Can the test of change in tariff heading/sub-headings be adopted for identifying whether a process amounts to manufacture?

The manufacture and production of goods is the event for attracting the levy of duty. However, unless such goods are covered under the individual headings/sub-headings of the Chapters of the Central Excise Tariff, no duty liability would arise. There is thus an intricate link between manufacture of goods and the liability that would arise. The aforesaid aspect brings into focus the question whether there has to necessarily be a change from one Tariff Heading/subheading to another in order to bring the said activity within the ambit of the definition of manufacture under excise law. In other words, the question to be answered is whether a change in Tariff heading or sub heading between input material and the resultant finished product is required so as to render such finished products liable to duty.

This question was considered by the larger Bench of the Appellate Tribunal in Guardian Plasticote Vs. C.C.EX. (1986) (24) T-542 wherein the Tribunal held that in such an eventuality, the definition of manufacture would be attracted. The reasoning was that there was a transformation from one identifiable and distinct article to another identifiable and distinct article, known differently in the trade parlance. It was held that since the market understood the two goods differently, the fact that the tariff headings or sub headings did not change as a result of the process was of no relevance for determining the chargeabilit y.

The decision was upheld by the Hon‘ble Supreme Court in landmark decisions in Laminated Packings (P) Ltd. Vs. C.C.EX. (1990) (49) ELT-326 and in Union of India Vs. Babubhai Nychand Mehta (1991) (51) ELT-182. The Supreme Court held that a process would amount to manufacture when input and output material were differentiated in the commercial or trade parlance and that the fact that the same chapter heading or sub heading would govern both the input and output material was not germane to the issue. The Supreme court in case of Laminated Packings case held that duty paid kraft paper and the resultant polyethylene laminated kraft paper falling under same tariff entry is not relevant for determining dutiability of the goods as both the goods are differently identifiable goods in the market The Apex Court held that the commercial or trade parlance test was a safe and reliable test which must necessarily be adopted in such a situation so as to determine whether or not the process amounted to manufacture or not.

Therefore, the test would be of commercial differentiation and not whether the Tariff heading changes or not