The term manufacture refers to a process involving the conversion of an input into a completely different output.
As per section 2(f) of Central Excise Act, 1944 (CEA), manufacture includes any process:
i. Incidental or ancillary to the completion of a manufactured product AND
ii. Which is specified in relation to any goods in the section or chapter notes of the 1st Schedule to the Central Excise Tariff Act, 1985 (CETA), as amounting to manufacture (deemed manufacture) OR
iii. Which in relation to goods specified in 3rd Schedule of CETA involves packing or repacking of such goods in a unit container or labeling or re-labeling of containers including declaration or alteration of retail sale price on it or adoption of any other treatment on the goods to render the product marketable to the consumer (deemed manufacture).
For instance, taking a piece of wood and converting it into smaller pieces of wood does not amount to manufacture as the wood has not undergone any change. But when pieces of wood are converted into a table, it amounts to manufacture as the wood has now become another product viz. table.
Supplier of Raw Material is not a manufacturer
A raw material supplier is not a manufacturer since s/he/it does not carry out any manufacturing activities.
Where a company outsources a job to a 3rd party (job worker) for converting a raw material into an excisable product, the 3rd party, and not the company, is considered as the manufacturer. Hence, central excise duty can be levied in the hands of a manufacturer irrespective of ownership of materials. Thus, the job worker is liable to pay excise duty although s/he/it is not the owner of the finished product.
For example, Mr. Khambhatwala was the owner of raw material. He supplied the raw materials to the household ladies who were manufacturing the dhoop, agarbatti etc in their houses. There was no control/supervision over their work and payment to them was on the basis of number of pieces manufactured. It was held that the household ladies (not Mr. Khambhatwala) were the manufacturers – CCE Vs M M Khambhatwala (1996) SC.
Goods manufactured outside the Indian territorial waters
If goods are manufactured outside the Indian territorial waters but within 150 nautical miles from the shore line, then central excise duty is attracted.
The CEA has been extended to designated areas in the Continental Shelf (CS) and Exclusive Economic Zone (EEZ) of India vide notification no.166/87-CE dated 11th June 1987. EEZ extends to 200 nautical miles from the base line of the coast and beyond it, is the High Seas. Any mineral oil produced in the EEZ or CS will be chargeable to central excise duty, as goods produced in India (and not as import).
Any activity specified in the section or chapter notes of the 1st schedule to the CETA will be deemed to be manufacture. The Govt has power to declare any process as manufacture in terms of chapter notes or section notes to the 1st schedule to the CETA.
For example, Galvanization, Metallization, Painting or Decorating on glasses, cutting of marble blocks into slabs are manufacture because they are named in the 1st schedule to the CETA.
In respect of goods specified in 3rd schedule to CEA (same as those on which excise duty is payable u/s 4A of CEA on the basis of maximum retail price (MRP) printed on the package), repacking, relabeling, declaring or altering retail sale price will be manufacture.
Where a manufacturer of goods manufactures MRP products and clears from factory without mentioning MRP price by paying duty u/s 4 (instead of 4A) and the goods are packed and labeled and MRP is affixed by the buyer who buys the goods for retail sales. The process carried out by the buyer is manufacture and hence such buyer is liable to pay duty on the basis of MRP, but will get cenvat credit of duty paid at the time of clearance from the factory. Such a buyer has to register under central excise as a manufacturer.
Packing, repacking, labeling, relabeling or alteration of retail sale price on cigarette containers is deemed to be manufacture w.e.f 28th May, 2012.
The process of crushing betel nuts into smaller pieces and mixing them with oils or spices would amount to manufacture, as amended by Finance Act (No.2), 2009. Betel nut product known as Supari is a non-dutiable goods (i.e. an excisable goods with nil rate of duty), as specified in Finance Act, 2010.
Packing, Re-packing & putting stickers on goods
Mere packing for convenience is not manufacture for the purpose of chapter notes. If the product is already marketable, any treatment to enhance marketability is not manufacture – CCE Vs Johnson & Johnson 2005 (SC).
If the product is imported as ready to market retail packs, mere affixing the stickers containing information like name and address of importer, MRP etc will not amount to manufacture.
For example: 1000 liters of cough syrup imported in a bulk container was extracted into small bottles each containing 100 ml by affixing stickers containing information like name, address of importer, MRP etc will not amount to manufacture.
Affixing brand name, labeling or relabeling or repacking from bulk pack to small pack is deemed to be manufacture.
Packing imported compact discs in a jewel box along with inlay card does not amount to manufacture
The activity of packing imported CDs in a jewel box along with inlay card does not amount to manufacture – CCE Vs Sony Music Entertainment (I) Pvt Ltd 2010 (249) ELT 341 (Bom).
Brand name owner is not the manufacturer
If the goods are produced with customer’s brand name under his/her/its quality control, it does not mean that the customer is the manufacturer.
For example, Bata India Ltd procures footwear from job workers & affixes its brand name on it. Here Bata is not the manufacturer.
Brand owners liable to pay excise duty
In case of ready-made garments and made-up articles of textiles manufactured on job-work basis, liability to pay excise duty and comply with the provisions of Central Excise Rules, 2002 (CER), is on the merchant manufacturer (i.e. person on whose behalf the goods are manufactured by job workers, viz. the owner of raw materials) as per rule 4(1A) of CER, - Notification no.4/2011-CE dated Mar 1, 2011.
For example, X Pvt Ltd, a job worker located in Mumbai, received raw materials for manufacture of articles of apparels, clothing accessories etc from Peter England, a brand owner. Hence the liability to pay excise duty is on Peter England.
Job work in article of jewellery or other articles of precious metals
As per rule 12AA of CER, every person (other than an Export Oriented Unit or a unit located in Special Economic Zone) who gets article of jewellery or other articles of precious metals (falling under 7113 or 7114 of I Schedule to CETA) produced/manufactured on his/her/its behalf, on job work basis, shall obtain registration, maintain accounts, pay duty leviable on such goods and comply with all the relevant provisions of these rules, as if s/he/it is an assessee. Thus, the job worker shall not be required to get himself/herself/itself registered or shall not be required to maintain any records under Central Excise Law.
Assembly of CKD/SKD packs is not manufacture
In order to avoid transportation cost and transit damage, the goods are dispatched by manufacturers in Completely Knocked Down (CKD) and Semi Knocked Down (SKD) condition. In such cases, assembly of such CKD or SKD packs at site would not amount to manufacture – TI Cycles of India Vs UOI (1983) (12) ELT 681 (Mad HC).
For example, X Ltd purchased CPU, Monitor, Keyboard, Mouse & Printer by paying excise duty. These components are assembled in the premises of buyer and such assembly does not amount to manufacture – Universal Micro Systems Vs CCE 1999 (107) ELT 505 (CEGAT).
Pickling and oiling is not manufacture
CBEC has clarified that the process of pickling & oiling does not amount to manufacture – Circular No.927/17/2010-CE dated June 24, 2010.
Pickling is the process of removing surface oxides (scale) from metals by chemical or electro chemical reaction. Further, such process is only a chemical cleaning process to remove scales and dirt from the metal by immersion in chemical solution and does not result in emergence of any new commercially different commodity.
Tarpaulin made-ups does not amount to manufacture
Making tarpaulin made-ups from tarpaulin cloth by cutting and stitching the cloth into various sizes and fitting the eye-lets would not amount to manufacture as there is no change in the basic characteristic of the raw material and end product – CCE Vs Tarpaulin International 2010 (256) ELT 481 (SC).