Holding

The benefit of Notification No. 8/97‑CE is available only when the end product is wholly manufactured from raw material produced in India; imported inputs classified as consumables cannot be counted as raw material.

Summary

The case concerned Vanasthali Textiles Industries Ltd., a 100% Export Oriented Undertaking, which claimed a partial excise duty exemption under Notification No. 8/97‑CE for products manufactured using imported carboxymethyl cellulose (a sizing material) and imported indigo dye. The central issue was whether these imported inputs should be treated as "raw material" or as "consumable" for the purpose of the Notification, which requires the end product to be wholly manufactured from raw material produced in India. The Supreme Court held that "consumable" is a distinct concept from "raw material" and that the Notification’s benefit is available only when the product is wholly made from Indian‑produced raw material; the imported items could not be counted as raw material. The Court also observed that the dominant‑ingredient test and cost‑variation considerations were not applied by the CEGAT and remitted the matter to that tribunal for further examination. Consequently, the appeals were allowed without any order as to costs.

Issues considered

Whether imported carboxymethyl cellulose used as a sizing material qualifies as "raw material" or "consumable" under Notification No. 8/97‑CE for a 100% EOU.
Whether imported indigo dye used in denim fabric is to be treated as a raw material for the purpose of the Notification.
Whether the condition that the end product be "wholly" manufactured from raw material produced in India is satisfied in the present facts.
Whether the dominant‑ingredient test or cost‑variation analysis should be applied in determining eligibility for exemption.

Legislation cited

Central Excise Act, 1944s. 11-A(1), s. 11-AC
Central Excise Rules, 1944s. Rule 173-Q, s. Rule 209, s. Rule 9(2)

Subjects

Excise dutyNotification 8/97-CEExport Oriented UndertakingRaw materialConsumablePartial exemptionDominant ingredient testIndigo dyeCarboxymethyl celluloseWholly manufacturedCentral Excise Act

Judgment

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A MIS VANASTHALI TEXTILES INDUSTRIES LTD.
V.
COMMISSIONER OF CENTRAL EXCISE, JAIPUR,
RAJAS THAN

B
OCTOBER 26, 2007

[DR.ARIJITPASAYAT AND S.H. KAPADIA,JJ.)

Excise duty-Exemption under Notification No. 8197-CE-
C Entitlement of-100 % EOU using imported sizing material in
manufacture of terry towels-Another I 00% EOU using imported
'Indigo pure' in manuft1cture ofdenim fabric-First company's case
that imported sizing material not raw material but consumable and
other company's case that Denim fabric wholly producedfrom cotton
D yarn and Indigo pure not raw material, thus entitled to exemption under
Notification-Held: Benefit ofNotffication is available when products
are manufactured by I 00% EOU wholly from raw material produced
and sold in lndia-Onfacts, dominant ingredient test in regard to cost
variation not applied-Thus, matter remitted to CEGAT to consider
E the same and also whether the items are 'consumable '-Notification
No. 8197-CE-Central Excise and Salt Act, I 944.
Words and Phrases: 'Consumables' and 'raw materials'-
Meaning of
F In the present batch of appeals, appellant-company is 100% }.-
Export Oriented Undertaking-'EOU'. In terms of Notification No.8/
97-CE dated 1.3.1997, goods sold in Domestic Tariff Arca by a
100% EOU were partially exempted from payment of Central Excise
Duty provided the goods were manufactured by 100% EOU wholly
G from raw material produced or manufactured in India.
Appellant-company in first batch ofappeals procured the raw -1
materials from domestic manufacturers in India and also imported
Carboxymcthyle Cellulose which is used for sizing of single yarn to
710
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VANASTHALI TEXTILES INDUSTRIES LTD. v. 711
COMMNR. OF CENTRAL EXCISE, JAIPUR, RAJASTHAN
r
give strength to the yarn during weaving after which the woven A
towels are washed to remove completely the sizing materials and
Ultra fresh N.M. which is used for anti bacteria and anti fungus
treatment of terry towels. Appellant-company claimed the benefit
of the Notification. It was appellant's case that the sizing material
imported is not raw material but is classified as consumable under B
,k EXIM Policy, which participates in or is required for manufacturing
process but does not form part of the end product; that the sizing
j
material is washed away afte.r weaving and as such it does not form
part of the end product at all which is dyed towel or its waste and
scrap; and that the Board's Circular No. 389/22/98-CX dated c
5.5.1998 clarified that the benefit of the Notification would also be
available even ifimported consumables are used in the manufacture
by 100% EOU. The Department relying upon the decision in CCE,
ln<for<r v. Century Denim, EOU and CCE v. Ballarpur Industries Ltd.
contended that the benefit of Notification was not available as 100% D
EOU had used the imported articles. Commissioner (Appeals)
)' confirmed the demand of duty on the ground that the sizing material
was imported by the company and is raw material, thus, the benefit
of Notification was not available. Appellant-company challenged the
order. CEGAT granted stay of the recovery of duty and disposed of E
the appeals filed by the appellant-company.
The appellant-company in other batch of appeals is engaged in
the manufacture of cotton yarn and Denim fabric. They are using
Indigo pure in manufacture of Denim Fabric which is an imported F
-). raw material. The Commissioner, Central Excise and Customs issued
notice to the appellant-company to show cause as to why benefit of
the Notification be not denied as they are using imported 'Indigo
pure' in the manufacture of Denim fabric. The Commissioner holding
that the 'Indigo pure' cannot be termed as raw material for G
production of Denim fabrics, dropped the show cause notice. In
appeal, CEGAT held that use oflndigo pure was a raw material in
t the manufacture of denim fibre. High Court relying on the decision
in Ballarpur 's case, upheld the order of CEGAT. It held that the
finished product is not wholly from basic raw material i.e. cotton but H
712 SUPREME COURT REPORTS [2007] 11 S.C.R.

A it has to be treated that the dye is also a raw material which is
imported. .,
Hence the present batch of appeals.
Allowing the appeals, the Court
B
HELD: 1.1. 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"
C therein refers only to material which is utilize<:J 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".
D [Para 20] [720-:~' C]
Deputy Commissioner of Sales Tax (Law), Board of Revenue
(Taxes), Ernakulam v. M/s Thomas Stephen & Co. Ltd, Qui/on, [1988]
2 SCC 264 and Coastal Chemicals Ltd v. Commercial Tax Officer,
A.P. and Ors., [1999] 8 SCC 465, referred to.
E
1.2. The expression "raw material" is not a defined term. The
meaning has to be given in the ordinary well accepted con~otation
in the common parlance of those who deal with the matter.
[Para 13] [717-E]
·,1
F 11 ' ' ., .,

1.3. The conditions for getting the benefit of the NotificatiOn is
I J 1 )
that the end products should be wholly manufactured from tlie raw
material produced and sold in India. The dominant ing~e<i'ieri'ftest
YI ,n.--i ·

has not been applied in the instant case; so also the effect of value
G addition. The Notification does not ~?ke distinction on a~~o~~t of
value. Stress is on the word 'wholly'. Since the reliance on dominant
ingredient test in regard to cost variation has not been considered
by CEGAT though the same has relevance, the matter is remitted
to CEGAT to consider those aspects. It shall also consider whether
the items can be considered as "consumable" on the facts of the case.
H [Paras 15, 16, 17 and 19] [718-G, H; 719-A, C, G; 720-A]
I
;
J VAN AS THALi TEXTILES INDUSTRIES LTD. v. COMMNR.' 713
OFCENTRALEXCISE,JAIPUR,RAJASTHAN [PASAYAT,J.]
CCE. Indore v. Century Denim, EOU (2001) (129) ELT 657 and A
CCEv. Ballarpur Industries Ltd., (1989) 4 SCC 566, referred to.

Chemical Technology of Fibrous Materials'·' by F Sadov, M
Korchagin & A Mate/sky, referred to.
CIVIL APPELLATE JURISDICTION: Civil Appel Nos. 2611- B
>--- 2612of2003.
From the Judgment and Final Order No. 21-22/03-D dated
15.1.2003 of the Customs Excise & Gold (Control) Appellate TribJnal,
New Delhi in Appeal Nos. E/2845/02-D & E/2018/02-D.
c
WITH
Civil Appeal Nos. 5000-5002 of2007.
K.K. Venugopal, R.G. Padia, S.K. Gambhir, Dr. AM. Singhvi, R.
Krishnan, S. Narayanan, M.K.D. Namboodiri, Rajiv Kapur, Shl:lbra D
y Kapoor, Arti Singh, Sanjay Kapur, Alok Yadav, M. P. Devanath, Rajesh
Kumar, Naveen Prakash, Rahul Kaushik, B. Krishna Prasad and Amit
Bhandari appearing parties.
The Judgment of the Court was delivered by
E
DR. ARIJIT PASAYAT, J. I. Leave granted in SLP {C) Nos.
9698/2005 and 8595-8596/2005.
2. Challenge in these appeals is to the judgment of the Customs,
Excise and Gold (Control) Appellate Tribunal, New Delhi (in short
'CEGAT') disposing of appeals filed by the appellant-company. Chall~nge F
before the CEGA T was to the order passed by the Commissioner
(Appeals). CEGAT granted stay of the recovery of duty, and took up
the appeals for disposal of merits. The appellant-company had challenged
the order passed by the Commissioner of Central Excise (Appeals) Jaipur.
G
3. Background facts in a nutshell are as follows:

Appellant-company is I00% exp011 oriented undertaking (in sqort
'EOU') who claimed partial exemption from duty in terms ofNotification
N0.8/97-CE dated 1.3.1997 in respect of goods sold in Domestic Tariff
H
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SUPREME COURT REPORTS [2007] 11 S.C.R. '
714
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A Area (in short 'OTA'), which stipulated conditions that the goods have
been manufactured wholly from the raw materials produced or
manufactured in India. According to the company it procured the raw
materials from domestic manufacturers in India and also imported ( 1)
Carboxymethyle Cellulose which is used for sizing of single yam to give
B strength to the yam during weaving after which the woven towels are
washed to remove completely the sizing materials and (2) Ultra fresh N.M.
~
which is used for anti bacteria and anti fungus treatment of terry towels.
The Commissioner (Appeals) had confirmed the demand of duty on the ....
' ,_
ground that the sizing materials imported by the company is raw material
and as imported raw material has been used, the benefit of Notification
c No.8/97-CE is not available.
4. According to learned counsel for the appellant the sizing material
imported is not raw material but is a consumable as per definition given
in para 3.13 of the EXIM Policy. According to the definition of
D 'Consumable', it means any item which participates in or is required for
manufacturing process but does not form part of the end product. Items y
which are substantially or totally consumed during manufacturing process
will be deemed to be consumable. It was submitted that the sizing material
is washed away after weaving and as such it does not form part of the
E end product at all which is dyed towel or its waste and scrap. According
to para 3.41 of the Policy, raw material means basic materials which are
needed for the manufacture of goods but which are still in a raw nature,
unrefined or un-manufactured stage. Reliance was placed on the Board's
Circular No.389/22/98-CX dated 5.5.1998 wherein it has been clarified
F that the benefit of the Notification would also be available even if imported ~
consumables are used in the manufacture by 100% EOU. The sizing
material answers the definition of'consun1able' given in the EXIM Policy
and, therefore, benefit of the Notification cannot be denied to the appellant.
5. Reliance was placed by the Department upon the decision in
G CCE, Indore v. CenlWJ' Denim, EOU (2001) 129 EL T 657 wherein
the Tribunal relying upon the decision ofthis Court in the case of CCE v. -t
Ballarpur Industries Ltd., [1989] 4 SCC 566 held that the benefit of
Notification 8/97 is not available as 100% EOU has used the imported
indigo pure dye and other aiticles. Tribunal dismissed the appeals and
H
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VANASTHALI TEXTILES INDUSTRIES LTD. v. COMMNR. 715
"t OFCENTRALEXCISE,JAIPUR,RAJASTHAN[PASAYAT,J.]
upheld the views of the departmental authorities. After considering the rival A
submissions, CEGA T came to hold that the appellant-company is using
Carboxymethyle Cellulose which is a sizing material in the manufacture
of finished products, which are finally cleared in the DT A. The sizing
material is undisputedly imported by it. The benefit of Notification No.8/
97 is available only ifthe products brought only from the raw materials B
produced or manufactured. The Board's Circular dated 5.5 .1998 has
j clarified that 100% EOU is available for the benefit of the said Notification
even if the imported consumables are used since the Notification dot::s
not bar the use of imported consumables. Reliance was placed in
Ballarpur 's case (supra) to conclude that the benefits of Notification were c
not available. It was also noted that in the case of Centwy Denim's EOU
case (supra) the view taken was affirmed by this Court in Century
Denim's case (supra). Accordingly, the appeals were dismissed. It is the
assessee's stand in these appeals that the Tribunal had not correctly applied
the decision in BallaTpur 's case (supra) inasmuch as this Court clearly D
observed that the said decision was in the facts and circumstances of that
matter and no general proposition of law was being laid down. In that
case this Court was concerned with Sodium Sulphate which was burnt
up in the process of manufacture and other chemical reaction. Additionally, '
in Ballarpur's case (supra) the manufacturer was not 100% EOU ;E
importing any material unlike the present appellant company which is 100%
EOU in1po1ting material classified under the EXIM Policy as consumable.
6. Stand of the Department-respondent was that imported sizing
material was used by the assessee in the manufacture of impugned product
and the process of sizing is essential process during the course of F
manufacture of ten-y towel because it increased the strength of the yam
and the fibre and thus improves the weaving of the yam. Therefore, the
sizing material is an essential ingredient for weaving of terry towel. Reliance
was placed on the decision of this Court in Ballarpur 's case (supra) to
contend that one of the valid tests to detem1ine whether the ingredient G
qualifies to be called raw material could be that ingredient should be so
essential for the chemical processes culminating in the emergence of the
desired end product.
7. Learned cotmsel for the parties re-iterated the stand taken before
H
716 SUPREME COURT REPORTS [2007] 11 S.C.R.

A theCEGAT.
--'
8. In the com1ected matter i.e. SLP (C) No.9698/2005 challenge is
to the order passed by a learned Single Judge of the Madhya Pradesh
High Court, Indore Bench. Factual position in that case is as follows:
B 9. The appellant-Company is a duly incorporated company. It is a
100% export oriented unit situated in the industrial backward district of
Khargone for manufacture of cotton yam and/or blended yam. Appellant-
Company is engaged in the manufacture of cotton yam and Denim fabric,
which is made out of the cotton yarn produced by the appellant. The
c Denim cloth being so manufactured is thus a variety of textile product.
The Denim so manufactured is of two varieties, namely, coloured Denim
and gray Denim. As per appellant's case under Chapter 52 of the Central
Excise Tariff Act, J985 which deals with cotton, the Denim fabrics
produced by the appellant is covered by sub-heading 52.07 of the Tariff.
D Vide Notification No.8/97 dated 1.3.1997, the Government oflndia has
permitted payment of Central Excise duty at the same rate at which goods
produced by an EOU, provided the goods are manufactured by a 100%
EOU wholly from raw material produced or manufactured in India. It is
further submitted in the appeal that the appellant's product Denim fabrics
E is wholly produced from cotton yam and the Company is availing the
benefit of the aforesaid Notification since 1977.
10. The Commissioner of Central Excise & Customs, Indore issued
a notice dated 3.2.1998, to the appellant-Company to show cau~e ~hy
benefit of this Notification be not denied, as they are using 'Indig9 p~e'
F in the manufacture of Denim fabrics, which is an imported raw mate[i.~l
and also for the recovery ofRs.1,97,11,939/- being short duty paid on
Denim fabric cleared in DTS Sales during the period 1.4.97 to 3·0.1.98
under Rule 9(2) of the Central Excise Rules, 1944 (in short the 'Rules')
read with proviso to section 11-A(l) of the Central Excise Act, 1944 (in
G short the 'Act') and also for imposing penalty under section 11-AC of
the Act and Rules 173-Q and 209 of the Rules and also for recovery of i
interest on the duty short paid and with other directions about the
confiscation of the land, building, plant and machinery, materials or any
other things under Rule 173-Q(2) and Rule 209(2) of the Rules.
H
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I VAN AS THALi TEXTILES INDUSTRIES LTD. v. COMMNR. 717
OFCENTRALEXCISE,JAIPUR,RAJASTHAN[PASAYAT,J.]
11. On 5.6.1998 the appellant filed reply to the aforesaid show cause A
notice and, thereafter after hearing the learned counsel for the parties the
Commissioner, Central Excise and Customs, Indore by order dated
23.6.1999 held that since the raw material has not been ciefined specifically
and also nothing has been brought on record to establish that imported
'Indigo pure' is a raw material known in common trade parlance therefore, B
the 'Indigo pure' cannot be termed as raw material for production of
Denim fabrics and dropped the show cause notice against which the
Revenue filed a joint appeal before the CEGAT.
12. The CEGAT allowed the appeal filed by the Revenue by ord~r
dated 30.1.2001 and set aside the order passed by the Commissioner C
on 26.3 .1999 and considered the case in the light of finished product and
has held that 'Indigo pure' which has gone into the production of the
finished product is thus the raw material and remanded the case to considet
the points oflimitation and the quantum of duty, as these points were not
considered as the entire proceedings were dropped, against which the D
appellant-Company has filed the writ petition challenging the aforesaid.
order of the CEGAT. The dispute relates to a question whether Indigo
Pure dye can be treated as a raw material. Relying on the decision in .
Ballarpur 's case (supra) the order passed by the CEGAT was upheld.
In that case also the question was relating to the Notification as referred E
to above.
13. The expression "raw material" is not a defined term. The meaning
has to be given in the ordinary well accepted connotation in the common
parlance of those who deal with the matter. In Ballarpur 's case (supra) F
it was inter alia observed as follows:
"14. The ingredients used in the chemical technology of manufacture
of any end product might comprise, amongst others, of those which
may retain their dominant individual identity and character · .
throughout the process and also in the end product; those which, G
as a result of interaction with other chemicals or ingredients might
themselves undergo chemical or qualitative changes and in such
altered fonn find themselves in the end product; those which, like
catalytic agents, while influencing and accelerating the chemical
reactions, however, may themselves remain uninfluenced and H
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718 SUPREME COURT REPORTS [2007] 11 S.C.R.
...,,
A unaltered and remain independent of and outside the end products
and those, as here, which might be burnt up or consumed in the
chemical reactions. The question in the present case is whether the
ingredients of the last mentioned class qualify themselves as and
are eligible to be called "raw material" for the end product. One
B of the valid tests, in our opinion, could be that the ingredient should
be so essential from the chemical processes culminating in the
.,..4..
emergence of the desired end product, that having regard to its
....._
importance in and indispensability for the process, it could be said ,_
that its very consun1ption on burning up is its quality and value as
c raw material. In such a case, the relevant test is not its absence in
the end product, but the dependence of the end product for its
essential presence at the delivery end of the process. The ingredient
goes into the making of the end product in the sense that without
its absence the presence of the end product, as such, is rendered
hnpossible. This quality should coalesce with the requirement that
D
its utilization is in the manufacturing process as distinct from the
manufacturing apparatus."
14. CEGAT had held in that case that the use oflndigo dye is a
raw material in the manufacture of denim fibre. According to the High
E Court also the question was whether the use of small quantity of imported
dye .in bringing the end product into existence, even in that case it can be
treated that the finished product has come into existence wholly from
cotton. It was held that for the manufacture of denim the basic raw material
and the finished product cannot be treated as wholly produced or
F manufactured from cotton. Therefore, placing reliance on Balla1pur 's case );--
(supra) it was held that the finished product is not wholly from basic raw
material i.e. cotton but it has to be treated that the dye is also a raw
material which is imported.
15. It is to be noted that cost of dye varied between 2 and 2.5% of
G the total production cost. The denim is manufactured from cotton and not
, from indigo. The conditions for getting the benefit of the Notification is i;
that the end products should be wholly manufactured from the raw material
produced and sold in India.

H 16. It is to be noted that dominant ingredient test has not been
VAN AS THALi TEXTILES INDUSTRIES LTD. v. COMMNR. 719
OFCENTRALEXCISE,JAIPUR,RAJASTHAN [PASAYAT,J.]
applied in the instant case; so also the effect of value addition. In A
Ballarpur 's case (supra) it was held in para 19 as follows:
"We are afraid, in the infinite variety of ways in which these
problems present themselves it is neither necessary nor wise to
enunciate principles of any general validity intended to cover all
cases. The matter must rest upon the facts of each case. Though B
in many cases it might be difficult to draw a line of demarcation, it
is easy to discern on which side of the borderline a particular case
,.
falls."
17. It is true that the Notification does not make distinction on c 1

account of value. Stress is on the word 'wholly'. In the Circular dated
5.5.1998 it is stated as follows:
"xx xx xx xx
3(b) In respect of situation (ii) a Unit is eligible for the benefit of D
Notification 8/97-CX ibid, even if imported consumables are used
since the Notification does not debar the use of imported
consumables, provided other conditions of the said Notification are
satisfied."
18. In Chemical Technology of Fibrous Materials" by F. Sadov, M E
Korchagin & A Matelsky it has been stated as follows:
"In industry, textile fonning (fibrous) items used for manufacturing
(Main activity) a textile product are referred as raw material, e.g.
cotton, viscose, wool, silk, nylon, polyster, etc. or their blends in F
different compositions. Whereas, (non fibrous) items used for
chemical processing of textile product (Ancillary activity) are
referred as consumables e.g. starches, vruiety of chemicals, several
colowing matters such as dyes and pigments etc. Power ru1d water
are other consumable items in addition to fuel oil, lubricating agents G
and packing materials. It is a common practice in Textile industty
and trade to identify at1d categorise raw material and consumables
on such basis".

19. Since the reliance on dominant ingredient test in regard to cost
H
720 SUPREME COURT REPORTS [2007] 11 S.C.R.

A variation has not been considered by CEGAT though the same has
relevance, the matter is remitted to the CEGAT to consider those aspects.
It shall also consider whether the items can be considered as "consumable"
on the facts of the case.
20. Dealing with a case under a Sales Tax statues, i.e. Andhra
8 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
C 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". Reference in this connection
can be made to the view expressed in Deputy Commissioner ofSales
D Tax (Law), Board of Revenue (Taxes), Ernakulam v. Mis Thomas
Stephen & Co. Ltd., Qui/on, [1988] 2 SCC 264 and Coastal "'r'
Chemicals Ltd. v. Commercial Tax Officer, A.P. and Ors., [1999] 8
SCC 465. In the cases at hand "consumable" are treated differently from
"raw materials".
E
21. The appeals are allowed with no order as to costs.
N.J. Appeals allowed.