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CASE NO.: Appeal (civil)  1767 of 2007

PETITIONER: Commissioner of Central Excise, Mumbai- I

RESPONDENT: M/s Bombay Dyeing & Mfg. Co.Ltd

DATE OF JUDGMENT: 08/08/2007

BENCH: S. H. Kapadia & B. Sudershan Reddy

JUDGMENT: J U D G M E N T

KAPADIA, J.

       Interpretation of Notification No. 14/2002-CE arises for determination  in this civil appeal filed by the Department.   The facts giving rise to this  civil appeal are as follows:

2.      The assessee has two textile mills in Mumbai known as the Spring  Mills and the Textile Mills. This civil appeal relates to the former. Spring  Mills is a composite name of the mill in which there is a spinning section  where yarn is spun from raw cotton, and a weaving section where grey  fabrics is woven from such yarn. The grey fabrics woven in the Spring Mills  are not processed at Spring Mills. Most of the grey fabrics manufactured by  the assessee are processed by the Textile Mill though some quantity thereof  is sold to third parties. In this civil appeal, we are concerned with the period  13.3.2002 to 15.9.2002. In this civil appeal, we are not concerned with  quantification. That question is even today pending adjudication.

3.      At the outset, we quote hereinbelow notification no. 14/2002-CE  granting exemption, both full and partial to a range of goods. As stated  above, in this civil appeal we are concerned with the item, namely, grey  fabrics manufactured by the assessee. In this civil appeal, we are concerned  with the interpretation of item 1 and item 2 of the table to the notification. "Notification No.14/2002-CE dated 01-Mar-2002

Processed textile fabrics \026 Effective rate of duty  Notification No. 11/2001-C.E. superseded.

      In exercise of the powers conferred by sub-section  (1) of section 5A of the Central Excise Act,1944 (1 of  1944) read with sub-section (3) of section 3 of the  Additional Duties of Excise (Goods of Special  Importance) Act, 1957 (58 of 1957) and in supersession  of the notification of the Government of India in the  Ministry of Finance (Department of Revenue), No.  11/2001-Central Excise, dated the 1st March, 2001,  published in the Gazette of India vide number G.S.R. 136  (E), dated the 1st March, 2001, except as respects things  done or omitted to be done before such supersession, the  Central Government being satisfied that it is necessary in  the public interest so to do, hereby exempts excisable  goods of the description specified in column (3) of the  Table below and falling within the Chapter, heading No.  or sub-heading No. of the First Schedule to the Central  Excise Tariff Act, 1985 (5 of 1986), specified in the  corresponding entry in column (2) of the said Table, from  so much of the aggregate of, \026

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(a)        the duty of excise specified in the First Schedule  to the said Central Excise Tariff Act; and  

(b)        the duty of excise specified in the First Schedule  to the said Additional Duties of Excise (Goods of Special  Importance) Act, (hereinafter referred to as the  ’aggregate duty’) as is in excess of an amount calculated  at the rate specified in the corresponding entry in column  (4) of the said Table, subject to the relevant conditions  specified below the said Table, and referred to in the  corresponding entry in column (5) of the said Table:

           Provided that the aggregate duty of sixteen per  cent. ad valorem leviable on the excisable goods  specified in S. No. 9 of the Table below shall be  apportioned equally between the duty leviable under the  said Central Excise Act and the said Additional Duties of  Excise (Goods of Special Importance) Act:

           Provided further that-

(a)        during the period commencing from the 1st day  of March, 2002 and ending on the 28th day of February,  2005, the aggregate duty in respect of the goods specified  against S.Nos. 2, 3, 4, 5, 6, 7, 8, 11, 13, 15 and 16, shall  be further exempted in excess of three-fourths of the rate  specified in the corresponding entry in column (4) of the  said Table; and

(b)        during the period specified in clause (a) above,  the duty leviable on the excisable goods specified therein,  shall be apportioned in the ratio 2:1 between the duty  leviable under the said Central Excise Act and the said  Additional Duties of Excise (Goods of Special  Importance) Act.

Explanation I.- For the purposes of this notification, the  rates specified in column (4) of the said Table are ad  valorem rates, unless otherwise specified.

Explanation II.- For the purposes of the conditions  specified below, textile yarns or fabrics shall be deemed  to have been duty paid even without production of  documents evidencing payment of duty thereon.

Explanation III.- For the purposes of the exemption  under S.No. 5 of the Table,-

(i) the expression "independent processor" means a  manufacturer who is engaged exclusively in the  processing of fabrics with the aid of power and  who has no proprietary interest in any factory  engaged in the spinning of yarn of cotton or  weaving of cotton fabrics; and (ii) the value of the fabrics shall be equal to 40% of the  value determined under section 4 of the Central  Excise Act, 1944.               Table

S.No. Chapter or heading

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No., or sub- heading  No. Description Rate  of  duty Condition (1) (2) (3) (4) (5) 1 5110.10, 5111.10,  5207.20, 5208.20,  5209.10, 5406.10,  5407.10, 5511.10,  5512.10, 5513.10,  5514.10, 5801.11  or 5802.51 Woven fabrics,  not subjected to  any process Nil 1 2 5110.10, 5111.10,  5207.20, 5208.20,  5209.10, 5406.10,  5407.10, 5511.10,  5512.10, 5513.10,  5514.10, 5801.11  or 5802.51 Woven fabrics,  not subjected to  any process 16% 2 3 5207.10 or  5208.10 Denim fabrics,  whether or not  processed 16% 2 and 5 4 51.10, 51.11,  52.07, 52.08,  52.09, 54.06,  54.07, 55.11,  55.12, 55.13,  55.14, 5801.12,  5801.22, 5801.32,  5802.22, 5802.32,  5802.52 Woven fabrics,  subjected to any  process 16% 5 5 52.07,52.08 or  52.09

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Cotton fabrics  woven on  handlooms and  processed with  aid of power or  steam by an  independent  processor  approved in this  behalf by the  Government of  India on the  recommendation  of the  Development  Commissioner  for Handlooms. 16% - 6 5801.21, 5801.31,  5802.21 or  5802.31 Woven fabrics,  whether or not  subjected to any  process 16% 2 and 5 7 58.03 All goods 16% 2 and 5 8 5804.11 or  5804.12 All goods 16% 2 and 5 9 59.01 All goods 16% - 10 6001.11, 6001.21, 6001.91, 6002.42  or 6002.92 Knitted or  crocheted fabrics  of cotton, not  subjected to any  process Nil 1 11 6001.11, 6001.21, 6001.91, 6002.42  or 6002.92 Knitted or  crocheted fabrics  of cotton, not  subjected to any  process

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16% 2 12 6001.11, 6001.21, 6001.91, 6002.42  or 6002.92 Knitted or  crocheted fabrics  of cotton,  subjected to any  process Nil 3 13 6001.11, 6001.21, 6001.91, 6002.42  or 6002.92 Knitted or  crocheted fabrics  of cotton,  subjected to any  process 16% 4 14 6001.12, 6001.22,  6001.92, 6002.20, 6002.30, 6002.43  or 6002.93 Knitted or  crocheted  fabrics, other  than of cotton,  not subjected to  any process Nil 1 15 6001.12, 6001.22,  6001.92, 6002.10,  6002.20, 6002.30, 6002.43  or 6002.93 Knitted or  crocheted  fabrics, other  than of cotton,  not subjected to  any process 16% 2 16 6001.12, 6001.22,  6001.92, 6002.10,  6002.20, 6002.30, 6002.43  or 6002.93 Knitted or  crocheted  fabrics, other  than of cotton,  subjected to any  process 16% 5

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 Condition  No. Conditions (1) (2) 1 If made from textile yarns on which the appropriate  duty of excise leviable under the First Schedule or  the Second Schedule to the said Central Excise Tariff  Act read with any notification for the time being in  force or the additional duty of customs leviable under  section 3 of the Customs Tariff Act, 1975, as the case  may be, has been paid and no credit of the duty paid  on inputs or capital goods has been taken under rule  3 or rule 11 of the CENVAT Credit Rules, 2002. 2 If made from textile yarns on which the appropriate  duty of excise leviable under the First Schedule or  the Second Schedule to the said Central Excise Tariff  Act read with any notification for the time being in  force or the additional duty of customs leviable under  section 3 of the Customs Tariff Act, 1975, as the case  may be, has been paid. 3 If made from knitted or crocheted textile fabrics of  cotton, whether or not processed, on which the  appropriate duty of excise leviable under the First  Schedule to the said Central Excise Tariff Act and  the Additional Duties of Excise (Goods of Special  Importance) Act, read with any notification for the  time being in force , or the additional duty of  customs leviable under section 3 of the Customs  Tariff Act, 1975, as the case may be, has been paid  and no credit of the duty paid on inputs or capital  goods has been taken under rule 3 or rule 11 of the  CENVAT Credit Rules, 2002. 4 If made from knitted or crocheted textile fabrics of  cotton, whether or not processed, on which the  appropriate duty of excise leviable under the First  Schedule to the said Central Excise Tariff Act and  the Additional Duties of Excise (Goods of Special  Importance) Act, read with any notification for the  time being in force , or the additional duty of  customs leviable under section 3 of the Customs  Tariff Act, 1975, as the case may be, has been paid. 5 If made from textile fabrics, whether or not  processed, on which the appropriate duty of excise  leviable under the First Schedule to the said Central  Excise Tariff Act and the Additional Duties of  Excise (Goods of Special Importance) Act, read with  any notification for the time being in force or the  additional duty of customs leviable under section 3  of the Customs Tariff Act, 1975, as the case may be,  has been paid."                       (emphasis supplied)

4.      We also quote hereinbelow Section 11AB of the Central Excise Act,  1944;

"Interest on delayed payment of duty. - (1) Where any  duty of excise has not been levied or paid or has been

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short-levied or short-paid or erroneously refunded, the  person who is liable to pay the duty as determined under  sub-section (2), or has paid the duty under sub-section  (2B), of section 11A, shall, in addition to the duty, be  liable to pay interest at such rate not below [ten per cent.]  and not exceeding thirty-six per cent per annum, as is for  the time being fixed by the Central Government, by  notification in the Official Gazette, from the first date of  the month succeeding the month in which the duty ought  to have been paid under this Act, or from the date of such  erroneous refund, as the case may be, but for the  provisions contained in sub-section (2), or sub-section  (2B), of section 11A till the date of payment of such  duty:

Provided that in such cases where the duty  becomes payable consequent to issue of an order,  instruction or direction by the Board under section 37B,  and such amount of duty payable is voluntarily paid in  full, without reserving any right to appeal against such  payment at any subsequent stage, within forty-five days  from the date of issue of such order, instruction or  direction, as the case may be, no interest shall  be   payable  and  in  other  cases  the  interest  shall  be  payable on the whole of the amount, including the  amount already paid."

and, Rule 8(3) of the Central Excise Rules, 2002:

"If the assessee fails to pay the amount of duty by due  date, he shall be liable to pay the outstanding amount  along with interest at the rate specified by the Central  Government vide notification under section 11AB of the  Act on the outstanding amount, for the period starting  with the first day after due date till the date of actual  payment of the outstanding amount."

5.      The assessee herein opted for exemption under notification no.  14/2002 under which grey fabrics, not subjected to any process, were  chargeable to nil rate of duty subject to the condition that the said fabrics  were made from textile yarn on which appropriate duty of excise stood paid  and no credit for duty paid on inputs had been taken under CENVAT Credit  Rules, 2002. However, the assessee was not in a position to ascertain the  variety and quantity of yarn entering into the manufacture of export  production of "grey fabrics" and grey fabrics meant for home consumption.  The assessee was not in a position to pay duty on yarn at spindle stage.  Therefore, they opted to pay duty on yarn on deferred basis at the time of  clearance of grey fabrics for home consumption along with interest at the  rate prescribed under Section 11AB of Central Excise Act, 1944 read with  Rule 8(3) of Central Excise Rules, 2002. According to the Department, the  assessee was liable to pay duty at the rate of 12% under item 2 of the table to   notification no. 14/2002-CE. According to the Department, the assessee had  failed to comply with twofold conditions mentioned in item 1 of the table to  the said notification, namely, payment of duty on yarn at the spindle stage  and, secondly, no credit of duty paid on inputs had been taken under  CENVAT Credit Rules, 2002. In other words, according to the Department,  the assessee had failed to pay duty on yarn at the spindle stage and,  secondly, it had taken credit for the duty paid on inputs under CENVAT  Credit Rules, 2002, therefore, according to the Department, the assessee was  not entitled to claim nil rate of duty as, according to the Department, the   assessee had failed to comply with the aforestated twofold conditions  mentioned in item 1 of the table to the said notification. According to the  Department, the assessee herein had specifically applied for clarification  from the Department as to whether the assessee was entitled to claim nil rate

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of duty under the said Notification since it was not in a position to ascertain  the variety and quantity of yarn going into the manufacture of grey fabrics.  This request for clarification was expressly turned down by the Department  and despite refusal by the Department to the request made by the assessee to  pay duty on yarn at the time of clearance of grey fabrics, the assessee   reversed the CENVAT credit, which, according to the Department,  contravened the provisions of the said notification. Accordingly, the assessee  was held liable to pay duty at the rate of 12% under item 2 of the table to  notification no. 14/2002-CE and, consequently, a demand was raised for  differential duty for the period 13.3.2002 to 15.9.2002 on the ground that the  assessee had failed to pay the duty on the yarn at the spindle stage. The  demand was confirmed by the Deputy Commissioner. However, in appeal,  the Commissioner (A) allowed the assessee the payment of duty on yarn at  the time of clearance of grey fabrics instead of payment of duty on yarn at  the spindle stage. In this connection, the Commissioner (A) relied upon  Trade Notice No. 40/96. This order of the Commissioner (A) has been  confirmed by the Tribunal, hence, the Department has come to this Court by  way of this civil appeal.

6.      Shri Vikas Singh, learned Additional Solicitor General, appearing on  behalf of the Department submitted that notification no. 14/2002-CE dated  1.3.2002 is an exemption notification. Learned counsel cited several  authorities in support of his contention that the conditions mentioned in the  exemption notification should be strictly followed. Learned counsel  contended that in the table to the said notification, grey fabrics falling under  Chapter Heading 5110.10 fell under item no. 1 as also under item no. 2.  However, if it fell under item no. 1 and if the assessee was to fulfil the  twofold conditions referred to above then the rate of duty was nil whereas if  the said item fell in item no. 2 then it would attract the rate of duty @ 12%.  Learned counsel submitted that, in the present case, the assessee was not  entitled to claim nil rate of duty on the grey fabrics manufactured from yarn  as the assessee has not fulfiled the two conditions mentioned in item no. 1.  According to the learned counsel, the assessee was required to pay duty on  the yarn prior to its claim for exemption. Secondly, according to the learned  counsel, the  assessee was required to show as a second condition that it had  not availed of credit for the duty paid on inputs under CENVAT Credit  Rules, 2002 prior to its claim for exemption. Since these two conditions  were not fulfilled, the assessee was not entitled to claim nil rate of duty.  Learned counsel submitted that the above two conditions were pre- conditions. They were conditions required to be fulfilled prior to making of  the claim for exemption. Learned counsel submitted that since notification  no. 14/2002-CE was an exemption notification, it was not open to the  assessee to submit that it had substantially complied with the aforesaid two  conditions. Learned counsel further submitted that, in the present case,  despite refusal by the Department, the assessee had reversed subsequently  the CENVAT credit. In this connection, learned counsel submitted that the  assessee had requested the Department to allow the assessee to defer  payment of duty on yarn from the spindle stage to the stage of clearance of  the grey fabrics for home consumption. This was refused by the Department.  Despite refusal, the assessee proceeded to reverse subsequently the  CENVAT credit availed of by the assessee earlier and, therefore, in the  present case, the Tribunal ought not to have allowed to the assessee the  benefit of exemption. Learned counsel further submitted that, in the present  case, we are concerned with the period 13.3.2002 to 15.9.2002. During this  period, according to the learned counsel, Rule 49A was not in force. Learned  counsel pointed out that originally we had Central Excise Rules, 1944. These  Rules were repealed by Central Excise Rules, 2001, which, in turn, were  repealed by Central Excise Rules, 2002. Learned counsel pointed out that  since we are concerned with the period 13.3.2002 to 15.9.2002 there was no  question of invoking Rule 49A of the earlier Rules as the earlier Rules were  repealed and substituted by Central Excise Rules, 2002. In other words,  according to the learned counsel, it was not open to the Appellate Authority  and the Tribunal to rely upon Rule 49A of Central Excise Rules, 1944 read  with Trade Notice No. 40/96. According to the learned counsel, Trade  Notice No. 40/96 was based on Rule 49A of Central Excise Rules, 1944

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under which deferment of duty payable on yarn along with interest could be  postponed to the grey fabrics stage. That, since Rule 49A was not applicable  once the Central Excise Rules, 2002 came into force, it was not open to the  Commissioner (A) as well as the Tribunal to place reliance on Rule 49A of  the 1944 Rules read with trade notice no. 40/96. Learned counsel further  submitted that the judgment of the Allahabad High Court in the case of  Hello Minerals Water (P) Ltd.  v.  Union of India reported in 2004 (174)  E.L.T. 422 was also not applicable to the facts of the present case as the said  judgment did not deal with the question of exemption.

7.      Shri Atul Setalvad, learned senior counsel appearing on behalf of the  assessee submitted that Spring Mills is a composite mill, meaning thereby  that there is a spinning section where yarn is spun from cotton and a  weaving section where grey fabrics is woven from such yarn. Learned  counsel submitted that in certain cases it become difficult for a manufacturer  to know at the spindle stage whether grey fabrics were to be exported or  cleared for home consumption. According to the learned counsel, a  manufacturer could pay duty on yarn in such cases not when the yarn stood  cleared but when the fabric was cleared. It is under these circumstances that  an option was given over the years under trade notice no. 40/96 allowing the  assessee to defer payment of duty on yarn from spindle stage to the grey  fabrics clearance stage subject to payment of interest for such deferment.  Learned counsel submitted that trade notice no. 40/96 did not flow from  Rule 49A of the 1944 Rules. The said trade notice was based on certain  unforeseen difficulties in the operations. It was issued taking into account  the trade representations. Learned counsel submitted that till today the said  trade notice has not been revoked. Learned counsel further submitted that  there was no difference whatsoever between item no. 1 and item no. 2 of the  table to notification no. 14/2002-CE. Both dealt with grey fabrics. However,  item no. 1 attracted nil rate of duty on fulfilment of twofold conditions,  namely, payment of duty by the assessee for claiming exemption and that  assessee should not have taken credit for duty paid on inputs under  CENVAT Credit Rules, 2002. Learned counsel submitted that yarn is an  input used in the manufacture of grey fabrics. Learned counsel urged that the  said notification no. 14/2002-CE was an exemption notification. Learned  counsel submitted that exemption was in respect of grey fabrics. Learned  counsel submitted that duty was payable on yarn, however, in certain  circumstances, the assessee was entitled to claim deferment of duty from  spindle stage to the stage of clearance of grey fabrics subject to payment of  interest under Section 11AB of Central Excise Act, 1944 read with Rule 8(3)  of Central Excise Rules, 2002. Learned counsel submitted that in the present  case it is not in dispute that duty on yarn became payable at the spindle  stage, however, the assessee has deferred the payment to the stage of  clearance of grey fabrics and, therefore, it cannot be said that the assessee  has not complied with the first condition of item no. 1 to the table attached  with the notification. Similarly, learned counsel submitted that the assessee,  in the present case, has reversed CENVAT credit and the assessee has not  taken credit on account of such reversal. Learned counsel submitted that  whenever duty is paid on the input (yarn) the assessee is entitled to credit  under the CENVAT Credit Rules, 2002, however, availment of credit takes  place later on when the assessee makes adjustments of duty paid on input  against duty paid on final product (grey fabrics). In the present case, before  the account could be debited and before the assessee could avail of  CENVAT credit, the assessee has reversed CENVAT credit which would  amount to the assessee not taking credit for duty paid on input (yarn).  Learned counsel submitted that the assessee was free to reverse the credit  before utilization  of such credit. In the circumstances, it was urged that both  the conditions of item no. 1 of the table to the notification stood fulfilled  and, therefore, the assessee was entitled to claim the benefit of exemption at  nil rate of duty in this case.

8.      There is no merit in this civil appeal. Under the notification, mode of  payment has not been prescribed. Further, exemption is given to the final  product, namely, grey fabric under the Central Excise Act, 1944, levy is on  manufacture but payment is at the time of clearance. Under the Act, payment

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of duty on yarn had to be at the spindle stage. However, when we come to  the Exemption Notification no. 14/2002-CE, the requirement was that  exemption on grey fabrics was admissible subject to the assessee paying  duty on yarn before claiming exemption and subject to the assessee not  claiming CENVAT credit before claiming exemption. The question of  exemption from payment of duty on grey fabrics arose on satisfaction of the  said two conditions. In this case, payment of duty on yarn on deferred basis  took place before clearance of grey fabrics on which exemption was  claimed. Therefore, payment was made before the stage of exemption.  Similarly, on payment of duty on the input (yarn) the assessee got the credit  which was never utilized. That before utilization, the entry has been reversed  which amounts to not taking credit. Hence, in this case, both the conditions  are satisfied. Hence item no. 1 of the table to notification no. 14/2002-CE  would apply and accordingly the grey fabrics would attract nil rate of duty.  

9.      In conclusion on the question of reversal of credit we quote  hereinbelow the following para from the judgment of this Court in Collector  of Central Excise  v.  Dai Ichi Karkaria Ltd. reported in 1999(112)E.L.T.  353. "It is clear from these Rules, as we read them, that a  manufacturer obtains credit for the excise duty paid on  raw material to be used by him in the production of an  excisable product immediately it makes the requisite  declaration and obtains an acknowledgement thereof. It is  entitled to use the credit at any time thereafter when  making payment of excise duty on the excisable product.  There is no provision in the Rules which provides for a  reversal of the credit by the excise authorities except  where it has been illegally or irregularly taken, in which  event it stands cancelled or, if utilised, has to be paid for.  We are here really concerned with credit that has been  validly taken, and its benefit is available to the  manufacturer without any limitation in time or otherwise  unless the manufacturer itself chooses not to use the raw  material in its excisable product. The credit is, therefore,  indefeasible. It should also be noted that there is no co- relation of the raw material and the final product; that is  to say, it is not as if credit can be taken only on a final  product that is manufactured out of the particular raw  material to which the credit is related. The credit may be  taken against the excise duty on a final product  manufactured on the very day that it becomes available."

10.     Accordingly, the civil appeal filed by the Department fails and the  same is dismissed with no order as to costs.