Exemption without aid of power turns on final manufacture, not earlier processing; cutting alone is not manufacture.

For exemption under Notification No. 65/87-C.E., the decisive question was whether the final goods were manufactured without the aid of power; prior use of power in knitting and processing inputs did not disqualify tere-towels made only by cutting, hemming and stitching without power, so the exemption applied. Cutting running knitted processed fabric into small lengths, by itself, did not amount to manufacture because it did not yet produce a marketable article; the assessee succeeded on this issue. The demand for 1-3-1994 to 31-3-1994 was within limitation, interest was not chargeable for want of the relevant provision during that period, and penalty was reduced.

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Issues: (i) whether tere-towels made by cutting, hemming and stitching without the aid of power were entitled to exemption under Notification No. 65/87-C.E. notwithstanding use of power at earlier stages of knitting and processing; (ii) whether cutting of running knitted processed fabric into small lengths amounted to manufacture; (iii) whether the duty demand for 1-3-1994 to 31-3-1994 was time-barred and whether interest and penalty were sustainable.

Issue (i): whether tere-towels made by cutting, hemming and stitching without the aid of power were entitled to exemption under Notification No. 65/87-C.E. notwithstanding use of power at earlier stages of knitting and processing

Analysis: The tere-towels were made from processed knitted fabrics, and power was used in knitting and processing the fabrics. However, the final conversion into tere-towels took place only at the stage of cutting, hemming and stitching, and no power was used in those operations. The relevant exemption turned on whether the final manufacture of the goods was carried out without the aid of power, and the earlier use of power in making duty-paid inputs did not by itself disqualify the finished product from the exemption.

Conclusion: The tere-towels were entitled to the benefit of Notification No. 65/87-C.E., and the assessee succeeded on this issue.

Issue (ii): whether cutting of running knitted processed fabric into small lengths amounted to manufacture

Analysis: Cutting by itself did not make the fabric marketable as goods. The fabric required further hemming and stitching before it became a finished marketable article. Since the evidence did not show marketability at the cutting stage, and the later operations were not merely incidental to cutting, the cutting activity by itself was not manufacture.

Conclusion: Cutting of running knitted processed fabric into small lengths did not amount to manufacture, and the assessee succeeded on this issue.

Issue (iii): whether the duty demand for 1-3-1994 to 31-3-1994 was time-barred and whether interest and penalty were sustainable

Analysis: The demand for the short period was held to be within limitation. Interest was held not chargeable because the relevant interest provision was not on the statute book for the period in question. Penalty was retained only in reduced form in view of the finding on exemption and the nature of the dispute.

Conclusion: The duty demand for 1-3-1994 to 31-3-1994 was not time-barred, interest was not chargeable, and the penalty was reduced to Rs. 20,000.

Final Conclusion: The assessee obtained exemption on the principal classification/manufacture controversy and on the cutting-stage question, while the Revenue succeeded only to the limited extent of the confirmed duty for the specified period, with no interest and only a reduced penalty.

Ratio Decidendi: For exemption conditioned on manufacture without the aid of power, the decisive inquiry is whether power is used in the actual manufacture of the final excisable goods, not merely in earlier processing of inputs; and an activity does not amount to manufacture unless it results in a marketable product.

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