SC defines 'manufacture'

CA Nikita | Last updated: 31 May 2007

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The Supreme Court of India addressed whether assembling plants and machinery on-site constitutes 'manufacture' for excise duty purposes, remitting the disputes back to the tribunal based on the 2006 Virdi Brothers precedent. Additionally, the Court set aside an Income Tax Appellate Tribunal order concerning Hindustan Zinc Ltd. This tax dispute involved the valuation and export of accumulated zinc concentrate inventory that could not be consumed domestically.

The question whether plants and machinery assembled at site amounted to manufacture and therefore attracted excise duty arose in three appeals before the Supreme Court in the case, Commissioner of Central Excise vs Cethar Vessels Ltd.

In one case, the firm erected a boiler by assembling various components and parts. In another, it was the erection related to membrane cell technology. The third related to a solvent extraction plant. The revenue authorities maintained that fabrication of such plants out of duty-paid, bought-out items amounted to manufacture of a new marketable commodity and therefore excise duty was payable.

However, the firms moved the Customs, Excise & Gold (Control) Appellate Tribunal, which ruled that these plants were basically systems comprising various components and were thus in the nature of systems and were not machines as a whole. Therefore, they were not excisable.

The Supreme Court stated that the law on this point has been laid down by it in the Virdi Brothers case in 2006 and it should be followed. Therefore, the court remitted the disputes to the tribunal for determining the issues on the facts of each case.

I-T appellate tribunal order set aside

The Supreme Court has set aside the order of the income tax appellate tribunal in the case, Commissioner of Income Tax vs Hindustan Zinc Ltd. In this case, the government company was a producer of zinc concentrate, which was used captively.

In 1997, the material got accumulated and it could not be consumed. Since it could not be domestically consumed, it was exported at the London Metallic Exchange price.

The assessing officer maintained that there was no export in the financial year concerned and the decrease shown in the inventory was not in accordance with the accounting policy of the firm. Therefore, an addition was made to the income of the firm. The tribunal and the high court did not approve of it. Their decisions were reversed by the Supreme Court.

FAQ :

The issue was whether assembling plants and machinery on-site, such as boilers and solvent extraction plants, amounted to manufacture and were subject to excise duty.

The tribunal ruled that the plants were systems comprising various components rather than complete machines, making them non-excisable.

The Supreme Court remitted the disputes back to the tribunal to determine the issues based on the facts of each case, following the precedent set in the 2006 Virdi Brothers case.

The Supreme Court reversed the lower decisions, supporting the assessing officer's addition to the firm's income after finding discrepancies in the export timing and inventory accounting of zinc concentrate.

The dispute arose when the company exported accumulated zinc concentrate that could not be consumed domestically, leading the assessing officer to challenge the inventory decrease and export timing.