Don't link input credit, manufacture

EXPERT EYE

The case to be discussed in the column is revealing in the context of the value-added tax (VAT) rollout in the states and the inclusion of the concept of manufacture in the states' legislation on the tax.

The controversy over manufacturing is getting more and more refined and it will not end as long as input credit as envisaged in the Cenvat or VAT is related to manufacture.

In the states' legislation on VAT there is no need to have the concept of manufacture as the tax is on value addition and not on manufacture. But the legislation are unduly retaining the concept. This will lead to controversies like the one under discussion now.

A manufacturer was found clearing unsterilised syringes on payment of excise duty but then taking it to another factory for sterilisation. The process of sterilisation kills germs, it does not create a new product. But, in the market it is a new product. So, it is treated as a new product and subjected to excise duty.

To avoid paying central excise duty, the manufacturer contended that sterilisation was only a case of value addition and not manufacture. This is obviously an attempt at evasion of duty.

However, the Tribunal ruled that sterilisation was an act of manufacture and excise duty was payable, though the manufacturer would get Cenvat credit for the duty paid on unsterilised syringes. CCE vs Servo-Med Industry Pvt Ltd, 2004 (172) ELT 318 (T).

Similarly, to avoid paying duty manufacturers were spliting up the process and getting it done in different factories so that no single process fell in the strict definition of manufacture.

For example, a tea set is manufactured in one factory, for which duty is paid. It is then polished in another factory and flower designs incorporated in yet another. These processes add value but by themselves polishing or designing do not constitute manufacture. Or do they? The controversy begins here.

One reason why manufacturers want to split the processes of manufacture in different factories is that in such a case, the last process is called value addition by them and not manufacture. The other advantage is that both unfinished and finished goods usually fall under the same tariff heading as in this case of syringes and sterilised syringes.

Then they argue that the central excise department cannot charge duty twice under the same tariff heading. Both these points are controversial and it is possible to quote judgments on both sides. But this Tribunal judgment has rightly clarified the issue by saying that (a) it is a case of manufacture and that (b) it is possible to charge duty under the same tariff twice if there has been a manufacture.

This may now bring us to the main issue as to what is manufacture. "Manufacture involves change, but all change is not manufacture." Sounds more like dialectics, but it is in fact a famous decision of the Supreme Court in the case of South Bihar Sugar Mills, 1978(2) ELT J 336.

In spite of many such clear judgments of the Supreme Court there will be attempts to evade duty. So, it is not advisable to link input credit to manufacture either in excise or in VAT.

It is possible to link it to "use" in excise or simply to "value addition" in VAT. Unfortunately, however, this is not being done. Keeping the definition of manufacture in VAT legislation is nothing but inviting trouble.