qualifying the charge. Though levy is attracted on production but the power to collect duty is only on removal. There may be circumstances where production may take place and yet the product may not be issued out, utilised, or marketed in which case the scheme of the Act and the Rules tend to show that no excise duty would be collected on the product. For example the glut of a particular article in the market may make it expedient for a manufacturer to hold back his product or financial circumstances may prevent the finished product to be marketed. It is in this context, thereforee, that the provisions of Section 3 of the Act and Rules 9 and 49 of the Excise Rules have to be harmonised. Indeed, these provisions complement each other. Section 3 lays down the legislative policy on what products excise duty may be levied. Rule 9 is an injunction on the manufacturer that he has not to remove any excisable goods from the place of manufacture or any specified premises appurtenant thereto, whether for consumption, export or manufactures of any other commodity in or outside such place unless he first pays the excise duty livable on these goods. Rule 49 is a direction to the excise authorities that the payment of excise duty shall not be demanded until excisable goods are about to be issued out of place or premises specified under Rule 9 or are about to be removed from a store room or other place or storage approved by the Collector under Rule 47. Thus, the point out of time when duty must be paid or may be collected is clearly given. Similarly, it is provided that there must be removal from the specified place to attract the payment of duty. If there is no removal there would be no question of payment. Removal is a positive act and cannot have any reference to disappearance of the product. For example evaporating would not be removal for that taken place by natural causes in the process of manufacture or even afterwards. Similarly, waste, of product while in the pipe-line or in storage may take place on account of natural causes or otherwise. We have, thereforee, to see whether in the present case the product in question is (a) only an intermediate product obtained in the process of manufacturing of any other finished petroleum product, (b) whether this product is treated as an end product or only an intermediate product by processing of which may other product is to be obtained, and (c) whether this product can be regarded as having been removed at any stage for any of the purposes mentioned in Rule 9 of the Excise Rules.'

It was pointed out that if the product in question i.e. Burner Fuel Oil were first sent to the P.D. Unit and from there to the Fluid Catalytic Cracking unit and on being blended with cutter stock were marketed as Marketable Fuel Oil, it would be a part of the continuous uninterrupted process of manufacture and would not attract the levy or assessment of excise duty by itself and the product which would be subject to duty will be the end product, namely, the marketable fuel oil. As long as the oil in question was thus in the pipeline of the petitioner's refinery it would continue to be the intermediate product being utilised in one single process for the manufacture of another product.

(d) Applying the principles outlined above to the facts of the case before the court it was further observed him, the learned Judge observed :-

'From what we have been told about the process of manufacture and even in accordance with the contention of the petitioner there can be no manner of doubt that the oil coming into tanks 170 and 171, even if non-marketable as utilised for the purposes of heating the furnace of the various units in the refinery of the petitioner. It has not been shown to us that the oil coming out from tanks 170 and 171 is further processed to be converted into any other product. As already noticed earlier, this very oil if it goes from the Crude Unit to the P.D. Unit and further on to the Fluid Catalytic Cracking unit and thence for addition of cutter stock or blending with cutter stock the oil is being utilised for being converted into some other product but if it comes into tanks 170 and 171 either directly from the Crude Unit or via the P.D. Unit or the bonded tank it is not being utilised for being converted into another product but is thereafter utilised for heating purposes. Oil thus obtained for use as a heating medium either by separating it from Crude oil and other base stocks in the Crude Unit or when this very type of oil goes from the Crude Unit to the P.D. Unit or blending unit to tanks 170 and 171, it is only for one purpose and is to use it as fuel. thereforee, it must be held that the oil which comes into tanks 170 and 171 is really an end product and distinct from an intermediary product utilised in an uninterrupted process of manufacture for obtaining another product.'

It was urged on behalf of the petitioner in that case that even where oil was used for heating purposes it was really a self generating fuel obtained the process of manufacture of various petroleum products and that even, if consumed for heating, it was part of an integrated uninterrupted continuous process of manufacture, because the self generating fuel was a necessity for the running of the plant to get the end product. But it was pointed out that Excise Duty is attracted on all excisable goods which are produced as and when the some are removed within the meaning of Rules 9 and 49 and that the only product which is not excisable is the product which itself gets converted into another product which may be excisable as a single continuous process.

(e) The decision of the Bombay High Court in Nirlon Synthetic Fibres and Chemicals Limited v. Shri R.K. Audim, Assistant Collector and others, (Miscellaneous Case No. 491 of 1963, decided on 30-4-1970) was relied upon on behalf of the petitioner but distinguished as under. In that case the petitioner company employed a continuous and integrated process for the manufacture of Nylon Yarn. At an intermediate stage, the company obtained Polymer Chips which were used or consumed in the further manufacture of the Nylon Yarn without the chips being taken out of the manufacturing equipment. Tulzapurkar J. had held that polymer chips did not attract the levy of excise duty as the same were utilised in an uninterrupted integrated process for the manufacture of Nylon yarn and there was no removal within the meaning of Rule 49 read with Rule 9 of the Excise Rules. So, it was pointed out that the decision was not helpful in deciding the point in the Caltex Case. For though there would be no dispute with the proposition that an intermediate product used for obtaining the end product in a single uninterrupted process would not attract duty, the intermediate product would attract duty if it is obtained by one process and was used for being converted into another product by a separate and distinct process.

(f) Elaborating on the scope of Rule 9 in the judgment it was said :-

'The Rule thus contemplates the situs on manufacture as the place from where removal has to take place whether for consumption, export or manufacture of any other commodity. It obviously makes no reference to the plant or equipment. But where there are two distinct plants within the same factory premises removal can take place either outside the factory premises or within the factory premises if the product obtained by working of one plant is sent to another plant for obtaining another product. There can be no removal of a product within the plant itself so long as the product is in the process of manufacture. There can be removal only if the product goes out of one stream of production into another stream of production or if the produce is issued out of or taken out or consumed if no further processing of that product is to be done. The Rule also contemplates that consumption within the place of manufacture would also amount to removal. The consumption of the product contemplated by Rule 9 is consumption of the product by itself and not for converting it into another product, as in the case of Polymer Chips.'

(g) It was held on the facts that the moment the oil went out of the pipeline for consumption as fuel the continuous process of manufacture got snapped. There was no putting back of this oil into the process of manufacture if it is consumed for lighting furnaces or for heating the equipment.

14. We think that the above decision completely governs the present case. Like the polymer chips in the Nirlon case (supra), the resin in the present case is converted in the course of the single integrated uninterrupted process of manufacture carried on by the assessed. In the process followed by the petitioner prior to 1972 there were two stages of manufacture. In the first stage it obtained either polyester resin in the form of solidified flakes or phenolic resin in the form of a solution. These were products well known in the market as resins. It was open to the petitioner to deal with the resin in whatever manner it liked. It would be removed for purpose of sale or it could be removed for consumption in the second stage of manufacture. In fact perhaps most of the resin was used for the second stage of manufacture. But in the state of affairs as it then stood, the two stages were totally independent. The link in the chain of manufacture snapped at the point of time when the resin was produced, as in the case of the Burner Fuel Oil in the Caltex case. Its subsequent use for the manufacture of a different commodity which the assessed also manufacture was of no relevance. But there has been a vital change in the process of manufacture subsequent to July 1972. The process has been converted from a two stage process into a single continuous and uninterrupted process. The question is not whether the Chemical reactions take place in one kettle or in two kettles. The question is whether, as before the petitioner is manufacturing resins and then manufacturing varnish by utilising its own resins or whether the petitioner has switched over to a process of manufacture of varnish which is single integrated, continuous and uninterrupted. We think there can be no doubt that, after July 1972, the position is that, starting from the stage when the raw materials are put in right up to the stage when the solution of varnish emerges, there is only one integrated process of which the end product is varnish. At the intermediate stage no doubt some product which can be Chemically analysed as resin has emerged but this product never comes out of the plant. It is all the time in the plant itself and it is used for manufacturing into the end product. This is, thereforee, clearly a case of consumption of the intermediate product for the purposes of converting it into another product like the case of Polymer Chips in the Nirlon case and not consumption of it by itself (as in the case of furnace oil dealt with in the Caltex case).

15. We may also point out that in Modi Carpets Ltd. v. Union of India - 1980 E.L.T. 320, the question whether excise duty could be levied and recovered on 'Silver' obtained by the petitioner as an 'in-process material' in the manufacture of woollen yarn in its factory premises was answered in the negative Caltex (Supra) and Delhi Cloth Mills - 1978 E.L.T. ( 121) were followed, we are, thereforee, clearly of opinion that no excise duty is livable merely because in the process of manufacture of varnish an intermediate product which may be described as resin also emerges.

16. Reference was made on behalf of the respondent to the decision of Allahabad High Court in Geep Flashlight Industries Ltd. v. Union of India 1979 E.L.T. 674. In that case, the company was a manufacturer of dry cell batteries. For this purpose the company needed since cans. It purchased zinc ingots, melted them in a furnace and pressed them into moulds to form zinc slabs. The slabs were then heated incrolled into a flat form with the help of rollers out of which callots were punched. From these callots, cans were made by the impact extrusion process. Thereafter, required Chemicals were filled into the cans which after sealing and cladding took the shape of finished dry cell batteries. The question for consideration was whether the rough flat forms of zinc obtained during the process of manufacture which were not removed from the premises but were immediately put to use by feeding them hot into a punching process were excisable as 'zinc sheets' falling under Item 26-B(2) of the First Schedule of the Central Excises and Salt Act, 1944. The Court found that the flat form from which callots were punched was a produce commercially known as zinc sheets and accepted the argument on behalf of the Revenue that though the zinc sheets did not go out the factory premises as such, there was a removal in law as contemplated in Rule 9 because they were admittedly removed from the rolling mill for consumption or for manufacture of another excisable commodity. The Judgment contains no discussion of the contention (which has been upheld in Nirlon & Caltex) that the entire process of manufacture of dry cell batteries was a continuous one and that the utilisation of the zinc sheets even while they were white hot for the purpose of producing the end product could not be described as removal for purpose of manufacture within the meaning of Rules 9 and 19. The Court relied on Rule 173-G for its conclusion but it seems to us that this rule is not helpful. It only lays down the accounting procedure to be followed where the excisable goods are intended to be, and are, removed within the meaning of Rules 9 and 49 so as to attract excise duty. With respect, we find ourselves unable to agree with the conclusion of the Allahabad High Court, particularly in view of the judgments of this Court earlier referred to.

17. For the above reason, we hold that the petitioner cannot be called upon to pay excise duty in respect of resins on the intermediate product obtained by it. The orders (i) calling upon it to take out a separate license for the manufacture of resins; (ii) requiring it to pay excise duty in respect of the resins manufactured by it; (iii) levying excise duty in respect of such goods including the sum of Rs. 871.93 collected in respect of the manufacture on 11th May, 1976, are all quashed. In view we have taken that the intermediate product was obtained in the course of a single continuous uninterrupted process of manufacture of varnish carried on by the assessed, we did not hear the petitioner and express no opinion on the contention raised by it that the intermediate product in the present case was not a 'resin' as known to trade.

18. In the result these writ petitions are allowed to the extent indicated above. We direct, in C.W. 219/78, the issue of a writ of certiorari quashing (a) the orders dated 6-6-1974 and 11-2-1975 of the second respondent (Exhibits 'G' & 'H'), (b) the orders dated 5-3-1975 and 30.9.1975 of the third respondent (Exhibits 'J', & 'P'); and (c) the orders dated 6-12-1977 and 17-11-1977 of the first respondent (Exhibits 'L' & 'R') and the issue of a writ of mandamus directing the respondents to refund to the petitioners the excise duty of Rs. 5,00,283.17 in respect of the period from July, 1974 to 15th February, 1975 illegally collected from it. In C.W. 220/78 we direct the issue of a writ of certiorari quashing the orders dated 6-12-1977 (Exhibit 'I') 31-8-1976 (Exhibit 'G') and 25-6-1976 (Exhibit 'E') and the issue of writ of mandamus directing the respondent to refund to the petitioner the sum of Rs. 871.93 collected from it in respect of the production on 11-5-1976. The petitioners will be entitled to one set of costs. Counsel's fee Rs. 500/-.


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