MAY 09, 2005

By Sunil Achutan

AFTER an understandably truncated first posting, my exceedingly long second posting remains the most unforgettable one. I will remain indebted to the department' for dispatching me to a cigarette manufacturing unit.

Watching cigarettes being manufactured became my favourite pastime ' a cigarette making machine churns out nearly 2500 cigarettes per minute. My colleagues reprimanded me and suggested that I concentrate on many other 'healthy' manufacturing processes, rather than this 'addictive' one.

To get that 'intellectual look', I started growing a beard as if I was preparing a thesis on cigarette manufacturing.

Cigarette (heading 24.03) is the only commodity in the Indian Republic that continues to be covered under physical control. Although at present, there are only a handful of manufacturers like Godfrey Philips, Golden Tobacco and the giant ITC and not to miss out on a few job workers, the central government in all its wisdom still chooses to go 'physical', probably because the manufacturers themselves wish it to be so.

Going back, tobacco leaf (standing crops) purchased on auction from the vast fields in Andhra Pradesh and elsewhere, was also earlier under licencing control called popularly the L-2 licence. Fortunately that was dispensed with in 1988 and thereafter the department had to take care of the cigarette manufacturing activity only. No doubt, tobacco leaf along with stalk/stems etc. first enter the manufacturing stage where they are converted into cut tobacco by an elaborate manufacturing process and hence cut tobacco (heading 24.04) becomes excisable and chargeable to duty. During this process, certain 'casing materials' (prepared out of bought out raw materials like propylene, glycol, glycerine, sarcelly PLV sugar etc. by mixing them with water and treated) are also added depending upon the blend of cut tobacco required for each brand of cigarette.

This blended cut tobacco is fed into the cigarette making machine, which is a complex machinery boasting a multitude of ancillary functions like :-

1. Un-spooling the cigarette paper spool;

2. the cigarette paper is printed with the logo of the company, a written word being the brand name, and on occasions with the name of the manufacturer written sideways, black or golden yellow in colour;

3. the cigarette paper after printing is simultaneously fed with the cut tobacco and immediately gets converted into a cylinder ' a running tube with cut tobacco filled in it by sealing alongside with glue;

4. this laden tube is cut with a fast revolving blades into running lengths of specific size depending upon the intended cigarette length;

5. It then moves onto another roller which is being fed with cigarette filter rods (chapter 56) each 66 mm in length cut into filters of 22 mm which is placed on the roller to which two pieces of the cut tobacco filled tubes are placed on either side and then simultaneously covered and glued by the filter covering paper/wrapper - golden yellow, brown, dotted or white in colour, and finally halved on the filter portion into two cigarette sticks, one facing the other; (Way back in early '80's, while prescribing the effective rate of duty, it was mandatory that the cigarette filter should have a minimum length of 11 mm, nowadays the tariff entry itself prescribes this.)

6. these processes are too quick to be noticed by the naked unless the machine breaks down and you can see the cigarette in various stages of un-dressing;

7. These cigarettes are moved in trolleys to a drying room if required and then carried to the packing/production section, where they will be dressed up into a packet;

8. The packing machine is another beautiful example of harmony, we have the conventional 'shell and slide' pack and the premium brands are clothed in a flamboyant manner in a 'hinge lid pack' (HLP), you have soft cup labels too;

9. First - the shell and slide pack (the department sought duty on the 'conjugal bliss' acquired by the shell and slide by alleging that a box classifiable under heading 4819.12 of the CETA'85 came in to being. Fortunately, the conjugal bliss was a long lived one for the Madras High Court in the case of Asia Tobacco Co. Ltd. v. U.O.I. (2003-TIOL-108-HC-MAD-CX) and again in the case of the very same company Asia Tobacco Co. Ltd. vs. A.C, C.Ex, (2003-TIOL-109-HC-MAD-CX) held that what comes into being is not a mere 'packet/box/carton' consisting of a shell and a slide but a 'CIGARETTE PACKET containing ten cigarettes'. A look at the said manufacturing process would reveal that cigarettes, 10 or 20 in number are first placed mechanically on an embossed paper backed aluminium foil cut into a specific length by the machine leaving a portion of the foil for being folded upwards to keep a part of the cigarettes exposed, (note that embossing is done on the machine itself on the plain paper backed aluminium foil while being un-spooled), the exposed portion is then covered with another cut piece of embossed paper backed aluminium foil and this in turn is placed on the open slide, which then slides into the opened shell and what is ultimately formed is a 'packet containing ten cigarettes' wrapped in embossed paper backed Aluminium foil. Had some one studied the manufacturing process and then proceeded to issue demand notices this exercise in futility could have been avoided. Although, Board Circular 11/89 dated 30.03.1989 in the context of 'plastic milk pouches' and 'tea packets' clarified that these were not chargeable to duty, no one bothered to apply the same logic here. Also refer the case of Milk Plant, 1995(79)ELT 315(Tri) wherein a similar view was taken.

10 . It's fun ' real fun! As regards manufacture of hinge lid packs (HLP's), it's not that exciting as this is ' take my word for it except for the embossed aluminium foil also having a 'PULL' embossed or is it called depressed, the basic packing process remains the same but there is no shell or slide but a HL blank !

11. Subsequently, these cigarette packets are wrapped in PVC films and ultimately packed in cartons and then into corrugated board boxes (C.B.B's).

There is central excise in each and every stage of the above referred manufacturing process apart from the prominent ones mentioned as you can see.

1. Casing materials (heading 33) - since produced out of bought out raw materials and has limited shelf life and has to be used immediately in the manufacture - hence not considered as excisable goods ' Chandigarh Trade notice no. 93/89 dated 24.11.89.

2. Bought out cigarette paper printed with brand name/logo/name of company during the in situ manufacturing operation ' printing does not amount to `manufacture' under section 2(f) ' Supreme Court in J.G. Glass Works;

3. Glues, pastes and gums for gluing cigarette paper prepared from bought out items like duty paid starch, dextrine etc. and captively consumed (heading 35.06) - since not 'marketable' not 'goods' hence not excisable ' Chandigarh Trade Notice 39/89, dated 28.04.1989.

4. Packing operations ' Plain paper backed Aluminium foil embossed on machine during packing operations and also cut to shape and size, an in situ process, and not separately (remember how you used to place a five paise coin on the aluminium foil collected from your father's cigarette pack and rub gently to get an emboss ' a similar type of embossing is carried out to make the foil sturdy) ' this was 'unfortunately' thought to have been covered under exemption notification no. 180/88 CE. Dated 13.05.1988, sr.no.14, and which was amended by notification no. 44/94 C.E dated 01.03.94 - when the whole problem started as the 'supposed exemption entry' was omitted !

Demand notices began raining, but fortunately, when it reached the Tribunal, it was held that this activity did not amount to 'manufacture' merely because of finding a changed tariff entry, paper backed aluminium foil (S.H 7607.10) ' after embossing S.H 7607.20 and after cutting to shape and size S.H 7607.30. This was the case of CCE vs. Godfrey Philips ( 2003-TIOL-242-CESTAT-MUM ) .

It was now the turn of another manufacturer to have a 'fag'. The case involving GTC took a bit circuitous route for the reason that when the department's appeal in the matter was first heard by the CESTAT in the year 2004, the two Members arrived at a finding contrary to the view taken by the co-ordinate Bench in the case of Godfrey Philips and hence referred the matter to be placed before the Larger Bench to resolve the difference.

The Larger Bench verdict is out. Order no. A/444/WZB/2005/C-III dated 19.04.2005 approves the decision taken in the case of Godfrey Philips (I) Ltd.

Next time, when you take a puff ' remember that for 2.95 per stick you get a trip across five chapters of the CETA'85, a steal isn't it?.

(See 2005-TIOL-370-CESTAT-MUM-LB)

(The author works with the Department and the views expressed are strictly personal)