The Hindu Business Line : Looking on darkness which the blind do see

CASSIO talks of chatting with certain Venetians on the sea-bank, in Othello, but the talk in the Aldec Corporation case was about inputs for Venetian blinds. Instead of "a Venetian, a scholar and a soldier that came hither in company of the Marquis of Montferrat," as in The Merchant of Venice, the Aldec case had Excise officials, Vitthaleshwara Painting Industries (VPI) and Srinivasa Rolling and Engineering Works (SREW).

The dispute was whether the companies had `manufactured' a separate, independent and distinct identifiable product, namely, painted aluminium slat (PAS), for Venetian blinds classifiable under chapter sub-heading 7616.90, as the Department claimed. Venetian blind is "a window blind consisting of narrow horizontal slats whose angle can be adjusted to let in more or less light," as Encarta defines.

The PAS process

The Aldec story began on November 8, 1994, when a patrol party of Excise officers of Hyderabad inspected an auto-trolley and found that the goods in transit were PAS for Venetian blinds. Since no Excise Duty had been paid, the vehicle was seized, and a show-cause notice issued in due course.

Aldec bought aluminium sheets in coil form from Hindalco and paint from Goodlass Nerolac, sent the sheets to VPI (job processor), which in turn forwarded the same to SREW (another job processor) `for slitting and re-rolling'. SREW sent the slats to VPI, which painted them and sent the product to Aldec, from where PAS went to the market for use in the manufacture of Venetian blinds.

Excise officials peered through the blinds and found that the father of one of the partners of Aldec was a partner of Sunder Das & Co, which had let out the premises to Aldec. Sunder Das & Co had also entered into agreements with VPI and SREW "for supply of power, lighting and water".

The Department alleged that control of all the activities vested in Aldec; and with the intention to evade Excise Duty, Aldec had called itself a `trader' and called SREW and VPI `job processors'. Tax was being circumvented by fragmenting the distinct activities, "which if taken together resulted in the manufacture of an independent identifiable product", said the Department.

No blind alley, this

At the level of Additional Collector and Collector, VPI and SREW got a favourable order — that slitting and painting of aluminium sheets did not amount to `manufacture'; that the sheets came under Tariff item 27(6); and that no new article was produced or manufactured.

But the Department sent a notice to Aldec saying it was not a trader but a processor and that VPI and SREW were only its workmen/labourers.

Show-cause notices were issued, asking Aldec to cough up Rs 1.51 crore as duty. Aldec cited the Ujagar Prints case, where the apex court had held that in the case of processing-houses, duty was leviable on the processors not because they were owners of the goods but because they caused the manufacture of the goods. Aldec argued that it did not cause the manufacture of the goods in the present case and, therefore, it was not liable. Ownership was not relevant, said Aldec. What was relevant was the nature of the activity and not the ownership of goods or plant/machinery, reasoned the company.

But the Commissioner went ahead and upheld the notice demanding duty. According to him, there was manufacture because the sheets were slit, using machines, into smaller sizes and reduced thickness. He studied the company's financial statements and said that both VPI and SREW had partners who were wage earners/employees of Aldec; and that both VPI and SREW were "dummies created for the purposes of fragmenting the various activities/processes with the idea of evading Excise Duty".

Aggrieved, Aldec approached the Tribunal, where the decision went in favour of the company. Therefore, it was now the Department that took up the case to the apex court.

Arguing for the Department, K. Radha Krishnan said that the Tribunal's decision was erroneous. He urged that the thickness of aluminium sheets was ten times more than the thickness of the strips; that there is value-addition in the case of PAS; and that the process of slitting, trimming and re-rolling changed the structure of the original aluminium sheets resulting in a distinct identifiable commodity known in the market as PAS.

For Aldec, it was Joseph Vellapally who argued that if two different processes, neither of which by itself amounts to manufacture, are carried on individually in different factories, no new product comes into existence. "If two factories are owned by one individual, it will make no difference," he said. The phrase `article of aluminium' in Chapter 76 refers to `a finished product made of aluminium' where aluminium is used as a raw material to manufacture various articles; and "the process of rolling and slitting followed by painting did not result in production of a new article," said Vellapally.

Article of aluminium comes into being only when the buyers manufactured the Venetian blinds, he contended. PAS can be used not just for Venetian blinds but also for making false ceilings, lamps and so on, said Vellapally.

Chargeability vs classification

After hearing both the sides, Justices B. P. Singh and S. H. Kapadia of the Supreme Court highlighted the difference between `chargeability' and `liability to pay duty'. "Chargeability arises on manufacture under Section 3 of the Central Excise Act, 1944. Liability to pay excise duty depends on classification.

Therefore, there is a difference between the concept of `chargeability' and the concept of `classification'," reads the text of the judgment dated September 26.

"Chargeability, classification, valuation and exemption are different and distinct concepts," said the court citing Bombay Tyre International Ltd. "The twin test contemplated by the excise law is that the goods must not only be manufactured but they should also be capable of being marketed," it said, referring to Moti Laminates P Ltd.

In MRF Ltd, the court had said, "The basic commodity was a tyre cord and the final product was a rubberised nylon tyre cord; the intermediate product, namely, dipped nylon tyre cord, could constitute a separate identifiable product in terms of manufacture and marketability."

In Hindustan Zinc Ltd, it was held that emergence of silver chloride by filtering sulphates from mixture of zinc chloride was a process which amounted to manufacture, but the Department "failed on marketability for want of evidence".

What is manufacture

The question whether a process, taken singly or jointly, constitutes `manufacture' on first principles or under Section 2(f) has to be determined having regard to the facts and circumstances of each case, observed the court.

`Manufacture' includes any process incidental or ancillary to the completion of a manufactured product, said the court and gave an example: "Painting of steel furniture is incidental or ancillary to the manufacture of steel furniture. But if the steel furniture is sold without painting and if painting is done after the furniture is sold then painting will not amount to manufacture."

Coming to the case on hand, the court said that there was no evidence produced on marketability, and declined to interfere with the Tribunal's ruling. However, the court instructed that the Tribunal check if the clearances were made in the name of dummy firms, because `the question of ownership' was relevant; to study the effect of bifurcation of activities by Aldec; and to examine the processes involved either jointly or singly in the light of section notes, chapter notes, and notes to HSN, and also the functional utility of the product.

"We are not examining the question whether the bifurcation impugned was with the intention to evade duty," said the court, in conclusion, dismissing the Department's appeal.

That may stir up some discussion, I'm sure. Meanwhile, here's an apt quote for the taxman from a sonnet of the Bard: "Keep my drooping eyelids open wide, looking on darkness which the blind do see... "

Tailpiece

"How nice if we had an eternal bull market... "

"With no correction?"

"Yes! And how I wish the volumes rake in so much STT that the FM would delete all other taxes!"

Detaxification@TheHindu.co.in

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