‘CONSUMABLES’ ARE DIFFERING FROM ‘RAW MATERIALS’

[Mr. M. GOVINDARAJAN]

The Export and Import Policy 1997 – 200, defines the expressions ‘consumables’ and ‘raw materials’.  The expression ‘consumables’ is defined as any item which participates in or is required for a manufacturing process, but does not form part of the end product.   Items which are substantially or totally consumed during a manufacturing process will be deemed to be consumables.  The expression ‘raw material’ is defined as-

• Basic materials which are needed for the manufacture of goods, but which are still in a raw, natural, unrefined or unmanufactured state; and
• For a manufacturer, any materials or goods which are required for the manufacturing process, whether they have actually been previously manufactured or are processed or still in a raw or natural state.

In ‘Collector V. Ballapur Industries Limited’ – 1989 (9) TMI 102 - SUPREME COURT OF INDIA the Supreme Court discussed about the raw materials and consumable goods.  The ingredients used in the chemical technology of manufacture of any end product might comprise, amongst others, of those which may retain their dominant individual identity and character throughout the process and also in the end product, those which as a result of interaction with other chemicals or ingredients, might themselves undergo chemical or qualitative changes and in such altered form find themselves in the end product.  One of the valid test to decide whether a material is to be called as ‘raw material’ is could be that the ingredient should be so essential from the chemical processes culminating in the emergence of the desired end product, that having regard to its importance in and indispensability for the process, it could be said that its very consumption on burning up is its quality and value as raw material.  In such a case, the relevant test is not its absence in the end product, but the dependence of the end product for its essential presence at the delivery end of the process.  The ingredient goes into the making of the end product in the sense that without its absence the presence of the end product is rendered impossible.  This quality should coalesce with the requirement that its utilization is in the manufacturing process as distinct from the manufacturing apparatus.

The Supreme Court held that the goods are consumable one which, like catalytic agents, while influencing and accelerating the chemical reactions, however, may themselves may remain uninfluenced and unaltered and remain independent of and outside the end products and which might be burnt up or consumed in the chemical reactions.

In ‘Chemical Technology of Fibrous Materials’ case it has been held that in industry, textile fonning (fibrous) items used for manufacturing (main activity) a textile product are referred to as raw material e.g., cotton, viscose, wool, silk, nylon, polyester etc., or their blends in different compositions.  Whereas (non fibrous) items used for chemical processing of textile product (ancillary activity) are referred to as consumables e.g., starches, variety of chemicals, several coloring matters such as dyes and pigments etc.,  Power and water are other consumable items in addition to fuel oil, lubricating agents and packing materials.   It is a common practice in textile industry and trade to identify and categorize raw material and consumables on such basis.

Dealing with a case under a sales tax statute i.e., the Andhra Pradesh General Sales Tax Act, 1957, the Supreme Court held that the word ‘consumable’ takes color from and must be read in the light of the words that are its neighbors ‘raw material’, ‘component part’, ‘sub-assembly part’ and  ‘intermediate part’.  So read, it is clear that the word ‘consumables’ therein refers only to material which is utilized as an input in the manufacturing process but is not identifiable in the final product by reason of the fact that it has got consumed therein.  It is for this reason, a departure was made from the concept that ‘consumables’ fall within a broader scope of the words ‘raw materials’.

Thus as held by the Supreme Court in ‘Coastal Chemicals Limited V. Commercial Tax Officer’ – 1999 (10) TMI 599 - SUPREME COURT OF INDIA, that the ‘consumables’ are treated differently from ‘raw materials’.

Notification No.8/97-CE, dated 01.03.1997 exempted the finished products, rejects and waste or scrap specified in the Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) and produced or manufactured, in a hundred per cent export-oriented undertaking or a free trade zone wholly from the raw materials produced or manufactured in India.  Exemption is not available if any raw material is imported and utilized for manufacturing.  Many a litigation was arised as to the interpretation of the term ‘raw material’.  Since imported goods were utilized in the manufacturing and contested that the same are not raw material and consumable.   In this regard the Department issued a clarification vide circular No. 389/22/98-CX that a unit eligible for the benefit of Notification NO. 8/97-CE, even if, imported consumables are used since the Notification does not debar the use of imported consumables, provided other conditions of the said notification are satisfied.

Further a circular No. 614/5/2002-CX, dated 31.01.2002 was issued in which the Department withdrew the circular No. 389/22/98-CX and clarified that the benefit of Notification No. 8/97-CE, dated 01.03.1997 shall not be available to those EOUs which use imported consumables.

By Circular No.631/22/2002-CD, dated 28.03.2002, the Department further clarified that the consumables used with the capital goods cannot be termed as raw materials for the manufacture of finished goods.   Therefore the benefit of concessional rate of duty under Notification No. 8/97-CE, dated 01.03.1997 (as amended) should not be denied to export oriented units using imported consumables with capital goods provided all other conditions of notifications are satisfied.

Therefore it is essential to avail the benefit of exemption under Notification No. 8/97-CE, dated 01.03.1997 exempted units are to use only indigenous raw materials and not the imported ones.