2007 (10) TMI 303 - SC - Central Excise

Supreme Court remits classification matter to CEGAT for reconsideration

VANASTHALI TEXTILES INDUSTRIES LTD. Versus COMMR. OF C. EX., JAIPUR, RAJASTHAN

The Supreme Court allowed the appeals, remitting the matter to CEGAT for reconsideration regarding the classification of imported materials as ... Whether the items can be considered as 'consumable' on the facts of the case? Held that:- Dealing with a case under a Sales Tax statutes, i.e. Andhra Pradesh General Sales Tax Act, 1957, this Court held that the word 'consumable' takes colour from and must be read in the light of the words that are its neighbours 'raw material', 'component part', sub-assembly part' and 'intermediate part'. So read, it is clear that the word 'consumables' therein refers only to material which is utilized as an input in the manufacturing process but is not identifiable in the final product by reason of the fact that it has got consumed therein. It is for this reason, a departure was made from the concept that 'consumable' fall within the broader scope of the words 'raw materials'. In the cases at hand 'consumable' are treated differently from 'raw materials'. Appeal allowed. Issues Involved:1. Eligibility for partial exemption from duty under Notification No. 8/97-C.E.2. Classification of imported sizing materials as raw materials or consumables.3. Applicability of the dominant ingredient test and value addition.4. Interpretation of the term 'wholly' in the context of manufacturing from domestic raw materials.5. Relevance of the Board's Circular dated 5-5-1998.Issue-wise Detailed Analysis:1. Eligibility for Partial Exemption from Duty under Notification No. 8/97-C.E.:The appellant-company, a 100% Export Oriented Unit (EOU), claimed partial exemption from duty under Notification No. 8/97-C.E. for goods sold in the Domestic Tariff Area (DTA). The exemption was contingent on the goods being manufactured wholly from raw materials produced or manufactured in India. The Commissioner of Central Excise (Appeals) Jaipur confirmed the demand of duty, stating that the imported sizing materials used by the company disqualified them from the exemption. The Customs, Excise and Gold (Control) Appellate Tribunal (CEGAT) upheld this view, leading to the present appeals.2. Classification of Imported Sizing Materials as Raw Materials or Consumables:The appellant argued that the imported Carboxymethyle Cellulose and Ultra fresh N.M. used in the manufacturing process were consumables, not raw materials. According to the EXIM Policy, consumables are items required for the manufacturing process but do not form part of the end-product. The Board's Circular No. 389/22/98-CX., dated 5-5-1998, supported this interpretation, stating that the benefit of the Notification would be available even if imported consumables were used. The Department, however, contended that these materials were essential for the manufacturing process and thus should be considered raw materials.3. Applicability of the Dominant Ingredient Test and Value Addition:The dominant ingredient test and value addition were not considered by CEGAT. The Supreme Court noted that in Ballarpur Industries Ltd. (1989 (4) SCC 566), the ingredient's essentiality for the chemical processes culminating in the end-product was a crucial factor. The Court emphasized that the test is not the absence of the ingredient in the end-product but its indispensability in the manufacturing process. The cost of the dye (2-2.5% of the total production cost) and its role in manufacturing denim were significant factors that needed consideration.4. Interpretation of the Term 'Wholly' in the Context of Manufacturing from Domestic Raw Materials:The term 'wholly' in the Notification implied that the end-products should be entirely manufactured from raw materials produced or manufactured in India. The appellant's use of imported materials raised questions about compliance with this condition. The Supreme Court highlighted that the Notification did not distinguish based on value but stressed the word 'wholly.' The Court also referenced the decision in Century Denim, EOU, where the use of imported indigo dye disqualified the product from being considered wholly produced from domestic raw materials.5. Relevance of the Board's Circular Dated 5-5-1998:The Circular clarified that 100% EOUs could avail the benefit of the Notification even if imported consumables were used, provided other conditions were satisfied. However, the Supreme Court noted that the distinction between raw materials and consumables needed careful consideration. The Court referred to the interpretation in 'Chemical Technology of Fibrous Materials,' which categorized textile-forming items as raw materials and non-fibrous items used in chemical processing as consumables.Conclusion:The Supreme Court allowed the appeals, emphasizing the need for a detailed examination of whether the imported materials could be classified as consumables and the relevance of the dominant ingredient test. The matter was remitted to CEGAT for reconsideration, particularly focusing on the classification of the materials and the applicability of the Board's Circular. The Court also highlighted the importance of interpreting the term 'wholly' in the context of the Notification and the significance of the cost and role of the imported materials in the manufacturing process.