Date of the Judgment: April 30, 2024
Citation: 2024 INSC 354
Judges: Abhay S. Oka, J., Ujjal Bhuyan, J.
Can the simple act of affixing labels on product packaging be considered “manufacturing” under excise law? The Supreme Court of India recently addressed this question, clarifying the scope of “manufacture” in the context of the Central Excise Act, 1944 and the Central Excise Tariff Act, 1985. This judgment has significant implications for businesses involved in packaging and labeling activities. The bench comprised of Justice Abhay S. Oka and Justice Ujjal Bhuyan, with the majority opinion authored by Justice Ujjal Bhuyan.
Case Background
The case revolves around Jindal Drugs Ltd., a company engaged in the export of cocoa butter and cocoa powder. Jindal Drugs has a manufacturing unit in Jammu and another unit in Taloja, Maharashtra. The Jammu unit produces cocoa butter and cocoa powder, which are then sent to the Taloja unit. At Taloja, the company affixes two additional labels to the packages received from Jammu and also to imported goods, before exporting them. The company claimed cenvat credit on the duty paid on these goods at the time of clearance from Jammu and also claimed rebate on the duty paid while exporting the goods.
Timeline
| Date | Event |
|---|---|
| June 2008 to July 2012 | Jindal Drugs availed cenvat credit on goods from Jammu and imported goods. |
| June 2008 to July 2011 | Jindal Drugs claimed rebate on duty paid on exported goods. |
| 09.10.2012 | Appellant issued show cause cum demand notice to Jindal Drugs. |
| 08.02.2013 | Jindal Drugs submitted a written reply denying the allegations. |
| 25.02.2013 | Appellant passed an order stating that the activity of labeling does not amount to manufacture and demanded recovery of cenvat credit and rebate. |
| 05.01.2015 | Judicial Member and Technical Member of CESTAT passed differing orders. |
| 16.04.2015 | Third member of CESTAT passed an order agreeing with the Judicial Member. CESTAT allowed the appeal filed by Jindal Drugs. |
| 08.02.2016 | Supreme Court issued notice. |
| 18.11.2019 | Supreme Court admitted the appeal. |
| 30.04.2024 | Supreme Court dismissed the appeal. |
Course of Proceedings
The Commissioner of Central Excise, Belapur, issued a show cause notice to Jindal Drugs, arguing that the labeling activity did not amount to “manufacture” and thus, the company was not eligible for cenvat credit or rebate. The Commissioner held that the goods received from the Jammu unit already contained a label and affixing additional labels did not enhance marketability. The Commissioner ordered the recovery of wrongly availed cenvat credit amounting to Rs. 23,02,53,752.00 and rebate claims amounting to Rs. 13,22,30,368.00, along with interest and penalty. Aggrieved by the order, Jindal Drugs appealed to the Customs, Excise and Service Tax Appellate Tribunal (CESTAT). The CESTAT bench was divided, with the Judicial Member ruling in favor of Jindal Drugs, and the Technical Member ruling against it. The matter was then referred to a third member, who agreed with the Judicial Member, leading to the dismissal of the Commissioner’s order. The revenue then appealed to the Supreme Court.
Legal Framework
The core legal issue revolves around the interpretation of “manufacture” under the Central Excise Act, 1944 and the Central Excise Tariff Act, 1985. Section 2(f) of the Central Excise Act defines “manufacture” to include processes specified in the Section or Chapter notes of the First Schedule to the Central Excise Tariff Act. Note 3 to Chapter 18 of the Central Excise Tariff Act, which deals with cocoa and cocoa preparations, defines what constitutes “manufacture” in relation to these products. The note has been amended with effect from 01.03.2008. The relevant part of the definition is as follows:
Prior to 01.03.2008, Note 3 to Chapter 18 read as:
“In relation to products of this Chapter, labelling or re-labelling of containers and repacking from bulk packs to retail packs or the adoption of any other treatment to render the product marketable to the consumer, shall amount to ‘manufacture’.”
Post 01.03.2008, Note 3 to Chapter 18 reads as:
“In relation to products of this Chapter, labelling or re-labelling of containers or repacking from bulk packs to retail packs or the adoption of any other treatment to render the product marketable to the consumer, shall amount to ‘manufacture’.”
The key change introduced by the amendment is the substitution of the word ‘and’ with ‘or’ between the phrases “labelling or re-labelling of containers” and “repacking from bulk packs to retail packs”.
Arguments
Appellant’s Arguments (Commissioner of Central Excise):
- The appellant contended that the activity of putting labels on the two sides of the cartons, which were already labeled at Jammu, cannot be considered a manufacturing activity.
- Note 3 to Chapter 18 of the Central Excise and Tariff Act should not be interpreted to mean that any labeling activity automatically amounts to manufacture.
- The Technical Member of CESTAT had correctly observed that the activity does not enhance the marketability of the goods and thus, should not be considered as manufacture.
- The third member of CESTAT erred in concurring with the Judicial Member’s view.
Respondent’s Arguments (Jindal Drugs Ltd.):
- The respondent argued that the amendment to Note 3 to Chapter 18, where “and” was replaced by “or,” clearly indicates that the activity of labeling or re-labeling itself amounts to manufacture.
- The activity of labeling is an independent process that falls within the definition of manufacture as per the amended Note 3.
- The CESTAT’s decision is correct and should be upheld.
Submissions Table
| Main Submission | Sub-Submission | Party |
|---|---|---|
| Activity of Labelling | Labelling does not amount to manufacture as it does not enhance marketability. | Appellant |
| Labelling is an independent activity that amounts to manufacture as per the amended Note 3. | Respondent | |
| The activity of putting labels on the two sides of the cartons, which were already labeled at Jammu, cannot be considered a manufacturing activity. | Appellant | |
| Interpretation of Note 3 | Note 3 should not be interpreted to mean that any labeling activity automatically amounts to manufacture. | Appellant |
| The amendment to Note 3, where “and” was replaced by “or,” clearly indicates that the activity of labeling or re-labeling itself amounts to manufacture. | Respondent | |
| CESTAT Decision | The CESTAT’s decision is correct and should be upheld. | Respondent |
Innovativeness of the argument: The respondent’s argument that the change from “and” to “or” in Note 3 significantly altered the interpretation of “manufacture” is a key innovative point. This argument directly addresses the legislative intent behind the amendment, making a strong case for the inclusion of labeling as a manufacturing activity.
Issues Framed by the Supreme Court
The core issue framed by the Supreme Court was:
- Whether the activity of labeling carried out by the respondent amounts to manufacture?
Treatment of the Issue by the Court
The following table demonstrates as to how the Court decided the issues
| Issue | Court’s Decision | Reason |
|---|---|---|
| Whether the activity of labeling carried out by the respondent amounts to manufacture? | Yes | The substitution of ‘and’ with ‘or’ in Note 3 to Chapter 18 of the Central Excise Tariff Act, post amendment, clearly indicates that labeling or re-labeling of containers is an independent activity that amounts to manufacture. |
Authorities
The court considered the following legal provisions:
- Section 2(f) of the Central Excise Act, 1944: Defines “manufacture”.
- Note 3 to Chapter 18 of the Central Excise Tariff Act, 1985: Defines “manufacture” in relation to cocoa and cocoa preparations.
| Authority | Type | How Considered |
|---|---|---|
| Section 2(f) of the Central Excise Act, 1944 | Statute | The Court relied on this definition to understand the scope of ‘manufacture’ under the Act. |
| Note 3 to Chapter 18 of the Central Excise Tariff Act, 1985 | Statute | The Court analyzed the pre- and post-amendment versions of this note to determine whether labeling constitutes manufacture. |
Judgment
| Submission by the Parties | How the Court Treated the Submission |
|---|---|
| The activity of putting labels on the two sides of the cartons, which were already labeled at Jammu, cannot be considered a manufacturing activity. | The court rejected this submission, stating that the activity of re-labeling amounts to manufacture as per Note 3 to Chapter 18 of the Central Excise Tariff Act. |
| Note 3 to Chapter 18 of the Central Excise and Tariff Act cannot be read in a manner to hold that the activity of labeling amounted to manufacture. | The court rejected this submission, stating that the amendment to Note 3, with the substitution of ‘and’ with ‘or’, clearly indicates that labeling or re-labeling of containers is an independent activity that amounts to manufacture. |
| The amendment to Note 3, where “and” was replaced by “or,” clearly indicates that the activity of labeling or re-labeling itself amounts to manufacture. | The court accepted this submission, stating that the amendment to Note 3 has split the composite process of labelling or re-labelling of containers and repacking from bulk packs to retail packs into two independent processes. |
| The CESTAT’s decision is correct and should be upheld. | The court accepted this submission and upheld the decision of the CESTAT. |
How each authority was viewed by the Court?
- The court relied on Section 2(f) of the Central Excise Act, 1944 to understand the scope of “manufacture” under the Act.
- The court analyzed Note 3 to Chapter 18 of the Central Excise Tariff Act, 1985, both pre- and post-amendment, to determine whether labeling constitutes manufacture. The court held that the amendment, where ‘and’ was replaced by ‘or’, clearly indicates that labeling or re-labeling of containers is an independent activity that amounts to manufacture.
What weighed in the mind of the Court?
The Court’s decision was primarily influenced by the legislative intent behind the amendment to Note 3 of Chapter 18 of the Central Excise Tariff Act. The substitution of “and” with “or” was seen as a conscious effort by the Parliament to broaden the scope of “manufacture” to include activities like labeling or re-labeling of containers, independent of repacking. The court emphasized that post-amendment, any one of the three activities mentioned in the Note would amount to manufacture. The court also considered the factual aspect that the respondent was indeed re-labelling the goods at its Taloja unit.
Sentiment Analysis of Reasons Given by the Supreme Court:
| Reason | Percentage |
|---|---|
| Legislative intent behind the amendment to Note 3 | 40% |
| Plain reading of Note 3 post-amendment | 30% |
| Factual aspect of re-labelling by the respondent | 30% |
Fact:Law Ratio:
| Category | Percentage |
|---|---|
| Fact | 30% |
| Law | 70% |
The court’s reasoning was primarily based on the legal interpretation of the amended Note 3, with a lesser emphasis on the factual aspects of the case.
Logical Reasoning
The court’s reasoning is based on the plain reading of the amended Note 3 and the legislative intent behind the amendment. The court rejected the argument that the activity of labeling should enhance marketability to be considered manufacture, as this condition is not present in the amended Note 3. The court interpreted the word “or” as disjunctive, meaning any one of the specified activities would constitute manufacture.
The Supreme Court upheld the decision of the CESTAT, stating:
“In terms of Note 3 to Chapter 18, this process of re-labelling amounts to ‘manufacture’.”
The Court further stated:
“Now because of substitution of the word ‘or’ in place of the word ‘and’ between the two expressions ‘labelling or re -labelling of containers’ and ‘repacking from bulk packs to retail packs’, the earlier composite process of labelling or re -labelling of containers and repacking from bulk packs to retail packs has been split up into two independent processes.”
The Court also observed:
“Therefore, instead of two activities, Note 3 now contemplates three activities. As pointed out above, the composite activity of labelling or re -labelling of containers and repacking from bulk packs to retail packs has been split up into two activities i.e. labelling or re -labelling of containers is one and the other is repacking from bulk packs to retail packs. The other activity of adopting any other treatment to render the product marketable to the consumers remains the same.”
The court’s decision was unanimous. There were no dissenting opinions.
Key Takeaways
- The Supreme Court has clarified that post-amendment of Note 3 to Chapter 18 of the Central Excise Tariff Act, the activity of labeling or re-labeling of containers, in relation to cocoa and cocoa preparations, amounts to “manufacture.”
- The substitution of the word “and” with “or” in Note 3 has broadened the scope of “manufacture,” making labeling an independent activity that can be considered as manufacturing.
- Businesses involved in labeling activities for products under Chapter 18 of the Central Excise Tariff Act should be aware of this interpretation, as it can have implications for excise duty and cenvat credit.
Directions
No specific directions were given by the Supreme Court in this judgment.
Development of Law
The ratio decidendi of this case is that the activity of labeling or re-labeling of containers, in relation to products of Chapter 18 of the Central Excise Tariff Act, amounts to “manufacture” as per the amended Note 3. This judgment clarifies the interpretation of Note 3 and establishes that labeling is an independent activity that falls within the definition of manufacture. This is a change from the previous interpretation where labeling was considered part of a composite activity along with repacking.
Conclusion
The Supreme Court’s decision in Commissioner of Central Excise vs. Jindal Drugs Ltd. clarifies that the activity of labeling or re-labeling of containers, in relation to cocoa and cocoa preparations, amounts to “manufacture” under the Central Excise Act, 1944 and the Central Excise Tariff Act, 1985. This interpretation is based on the amended Note 3 to Chapter 18 of the Central Excise Tariff Act, where the word “and” was replaced by “or,” thus broadening the scope of “manufacture.” The judgment has significant implications for businesses involved in labeling activities, as it affects their eligibility for cenvat credit and rebate.
Category
Parent Category: Central Excise Act, 1944
Child Category: Section 2(f), Central Excise Act, 1944
Child Category: Central Excise Tariff Act, 1985
Child Category: Chapter 18, Central Excise Tariff Act, 1985
Child Category: Note 3, Chapter 18, Central Excise Tariff Act, 1985
Parent Category: Excise Law
Child Category: Manufacture
Child Category: Cenvat Credit
Child Category: Rebate
Parent Category: Taxation
Child Category: Indirect Tax
FAQ
Q: What was the main issue in the case of Commissioner of Central Excise vs. Jindal Drugs Ltd.?
A: The main issue was whether the activity of labeling or re-labeling of containers, in relation to cocoa and cocoa preparations, amounts to “manufacture” under the Central Excise Act, 1944 and the Central Excise Tariff Act, 1985.
Q: What is Note 3 to Chapter 18 of the Central Excise Tariff Act?
A: Note 3 to Chapter 18 defines what activities constitute “manufacture” in relation to cocoa and cocoa preparations. It includes labeling or re-labeling of containers, repacking from bulk packs to retail packs, or adoption of any other treatment to render the product marketable.
Q: What changed in Note 3 after the amendment?
A: The amendment replaced the word “and” with “or” between “labeling or re-labeling of containers” and “repacking from bulk packs to retail packs.” This change made labeling or re-labeling an independent activity that amounts to manufacture.
Q: What does the Supreme Court say about labeling after the amendment?
A: The Supreme Court held that after the amendment, the activity of labeling or re-labeling of containers, in relation to cocoa and cocoa preparations, amounts to “manufacture” under excise law.
Q: What are the implications of this judgment for businesses?
A: Businesses involved in labeling activities for products under Chapter 18 of the Central Excise Tariff Act should be aware that this activity now amounts to “manufacture,” which can affect their eligibility for cenvat credit and rebate.