Full Judgment Text
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CASE NO.:
Appeal (civil) 2611-2612 of 2003
PETITIONER:
M/s Vanasthali Textiles Industries Ltd
RESPONDENT:
Commissioner of Central Excise,Jaipur, Rajasthan
DATE OF JUDGMENT: 26/10/2007
BENCH:
Dr. ARIJIT PASAYAT & S.H. KAPADIA
JUDGMENT:
J U D G M E N T
(With Civil Appeal No.5000/2007 @ SLP (C) No. 9698/2005 and
Civil Appeal No. 5001-5002/2007 @ SLP (C) Nos. 8595-8596/2005
Dr. ARIJIT PASAYAT, J.
1. Leave granted in SLP (C) Nos. 9698/2005 and 8595-
8596/2005.
2. Challenge in these appeals is to the judgment of the
Customs, Excise and Gold (Control) Appellate Tribunal, New
Delhi (in short ’CEGAT’) disposing of appeals filed by the
appellant-company. Challenge before the CEGAT was to the
order passed by the Commissioner (Appeals). CEGAT granted
stay of the recovery of duty, and took up the appeals for
disposal of merits. The appellant-company had challenged the
order passed by the Commissioner of Central Excise (Appeals)
Jaipur.
3. Background facts in a nutshell are as follows:
Appellant-company is 100% export oriented undertaking
(in short ’EOU’) who claimed partial exemption from duty in
terms of Notification NO.8/97-CE dated 1.3.1997 in respect of
goods sold in Domestic Tariff Area (in short ’DTA’), which
stipulated conditions that the goods have been manufactured
wholly from the raw materials produced or manufactured in
India. According to the company it procured the raw materials
from domestic manufacturers in India and also imported (1)
Carboxymethyle 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) Ultra fresh N.M. which is used for anti
bacteria and anti fungus treatment of terry towels. The
Commissioner (Appeals) had confirmed the demand of duty on
the ground that the sizing materials imported by the company
is raw material and as imported raw material has been used,
the benefit of Notification No.8/97-CE is not available.
4. According to learned counsel for the appellant the sizing
material imported is not raw material but is a consumable as
per definition given in para 3.13 of the EXIM Policy. According
to the definition of ’Consumable’, it means any item which
participates in or is required for manufacturing process but
does not form part of the end product. Items which are
substantially or totally consumed during manufacturing
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process will be deemed to be consumable. It was submitted
that the sizing material is washed away after weaving and as
such it does not form part of the end product at all which is
dyed towel or its waste and scrap. According to para 3.41 of
the Policy, raw material means basic materials which are
needed for the manufacture of goods but which are still in a
raw nature, unrefined or un-manufactured stage. Reliance
was placed on the Board’s Circular No.389/22/98-CX dated
5.5.1998 wherein it has been clarified that the benefit of the
Notification would also be available even if imported
consumables are used in the manufacture by 100% EOU. The
sizing material answers the definition of ’consumable’ given in
the EXIM Policy and, therefore, benefit of the Notification
cannot be denied to the appellant.
5. Reliance was placed by the Department upon the
decision in CCE, Indore v. Century Denim, EOU (2001 (129)
ELT 657) wherein the Tribunal relying upon the decision of
this Court in the case of CCE v. Ballarpur Industries Ltd.
(1989 (4) SCC 566) held that the benefit of Notification 8/97 is
not available as 100% EOU has used the imported indigo pure
dye and other articles. Tribunal dismissed the appeals and
upheld the views of the departmental authorities. After
considering the rival submissions, CEGAT came to hold that
the appellant-company is using Carboxymethyle Cellulose
which is a sizing material in the manufacture of finished
products, which are finally cleared in the DTA. The sizing
material is undisputedly imported by it. The benefit of
Notification No.8/97 is available only if the products brought
only from the raw materials produced or manufactured. The
Board’s Circular dated 5.5.1998 has clarified that 100% EOU
is available for the benefit of the said Notification even if the
imported consumables are used since the Notification does not
bar the use of imported consumables. Reliance was placed in
Ballarpur’s case (supra) to conclude that the benefits of
Notification were not available. It was also noted that in the
case of Century Denim’s EOU case (supra) the view taken was
affirmed by this Court in Century Denim’s case (supra).
Accordingly, the appeals were dismissed. It is the assessee’s
stand in these appeals that the Tribunal had not correctly
applied the decision in Ballarpur’s case (supra) inasmuch as
this Court clearly observed that the said decision was in the
facts and circumstances of that matter and no general
proposition of law was being laid down. In that case this Court
was concerned with Sodium Sulphate which was burnt up in
the process of manufacture and other chemical reaction.
Additionally, in Ballarpur’s case (supra) the manufacturer was
not 100% EOU importing any material unlike the present
appellant company which is 100% EOU importing material
classified under the EXIM Policy as consumable.
6. Stand of the Department-respondent was that imported
sizing material was used by the assessee in the manufacture
of impugned product and the process of sizing is essential
process during the course of manufacture of terry towel
because it increased the strength of the yarn and the fibre and
thus improves the weaving of the yarn. Therefore, the sizing
material is an essential ingredient for weaving of terry towel.
Reliance was placed on the decision of this Court in
Ballarpur’s case (supra) to contend that one of 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.
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7. Learned counsel for the parties re-iterated the stand
taken before the CEGAT.
8. In the connected matter i.e. SLP (C) No.9698/2005
challenge is to the order passed by a learned Single Judge of
the Madhya Pradesh High Court, Indore Bench. Factual
position in that case is as follows:
9. The appellant-Company is a duly incorporated company.
It is a 100% export oriented unit situated in the industrial
backward district of Khargone for manufacture of cotton yarn
and/or blended yarn. Appellant-Company is engaged in the
manufacture of cotton yarn and Denim fabric, which is made
out of the cotton yarn produced by the appellant. The Denim
cloth being so manufactured is thus a variety of textile
product. The Denim so manufactured is of two varieties,
namely, coloured Denim and gray Denim. As per appellant’s
case under Chapter 52 of the Central Excise Tariff Act, 1985
which deals with cotton, the Denim fabrics produced by the
appellant is covered by sub-heading 52.07 of the Tariff. Vide
Notification No.8/97 dated 1.3.1997, the Government of India
has permitted payment of Central Excise duty at the same rate
at which goods produced by an EOU, provided the goods are
manufactured by a 100% EOU wholly from raw material
produced or manufactured in India. It is further submitted in
the appeal that the appellant’s product Denim fabrics is wholly
produced from cotton yarn and the Company is availing the
benefit of the aforesaid Notification since 1977.
10. The Commissioner of Central Excise & Customs, Indore
issued a notice dated 3.2.1998, to the appellant-Company to
show cause why benefit of this Notification be not denied, as
they are using ’Indigo pure’ in the manufacture of Denim
fabrics, which is an imported raw material and also for the
recovery of Rs.1,97,11,939/- being short duty paid on Denim
fabric cleared in DTS Sales during the period 1.4.97 to 30.1.98
under Rule 9(2) of the Central Excise Rules, 1944 (in short the
’Rules’) read with proviso to section 11-A(1) of the Central
Excise Act, 1944 (in short the ’Act’) and also for imposing
penalty under section 11-AC of the Act and Rules 173-Q and
209 of the Rules and also for recovery of interest on the duty
short paid and with other directions about the confiscation of
the land, building, plant and machinery, materials or any
other things under Rule 173-Q(2) and Rule 209(2) of the
Rules.
11. On 5.6.1998 the appellant filed reply to the aforesaid
show cause notice and, thereafter after hearing the learned
counsel for the parties the Commissioner, Central Excise and
Customs, Indore by order dated 23.6.1999 held that since the
raw material has not been defined specifically and also
nothing has been brought on record to establish that imported
’Indigo pure’ is a raw material known in common trade
parlance therefore, the ’Indigo pure’ cannot be termed as raw
material for production of Denim fabrics and dropped the
show cause notice against which the Revenue filed a joint
appeal before the CEGAT.
12. The CEGAT allowed the appeal filed by the Revenue by
order dated 30.1.2001 and set aside the order passed by the
Commissioner on 26.3.1999 and considered the case in the
light of finished product and has held that ’Indigo pure’ which
has gone into the production of the finished product is thus
the raw material and remanded the case to consider the points
of limitation and the quantum of duty, as these points were
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not considered as the entire proceedings were dropped,
against which the appellant-Company has filed the writ
petition challenging the aforesaid order of the CEGAT. The
dispute relates to a question whether Indigo Pure dye can be
treated as a raw material. Relying on the decision in
Ballarpur’s case (supra) the order passed by the CEGAT was
upheld. In that case also the question was relating to the
Notification as referred to above.
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’s case (supra) it was inter alia
observed as follows:
"14. The ingredients used in the chemical
technology of manufacture of any end product
might comprise, amongst others, of those
which may retain their dominant individual
identity and character throughout the process
and also in the end product; those which, as a
result of interaction with other chemicals or
ingredients might themselves undergo
chemical or qualitative changes and in such
altered form find themselves in the end
product; those which, like catalytic agents,
while influencing and accelerating the
chemical reactions, however, 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 in the
emergence of the desired end product, that
having regard to its importance in and
indispensability for the process, it could be
said that its very consumption on burning up
is its quality and value as raw material. In
such a case, the relevant test is not its absence
in the end product, but the dependence of the
end product for its essential presence at the
delivery end of the process. The ingredient goes
into the making of the end product in the
sense that without its absence the presence of
the end product, as such, is rendered
impossible. This quality should coalesce with
the requirement that its utilization 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
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 treated that the finished
product has come into existence wholly from cotton. It was
held that for the manufacture of denim the basic raw material
and the finished product cannot be treated as wholly produced
or manufactured from cotton. Therefore, placing reliance on
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Ballarpur’s case (supra) it was held that the finished product
is not wholly from basic raw material i.e. cotton but it has to
be treated that the dye is also a raw material which is
imported.
15. It is to be noted that cost of dye varied between 2 and
2.5% of the total production cost. The denim is manufactured
from cotton and not from indigo. The conditions 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’s case (supra) it was held in para 19 as
follows:
"We are afraid, in the infinite variety of ways in
which these problems present themselves it is
neither necessary nor wise to enunciate
principles of any general validity intended to
cover all cases. The matter must rest upon the
facts of each case. Though in many cases it
might be difficult to draw a line of
demarcation, it is easy to discern on which
side of the borderline a particular case falls."
17. It is true that the Notification does not make distinction
on account of value. Stress is on the word ’wholly’. In the
Circular dated 5.5.1998 it is stated as follows:
"xx xx xx xx
3(b) In respect of situation (ii) a Unit is eligible
for the benefit of Notification 8/97-CX 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 & A Matelsky it has been stated as
follows:
"In industry, textile fonning (fibrous) items
used for manufacturing (Main activity) a textile
product are referred as raw material, e.g.
cotton, viscose, wool, silk, nylon, polyster, etc.
or their blends in different compositions.
Whereas, (non fibrous) items used for chemical
processing of textile product (Ancillary activity)
are referred as consumables e.g. starches,
variety of chemicals, several colouring matters
such as dyes and pigments etc. Power and
water are other consumable items in addition
to 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
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the same has relevance, the matter is remitted to the CEGAT
to consider those aspects. It shall also consider whether the
items can be considered as "consumable" on the facts of the
case.
20. Dealing with a case under a Sales Tax statues, i.e.
Andhra Pradesh General Sales Tax Act, 1957, this Court held
that the word "consumable" takes colour from and must be
read in the light of the words that are its neighbours "raw
material", "component part", "sub-assembly part" and
"intermediate part". So read, it is clear that the word
"consumables" therein refers only to material which is utilized
as an input in the manufacturing process 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 "consumable" fall within the
broader scope of the words "raw materials". Reference in this
connection can be made to the view expressed in Deputy
Commissioner of Sales Tax (Law), Board of Revenue (Taxes),
Ernakulam v. M/s Thomas Stephen & Co. Ltd., Quilon (1988
(2) SCC 264) and Coastal Chemicals Ltd. V. Commercial Tax
Officer, A.P. and Ors. (1999 (8) SCC 465). In the cases at
hand "consumable" are treated differently from "raw
materials".
21. The appeals are allowed with no order as to costs.