A lower duty is charged, because the idea is to encourage labour-intensive activities and generate more job opportunities in trades like manufacture of bidi, cheap footwear and soaps.
But in some of these activities electricity is also used, not exactly in the manufacture but for lighting the work place or drawing water.
Footwear makers buy raw materials like paper, nail, alkali, thread and shoe shoals that are manufactured with the aid of power. Some bidi makers also use electricity for packing their products.
There are several controversies about an apparently simple issue. Also the case law is not well settled.
The Supreme Court in its latest judgment in the ITC vs Collector of Central Excise case (Patna), 2003 (151) ELT 246(SC), settled the issue after upsetting an earlier decision to the contrary. The Supreme Court said packing was not an ancillary to manufacture, but an ancillary to sale.
The earlier view regarded any process such as packing, finishing and even ironing ready-made shirts after stitching a manufacturing activity.
According to it, if MODVAT credit was to be allowed, they were to be regarded as manufacture.
This view got support from the apex court judgment in the Regional Director of Employees State Insurance vs Ram Chander case, 1987 (32) ELT231 (SC), where the court said in the process of making any goods marketable if any activity was done by power, like ironing of clothes, then it should be treated as being done with the aid of power.
But the case laws are not unanimous. They have distinguished fundamental and incidental processes.
