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: Civil Appeals Nos. 168-170 of 1960

Decision Date: 12 October 1962

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

In this case the Supreme Court of India delivered its judgment on 12 October 1962 in Union of India versus Delhi Cloth and General Mills. The opinion was authored by Justice K C Das Gupta and was pronounced by a bench consisting of Justices K C Das Gupta, Bhuvneshwar P Sinha, P B Gajendragadkar, K N Wanchoo and J C Shah. The petition was filed by the Union of India and the respondent was Delhi Cloth and General Mills. The decision is reported in 1963 AIR 791 and also appears in the 1963 Supplementary Law Reports (Suppl.) (1) at page 586, with subsequent citations including E 1967 SC 1895, RF 1968 SC 922, D 1971 SC 2333, R 1973 SC 225, R 1973 SC 425, R 1982 SC 127, RF 1984 SC 420, RF 1985 SC 746, D 1986 SC 281, RF 1986 SC 662, RF 1986 SC 1097, RF 1986 SC 1730, RF 1988 SC 871, R 1988 SC 1164, R 1988 SC 2176, R 1988 SC 2223, R 1988 SC 2237, APL 1989 SC 79, R 1989 SC 516, F 1989 SC 622, F 1989 SC 1153, RF 1990 SC 59, R 1990 SC 1579, R 1990 SC 1676, R 1990 SC 1893, RF 1991 SC 2222, RF 1992 SC 224, RF 1992 SC 2055 and others. The factual dispute centred on whether the respondents, who manufactured vegetable products known as Vanaspati, were liable to pay excise duty under item 23 of the First Schedule to the Central Excises and Salt Act, 1944. The tax authorities classified the respondents’ activity as the manufacture of refined oil from raw oil, describing such refined oil as “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.” The respondents contended, in a petition under Article 226 of the Constitution, that they purchased groundnut and til oil from the market, subjected these oils to various processing steps and ultimately applied hydrogenation to produce Vanaspati, and that at no stage did they create a product that fell within the description of item 23, rendering the levy unlawful. Both parties filed expert affidavits, and the High Court, after considering those affidavits, ruled in favour of the respondents and allowed the writ petition. The Union of India appealed, arguing that before the final Vanaspati product was obtained the respondents produced an intermediate product known in the market as refined oil, and that even if this intermediate product was not sold, its production attracted excise duty because duty is imposed on manufacture, not on sale. The Supreme Court held that excise duty is leviable on the act of manufacture of goods, not on their subsequent sale, and therefore the respondents would be liable if they indeed produced refined oil as an intermediate product. However, the Court examined the respondents’ process and found that deodorisation – a step required to obtain the market‑known refined oil – was applied only after hydrogenation, meaning that the respondents did not produce refined oil at any stage. The Court further observed that the mere processing of raw vegetable oils could not be equated with manufacture, which the statute defines as bringing a new substance into existence. Accordingly, the Legislature, by defining “manufacture” in section 2(f) of the Act, did not intend to make the mere processing of goods liable to duty. The words “all sorts” in item 23 were interpreted to refer to vegetable non‑essential oils, whether raw or refined, irrespective of the raw material from which they are derived, and to make clear that such oils are subject to duty when they are manufactured. Consequently, the Court affirmed that the respondents were not engaged in the manufacture of refined oil within the meaning of the Act, and the assessment of excise duty under item 23 was set aside.

The Court observed that the expression “refined oil” as it is understood in the market cannot come into existence without undergoing deodorisation, a requirement laid down in the specifications of the Indian Standards Institute and corroborated by the affidavits of the experts who were called before it. It further noted that, according to the evidence on record, the process of deodorisation was carried out in the factories of the respondents only after the hydrogenation step had been completed. Because deodorisation was applied after hydrogenation, the Court held that the respondents could not be said to have produced “refined oil” at any intermediate stage of their operations. In the same vein, the Court ruled that the respondents could not be deemed to be manufacturing a class of non‑essential vegetable oil. It explained that the term “processing” must not be equated with “manufacture”, the latter term signifying the creation of a new substance. By defining the word “manufacture” in section 2(f) of the Central Excises and Salt Act, the Legislature did not intend to bring the mere processing of goods within the charge of excise duty. The phrase “all sorts” appearing in item 23 of the first schedule is intended solely to make clear that vegetable non‑essential oils, whether they are in a raw condition or have been refined, and irrespective of the raw material from which they are derived, are liable to excise duty.

The matters addressed by the Court were civil appeals numbered 168, 169 and 170 of 1960, which arose from the order dated 10 October 1958 of the Circuit Bench of the Punjab High Court at Delhi in civil writs numbered 301, 302 and 347 of 1956. The appellants were represented by counsel consisting of G S Pathak, B Sen and R H Dhebar. The respondents in appeal 168 were represented by N C Chatterjee, A N Sinha and Mukherjee; the respondent in appeal 169 was represented by A V Viswanatha Sastri, Sardar Bahddur, S N Andley and Rameshwar Nath; and the respondents in appeal 170 were represented by A V Viswanatha Sastri, S K Kapur and K K Jain. Interveners appearing in all the appeals were represented by N A Palkhivala, J B Dadhania, O C Mathur and Ravinder Narain. The judgment was delivered on 12 October 1962 by Justice Das Gupta. The Court held that the three appeals challenged orders of the Punjab High Court that had arisen from petitions filed under article 226 of the Constitution by three distinct companies engaged in the manufacture of vegetable products known as Vanaspati. These companies contested the legality of an excise duty that the taxing authorities had imposed on what was described as the manufacture of “refined” oil from raw oil. The petitions raised a common question of law concerning liability to excise duty under item 23 of the First Schedule to the Central Excises and Salt Act 1944, based on similar factual situations. After hearing the three petitions together, the Court allowed the appeals and directed the excise authorities to withdraw the impugned demand for excise duty on the petitioners. The present appeals were also heard together, and the factual allegations in each petition were essentially the same: each petitioner alleged that, for the purpose of producing Vanaspati, it purchased groundnut oil and til oil either from the open market or directly from the oil manufacturers, and then subjected those oils to a series of processes in order to convert them into Vanaspati.

In its submissions, the petitioners argued that the only finished product they produced from the raw groundnut and sesame oils they purchased was Vanaspati, a vegetable product that was already subject to excise duty as a vegetable commodity. They maintained that at no point in their manufacturing process did they create any new product that could be classified under 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 power.” Accordingly, they contended that the demand for excise duty on the basis that they produced, from the raw oils, a product falling within item 23 of the schedule (now renumbered as item 12) was unlawful. In response, the Union of India put forward the contention that during the production of Vanaspati the petitioners, while processing the vegetable oil obtained from groundnut and sesame seeds, actually generated an intermediate product known in the market as “refined oil.” The Union argued that this refined oil matched the description of “vegetable non‑essential oils… in or in relation to the manufacture of which any process is ordinarily carried on with the aid of power,” and therefore attracted excise duty under the relevant schedule item. To support this position, the appellant relied on an affidavit filed by Mr. P. S. Krishnan, who was identified as the Chief Chemist of the Central Revenue Central Laboratory, Government of India. In his affidavit he explained the technical steps involved in converting raw oil into Vanaspati. He stated that the manufacture of the vegetable product required hydrogenating the oils in the presence of a catalyst, and that the catalyst would be rendered ineffective if certain impurities such as mucilaginous matter, free oxidized fatty acids and moisture were present. Consequently, the raw vegetable oil first had to be refined to remove these impurities before it could be hydrogenated. Krishnan described the refining process as follows: an aqueous alkali solution was added to the raw oil, causing the free fatty acids to combine with the alkali to form soap, which together with a large amount of suspended and mucilaginous matter settled out. After settlement, the clear supernatant layer was decanted and then treated with an appropriate amount of bleaching earth and carbon, after which the mixture was filtered. This treatment removed colour‑bearing matter and the residual moisture, producing a clear, colourless (or only slightly coloured) refined oil that was suitable for the subsequent hydrogenation step. He further noted that the refining operation generally involved the use of power and machinery. Krishnan added that, depending on the quality of the seed used for crushing and the characteristics of the original raw oil, the refined oil obtained by this method was typically suitable for edible purposes and for the manufacture of various products such as hair oils and high‑grade soaps, and that in some cases the refined oil could undergo an additional deodorisation step.

In this case, the Court described the uses of refined vegetable oil as being intended for discriminating consumers and for the manufacture of toiletry products such as hair oils and high‑grade soaps. For particularly selective users, the oil may undergo an additional deodorisation step. The Court explained that a clear distinction exists between raw vegetable non‑essential oils and refined vegetable oils when the two are examined. Refined oil is generally colourless or only slightly coloured, perfectly clear, and often odourless. By contrast, raw oil typically shows some turbidity, contains sediment at the bottom of the container, and possesses a deeper colour. The Court further noted that on occasion the refined oil described above is subjected to a further deodorisation process, after which it may be accurately described as refined and deodorised oil. The Court observed that, to the best of its knowledge, the two grades of oil are marketed separately in the country; for example, “groundnut oil” and “refined groundnut oil” are sold with distinct labels when packaged in containers of approximately four gallons or less. The experts who filed affidavits in support of the petitioners concurred with Mr. Krishnan that common oils such as groundnut, sesame, mustard, and cottonseed, in their raw state, invariably contain varying amounts of impurities that must be removed by different processes before hydrogenation can be applied to produce Vanaspati. However, the Court highlighted a crucial difference between the view expressed by Dr. Homi Ruttonji Nanji in his affidavit and that of Mr. Krishnan. While Mr. Krishnan contended that raw oil, once freed from impurities but not deodorised, is marketed as refined oil, Dr. Nanji unequivocally stated that, as understood by manufacturers and the trade, refined oil for edible purposes is oil that has undergone all three processes of neutralisation, bleaching and deodorisation. Dr. Nanji added that he would not consider any oil to be refined unless it had also been deodorised, because failure to deodorise leaves certain odour‑producing impurities in the oil, as he noted in paragraph five of his affidavit filed in the petition by Delhi Cloth & General Mills Ltd.

The Court further noted that the High Court had accepted the petitioners’ contention that the oil in their possession, after undergoing a degree of refinement in the course of being converted into Vanaspati, was not liable to excise duty under item 23 (now item 12) and consequently granted relief in their favour. In support of the appeals, counsel for the respondents advanced a two‑fold argument. Firstly, counsel argued that the respondents, after purchasing the raw oil containing all its impurities, apply certain refining processes to produce a refined oil that is identical to the refined oil available in the market. The counsel maintained that this refined oil, once produced, is the same commodity that, after further processing, becomes “vegetable product.” When the vegetable product is created, it becomes liable to excise duty as a vegetable product under the present clause 13, which corresponds to the old clause 11. Nevertheless, the counsel contended that this does not alter the fact that, at an earlier stage, the respondents have already manufactured refined oil that is known to the market. This substance falls squarely within clause 23 (now clause 12) and is therefore subject to duty under that clause. The fact that the respondents do not place this refined oil on the market but instead use it to produce the finished Vanaspati product does not affect the liability, because excise duty is imposed on the manufacture of goods, not on their sale. Accordingly, counsel asserted that the intermediate product’s non‑sale in the market should not make any difference to the duty liability.

In this case the Court considered that certain processes, such as those that use mechanical power, produce a material that the parties call “refined oil”. After those processes the material undergoes further treatment, including hydrogenation and other refining steps, and consequently becomes what the industry terms a “vegetable product”. When the vegetable product is created, it attracts excise duty under the present clause 13, which corresponds to the former clause 11. The Court observed that this later classification does not change the fact that, at an earlier stage, the same respondents had already manufactured a product that the market recognises as refined oil. That product falls squarely within clause 23, now re‑numbered as clause 12, and is therefore subject to duty under that provision. The fact that the respondents do not place the refined oil on the market but instead use it as an input for the finished vanaspati product does not remove the liability. Excise duty is therefore imposed on the manufacture of goods rather than on any subsequent sale of those goods. Accordingly, the Court agreed with Mr Pathak that the intermediate‑stage product’s non‑sale does not defeat the duty liability in any way. The Court further observed that a new substance can be produced from raw material in the course of various processes. Some of those processes may involve the use of mechanical power or other energy sources in the manufacturing. If the resulting substance is identical to the refined oil that the market recognises, then excise duty may be imposed under Item 23, now Item 12. However, the Court questioned whether the petitioners had demonstrated that, at any intermediate point before vanaspati is produced, the material they obtain qualifies as the market‑recognised refined oil. The Court expressed dissatisfaction with the evidence presented on that specific point of proof at the hearing and found it unconvincing. The Court noted that both sides had submitted affidavits summarising the many steps required to convert raw groundnut or til oil into a vegetable product. The Court also observed that there was no real dispute that the petitioners apply deodorisation after the hydrogenation stage. The appellant argued that before hydrogenation begins the material in the petitioners’ possession already constitutes refined oil as understood by the market. This raised the pivotal issue of whether any oil can be described as refined oil before it undergoes deodorisation. The appellant maintained that deodorisation is not a prerequisite for an oil to become refined oil, whereas the respondents contended that without deodorisation the oil cannot be regarded as refined oil. The Court referred to affidavits filed by counsel for the appellant, identified as Mr Krishnan, and for the respondents, identified as Dr Nanji. In Dr Nanji’s affidavit, an annexure reproduced the Indian Standards Institution’s specification of refined groundnut oil, and that specification reads as follows: “Refined groundnut oil – groundnut oil which has been refined by neutralisation with alkali, bleached with fuller earth and/or activated carbon, and deodorised with steam.”

The Indian Standards Institution defined refined groundnut oil as groundnut oil that has been refined by neutralisation with alkali, bleached with fullers’ earth and/or activated carbon, and deodorised, with no other chemical agents being used. This definition gave strong, almost incontrovertible support to Dr Nanji’s view and to the respondents’ contention that, without deodorisation, the oil cannot be regarded as “refined oil” in the understanding of consumers and the commercial community. Further reinforcement was found in the affidavits of several concerns that market refined groundnut oil under brand names such as Falika, Tripti, Kitchen, Kiran, Temple, Sovereign, Lotus, Nirmal, Dilkhus, Radio, Deer, Dog, Sepoy, Cocogem, Tushar and Ginutol; each affidavit asserted that the oil is always deodorised before being marketed as refined oil under those brands. In contrast, the appellant failed to produce any evidence of a single instance where refined oil was marketed without undergoing deodorisation. Instead, Mr Pathak submitted copies of extracts from three books: “Cottonseed and Cottonseed Products” and “Industrial Oil and Fat Products” by Alton Bailey, and “Vegetable Fats and Oil” by G. S. Jamieson. The Jamieson extract did not clearly indicate that refined oil is placed on the market without deodorisation. Bailey, in his “Industrial Oil and Fat Products” volume, described “refining” as any purifying treatment designed to remove free fatty acids, phosphatides, mucilaginous material or other gross impurities, explicitly excluding bleaching and deodorisation. Those extracts also failed to demonstrate that oil refined by such purifying treatment is marketed before deodorisation. In Bailey’s “Cottonseed and Cottonseed Products,” a passage stated that three kinds of oil are distinguished: (a) crude oil, (b) refined oil – defined as oil freed of most nonglyceride constituents by treatment with alkali, with or without subsequent bleaching or deodorisation, and (c) hydrogenated oil. Mr Pathak relied on Bailey’s statement that oil freed of most nonglyceride constituents by alkali treatment, with or without bleaching or deodorisation, qualifies as refined oil, to argue that deodorisation is unnecessary. However, drawing a conclusion from this isolated extract would be unsafe without knowledge of the full context of the statement or what the remainder of the book says, especially since the book itself was not produced before the Court. Moreover, Bailey’s statement concerned cottonseed oil, whereas the oil under consideration in this case is groundnut oil, a different commodity. Consequently, the Court preferred the Indian Standards Institution’s definition, which reflects the trade practice in India, over the author’s opinion. It is also notable that the respondents’ affidavits were clear and categorical, whereas the appellant’s affidavit by Krishnan was vague, hesitant and not categorical. Considering all these materials, the Court found no doubt that the raw oil purchased by the respondents for manufacturing vanaspati never becomes “refined oil” as understood by consumers and the commercial community. Accordingly, the first branch of Mr Pathak’s argument was rejected.

In the present matter the Court observed that the passage quoted from Mr. Bailey concerned cottonseed oil, whereas the oil at issue in this case is derived from groundnut oil, a commodity that is neither cottonseed nor related to it. Accordingly, the Court held that the opinion expressed by Mr. Bailey could not be applied to determine the nature of the oil in dispute. The Court further commented that the definition advanced by the Indian Standards Institution regarding what constitutes “refined oil” in the Indian trade should be given greater weight than the view expressed by the author of the quoted book. In examining the documentary material, the Court noted that the affidavits submitted on behalf of the respondents were clear, precise and categorical, while the affidavit of Krishnan, which was relied upon by the appellant, was found to be vague, hesitant and lacking categorical statements. After a careful consideration of all the evidence, the Court was convinced that the respondents’ contention was correct: the raw oil that the respondents purchased for the purpose of manufacturing Vanaspati never transforms at any stage into “refined oil” as understood by consumers and the commercial community. Consequently, the first limb of Mr. Pathak’s argument, which alleged that the respondents were dealing in refined oil, was rejected in its entirety.

The second limb of Mr. Pathak’s submission argued that, even if the respondents did not produce “refined oil” as recognized by the market, they should nevertheless be deemed to manufacture a form of “non‑essential vegetable oil” by subjecting the raw material to neutralisation with alkali and bleaching with activated earth or carbon. Counsel for the appellant contended that the act of “manufacture” was complete as soon as any process was applied that caused the raw material to undergo some change, however slight. The Court rejected this equation of “processing” with “manufacture,” holding that no statutory authority supported such an identification. In the Court’s view, the verb “manufacture” ordinarily means the creation of a new substance, not merely the alteration of an existing one, however minor the alteration may be. This distinction was illustrated by a passage from an American judgment cited in the Permanent Edition of Words and Phrases, Volume 26, which explained that while manufacture implies a change, not every change qualifies as manufacture; a true manufacture requires a transformation that yields a new article possessing a distinct name, character or use. The Court also examined the ordinary meaning of the word “goods.” The Central Excises and Salt Act, 1944, imposes excise duty on “goods,” although the Act itself does not define the term, defining instead “excitable goods” as those listed in the First Schedule, which includes salt. The Court referred to a passage from the same reference work, Volume 18, quoting a New York court that traced the definition of “goods” to Bailey’s 1732 dictionary, where it meant “merchandise,” and to later lexicographers who described goods as movables, personal estate, wares or commodities bought and sold. The Court concluded that for an article to be classified as “goods,” it must be something that can ordinarily reach the market for purchase and sale. This analysis reinforced the view that “manufacture” liable to excise duty under the 1944 Act must involve the creation of a new substance known to the market, rather than a mere process‑induced change.

The Court referred to the definition of “goods” found in Bailey’s Large Dictionary of 1732, which simply defines the term as “Merchandise”. It then noted that the lexicographer Johnson, who followed Bailey, described “goods” as movable items in a house, personal or immovable estates, ware, freight, and merchandise. The Court also cited Webster’s definition, stating that “goods” as a plural noun includes (1) movables such as household furniture, (2) personal or movable estate such as horses, cattle, utensils, and (3) wares, merchandise and commodities bought and sold by merchants and traders. From these authorities the Court concluded that for an article to qualify as “goods” it must be something that can ordinarily be offered in the market for purchase and sale. This understanding of the term “goods” thereby supports the view that “manufacture”, which is subject to excise duty under the Central Excises and Salt Act of 1944, must involve the creation of a new substance that is known to the market. The Court then addressed an argument raised by learned counsel who directed attention to the definition clause of the Act, where “manufacture” is defined to include “any process incidental or ancillary to the completion of a manufactured product” (section 2(f)). The Court stated that it could not accept the counsel’s contention that by inserting this definition the legislature intended to equate “processing” with “manufacture” and to treat mere processing as falling within the same sense of bringing into existence a new market‑known substance liable to duty. The Court observed that the sole purpose of the definition was to clarify that, in certain provisions of the Act, the word “manufacture” is employed to denote a process incidental to the making of the article. The Court further pointed out that the specific provision under which excise duty was claimed contains the wording “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) therefore makes it clear that whenever power is used for any of the many processes required to convert raw material into a finished article known to the market, the clause applies. The Court rejected any argument that power is not used throughout the whole process of manufacture in its ordinary sense. Consequently, the Court held that the legislature introduced the definition in the definition section only for this limited purpose and not to render the mere processing of goods liable to excise duty. The Court also rejected the submission of Mr. Pathak, who sought to rely on the words “all sorts” in the clause, arguing that those words would be superfluous unless interpreted to mean “whether bringing into existence a new substance or not”. The Court found that reasoning fallacious, explaining that “all sorts” was used to make clear that vegetable non‑essential oils, whether

In the matter before the Court, the issue was whether oil, whether in its raw form or after refinement, and regardless of the source of the raw material, was subject to excise duty. The Court observed that refined oil represented one category and raw oil represented another category. However, it emphasized that the duty was imposed only on the manufacture of goods, which the Court defined as the creation of a new substance that is recognised by the market. Consequently, for either raw oil or refined oil to attract the duty, each must already be a substance that the market knows. Since the raw oil had not yet become a market‑known substance, it could not be subjected to the excise levy. The Court therefore concluded that the High Court had correctly held that there was no legal foundation for the excise duty demands made against the petitioners. Accordingly, the Court directed the authorities to withdraw those demands. The appeals filed against the High Court’s decision were dismissed, and the parties were ordered to bear costs. The Court’s order thus affirmed the High Court’s view and terminated the excise duty claims.