Full Judgment Text
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CASE NO.:
Appeal (civil) 6451-6452 of 2000
PETITIONER:
M/S C.T. COTTON YARN LTD
RESPONDENT:
COMMISSIONER OF CENTRAL EXCISE, INDORE
DATE OF JUDGMENT: 22/09/2006
BENCH:
ASHOK BHAN & P.K. BALASUBRAMANYAN
JUDGMENT:
J U D G M E N T
P.K. BALASUBRAMANYAN, J.
1. The appellant challenges the decision of the Customs, Excise
and Gold (Control) Appellate Tribunal, New Delhi in A.No.E/1715-
1716/97-D dated 19.07.2000. By the said order the Tribunal substantially
dismissed the appeals filed by the appellant, but reduced the penalty
imposed on the appellant by the Original Authority.
2. According to the appellant, it is a 100% export oriented unit
engaged in the manufacture and export of cotton yarn. It purchases cotton
from the domestic market for the manufacture of yarn. After the cotton is
purchased it is subjected to carding and combing and only thereafter it is
spun into yarn. According to the appellant, carding involves opening and
separating out of fibres together with effective cleaning and combing is a
process by which impurities and undesired short fibres are removed.
During carding and combing, the fibre and noils can be separated and they
are collected in one place by suction. This, according to the appellant, is a
waste generated at the preparatory stage and it is cotton waste. It is impure
cotton fibre.
3. Earlier, the appellant was paying duty on this cotton waste
before clearing it and selling it in the Domestic Tariff Area. On finding that
certain similar other manufactures were not paying duty on the waste cotton
thus generated and disposed of in the Domestic Tariff Area, the appellant
sought clarification from the Collector of Central Excise and Customs,
Indore taking up the position that cotton waste was not dutiable. On
9.9.1993, the appellant was informed that soft cotton waste arising out of
indigenous material would not attract excise duty. The appellant started
clearing and selling the waste cotton without payment of duty. On
16.09.1993, the Department wrote a letter to the appellant to explain under
what circumstances the appellant was clearing the soft cotton waste and
selling it in the Domestic Tariff Area without payment of duty. It is the
case of the appellant that based on the clarification as above, it filed a fresh
clarification list dated 17.9.1993 declaring soft cotton waste as non-excisable
item and it continued clearing the same without payment of duty and selling
it in the Domestic Tariff Area. On receipt of the communication dated
16.09.1993 from the Department, the appellant took up the position that soft
cotton waste was not liable to duty since it was only cotton waste removed
from the cotton domestically purchased so as to enable the appellant to make
the yarn for the purpose of export.
4. On 16.3.1995, Finance Bill 1995 was introduced. In the First
schedule to the Central Excise Tariff Act, 1985, a heading 52.02 was
introduced covering cotton waste. The said Bill after having been passed,
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received the assent of the President of India on 26.5.1995 and thus became
the Finance Act, 1995. On 4.12.1995 the Department issued a notice to the
appellant to show cause why duty on the quantity of soft cotton waste
cleared by the appellant and sold in the Domestic Tariff Area during the
period from1.5.1995 to 31.7.1995, be not imposed in terms of the proviso to
Section 3(1) of the Act read with the concerned notification. Yet another
notice was issued by the Department dated 22.7.1996 covering the period
prior to the one covered by the earlier notice, the period from 16.3.1995 to
30.4.1995. The Department sought to invoke the extended period of
limitation available under Section 11A of the Act. The appellant filed
objections to the notices. In reply to the first notice it was put forward that
soft cotton waste was not exigible to duty and that in any event, the demand
for the period from 1.5.1995 to 3.6.1995 was barred by limitation, the
demand having been made six months after the expiry of the said period.
As regards the notice dated 22.7.1996, the appellant, in addition to the
contention that no excise duty was leviable on soft cotton waste which it had
disposed of in the DomesticTariff Area, contended that the Department was
not entitled to the extended period of limitation under the proviso to Section
11A of the Act since there was no suppression of any relevant fact on the
part of the appellant and the Department was well aware all along that the
appellant was removing soft cotton waste and disposing it of in the Domestic
Tariff Area without paying duty.
5. On 5.5.1997, the Commissioner of Central Excise, Indore,
rejected the contentions of the appellant. He confirmed the demand under
the first notice, of Rs.15,02,211.18 towards duty. He also imposed a
penalty of Rs.5 lakhs on the appellant. As regards the second notice, the
Commissioner found that the Department was entitled to the benefit of the
extended period under Section 11A of the Act and confirmed the demand
under notice dated 22.7.1996 of Rs.7,21,739.63 and also imposed a fine of
Rs.2.5 lakhs on the appellant.
6. The appellant filed appeals before the Appellate Tribunal. The
appellate Tribunal imposed a condition that the appellant should deposit
Rs.8 lakhs towards the duty and Rs.1 lakh towards the penalty before the
appeals could be heard. According to the appellant the said sum was
deposited on 31.10.1997. Before the Appellate Tribunal, the appellant
contended that no manufacture was involved while soft cotton waste was
being produced from the cotton that was being cleaned for the purpose of
making yarn for being exported and since there was no manufacture
involved, no duty was leviable on soft cotton waste sold in the Domestic
Tariff Area. It was also submitted that merely because the Finance Act has
introduced an entry under Heading 52.02 in the first schedule to the Central
Tariff Act covering cotton waste, it would not automatically mean that duty
was leviable on the same. Any way, the amendment applied only to the
period subsequent to the Finance Act 1995 and not before. It was also
reiterated that the claim of the Department for extended period of limitation
was unsustainable on the facts and in the circumstances of the case and that
in any event the penalty imposed was unjustified. The Appellate Tribunal
rejected the claim of the appellant mainly based on the admission of the
representative of the appellant that after the 1995 Finance Act, soft cotton
waste had become exigible to duty and further taking the view that since it
has been specified in the first schedule to the Tariff Act as a dutiable item,
the duty was payable at 50% of the rate of customs duty considering the fact
that the appellant was 100% export oriented. It took the view that the
Finance Act had come into force from the date of the Finance Bill. But the
Tribunal, in the circumstances, reduced the penalty imposed by the
Commissioner and reduced it to Rs.2.5 lakhs from of Rs.5 lakhs in respect
of the period covered by the notice dated 4.12.1995 and to Rs.1.25 lakhs
from Rs.2.5 lakhs in respect of the period covered by the notice dated
22.7.1996.
7. Learned counsel for the appellant submitted that soft cotton
waste is not manufactured by the appellant but that it was only impure cotton
separated from the cotton purchased from the domestic market for the
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manufacture of yarn intended solely for export. Counsel submitted that
cotton waste thus generated itself and in the absence of any process of
manufacture being involved, the mere fact that such cotton waste produced
is sold regularly in the Domestic Tariff Area, would not make the same
exigible to excise duty. He further contended that Heading 52.02 covering
’cotton waste’ was introduced only by the Finance Act 1995 enacted on
26.5.1995 and it did not have effect from the date of introduction of the
Finance Bill. He referred to Section 3, the charging section and emphasised
that "it must be actually produced or manufactured before excise duty could
be imposed". He also submitted that the Department was not entitled to
have the benefit of the extended period of limitation and the demand covered
by the notice dated 22.7.1996 was clearly barred and the demand covered by
the notice dated 4.12.1995 was also barred insofar as it related to the claim
for the period from 1.5.1995 to 3.6.1995. Counsel for the Department
controverted these submissions and submitted that soft cotton waste was
generated during the course of manufacture undertaken by the appellant
when it manufactured yarn for export from cotton purchased from domestic
market and this intermediate process cannot be separated and dealt with
separately. He pointed out that in view of the declaration made in that
behalf the amendment had been effective from the date of the Finance Bill.
He also contended that manufacture was involved when soft cotton waste
was produced and it was being regularly sold in the domestic market
indicating that it was a marketable commodity and in the circumstances it
was exigible to duty as rightly held by the Commissioner and the Appellate
Tribunal. He also submitted that on the facts and in the circumstances of the
case there was suppression of relevant material and information by the
appellant and the Tribunal was justified in holding that the Department was
entitled to the extended period of limitation available under Section 11A of
the Act. Counsel, therefore, urged that no interference was called for with
the decision of the Tribunal.
8. It is clear that the product involved herein is not a left over after
the end product is manufactured. Here the cotton waste is generated during
the process of manufacture of yarn. In other words, when cotton purchased
in the domestic market is used for manufacture of yarn, by initiating the
process of manufacture, at an intermediate stage, the so called cotton waste
is produced, which is a marketable commodity and which is regularly
marketed. Therefore, one of the twin tests, namely, that the commodity
which is produced is marketable and is regularly marketed as a product, is
satisfied. It is by now established that merely because a commodity is
included in the schedule, it will not be exigible to duty unless a process of
manufacture is involved when that product emerges. Here, heading 52.02
has been brought in in the Schedule by the Finance Act, 1995. Though it is
shown as an item bearing nil duty, since the appellant is a 100 per cent
export oriented manufacturing entity it will be liable to duty as provided in
the proviso to Section 3(1) of the Tariff Act. Therefore, the question
involved is whether a process of manufacture is involved when the cotton
waste is generated during the process of converting domestically purchased
cotton into exportable yarn manufactured by the appellant.
9. In State of Maharashtra vs. Pulgaon Cotton Mills Ltd.
[( 1995) 77 ELT 790 SC] This Court held that where a subsidiary product
is turned out regularly and continuously in the course of manufacturing
business and is also sold regularly from time to time, there may be attributed
an intention to the manufacturer to manufacture and sell not merely the main
item but also the subsidiary products. This Court relied on an earlier
decision in State of Gujarat vs. Raipur Manufacturing Company
Limited [(1967 (19) STC 1 (SC)] in support of the position that manufacture
was involved in that situation. Cotton waste generated was hence held
to be by a process of manufacture. For the appellant it is submitted that the
manufacture of a product may involve several processes and various changes
in the raw material at different stages. Manufacture would occur at the point
where the changes take the product to a point that commercially, it cannot be
regarded as the original commodity, but, instead, recognised as a new
distinct article. The decision of this Court in J.G. Glass Industries [(1998)
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97 E.L.T. 5] is relied on in support.
10. The scope of the expanded definition of manufacture has been
considered in the decision in Shyam Oil Cake Ltd. Vs. Collector of
Central Excise, Jaipur [2004 (174) E.L.T. 145 (SC)]. The appellate
authority has essentially proceeded on the amendment to the schedule and
inclusion of cotton waste therein and the admission of the representative of
the appellant that subsequent to the inclusion in the schedule, cotton waste is
taxable. It appears to us that the question whether cotton waste is dutiable
as a manufactured product requires to be reconsidered by the Tribunal in the
light of the various decisions of this Court brought to our notice and which
may hereafter be brought to the notice of the Tribunal. The argument that it
was only after the process of manufacture has started that the product has
come into existence and it has marketability and hence, it is dutiable and the
counter argument that it was only impure cotton which has got separated
from the cotton purchased from the open market so as to enable the appellant
to manufacture the yarn intended for export and this product produced at the
intermediate stage still remains cotton and it is not a manufactured produced,
have both to be considered in the light of the decided cases. In this
situation, we think it appropriate to set aside the order of the Tribunal and
remand the appeals filed by the appellant to the Tribunal for a fresh decision.
We think that this aspect needs to be reconsidered by the Tribunal afresh and
a fresh decision taken. We, therefore, set aside the order of the Tribunal on
this aspect and direct the Tribunal to decide the appeals afresh based on the
finding to be rendered on this question. All contentions including whether
the department could invoke the extended period of limitation are left open.
11. Thus, the appeals are allowed in part, the orders of the Tribunal
are set aside and the appeals filed by the appellant before the Tribunal are
remanded for a decision afresh on the question referred to above. The
parties are directed to bear their respective costs.
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