2008 (6) TMI 203 - AT - Customs

100% EOU exemption - manufacture from DTA / indigenous procured goods raw material versus consumables textile industry - held that - Indigo dye, which is very much present in the Blue denim fabrics, though is small quantity (about 1.1%), has to be treated as a raw material, not a consumable - the term consumables and raw materials are understood in trade parlance, we have to look at the meaning of these terms in Indian trade circle, not in the trade circles of some remote corner of the world - Just because the quantity of Indigo dye present in denim is just 1.1% by weight or cost of Indigo dye is 2% to 2.5% of the production cost of denim fabrics, the Indigo dye will not cease to be a raw material for denim fabrics - benefit of exemption under Notification No. 8/97-CE is not applicable to the DTA clearances of Blue denim cloth in the manufacture of which imported Indigo had been used. Penalty u/s 11AC set arise

Issues Involved:
1. Eligibility for exemption under Notification No. 8/97-CE.
2. Classification of Indigo Pure dye as a raw material or consumable.
3. Interpretation of the term "wholly" in the context of the exemption notification.
4. Applicability of extended limitation period and penalties under Section 11AC.

Detailed Analysis:

1. Eligibility for Exemption under Notification No. 8/97-CE:
The primary issue revolves around whether the Blue Denim cloth manufactured by the assessee qualifies for exemption under Notification No. 8/97-CE. This notification exempts finished products manufactured wholly from indigenous raw materials from excess duty. The dispute is whether the use of imported Indigo Pure dye disqualifies the Blue Denim from this exemption.

2. Classification of Indigo Pure Dye:
The crux of the matter is whether Indigo Pure dye should be classified as a "raw material" or a "consumable." The Tribunal previously ruled in favor of the Revenue, considering Indigo Pure as a raw material essential for manufacturing Blue Denim, thus disqualifying the product from the exemption. The Supreme Court directed a de novo adjudication to reconsider whether Indigo Pure could be classified as a consumable, emphasizing the importance of trade parlance and industry standards.

3. Interpretation of "Wholly":
The term "wholly" in the exemption notification is under scrutiny. The assessee argues that "wholly" should be interpreted as "predominantly," given that Indigo Pure constitutes only 2-2.5% of the production cost and 1.1% of the weight of the denim fabric. However, the Tribunal, referencing Supreme Court judgments, held that "wholly" means entirely or completely, and thus, any use of imported raw materials, regardless of quantity, disqualifies the product from the exemption.

4. Applicability of Extended Limitation Period and Penalties:
The extended limitation period and penalties under Section 11AC are relevant for certain appeals where duty was demanded by invoking the proviso to Section 11A(1). The Tribunal found that the assessee's unit was under physical control, and the jurisdictional central excise officers were aware of the use of imported Indigo dye. Hence, the normal limitation period applies, and penalties under Section 11AC are not attracted.

Conclusion:
The Tribunal concluded that the Blue Denim cloth manufactured using imported Indigo Pure dye does not qualify for exemption under Notification No. 8/97-CE. It upheld the orders rejecting the appeals filed by the assessee and the Revenue. The Tribunal affirmed that Indigo Pure dye is a raw material, not a consumable, and the term "wholly" in the notification means entirely, not predominantly. The Tribunal also upheld the Commissioner's decision on the normal limitation period and the non-applicability of penalties under Section 11AC.

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