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CASE NO.: Appeal (civil)  6451-6452 of 2000

PETITIONER: M/S C.T. COTTON YARN LTD

RESPONDENT: COMMISSIONER OF CENTRAL EXCISE, INDORE

DATE OF JUDGMENT: 22/09/2006

BENCH: ASHOK BHAN & P.K. BALASUBRAMANYAN

JUDGMENT: J U D G M E N T  

P.K. BALASUBRAMANYAN, J.

                1.              The appellant challenges the decision of the Customs, Excise  and Gold (Control) Appellate Tribunal, New Delhi in A.No.E/1715- 1716/97-D dated 19.07.2000.   By the said order the Tribunal substantially  dismissed the appeals filed by the appellant, but reduced the penalty  imposed on the appellant by the Original Authority.

2.              According to the appellant, it is a 100% export oriented unit  engaged in the manufacture and export of cotton yarn.  It purchases cotton  from the domestic market for the manufacture of yarn.   After the cotton is  purchased it is subjected to carding and combing and only thereafter it is  spun into yarn.   According to the appellant, carding involves opening and  separating out of fibres together with effective cleaning and combing is a  process by which impurities and undesired short fibres are removed.    During carding and combing, the fibre and noils can be separated and they  are collected in one place by suction.   This, according to the appellant, is a  waste generated at the preparatory stage and it is cotton waste.  It is impure  cotton fibre.      3.              Earlier, the appellant was paying duty on this cotton waste  before clearing it and selling it in the Domestic Tariff Area.   On finding that  certain similar other manufactures were not paying duty on the waste cotton  thus generated and disposed of in the Domestic Tariff Area, the appellant  sought clarification from the Collector of Central Excise and Customs,  Indore taking up the position that cotton waste was not dutiable.   On  9.9.1993, the appellant was informed that soft cotton waste arising out of  indigenous material would not attract excise duty.   The appellant started  clearing and selling the waste cotton without payment of duty. On  16.09.1993, the Department wrote a letter to the appellant to explain under  what circumstances the appellant was clearing the soft cotton waste and  selling it in the Domestic Tariff Area without payment of duty.   It is the  case of the appellant that based on the clarification as above, it filed a fresh  clarification list dated 17.9.1993 declaring soft cotton waste as non-excisable  item and it continued clearing the same without payment of duty and selling  it in the Domestic Tariff Area.  On receipt of the communication dated  16.09.1993 from the Department,  the appellant took up the position that soft  cotton waste was not liable to duty since it was only cotton waste removed  from the cotton domestically purchased so as to enable the appellant to make  the yarn for the purpose of export.

4.              On 16.3.1995, Finance Bill 1995 was introduced.   In the First  schedule to the Central Excise Tariff Act, 1985, a heading 52.02 was  introduced covering cotton waste.   The said Bill after having been passed,

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received the assent of the President of India on 26.5.1995 and thus became  the Finance Act, 1995.   On 4.12.1995 the Department issued a notice to the  appellant to show cause why duty on the quantity of soft cotton waste  cleared by the appellant and sold in the Domestic Tariff Area during the  period from1.5.1995 to 31.7.1995, be not imposed in terms of the proviso to  Section 3(1) of the Act read with the concerned notification.  Yet another  notice was issued by the Department dated 22.7.1996 covering the period  prior to the one covered by the earlier notice, the period from 16.3.1995 to  30.4.1995.  The Department sought to invoke the extended period of  limitation available under Section 11A of the Act.   The appellant filed  objections to the notices.   In reply to the first notice it was put forward that  soft cotton waste was not exigible to duty and that in any event, the demand  for the period from 1.5.1995 to 3.6.1995 was barred by limitation, the  demand having been made six months after the expiry of the said period.    As regards the notice dated 22.7.1996, the appellant, in addition to the  contention that no excise duty was leviable on soft cotton waste which it had  disposed of in the DomesticTariff Area,  contended that the Department was  not entitled to the extended period of limitation under the proviso to Section  11A of the Act since there was no suppression of any relevant fact on the  part of the appellant and the Department was well aware all along that the  appellant was removing soft cotton waste and disposing it of in the Domestic  Tariff Area without paying duty.    

5.              On 5.5.1997, the Commissioner of Central Excise, Indore,  rejected the contentions of the appellant.   He confirmed the demand under  the first notice, of Rs.15,02,211.18 towards duty.   He also imposed a  penalty of Rs.5 lakhs on the appellant.   As regards the second notice, the  Commissioner found that the Department was entitled to the benefit of the  extended period under Section 11A of the Act and confirmed the demand  under notice dated 22.7.1996 of Rs.7,21,739.63 and also imposed a fine of  Rs.2.5 lakhs on the appellant.    

6.              The appellant filed appeals before the Appellate Tribunal.   The  appellate Tribunal imposed a condition that the appellant should deposit  Rs.8 lakhs towards the duty and Rs.1 lakh towards the penalty before the  appeals could be heard.   According to the appellant the said sum was  deposited on 31.10.1997.   Before the Appellate Tribunal, the appellant  contended that no manufacture was involved while soft cotton waste was  being produced from the cotton that was being cleaned for the purpose of  making yarn for being exported and since there was no manufacture  involved, no duty was leviable on soft cotton waste sold in the Domestic  Tariff Area.   It was also submitted that merely because the Finance Act has  introduced an entry under Heading 52.02 in the first schedule to the Central  Tariff Act covering cotton waste, it would not automatically mean that duty  was leviable on the same.   Any way, the amendment applied only to the  period subsequent to the Finance Act 1995 and not before.  It was also  reiterated that the claim of the Department for extended period of limitation  was unsustainable on the facts and in the circumstances of the case and that  in any event the penalty imposed was unjustified.   The Appellate Tribunal  rejected the claim of the appellant mainly based on the admission of the  representative of the appellant that after the 1995 Finance Act, soft cotton  waste had become exigible to duty and further taking the view that since it  has been specified in the first schedule to the Tariff Act as a dutiable item,  the duty was payable at 50% of the rate of customs duty considering the fact  that the appellant was 100% export oriented.   It took the view that the  Finance Act had come into force from the date of the Finance Bill.  But the  Tribunal, in the circumstances, reduced the penalty imposed by the  Commissioner and reduced it to Rs.2.5 lakhs  from of Rs.5 lakhs in respect  of the period covered by the notice dated 4.12.1995  and to Rs.1.25 lakhs  from Rs.2.5 lakhs in respect of the period covered by the notice dated  22.7.1996.

7.              Learned counsel for the appellant submitted that soft cotton  waste is not manufactured by the appellant but that it was only impure cotton  separated from the cotton purchased from the domestic market for the

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manufacture of yarn intended solely for export.   Counsel submitted that  cotton waste thus generated itself and in the absence of any process of  manufacture being involved, the mere fact that such cotton waste produced  is sold regularly in the Domestic Tariff Area, would not make the same  exigible to excise duty.   He further contended that Heading 52.02 covering  ’cotton waste’ was introduced only by the Finance Act 1995 enacted on  26.5.1995 and it did not have effect from the date of introduction of the  Finance Bill.  He referred to Section 3, the charging section and emphasised  that "it must be actually produced or manufactured before excise duty could  be imposed".   He also submitted that the Department was not entitled to  have the benefit of the extended period of limitation and the demand covered  by the notice dated 22.7.1996 was clearly barred and the demand covered by  the notice dated 4.12.1995 was also barred insofar as it related to the claim  for the period from 1.5.1995 to 3.6.1995.   Counsel for the Department  controverted these submissions and submitted that soft cotton waste was  generated during the course of manufacture undertaken by the appellant  when it manufactured yarn for export from cotton purchased from domestic  market and this intermediate process cannot be separated and dealt with  separately.   He pointed out that in view of the declaration made in that  behalf the amendment had been effective from the date of the Finance Bill.   He also contended that manufacture was involved when soft cotton waste  was produced and it was being regularly sold in the domestic market  indicating that it was a marketable commodity and in the circumstances it  was exigible to duty as rightly held by the Commissioner and the Appellate  Tribunal.  He also submitted that on the facts and in the circumstances of the  case there was suppression of relevant material and information by the  appellant and the Tribunal was justified in holding that the Department was  entitled to the extended period of limitation available under Section 11A of  the Act.   Counsel, therefore, urged that no interference was called for with  the decision of the Tribunal.

8.              It is clear that the product involved herein is not a left over after  the end product is manufactured.   Here the cotton waste is generated during  the process of manufacture of yarn.   In other words, when cotton purchased  in the domestic market is used for manufacture of yarn, by initiating the  process of manufacture, at an intermediate stage, the so called cotton waste  is produced, which is a marketable commodity and which is regularly  marketed.   Therefore, one of the twin tests, namely, that the commodity  which is produced is marketable and is regularly marketed as a product, is  satisfied.   It is by now established that merely because a commodity is   included in the schedule, it will not be exigible to duty unless a process of  manufacture is involved when that product emerges.   Here, heading 52.02  has been brought in in the Schedule by the Finance Act, 1995.   Though it is  shown as an item bearing nil duty, since the appellant is a 100 per cent  export oriented manufacturing entity it will be liable to duty as provided in  the proviso to Section 3(1) of the Tariff Act.   Therefore, the question  involved is whether a process of manufacture is involved when the cotton  waste is generated during the process of converting domestically purchased  cotton into exportable yarn manufactured by the appellant.

9.              In   State of Maharashtra   vs.  Pulgaon Cotton Mills Ltd.        [( 1995) 77 ELT 790 SC]    This Court held that where a subsidiary product  is turned out regularly and continuously in the course of manufacturing  business and is also sold regularly from time to time, there may be attributed  an intention to the manufacturer to manufacture and sell not merely the main  item but also the subsidiary products.   This Court relied on an earlier  decision in State of Gujarat vs.  Raipur Manufacturing Company  Limited [(1967 (19) STC 1 (SC)] in support of the position that manufacture  was  involved  in  that situation.  Cotton  waste  generated  was  hence held  to be by a process of manufacture.  For the appellant it is submitted that the  manufacture of a product may involve several processes and various changes  in the raw material at different stages.  Manufacture would occur at the point  where the changes take the product to a point that commercially, it cannot be  regarded as the original commodity, but, instead, recognised as a new  distinct article.   The decision of this Court in J.G. Glass Industries [(1998)

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97 E.L.T.  5] is relied on in support.

10.             The scope of the expanded definition of manufacture has been  considered in the decision in Shyam Oil Cake Ltd. Vs. Collector of  Central Excise, Jaipur [2004 (174) E.L.T. 145 (SC)].   The appellate  authority has essentially proceeded on the amendment to the schedule and  inclusion of cotton waste therein and the admission of the representative of  the appellant that subsequent to the inclusion in the schedule, cotton waste is  taxable.   It appears to us that the question whether cotton waste is dutiable  as a manufactured product requires to be reconsidered by the Tribunal in the  light of the various decisions of this Court brought to our notice and which  may hereafter be brought to the notice of the Tribunal.   The argument that it  was only after the process of manufacture has started that the product has  come into existence and it has marketability and hence, it is dutiable and the  counter argument that it was only impure cotton which has got separated  from the cotton purchased from the open market so as to enable the appellant  to manufacture the yarn intended for export and this product produced at the  intermediate stage still remains cotton and it is not a manufactured produced,  have both to be considered in the light of the decided cases.   In this  situation, we think it appropriate to set aside the order of the Tribunal and  remand the appeals filed by the appellant to the Tribunal for a fresh decision.     We think that this aspect needs to be reconsidered by the Tribunal afresh and  a fresh decision taken.  We, therefore, set aside the order of the Tribunal on  this aspect and direct the Tribunal to decide the appeals afresh based on the  finding to be rendered on this question.  All contentions including whether  the department could invoke the extended period of limitation are left open.

11.             Thus, the appeals are allowed in part, the orders of the Tribunal  are set aside and the appeals filed by the appellant before the Tribunal are  remanded for a decision afresh on the question referred to above.    The  parties are directed to bear their respective costs. 28069