Union of India vs Delhi Cloth and General Mills

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 12 October, 1962

Coram: B.P. Sinha, J.C. Shah, K.C. Das Gupta, K.N. Wanchoo, P.B. Gajendragadkar

In this case the Supreme Court recorded that the matter involved three separate appeals filed against orders of the Punjab High Court which had permitted three petitions under Article 226 of the Constitution. Each petition had been filed by a distinct company engaged in the manufacture of a vegetable product commonly known as Vanaspati. The petitioners challenged the legal basis for the imposition of excise duty on a process that the revenue authorities described as the manufacture of “refined oil” from raw oil. All three petitions raised the same question of law, namely whether the companies were liable to pay excise duty under Item 23 of the First Schedule to the Central Excises and Salt Act of 1944, given the similar factual circumstances. The High Court had heard the three petitions together and delivered a single judgment that allowed the appeals, directing the excise authorities to withdraw the demand for excise duty that had been raised against the petitioners. The present appeals, which likewise were filed together, were consequently listed before the Supreme Court for a combined hearing.

The factual background presented in each of the three petitions was essentially identical. The petitioners, who were the respondents in the present appeals, stated that they purchased groundnut oil and til oil either from the open market or directly from the manufacturers of those oils for the purpose of producing Vanaspati. After acquisition, the oils were subjected to a series of processing steps aimed at converting them into the finished Vanaspati product, which is classified as a vegetable product and is therefore subject to excise duty. The petitioners maintained that at no point in their manufacturing process did they create any new product that would fall within the definition contained in the Schedule of “vegetable non‑essential oils, all sorts, in or in relation to the manufacture of which any process is ordinarily carried on with the aid of power.” Accordingly, they argued that the imposition of excise duty on the ground that they had produced a product liable to duty under Item 23 of the Schedule (now renumbered as Item 12) was unlawful. In response, the Union of India asserted that during the manufacture of Vanaspati, the petitioners’ process inevitably produced an intermediate product commonly known in the market as “refined oil.” The Union contended that this refined oil fit squarely within the Schedule description of “vegetable non‑essential oils, all sorts, in or in relation to the manufacture of which any process is ordinarily carried on with the aid of powers,” and therefore attracted excise duty. To support this contentions, an affidavit was filed by Mr P S Krishnan, who was identified as the Chief Chemist of the Central Revenue Central Laboratory, Government of India, and the affidavit set out a technical description of the manufacturing steps involved.

In describing the way raw oil is turned into Vanaspati, the chief chemist explained that the manufacture of the vegetable product requires hydrogenating the oils in the presence of a catalyst. He stated that the catalyst is a delicate substance that can become poisoned and lose its effectiveness if certain impurities such as mucilaginous material, free oxidised fatty acid and moisture are present in the oil. Consequently, he said, successful hydrogenation can be carried out only after the oil has been refined. The refined vegetable non‑essential oil, which he defined as oil that is free from the major impurities mentioned earlier, serves as the immediate raw material for the manufacture of the vegetable product. He distinguished the raw vegetable non‑essential oils, which are obtained by crushing and contain the impurities, from the refined oil. The refining process, he described, involves adding an aqueous alkali solution that reacts with the free fatty acids to form soap, causing a large quantity of suspended and mucilaginous matter to settle. After settling, the clear supernatant layer is drawn off and treated with a suitable amount of bleaching earth and carbon, and then filtered. This treatment removes colour matter and also eliminates the moisture that was originally present in the neutralised oil. At this point the oil becomes a refined oil that is suitable for hydrogenation into the vegetable product. He further noted that the refining operation normally requires the use of power and machinery.

He continued by observing that the suitability of the refined oil for various uses depends on the quality of the seed used for crushing and the quality of the original raw oil. According to his view, the refined oil is generally appropriate for the edible needs of discriminating consumers and for the production of toiletries such as hair oils and high‑grade soaps. For consumers who are even more selective, the oil may undergo an additional deodorisation step. He pointed out that the differences between raw vegetable non‑essential oils and refined vegetable oils are readily observable. The refined oil is typically colourless or only faintly coloured, perfectly clear, and often odourless, whereas the raw oil usually exhibits some turbidity, sediment at the bottom and a deeper colour. He added that sometimes the refined oil described above is subjected to further deodorisation, and such oil can correctly be termed refined and deodorised oil. To his knowledge, the two grades of oil are marketed separately in the country; for example, “groundnut oil” and “refined groundnut oil” are sold under distinct labels, especially when packaged in containers of about four gallons or less. The experts who filed affidavits in support of the petitioners agreed with the chemist that common oils such as groundnut, sesame, mustard and cottonseed, in their raw form, always contain varying amounts of impurities, and that these impurities must be removed by different processes before hydrogenation can be undertaken for the purpose of producing Vanaspati.

In this case the Court observed that there was a material disagreement between the expert evidence offered by Dr. Homi Ruttonji Nanji and the opinion expressed by Mr. Krishnan. According to Mr. Krishnan, the raw oil that has been freed from visible impurities but has not undergone deodorisation may nevertheless be sold in the market under the description “refined oil.” Dr. Nanji, however, wrote in his affidavit that the term “refined oil” for edible use, as understood by both manufacturers and traders, applies only to oil that has been subjected to the three successive processes of neutralisation, bleaching and deodorisation. He further explained that, in his view, an oil cannot be described as refined unless it is also deodorised, because failure to deodorise leaves behind odorous compounds that constitute undesirable impurities. The Court cited paragraph five of Dr. Nanji’s affidavit filed in support of the petition by the Delhi Cloth & General Mills Company Ltd. to illustrate this position. The High Court had previously accepted the petitioners’ contention that the oil in their possession, after undergoing a certain degree of refinement on its way to being converted into Vanaspati, was not liable to excise duty under Item 23 (now Item 12) and consequently allowed the petition. On appeal, counsel for the respondents, Mr. Pathak, set out a two‑fold argument. First, he contended that the respondents, after purchasing raw oil containing all of its natural impurities, apply a series of refining processes—some of which employ mechanical power—to produce a product that is identical to the refined oil commonly available in the market. He argued that this “refined oil,” once further processed, becomes a “vegetable product,” and that the vegetable product is subject to excise duty under the present Clause 13, which corresponds to the earlier Clause 11. Mr. Pathak maintained that this later liability does not alter the fact that, at an earlier stage, the same respondents had already manufactured “refined oil” as recognized by the market, and that such oil falls squarely within Clause 23 (now Clause 12), making it liable to duty regardless of the fact that the oil was not sold but was used as an intermediate input for the manufacture of Vanaspati.

The Court noted that excise duty is imposed on the manufacture of goods rather than on their sale. Accordingly, Mr. Pathak’s contention that the intermediate product’s non‑sale does not affect the duty liability was considered correct. The Court further explained that if, by applying one or more processes—some of which involve the use of power—a new substance is created from the raw material, and if that new substance is identical to the “refined oil” known in the market, then an excise duty may be chargeable under Item 23 (the current Item 12). The Court, however, raised the question of whether the petitioners had demonstrated that the substance produced at any intermediate stage before the formation of Vanaspati could be described as “refined oil” as understood by the market. The Court expressed lack of satisfaction that this point had been proved. It observed that the affidavits of the experts on both sides set out a detailed summary of the numerous processes required to convert raw groundnut or sesame oil into a vegetable product, and that it was not contested that a deodorisation step is applied in the petitioners’ factory after hydrogenation is completed. The respondents argued that before hydrogenation begins, the material in the petitioners’ possession is already “refined oil” as known to the market, thereby implying that deodorisation is not a necessary condition for the existence of refined oil. The petitioners, on the other hand, maintained that without deodorisation the substance cannot be termed “refined oil.” The Court concluded that this issue required further consideration. But has

The Court examined whether the petitioners had demonstrated that the material existing at any intermediate stage before the production of Vanaspati could be described as “refined oil” in the sense understood by the market. It concluded that the petitioners had not satisfied this burden. The Court noted that both sides had submitted detailed affidavits from experts, outlining the many steps required to convert raw groundnut or til oil into the final vegetable product. The Court observed that there was no dispute that the petitioners’ factory applied a deodorisation process after the hydrogenation stage was completed. The appellant argued that, prior to the commencement of hydrogenation, the oil in the petitioners’ possession already qualified as “refined oil” as known to the market. This contention raised the pivotal question of whether any oil could be regarded as “refined oil” before undergoing deodorisation. The appellant maintained that deodorisation was not a prerequisite for the emergence of “refined oil,” whereas the respondents contended that without deodorisation the oil could not be described as “refined oil.” The Court further indicated that it had already considered the affidavits submitted on this issue, those sworn by Mr Krishnan on behalf of the appellant and by Dr Nanji on behalf of the respondents‑petitioners.

In Dr Nanji’s affidavit, a specification issued by the Indian Standards Institution was quoted and attached as an annexure. The specification defined “refined groundnut oil” as groundnut oil that has been refined by neutralisation with alkali, bleached with fuller earth and/or activated carbon, and deodorised with steam, with no other chemical agents being used. It similarly defined “refined cotton‑seed oil” as cotton‑seed oil refined by neutralisation with alkali, bleached with alkali, fuller earth and/or activated carbon, and deodorised. The Court held that this specification provided very strong, almost incontrovertible support for the respondents’ view that deodorisation is an essential step for oil to be classified as “refined oil” in the eyes of consumers and the commercial community. Additional reinforcement was found in the affidavits of several companies that market refined groundnut oil under brand names such as Falika, Tripti, Kitchen, Kiran, Temple, Sovereign, Lotus, Nirmal, Dilkhus, Kamdhenu, Radio, Deer, Dog, Sepoy, Cocogem, Tushar and Ginutol. All of these affidavits asserted that the oil is always deodorised before it is marketed as refined oil under those brand names. In contrast, the appellant was unable to produce any evidence of even a single instance where refined oil was marketed without undergoing deodorisation. Instead, the appellant relied on extracts from books authored by Alton Bailey—namely “Cottonseed and Cottonseed Products,” “Industrial Oil and Fat Products”—and a third book, “Vegetable Fats and Oil,” authored by G. S. Jamiesom. The Court noted that Jamiesom’s statements did not clearly establish that refined oil is placed on the market without deodorisation. Moreover, Bailey’s text on “Industrial Oil and Fat Products” described “refining” as any purifying treatment designed to remove free fatty acids, phosphatides, mucilaginous material or other gross impurities, expressly excluding bleaching and deodorisation. The extracts did not demonstrate that oil, after being refined by such purifying treatment but before deodorisation, is marketed. Bailey’s discussion in “Cottonseed and Cottonseed Products” distinguished among crude oil, refined oil (freed of most non‑glyceride constituents by treatment with alkali, with or without subsequent bleaching or deodorisation), and other categories, but again failed to show that the refined oil is sold prior to deodorisation. Consequently, the Court found the appellant’s reliance on these extracts insufficient to prove that the intermediate product qualifies as “refined oil” without the deodorisation step.

In reviewing the material submitted, the Court observed that none of the authorities presented demonstrated that refined oil is marketed without undergoing deodorisation. The Court noted that Mr. Bailey, in his work titled “Industrial Oil and Fat Products,” explained that the term “refining” designates any purifying operation intended to eliminate free fatty acids, phosphatides, mucilaginous substances, or other obvious impurities from oil. He further clarified that such a definition does not include “bleaching” or “deodorisation.” The excerpts from that book, however, did not make clear that oil which has been purified but not yet deodorised is placed on the market. The Court also examined an extract from Bailey’s earlier book “Cottonseed and Cottonseed Products,” which contains the passage: “In a discussion of the composition and characteristics of cottonseed oil, three kinds of oil are to be distinguished. They are: (a) crude oil, which is the oil as it is expressed from the seed, and the commodity shipped from the oil mills; (b) refined oil, or oil which has been freed of most of its non‑glyceride constituents by treatment with alkali, with or without subsequent bleaching or deodorisation, and (c) hydrogenated oil.” Relying on this passage, Mr. Pathak argued that oil freed of most non‑glyceride constituents by alkali treatment, whether or not it is subsequently bleached or deodorised, is properly described as “refined oil,” and therefore the absence of deodorisation does not preclude the oil from being called refined. The Court cautioned that drawing a conclusion from this isolated excerpt would be unsafe without the full context of the surrounding discussion or the remainder of the volume, especially since the complete book had not been produced before the Court. Moreover, the passage by Mr. Bailey refers specifically to cottonseed oil, whereas the oil under consideration in this case is derived from groundnut and til, which are not cottonseed. Consequently, the Court expressed the opinion that the definition offered by the Indian Standards Institution regarding what the Indian trade recognizes as “refined oil” should be given greater weight than the author’s view. The Court also highlighted that the affidavits submitted by the respondents were clear and unequivocal, whereas the affidavit of Krishnan, which the appellant relied upon, was vague, hesitant and lacked categorical statements. After evaluating all the evidence, the Court concluded that the respondents’ raw oil, purchased for the manufacture of Vanaspati, never attains the status of “refined oil” as understood by consumers and the commercial community. Accordingly, the Court rejected the first prong of Mr. Pathak’s argument. The Court then turned to the second prong of Mr. Pathak’s contentions, which suggested that even if the respondents do not produce “refined oil” as recognized in the market, they might still be found to manufacture some other form of oil.

The respondents maintained that when they applied processes such as neutralisation with alkali and bleaching with activated earth or carbon to the raw material they bought, they were creating what they called “non‑essential vegetable oil.” Counsel for the respondents asserted that “manufacture” was complete as soon as one or more processes caused the raw material to undergo any change. The Court observed that equating “processing” with “manufacture” lacked any basis in law. It explained that the ordinary verb “manufacture” is commonly understood to mean the bringing into existence of a new substance, and it does not merely denote the production of a change, however slight, in an existing substance. To illustrate this distinction, the Court quoted a passage from the Permanent Edition of Words and Phrases, volume 26, taken from an American judgment, which stated: “‘Manufacture’ implies a change, but every change is not manufacture and yet every change of an article is the result of treatment, labour and manipulation. But something more is necessary and there must be transformation; a new and different article must emerge having a distinctive name, character or use.” The Court then turned to the ordinary meaning of the word “goods.” Under the Central Excises and Salt Act, 1944, excise duty is leviable on “goods,” yet the Act does not define the term, defining only “excisable goods” as those listed in the First Schedule, which includes salt. To clarify the meaning of “goods,” the Court cited a passage from the Permanent Edition of Words and Phrases, volume 18, which recorded a judgment of a New York court explaining that the first exposition of “goods” in Bailey’s Large Dictionary of 1732 defined it simply as “merchandise,” and Johnson later described it as “movables in a house; personal or immovable estates; wares; freight; merchandise.” The Court also referred to Webster’s definition, which described “goods” as (1) movables, household furniture; (2) personal or movable estate such as horses, cattle, utensils, etc.; and (3) wares, merchandise, commodities bought and sold by merchants and traders. These definitions, the Court noted, make clear that for an article to be regarded as “goods” it must be something that can ordinarily reach the market for purchase and sale. Consequently, the Court held that this consideration supports the view that “manufacture” liable to excise duty under the Central Excises and Salt Act, 1944, must involve the bringing into existence of a new substance known to the market. While counsel pointed to the definition clause of the Act, which states that “manufacture” includes any process incidental or ancillary to the completion of a manufactured product (section 2 (f)), the Court expressed its inability to agree with the counsel’s suggestion that this provision was intended to equate mere processing with manufacture.

In this case the Court observed that by inserting the definition of “manufacture” in section 2(f) the legislature did not intend to treat “processing” as equivalent to “manufacture” and therefore did not intend to make mere processing liable to excise duty. The purpose of that definition was to clarify that in certain parts of the Act the word “manufacture” is used to refer to a process that is incidental to the making of the article. Accordingly, the provision under which the duty was claimed contains the expression “in or in relation to the manufacture of which any process is ordinarily carried on with the aid of power.” The definition in section 2(f) makes it unmistakable that whenever power is employed for any of the many processes required to convert raw material into a finished article that is known to the market, the clause applies. Consequently, an argument that power is not used throughout the whole manufacturing process, when the term is understood in its ordinary sense, cannot succeed. The Court held that the legislature introduced the definition solely for this limited purpose and not to render the mere processing of goods subject to excise duty. The counsel then attempted to rely on the words “all sorts” that appear in the clause, arguing that those words would be meaningless unless they were read to include both situations where a new substance is created and where it is not. The Court found that reasoning to be incorrect. The phrase “all sorts” was used to make clear that vegetable non‑essential oils, whether they are raw or refined and irrespective of the raw material from which they are obtained, are liable to duty. Refined oil represents one sort and raw oil represents another. However, because the duty is imposed on the manufacture of goods—that is, on the creation of a new substance known to the market—both raw and refined oil must already be substances known to the market before any duty can be charged. On this basis the Court concluded that the High Court was correct in holding that there was no legal foundation for the excise duty demands made against the petitioners and in directing the authorities to withdraw those demands. Accordingly, the Court dismissed the appeals and ordered that costs be awarded, confirming the dismissal of the appeals.