Judgment:
1. The appellants manufacture articles of stationery such as carbon paper, stencil paper, ribbons, duplicating ink, etc. at their factory in' Thane. Among the products of the appellants one is Stencil Paper also referred to as duplicating stencil according to the appellants.
This consists of stencil skin, carbon paper and backing paper and stencil head. For the manufacture of this product the appellants import tissue paper known as Eltoline. This tissue paper is treated with a chemical solution called "Melt" and the said paper is then passed through a heat chamber for drying. The resultant product is "stencil skin". The appellants purchase duty paid tissue paper and convert the same into carbon paper through a process. They purchase duty paid printing and writing paper and use the same as backing paper for this stencil paper. The said stencil paper is made by collecting together the stencil skin, carbon paper and backing paper. The scale printing is also done simultaneously with collating. The said operation of collating is carried out by a machine known as collating machine. The stencil head of the said stencil paper is punched by the appellants on punching press by punching required holes to make it useable on a particular duplicating machine.
2. Upto 24th April, 1980 the appellants cleared the stencil paper after paying duty on it under Item 68 of the Central Excise Tariff.
Thereafter the appellants were asked to file classification lists for the stencil paper classifying it under Tariff Item 17(2) with effect from 16th March, 1976 and to pay the duty. The appellants thereafter cleared the goods under Item 17(2) GET under protest. They contended that duty was payable only under Item 68 CET. They, however, availed of proforma credit on the duty paid on the said paper.
3. On 15th November, 1980 the Central Excise Authorities issued to the appellants a demand-cum-show cause notice calling upon them to pay an amount of over Rs. 39.62 lacs on the ground that it was the differential duty payable by the appellants between 24-10-79 and 23-4-80. After the appellants replied the show cause notice on 1-1-81, they received a letter dated 20th March, 1981 from the Superintendent of Central Excise according to which 'stencil paper' (duplicating stencils according to the Superintendent) was correctly classifiable under Item 68 and "stencil skin" (stencil paper according to the Superintendent) was leviable to duty under Item 17(2) of CET from 27-2-81. After some developments including orders of the High Court, the Assistant Collector of Central Excise heard the appellants in person on 31st July, 1981.
4. By order dated 25th August, 1981 the Assistant Collector rejected the submissions of the appellants and held that the "stencil skin" was "goods" and the process of making "stencil skin" was a manufacturing process and that the same was liable to pay duty under Tariff Item 17(2) CET.5. The appellants preferred an appeal before the Collector of Central Excise (Appeals) who by the impugned order dated 15-2-82 rejected the contention of the appellants. Aggrieved, the appellants filed a revision application before the Government of India and this application, on statutory transfer, is being dealt with as an appeal before this Tribunal.
6. The issue before us can be briefly stated as the classification of "stencil skin" and the liability of the same to Central Excise duty.
Stated differently the question would be whether under the process material which goes into production of 'duplicating stencil' which is the finished product is liable to duty. The appellants say that it is not liable and the Revenue says that it is.
(i) Conversion of tissue paper (Eltoline Tissue Paper) in the "stencil skin" is not manufactured as the paper continues to remain as paper and no new product is brought into existence. (In this context the Learned Senior Counsel argued that the Department could not tax an item under the same entry twice. In this context he recalled a judgment of the Larger Bench of the Tribunal in the matter of Guardian Plasticote Ltd. v. Collector of Central Excise, Calcutta (ii) The "stencil skin" is not know as paper in the rket. In common parlance paper means paper which is used for writing, printing or packaging and as "stencil skin" is not used for any of these purposes, it is not known as paper and cannot be considered as such.
(iii) The "stencil skin" is obtained at an intermediate stage in the process of manufacture of 'duplicating paper' and is neither bought nor sold as such. It is, therefore, not 'goods'. (The appellants sought support for this argument by some affidavits filed). They also submitted that a small number of instances of export of "stencil skin" to some foreign buyers did not amount to buying and selling the same.
(iv) Even if "stencil skin" is paper no duty can be levied as there is no removal of the goods from the factory, all the skins being used in the manufacture of "stencil paper" also known as "duplicating stencils".
(v) Even if "stencil skin" is charged to duty it could be liable to duty under Tariff Item 68 GET and not 17(2) as it is not paper.
The Learned Counsel cited case law to which reference will be made at appropriate places.
8. Replying to the arguments and opposing the same the Learned JDR Shri Sundar Rajan submitted that the Bombay High Court order in A.S. Writ Petition No. 1886 of 1981 dated 13th July 1981 (copy filed by the appellants), itself indicated that the stencil skin is to be classified under Tariff Item 17(2) CET. He further submitted that the stencil skin was "goods" for that purposes and the fact that the appellants exported stencil skin six times during the period July 1980 and August 1981 shows that it is so. In support of his argument that these are "goods" he referred to 1986 (24) ELT 169 (SC) - Union Carbide India Ltd. v.Union of India and Ors..
9. Shri Sundar Rajan further submitted that even captive consumption is consumption under the law. He further argued that a consumer, in this case of the stencil skin, need not necessarily be a third party or a resident of India. Further according to the Learned JDR consumption or use is not a prerequisite for excisability.
10. He further argued on behalf of the Revenue that skin is manufactured independently and the manufacture is complete when the skin is made and becomes a component part of stencil. He further submitted that carbon paper was held as coated paper classifiable under Item 17(2) of CET even prior to the date when the Tariff is amended to bring carbon paper specifically under the item. He referred to a judgment of the CEGAT 1985 (6) ETR 570 in the matter of Kores (India) Ltd. Thane v. Collector of Central Excise, Thane, where carbon paper manufactured prior to the changes brought about by the Finance Act, 1982 was also held to be classifiable under Item 17(2) CET. Countering these arguments the Learned Counsel for the appellants Shri Sorabjee did not press his argument that an item cannot be taxed under the same entry twice. He made it clear that he was not pressing the point only because a Larger Bench of the Tribunal gave a judgment on the same point as reported in 1986 (24) ELT 542 Guardian Plasticote Ltd. v.Collector of Central Excise, Calcutta. The Learned Counsel was reserving his right to argue this matter elsewhere if need be. He further pointed out that in the Glossary of Paper issued by I.S.I.Ferro Paper finds place, but not the stencil skin. He also pointed out that a judgment issued by the Supreme Court cannot be terned as erroneous even if the Hon'ble Court overlooks some arguments or facts or these are not cited before the Court. The Learned Counsel was recalling a suggestion made by the Revenue that the Supreme Court judgment in Union Carbide India Ltd. 1986 (24) ELT 169 SC was not correct as. Rules 9 and 49 were not considered there. Shri Sorabjee also argued that captive consumption is different from being able to bring goods to the market and that mere removal for captive consumption does not render something into goods when they are otherwise not goods.
He pointed out that the affidavits filed have not been answered by the lower authorities.
11. We have considered the arguments of both sides carefully. The points for decision before us can be reduced to whether - (2) if they are so whether they are classifiable under Item 17(2) GET or Item 68 thereof.
12. Shri Sorabjee's argument that "stencil skin" were not goods was based on the averment that these are not normally and in the ordinary course bought and sold. The consumption is entirely captive and they are useless for anybody except the makers of stencil paper like the appellants. In this context Shri Sorabjee referred to Board's Tariff Advice No. 61/78 dated 20-11-1978 which was extracted from Jain's Central Excise Tariff 1985-86 page 468. This Tariff Advice was as follows : "Coated Paper : Levy of duty on coated paper used for making stencil paper was under examination for some time. It has been decided that this coated paper is an intermediate product which does not come to the market either to be bought or sold but used in the ultimate manufacture of stencils, it should be considered as not excisable." We note the argument of the Learned JDR in this context that this Tariff Advice was superseded by another Tariff Advice No. 25/81. The Bombay High Court's order dated July 13, 1981, inter alia, laid down that the original authority, appellate authority and the revisional authority are directed not to take into consideration the Tariff Advice bearing No. 25/81 dated 27th February, 1981 issued by the Central Board of Excise & Customs. We take it that these orders bind the Tribunal as well as this authority has replaced the revisional authority. We do not go further into it. Shri Sorabjee relied upon the judgment of the Supreme Court in Union Carbide India Ltd. (supra) to support his argument that stencil skin were not goods. We would like to record here that we straightway reject the Learned JDR's argument that the Supreme Court's order was wrong as it did not take into consideration Rules 9 and 49 of the Central Excise Rules. We note the legal position as explained by Shri Soli Sorabjee and accept the same.
13. The Supreme Court in this judgment held that in order to attract excise duty, the article manufactured must be capable of sale to a consumer. They also observed that to become "goods", an article must be something which can ordinarily come to the market to be bought and sold. Shri Sorabjee submitted that the stencil skin cannot be ordinarily bought and sold and they do not come to the market for being faded in. Therefore, stencil skin according to the Learned Counsel could not be considered as "goods".
14. We have considered this argument and have perused the Supreme Court judgment with utmost respect. The Hon'ble Court was examining the question whether aluminium cans which are ultimately used as torch light bodies were "goods" or not. It was in this context that the Hon'ble Court made the observations we have mentioned above.
15. In the present case, it was stated by the Learned JDR that the manufacture of stencil skin is independent and is complete when the skin is made and becomes a component part of stencil. In the Union Carbide case the position was different. As observed by the Supreme Court it appeared from the records (of the case) that the aluminium cans at the point of levy of excise duty exist in a crude and elementary form incapable of being employed at that stage as a component in a flashlight. The Hon'ble Court also observed that the cans have sharp uneven edges and in order to use them as a component in making flashlight cases, the cans have to undergo various processes such as trimming, threading and redrawing. After the cans are trimmed, threaded and redrawn, they are reeded, beaded and anodized or painted.
It is at that point only that they (the cans) become a distinct and complete component capable of being used as flashlight case...
16. In the present case, we note the submission of the Learned JDR to the effect that the stencil skin is a ready component of the stencil.
The observations made by the Supreme Court about the cans do not apply to the stencil skins which are subject matter of this appeal.
Therefore, we hold that on the basis of the facts and circumstances the ratio of the judgment in Union Carbide (supra) is not applicable to the facts of the present case.
17. In this context another judgment of the Supreme Court was cited before us and we have examined the same. This judgment was in the matter of Empire Industries Ltd. and Ors. v. Union of India and Ors. - 1985 (20) ELT 179 SC. Holding that the taxable event for Central Excise is the manufacture of excisable goods and the moment there is a transformation into a new commodity commercially known as a distinct and separate commodity having its own character, use and name, manufacture takes place and liability to duty is attracted, the Supreme Court laid down in paragraph 30 of the judgment as follows :In Deputy Commissioner, Sales Tax (Law) Board of Revenue (Taxes), Ernakulam v. Pio Food Packets - (1980) 3 SCR/271 arising out of Kerala General Sales Tax Act, 1963 where the expression used under Section 5A(1)(a) was "consumes such goods in the manufacture of other goods for sale or otherwise", and the meaning of the expression under Section 5A(1)(a) fell for consideration for exigibility to tax of pineapple fruit when processed into slices for the purpose of being sold in sealed cans. Though in the facts of that case in the context of Sales Tax Law, it was held that there was no manufacture, the principles enunciated by this Court are in the following terms : "There are several criteria for determining whether a commodity is consumed in the manufacture of another. The generally prevalent test is whether the article produced is regarded in the trade, by those who deal in it, as distinct in identity from the commodity involved in its manufacture. Commonly, manufacture is the end result of one or more processes, through which the original commodity is made to pass. The nature and extent of processing may vary from one case to another, and indeed there may be several tages of processing and perhaps a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. But it is only when the change or a series of changes, take the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognised as a new and distinct article that a manufacture can be said to take place. Where there is no essential difference in identity between the original commodity and the processed article it is not possible to say that one commodity has been consumed in the manufacture of another. Although in has undergone a degree of processing, it must be regarded as still retaining its original identity".
It may be noted that the taxable event in the context of Sales Tax Law is 'sale". The taxable event under the Excise Law is 'manufacture'. The moment there is transformation into a new commodity commercially known as a distinct and separate commodity having its own character, use and name, whether be it the result of one process or several processes 'manufacture' takes place and liability to duty is attracted. Though in the facts' of that case perhaps it was not necessary and as such the attention of the Court was not drawn to the definition of the term "manufacture" under Section 2(f) of the Central Excise Act nor was the Tariff Item IB placed before the Court." 18. It cannot be denied that the stencil skin is manufactured by the appellants. The argument that the stencil skin is not bought or sold in market place appears to be immaterial as it is not a general consumption item but a highly specialized item. It is conceivable that a manufacturer who wants to manufacture stencils may purchase stencil skin from appellants or some other manufacturers. Besides, it is shown that the appellants did in a few instances export stencil skin along with machine to purchasers abroad.. These instances do not prove that stencil skins are bought and sold in India but these certainly show the capability of the stencil skin to be bought and sold if the right circumstances are present.
19. We have also gone through the judgment of the Delhi High Court in Metal Forgings Pvt. Ltd. and Anr. v. Union of India and Ors. 1985 (20) ELT 280 cited by the respondent. Referring to the Supreme Court judgment in Dunlop India Ltd. v. Union of India - AIR 1977 SC 597, the Court in para 18 of their order made the following observation : "The counsel is right when he says that the taxing event is the manufacture and the excise duty is leviable when the goods leave the factory gate. The condition of the article at the time when it leaves the factory gate is the determining factor for the purposes of levy of excise duty. End use of the goods cannot determine their classification in general except where classification is related to the function of the goods as in Tariff Item No. 68. The question as to what would be the possible ultimate use or end use of a forged product or the use of which the trade might put the said goods after they leave the factory as forged products is altogether immaterial (See "Dunlop India Ltd. v. Union of India", AIR 1977 SC 597). This is applicable to forged products of iron and steel which have not undergone the further process of machining/ drilling/polishing. The forged products which have to undergo the further process of manufacture to make them suitable and identifiable as machine parts, leave the factory gate into a form known to the commercial community as machinery parts. They are liable to duty under Tariff Item 68." The judgment of the Bombay High Court in M.R.F. Limited v. Union of India and Ors. 1985 (22) ELT 5 which relied upon and referred to various Supreme Court judgments held that marketability was no consideration for liability to excise duty.
20. 'Stencil Skin' is without doubt a complete product after processing is done on it. In view of this and in view of the foregoing discussion, we hold that it is "goods" and is liable to excise duty.
21. This brings us to the next question as to the correct classification. The Revenue's argument is that it is 'paper' falling under Item 17(2) GET. Appellants resist this argument and submit that it is not 'paper' and it is not liable to duty under that item. We would like to straightway reject the argument of the Learned JDR that the Bombay High Court's order dated July 13, 1981 classified these goods under Tariff Item 17(2). These orders do not have any indication to that effect.
"17. Paper and Paper board, all sorts (including paste-board, mill board, strawboard, cardboard and corrugated board), in or in relation to the manufacture of which any process is ordinarily carried on with the aid of power - (1) Uncoated and coated printing and writing paper (other than poster paper).
(2) Paper board and all other kinds of papers (including paper or paper boards which have been subjected to various treatments such as coating, impregnating, corrugation, creping and design printing), not elsewhere specified".
23. This item will become relevant if the 'stencil skin' is found to be paper. Shri Soli Sorabjee relied upon a judgment of the Supreme Court in Commissioner of Sales Tax, U.P. v. Macneill & Barry Ltd. 1986 (23) ELT 5 (S.C.), where the Supreme Court held that Ammonia paper and ferro paper is not paper and hence not covered by expression "paper other than hand-made paper". The Supreme Court after examining the process of manufacture of Ammonia paper and ferro paper observed that this could not be regarded as paper in the popular sense of the term. In paragraph 6 of the order the Court said "Paper is used for printing or writing or for packing. Ammonia paper and ferro paper are not employed for any of the purposes and subjected to any of the processes for which a paper, as commonly understood, is generally used." Incidentally in this order the Supreme Court referred to an order of the Orissa High Court in the following terms : "On the contrary, more to the point is the decision of the Orissa High Court in State of Orissa v. Gestetner Duplicators (P) Ltd. (1974) 33 STC 333, where it was held that stencil paper was not paper within the meaning of Serial No. 7A of the Schedule to :he notification issued by the State Government under the first proviso to Sub-section (1) of Section 5 of the Orissa Sales Tax Act, 1947." Shri Sorabjee argued that 'stencil skin' is not used as a paper for writing or packing or for any of the other purposes for which ordinary paper is used including printing. He also referred to the judgment of the Supreme Court in State of Uttar Pradesh and Anr. v. Kores (India) Ltd. AIR 1977 SC 132 and submitted that carbon paper was held not to be paper in the said judgment. In this judgment the Supreme Court held that carbon paper is not paper covered by the expression "paper other than hand paper". We note that the Tariff at the relevant time was different from what it was during the relevant time for the present appeal. The same is the case with the judgment cited earlier, namely, Macneill & Barry Ltd. (supra). However, the Supreme Court were not considering the classification of Ammonia paper and ferro paper and in the later case carbon paper, as such but were examining whether it was paper. AIR 1977 judgment of the Supreme Court in M/s. Kores (India) Ltd. relates to a dispute under the U.P. Sales Tax Act but in our opinion the views expressed by the Supreme Court have to be followed with respect as these are relevant to a judgment on the present matter.
Holding that carbon paper is not paper, the Hon'ble Supreme Court observed as follows: "16. Bearing in mind the ratio of the above-mentioned decisions, it is quite clear that the mere fact that -the word "paper' forms part of the denomination of a specialised article is not decisive of the question whether the article is paper is generally understood. The word 'paper' in the common parlance or in the commercial sense means paper which is used for printing, writing or packing purposes. We are, therefore, clearly of opinion that carbon paper is not paper as envisaged by entry 2 of the aforesaid Notification." Shri Sorabjee submitted that the Tribunal's rejection of this judgment in 1985 (6) ETR 570 [Kores (India) Ltd. Thane v. Collector of Central Excise, Thane] on the ground that it was delivered in a sales-tax case was wrong. We note this argument but do not find it necessary to make any observations on the correctness or otherwise of the earlier decision as it is not necessary for the present proceedings.
24. Shri Soli Sorabjee also relied on a judgment of the Karnataka High Court in Khoday Industries Limited v. Union of India and Ors. 1986 (23) ELT 337. The High Court in this judgment held that carbon paper is an article of stationery classifiable under Item 68 and not under Item 17(2) prior to the amendment with effect from 27-2-1982.
25. We have carefully considered the arguments of Shri Sundar Rajan that even according to the judgment in Khoday Industries Ltd. (supra) once held as coated paper, the paper falls only under Item 17(2) CET.He made a special reference to paragraph 13 of the judgment. However, this argument would be relevant only if the 'stencil skin' is held to be paper. The overwhelming case law cited, by Shri Soli Sorabjee leads us to the finding that 'stencil skin' cannot be considered as 'paper'.
We therefore hold that it is not classifiable under Item 17(2) of CET but being manufactured goods it is correctly classifiable under Tariff Item 68 CET.26. As a result, we hold that the "stencil skin" is "goods" and that it is not "paper" and that it is correctly classifiable under Tariff Item