Case: M/s. Meridian Industries Ltd Vs. Commissioner of Central Excise

2. The appellant while manufacturing cotton yarn had used indigenous cotton and also imported wax. The Department sought to deny the benefit of Notification No.8/97-C.E. on the ground that imported wax was also used, which was treated as the ?raw material?. Show cause notice dated 04.09.2001 was, accordingly, issued by the Superintendent of Central Excise, Pollachi-II Range, in O.C. No.777/2001 to state that the appellant was wrong in claiming the benefit of Notification No.8/97-C.E. dated 01.03.1997 since cotton yarn was manufactured out of indigenous cotton and imported wax, as wax was contained in the final product (yarn). It was stated that the appellant is maintaining separate production account for manufacture of cotton yarn both for indigenously procured and imported cotton as detailed in Annexures-I and II to the show cause notice. The appellant filed objections/reply dated 29.01.2001 wherein it statedwax disc was used in the High Speed Autoconer for supply to hosiery industries. Wax acts as a lubricant for reducing the friction and hairiness arising due to cone winding of yarn at a speed of 1200-1500 meters perThe lubrication of the yarn also facilitated the use of the high speed knittingThe wax was only a temporary coat and did not form part of the cotton yarn and the wax removed permanently after the knitting and does not remain part and parcel of theThe jurisdictional Superintendent of Central Excise had consistently issued Warehousing Certificate treating the same as consumable and the wax disc was treated as capital goods consistently as entered in RG 23C for Cenvat purposes.The Commissioner of Central Excise, Coimbatore after hearing the matter, passed the Order-in-Original dated 21.06.2002 deciding the matter in favour of the assessee and, thus, dropped proposed demand in the show cause notice by recording the finding to the effectWax disc acted as a lubricant and facilitated processing and use in the manufacturing process and remained a temporaryBy Circular No.631/22/2002-CX dated 28.03.2002, the Ministry of Finance held that consumables used in capital goods cannot be termed as raw material for the manufacture of finished goods and in the case wax was only a consumable for the capitalRevenue was inconsistent in having dealt with wax discs as consumable in the warehousing operation of the appellant but dealt as raw material for denying the benefit ofBenefit was available to cotton yarn manufactured wholly out of indigenous cotton as well as cotton yarn manufactured out of imported cotton yarn on which appropriate additional duty of customs was paid when removed into DTA.However, the Central Board of Excise & Customs, reviewed the order of the Commissioner of Central Excise in Order-in-Original No.32/2002-Commr. dated 21.06.2002 and directed the Commissioner to present an appeal before the Appellate Tribunal exercising power under Section 35B of the Act. The Commissioner of Central Excise preferred the appeal as directed by the Central Board of Excise & Customs against his own Order-in-Original No.32/2002-Commr. dated 21.06.2002 before the Tribunal.The Tribunal allowed the appeal preferred by the Commissioner of Central Excise vide its decision dated 17.07.2007. Perusal of the decision indicates following thoughtThe imported wax was used through discs fitted in the cone winder (Auto Coner) running at a speed of 1200-1500 meters perThe wax coating was necessary to smoothen the surface and to lubricate yarn in winding and further process ofThe coating disappears in the further process to which the knitted fabric is subjected to, but at the time of clearance of the yarn from the EOU, wax was part of theThe use of the wax satisfied the definition of ?raw material? and wax provided lubricity to the yarn.Present appeal is preferred by the appellant challenging the correctness and validity of the aforesaid decision of the

Court's reasoning:
19. A cursory glance of these judgments may give an impression that the present case is also covered by those decisions as in the instant case the waxing is ultimately removed from the cotton yarn by the buyer, after using this cotton yarn as raw material for fabricating the cloth. It is this aspect on which great stress and emphasis is laid by Mr. Bagaria, learned senior counsel for the appellant/assessee. However, a fine and subtle distinction is pointed out by Ms. Khajuria that becomes determinative of the outcome and changes the entire complexion, weighing the scales in favour of the respondent. Consumable is an item which does not form part of the end product. The assessee while arguing so is taking into consideration the end product at the hands of buyer which is not only extraneous and irrelevant but clearly impermissible. We are concerned with the article manufactured by the assessee, viz. cotton yarn, and not with the new and altogether different product, viz. knitting hosiery, manufactured by the buyer, who buys the cotton yarn as raw material/input. The article manufactured by the assessee is cotton yarn. Insofar as the assessee is concerned, its end product is cotton yarn. This cotton yarn becomes input for the manufacture of hosiery by the buyer who buys the cotton yarn from the assessee. This is to be kept in mind while determining whether wax as an item used in manufacturing cotton yarn becomes part of this cotton yarn or not.Concentrating on this pertinent aspect, let us revisit the manufacturing process of cotton yarn by the assessee, which is the end product as far as the assessee is concerned.Evidence has emerged on record, on which there is no dispute, that the final product which was cleared by the assessee, namely, cotton yarn was made of indigenous as well as imported cotton coated with imported wax. The wax coating is found to be essential for lubrication of the yarn and was allowed to remain on the yarn in order to facilitate its winding on cones and its use in knitting hosiery. Wax imparts a quality whereby the protruding fibres of the yarn are made to settle uniformly on the surface of the yarn to enable easy winding. This quality of the yarn is essential for its application in the manufacture of knitted fabrics by the buyers. It follows from the above that insofar as assessee is concerned, it manufactured cotton yarn by applying wax coating thereon. This wax coating, or significant portion thereof, remains on the cotton yarn. The buyer wants wax coating to remain as that is needed for lubrication of the yarn to facilitate its winding on cones when the buyer uses the said cotton yarn for manufacture of hosiery. No doubt that cotton yarn can be produced without wax as well. However, such cotton yarn without wax would be of inferior quality for the purposes of buyer in comparison with cotton yarn coated with wax as the use of cotton yarn with wax thereupon acting as lubricant is much more useful and becomes a value addition making it better quality cotton yarn, insofar as requirement of the buyer in using such cotton yarn for manufacture of knitted fabircs is concerned. When matter is examined from this angle, an irresistible conclusion is arrived at, namely, wax was used as raw material and not as consumable, insofar as end product of the assessee is concerned. For the assessee, end product is cotton yarn and not knitted hosiery. Knitted hosiery is the end product of the buyer. If buyer removes the wax after manufacture of knitted fabrics, that may not be of any consequence insofar as the assessee is concerned and would be totally extraneous to determine the issue at the hands of the assessee.Once we examine the matter from the aforesaid angle, other arguments of the learned senior counsel appearing for the assessee also pale into insignificance. It clearly follows that the judgment in the case of Super Spinning Mills Ltd. or the judgments of this Court as noted above would not apply in the present case. Likewise, Circular No.389/22/98-CX issued by the Ministry of Finance giving certain clarifications, would not help the assessee. On the contrary, clarifications given therein go against the assessee. Para 3 (a) thereof which has already been reproduced in the earlier part of the judgment categorically states that those units which manufacture goods out of both imported and indigenous raw material would not be entitled to the benefit of Notification No.8/97. No doubt, as per para 3 (b), if imported consumables are used, benefit of the notification would still be available. However, in the present case, we find, as a fact, that wax is not used as consumable but as raw material. For same reasons, other circulars also will not advance the case of the assessee.The appellant is seeking the benefit of exemption Notification No.8/97-C.E. Since it is an exemption notification, onus lies upon the appellant to show that its case falls within the four corners of this notification and is unambiguously covered by the provisions thereof. It is also to be borne in mind that such exemption notifications are to be given strict interpretation and, therefore, unless the assessee is able to make out a clear case in its favour, it is not entitled to claim the benefit thereof. Otherwise, if there is a doubt or two interpretations are possible, one which favours the Department is to be resorted to while construing an exemption notification.The gravamen of the charge against the appellant is that wax disc which is admittedly imported and used for the production of cotton yarn constitutes raw material and since imported material is used for the production of the aforesaid commodity, benefit of Notification No.8/97-C.E. cannot be extended to the appellant. It is not in dispute that wax is used in the process which is an imported material.