Whether or not a process amounts to manufacture of goods, and the consequent Excise Duty payable if it does, has been in dispute between the government and the industry for years now despite a large number of decisions at various fora. The primary cause being that the definition of ‘manufacture’ in the Central Excise Act is inclusive, and the word ‘goods’ remains undefined. Accordingly while excise authorities allege manufacture and emergence of goods to levy duty, assesses contend otherwise. 

Before excise duty is levied on any product, it has to cumulatively satisfy the twin tests: (a) that manufacture has taken place; and (b) goods have emerged as a direct consequence. 

In a landmark decision in 1962, the Supreme Court in the Delhi Cloth Mills case defined goods and manufacture. The Bench held that an article must be something which can ordinarily come to market to be bought and sold to be called ‘goods’. It further held that ‘manufacture’ means to bring into existence a product known to the market and not merely producing some change. The Supreme Court in the South Bihar Sugar Mills case went on to hold that an article cannot be called ‘goods’ if not marketable and actual sale is immaterial. Speaking of the machinery attached to the earth, the Supreme Court in the Quality Steel Tubes case held that they are not goods and thus became immoveable property and neither satisfy the test of being goods nor can be said to be capable of being brought to the market for being bought and sold. After similar views were expressed several other cases, the Supreme Court in Sirpur Paper Mills held that just because a plant and machinery are fixed in the earth for better functioning, it does not automatically become immovable property.

The Central Board of Excise and Customs (Board) in January 2002, issued a clarificatory notification under Section 37B of the Act. It said that; (a) For goods manufactured at site to be dutiable, they should have a new identity, character and use, distinct from inputs/ components that have gone into its production; (b) Where processing of inputs results in a new products with a distinct commercial name, identity and use (prior to such product being assimilated in a structure which would render them as a part of immovable property), excise duty would be chargeable on such goods immediately upon their change of identity and prior to their assimilation in the structure or other immovable property; (c) Where change of identity takes place in the course of construction or erection of a structure which is an immovable property, then there would be no manufacture of “goods” involved and no levy of excise duty; (d) Integrated plants/ machines, as a whole, may or may not be ‘goods’. For example, plants for transportation of material (such as handling plants) are actually a system or a net work of machines. The system comes into being upon assembly of its component. In such a situation there is no manufacture of ‘goods’ as it is only a case of assembly of manufactured goods into a system. This cannot be compared to a fabrication where a group of machines themselves may be combined to constitute a new machine which has its own identity/ marketability and is dutiable (e.g. a paper making machine assembled at site and fixed to the earth only for the purpose of ensuring vibration free movement), and ; (e)    If items assembled or erected at site and attached by foundation to earth cannot be dismantled without substantial damage to its components and thus cannot be reassembled, then the items would not be considered as moveable and will, therefore, not be excisable goods.

Reaffirming the views in Sirpur Paper Mills and going into the details of the manner of installation of machinery, the Supreme Court in April this year in Solid and Correct Engineering Works held that if plant and machinery is bolted to earth to make it wobble/ vibration-free and give stability, such plant and machinery are classified as moveable and therefore liable to excise duty.

With this decision, the department is again expected to go after the industry and bring in its wake, a large number of demands of excise duty on plant and machinery assembled at site. Thus, the issue is yet again open for another round of litigation. Whether a process amounts to manufacture or not and whether a marketable and movable product has emerged, are questions that need to be determined on the facts and circumstances of each case.

However, it would still need to be determined whether the machinery is immovable or movable property, to fasten excise duty liability. In the event that such plant machinery assembled at site is attached to earth to make it vibration free and for smooth operations only, it would be treated as amounting to manufacture of excisable goods thereby following decision in Sirpur Paper Mill and Solid and Correct Engineering Works. 

However where plant and machinery so erected at site is embedded for permanent beneficial enjoyment, so much so that it becomes part and parcel of the earth, and cannot be recovered or relocated without being making substantial damage to it then it will become a immovable property and hence not liable to excise duty thereby following decision in the Quality Steel and Mittal Engineering cases.

It is on these two lines that the facts of each case are determined and an appropriate view is to be taken. To bring further clarity to the issue and save on litigation costs to both the Central Government and the industry, it is recommended that the Board issue another circular or reiterate the position adopted in the 2002 circular. This will go a long way in helping the Board with a progressive outlook vis-à-vis the industry.

Ashok Dhingra is the partner and chair of J.Sagar Associates' taxation practice. 

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