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2015 (11) TMI 94 - SUPREME COURT

2015 (11) TMI 94 - SUPREME COURT - 2015 (325) E.L.T. 417 (SC) - Clearance of goods to DTA by an EOU - Denial of concessional rate of duty - benefit of Notification No.8/97-C.E. dated 01.03.1997 - cotton yarn was made of indigenous as well as imported cotton coated with imported wax. cotton yarn was manufactured out of indigenous cotton and imported wax, as wax was contained in the final product (yarn) - Held that:- Cotton yarn can be produced without wax as well. However, such cotton yarn withou .....

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s consumable, insofar as end product of the assessee is concerned.

For the assessee, end product is cotton yarn and not knitted hosiery. Knitted hosiery is the end product of the buyer. If buyer removes the wax after manufacture of knitted fabrics, that may not be of any consequence insofar as the assessee is concerned and would be totally extraneous to determine the issue at the hands of the assessee.

Those units which manufacture goods out of both imported and indigenous .....

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n, JJ. For the Appellant : Mr. K. K. Mani, Adv. Ms. T. Archna, Adv For the Respondent : Mr. B. Krishna Prasad, Adv JUDGMENT A. K. Sikri, J. The appellant-assessee is engaged in the manufacture of cotton yarn which is 100% Export Oriented Undertaking (EOU) constituted as per Export and Import Policy 1997-2002. During the period August, 2000 to March, 2001, it had cleared the aforesaid cotton yarn made to Domestic Tariff Area (DTA). While clearing these goods, the appellant did not pay normal exci .....

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. The appellant while manufacturing cotton yarn had used indigenous cotton and also imported wax. The Department sought to deny the benefit of Notification No.8/97-C.E. on the ground that imported wax was also used, which was treated as the "raw material". Show cause notice dated 04.09.2001 was, accordingly, issued by the Superintendent of Central Excise, Pollachi-II Range, in O.C. No.777/2001 to state that the appellant was wrong in claiming the benefit of Notification No.8/97-C.E. da .....

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to hosiery industries. Wax acts as a lubricant for reducing the friction and hairiness arising due to cone winding of yarn at a speed of 1200-1500 meters per minute. (ii) The lubrication of the yarn also facilitated the use of the high speed knitting machines. (iii) The wax was only a temporary coat and did not form part of the cotton yarn and the wax removed permanently after the knitting and does not remain part and parcel of the yarn. (iv) The jurisdictional Superintendent of Central Excise h .....

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ricant and facilitated processing and use in the manufacturing process and remained a temporary coat. (ii) By Circular No.631/22/2002-CX dated 28.03.2002, the Ministry of Finance held that consumables used in capital goods cannot be termed as 'raw material' for the manufacture of finished goods and in the case wax was only a consumable for the capital goods. (iii) Revenue was inconsistent in having dealt with wax discs as consumable in the warehousing operation of the appellant but dealt .....

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peal before the Appellate Tribunal exercising power under Section 35B of the Act. The Commissioner of Central Excise preferred the appeal as directed by the Central Board of Excise & Customs against his own Order-in-Original No.32/2002-Commr. dated 21.06.2002 before the Tribunal. 5. The Tribunal allowed the appeal preferred by the Commissioner of Central Excise vide its decision dated 17.07.2007. Perusal of the decision indicates following thought process: (i) The imported wax was used throu .....

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icity to the yarn. 6. Present appeal is preferred by the appellant challenging the correctness and validity of the aforesaid decision of the Tribunal. 7. Mr. Bagaria, learned senior counsel, appearing for the appellant, drew our attention to the language used in the exemption notification which provides for 100% exemption to EOU or a free trade zone from excise duty on the finished products, rejects and waste or scrap specified in the Schedule to the Central Excise Tariff Act, 1985 when produced .....

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ones. In this process, the yarn is passed over an imported wax disc fitted on the cone winder (Auto Coner) at a speed of 1200 to 1500 meters when the wax gets coated on the yarn. The purpose of wax coating was only to smoothen the yarn and provide lubrication to this product. It was not used as raw material for the production of cotton yarn, as yarn could be produced even without the said wax cotton. He also explained that the cotton yarn was sold by the appellant to the consumers for the purpos .....

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-C.E. 8. Mr. Bagaria also referred to Circular No.389/22/98-CX issued by the Ministry of Finance on Notification No.8/97-C.E. dated 01.03.1997 applicable to 100% EOU, which clarified certain doubts and paragraph 3 thereof reads as under: "3. The matter has been examined by the Board and it is clarified that: (a) In respect of situation (i) above the benefit of Notification 8/97-C.E. dated 01.03.1997 cannot be extended to those units which manufacture goods out of both imported and indigenou .....

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fies that the use of imported consumables would not debar such a manufacture from availing the benefit from the notification. He also referred to two circulars of the Ministry of Finance in support of his aforesaid plea, the particulars and the material contained thereof are as under: (i) Circular No.614/5/2002-CX dated 31.01.2002, the Ministry of Finance stated as under: "I am directed to refer Board's Circular No.389/22/98-CX dated 05.05.1998 [1998 (100) ELT T19] relating to extension .....

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follows: "I am directed to invite reference to Board's Circular No.614/5/2002-CX dated 31.01.2002 [2202 (140) ELT T3] regarding denial of the benefit of Notification No.8/97-C.E. dated 01.03.1997 (as amended) to the export oriented units using imported consumables. It has been brought to the notice of the Board that the field formations are denying the benefit of Notification No.8/97-C.E. to units using imported consumables with capital goods. 2. Board has taken serious view of this mis .....

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ng imported consumables with capital goods provided all other conditions of notification are satisfied." 10. Mr. Bagaria went on to argue that the issue was no more res integra as this Court had already taken a view on this aspect, favourable to the assesses/manufacturers. In this direction, he pointed out that the Chennai Bench of the Tribunal in the case of Super Spinning Mills Ltd. v. Commissioner of Central Excise, Tiruchirapalli 2013 (296) ELT 133 which was concerned with identical typ .....

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of the Tribunal, which reads as under: "2. We have heard both sides on the appeal against the order. The process of waxing of hosiery cotton yarn is done at the winding stage (whether auto-cone or manual cone). In the auto-coner machine, the imported wax disc is kept in the yarn path and the yarn is allowed to pass through the wax disc while the wax disc is rotated to ensure uniform waxing. The waxed yarn is subsequently conditioned by "Yarn Conditioning Process" in which yarn is .....

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L.T. 186 (Kar.) holding that wax cannot be considered as raw material but as consumable and upholding the Tribunal's order reported in 2005 (192) E.L.T. 1000 to this effect. The Karnataka High Court's decision cited supra is applicable on all fours to the facts of the present case. Although, ld. JCDR seeks to rely upon the remand and order of the Apex Court in Vanasthali Textiles Industries Ltd. v. CCE, Jaipur [2007 (218) E.L.T. 3 (S.C.)] to examine whether sizing material was a raw mate .....

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be a consumable and not a raw material, set aside the impugned order and allow the appeal. CO disposed of accordingly." 11. He also brought to the notice of this Court that against the aforesaid judgment of the Tribunal, the Revenue/Department had preferred an appeal in this Court, being Civil Appeal No.5294-5299/2010 which was dismissed by this Court on 08.07.2010 with the following order: "The appeal is dismissed on the ground of delay as well as on merits." He, thus, made passi .....

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acts of the two cases. She further submitted that the Tribunal had appreciated the same in the impugned decision appropriately discerning the facts of the present case and, therefore, the impugned order did not warrant any interference. We shall take note of the arguments of Ms. Khajuria in some detail at the later stage. At this point of time, we would like to deal with the contentions raised by the learned senior counsel for the appellant. 13. The appellant is seeking the benefit of exemption .....

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erpretations are possible, one which favours the Department is to be resorted to while construing an exemption notification. 14. The gravamen of the charge against the appellant is that wax disc which is admittedly imported and used for the production of cotton yarn constitutes 'raw material' and since imported material is used for the production of the aforesaid commodity, benefit of Notification No.8/97-C.E. cannot be extended to the appellant. It is not in dispute that wax is used in .....

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participates in or is required for a manufacturing process, but does not form part of the end product. Items which are substantially or totally consumed during a manufacturing process will be deemed to be consumables. "Raw material" means: (i) basic materials which are needed for the manufacture of goods, but which are still in a raw, natural, unrefined or unmanufactured state; and (ii) for a manufacturer, any materials or goods which are required for the manufacturing process, whether .....

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if any materials or goods are required for the manufacturing process, such materials or goods would be treated as the 'raw material', whether they have actually been previously manufactured or are processed or are still in a raw or natural state. 16. These expressions have come up for interpretation before this Court on earlier occasions in few cases. Some of these judgments were taken note of in the case of Vanasthali Textiles Industries Ltd. v. CCE, Jaipur (2007) 12 SCC 115 . We may cl .....

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discussion in the said judgment becomes relevant. As far as term 'raw material' is concerned, following discussion followed in the said judgment: "13. The expression "raw material" is not a defined term. The meaning has to be given in the ordinary well-accepted connotation in the common parlance of those who deal with the matter. In Ballarpur case (1989) 4 SCC 566 it was inter alia observed as follows: (SCC p. 572, para 14) "14. The ingredients used in the chemical t .....

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, may themselves remain uninfluenced and unaltered and remain independent of and outside the end products and those, as here, which might be burnt up or consumed in the chemical reactions. The question in the present case is whether the ingredients of the last-mentioned class qualify themselves as and are eligible to be called raw material' for the end product. One of the valid tests, in our opinion, could be that the ingredient should be so essential from the chemical processes culminating .....

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e of the end product, as such, is rendered impossible. This quality should coalesce with the requirement that its utilisation is in the manufacturing process as distinct from the manufacturing apparatus." 14. CEGAT had held in that case that the use of indigo dye is as a raw material in the manufacture of denim fibre. According to the High Court also the question was whether the use of small quantity of imported dye in bringing the end product into existence, even in that case it can be tre .....

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een 2 and 2.5% of the total production cost. The denim is manufactured from cotton and not from indigo. The condition for getting the benefit of the notification is that the end products should be wholly manufactured from the raw material produced and sold in India. 16. It is to be noted that dominant ingredient test has not been applied in the instant case; so also the effect of value addition. In Ballarpur case it was held in para 19 as follows: (SCC p. 573) "19. We are afraid, in the inf .....

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ly". In the Circular dated 5-5-1998 it is stated as follows: "3(b) In respect of Situation (ii) a unit is eligible for the benefit of Notification No. 8/97-CE ibid., even if imported consumables are used since the notification does not debar the use of imported consumables, provided other conditions of the said notification are satisfied." 18. In Chemical Technology of Fibrous Materials by F. Sadov, M. Korchagin and A. Matelsky it has been stated as follows: "In industry, tex .....

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fuel oil, lubricating agents and packing materials. It is a common practice in textile industry and trade to identify and categorise raw material and consumables on such basis." 19. Since the reliance on dominant ingredient test in regard to cost variation has not been considered by CEGAT though the same has relevance, the matter is remitted to CEGAT to consider those aspects. It shall also consider whether the items can be considered as "consumable" on the facts of the case. 20. .....

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ocess but is not identifiable in the final product by reason of the fact that it has got consumed therein. It is for this reason, a departure was made from the concept that "consumables" fall within the broader scope of the words "raw materials". Reference in this connection can be made to the view expressed in Dy. CST v. Thomas Stephen & Co. Ltd (1988) 2 SCC 264 and Coastal Chemicals Ltd. v. CTO (1999) 8 SCC 465. In the cases at hand "consumables" are treated d .....

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assessee had procured the raw material from domestic manufacturer in India and had also imported (1) carboxymethyl cellulose which is used for sizing of single yarn to give strength to the yarn during weaving after which the woven towels are washed to remove completely the sizing materials and (2) ultrafresh N.M. which is used for anti-bacteria and anti-fungus treatment of terry towels. The question that fell for consideration was as to whether the aforesaid imported material used while manufact .....

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the decision of this Court in CCE v. Ballarpur Industries Ltd. (1989) 4 SCC 566 wherein this Court has held that the valid tests to determine whether the ingredient qualifies to be called raw material could be that ingredient should be so essential for the chemical processes culminating in the emergence of the desired end product. 18. As already pointed out above, Export and Import Policy 1997-2002 provided the definition of 'consumables' and 'raw material'. The definition of  .....

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relevant time when Vanasthali Textiles Industries Limited and Ballarpur Industries Limited cases were decided, going by the dictionary meaning, almost similar test was applied to determine whether a particular input would be treated as 'consumable' or 'raw material'. 19. A cursory glance of these judgments may give an impression that the present case is also covered by those decisions as in the instant case the waxing is ultimately removed from the cotton yarn by the buyer, afte .....

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nto consideration the end product at the hands of buyer which is not only extraneous and irrelevant but clearly impermissible. We are concerned with the article manufactured by the assessee, viz. cotton yarn, and not with the new and altogether different product, viz. knitting hosiery, manufactured by the buyer, who buys the cotton yarn as raw material/input. The article manufactured by the assessee is cotton yarn. Insofar as the assessee is concerned, its 'end product' is cotton yarn. T .....

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is no dispute, that the final product which was cleared by the assessee, namely, cotton yarn was made of indigenous as well as imported cotton coated with imported wax. The wax coating is found to be essential for lubrication of the yarn and was allowed to remain on the yarn in order to facilitate its winding on cones and its use in knitting hosiery. Wax imparts a quality whereby the protruding fibres of the yarn are made to settle uniformly on the surface of the yarn to enable easy winding. Th .....

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No doubt that cotton yarn can be produced without wax as well. However, such cotton yarn without wax would be of inferior quality for the purposes of buyer in comparison with cotton yarn coated with wax as the use of cotton yarn with wax thereupon acting as lubricant is much more useful and becomes a value addition making it better quality cotton yarn, insofar as requirement of the buyer in using such cotton yarn for manufacture of knitted fabircs is concerned. When matter is examined from this .....

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