There is a legal battle going on between manufacturers and revenue authorities over the classification of goods. The Supreme Court in the case of M M Rubber Co Ltd vs Collector of Central Excise Madras, has laid down the functional test as the guideline for resolving these disputes. But, quite often, the functional test in its application merges into the transformation test, which means an assessment of whether the primary article has been effectively changed into a new market product.

The continuing clash spawns litigation, spread over several years right till the apex court. It is unfortunate that the Union Finance Ministry and the Central Board of Excise have not come out with any effective method of drafting of notifications or tariff headings, the training of their counsel and regular updating of knowledge of Tribunal members to minimise this waste of national productive time. Is it that excise, apart from being the backbone of the Budget, is also the spinal chord of the secondary cash income of officials? Is no remedy possible till an upright Finance Minister tackles this squarely?

In the M M Rubber case, the company told the Tribunal that it manufacturers seats for scooters, autorickshaws, tractors and jeeps from natural rubber latex mixed with zinc oxide, accelerators, anti-oxidants and stabilisers. The mix of these is not uniform for the seats of all the vehicles since the specifications required by each manufacturer for a particular vehicle are different. In any event, all these formulations are different from that for latex foam mattresses. The material mixed according to the required specifications is foamed mechanically and then poured into moulds which are prepared from the drawings given by the ordering automobile company. Finally, the moulds are vulcanised by putting these into a steam chamber. What is rejected by automobile companies is scrap which is not useful for any other purpose, since the life of the seats is normally longer than that of the automobile.

On this basis, the company pointed out that the seats were an accessory for the comfort or convenience of those using the vehicles. Hence these became a part of the vehicle itself. Accordingly, there was no question of levying excise duty on this at the rate of 60 per cent ad valorem by treating the seats as rubber products falling under the sub-heading latex foam sponge.

The seats were legally in the same position as car seat covers which the apex court in its 1991 judgment, Mehra Brothers vs Joint Commercial Officer, Madras, had held to be accessories. Accordingly, excise could be levied on the seats only at 20 per cent ad valorem under the head parts and accessories of motor vehicles not otherwise specified. With a 40 per cent ad valorem difference of the rate of excise under the two different heads, there was a major financial stake for the company.

However, the Tribunal went by certain passages in the 1986 Supreme Court judgement in the Atul Glass Pvt Industries Ltd case where the question was whether glass mirrors could be levied excise under the head Other Glass and glass ware. The apex court had gone into the functional aspect of a glass mirror and pointed out that it discharged a function completely different from the glass sheet from which it was made. But then it also went into the process of making the glass mirror and held that the glass sheet stood entirely transformed by the chemical silvering process. According to it, the simple test was that if any part of the coating is scratched it will cease to be a mirror. From this the Tribunal derived the test of ``complete or considerable transformation.'' Applying this it held that even in the seats latex foam sponge remained latex foam sponge though moulded into a particular shape. Hence excise should be at 60 per cent ad valorem as latex foam sponge instead of at 20 per cent as an accessory of motor vehicles.

Unfortunately, the Supreme Court did not discuss this at all and in a short seven-line order disposed of the appeal in favour of the company by relying on the functional test that the seats could be used only for the specific purposes for which they were made from the latex foam sponge.

The excise authorities had amended the Tariff head on latex foam sponge to specifically state that it included ``articles made from latex foam sponge.'' The absence of these six words resulted in a litigation spread over 18 years without any final clarification from the apex court. This can only benefit excise officers and lawyers leaving the public running round in circles.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.