Central Excise - EOU - Concessional rate to goods cleared to DTA , when manufactured from indigenous raw material - Imported wax used in manufacture of cotton yarn - not eligible for exemption: Supreme Court
By TIOL News Service
NEW DELHI, NOV 04, 2015: THE appellant-assessee is engaged in the manufacture of cotton yarn which is 100% Export Oriented Undertaking ( EOU ). During the period August, 2000 to March, 2001, it had cleared cotton yarn made to Domestic Tariff Area ( DTA ). While clearing these goods, it took benefit of Notification No.8 /97- C.E . dated 01.03.1997 and paid duty at concessional rate in terms of the said notification. This notification provides for concessional rate to those products which are cleared to DTA by an EOU . However, one of the conditions for availing the benefit of the said notification is that the products that are manufactured by such EOU should have been manufactured using indigenous raw material only.
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".
The Commissioner of Central Excise, after hearing the matter, passed the Order-in-Original dated 21.06.2002 deciding the matter in favour of the assessee and, thus, dropped proposed demand in the show cause notice by recording the finding to the effect that wax disc acted as a lubricant and facilitated processing and use in the manufacturing process and remained a temporary coat.
The Tribunal allowed the appeal preferred by the Commissioner of Central Excise vide its decision dated 17.07.2007.
Present appeal is preferred by the appellant challenging the correctness and validity of the aforesaid decision of the Tribunal.
The Supreme Court observed,
The appellant is seeking the benefit of exemption Notification No.8 /97- C.E . Since it is an exemption notification, onus lies upon the appellant to show that its case falls within the four corners of this notification and is unambiguously covered by the provisions thereof. It is also to be borne in mind that such exemption notifications are to be given strict interpretation and, therefore, unless the assessee is able to make out a clear case in its favour, it is not entitled to claim the benefit thereof. Otherwise, if there is a doubt or two interpretations are possible, one which favours the Department is to be resorted to while construing an exemption notification.
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 the process which is an imported material. However, the refutation of the appellant is that wax is not 'raw material' and it is only used as 'consumable' in the process of manufacturing cotton yarn.
A particular item, though required for a manufacturing process or participates in the said process would be treated as 'consumable', if it does not form part of end product and instead it gets substantially or totally consumed during the manufacturing process. In contrast, 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.
Evidence has emerged on record, on which there 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. This quality of the yarn is essential for its application in the manufacture of knitted fabrics by the buyers. It follows from the above that insofar as assessee is concerned, it manufactured cotton yarn by applying wax coating thereon. This wax coating, or significant portion thereof, remains on the cotton yarn. The buyer wants wax coating to remain as that is needed for lubrication of the yarn to facilitate its winding on cones when the buyer uses the said cotton yarn for manufacture of hosiery. 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 angle, an irresistible conclusion is arrived at, namely, wax was used as raw material and not as 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.
As a result, this appeal fails and is dismissed with costs.
(See 2015-TIOL-262-SC-CX)
