2021 (11) TMI 654 - AT - Central Excise

100% EOU - Levy of Central Excise Duty - cotton waste generated in manufacturing of the finished products and cleared in the domestic tariff area - period 08.03.1999 to January 2011 - proviso to Section 3 (1) of Central Excise Act, 1944 - HELD THAT - Bare reading of proviso indicates that it is applicable, only in respect of the excisable goods which are produced or manufactured in India. In our view if the goods fail to qualify the test of manufacture as per Section 2 (f) and the law as laid down by various courts, then the proviso to section 3 cannot be pressed in to service for the purpose of levy of duty of excise as equivalent to the Customs duty. Further by the amendment made in proviso, to section 3(1), whereby the phrase allowed to be sold in India was replaced by the phrase brought to any other place in India , very clear that in case of manufactured goods by an EOU, the proviso shall apply in all situations. Section 11A of the Central Excise Act, 1944 can be pressed into service for recovery of duty of excise and not for the recovery of any other tax or duty including the Customs Duty leviable under Customs Act, 1962. Hence there are no merits in the observations made by the Commissioner while distinguishing the decision of C T Cotton. The issue for consideration in the present case is demand of duty on the cotton waste arising during the course of manufacture of finished product exported by the appellants. Once it is held that the cotton waste is not a manufactured goods leviable to excise duty, all the subsequent arguments advanced by the Commissioner vis a vis contravention of the provisions of exemptions issued under Customs Act, 1962 and those of the Foreign Trade Policy, become irrelevant for these proceedings, initiated under provisions of Section 11A of the Central Excise Act, 1944. Commissioner have referred to the first two show cause notices, where in the demand has been made in respect of the Cotton Waste cleared clandestinely by the appellant, treating it as the goods produced by the EOU. In view of the decision of the tribunal in case of M/S CT. COTTON YARN LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE, INDORE 2013 (1) TMI 249 - CESTAT NEW DELHI , we are not in position to agree with the said observations. Distinction made by the Commissioner, by stating that C T Cotton was a case in which the Cotton Waste aroused from the indigenous raw material, also lack merits as the source of raw material do not determine whether a process amounts to manufacture or not in terms of Section 2 (f) of the Central Excise Act, 1944. The demand of duty cannot survive in view of the decision in case of C T Cotton, for consideration of which the matter was earlier remanded back by the tribunal to original authority, we do not discuss the issue of limitation - Since we hold against the demand of duty, the demand for interest and penalty to is set aside. Appeal allowed - decided in favor of appellant.

Issues Involved:
1. Levy of Central Excise Duty on "cotton waste."
2. Applicability of the decision in the case of C.T. Cotton Yarn Ltd.
3. Requirement of permission from the Development Commissioner for DTA sales.
4. Applicability of Section 3(1) and its proviso of the Central Excise Act, 1944.
5. Invocation of extended period of limitation.
6. Demand of duty under Section 11A of the Central Excise Act, 1944.
7. Imposition of penalties and interest.

Issue-wise Detailed Analysis:

1. Levy of Central Excise Duty on "cotton waste":
The core dispute revolves around the levy of Central Excise Duty on "cotton waste" generated during the manufacture of absorbent cotton. The Tribunal had previously remanded the matter for reconsideration in light of the C.T. Cotton case, which held that obtaining soft cotton waste during carding and combing does not amount to manufacture as no new product with distinct name, usage, and character emerges.

2. Applicability of the decision in the case of C.T. Cotton Yarn Ltd.:
The Commissioner distinguished the C.T. Cotton case, stating it dealt with cotton waste from indigenously procured cotton, whereas the current case involves imported comber noils. The Tribunal found this distinction irrelevant, emphasizing that the source of raw material does not determine whether a process amounts to manufacture under Section 2(f) of the Central Excise Act, 1944.

3. Requirement of permission from the Development Commissioner for DTA sales:
The Commissioner argued that permission from the Development Commissioner was mandatory for availing exemption under Notifications No. 6/97-CE and 23/2003-CE. The Tribunal disagreed, noting that the failure to obtain permission does not change the fact that cotton waste is not a manufactured product and thus not subject to excise duty.

4. Applicability of Section 3(1) and its proviso of the Central Excise Act, 1944:
The Tribunal clarified that the proviso to Section 3(1) applies only to excisable goods produced or manufactured in India. Since cotton waste is not a manufactured product, the proviso cannot be invoked. The Tribunal referred to the Supreme Court's decision in Sarla Performance Fibre, which distinguished between duties on finished goods and inputs at the time of debonding.

5. Invocation of extended period of limitation:
The Tribunal did not delve into the issue of limitation, as it found the demand for duty itself unsustainable on merits. The appellant had disclosed all relevant facts, and the extended period could not be invoked due to the absence of suppression or intent to evade duty.

6. Demand of duty under Section 11A of the Central Excise Act, 1944:
The Tribunal found that Section 11A could only be used for recovering "duty of excise." Since the demand was for customs duty on excess waste generated, the correct provision should have been Section 28 of the Customs Act, 1962. The Tribunal emphasized that the show cause notices were issued under the Central Excise Act, making the demand unsustainable.

7. Imposition of penalties and interest:
Given that the demand for duty was set aside, the Tribunal also set aside the demands for interest and penalties. The Tribunal highlighted that penalties could not be imposed when the primary demand itself was invalid.

Conclusion:
The Tribunal set aside the impugned order, allowing the appeal. It clarified that its decision should not be construed as granting immunity from any demands under the Customs Act, 1962, for violations of notifications or provisions of the Foreign Trade Policy. Any recovery under the Customs Act would need to be considered independently.

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