Exemption for plain reel hank yarn applied where intermediate processing did not create a new excisable commodity.

Cotton yarn that underwent doubling or twisting inside the factory before being cleared as plain reel hank yarn did not attract central excise duty, because the intermediate processes did not produce a distinct commercial commodity. The exemption for cotton yarn in plain reel hanks was held to cover the goods, and the fact that the yarn remained in process without being removed for consumption, sale, or use in manufacturing another commodity was decisive. The duty demand on the in-process yarn was therefore unsustainable.

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Issues: Whether cotton yarn undergoing doubling or twisting within the factory, before being cleared as plain (straight) reel hank yarn, attracted central excise duty notwithstanding the exemption available to plain hank yarn.

Analysis: Cotton yarn all sorts was covered by Item 18A of the First Schedule to the Central Excises and Salt Act, 1944, and the inclusive definition of manufacture under Section 2(f)(iv) showed that the form in which yarn was cleared was material for duty liability. Notification No. 275/82-C.E. granted full exemption to cotton yarn in plain reel hanks, and its scheme indicated that the exemption was intended to protect handloom supply. The intermediate processes undertaken in the factory did not result in a different commercial commodity, and the goods remained in process without being removed for consumption, sale, or use in the manufacture of any other commodity. The duty demand could not be sustained merely because the yarn had undergone preparatory processes before conversion into hank form.

Conclusion: The demand of duty on the in-process yarn was not sustainable, and the appeal was allowed in favour of the assessee.

Ratio Decidendi: Where cotton yarn continues to remain cotton yarn and no distinct product emerges, intermediate processes carried out before conversion into exempt hank yarn do not by themselves attract excise duty.

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