K.L. Rekhi, Member (T)

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",

(2) bone grist (smaller pieces of bones),

(3) bone meal (granule like powder of bones), and

(4) bone sinews (fleshy portions separated from the bones).

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.

3. The Assistant Collector held that the goods were dutiable under Item 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.

4. During the hearing, the respondents made a two-fold submission-

(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 cr