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Reportable

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.3169 OF 2009

[Arising out of SLP(C) No.5861/2007]

Jai Bhagwan Oil & Flour Mills … Appellant

Vs.

Union of India & Ors. … Respondents

J U D G M E N T

R.V.RAVEENDRAN, J.

Leave granted. Heard counsel.

2. By notification dated 23.7.1971 the Government of India formulated a

‘Transport Subsidy Scheme’ for grant of subsidy on the transport of raw

materials and finished goods to and from certain selected areas with a view to

promote growth of industries in such areas. Clause 6 contains the details of the

Scheme. Sub-clause (i) thereof provided that “a transport subsidy will be given

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to the industrial units located in selected areas in respect of raw materials which

are brought into and finished goods which are taken out of such areas.” Sub-

clause (iv) specified the north-eastern region including the State of Assam as

one of the selected areas to which the scheme was made applicable. Sub-clause

(xii) required the State Government to set up a Committee consisting of

Director of Industries, a representative of the State Industries Department, a

representative of the State Finance Department, and a nominee of the Central

Government (Ministry of Industrial Development), to scrutinize and settle all

claims for transport subsidy arising in the State. The said Committee was

required to call upon the applicants for subsidy, to provide proof of raw

materials imported into the State and finished goods exported out of the State

by their industrial units, to decide their eligibility for transport subsidy. The

Committee was also required to scrutinize and settle the claims in the manner

indicated in the scheme. The words ‘industrial unit’, ‘raw material’ and

‘finished goods’ were defined in sub-clauses (a), (h) and (i) of clause (4) of the

scheme, as follows :-

“(a) ‘Industrial Unit’ means an industrial unit where a manufacturing

programme is carried on.

(h)‘Raw material’ means any raw material actually required and used by

an industrial unit in its manufacturing programme as approved by the

Government of India and/or by the Government of State/Union Territory in

which the industrial unit is located.”

(i) ‘Finished goods’ means the goods actually produced by an industrial

unit in accordance with the manufacturing programme approved by the

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Government of India and/or the Government of the State/union Territory in

which the industrial unit is located.”

3.The appellant claimed that it has its industrial unit at Tinsukia, Assam;

that it was engaged in the manufacturing activity of crushing mustard seeds and

producing two distinct products namely mustard oil and oil cake, as finished

goods; and that it was registered under the transport subsidy scheme, after

verification as provided in the Scheme. It was also claimed that crushing of

mustard seeds yielded 30-34% mustard oil and 60-64% oil cake, each product

having a separate identity and different markets.

4.The appellant made several claims for grant of transport subsidy in

respect of raw materials, oil cake and oil, from time to time. According to

appellant, after giving credit to Rs.5,88,421/- released as subsidy, the amount

due towards subsidy claim till August, 1993, was Rs.58,44,531/-. As there was

inordinate delay in settling the claims, the appellant filed a writ petition in the

year 1996, seeking a direction for release of the said transport subsidy amount.

The said writ petition was disposed of on 15.5.1996 with a direction to

scrutinize appellant’s claim and if found eligible, disburse the amount.

The State Government scrutinized and recommended to the Government of

India, the release of Rs.58,44,531 as transport subsidy to the appellant. On

18.6.1997, the Government of India sanctioned and released Rs.44,14,922 as

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transport subsidy as against the recommended claim of Rs.58,44,531. On

14.7.1997 the Government of India issued a clarification that the transport

subsidy under the said scheme would not be applicable in regard to oil cake as it

was only a by product. Aggrieved by the disallowance of transport subsidy for

oil cake, appellant filed another writ petition (C.R. No.376/1997) for release of

subsidy in respect of oil cake, as sanctioned by the State Level Committee. A

learned Single Judge of the Guwahati High Court by order dated 4.10.1982

rejected the writ petition. The writ appeal filed by the appellant was also

dismissed on 27.10.2008. The said order is challenged in this appeal.

5.The learned Single Judge and the Division Bench have held that the term

‘finished goods’ used in the Scheme would not include oil cake, which was

only a by-product or waste produced while manufacturing mustard oil; and

transport subside was available only in regard to the finished product intended

to be produced by the process of manufacture, which in this case was mustard

oil. The High Court held that ‘finished goods’ refers to goods produced in an

industrial unit by a process of manufacture and “manufacture” means

production of an item distinct and different from the raw material, having a

separate identity; and that the appellant had failed to place before the court

necessary material to explain (i) the process and technology in the manufacture

of oil cake; (ii) the composition of the oil cake; (iii) the purpose and use of oil

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cake; and (iv) the product name in the market and the marketability of oil cake

as a finished goods. The High Court held that in the absence of such material, it

will not be possible to decide whether ‘oil cake’ was a ‘finished goods’ for the

purpose of the Scheme, or merely the residuary waste generated as a by-product

while producing mustard oil as the finished goods.

6.We are of the considered view that the learned single Judge and the

Division Bench missed the real issue. The question was not whether oil cake

was a by-product or not. There are several manufacturing processes which yield

or produce more than one finished product or manufactured item. When

considering whether the ‘finished goods’ is a marketable product, distinct and

different from the raw material from which it is produced, the fact that the

finished goods is the main product, or is a parallel main product or is a by-

product of the manufacturing process, may not make any difference. The

question to be considered is whether oil cake can be said to be a ‘finished

goods’ produced by an industrial unit in accordance with its manufacturing

programme approved by the state government.

7.The object of the Transport Subsidy Scheme is not augmentation of

revenue, by levy and collection of tax or duty. The object of the Scheme is to

improve trade and commerce between the remote parts of the country with

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other parts, so as to bring about economic development of remote backward

regions. This was sought to be achieved by the Scheme, by making it feasible

and attractive to industrial entrepreneurs to start and run industries in remote

parts, by giving them a level playing field so that they could compete with their

counterparts in central (non-remote) areas. The huge transportation cost for

getting the raw materials to the industrial unit and finished goods to the existing

market outside the side, was making it unviable for industries in remote parts of

the country to compete with industries in central areas. Therefore, industrial

units in remote areas were extended the benefit of subsidized transportation. For

industrial units in Assam and other north-eastern States, the benefit was given

in the form of a subsidy in respect of a percentage of the cost of transportation

between a point in central area (Siliguri in West Bengal) and the actual location

of the industrial unit in the remote area, so that the industry could become

competitive and economically viable. So when the Scheme refers to finished

goods coming out of or being exported from the State (remote area), it refers to

any goods manufactured or produced by an industrial unit in the State in

accordance with the manufacturing programme approved by the central

government and/or the state government. So long as the goods coming out is

something identifiable, something which has undergone a process of

manufacture, something which is marketable and tradable as a commodity,

something that is completely different and distinct from raw material as a

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product, something that was intended to be a definite product of manufacture by

the industrial unit, the product had to be considered as ‘finished goods’ from the

industrial unit. Any goods which goes in as a raw material required/used in the

manufacturing programme of an industrial unit situated in a notified remote

area, or any finished goods that is produced in the industrial unit situated in

such area and exported out of the State, was eligible for the transport subsidy

under the scheme.

8.The scheme itself specifically defines ‘finished goods’ as goods actually

produced by an industrial unit in accordance with the manufacturing

programme as approved by the Central Government and/or the Government of

the State where the industrial unit is located. Two certificates issued by the

State Government (District Industries Centre, Dibrugarh) dated 13.11.1987 and

28.8.1992 clearly state that oil cake was produced by the appellant’s industrial

unit in accordance with its manufacturing programme from 1984 and the

appellant’s industrial unit was engaged in the production of two products -

mustard oil and oil cake. It was further certified that the appellant was capable

of manufacturing, with its existing machinery, 1440 MT of mustard oil and

2880 MT of oil cake. Further, the State Level Committee formed under the

scheme and the State Government have consistently opined that oil cake was

finished goods, entitled to transport subsidy. Until the Central Government gave

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a clarification on 14.7.1997 stating that oil cake should not be treated as a

finished goods for the purpose of subsidy, the State Level Committee, State

Government as also the Central Government had proceeded on the basis that oil

cake was finished goods eligible for transport subsidy. It is not disputed that the

transport subsidy had been sanctioned and disbursed in regard to oil cake

produced by other industrial units in the notified remote areas. The position was

explained in the following communication dated 7.2.2005 from the Government

of Assam (Directorate of Industries & Commerce) to the Ministry of Commerce

and Industry, Government of India:

“Government of Assam agrees to the fact that in crushing of mustard seeds

oil cake is a finished product as it constitutes 64% whereas mustard oil

percentage is 32% (4% loss in manufacturing process). If oil cake is not

considered eligible for transport subsidy the oil mills/mustard seed

crushing units will not be economically viable and the purpose of the

transport subsidy scheme will be defeated as the units located in Assam

will not be able to compete with similar units located outside north

eastern region. Accordingly State Level Committees at different

dates/meetings approved the claims for import of Mustard Seeds (RM) and

export of oil cake as finished product as eligible for transport subsidy.”

(emphasis supplied)

9.In spite of the above, the High Court denied the benefit on the ground

that the appellant had failed to place relevant material to establish the

process/technology of manufacture, the composition and product name, and

purpose, use and marketability of the oil cake, so as to recognize it as a

‘finished goods’. What is contained in reference works/technical Journals, or

well known in trade/industrial circles, need not be established by independent

‘evidence’. It is well known that oil cake is the coarse solid residue obtained

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when oil is extracted from various types of oil seeds like peanuts, soyabeans,

linseed, mustard, sesame and sunflower seeds. Oil cake is produced not only in

oil mills/industries, but also in village level Ghanis. The standard

preservation/detoxification procedure for oil cakes is sun-drying, controlled

mechanical heating or by chemical processing. Oil cake is rich in proteins and

minerals and commonly used as cattle feed and poultry feed. Oil cake

containing toxic elements (as for example oil cake from castor beans) is used as

fertilizer. Oil cake has a wide ready market. It is bulk-purchased by

cattle/poultry feed manufacturers who grind it and mix it with other feed

articles to make cattle/poultry feed. Farmers and owners of cattle/poultry

purchase it in retail, break it or grind it and feed them to cattle/poultry, with or

without additives. It is also used as boiler fuel in some areas. Serious research is

in progress to make it fit for human consumption. The name, method of

manufacture, uses and marketability are well known in trade, industrial,

agricultural and village circles. When any reference book can authenticate these

facts within common knowledge, the High Court was not justified in rejecting

the claim on the ground that special evidence in regard to these aspects was not

placed.

10. The true test to ascertain whether a process is a manufacturing process

producing a new and distinct article is whether the article produced is regarded

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in the trade, by those who deal in it, as a marketable product distinct in identity

from the commodity/raw material involved in the manufacture. (See Deputy

Commissioner of Sales Tax (Law), Ernakulam v. Pio Food Packers – 1980

Supp. (1) SCC 174 and Sterling Foods v. State of Karnataka – 1986 (3) SCC

469). When mustard oil and oil cake are produced from mustard seeds, it is a

process of manufacture. It is certainly not a mere process of cleaning, repairing,

reconditioning, recycling or assembling. A new marketable article distinct from

the raw material, emerges when oil cake is produced from oil seeds. In this

context, we may refer to the century old decision in Dean Linseed Oil Co. v.

United States [78 (1897) Federal Reporter 467] relating to availment of customs

duty drawback. A provision of a Tariff Act provided that where imported

materials, on which duties have been paid, are used in the manufacture or

production of articles in the United States, there shall be allowed on the

exportation of such articles, a drawback equal in amount to the duties paid on

the material used, less one per centum of such duties. The issue before the

American court was whether production of oil cake from linseed, by separation

of linseed into linseed oil and oil cake, was manufacture entitled to the benefit

of duty drawback. The court answered the question by the following brief but

classic analysis:

“…..the linseed was not oil cake, and did not contain oil cake, as such.

The linseed had to be treated, and from this treatment the linseed oil was

produced as one thing, and this oil cake as another thing. The oil cake was

made from the linseed, and was a new article of manufacture.”

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We may also refer to the decision in Devi Das Gopal Krishnan v. State of

Punjab [1967 (3) SCR 557], where this Court negatived the contention that

when oil is extracted from oil seeds, oil was produced and not manufactured.

This Court held that ‘when oil is produced out of the seeds, the process

certainly transforms raw material into a different article for use”. What is stated

about oil produced from oil seeds, will apply equally to the other product of the

manufacturing process, namely oil cake.

11. There can therefore be no doubt that when mustard seeds are subjected to

the process of extraction whereby mustard oil and oil cake are produced, the

process involves manufacture of mustard oil as also the manufacture of oil cake.

Oil cake is a distinct and different entity from mustard seeds and it has a

separate name, character and use different from mustard seed. Oil cake is not a

waste to be thrown away, but a valuable product with a distinct name, character,

use and marketability. There can thus be no doubt that the oil cake was a

finished goods eligible for transport subsidy, until it was specifically excluded

by the central government in the year 1997. We are not however concerned

with the validity or correctness of such exclusion from 1997, in this case.

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12.We therefore allow this appeal, set aside the orders of the Division Bench

and single judge of the High Court and allow the writ petition before the High

Court by declaring that oil cake is ‘finished goods’ for the purpose of transport

subsidy scheme and consequently the appellant was entitled to the subsidy.

Respondents are directed to verify and release the subsidy amount due to the

appellant in regard to oil cake exported out of the State. Compliance within six

months.

…………………………J.

(R V Raveendran)

New Delhi; ………………………..J.

May 4, 2009. (Harjit Singh Bedi)