By TIOL News Service

NEW DELHI, MAY 08, 2015: BETWEEN June 1995 and March 1997, the appellants purchased syringes and needles in bulk from the open market. They would then sterilize the syringes and the needles and put one syringe and one needle in an unassembled form in a printed plastic pouch. The syringe and the needle were capable of use only once and, hence, were disposable. The plastic pouches so packed were sold to an industrial customer, namely, M/s. Hoechst Marion Roussel Ltd. The pouches bore the brand name 'Behring'. The brand name 'Behring' belonged to the purchaser.

By an order dated 31.12.1997, 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.

By his order dated 25.2.1999, the Commissioner of Central Excise (Appeals) set aside the said order, 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.

The CESTAT in turn set aside the order of the Commissioner of Central Excise (Appeals) observing:

"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 has changed, manufacturing has taken place, excise levy is attracted."

The assessee is in appeal before the Supreme Court.

The Supreme Court delved rather deeply into certain basic principles, with the help of decided cases:

Distinction between manufacture and marketability : A duty of excise is levied on the manufacture of excisable goods. "Excisable goods" are those goods which are included in the schedules of the Central Excise Tariff Act, 1985. "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 transformation does not take place.: 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. An illustration of this principle is brought out by the judgment in CCE, New Delhi v. S.R. Tissues, - 2005-TIOL-194-SC-CX . On facts, in the said case, jumbo rolls of tissue paper were cut into various shapes and sizes so that they could be used as table napkins, facial tissues and toilet rolls. The Court held that there was no manufacture as the character and the end use of the tissue paper in the jumbo roll and the tissue paper in the table napkin, facial tissue and toilet roll remains the same. Another example when transformation does not take place is when foreign matter is removed from an article or additions are made to the article to preserve it or increase its shelf life. Similarly in the Maruti Suzuki case, it was held that bumpers and grills of motor vehicles continue to be the same commodity after ED coating which would increase the shelf life of the said bumpers and grills and provide anti rust treatment to the same. No new commodity known to the market as such had come into being merely on account of the value addition of the ED coating.

Retaining of essential character test.: In M/s. Satnam Overseas Ltd. v. Commissioner of Central Excise, New Delhi (Civil Appeal No.8958 of 2003) - 2015-TIOL-66-SC-CX, it was held that as the essential character of the product had not changed, there would be no manufacture. In that case, the product was a combination of raw rice, dehydrated vegetables and spices in the name of rice and spice. It was held that the said product in its primary and essential character was sold in the market as rice only, despite the addition of dehydrated vegetables and certain spices.

Test of no commercial user without further process: In Brakes India Ltd. v. Superintendent of Central Excise, - 2002-TIOL-858-SC-CX, the commodity in question was brake lining blanks. It was held on facts that such blanks could not be used as brake linings by themselves without the processes of drilling, trimming and chamfering. It was in this situation that the test laid down was that if by adopting a particular process a transformation takes place which makes the product have a character and use of its own which it did not bear earlier, then such process would amount to manufacture irrespective of whether there was a single process or several processes.

The test of integrated process without which manufacture would be impossible or commercially inexpedient.: In J.K . Cotton Spg . & Wvg . Mills Co. Ltd. V . STO - 2002-TIOL-116-SC-CT- LB the Supreme Court held that where any particular process is so integrally connected with the ultimate production of goods that but for that process, the manufacture of such goods would be impossible or commercial inexpedient. Two things need to be noticed here. One is that what is spoken about is raw material which is subjected to several processes after which a final manufactured product emerges and two that the test of integral connection of a particular process with the ultimate production of goods that but for such process manufacture of goods would become impossible or commercially inexpedient was applied in the context of a process being in relation to manufacture.

The Supreme Court concluded:

(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 the said goods are not marketable. Examples within this group are the Brakes India case and cases where the transformation of goods having a shelf life which is of extremely small duration. In these cases also no manufacture of goods takes place.

(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 falls within the first category aforementioned. This is a case of manufacture of disposable syringes and needles which are used for medical purposes. These syringes and needles, like in the J.G . Glass case and unlike the Brakes India case, 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 bring this case within the ratio of the Brakes India case. All articles used medically in, let us say, 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. A 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. This 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.

Appeal is allowed and impugned order is set aside.

(See 2015-TIOL-103-SC-CX)