The Hindu Business Line : When tissue was the issue

THE issue before the apex court in a recently decided excise case was tissue, and the company in focus was S. R. Tissues P Ltd. "If you have the material it will form itself as a kind of connective tissue," said James McBride, but that's a different meaning of tissue, as group of cells in organism.

There are four basic types of tissue — nerve, muscle, epidermal and connective — Encarta would inform, but this case is about absorbent paper. Yet another meaning of tissue, `an intricate interrelated series of things', as in `a tissue of lies', is what perhaps most taxmen often view assessees' many statements to be.

The `short question' before the court was "whether the process of unwinding, cutting and slitting to sizes of jumbo rolls of tissue paper would amount to `manufacture' on first principles or under Section 2 of the Central Excise Act"? Well, that was what SR was doing, cutting/slitting of jumbo rolls of tissue paper of a width exceeding 36 cm. Jumbo, for starters, means something extra large, like a `jumbo helping', that http://encarta.msn.com helps with.

SR purchased jumbo rolls from various suppliers, paying excise duty. And these rolls of a kind normally used for household or sanitary purposes, as one learns from the text of the judgment dated August 5. "All that the assessee was doing was to reduce the width to less than 36 cm," and that's where the taxman stepped in, with a demand for duty under tariff sub-heading 4818.90. SR said it had paid duty under the heading 48.03.

Chapter 48 that you can see on the excise tariff available on www.cbec.gov.in is titled `Paper and paperboard; articles of paper pulp of paper or of paperboard'. Heading 4818 reads: "Toilet paper and similar paper, cellulose wadding or webs of cellulose fibres, of a kind used for household or sanitary purposes, in rolls of a width not exceeding 36 cm, or cut to size or shape; handkerchiefs, cleansing tissues, towels, table cloths, serviettes, napkins for babies, tampons, bed sheets and similar household, sanitary or hospital articles, articles of apparel and clothing accessories, of paper pulp, paper, cellulose wadding or webs of cellulose fibres." And 4818.90 related to the residuary `other' under this category.

Heading 4803, which SR relied upon, reads: "Toilet or facial tissue stock, towel or napkin stock and similar paper of a kind used for household or sanitary purposes, cellulose wadding and webs of cellulose fibres, whether or not creped, crinkled, embossed, perforated, surface-coloured, surface decorated or printed, in rolls or sheets."

Chapter notes clarify that 4803 applies to paper, paperboard, cellulose wadding and webs of cellulose fibres in strips or rolls of a width exceeding 36 cm; or in rectangular (including square) sheets with one side exceeding 36 cm and the other side exceeding 15 cm in the unfolded state.

When the Department initiated proceedings against it, alleging that there was `manufacture and storage' of tissue paper rolls, napkins and facial tissues, which were liable to be seized and confiscated for non-compliance of the provisions of the excise law, SR replied that cutting and slitting of jumbo rolls of tissue paper into specific width and different shapes did not amount to manufacture.

There was no change in the characteristics or the end-use of the tissue paper, said SR. Such a reduction in the width on the duty-paid jumbo rolls cannot amount to manufacture, argued SR. And there was more: "The assessee also denied the allegations of the Department that they were manufacturing/making tissues of wet type. The assessee also denied the allegations of the Department that they were imparting fragrance to the napkins made by them."

On appeal, the Commissioner decided against SR and confirmed the duty demand, and also imposed a penalty, holding that SR was a manufacturer of "table napkins, toilet rolls and ordinary wet and fragrant facial tissues with distinct brands/trademark." Aggrieved by the order, SR approached the tribunal.

There, the decision went in favour of SR, because the tribunal said that there was no section note/chapter note in chapter 48 to bring in the activity of slitting and cutting of jumbo rolls of tissue paper into smaller sizes within the ambit of Section 2. Mere existence of a separate tariff entry 48.18 would not, by itself, make facial tissues and table napkins excisable, reasoned the tribunal. From the activity of slitting and cutting, no new commodity with different name, character, end-use or commercial identity emerged and, therefore, there was no `manufacture', ruled the tribunal.

Justices B. P. Singh and S. H. Kapadia of the Supreme Court heard the arguments of the Department that there was a 180 per cent value addition from SR's activity, and that from the cutting/slitting of jumbo rolls, several different products emerged, viz. table napkins, toilet rolls, facial tissues and so on.

The judges reasoned that the characteristics of the tissue paper are its texture, moisture absorption, feel and so forth. "Characteristics of table napkins, facial tissues and toilet rolls in terms of texture, moisture absorption capacity, feel and so on are the same as the tissue paper in the jumbo rolls," they opined. "The said jumbo rolls cannot be conveniently used for household or for sanitary purposes. Therefore, for the sake of convenience, the said jumbo rolls are required to be cut into various shapes and sizes so that it can be conveniently used as table napkins, facial tissues, toilet rolls and so on."

The predominant test is whether the characteristics of the tissue paper in the jumbo roll are different from those of the tissue paper in the form of table napkin, toilet roll and facial tissue, laid down the court, concurring with the tribunal, and in the process citing precedents such as Brakes India, Shyam Oil Cake, Moti Laminates, and J. G. Glass Industries.

"Just because the raw-material and the finished product came under two different headings, it cannot be presumed that the process of obtaining the finished product from such raw-material automatically constituted manufacture," observed the court, applying the same logic to aluminium foils too, the subject of a different appeal.

On the Department's argument of 180 per cent value addition, here is something of value from the court: "Under the excise law, value addition based on a process is certainly a relevant criteria to decide as to what constitutes `manufacture'. Such value addition should be on account of change in the nature or characteristics of the product."

In SR's case, there was no such change; "value addition on account of transport charges, sales tax, distribution and selling expenses and trading margin cannot be an indicia to decide what is manufacture". Thus, value addition without any change in the name, character or end-use by mere cutting or slitting of jumbo rolls cannot constitute criteria to decide what is `manufacture', decided the court.

Tailpiece

"Won't tax law become simpler if they reduced the number of lines in the Act?"

"No, that would mean we'd have to read more between the lines!"

Detaxification@TheHindu.co.in

D. Murali

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