2015 (11) TMI 94 - SC - Central Excise

Clearance of goods to DTA by an EOU - Denial of concessional rate of duty - benefit of Notification No.8/97-C.E. dated 01.03.1997 - cotton yarn was made of indigenous as well as imported cotton coated with imported wax. cotton yarn was manufactured out of indigenous cotton and imported wax, as wax was contained in the final product (yarn) - Held that - Cotton yarn can be produced without wax as well. However, such cotton yarn without wax would be of inferior quality for the purposes of buyer in comparison with cotton yarn coated with wax as the use of cotton yarn with wax thereupon acting as lubricant is much more useful and becomes a value addition making it better quality cotton yarn, insofar as requirement of the buyer in using such cotton yarn for manufacture of knitted fabircs is concerned. When matter is examined from this angle, an irresistible conclusion is arrived at, namely, wax was used as raw material and not as consumable, insofar as end product of the assessee is concerned. For the assessee, end product is cotton yarn and not knitted hosiery. Knitted hosiery is the end product of the buyer. If buyer removes the wax after manufacture of knitted fabrics, that may not be of any consequence insofar as the assessee is concerned and would be totally extraneous to determine the issue at the hands of the assessee. Those units which manufacture goods out of both imported and indigenous raw material would not be entitled to the benefit of Notification No.8/97. No doubt, as per para 3 (b), if imported consumables are used, benefit of the notification would still be available. However, in the present case, we find, as a fact, that wax is not used as consumable but as raw material. For same reasons, other circulars also will not advance the case of the assessee. - Decided against assessee.

Issues Involved:
1. Whether the imported wax used in the manufacturing process of cotton yarn by the appellant constitutes "raw material" or "consumable".
2. Eligibility of the appellant to avail the benefit of Notification No.8/97-C.E. dated 01.03.1997.

Detailed Analysis:

1. Whether the imported wax used in the manufacturing process of cotton yarn by the appellant constitutes "raw material" or "consumable":

The appellant-assessee, engaged in the manufacture of cotton yarn as a 100% Export Oriented Undertaking (EOU), used both indigenous cotton and imported wax in the process. The Department argued that the use of imported wax disqualified the appellant from availing the benefit of Notification No.8/97-C.E. because it constituted "raw material". The appellant contended that the wax was merely a lubricant and did not form part of the final product, thus should be considered as a "consumable".

The Commissioner of Central Excise initially ruled in favor of the appellant, stating that the wax was a consumable used in the manufacturing process and not a raw material. However, the Tribunal overturned this decision, holding that the wax used in the process satisfied the definition of "raw material" as it was essential for the production of cotton yarn and formed part of the yarn at the time of clearance.

Upon appeal, the Supreme Court examined the definitions provided in the Export and Import Policy 1997-2002:
- "Consumables" are items required for a manufacturing process but do not form part of the end product and are substantially consumed during the process.
- "Raw material" includes any materials required for the manufacturing process, whether in a raw or processed state.

The Court emphasized that the determination should focus on the end product of the assessee, which is cotton yarn, not the subsequent product manufactured by the buyer. The Court found that the wax coating was essential for the lubrication and quality of the cotton yarn, making it a raw material rather than a consumable. The wax remained on the yarn to facilitate its winding on cones and its use in knitting hosiery, thus forming part of the end product at the time of clearance.

2. Eligibility of the appellant to avail the benefit of Notification No.8/97-C.E. dated 01.03.1997:

The Notification No.8/97-C.E. provides a concessional rate of duty for products manufactured by EOUs using only indigenous raw materials. The appellant claimed that the wax should not disqualify them from this benefit as it was not a raw material.

The Court referred to various circulars issued by the Ministry of Finance, particularly Circular No.389/22/98-CX, which clarified that the benefit of the notification is not available to units using both imported and indigenous raw materials, but it is available if only imported consumables are used. However, since the Court determined that the wax used by the appellant was a raw material, the appellant did not meet the conditions of the notification.

The Court also considered previous judgments, including Vanasthali Textiles Industries Ltd. v. CCE and Ballarpur Industries Ltd., which supported the interpretation that essential ingredients used in the manufacturing process, even if consumed, could be considered raw materials if they are indispensable for the end product.

Based on these findings, the Court concluded that the appellant was not entitled to the benefit of Notification No.8/97-C.E. as the imported wax used in the manufacturing process constituted a raw material. Consequently, the appeal was dismissed with costs.

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