IMPORTANT POINT
Benefit of exemption would be available if imported material used in manufacture of goods is consumable and not raw material.

Judgment

A.K. Sikri, J.

The appellant-assessee is engaged in the manufacture of cotton yarn which is 100% Export Oriented Undertaking (EOU) constituted as per Export and Import Policy 1997-2002. During the period August, 2000 to March, 2001, it had cleared the aforesaid cotton yarn made to Domestic Tariff Area (DTA). While clearing these goods, the appellant did not pay normal excise duty that is chargeable for the aforesaid product. Instead it took benefit of Notification No.8/97-C.E. dated 01.03.1997 and paid duty at concessional rate in terms of the said notification. This notification provides for concessional rate to those products which are cleared to DTA by an EOU. However, one of the conditions for availing the benefit of the said notification is that the products that are manufactured by such EOU should have been manufactured using indigenous raw material only.

2. The appellant while manufacturing cotton yarn had used indigenous cotton and also imported wax. The Department sought to deny the benefit of Notification No.8/97-C.E. on the ground that imported wax was also used, which was treated as the “raw material”. Show cause notice dated 04.09.2001 was, accordingly, issued by the Superintendent of Central Excise, Pollachi-II Range, in O.C. No.777/2001 to state that the appellant was wrong in claiming the benefit of Notification No.8/97-C.E. dated 01.03.1997 since cotton yarn was manufactured out of indigenous cotton and imported wax, as wax was contained in the final product (yarn). It was stated that the appellant is maintaining separate production account for manufacture of cotton yarn both for indigenously procured and imported cotton as detailed in Annexures-I and II to the show cause notice. The appellant filed objections/reply dated 29.01.2001 wherein it stated that:-

(i) wax disc was used in the High Speed Autoconer for supply to hosiery industries. Wax acts as a lubricant for reducing the friction and hairiness arising due to cone winding of yarn at a speed of 1200-1500 meters per minute.

(ii) The lubrication of the yarn also facilitated the use of the high speed knitting machines.

(iii) The wax was only a temporary coat and did not form part of the cotton yarn and the wax removed permanently after the knitting and does not remain part and parcel of the yarn.

(iv) The jurisdictional Superintendent of Central Excise had consistently issued Warehousing Certificate treating the same as 'consumable' and the wax disc was treated as 'capital goods' consistently as entered in RG 23C for Cenvat purposes.

3. The Commissioner of Central Excise, Coimbatore after hearing the matter, passed the Order-in-Original dated 21.06.2002 deciding the matter in favour of the assessee and, thus, dropped proposed demand in the show cause notice by recording the finding to the effect that:-

(i) Wax disc acted as a lubricant and facilitated processing and use in the manufacturing process and remained a temporary coat.

(ii) By Circular No.631/22/2002-CX dated 28.03.2002, the Ministry of Finance held that consumables used in capital goods cannot be termed as 'raw material' for the manufacture of finished goods and in the case wax was only a consumable for the capital goods.

(iii) Revenue was inconsistent in having dealt with wax discs as consumable in the warehousing operation of the appellant but dealt as raw material for denying the benefit of exemption.

(iv) Benefit was available to cotton yarn manufactured wholly out of indigenous cotton as well as cotton yarn manufactured out of imported cotton yarn on which appropriate additional duty of customs was paid when removed into DTA.

4. However, the Central Board of Excise & Customs, reviewed the order of the Commissioner of Central Excise in Order-in-Original No.32/2002-Commr. dated 21.06.2002 and directed the Commissioner to present an appeal before the Appellate Tribunal exercising power under Section 35B of the Act. The Commissioner of Central Excise preferred the appeal as directed by the Central