M-S VANASTHALI TEXTILES INDUSTRIES LTD. v. COMMISSIONER OF CENTRAL EXCISE, JAIPUR, RAJASTHAN

Citation: [2007] 11 S.C.R. 710

Court: Supreme Court of India

Bench: ARIJIT PASAYAT, S.H. KAPADIA

Case summary

M-S VANASTHALI TEXTILES INDUSTRIES LTD. v. COMMISSIONER OF CENTRAL EXCISE, JAIPUR, RAJASTHAN.pdf

Judgment text

-~- \ \ MIS VANASTHALI TEXTILES INDUSTRIES LTD. V. COMMISSIONER OF CENTRAL EXCISE, JAIPUR, RAJASTHAN OCTOBER 26, 2007 [DR. ARIJITPASAYAT AND S. H. KAPADIA,JJ. ) Excise duty-Exemption under Notification No. 8197-CE- Entitlement of-100 % EOU using imported sizing material in manufacture of terry towels-Another I 00% EOU using imported 'Indigo pure' in manuft1cture ofdenim fabric-First company's case that imported sizing material not raw material but consumable and other company's case that Denim fabric whollyproducedfrom cotton yarn andIndigo pure not raw material, thus entitledto exemption under Notification-Held: Benefit ofNotffication is available when products are manufactured by I 00% EOU whollyfrom raw materialproduced andsold in lndia-Onfacts, dominant ingredient test in regard to cost variation not applied-Thus, matter remitted to CEGAT to consider the same and also whether the items are 'consumable '-Notification No. 8197-CE-Central Excise and Salt Act, I 944.

Words and Phrases: 'Consumables' and 'raw materials'- Meaning of In the present batch of appeals, appellant-company is 100% }. - Export Oriented Undertaking-'EOU'. In terms ofNotification No. 8/ 97-CE dated 1. 3. 1997, goods sold in Domestic Tariff Arca by a 100% EOU were partially exempted from payment ofCentral Excise Duty provided the goods were manufactured by 100% EOU wholly from raw material produced or manufactured in India. Appellant-company in first batch ofappeals procured the raw -1 materials from domestic manufacturers in India and also imported Carboxymcthyle Cellulose which is used for sizing ofsingle yarn to > VANASTHALI TEXTILES INDUSTRIES LTD. v. 711 COMMNR. OF CENTRAL EXCISE, JAIPUR, RAJASTHAN give strength to the yarn during weaving after which the woven towels are washed to remove completely the sizing materials and Ultra fresh N. M. which is used for anti bacteria and anti fungus treatment ofterry towels. Appellant-company claimed the benefit of the Notification.

It was appellant's case that the sizing material imported is not raw material but is classified as consumable under EXIM Policy, which participates in or is required for manufacturing ,k process but does not form part of the end product; that the sizing j material is washed away afte. r weaving and as such it does not form part of the end product at all which is dyed towel or its waste and scrap; and that the Board's Circular No. 389/22/98-CX dated 5. 5. 1998 clarified that the benefit of the Notification would also be available even ifimported consumables are used in the manufacture by 100% EOU. The Department relying upon the decision in CCE, ln --- 2612of2003. From the Judgment and Final Order No. 21-22/03-D dated 15. 1. 2003 ofthe Customs Excise & Gold (Control) Appellate TribJnal, New Delhi in Appeal Nos. E/2845/02-D & E/2018/02-D. WITH Civil Appeal Nos. 5000-5002 of2007. K. K. Venugopal, R. G. Padia, S. K. Gambhir, Dr. AM. Singhvi, R. Krishnan, S. Narayanan, M. K. D.

Namboodiri, Rajiv Kapur, Shl:lbra Kapoor, Arti Singh, Sanjay Kapur, Alok Yadav, M. P. Devanath, Rajesh y Kumar, Naveen Prakash, Rahul Kaushik, B. Krishna Prasad and Amit Bhandari appearing parties. The Judgment of the Court was delivered by DR. ARIJIT PASAYAT, J. I. 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 ofappeals filed by the appellant-company. Chall~nge before the CEGAT was to the order passed by the Commissioner (Appeals). CEGAT granted stay of the recovery ofduty, and took up the appeals for disposal ofmerits. The appellant-company had challenged the order passed by the Commissioner ofCentral Excise (Appeals) Jaipur. 3. Background facts in a nutshell are as follows: Appellant-company is I00% exp011 oriented undertaking (in sqort 'EOU') who claimed partial exemption from duty in terms ofNotification N0.

8/97-CE dated 1. 3. 1997 in respect ofgoods sold in Domestic Tariff \ ~ \ ' Area (in short 'OTA'), 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 ofsingle yam to give strength to the yam 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 ofterry towels. .... The Commissioner (Appeals) had confirmed the demand ofduty on the ' ,_ ground that the sizing materials imported by the company is raw material and as imported raw material has been used, the benefit ofNotification 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 ofthe end product. Items y which are substantially or totally consumed during manufacturing 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 ofthe end product at all which is dyed towel or its waste and scrap. According to para 3. 41 ofthe Policy, raw material means basic materials which are needed for the manufacture ofgoods 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 ofthe Notification would also be available even ifimported ~ consumables are used in the manufacture by 100% EOU. The sizing material answers the definition of'consun1able' given in the EXIM Policy and, therefore, benefit ofthe Notification cannot be denied to the appellant. 5. Reliance was placed by the Department upon the decision in CCE, Indore v. CenlWJ' Denim, EOU (2001) 129 ELT 657 wherein the Tribunal relying upon the decision ofthis Court in the case ofCCE v. -t 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 aiticles. Tribunal dismissed the appeals and ' )- / "t OFCENTRALEXCISE,JAIPUR,RAJASTHAN[PASAYAT,J. ] upheld the views ofthe 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 offinished products, which are finally cleared in the DTA. The sizing material is undisputedly imported by it. The benefit ofNotification No. 8/ 97 is available only ifthe 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 ofthe said Notification j even if the imported consumables are used since the Notification dot::s not bar the use of imported consumables. Reliance was placed in Ballarpur 's case (supra) to conclude that the benefits ofNotification were not available. It was also noted that in the case ofCentwy 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 BallaTpur 's case (supra) inasmuch as this Court clearly observed that the said decision was in the facts and circumstances ofthat 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 ofmanufacture and other chemical reaction. Additionally, ' in Ballarpur's case (supra) the manufacturer was not 100% EOU ;E importing any material unlike the present appellant company which is 100% EOU in1po1ting 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 ofimpugned product and the process of sizing is essential process during the course of manufacture of ten-y towel because it increased the strength ofthe yam and the fibre and thus improves the weaving ofthe yam.

Therefore, the sizing material is an essential ingredient for weaving ofterry towel. Reliance was placed on the decision ofthis Court in Ballarpur 's case (supra) to contend that one of the valid tests to detem1ine whether the ingredient G qualifies to be called raw material could be that ingredient should be so essential for the chemical processes culminating in the emergence ofthe desired end product. 7. Learned cotmsel for the parties re-iterated the stand taken before theCEGAT. --' 8. In the com1ected 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 ofcotton yam and/or blended yam.

Appellant- Company is engaged in the manufacture ofcotton yam 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 oftextile product. The Denim so manufactured is oftwo varieties, namely, coloured Denim and gray Denim. As per appellant's case under Chapter 52 ofthe Central Excise Tariff Act, J985 which deals with cotton, the Denim fabrics produced by the appellant is covered by sub-heading 52. 07 ofthe Tariff. Vide Notification No. 8/97 dated 1. 3. 1997, the Government oflndia has permitted payment ofCentral 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 yam and the Company is availing the benefit ofthe aforesaid Notification since 1977. 10.

The Commissioner ofCentral Excise & Customs, Indore issued a notice dated 3. 2. 1998, to the appellant-Company to show cau~e ~hy benefit ofthis Notification be not denied, as they are using 'Indig9 p~e' in the manufacture ofDenim fabrics, which is an imported raw mate[i. ~l and also for the recovery ofRs. 1,97,11,939/- being short duty paid on Denim fabric cleared in DTS Sales during the period 1. 4. 97 to 3·0. 1. 98 under Rule 9(2) ofthe Central Excise Rules, 1944 (in short the 'Rules') read with proviso to section 11-A(l) ofthe 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 ofthe Rules and also for recovery of i interest on the duty short paid and with other directions about the confiscation ofthe land, building, plant and machinery, materials or any other things under Rule 173-Q(2) and Rule 209(2) ofthe Rules. J 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 ciefined 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 ord~r dated 30. 1. 2001 and set aside the order passed by the Commissioner on 26. 3.

1999 and considered the case in the light offinished 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 considet the points oflimitation and the quantum ofduty, as these points were not considered as the entire proceedings were dropped, against which the appellant-Company has filed the writ petition challenging the aforesaid. order ofthe 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 ofthose 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 ofmanufacture ofany end product might comprise, amongst others, ofthose which may retain their dominant individual identity and character · . throughout the process and also in the end product; those which, as a result ofinteraction with other chemicals or ingredients might themselves undergo chemical or qualitative changes and in such altered fonn 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 ofand 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 ofthe last mentioned class qualify themselves as and are eligible to be called "raw material" for the end product.

One ofthe valid tests, in our opinion, could be that the ingredient should be so essential from the chemical processes culminating in the . ,.. 4.. emergence ofthe desired end product, that having regard to its ..... _ importance in and indispensability for the process, it could be said ,_ that its very consun1ption 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 ofthe process. The ingredient goes into the making ofthe end product in the sense that without its absence the presence ofthe end product, as such, is rendered hnpossible. 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 oflndigo dye is a raw material in the manufacture of denim fibre.

According to the High Court also the question was whether the use ofsmall quantity ofimported 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 ofdenim the basic raw material and the finished product cannot be treated as wholly produced or manufactured from cotton. Therefore, placing reliance on Balla1pur'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 ofdye 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 i; 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 ofany general validity intended to cover all cases. The matter must rest upon the facts ofeach case. Though in many cases it might be difficult to draw a line ofdemarcation, it is easy to discern on which side ofthe borderline aparticular case ,. falls. " 17. It is true that the Notification does not make distinction on 1 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 ofsituation (ii) a Unit is eligible for the benefit of Notification 8/97-CX ibid, even ifimported consumables are used since the Notification does not debar the use of imported consumables, provided other conditions ofthe said Notification are satisfied. " 18. In Chemical Technology ofFibrous 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, vruiety ofchemicals, several colowing matters such as dyes and pigments etc. Power ru1d water are other consumable items in addition to fuel oil, lubricating agents and packing materials.

It is a common practice in Textile industty and trade to identify at1d 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 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 8 Pradesh General Sales Tax Act, 1957, this Court held that the word "consumable" takes colour from and must be read in the light ofthe 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 ofthe 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 ofthe words "raw materials". Reference in this connection can be made to the view expressed in Deputy Commissioner ofSales Tax (Law), Board of Revenue (Taxes), Ernakulam v. Mis Thomas Stephen & Co. Ltd. , Qui/on, [1988] 2 SCC 264 and Coastal "'r' 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. N. J. Appeals allowed.