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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.