Process of making finished product usable at end users convenience does not amount of transformation in character

Where there is no essential difference in identity between the original commodity and post processed article – would processing stage would mean manufacturing and open to excise levy was the issue before Court.

In the instant matter, during the relevant period assessee had purchased syringes and needles in bulk from the open market. They were then to be sterilized and one syringe and one needle were placed in an unassembled form in a printed plastic pouch. Both were capable of use only once and, hence, were disposable. The plastic pouches so packed were sold to an industrial customer. The pouches bore a brand name belonging to the purchaser.
The Department vide show cause notice asked the assessee to show cause as to why the said syringes and needles, (which had already borne the payment of excise duty in the hands of their manufacturers), be made to pay excise duty again as a result of sterilization. The show cause notice alleged that sterilization brings about a change in the character of the final product, which now becomes disposable syringes and needles. Therefore, a new commodity having a different character has come into existence. Assessee replied by claiming that the activity of sterilization would not amount to manufacture and no new product comes into existence by merely sterilizing disposable syringes and needles which continue to be disposable syringes and needles post-sterilization.
The Assistant Commissioner Central Excise held that the process of sterilization was essential to complete manufacture before the products are sold in the market. This being so, the process of sterilization was found to be an integral and inextricable part of the manufacturing process to make the product marketable. It was further held that the process of sterilization brings about a transformation of the product by making something non-sterile, sterile.

The above order was set aside by the Commissioner of Central Excise (Appeals) reasoning that the process of sterilization does not bring about any change in the basic structure of syringes and needles even though post-sterilization the value of the product gets enhanced. He further held that under Section 2(f) of the Central Excise Act, there is no mention of the test of integral or inextricable process and found that the wrong test had been applied to arrive at the wrong result. CESTAT in turn set aside the order of the Commissioner of Central Excise (Appeals) observing that an Article with distinct brand name and separate end use/quality has emerged by the activity undertaken. The use/character of a ‘syringe’ which was brought and which emerged has changed. While the goods brought were not fit for use on humans, medical needles as made were not usable till sterilized. The commercial identity, nature, use and understanding have changed and manufacturing has taken place thereby attracting excise levy.

The court in order to decide on upon the above controversy analysed the distinction between manufacture and marketability, noting as under:

•   A duty of excise is levied on the manufacture of excisable goods.
•   “Excisable goods” brings in the concept of goods that are marketable, that is goods capable of being sold in the market.
•   On the other hand, manufacture is distinct from sale-ability.
•   Manufacture takes place on the application of one or more processes. Each process may lead to a change in the goods, but every change does not amount to manufacture. There must be something more – there must be a transformation by which something new and different comes into being, that is, there must now emerge an article which has a distinctive name, character or use.
•   When a finished product cannot conveniently be used in the form in which it happens to be, and it is required to be changed into various shapes and sizes so that it can conveniently be used, no transformation takes place if the character and the end use of the first product continue to be the same.
•   The test for determining whether manufacture can be said to have taken place is whether the commodity which is subjected to the process of manufacture can no longer be regarded as the original commodity but is recognized by the trade as a new and distinct commodity.
•   When the essential character of the product has not changed, there would be no manufacture. 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 it has undergone a degree of processing, it must be regarded as still retaining its original identity.
•   “Processing” may be an intermediate stage in manufacture and until some change has taken place and the commodity retains a continuing substantial identity through the processing stage, it cannot be said that it has been manufactured.

It was held that from various precedents and legal position that prevails there can be laid down following four neat categories:
(1)   Where the goods remain exactly the same even after a particular process, there is obviously no manufacture involved. Processes which remove foreign matter from goods complete in themselves and/or processes which clean goods that are complete in themselves fall within this category.
(2)   Where the goods remain essentially the same after the particular process, again there can be no manufacture. This is for the reason that the original article continues as such despite the said process and the changes brought about by the said process.
(3)   Where the goods are transformed into something different and/or new after a particular process, but said goods are not marketable.
(4)   Where the goods are transformed into goods which are different and/or new after a particular process, such goods being marketable as such. It is in this category that manufacture of goods can be said to take place.

The instant case held to be falling within the first category aforementioned being a case of manufacture of disposable syringes and needles which are used for medical purposes. These syringes and needles are finished or complete in themselves. They can be used or sold for medical purposes in the form in which they are. The fact that medically speaking they are only used after sterilization would not change the character. All articles used medically in surgical operations, must of necessity first be sterilized.
The added process of sterilization does not mean that such articles are not complete articles in themselves or that the process of sterilization produces a transformation in the original articles leading to new articles known to the market as such. Surgical equipment such as a knife continues to be a surgical knife even after sterilization. If the Department were right, every time such instruments are sterilized, the same surgical instrument is brought forth again and again by way of manufacture and excisable duty is chargeable on the same.

The above would lead to an absurd result and fly in the face of common sense. If a surgical instrument is being used five times a day, it cannot be said that the same instrument has suffered a process which amounts to manufacture in which case excise duty would be liable to be paid on such instruments five times over on any given day of use. Further, what is to be remembered here is that the disposable syringe and needle in question is a finished product in itself. Sterilization does not lead to any value addition in the said product. All that the process of sterilization does is to remove bacteria which settles on the syringe’s and needle’s surface, which process does not bring about a transformation of the said articles into something new and different. Such process of removal of foreign matters from a product complete in itself would not amount to manufacture but would only be a process which is for the more convenient use of the said product. In fact, no transformation of the original articles into different articles at all takes place.

Neither the character nor the end use of the syringe and needle has changed post-sterilization. The syringe and needle retains its essential character as such even after sterilization.

[M/s. Servo-Med Industries Pvt. Ltd. vs. CCE, Mumbai]
(SC, 07.05.2015 – Civil Appeal No. 583 of 2005)