2001 (4) TMI 497 - AT - Central Excise

Summary

Issues Involved:
1. Whether the conversion of woollen yarn from plain reel hanks to cone yarn amounts to manufacture.
2. Applicability of the extended period of limitation for demanding Central Excise Duty.
3. Imposability of penalty under Section 11AC of the Central Excise Act.

Detailed Analysis:

1. Conversion of Woollen Yarn from Plain Reel Hanks to Cone Yarn:
The primary issue was whether the conversion of woollen yarn from plain reel hanks to cone yarn constitutes "manufacture" under Chapter Note 3 of Chapter 51. The Tribunal referred to its earlier decision in the case of Nahar Spinning Mills Ltd. v. C.C.E., Chandigarh, which clarified that the conversion of hank yarn into cone yarn attracts duty liability. The Tribunal emphasized that the purpose of providing exemption to hank yarn was to benefit the handloom sector, and converting it to cone yarn, which is usable by powerlooms, would undermine this intent. Thus, the Tribunal held that the conversion process amounts to manufacture and upheld the duty liability on the yarn in cone form. Consequently, the revenue succeeded on merits.

2. Extended Period of Limitation:
The appellants contended that they had a bona fide belief that no duty was payable on the conversion of yarn from hanks to cones, as they had been manufacturing woollen hosiery products, which were exempt from duty. They argued that no declaration or classification list was required, and thus, there was no suppression or mis-statement. The Tribunal considered several precedents, including the Supreme Court's decisions in C.C.E. v. Chemphar Drugs & Liniments and Cosmic Dye Chemical v. C.C.E., Bombay, which established that the extended period of five years is applicable only when there is evidence of fraud, collusion, or wilful mis-statement with intent to evade duty. The Tribunal concluded that the appellants' long-standing practice and bona fide belief that no duty was payable did not constitute suppression or mis-statement. Therefore, the demand was held to be time-barred.

3. Imposability of Penalty under Section 11AC:
The appellants argued that the penalty under Section 11AC could not be imposed as the period of demand was prior to the introduction of this section. The Tribunal agreed with this contention, noting that the demand period predated the enactment of Section 11AC. The Tribunal cited the Supreme Court's decision in Commissioner v. Elgi Equipment, which supported this view. Consequently, the Tribunal held that no penalty was imposable under Section 11AC, and the question of paying interest did not arise.

Conclusion:
The Tribunal upheld the duty liability on the conversion of yarn from hanks to cones, confirming that it amounts to manufacture. However, it ruled that the extended period of limitation for demanding duty was not applicable due to the bona fide belief and long-standing practice of the appellants, rendering the demand time-barred. Additionally, no penalty under Section 11AC was imposable as the demand period was prior to its introduction. The appeal was disposed of accordingly, with consequential relief to be granted in accordance with the law.