Ban machine-based tariff distinction

EXPERT EYE

One of the most litigated subjects in central excise is the use of machine or power for the manufacture of some items, usually made by small scale units. Cheap shoes, aerated water, furniture, fireworks, gas mantles, cheap soaps, mica and the poor man's bidi are some examples of such distinction being made over a period of time with regard to the rates of duty.

There have been extreme cases where the use of light in the room to sort out mica or the use of power to lift water from the ground floor to the first for its use in manufacture have been the subject of litigation. These small items have left a rich legacy of literature behind. Some of these distinctions are now being abolished but some still continue, such as the distinction in bidi manufacture.

The structure of the tariff on bidis is such that if they are manufactured with the aid of a machine, the rate of duty is much higher than if they are manufactured without it. Machines are usually used with power but even a punching machine or a stapler, which are used without power, can make the revenue department ask for a higher rate of duty, though such machines are used merely for closing the packing.

Usually, a bidi is rolled by hand by household workers in villages where the small-scale bidi factories are situated. However, at the time of branding the bidis, pre-printed and branded papers or plastic sheets are often purchased from outsiders, who use machines for printing such packets.

This has led the revenue department to debar the bidi manufacturer from claiming a lower rate of duty. However, a decision has been given by the tax tribunal in the case of Ajanta Sada Bidi Co vs Commissioner of Central Excise, Calcutta "� 1997(95)ELT 513(T), holding that if the bought out items are made with the aid of machine then it cannot be held that the bidi is made with the help of machine.

On that basis, a circular has now been issued by the Central Board of Excise and Customs (circular no 840/17/2006-Cx dated 6.12.2006), which clarifies that "after taking into account the various judicial pronouncements and the fact that rolling and other processes involved in the manufacture of bidis per se are not carried out with the aid of machines, the board is of the view that in such circumstances, it is legal and proper to classify such bidis manufactured without the aid of machines under tariff item No 2403 10 31, even if the labels/wrappers are manufactured with the aid of machines by the job workers".

There is also the problem that the raw material, which is bought from outside, if cut to size by machine also debars the manufacturer from getting the exemption. The above judgement holds that they cannot be debarred. But there are other judgements that say that even if the raw-material is processed with power, the exemption cannot be availed of. So the issue remains open.

Moreover, if, at the stage of packing any machine is used, the revenue department debars the manufacturer from the exemption. However, packing does not specifically occur in the definition of manufacture in chapter 24 of the central excise tariff, which relates to cigarette and bidi. This issue has been settled for cigarettes but the revenue department distinguishes cigarettes from bidis.

Such controversies will never be over and small-scale manufacturers will have to run from adjudication to appeal to tribunal to courts, despite all the clarifications by the board, until the exemptions based on the use of power or machine are abolished.

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