IMPORTANT POINT
The burden of proving whether a particular product is marketable or not is on the department and in the absence of such proof it cannot be presumed to be marketable.

Headnote:Central Excise Tariff Act, 1985 - Central Excise Rules, 1944 - Rule 57A - Central Excise Act, 1944- Section 35H - Appellant -assessee, a body corporate, engaged in the manufacture of various types of packaging machines, filed declarations and availed of benefit of Modvat credit in respect of Flexible Laminated Plastic Film in roll form & Poly Paper used for testing the F&S machine- Adjudicating authority, denied the benefit of Modvat credit on said items- Appeals preferred by assessee before the Commissioner (Appeals) and Tribunal were also dismissed-On reference ,High Court opined that since testing performance of a final product is not a process of manufacture , materials used for testing the performance of the F&S machine cannot be termed as ‘inputs’ for the purpose of allowing Modvat credit-Appeals thereagainst- Held if a product is not saleable, it would not be marketable and consequently the process of manufacture would not be held to be complete and duty of excise would not be leviable on it- The corollary to the above is that till the time the step of manufacture continues, all the goods used in relation to it will be considered as inputs and thus, entitled to Modvat credit under Rule 57A of the Rules- Instantly, each machine was tailor made according to requirements of individual customers- If the results are not in conformity with the order, then machine loses its marketability and is of no use to any other customer- Thus, process of manufacture would not be said to be complete till the time machines meet the contractual specifications and that would not be possible unless the machines were subjected to individual testing- Opinion rendered by High Court on the questions referred by Tribunal hence held unsustainable -Appeals allowed (Para 20)
        Central Excise Rules, 1944 - Rule 57A -Appellant -assessee, a body corporate, engaged in the manufacture of various types of packaging machines, filed declarations and availed of benefit of Modvat credit in respect of Flexible Laminated Plastic Film in roll form & Poly Paper used for testing the F&S machine- Duties paid on plastic films/poly paper used for testing machines for forming commercial/technical opinion as to their marketability/ excisability –Whether would be eligible to be taken as credit under rule 57-A read with relevant notification? –Held process of testing the customised F&S machines was inextricably connected with the manufacturing process, in as much as, until this process was carried out in terms of the afore-extracted covenant in the purchase order, the manufacturing process was not complete; the machines were not fit for sale and hence not marketable at the factory gate- Manufacturing process got completed on testing of said machines and hence, flexible plastic films used for testing the F&S machines were inputs used in relation to manufacture of final product and would be eligible for Modvat credit under Rule 57A of the Rules- Process of testing customised machines being integrally connected with ultimate production of final product viz. the F&S machines and therefore, that process is one in relation to manufacture, falling within sweep of Rule 57A of Rules- Opinion rendered by High Court on the questions referred by Tribunal held unsustainable -Appeals allowed (Paras 21, 22)
       Facts of the Case :
        A.Appellant -assessee, a body corporate, engaged in the manufacture of various types of packaging machines, filed declarations and availed of benefit of Modvat credit in respect of Flexible Laminated Plastic Film in roll form & Poly Paper used for testing the F&S Machine herein in the instant case. Adjudicating authority, denied the benefit of Modvat credit on said items. Appeals preferred by assessee before the Commissioner (Appeals) and Tribunal were also dismissed.On reference ,High Court opined that since testing performance of a final product is not a process of manufacture , materials used for testing the performance of the F&S machine cannot be termed as ‘inputs’ for the purpose of allowing Modvat credit.
        B. Present appeals have been filed against said order of High Court. Plea of appellant that testing of machine being an integral process of manufacture and marketability of the final product, particularly in terms of specific condition in the contract, claim for Modvat credit was admissible on flexible plastic films consumed in the testing of the F&S machines.
       Findings of the Court :
        A. Instantly, each machine was tailor made according to requirements of individual customers- If the results are not in conformity with the order, then machine loses its marketability and is of no use to any other customer. Thus, process of manufacture would not be said to be complete till the time machines meet the contractual specifications and that would not be possible unless the machines were subjected to individual testing. Even though revenue alleged that process of manufacture is complete as soon as machine is assembled, yet it had not discharged the onus of proving the marketability of the machines thus assembled, prior to the stage of testing.
        B. Process of testing the customised F&S machines was inextricably connected with the manufacturing process, in as much as, until this process was carried out in terms of the afore-extracted covenant in the purchase order, the manufacturing process was not complete; the machines were not fit for sale and hence not marketable at the factory gate. Manufacturing process got completed on testing of said machines and hence, flexible plastic films used for testing the F&S machines were inputs used in relation to manufacture of final product and would be eligible for Modvat credit under Rule 57A of the Rules. Process of testing customised machines being integrally connected with ultimate production of final product viz. the F&S machines and therefore, that process is one in relation to manufacture, falling within sweep of Rule 57A of Rules. Opinion rendered by High Court on the questions referred by Tribunal were held unsustainable .Appeals were allowed.

JUDGMENT

D.K. Jain, J.:

1. Leave granted in S.L.P. (C) Nos. 875 of 2008, 10759 of 2010 and 6501 of 2011.

2. This batch of appeals, by grant of leave, arises out of judgments dated 26th August, 2002 in C.E.R. No. 11 of 2001, 11th April, 2007 in C.E.A. No. 10 of 2004, 8th September, 2009 in C.E.A. No. 6 of 2003 and 25th October, 2010 in C.E.R. No. 51 of 2002 passed by the High Court of Judicature at Allahabad. By the impugned judgments, rendered in the reference applications filed by the assessee, under Section 35H of the Central Excise Act, 1944 (for short “the Act”), the questions referred by the Customs, Excise and Gold (Control) Appellate Tribunal, as it then existed, (for short “the Tribunal”) have been answered in favour of the revenue.

3. In order to comprehend the controversy at hand, a few material facts may be noticed. At the outset, it may be noted that these appeals relate to the period between August 1992 to June 1996.

The appellant -assessee, a body corporate, claiming to be pioneers in the concept of flexible packaging, is engaged in the manufacture of various types of packaging machines, marketed as Automatic form fill and seal machines (for short “F&S machines”), classified under chapter heading 8422.00 of the Schedule to the Central Excise Tariff Act, 1985 (for short “the Tariff Act”). The literature placed on record shows that the assessee has prototype models of F&S machines with technical details like web width, Roll diameter, Core diameter, typical material range, the type of material to be packed, etc. According to the assessee, the machines are `made to order’, inasmuch as all the dimensions of the packaging/sealing pouches, for which the F&S machine is required, are provided by the customer. The purchase order contains the following inspection clause:

“Inspection/Trial will be carried out at your works in the presence of (sic) our Engineer before dispatch of equipment for the performance of the machine.”

Flexible Laminated Plastic Film in roll form & Poly Paper which are duty paid, falling under chapter headings 3920.38 and 4811.30 of the Schedule to the Tariff Act, are used for testing, tuning and adjusting various parts of the F&S machine in terms of the afore-extracted condition in the purchase order. As the machine ordered is customer specific, if after inspection by the customer it is found deficient in respect of its operations for being used for a particular specified packaging, it cannot be delivered to the customer, till it is re-adjusted and tuned to make it match with the required size of the pouches as per the customer’s requirement. On completion of the above process and when the customer is satisfied, an entry is made in the RG 1 register declaring the machine as manufactured, ready for clearance.

4. The assessee filed declarations and availed of the benefit of Modvat credit in respect of the Flexible Laminated Plastic Film in roll form & Poly Paper used for testing the F&S machine. On 4th March, 1993, a notice was issued to the assessee to show cause as to why the benefit of Modvat credit on the above goods be not denied, on the ground that they have used the said material for the purpose of testing the final product i.e. the F&S machine which cannot be treated as inputs as stipulated in Rule 57A of the Central Excise Rules, 1944 (for short “the Rules”). On a similar ground, a number of show cause notices were issued to the assessee covering the period from August 1992 to June 1996. The assessees’ reply to the show cause notices did not find favour with the adjudicating authority, who accordingly, denied the benefit of Modvat credit on the said items. Appeals preferred by the assessee before the Commissioner (Appeals) and the Tribunal were also dismissed.

5. Aggrieved thereby, the assessee filed applications seeking reference to the High Court on the questions proposed. However, having failed to persuade the Tribunal that its orders gave rise to questions of law, the assessee moved the Al

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2012 Supreme(SC) 36

IMPORTANT POINT The burden of proving whether a particular product is marketable or not is on the department and in the absence of such proof it cannot be presumed to be marketable.

Cases Referred (19)

IMPORTANT POINT
The burden of proving whether a particular product is marketable or not is on the department and in the absence of such proof it cannot be presumed to be marketable.