M/S. C.T. COTTON YARN LTD.versusCOMMISSIONER OF CENTRAL EXCISE, INDORE

A                       MIS. C.T. COTTON YARN LTD.
                                      v.
                  COMMISSIONER OF CENTRAL EXCISE, INDORE

                                 SEPTEMBER 22, 2006
B
               [ASHOK BHAN AND P.K. BALASUBRAMANY AN, JJ.]


          Central Excise Tariff Act, 1985-Heading No. 52.02-/00% Export
    oriented unit manufacturing exportable yarn from domestically purchased
    cotton-Cotton waste generated during course of such manufacture earlier
    sold in Domestic Tariff Area without payment of duty-Later Tariff Heading
    52.02 introduced in First Schedule to the Tariff Act covering cotton waste-
    Levy of duty on cotton waste-Validity-Held: Merely because a commodity
    is included in the Schedule, it will not be exigible to duty unless a process
    of manufacture was involved when that product emerges-Dispute whether
    process of manufacture was involved when cotton waste was generated-
    Question if cotton waste dutiable as a manufactured product directed to be
    re-considered by the Tribunal.

          Soft cotton waste was generated during the course of manufacture
    undertaken by Appellant, a 100% Export Oriented Unit, when it manufactured
    yarn for export from cotton purchased from domestic market.

          The question which arose for consideration in the present appeal is
    whether manufacture.was involved when soft cotton waste was produced and
    it being regularly sold in the domestic market indicated that it was a
    marketable commodity and in the circumstances it was exigible to duty as
    held by the Commissioner and the Appellate Tribunal.

          Partly allowing the appeals, the Court

           HELD: I.I. It is clear that the product involved herein is not a left over
    after the end product is manufactured. Here the cotton waste is generated
    during the process of manufacture of yarn. In other words, when cotton
    purchased in the domestic market is used for manufacture or yarn, by
    initiating the process of manufacture, at an intermediate stage, the so called

                                          498
    CT. COTION YARN LTD." COMMNR. OF CENTRAL EXCISE, INOORE (P.K. BALASUBRAMANYAN: J.]   499

cotton waste is produced, which is a marketable commodity and which is A
regularly marketed. Therefore, one of the twin tests, namely, that the
commodity which is produced is marketable and is regularly marketed as a
product, is satisfied. It is by now established that merely because a commodity
is included in the schedule, it will not be exigible to duty unless a process of
manufacture is involved when that product emerges. Here, heading 52.02 has B
been brought in the Schedule by the Finance Act, 1995. Though it is shown
as an item bearing nil duty, since the appellant is a 100 per cent export oriented
manufacturing entity itwill be liable to duty as provided in the proviso to
Section 3(1) of the Tariff Act. Therefore, the question involved is whether a
process of manufacture is involved when the cotton waste is generated during
the process of converting domestically purchased cotton into exportable yarn C
manufactured by the appellant. (503-A-G(

        1.2. The question whether cotton waste is dutiable as a manufactured
product requires to be reconsidered by the Tribunal. The argument that it
was only after the process of manufacture has started that the product has
come into existence and it has marketability and hence, it is dutiable and the D
counter argument that it was only impure cotton which has got separated from
the cotton purchased from the open market so as to enable the appellant to
manufacture the yarn intended for export and this product produced at the
intermediate stage still remains cotton and it is not manufactured product
have both to be considered in the light of the decided cases. In this situation, E
it is appropriate to set aside the order. of the Tribunal and remand the appeals
filed by the appellant to the Tribunal for a fresh decision. (504-E-G(

      State of Maharashira v. Pulgaon Cotton Mills Ltd, (1995) 77 ELT 790
SC; State ofGujarat v. Raipur Manufacturing Company Ltd, (1967) 19 STC
1 SC; Re; J.G. Glass Industries, (1998) 97 E.L.T. and Shyam Oil Cake Ltd. v.                   F
Collector ofCentral Excise, Jaipur, (2004 (174) ELT 145 (SC)), referred to.

        CIVIL APPELLATE JURISDICTION: CivilAppeal Nos. 6451-6452 of
2000.                                          .

      From the Final Order No. 227-22812000-D dated 19. 7.2000 of the Customs,                 G
Excise and Gold (Control) Appellate Tribunal, New Delhi (Bench-D) in Appeal
Nos. E'.11715-1716/97-D.

     Ravinder Narain, Sonu Bhatnagar, Ajay Aggarwal, Amrita Bhinder and
Rajan Narain for the Appellant.                                         H
      500                     SUPREME COURT REPORTS (2006] SUPP. 6 S.C.R.

 A        Rajeev Dutta, K. Swami. MF. Humayunisa and P. Parmeswaran for the
     Respondent.

             The Judgment of the Court was delivered by

            P.K. BALASUBRAMANYAN, J. I.The appellant challenges the decision
B of the Customs, Excise and Gold (Control) Appellate Tribunal, New Delhi in
     A. No. E/1715-1716/97-D dated 19.07.2000. By the said order the Tribunal
     substantially dismissed the appeals filed by the appellant, but reduced the
     penalty imposed on the appellant by the Original Authority.

C            2. According to the appellant, it is a I00% export oriented unit engaged
      in the manufacture and export of cotton yam. It purchases cotton from the
     domestic market for the manufacture of yam. After the cotton is purchased
     it is subjected to carding and combing and only thereafter it is spun into yam.
     According to the appellant, carding involves opening and separating out of
     fibres together with effective cleaning and combing is a process by which
D    impurities and undesired short fibres are removed. During carding and combing,
     the fibre and noils can be separated and they are collected in one place by
     suction. This. <.ccording to the appellant, is a waste generated at the preparatory
     stage and it is cotton waste. It is impure cotton fibre.

E        3. Earlier, the appellant was paying duty on this cotton waste before
  clearing it and selling it in the Domestic Tariff Area. On finding that certain
  similar other manufacturers were not paying duty on the waste cotton thus
  generated and disposed of in the Domestic Tariff Area, the appellant sought
  clarification from the Collector of Central Excise and Customs, Indore taking
  up the position that cotton waste was not dutiable. On 9.9.1993, the appellant
F was informed that soft cotton waste arising out of indigenous material would
  not attract excise duty. The appellant started clearing and selling the waste
  cotton without payment of duty. On 16.09.1993, the Department wrote a letter
  to the appellant to explain under what circumstances the appellant was clearing
  the soft cotton waste and selling it in the Domestic Tariff Area without
  payment of duty. It is the case of the appellant that based on the clarification
G as above, it filed a fresh clarification list dated 17.9.1993 declaring soft cotton
  waste as non-excisable item and it continued clearing the same without payment
  of duty and selling it in the D9mestic Tariff Area. On receipt of the
  communication dated 16.09.1993 from the Department, the appellant took up
  the position that soft cotton waste was not liable to duty since it was only
H cotton waste removed from the cotton domestically purchased so as to enable
     C.T. COTTON YARN LTD."· COMMNR OF CENTRAL EXCISE. INOORE [P.K. BALASUBRAMANYAN. J.]   50)

the appellant to make the yarn for the purpose of export.                                        A
       4. On 163.1995, Finance Bill 1995 was introduced. In the First schedule
to the Central Excise Tariff Act, 1985, a heading 52.02 was introduced covering
cotton waste. The said Bill after having been passed, received the assent of
the President of India on 26.5.1995 and thus became the Finance Act, 1995.
On 4.12.1995 the Department issued a notice to the appellant to show cause B
why duty on the quantity of soft cotton waste cleared by the appellant and
sold in the Domestic Tariff Area during the period from 1.5. I995 to 31. 7.1995,
be not imposed in terms of the proviso to Section 3(1) of the Act read with
the concerned notification. Yet another notice was issued by the Department
dated 22. 7.1996 covering the period prior to the one covered by the earlier C
notice, the period from 16.3.1995 to 30.4.1995. The Department sought to
invoke the extended period of limitation available under Section I IA of the
Act. The appellant filed objections to the notices. In reply to the first notice
it was put forward that soft cotton waste was not exigible to duty and that
in any event, the demand for the period from 1.5.1995 to 3.6.1995 was barred
by limitation, the demand having been made six months after the expiry of the D
said period. As regards the notice dated 22. 7.1996, the appellant, in addition
to the contention that no excise duty was leviable on soft cotton waste which
it had disposed of in the DomesticTariff Area, contended that the Department
was not entitled to the extended period of limitation under the proviso to
Section l IA of the Act since there was no suppression of any relevant fact E
on the part of the appellant and the Department was well aware all along that
the appellant was removing soft cotton waste and disposing it of in the
Domestic Tariff Area without paying duty.

      5. On 5.5.1997, the Commissioner of Central Excise, Indore, rejected the
contentions of the appellant. He confirmed the demand under the first notiCe, F
of Rs.15,02,211.l 8 towards duty. He also imposed a penalty of Rs.5 lakhs on
the appellant. As regards the second notice, the Commissioner found that the
Department was entitled to the benefit of the extended period under Section
II A of the Act and con finned the demand under notice dated 22. 7.1996 of
Rs.7,21,739.63 and also imposed a fine of Rs.2.5 lakhs on the appellant.       G

      6. The appellant filed appeals before the Appellate Tribunal. The appellate
Tribunal impos_ed a condition that the. appellant should deposit Rs.8 lakhs
towards the duty and Rs. I lakh towards the penalty before the appeals could
be heard. According to the appellant the said sum was deposited on 31.10.1997.
                                                                                                 H
    502                    SUPREME COURT REPORTS [2006] SUPP. 6 S.C.R.

A Before the Appellate Tribunal, the appellant contended that no manufacture
  was involved while soft cotton waste was being produced from the cotton
  that was being cleaned for the purpose of making yarn for being exported and
  since there was no manufacture involved, no duty was leviable on soft cotton
  waste sold in the Domestic Tariff Area. It was also submitted that merely
B because the Finance Act has introduced an entry under Heading 52.02 in the
  first schedule to the Central Tariff Act covering cotton waste, it would not
  automatically mean that duty was leviable on the same. Any way, the
  amendment applied only to the period subsequent to the Finance Act 1995
  and not before. It was also reiterated that the claim of the Department for
  extended period of Iimitation was unsustainable on the facts and in the
C circumstances of the case and that in any event the penalty imposed was
  unjustified. The Appellate Tribunal rejected the claim of the appellant mainly
  based on the admission of the representative of the appellant that after the
   1995 Finance Act, soft cotton waste had become exigible to duty and further
  taking the view that since it has been specified in the first schedule to the
  Tariff Act as a dutiable item, the duty was payable at 50% of the rate of
D customs duty considering the fact that the appellant was I00% export oriented.
  It took the view that the Finance Act had come into force from the date of
  the Finance Bill. But the Tribunal, in the circumstances, reduced the penalty
  imposed by the Commissioner and reduced it to Rs.2.5 lakhs from Rs.5 lakhs
  in respect of the period covered by the notice dated 4.12.1995 and to Rs.1.25
E lakhs from Rs.2.5 lakhs in respect of the period covered by the notice dated
  22.7.1996.

         7. Learned counsel for the appellant submitted that soft cotton waste
  is not manufactured by the appellant but that it was only impure cotton
  separated from the cotton purchased from the domestic market for the
F manufacture of yarn intended solely for export. Counsel submitted that cotton
  waste thus generated itself and in the absence of any process of manufacture
  being involved, the mere fact that such cotton waste produced is sold regularly
  in the Domestic Tariff Area, would not make the same exigible to excise duty.
  He further contended that Heading 52.02 covering 'cotton waste' was
G introduced only by the Finance Act 1995 enacted on 26.5.1995 and it did not
  have effect from the date of introduction of the Finance Bill. He referred to
  Section 3, the charging section and emphasised that "it must be actually
  produced or manufactured before excise duty could be imposed". He also
  submitted that the Department was not entitled to have the benefit of the
  extended period of limitation and the demand covered by the notice dated
H
           C.T. COITON YARN LTO.'· COMMNR. OF CENTRAL EXCISE. INOORE [P.K. BALASUBRAMANYAN. J.J   503

       22.7.1996 was clearly barred and the demand covered by the notice dated A
       4.12.1995 was also barred insofar as it related to the claim for the period from
       1.5: 1995 to 3.6.1995. Counsel for the Department controverted these
       submissions and submitted that soft cotton waste was generated during the
...    course of manufacture undertaken by the appellant when it manufactured
      yarn for export from cotton purchased from domestic market and this
       intermediate process cannot be.separated and dealt with separately. He pointed B
      out that in view of the declaration made in that behalf the amendment had
      been effective from the date of the Finance. Bill. He also contended that
      manufacture was involved when soft cotton waste was produced and it was
       being regularly sold in the domestic market indicating that it was a marketable
      commodity and in the circumstances it was exigible to duty as rightly held c
      by the Commissioner and the Appellate Tribunal. He also submitted that on
      the facts and in the circumstances of the case there was suppression of
      relevant material and information by the appellant and the Tribunal was
      justified in holding that the Department was entitled to the extended period
      of limitation available under Section 11 A of the Act. Counsel, therefore, urged
      that no interference was called for with the decision of the Tribunal.            D

              8. It is clear that the product involved herein is not a left over after the
        end product is manufactured. Here the cotton waste is generated during the
        process of manufacture of yarn. In other words, when cotton purchased in
        the domestic market is used for manufacture of yarn, by initiating the process E
        of manufacture, at an intermediate stage, the so called cotton waste is produced,
      . which is.a marketable commodity and which is regularly marketed. Therefore,
        one of the twin tests, namely, that the commodity which is produced is
        marketable and is regularly marketed as a product, is satisfied. It is by now
       established that merely because a commodity is included in the schedule, it
       will not be exigible to duty unless a process of manufacture is involved when F
       that product• emerges. Here, heading 52.02 has been brought in in the Schedule
       by the Finance Act, 1995. Though it is shown as an item bearing nil duty,
       since the appellant is a I00 per cent export oriented manufacturing entity it
       will be liable to duty as provided in the proviso to Section 3(1) of the Tariff
       Act. Therefore, the question involved is whether a process of manufacture
                                                                                           G
       is involved when the cotton waste is generated during the process of
 •.    converting domestically purchased cotton into exportable yarn manufactured
       by the appellant.

           9. In State of Maharashtra v. Pu/gaon Cotton Mills Ltd, ( 1995) 77 ELT
      790 SC This Court held that where a subsidiary product is turned out regularly H
    504                     SUPREME COURT REPORTS [2006) SUPP. 6 S.C.R.

A and continuously in the course of manufacturing business and is also sold
    regularly from time to time. there may be attributed an intention to the
    manufacturer to manufacture and sell not merely the main item but also the
    subsidiary products. This Court relied on an earlier decision in State of
    Gujarat v. Raipur Manufacturing Company limited, ( 1967) 19 STC I (SC) in
B   support of the position that manufacture was involved in that situation.
    Cotton waste generated was hence held to be by a process of manufacture.
    For the appellant it is submitted that the manufacture of a product may
    involve several processes and various changes in the raw material at different
    stages. Manufacture would occur at the point where the changes take the
    product to a point that commercially, it cannot be regarded as the original
C   commodity, but, instead, recognised as a new distinct article. The decision of
    this Court in JG. Glass Industries, (1998) 97 E.L.T. 5 is relied on in support.

         I0. The scope of the expanded definition of manufacture has been
  considered in the decision in Shyam Oil Cake ltd. v. Collector of Central
  Excise, Jaipur, (2004) (174) E.L.T. 145 (SC). The appellate authority has
D essentially proceeded on the amendment to the schedule and inclusion of
  cotton waste therein and the admission of the representative of the appellant
  that subsequent to the inclusion in the schedule, cotton waste is taxable. It
  appears to us that the question whether cotton waste is dutiable as a
  manufactured product requires to be reconsidered by the Tribunal in the light
E of the various decisions of this Court brought to our notice and which may
  hereafter be brought to the notice of the Tribunal. The argument that it was
  only after the process of manufacture has started that the product has come
  into existence and it has marketability and hence, it is dutiable and the counter
  argument that it was only impure cotton which has got separated from the
  cotton purchased from the open market so as to enable the appellant to
F manufacture the yarn intended for export and this product produced at the
  intermediate stage still remains cotton and it is not a manufactured product,
  have both to be considered in the light of the decided cases. In this situation,
  we think it appropriate to set aside the order of the Tribunal and remand the
  appeals filed by the appellant to the Tribunal for a fresh decision. We think
G that this aspect needs to be reconsidered by the Tribunal afresh and a fresh
  decision taken. We, therefore, set aside the order of the Tribunal on this
  aspect and direct the Tribunal to decide the appeals afresh based on the
  finding to be rendered on this question. All contentions including whether
  the department could invoke the extended period of limitation are left open.

H
    C.T. COTTON YARN LTD . .: COMMNR. OF CENTRAL EXCISE, JN DORE [P.K BALASUBRAMANY AN, J.]   505

      11. Thus, the appeals are allowed in part, the orders of the Tribunal are A
set aside and the appeals filed by the appellant before the Tribunal are
remanded for a decision afresh on the question referred to above. The parties
are directed to bear their respective costs.

B.B.B.                                                            Appeals partly allowed.