By TIOL News Service

MUMBAI, DEC 19, 2014 : THE appellants are manufacturers of products which are being sold in the name of Sika Latex and Sika Latex Power - "water resistant bonding agent”. The said items are used as additives in cement mortar and concrete. The addition of the said products improves the adhesive quality and also improves the water resistance. For the manufacture of the said items, appellants are buying products described as "Styrofan D 623 AP/Apcotex TSN 100”.

It is the claim of the appellant that for manufacturing the product Sika Latex and Sika Latex Power, they are only adding water to inputs namely "Styrofan D 623 AP"and "Apcotex TSN 100”. The appellants' claim is that since the manufacturing process undertaken by them is only of diluting the inputs and repacking the same, their activities do not amount to manufacture and hence, no excise duty is payable on their final product namely, Sika Latex and Sika Latex Power.

The Revenue, on the other hand, is claiming that the final product of the appellant is ‘water resistant bonding agent' and their inputs are "Styrofan D 623 AP" and "Apcotex TSN 100" [classified under CH 40.02], which are aqueous polymer dispersion used in the modification of hydraulic setting system; that the products being sold have distinctive name, character and use and hence the process undertaken amounts to manufacture of excisable goods classifiable under Heading 3824.

The proceedings culminated into confirmation of the CE duty demand and, therefore, the appellant is before the CESTAT.

Taking the support of two dozen case laws the appellant submitted that there is no change in name, character and use and there is no ‘deemed manufacture' provision involved/invoked in the present case; burden to prove ‘manufacture' is on Revenue and such a burden has not been discharged; the goods have been tested (by Chemical Examiner, Central Excise Chemical laboratory, Marmagoa; Deputy Chief Chemist, Custom House, Kolkata and National Test House, Kolkata) and all the test reports have confirmed that the starting material and the final materials are the same; that the fact that there is change in the tariff heading is of no relevance to decide whether activity amounts to manufacture or not; that the product literature are of little evidentiary value since they are meant for marketing of the product in different ways and the phrase used on the literature are loosely referred for publicity and salesmanship purposes.

The AR inter alia submitted that commercially the product is known in the market as Sika Latex and Sika Latex Power; that the fact that appellant is just diluting the input is of no consequence as the commercial user does not know the details of inputs or the dilution process and extent of dilution, as it is secret. So called dilution is not simple addition of water and mixing but it is highly technical job and it is for this reason that every batch after dilution is tested and thereafter certified whether it is suitable for cement mortar/concrete or not;if process was simple, then one would have added fixed percentage of water and there was no need to test each batch; the products "Styrofan D 623 AP" and "Apcotex TSN 100" and the products Sika Latex and Sika Latex Power are different and having distinctive name, character and use and, therefore, the process undertaken by the appellant amounts to manufacture. Further, since the final product is used as water resistant bonding agent or additives, these are correctly classifiable under Chapter 38 and would be chargeable to duty; case laws quoted are in different context & cannot be blindly applied; since the goods are not sold by the chemical composition the test reports etc. are of no consequence; the demand has been correctly confirmed.

The Bench after considering the submissions visited the product literature of the products Sika Latex &Sika Latex Power and observed -

++ It is seen from the product literature that the appellant is selling his products as water resistant bonding agent. Sika Latex is rubber emulsion while Sika Latex Power is a multi-functional emulsion rubber. The Latex power is more suitable for repairing jobs. We have also gone through the product literature of inputs. The product literature of "Styrofan D 623 AP"describes the goods as "aqueous polymer, dispersion used in the modification of hydraulic setting system".

++ It would thus be seen that "Styrofan D 623 AP" is not a product which is used straight away by the consumer or the end user but it is generally used by various manufacturers, who process the same for specified application. In the present case, the appellants have processed the same but claimed that the process being done by them is only of diluting. It also appears that the process of dilution is trade secret of the appellant and is not known to the end user or to the trade and commerce in general. It also appears that so called dilution process is not a simple process of addition of water as is done in the case of large number of chemicals, pesticides and insecticides etc. In fact, Sika Latex Power is being sold as multi-functional rubber emulsion and appears to be suitable for repairing.

Adverting to the apex court decision in Union of India vs. Delhi Cloth & General Mills Co. Ltd. - 2002-TIOL-12-SC-CX-LB the Bench observed that from the literature, there can be no doubt that the inputs and final product are having distinctive name, character or use. The inputs are not described/understood as additives or water resistant bonding agent. It also appears from the product literature that while the product of the appellant is meant for direct use in the cement, mortar/concrete etc., the same is not true for the input Styrofan.

The Bench added -

++ From the product literature of "Styrofan D 623 AP"it is very clear that the inputs are meant to be used by the manufacturers, who in turn are expected to carry out their trials and develop the product based on "Styrofan D 623 AP"depending upon mutual compatibility of the components of the formulation, the curing characteristics of the hydraulic binders, the wetting and adhesion on various substrates etc. Thus Styrofan D 623 AP cannot be used directly as water resistant bonding agent. In our considered view, by the process carried out by appellants, a new product having distinctive name, character or use has emerged and therefore process amounts to manufacture. The fact that inputs have not undergone any chemical transformation, in our view, is of no consequence.

++ Revenue has discharged the burden from the literature of the final product as also that of inputs that the process being carried out leads to transformation of inputs into a final product having distinctive name, character or use.

++ In the present case, the final products are not sold by chemical name at all and in our view the testing of the final product is therefore of no consequence.

++ As held, dilution in the present case brings into existence a new product having different name, character or use. The dilution with water and the name of inputs are something which is known only to the appellant. In fact, even the process of diluting or extent of dilution is trade-secret and not known in the commercial world. Even to the Revenue they have not given very precise detail.

++ Moreover, the addition of the water is not a simple process otherwise even the customers could have done the same while using it.

++ We have already come to the conclusion that in the present case activity amounts to manufacture without any reference to Tariff. Existence of different Tariff entry only supports the contention already arrived at.

++ While we agree with the contention that maintenance of elaborate records and conduct of quality test ipso facto dos not mean that the process amounts to manufacture, however, it is to be noted that if the process is very simple of dilution, then there is no need to keep elaborate records and there will be no need to conduct quality test for each batch (it can be concentration test only).

Conclusion:

"…we are of the considered view that in the facts and circumstances of the case, the product having distinct name, character and use comes into existence from the inputs. The final product is a water resistant bonding agent while the inputs are understood as aqueous polymer dispersion used in the modification of hydraulic setting system. Name of inputs or process of transformation is a trade secret and is not known to trade or users."

The Bench agreed with the submission of the appellant that the value has to be taken as cum-duty and, therefore, remanded the matter to the adjudicating authority to re-compute the duty liability considering the selling price as cum-duty price. The penalty imposed was also set aside.

The appeal was disposed of in above terms.

In passing: Now for some CENVAT credit! Also see 2008-TIOL-1563-CESTAT-MUM.

(See 2014-TIOL-2567-CESTAT-MUM)