2007 (10) TMI 7 - SC - Central Excise

Exemption - Department contended that appellant is not entitle for benefit of Notification No.8/97-C.E. on the ground that the sizing material imported by appellant is raw material - Held that department contention was not correct and allowed the benefit of notification

Issues Involved:
1. Interpretation of "raw material" and "consumable" under Notification No. 8/97-CE.
2. Applicability of the Notification No. 8/97-CE to 100% Export Oriented Units (EOUs) using imported materials.
3. Relevance of the dominant ingredient test and value addition in determining eligibility for exemption.
4. Legal precedents and their applicability to the current case.

Detailed Analysis:

1. Interpretation of "raw material" and "consumable" under Notification No. 8/97-CE:
The appellant-company, a 100% Export Oriented Unit (EOU), claimed partial exemption from duty under Notification No. 8/97-CE for goods sold in the Domestic Tariff Area (DTA). The Notification stipulated that goods must be manufactured wholly from raw materials produced or manufactured in India. The company argued that imported Carboxymethyle Cellulose and Ultra fresh N.M. used in manufacturing were "consumables" and not "raw materials". According to para 3.13 of the EXIM Policy, a "consumable" is any item required for manufacturing but does not form part of the end product. The company's stance was that these materials were washed away and did not remain in the final product. The Department, however, considered these imported items as essential raw materials, thereby denying the exemption.

2. Applicability of the Notification No. 8/97-CE to 100% Export Oriented Units (EOUs) using imported materials:
The appellant relied on the Board's Circular No. 389/22/98-CX dated 5.5.1998, which clarified that the benefit of Notification No. 8/97-CE would be available even if imported consumables were used by 100% EOUs. The Tribunal, however, dismissed the appeals, holding that the imported sizing material used by the appellant in manufacturing finished products cleared in the DTA disqualified them from the exemption. The Tribunal relied on the precedent set in CCE v. Ballarpur Industries Ltd. and CCE, Indore v. Century Denim, EOU, where the use of imported materials negated the exemption benefit.

3. Relevance of the dominant ingredient test and value addition in determining eligibility for exemption:
The Supreme Court noted that the dominant ingredient test and the effect of value addition had not been applied by the Tribunal. The "dominant ingredient" test considers whether the primary material used in production is of domestic origin, which was not evaluated in this case. The Court emphasized that the Notification's condition was that the end products should be wholly manufactured from raw materials produced and sold in India. The cost of dye used in manufacturing denim was between 2 and 2.5% of the total production cost, indicating minimal value addition from the imported material.

4. Legal precedents and their applicability to the current case:
The Supreme Court referred to its decision in Ballarpur Industries Ltd., which discussed the definition of "raw material" in the context of chemical processes. The Court observed that the term "raw material" should be understood in its ordinary sense and common parlance. The Court also referenced decisions under the Andhra Pradesh General Sales Tax Act, where "consumable" was defined as material utilized in the manufacturing process but not identifiable in the final product. The Court concluded that the distinction between "raw materials" and "consumables" must be maintained.

Conclusion:
The Supreme Court remitted the matter to the Tribunal for reconsideration, emphasizing the need to apply the dominant ingredient test and evaluate whether the imported items could be considered "consumables" under the facts of the case. The appeals were allowed, and the Tribunal was directed to reassess the eligibility for exemption under Notification No. 8/97-CE, considering the relevant legal principles and definitions.

Separate Judgments:
No separate judgments by different judges were mentioned in the provided text.

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