Substantial expansion and slitting of carbon paper do not defeat exemption unless a distinct new product emerges.

Exemption under Notification No. 50/2003-CE was available where the assessee had recorded substantial expansion in installed capacity, and the denial could not stand on an unchallenged finding to the contrary. Cutting and slitting wider carbon paper into smaller sizes did not amount to manufacture because the Department failed to show that the product retained a disqualifying width or that a distinct new product emerged. The operative principle is that slitting or cutting, by itself, does not create manufacture unless the essential character of the goods changes.

---

---

Issues: (i) Whether the assessee was entitled to exemption under Notification No. 50/2003-CE on the basis of substantial expansion; (ii) whether cutting and slitting of wider carbon paper into smaller sizes amounted to manufacture so as to deny the exemption.

Issue (i): Whether the assessee was entitled to exemption under Notification No. 50/2003-CE on the basis of substantial expansion.

Analysis: The impugned order itself recorded that the assessee had increased installed capacity and undertaken substantial expansion. No appeal had been filed by the Revenue against that finding. The denial of exemption could not therefore be sustained on the ground that the assessee had not fulfilled the expansion requirement.

Conclusion: The assessee was entitled to exemption on the ground of substantial expansion.

Issue (ii): Whether cutting and slitting of wider carbon paper into smaller sizes amounted to manufacture so as to deny the exemption.

Analysis: The assessee was found to be cutting wider carbon paper into smaller sizes after expansion. The Tribunal held that the Department had not produced evidence to show that the assessee continued to clear only carbon paper of width exceeding 36 cms. The reasoning in the impugned orders was held to be inconsistent with the principle that slitting and cutting, by itself, does not amount to manufacture where the essential character of the product remains unchanged. Reliance was placed on the settled principle applied by the Supreme Court in similar facts.

Conclusion: Cutting and slitting of the carbon paper did not amount to manufacture, and the exemption could not be denied on that basis.

Final Conclusion: The denial of exemption on both grounds was unsustainable, the impugned orders were set aside, and the appeals were allowed.

Ratio Decidendi: Where an assessee has satisfied the condition of substantial expansion, exemption cannot be denied on an unproved assumption of continued ineligibility, and cutting or slitting of goods into smaller sizes does not amount to manufacture unless a distinct new product with different character emerges.

---