2010 (6) TMI 360 - AT - Central Excise

Exemption - the electric power is used by the respondents for drawing out water from the tube well and lifting the same to a high rise water treatment plant - treated water is thereafter filled in the boiler with the help of electric motors - Commissioner (Appeals) observed that The process of manufacture of essential oil starts with generation of steam by firing the husk in the boiler - process regarding drawing, lifting and shifting of water are the processes prior to starting of the manufacturing process of the essential oils Held that - in order to generate steam the presence of water in the boiler is absolutely necessary and without generation of the steam, there cannot be manufacture of essential oils - presence of water and the activity which is necessary to heat water in the boiler was being integrally related to the process in relation to the manufacture of the said product - such process being involved in the matter - Notification No. 167/86-C.E cannot be said to be available

Summary

Issues Involved:
1. Entitlement to Exemption Notification No. 167/86-C.E. dated 1-3-86.
2. Imposition of Penalty.

Issue-wise Detailed Analysis:

1. Entitlement to Exemption Notification No. 167/86-C.E. dated 1-3-86:

The appeal arises from an order dated 27th December 2004 by the Commissioner (Appeals), Delhi, which quashed proceedings initiated by three show cause notices and reversed the adjudicating authority's decision denying the benefit of exemption Notification No. 167/86-C.E. dated 1-3-86. The respondents, engaged in manufacturing essential oil, claimed the benefit of the said notification, asserting no processes in their manufacture involved the aid of power. However, investigations revealed electric power was used at various stages, leading to the issuance of show cause notices.

The adjudicating authority, referencing the Supreme Court's decision in Collector of Central Excise v. Rajasthan State Chemical Works (1991), concluded that using power in lifting and shifting raw materials amounted to manufacture with the aid of power. Consequently, the respondents were deemed ineligible for the exemption.

The Commissioner (Appeals) disagreed, stating the processes of drawing, lifting, and shifting water occurred before the manufacturing process began and were not incidental or ancillary to the manufacture of essential oils. Thus, the benefit of the exemption was granted.

The Tribunal, however, noted that the adjudicating authority had clearly established that electric power was used at three different stages: pulling water from a tube well, lifting water to a treatment plant, and maintaining boiler pressure with an automatic gauge powered by electricity. The Commissioner (Appeals) failed to consider the use of power in steam generation, which is integral to the manufacturing process. The Tribunal emphasized that the generation of steam, essential for manufacturing essential oils, involves power, making the entire process reliant on it. Therefore, the benefit of the exemption under Notification No. 167/86-C.E. dated 1-3-86 was not applicable to the respondents.

The Tribunal referred to the Supreme Court's interpretation in J.K. Cotton Spg. & Wvg. Mills Co. Ltd. v. Sales Tax Officer, Kanpur (1997), which held that any process integrally related to manufacturing, even if commercially inexpedient without it, falls within the scope of "in relation to" manufacture. Thus, the presence and heating of water in the boiler, essential for steam generation, are integrally related to the manufacturing process, disqualifying the respondents from the exemption.

2. Imposition of Penalty:

The adjudicating authority had imposed a penalty of Rs. 50,000 on the respondents. The Commissioner (Appeals) did not address the penalty aspect directly. The Tribunal, acknowledging the learned Advocate's contention, agreed that the matter involved interpretation, which justified the absence of a penalty. Therefore, while the Tribunal set aside the Commissioner (Appeals)'s order granting the exemption, it also annulled the penalty imposed by the adjudicating authority.

Conclusion:

The appeal partially succeeded. The Tribunal ruled that the respondents were not entitled to the benefit under Notification No. 167/86-C.E. dated 1-3-86, setting aside the Commissioner (Appeals)'s order and restoring the adjudicating authority's decision. However, it annulled the penalty, recognizing the interpretative nature of the issue. The appeal was disposed of accordingly.