2005 (2) TMI 116 - SC - Central Excise

Supreme Court sets aside Tribunal decision on Notification No. 123/81-C.E.

The Supreme Court ruled in favor of the department, setting aside the Tribunal's decision. The Court held that the assessee did not meet the conditions ... Interpretation of exemption notification - requirement of goods to be 'used in the manufacture' - meaning of 'in connection with the manufacture' versus 'used in the manufacture' - strict construction of exemption - burden of proof on the assessee to show participation of goods in manufacture - distinction between 'capital asset' and 'capital goods'Interpretation of exemption notification - requirement of goods to be 'used in the manufacture' - meaning of 'in connection with the manufacture' versus 'used in the manufacture' - strict construction of exemption - Scope, ambit and effect of Notification No. 123/81-whether goods removed under CT-3 which were not shown to have been used in manufacture qualified for exemption - HELD THAT: - The Court held that the notification must be read in its entirety and two essential stipulations must be satisfied for exemption: (a) removal of the goods from a 100% Export Oriented Unit to the licensee's factory under form CT-3; and (b) use or participation of those goods in the manufacture of products meant for export. The preamble's wider phrase 'in connection with the manufacture' cannot override the specific conditional language in the body of the notification requiring that goods be 'used in the manufacture of' the export products. Exemption notifications are to be construed strictly as to eligibility; therefore the test of 'participation' or actual use in manufacture must be applied to each case. The Court also explained that the term 'capital asset' is broad but becomes 'capital goods' for the notification's purposes only when such assets are used in manufacture; not every capital asset will qualify as a capital good in all businesses. Finally, the Court reiterated that it was the assessee's burden to prove, by evidence, the requisite nexus or participation of items like tables, chairs and air-conditioners in the manufacture of filament/cotton yarn, and the Tribunal erred in granting exemption by relying on the preamble without the required proof of use under the conditions of the notification. [Paras 9, 10, 11]Tribunal's reliance on the preamble was misplaced; exemption under Notification No.123/81 requires direct use/participation in manufacture as per the conditions and the assessee failed to prove such use.Final Conclusion: Civil appeal allowed; the Tribunal's order is set aside for having wrongly admitted the exemption claim without applying the condition that the goods be shown to have been used in the manufacture of export products; no order as to costs. Issues Involved:1. Eligibility for the benefit of exemption under Notification No. 123/81-C.E., dated 2nd June 1981, as amended.2. Interpretation of the terms 'in connection with the manufacture' and 'used in the manufacture of' within the notification.3. The requirement of evidence to prove the use of goods in the manufacturing process.Issue-wise Detailed Analysis:1. Eligibility for the Benefit of Exemption under Notification No. 123/81-C.E., dated 2nd June 1981, as amended:The case revolves around the eligibility of the assessee, a 100% Export Oriented Unit, to claim an exemption under Notification No. 123/81-C.E. The assessee sought to remove certain goods like A.C. Sheets, Air-Conditioners, Flush doors, Typewriters, Storewells, Tables, and Chairs from the 100% Export Oriented Unit to its factory under form CT-3, claiming these goods were used 'in connection with the manufacture' of filament yarn. The department issued a show-cause notice demanding duty for not using these goods in the manufacture of cotton/filament yarn. The Adjudicating Authority confirmed the demand, stating the assessee failed to prove the use of these goods in the manufacturing process. The Tribunal, however, interpreted the notification broadly, emphasizing the phrase 'in connection with the manufacture,' and allowed the exemption.2. Interpretation of the Terms 'In Connection with the Manufacture' and 'Used in the Manufacture of' within the Notification:The Supreme Court needed to determine the scope, ambit, and effect of Notification No. 123/81-C.E. The notification provided an exemption for goods brought into an undertaking from a 100% Export Oriented Unit under a certificate in form CT-3 'in connection with the manufacture of' products for export. The notification's conditions stipulated that the exemption applied only if the goods were brought directly into the factory and 'used in the manufacture' of products for export. The Court highlighted the difference between the broader term 'in connection with the manufacture' in the preamble and the more specific 'used in the manufacture' in the conditions, emphasizing that both conditions must be fulfilled for the exemption to apply.3. The Requirement of Evidence to Prove the Use of Goods in the Manufacturing Process:The Court noted that the Tribunal had erred by focusing solely on the phrase 'in connection with the manufacture' without considering the requirement that the goods must be 'used in the manufacture' of products for export. The Court emphasized that the assessee must provide evidence to prove the participation of the goods in the manufacturing process. In this case, the assessee failed to demonstrate how items like tables, chairs, and air-conditioners were used in the manufacture of filament yarn. The Court stated that the notification must be read in its entirety and interpreted strictly regarding eligibility for exemption. The Tribunal's acceptance of the assessee's contention without proper evidence was deemed erroneous.Conclusion:The Supreme Court allowed the department's appeal, setting aside the Tribunal's judgment. The Court held that the assessee did not meet the conditions stipulated in Notification No. 123/81-C.E., as it failed to prove the use of the goods in the manufacturing process. The civil appeal was allowed with no order as to costs.