2009 (10) TMI 258 - HC - Central Excise

Exemption- Notification No. 8/97-CH, dated 1-3-1997- It is the case of the respondent that they are importing wax from Germany which is used in the process of manufacturing of cotton yarn. The said wax is being used by them as consumable in the process of manufacture of cotton yarn, which according to the respondent is not raw material in the process of manufacturing the cotton yarn, based on that they have availed the benefit under the aforesaid notification. According to the appellant herein, the said wax which is imported by the respondent company is not a consumable, it is a raw material without which the cotton yarn cannot be manufactured by the respondent. It is the case of the appellant that Director General of Central Excise Intelligence, Bangalore on investigation found that the wax used by the respondent in the process of manufacturing of cotton yarn, is a raw material. Accordingly a show cause notice was issued to respondent. Thereafter the adjudication authority by its order held that respondent is not eligible to claim benefit of Notification No. 8/97, dated 1-3-1997 on the ground that the wax used by them in the process of manufacturing is a raw material which was challenged by the respondent herein in an appeal before the CESTAT in appeal No. 1068/2003 wherein the order of the adjudication authority was set aside and the matter was remanded for fresh enquiry. Held that- The one and only purpose for which the said wax is used by the respondent herein is to reduce the friction between the metal and the yarn in the process of its manufacturing, the absence of it does not render manufacturing process impossible. On the contrary it would only smoothen the process of manufacturing. Therefore use of the wax could not be considered as a raw material in the process. In the result this Court is of the opinion that the finding of the CESTAT, holding that the said wax is a consumable and not a raw material is correct. Therefore the respondent availing the benefit of Notification No. 8/97-C.E., dated 1-3-1997 is in order. Accordingly the appeal filed by the Revenue is dismissed answering the aforesaid substantial questions of law in favour of the respondent herein.

Summary

Issues Involved:
- Interpretation of whether the wax used in the manufacturing of yarn is a consumable or a raw material.
- Consideration of expert opinions and reliance on previous court decisions.
- Evaluation of circulars and their impact on claiming exemption benefits.
- Determination of the time-barred nature of the show cause notice and the Department's claim.

Analysis:

Interpretation of Wax as Consumable or Raw Material:
The case involved a dispute over whether wax imported by a company for manufacturing cotton yarn should be classified as a consumable or a raw material. The company argued that the wax was a consumable used to maintain friction levels during the manufacturing process. The court examined the definitions of consumables and raw materials under the EXIM Policy 1997-2000 and referred to a Supreme Court decision on the essential nature of ingredients in the manufacturing process. The court concluded that the wax, used solely to reduce friction during manufacturing and not becoming part of the end-product, should be considered a consumable, not a raw material. Expert opinions from textile research associations supported this view, leading to the dismissal of the Revenue's appeal.

Consideration of Expert Opinions and Court Decisions:
The court analyzed expert opinions from textile research associations, which aligned with its interpretation that the wax was a consumable. These opinions, along with the definitions of consumables and raw materials, were crucial in determining the classification of the wax. Additionally, the court referred to a Supreme Court decision to establish the essentiality of ingredients in the manufacturing process, emphasizing that the wax did not meet the criteria to be considered a raw material based on its usage and impact on the end-product.

Impact of Circulars on Exemption Benefits:
The court addressed the relevance of circulars, specifically Circular Nos. 389/22/98-CX and 631/22/02-CX, in qualifying the company for claiming exemption benefits under Notification 8/97-CX. While evaluating the circulars, the court focused on the core issue of whether the wax should be classified as a raw material or a consumable, ultimately determining that the company was entitled to the exemption benefits based on the nature of the wax's usage in the manufacturing process.

Time-Barred Nature of Show Cause Notice:
One of the substantial questions of law raised was the timeliness of the show cause notice and the Department's claim, questioning the invocation of the extended period of limitation under Section 11A. The court's analysis did not specifically address this issue in the detailed judgment provided, but it was a significant aspect considered during the appeal process.

In conclusion, the High Court of Karnataka upheld the Tribunal's decision, dismissing the Revenue's appeal and affirming that the wax imported by the company for manufacturing cotton yarn should be classified as a consumable, not a raw material. The court's thorough analysis of definitions, expert opinions, and previous court decisions formed the basis for its decision, highlighting the importance of understanding the essential nature of ingredients in the manufacturing process to determine their classification accurately.