2017 (10) TMI 133 - AT - Central Excise

Denial of exemption notification no No.14/2002-CE dated 01/03/2002 - CBEC Circular No.667/58/2002-CX dated 26/09/2002 - Held that - it is clear that all the textile fabrics used for the manufacture of final products shall be deemed to have been duty paid even without production of documents evidencing payment thereof. As per this explanation it is not required to look into the facts whether the grey fabrics was suffered duty or otherwise and all the fabrics used shall be treated deemed duty paid and accordingly, the condition stands fulfilled - we are of the view that as per explanting (2) of the Notification, when the assesee is not required to prove whether the knitted textile fabrics of cotton used for manufacture of processing fabrics is duty paid or otherwise, accordingly, the grey fabrics used by the appellant is deemed duty paid, Condition No.3 of the Notification stands fulfilled - Appeal allowed.

Issues Involved:
1. Eligibility for exemption under Notification No.14/2002-CE.
2. Compliance with Condition No.3 of Notification No.14/2002-CE.
3. Interpretation of Explanation II of Notification No.14/2002-CE.
4. Distinction between duty-paid and deemed duty-paid status of inputs.
5. Applicability of precedents and judicial interpretations.

Detailed Analysis:

1. Eligibility for Exemption under Notification No.14/2002-CE:
The core issue revolves around whether the appellant's processed fabric of cotton qualifies for exemption under Notification No.14/2002-CE dated 01/03/2002. The appellant argued that their product is exempted as per Sl.No.12 of the notification, asserting that the intermediate product (grey fabric) used in manufacturing is also covered under the same notification. The adjudicating authority and Commissioner (Appeals) denied the exemption, contending that the input (grey fabric) was not duty-paid, thus violating Condition No.3 of the notification.

2. Compliance with Condition No.3 of Notification No.14/2002-CE:
Condition No.3 stipulates that the processed fabric must be made from textile fabrics on which the appropriate duty of excise has been paid. The Revenue argued that since the grey fabric used was exempt from duty, the condition was not met. However, the appellant contended that as per Explanation II of the notification, all textile fabrics used in manufacturing should be deemed duty-paid, regardless of actual duty payment evidence.

3. Interpretation of Explanation II of Notification No.14/2002-CE:
Explanation II states that textile yarns or fabrics shall be deemed duty-paid even without production of documents evidencing payment of duty. The Tribunal found that this explanation implies that it is not necessary to prove whether the grey fabric used was duty-paid. This interpretation was supported by precedents, including the Larger Bench decision in Arvind Products Ltd., which held that fabrics received for processing should be considered deemed duty-paid as per Explanation II.

4. Distinction Between Duty-Paid and Deemed Duty-Paid Status of Inputs:
The Tribunal noted that the explanation in the notification creates a legal fiction, treating all textile fabrics used in manufacturing as deemed duty-paid. This interpretation aligns with the Supreme Court's judgment in Sports & Leisure Apparel Ltd., which emphasized that the fiction created by the explanation must be given its due play. The Tribunal concluded that the grey fabric used by the appellant is deemed duty-paid, thus satisfying Condition No.3.

5. Applicability of Precedents and Judicial Interpretations:
The Tribunal relied on the Larger Bench decision in Arvind Products Ltd. and the Supreme Court's judgment in Sports & Leisure Apparel Ltd. to support the appellant's case. These judgments clarified that the benefit of the exemption notification should be allowed without insisting on documentary proof of duty payment for inputs. The Tribunal distinguished the Supreme Court's decision in Dhiren Chemical Industries, noting that the legal fiction in Explanation II was not considered in that case.

Conclusion:
The Tribunal concluded that as per Explanation II of Notification No.14/2002-CE, the grey fabric used by the appellant is deemed duty-paid, fulfilling Condition No.3. The Tribunal set aside the impugned order and allowed the appeals, granting the exemption to the appellant. The judgment emphasized the importance of adhering to the legal fiction created by the notification and aligning with judicial precedents that support the appellant's interpretation.

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