Holding

Yarn captively consumed before 15 July 1977 is exempt from excise duty under the earlier notification, as liability is fixed at the time of its removal for captive consumption, not at the later removal of the fabric.

Summary

The case concerned two composite textile mills that manufactured cotton yarn in their weaving departments and used it captive in their spinning departments to produce fabric. An exemption notification dated 18 June 1977 exempted such yarn from excise duty, but a later notification dated 15 July 1977 partially withdrew the exemption. The issue was whether yarn manufactured between 18 June and 14 July 1977, though captively consumed before 15 July, became liable to duty because the fabric made from it was removed after 15 July. The Supreme Court held that liability crystallises at the time of removal of the manufactured item for captive consumption, governed by Rule 9(1) and its explanation, and therefore the earlier exemption applied. Consequently, no excise duty was payable on the yarn, and the Tribunal’s view favouring the assessee was affirmed. The Court dismissed the Collector’s appeals and allowed the assessee’s appeal, also remanding the refund application for fresh consideration.

Issues considered

Whether yarn manufactured in a composite textile mill between 18 June 1977 and 14 July 1977 and captively consumed before 15 July 1977 is liable to excise duty under the notification of 15 July 1977.
Whether the liability to pay excise duty is determined at the time of manufacture, removal for captive consumption, or at the time of removal of the final fabric from the factory gate.

Legislation cited

Additional Duties of Excise (Goods of Special Importance) Act, 1957s. Section 3
Central Excise Act, 1944s. Section 49
Central Excise Rules, 1944s. Rule 8, s. Rule 9(1), s. Rule 9(2)

Subjects

central excisecaptive consumptioncomposite textile millexemption notificationRule 9excise duty liabilityfabric removaltax exemption

Judgment

COLLECTOR OF CENTRAL EXCISE, BOMBAY A
v.
MIS KOHINOOR MILLS BOMBAY

APRIL 4, 1995

[R.M. SAHA! AND S.B. MAJMUDAR, JJ.] B

Central Excises and Salt Act, 1944:

...,.J"___., Item 18(III)(i), 18-A(i) and 19.
'
Central Excise Rules, 1944: Rules 18(1) and 19.
c
Excise-Exemption Notification-Applicability of-Composite Textile
Mill:-Yam manufactured-Captive consumption of-Notification exemption
levy of duty-Subsequent withdrawal of notificatio~Yam manufactured and
captively consumed prior to withdrawal of notification-Fabric manufactured D
out of such yam removed from factory subsequent to withdrawal of exemp·
tio~,Assessee held entitled to benefit of exemption n<!tification.

The assessees In both these appeals are composite textile mills. The
yarn manufactured by them In their weaving department was captlvely
consumed In there spinning department. Under a notification No. 132n7 E
dated 18.6.1977 the yarn manufactured In the Composite Textile Mill from
18.6.1977 onwards was exempted from excise duty when such yarn was
removed for captive consumption and used for that purpose by the same
mill In Its spinning department for manufacturing fabrics. However, this
exemption was partially withdrawn with effect from 15.7.1977. The respon· F
dent assessee claimed benefit of the notification· dated 18.6.1977 and the
Tribunal held that when cotton yarn was manufactured prior to 15.7.1977
and was removed for captive consumption and used by the composite textile
mill in manufacturing fabric prior to that date no excise duty was levlable
.. thereon even if the fabric was manufactured out of it after 15.7.1977. In the
other connected appeal the Tribunal took contrary view and held that It was G
not the date or manufacture but the date of clearance or the manufactured
commodities that was relevant for deciding the tax liability and as cotton
fabric was cleared after 15.7.1977, the input of yarn was liable to be taxed as
per the notification holding the field after 15.7.1977. Against the orders of
the Tribunals appeals were preferred before this Court. H
159
160 SUPREME COURT REPORTS (1995] 3 s:c.R. ·

A On behalf of the Revenue it was contended that even though the yam
might have been manufactured between 18.6.1977 and 14.7.1977 if such
yam was captively consumed and ultimately resulted Into fabric and if
such fabric was removed from the factory gate after 15.7.1977, the captively
consumed yarn out of which such fabric was manufactured was liable to
B excise duty as per notification dated 15.7.1977.

Dismissing the appeals preferred by Revenue and allowing the ap·
peals of assessees, this Court

HELD: 1. The view taken by the Tribunal in the impugned judgment
C against which Revenue bas preferred appeals cannot be found fault with.
The view taken by the Tribunal in the Impugned judgment against which
assessee bas preferred appeal cannot be upheld. [167-H, 168-D]

2. The yarn manufactured by the appellant composite mills from
D 18.6.1977 upto 14.7.1977 and removed for captive consumption and used
as such during that time In the spinning department for manufacture of
fabric will not be liable to bear any excise duty as per the latter notification
dated 15.7.1977. [164-H, 165-A]

3. A conjoint reading of Rule 9(1) and Explanation to Rule 9(2) of
E the Rules makes it clear that if a manufactured item covered by the charge
of excise d11ty by the charging provisions of the Central Excise Act is
captively consumed, it would amount to removal of such manufactured
item . Consequently once the yam is manufactured in the weaving depart·
ment of the composite textile mill and Is taken to the spinning department
F for being captively utilised by way of consumption in spinning department,
and gets consumed, it Is deemed to have been removed within the meaning
of Rule 9(1). Once that happens, the liability of such manufactured yarn
to-pay excise duty at the then prevalent rate of duty is crystalised. There·
after, the question as to when subsequently the fabric is manufactured or
emerges or Is removed from factory gate becomes irrelevant for the pur-
G pose of deciding the question of liability of excise duty on such captively
consumed yarn. [167-C to El

4. In the present case cap lively consumed yarn was manufactured on
and from 18.6.1977 and removed to spinning department and was utilised
H prior to 15.7.1977. Thus such yam falls In first category under notification
~-

C.C.E. v. KOHINOOR MILLS [MAIMUDAR, J.] 161

dated 15.7.1977 viz. cotton yarn manufactured prior to 15.7.1977 and A
removed for captive consumption and utilised In production of fab!'lcs.
The liability to pay excise duty on such yam, therefore, has to be decided
prior to 15.7.1977 In the light of Rule 9(1) read with Explanation and
subject to the relevant exemption notification then holding the field. As at
the relevant time the earlier Notification No. 132/77 of 18.6.1977 was
B
holding the field under which such yam was wholly exempt from payment
of excise duty, no excise duty was to be paid thereon. (167-F, G]

Sriram Mills Ltd. v. Union of India, (1982) E.L.T. 457; Aryodaya
...,.,...., Spinning and .Weaving Company Ltd. v. Union of India, (1981) E.L.T. 274
and Union of India v. Hindustan Spinning and Weaving Mills Ltd., (1992) 61 c
E.L.T. 531, approved.

Wallace Flour Mills Company Ltd. v. Collector of Central Excise,
(1989) 44 E.L.T. 598, held Inapplicable.

M/s. J.K. Cotton Spinning and Weaving Mills Ltd. and Anr. v, Union D
of India and Ors., (1987) Supp. SCC 350, referred to.

CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 103-
04/88.
Appeal under Section 35L(b) of the Central Excise and Salt Act, E
1944 from the order dated 16.4.86 of the Customs Excise and Gold (Con-
trot) Appellate Tribunal, New Delhi in Appeal .No. 440 and 441of1981-D
[Order Nos. 234 and 235 of 1986-D].

WITH
F
- C.A. No. 5408 of 1990.

A.K. Srivastava for the Appellants and Respondent in CA.No.
5408/90.

V.Laxmikumaran, Rajinder Nar'!in, Ms. Amrita Mi.Ira, Rajan Narain, G
Ms. Sonu Bhatnagar, A.R. Madav Rao for the Respondent and Petitioner
in C.A.No. 5408 of 1990.

~· The Judgment of the Court was delivered by

MAJMUDAR, J. These appeals involve a common question for our H
162 SUPREME COURT REPORTS (1995] 3 S.C.R. ......
A consideration. It is to the effect 'when yarn was manufactured in the
weaving department of a composite textile mill and was captively consumed
in the spinning department for manufacturing fabrics therefrom, whether
any excise duty was payable on the manufactured yarn prior to 15.7.1977
when an earlier notification dated 18.6.1977' exempting such yarn from
payment of excise duty was in operation, only because the ultimate fabrics
B got manufactured from such yarn on and from 15.7.1977 when the earlier
notification stood rescinded'.

Civil Appeals 103 and 104 of 1988 are moved by the Collector of
Central Excise of Bombay being aggrieved by the order passed by the ._.,..
c Customs and Excise and Gold (Control) Appellate Tribunal (hereinafter
referred to as 'the Tribunal") which has taken the view that such yarn would
not be liable to pay any duty while Civil Appeal No. 5408 of 1990 is moved
by the assessee against the order of the Tribunal which has taken a contrary
view. In order to appreciate the contours of this controversy, it is necessary
to note a few relevant facts.
D
There is no dispute that the assessee textile mills in both the sets of
appeals are composite textile mills. Composite textile mill is one which
contains two departments amongst others, namely, spinning and weaving
departments. In the weaving department yarn is manufactured. That yarn
E is captively consumed in the spinning department of the same mill and
ultimately cotton fabric emerges. It is also not in dispute that once yarn is
manufactured even for capctive consumption in the weaving department,
it has to bear excise duty as a commercial commodity is said to have
emerged. When this yarn is utilised in the spining department of the
F composite mill and fabric is manufactured out of it, on fabric excise duty
has to be paid as per the tariff rate operating at the relevant time. The
dispute in there present case arose because from 18.6.1977 there was in
operation an exemption notification issued by the Central Government in
exercise of its powers conferred under Rule 8 of the Central Excise Rules,
1944. The said Notification No. 132177 reads as under :
G
"In exercise of the powers conferred L; sub-rule (i) of rule 8 of
the Central Excise Rules, 1944, the Central Government hereby
exempts cellulosic spun yarn and cotton yarn falling under sub-item
III (i) of Item No. 18 and Item No. 18A (i) respectively, of the '
H First Schedule to the Central Excise and Salt Act, 1944 (1 of 1944),
C.C.E. v. KOHINOOR MILLS [MAJMUDAR,J.] 163
when used for weaving of cotton fabrics falling under Item No. 19 A
in a composite mill, free from whole of the duty of excise leviable
thereon:

Provided that when such yarn is produced in a factory other
than such composite mill, the procedure set out in Rule %E of
the Central Excise Rules, 1944 is followed. B
Explanation - For the purposes of this notificati.on 'composite Mill'
means a manufacturer who is engaged in spinning of cotton yarn
or weaving of cotton fabrics or processing of cotton fabrics with
the aid of power and bas a proprietary interest in at least two of C
such manufacturing activities."

It may be mentioned at this stage that there was also in operation from the
same date 18.6.1977 Notification No. 131{77 which first granted partial
exemption from excise duty to cotton yarn. But because of Notification No.
132n7, such yarn when captively consumed in the composite textile mill D
got fully exempted.

Consequently the cotton yarn manufactured by the assessee com-
posite textile ·mills from 18.6.1977 onwards bad not to bear any excise duty
when-such yarn was removed for captive consumption and used for that
purpose by the same mills in its spinning department for manufacturing E
fabrics. This exemption was partially withdrawn by a latter notification
dated 15.7.1977. The said notification reads as under:-

"Cotton Fabrics [Tariff Item 19]

Notification No. mm-C.E., dated 15.7.1977. F
In exercise of the powers conferred by sub-rule (1) of rule 8 of the
Central Excise Rules, 1944, read with sub-section (3) of Section 3
of the Additional Duties of Excise (Goods of Special Importance)
' Act, 1957_ (58 of 1957), and in supersession of the notification of
the Government of India in the Department of Revenue and G
Banking, No. 135n7 - Central Excises; dated the 18th June, 1977,
the Central Government hereby exempts cotton fabrics, falling
under sub-item I of Item No. 19 of the First Schedule to the Central
y
Excises and Salt Act, 1944 (I of 1944) and specified in column (2)
of the Table hereto annexed (hereafter in this notification referred H
164 SUPREME COURT REPORTS [1995] 3 S.C.R.

A to as the "Table") from so much of the duty of excise leviable
thereon as is in excess of the duty specified in the corresponding
entry in column (3) thereto.

TABLE

B S. No. Description Rate of duty
(1) (2) (3)
1. Cotto11 fabrics in which the average count of fifteen per cent
yam is 41s or more. ad valorem.
2. Cotton fabrics (other than those in which the
c average count of yarn is 4ls or more), -
(i) does not exceed four rupees two per cent
ad valorem.
(ii) exceeds four rupees but does not exceed three per cent
six rupees ad valorem.
D (iii) exceeds six rupees but does not exceed four. per cent
seven rupees ad valorem.
(iv) exceeds seven rupees but does not six per cent
exceed eight rupees ad valorem.
(v) exceeds eight rupees but does not exceed eight per cent
E nine rupees ad va/orem.

(vi) exceeds nine rupees but does not exceed ten per cent
ten rupees ad valorem.
(vii) exceeds ten rupees but does not exceed twelve per cent
F eleven rupees ad valorem.
(viii) exceeds eleven rupees but does not fourteen per cent
exceed twelve rupees ad valorem.
(ix) exceeds twelve rupees fifteen per cent
ad valorem." '
G The excise authorities contended that even though the yam might
have been manufactured in the spinning department of the concerned
composite mill between 18.6.1977 and 14.7.1977 if such yarn was captively
consumed and ultimately resulted into fabric and if such fabric was
removed from the factory gate after 15.7.1977, the captively consumed yam
H out of which such fabric was manufactured must bear the duty of excise as
C.C.E. v. KOHINOOR MILLS [MAJMUDAR, J.] 165
per notification dated 15.7.1977. That stand of the excise authorities was A
based on proviso (1) contained in the notification dated 15.7.1977. The said
proviso reads as under :-.

"Provided further that in cases where cotton fabrics have been
produced in a composite mill or are produced therein and in the
production of such cotton fabrics cellulosic spun yarn falling under B
sub-item III(i) of Item No. 18 of the said First Schedule or Cotton
yarn falling under Item no. 18A(i) of the said First Schedule, or
both, on which no duty of excise was paid prior to the 15th day of
July, 1977, was or is used, the duty payable on such fabrics shall
be· C
(a) at the appropriate rate of duty as specified in this notification
plus

(b) the duty payable on such cellulosic spun yarn or cotton yarn
or both, as the case may be, under the notification of the D
Government of India in the Department of Revenue and
Banking, No. 131/77 • Central Excises, dated the 18th June,
1977.'

A mere. look at the said proviso shows that under the notification dated
15.7.1977 two types of cotton yarns manufacll!red by the composite textile E
mills, were sought to be taxed by way of excise duty-as per Notification No.
13tn7, namely, (1) cotton yarn manufactured prior to 15.7.1977 and
removed for captive consumption and utilised in production of fabrics; and
(2) cotton yirrn already manufactured prior to 15. 7.1977 but removed for
captive consumption from and after 15.7.1977 for manufacturing of fabrics. p
This is clearly discermble from the words 'where cotton fabrics have.been
produced in a composite mill or are produced therein and in the produc-
tion of such cotton fabrics ..... cotton yarn.... on which no duty of excise
was paid prior to the 15th day of July, 1977, was or is used..." The dispute
centres around the cotton yarn in the first category. In Civil Appeals 103
and 104 of 1988, the Tribunal has taken the view following the decisions of G
the Bombay High Court in Sriram Mills Ltd. v. Union of India, (1982)
E.L.T. 457 and the Gujarat High Court inAryod~a Spinning and Weaving
Company Ltd. v. Union of India, (1981) E.L.T. 274, that when cotton yarn
is manufactured prior to 15.7.1977 and is removed for captive consump-
tion and used by the composite textile mill in manufacturing fabric prior H
166 SUPREME COURT REPORTS (1995] 3 S.C.R.

A to that date no excise duty can be charged thereon even if the fabric is
manufactured out of it after 15.7.1977. In Civil Appeal 5408 of 1990 on
the other hand, another Bench of the Tribunal took the view placing
reliance on the decision of this Court in Wallace Flour Mills Company Ltd.
v. Collector of Central F.xcise, (1989) 44 ELT 598 that it is not the date of
B manufacture but the date of clearance of the manufactured commodities
that is relevant for deciding the tax liability and as cotton fabric was
cleared after 15.7.1977, the input of yarn would be liable to be taxed as per
the notification holding the field after 15.7.1977.

We have heard learned counsel for the parties in support of their
C respective cases. In our view the contention canvassed on behalf of the
revenue cannot be accepted. The reasons are obvious. It has to be kept in
view that charge under the Central Excise Act fastened on a manufactured
item once manufacture takes place. But the liability to pay the duty thereon
will have to be decided in the light of the appropriate tariff applicable
at the time when such manufactured commodity is cleared by the
D manufacturer as per the provisions of the Excise Rules. In this connection,
Rule 9(1) of the Central Excise Rules, 1944 becomes relevant. It reads as
under:-

"9. Time and manner of payment of duty.- (1) No excisable goods
shall be removed from any place where they are produced, cured
E
or manufactured or any premises appurtenant thereto, which may
be specified by the Collector in this behalf, whether for consump-
. tion, export or manufacture of any other commodity in or outside
such place, until the excise duty leviable thereon has been paid at
such place and in such manner as is prescribed in these Rules or
F as the Collector may require and except on presentation of an
application in the proper form and on obtaining the permission of
the proper officer on the form."

It, therefore, becomes obvious that the duty becomes payable on a
G manufactured item once it is removed from the place of manufacture for
consumption, export or manufacture of any other commodity in or outside
such place. There is an explanation of sub-rule (2) of Rule 9, which is
relevant for the present purpose. It reads as under :-

"Explanation. - For the purposes of this rule, excisable goods,
H produced, cured or manufactured in any place and consumed or
C.C.E. v. KOHINOOR MILLS [MAJMUDAR, J.] 167
utilised - A
(i) as such or after subjection to any process or processes; or

(ii) for the manufacture of any other commodity;

Whether in a continuous process or otherwise, in such place or B
any premises appurtenant thereto,. specified by the Collector under
sub-rule (1), shall be deemed to have been removed from such
place or premises immediately before such consumption or utilisa-
---- tion. 11

A conjoint reading of Rule 9(1) and Explanation makes it clear that if a c
manufactured item covered by the charge of excise duty by the charging
provisions of the Central Excise Act is captively consumed, it would among
to removal of such manufactured item. Consequently once the yarn is
manufacture in the weaving department of the composite textile mill and
is taken to the spinning department for being captive)y utilised by way of D
consUDj.ption in spinning department, and gets consumed, it is deemed to
have been removed within the meaning of Rule 9(1). Once that happens,
the liability of such manufactured yarn to pay excise duty at the then
prevalent rate of duty is crystalised. Thereafter, the question as to when
subsequently the fabric is manufactured or emerges or is removed from
factory gate becomes irrelewnt for the purpose of .deciding the question E
of liability of excise duty on such captively consumed yarn.

It is not in dispute between the parties that in the present case
captively consumed yarn was manufactured on and from 18'6.1977 and'

-- removed to spinning department and was utilised in the spinning depart- F
ment prior to 15.7.1977. Thus such yarn falls in first category of yarn to
which we have referred to earlier. The liability to pay excise duty on such
yarn, therefore, has to be decided prior to 15.7.1977 in the light of Rule
.- 9(1) read with Explanation and subject to the relevant exemption notifica-
tion then holding the field. Once that happens, it has to be held that as at
the relevant time the earlier Notification No. 132n7 of 18.6.1977 was G
holding the field under which such yarn was wholly exempt from payment
of excise duty, no excise duty was to be paid thereon. The view taken by
the Tribunal, therefore, in Civil Appeals 103 and 104 of 1988 cannot be
found fault with. That was in confirmity with the view taken by the Gujarat
and the Bombay High Courts in the earlier mentioned cases. We concur H
168 SUPREME COURT REPORTS [1995] 3 S.C.R.

A with the same.

The latter view taken by the Tribunal in judgment under appeal in
Civil Appeal 5408 of 1990 seeks to rely on the decision of this Court in
Wallace Flour Mill's case (supra). In that case this Court was not concerned
with the manufacture and utilisation of a commodity by way of captive
B consumption. It was a case dealing with manufacture of food articles by an
assessee company. After their manufacture but before they could be
removed from the factory gate for home consumption, the rate of duty
changed. It was, therefore, held that the said products had to bear the
excise duty in the light of the prevailing tariff rate when such manufactured
C items were removed from the factory gate for home consumption. The said
view was obviously based on operation of Rule 9(1). Explanation to Rule
9(1) was not attracted on the facts of the case. Such is not the present
situation where the manufactured yarn is not removed in its the then
existing condition from the factory gate for home consumption. On the
contrary, it was removed for being utilised for captive consumplion prior
D to 18.7.1977. It is, therefore, not possible to uphold the view taken by the
Tribunal in Civil Appeal 5408 of 1990. At this stage it is also appropriate
to note that the Explanation to Rule 9(1) and Section 49 inserted with
retrospective effect by the mle making authorities were upheld by this
Court in the case of Mis. J.K Cotton Spinning & Weaving Mills Ltd. & Anr.
E v. Union of India & Ors., [1987] Supp. SCC 350. A latter Bench of the
Bombay High Court in the case of Union of India v. Hindustan Spinning &
Weaving Mills Ltd., (1992) 61 E.L.T. 531 at 535, has taken the same view
which has appealed to us. According to us no other view is possible on the
scheme of the relevant provisions of the Act and the Rules. We respectfully
F concur with the view of the Division Bench of the Bombay High Court in
Union of India v. Hindustan Spinning & Weaving Mills' case (supra).

For all these reasons, Civil Appeals 103 and 104 are liable to fail and
are dismissed. Civil Appeal 5408 of 1990 is allowed and it is held that the
yarn manufactured by the appellant composite mills from 18.6.1977 upto
G 14.7.1977 and removed for captive consumption and used as such during
that time in the spining department for manufacture of fabric will not be
liable to bear any excise duty as per the latter notification dated 15.7.1977.

The appellant in Civil Appeal 5408 of 1990 had moved an application
H for refund of the duty paid under protest as demanded by the excise
C.C.E. v. KOHINOOR MILLS [MAJMUDAR, J.] 169
authorities in the light of notification dated 15.7.1977. The question A
whether the appellant is entitled to any refund will have to be re-examined
by the Assistant Collector of Central Excise before whom application was
moved in the present case in the light of Section UB of the Central Excise
Act and the said application will have to be considered on merits in
accordance with law and in the light of the pr~ent judgment after hearing . B
the parties. The orders passed by the Tribunal as well as the Collector,
Central Excise (Appeals) stand quashed and set aside and the application
is remanded to the Assistant Collector for the re-adjudication of the refund
claim of the appellant as aforesaid. Civil Appeal 5408 of 1990 will stand
allowed accordingly. In the facts and circumstances of the case, there will
be no order as to costs. c
T.N.A. Appeals dismissed.