CA Urvashi Porwal
Brief of the Case
In the case of M/S. MERIDIAN INDUSTRIES LTD. V/s COMMISSIONER OF CENTRAL EXCISE, it was held that if a particular item participates in or is required for a manufacturing process, but does not form part of the end product and instead it is specifically or totally consumed during a manufacturing process, the same would be treated as ‘consumables’. On the other hand, ‘raw material’, inter alia, includes any materials or goods that are required for the manufacturing process for a manufacturer. Hence the wax used in producing cotton yarn, the 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 fabrics is concerned.
Brief Facts of the Case
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 excise duty that is chargeable for the aforesaid product. Instead 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”. 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. dated 01.03.1997 since cotton yarn was manufactured out of indigenous cotton and imported wax, as wax was contained in the final product (yarn). It was stated that the appellant is maintaining separate production account for manufacture of cotton yarn both for indigenously procured and imported cotton as detailed in Annexures-I and II to the show cause notice.
The Commissioner of Central Excise, Coimbatore 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:
(i) Wax disc acted as a lubricant 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 as raw material for denying the benefit of exemption.
(iv) Benefit was available to cotton yarn manufactured wholly out of indigenous cotton as well as cotton yarn manufactured out of imported cotton yarn on which appropriate additional duty of customs was paid when removed into DTA.
However, 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.
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:
Present appeal is preferred by the appellant challenging the correctness and validity of the aforesaid decision of the Tribunal.
Contentions of the Appellant
The Appellant contented that 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 or manufactured ‘only from the raw materials produced or manufactured in India…’ On the basis of the aforesaid wording from the notification, his submission was that the word ‘from’ clearly suggests that the material used has to be ‘raw material’ and the wax, in the present case, was not used as the raw material. In this behalf, he explained the process of manufacturing of cotton yarn by explaining that since it was only a yarn, the same was manufactured and wound on cones. 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.
Therefore, on that basis, the appellant submitted that the requirement of the notification was that the product which is cotton yarn in the instant case had to be manufactured from raw material and when the matter is considered in the aforesaid perspective since wax was not the raw material for the production of yarn, the use thereof could not disqualify the appellant from taking benefit of Notification No.8/97-C.E.
The Appellant contended that the issue was no more res integra as this Court had already taken a view on this aspect, favourable to the assesses/manufacturers. The Chennai Bench of the Tribunal in the case of Super Spinning Mills Ltd. v. Commissioner of Central Excise, Tiruchirapalli which was concerned with identical type of case, took the view in the process of waxing of hosiery cotton yarn which was done at the winding stage, wax could not be considered as raw material but was only consumable and on that basis, held that the use of imported wax would not debar the assessee from claiming benefit of the exemption Notification No.8/97-C.E. dated 01.03.1997.
Contentions of the Department
The department contended that the decision of Super Spinning Mills Ltd. was not applicable to the facts of the present case.
Held by Hon’ble Supreme Court of India
The Hon’ble Supreme Court of India stated that 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. The Export and Import Policy 1997-2002, which is applicable in the instant case, defines both the expressions, namely, ‘consumables’ and ‘raw material’ and, therefore, it would be apposite to take note of these definitions:
“Consumables” means any item which 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 they have actually been previously manufactured or are processed or are still in a raw or natural state.”
As is evident from the aforesaid definitions, 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, as per sub-para (ii) of the definition of raw material, 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.
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.
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:
“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.”
In Chemical Technology of Fibrous Materials by F. Sadov, M. Korchagin and A. Matelsky it has been stated as follows:
“In industry, textile fonning (fibrous) items used for manufacturing (main activity) a textile product are referred to as raw material e.g. cotton, viscose, wool, silk, nylon, polyester, etc. or their blends in different compositions. Whereas, (non-fibrous) items used for chemical processing of textile product (ancillary activity) are referred to 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.”
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.
The Hon’ble Court further stated that the definition of ‘consumables’ suggest that if a particular item participates in or is required for a manufacturing process, but does not form part of the end product and instead it is specifically or totally consumed during a manufacturing process, the same would be treated as ‘consumables’. On the other hand, ‘raw material’, inter alia, includes any materials or goods that are required for the manufacturing process for a manufacturer.
The Hon’ble Court further stated that the consumable is an item which does not form part of the end product. The assessee while arguing so is taking into consideration the end product at the hands of buyer which is not only extraneous and irrelevant but clearly impermissible. Insofar as the assessee is concerned, its ‘end product’ is cotton yarn. This cotton yarn becomes input for the manufacture of hosiery by the buyer who buys the cotton yarn from the assessee. This is to be kept in mind while determining whether wax as an item used in manufacturing cotton yarn becomes part of this cotton yarn or not.
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 fabrics 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.
It clearly follows that the judgment in the case of Super Spinning Mills Ltd. or the judgments of this Court as noted above would not apply in the present case. Likewise, Circular No.389/22/98-CX issued by the Ministry of Finance giving certain clarifications, would not help the assessee. On the contrary, clarifications given therein go against the assessee.
In view of the above, this appeal fails and is hereby dismissed with costs.