IMPORTANT POINT
For the purpose of levy of excise duty, the test to be applied is whether the goods manufactured are marketable or not.

Headnote:Central Excise Act, 1944-Section 2(f)-Definition of manufacture-Central Excise Rules, 1944-Rule 93-Excisable tobacco products-Cigarettes-Test of marketability for levy of excise duty-Whether cigarettes removed for the purposes of tests in the quality control laboratory situated within the factory premises could be treated to be excisable goods manufactured and consequently liable to payment of excise duty under the provisions of the Act? (Yes)-Whether excise duty is leviable on the cigarettes that are destroyed during the process of testing in the laboratory? (Yes in the absence of records) -Appeals dismissed-Case law discussed.
       Held : From a conspectus of the aforesaid decisions, it would be clear that for the purposes of levy of excise duty, the test to be applied is whether the goods manufactured are marketable or not. In the present case, the cigarette, which is the end product of tobacco, is fit for consumption before the same is removed for test. Packing of the cigarette cannot be said to be incidental or ancillary to the manufacturing process, but the same may be incidental or ancillary to its sale only. In case it is laid down that packing of cigarette is incidental or ancillary to the completion of manufactured products, the same may result into evasion of excise duty as before packing the cigarettes the same may be regularly supplied to each and every employee for his consumption without payment of excise duty thereon. The definition of manufacture under Section 2(f) very clearly includes process which is incidental or ancillary to the completion of manufactured product. Manufacture of cigarette is completed when the same emerges in the form of sticks of cigarettes which are sent to the laboratory for quality control test. Sticks of cigarettes can be consumed and manufacture of the end-product, i.e., cigarette, which is commercially known in the market as such, is completed before its removal for test and after testing only packing of the same, which is the requirement of rule 93 of the Rules, is done. Thus, we hold that sticks of cigarette which are removed for the purpose of test in the quality control laboratory located within the factory premises of the appellant-Company are liable to excise duty. (Para 17)
       Held further : Coming now to the second question, it may be stated that learned counsel appearing on behalf of the Revenue could not dispute the proposition that the quantity of cigarette sticks that is destroyed in the course of quality control test is not liable to excise duty. He, however, submitted that no evidence whatsoever was adduced on behalf of the appellant-Company either before the assessing authorities or the Tribunal to show that any cigarette stick was destroyed in the process of quality control test, much less cigarette sticks of any particular quantity inasmuch as, undisputedly, for major period no account at all was maintained and for some period, though account was maintained in relation to the quantity of cigarette sticks sent to the laboratory for testing, but no account was maintained as to how much quantity was destroyed during the process of testing. It was pointed out by learned Additional Solicitor General that though in the show cause notice the appellant -Company was specifically called upon to show cause for non-maintenance of account in relation to the sticks of cigarette sent for quality control test, but in spite of that it failed to produce any account whatsoever to show as to how much quantity of cigarette sticks was sent for quality control test during different periods, much less producing any account in relation to the destruction of the cigarette sticks during the course of testing. At this stage, Shri Ganesh submitted that the matter should be remitted either to the Tribunal or the assessing authority for affording opportunity to the appellant to produce the accounts and then record a finding as to how many cigarette sticks were destroyed during the course of testing. In our view, no useful purpose will be served by remitting the matter on this question, firstly, because even according to the show cause reply filed by the appellant-Company before the assessing authorities, it had not maintained any account in relation to the destruction of cigarette sticks during the course of quality control test and, secondly, no reason was assigned for not producing any account either before the assessing authority or before the Tribunal in spite of the fact that it was clearly stated in the show cause notice that the appellant -Company was not maintaining any such account. In view of the non-maintenance and non-production of accounts in relation to the destruction of cigarette sticks during the course of testing, we are of the opinion that excise duty was leviable on the entire stock of cigarette sticks sent to the laboratory for quality control test. (Paras 18)
       Held consequently : For the forgoing reasons, we do not find any merit in these appeals, which are accordingly dismissed, but in the facts and circumstances of the case, there shall be no order as to costs.
        (Para 19)

JUDGMENT

B.N. Agrawal, J.-The order impugned in these appeals was passed by Customs, Excise and Gold (Control) Appellate Tribunal (hereinafter referred to as the Tribunal ) in appeals preferred against the orders of assessing authorities whereby excise duty was levied and penalty imposed.

2. The short facts are that four show cause notices were issued to the appellant-Company, which was manufacturer of cigarette, alleging therein that it had been clearing without payment of excise duty 20 sticks of cigarette from each cigarette making machine in the cigarette making department on each working day as samples for test in their quality control laboratory within the factory premises, total quantity each day being 65 packets of cigarettes of each brand manufactured in the factory. It was further alleged that the company neither submitted any classification list nor maintained any account in respect of quantity of cigarettes removed, which was liable to excise duty. Out of the aforesaid show cause notices, first show cause notice was issued by the Collector of Central Excise, Patna on 25th July, 1990 and the appellant company was required to pay excise duty to the tune of Rs. 65,45,630.32 besides penalty in relation to the period from March 1973 to April 1990 under the provisions of Central Excise Act, 1944 (hereinafter referred to as the Act ) and the rules framed thereunder which was issued in case No. 6-MP of 1991. Other three notices were issued in the months of January and February, 1991 by the Additional Collector of Central Excise, Patna, in relation to period between May and December, 1990 in case Nos. E-522, E-523 and E-524 of 1992 and total amount of excise duty leviable upon the appellant company was Rs. 6,14,278.48 besides penalty.

3. The appellant company contested the demand on grounds, inter alia, that no duty was leviable on samples of cigarettes drawn for test purposes in the quality control laboratory within the factory since the process of manufacture of cigarettes is not completed until the same are packed as packing is a process incidental or ancillary to the process of manufacture of cigarettes and packing of cigarettes is done after the samples sent are tested in the laboratory. According to it, some quantity of cigarettes is destroyed in the process of testing.

4. The assessing authorities by two separate orders disposed of the proceedings. In one case, excise duty was levied to the tune of Rs. 65,45,630.32 and penalty to the tune of Rs. 5 lacs and in another case, Rs. 6,14,278.48 apart from penalty of Rs. 15,000/. The assessing authorities passed the orders after holding that the manufacturing process in respect of the cigarettes is completed at the stage when they emerge in the form of sticks of cigarettes and excise duty under the provisions of Section 3 of the Act on the manufacture or production of the final article, i.e., in the case of cigarette, was attracted at that very stage even though collection was deferred until clearance. It was further held that the process of packing of cigarettes was not incidental or ancillary to manufacture but it was incidental or ancillary to the sale of the end products.

5. Challenging orders passed by the assessing authorities, four separate appeals were filed on behalf of the appellant company before the Tribunal which have been disposed of by a common order whereby the Tribunal has decided the question of law raised against the assessee holding that excise duty is leviable on the samples of cigarettes sent to the laboratory for the purposes of test within the factory premises but remitted the matter to the assessing authorities for a limited purpose for working out the effective excise duty recoverable on the disputed quantity of cigarettes. Hence these appeals.

6. Shri S. Ganesh, learned Senior Counsel appearing in support of the appeals, submitted that in terms of rule 93 of the Central Excise Rules, 1944 (hereinafter referred to as the Rules ), no excisable

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2002 Supreme(SC) 1213

IMPORTANT POINTFor the purpose of levy of excise duty, the test to be applied is whether the goods manufactured are marketable or not.

Cases Referred (3)

IMPORTANT POINT
For the purpose of levy of excise duty, the test to be applied is whether the goods manufactured are marketable or not.