Deeming fiction for manufacture in cotton yarn doubling sustained duty, interest and penalty despite bona fide belief plea.

Doubling of cotton yarn was treated as manufacture because Chapter Note (1) to Chapter 52 expressly deemed that process to be manufacture during the relevant period, making central excise duty and consequential interest payable. The appellant's reliance on earlier authorities failed because they predated the insertion of the deeming provision. The plea of bona fide belief was rejected for penalty purposes under Section 11AC, as the statutory chapter note was already in force and should have been considered in the job-work activity. The duty demand, interest and penalty were therefore upheld.

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Issues: (i) Whether doubling of cotton yarn was liable to be treated as manufacture attracting central excise duty under Chapter Note (1) to Chapter 52. (ii) Whether penalty under Section 11AC was sustainable despite the claim of bona fide belief.

Issue (i): Whether doubling of cotton yarn was liable to be treated as manufacture attracting central excise duty under Chapter Note (1) to Chapter 52.

Analysis: The activity of doubling cotton yarn fell within the express deeming provision in Chapter Note (1) to Chapter 52 of the Central Excise Tariff Act, 1985. The applicability of that note for the relevant period was not in dispute. The authorities relied on by the appellant related to periods prior to incorporation of the deeming provision and therefore did not assist the appellant. Once the statute itself treated the activity as manufacture, the duty demand and consequential interest were justified.

Conclusion: The issue is decided against the assessee and in favour of the Revenue.

Issue (ii): Whether penalty under Section 11AC was sustainable despite the claim of bona fide belief.

Analysis: The plea of bona fide belief was rejected because the chapter note was already part of the statutory framework during the relevant period and ought to have been taken into account while undertaking the job work. In these circumstances, the imposition of penalty was held to be legally valid.

Conclusion: The issue is decided against the assessee and in favour of the Revenue.

Final Conclusion: The appeal failed in its entirety, and the duty demand, interest, and penalty were upheld.

Ratio Decidendi: Where a tariff chapter note expressly deems a specified process to be manufacture, duty follows from the statutory deeming fiction, and a claim of bona fide belief does not negate penalty when the provision was in force during the relevant period.

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