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REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 4112 OF 2007

M/S. MERIDIAN INDUSTRIES LTD. .....APPELLANT(S)

VERSUS

COMMISSIONER OF CENTRAL EXCISE .....RESPONDENT(S)

J U D G M E N T

A.K. SIKRI, J.

The appellant-assessee is engaged in the manufacture of cotton

yarn which is 100% Export Oriented Undertaking (EOU) constituted as

per  Export  and  Import  Policy  1997-2002.   During the  period August,

2000 to March, 2001, it had cleared the aforesaid cotton yarn made to

Domestic Tariff Area (DTA).  While clearing these goods, the appellant

did  not  pay  normal  excise  duty  that  is  chargeable  for  the  aforesaid

product.   Instead  it  took  benefit  of  Notification  No.8/97-C.E.  dated

01.03.1997  and  paid  duty  at  concessional  rate  in  terms  of  the  said

notification.   This  notification  provides  for  concessional  rate  to  those

products which are cleared to DTA by an EOU.  However, one of the

conditions  for  availing  the  benefit  of  the  said  notification  is  that  the

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products  that  are  manufactured  by  such  EOU  should  have  been

manufactured using indigenous raw material only.     

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 stated that:

(i)   wax 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 per

minute.

(ii)   The lubrication  of  the yarn also  facilitated the  use of  the high  speed

knitting machines.

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(iii)  The 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 the yarn.

(iv)   The  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.   

3. 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 effect that:

(i)  Wax disc acted as a lubricant and facilitated processing and use in the

manufacturing process and remained a temporary coat.

(ii)  By 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 capital goods.

(iii)  Revenue 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 of exemption.

(iv)   Benefit  was  available  to  cotton  yarn  manufactured  wholly  out  of

indigenous cotton as well as cotton yarn manufactured out of imported

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cotton yarn on which appropriate additional duty of customs was paid

when removed into DTA.   

4. 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.

5. 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 thought process:

(i)  The imported wax was used through discs fitted in the cone winder (Auto

Coner) running at a speed of 1200-1500 meters per minute.   

(ii)  The wax coating was necessary to smoothen the surface and to lubricate

yarn in winding and further process of knitting.

(iii)  The 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 the yarn.

(iv)   The use of  the wax satisfied the definition of  “raw material”  and wax

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provided lubricity to the yarn.

6. Present appeal is preferred by the appellant challenging the correctness

and validity of the aforesaid decision of the Tribunal.   

7. Mr. Bagaria, learned senior counsel, appearing for the appellant, drew

our attention to the language used in the exemption notification which

provides for 100% exemption to EOU or a free trade zone from excise

duty on the finished products, rejects and waste or scrap specified in the

Schedule  to  the  Central  Excise  Tariff  Act,  1985  when  produced  or

manufactured 'only from the raw materials produced or manufactured in

India...'  On the basis of the aforesaid wording from the notification, his

submission was that the word 'from' clearly suggests that the material

used has to be 'raw material' and the wax, in the present case, was not

used as the raw material.  In this behalf, he explained the process of

manufacturing of cotton yarn by explaining that since it was only a yarn,

the same was manufactured and wound on cones.  In this process, the

yarn is  passed over  an imported wax disc fitted on the cone winder

(Auto Coner) at a speed of 1200 to 1500 meters when the wax gets

coated on the yarn.  The purpose of wax coating was only to smoothen

the yarn and provide lubrication to this product.  It was not used as raw

material for the production of cotton yarn, as yarn could be produced

even without the said wax cotton.  He also explained that the cotton yarn

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was  sold  by  the  appellant  to  the  consumers  for  the  purpose  of

manufacturing/fabricating  the  garments  and  after  the  fabrication,  the

said wax was removed.  Therefore, on that basis, he submitted that the

requirement of the notification was that the product which is cotton yarn

in the instant case had to be manufactured from raw material and when

the matter is considered in the aforesaid perspective since wax was not

the raw material for the production of yarn, the use thereof could not

disqualify the appellant from taking benefit of Notification No.8/97-C.E.   

8. Mr. Bagaria  also referred  to  Circular  No.389/22/98-CX issued by the

Ministry  of  Finance  on  Notification  No.8/97-C.E.  dated  01.03.1997

applicable to 100% EOU, which clarified certain doubts and paragraph 3

thereof reads as under:

“3.  The matter has been examined by the Board and it is clarified that:

(a)   In  respect  of  situation  (i)  above  the  benefit  of Notification  8/97-C.E.  dated  01.03.1997  cannot  be extended to those units which manufacture goods out of both imported and indigenous raw material.  The benefit is  available  to  those  units  which  manufacture  goods only from indigenous raw materials.

(b)  In respect of situation (ii) a Unit is eligible for the benefit of Notification 8/97-C.E.,  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.”

9.  On the basis of the aforesaid clarification particularly contained in para

(b) thereof which clarifies that the use of imported consumables would

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not  debar  such  a  manufacture  from  availing  the  benefit  from  the

notification.  He also referred to two circulars of the Ministry of Finance

in  support  of  his  aforesaid  plea,  the  particulars  and  the  material

contained thereof are as under:

(i)  Circular No.614/5/2002-CX dated 31.01.2002, the Ministry of Finance stated as under:

“I am directed to refer Board's Circular No.389/22/98-CX dated  05.05.1998  [1998  (100)  ELT  T19]  relating  to extension  of  benefit  under  Notification  No.8/97-C.E. dated 01.03.1997 to  EOUs even if  they use imported consumables  and  to  say  that  the  matter  has  been re-examined by the Board and it has been decided to withdraw the circular.  Accordingly, it is clarified that the benefit  of  Notification  No.8/97-C.E.  dated  01.03.1997 shall not be available to those EOUs which use imported consumables.”

(ii)   By  Circular  No.631/22/2002-CX dated  28.03.2002,  the Ministry  of   Finance  vide  paragraph  2  further  clarified  as follows:

“I  am directed  to  invite  reference  to  Board's  Circular No.614/5/2002-CX dated  31.01.2002 [2202 (140)  ELT T3]  regarding  denial  of  the  benefit  of  Notification No.8/97-C.E.  dated  01.03.1997  (as  amended)  to  the export  oriented  units  using  imported  consumables.  It has been brought to the notice of the Board that the field formations  are  denying  the  benefit  of  Notification No.8/97-C.E. to units using imported consumables with capital goods.   

2. Board  has  taken  serious  view  of  this mis-interpretation.   Notification  No.8/97-C.E.  dated 01.03.1997 extends the benefit of concessional rate of duty  to  EOUs on  finished  products  which  are  wholly manufactured from the indigenous raw materials.  The consumables  used  with  the  capital  goods  cannot  be termed as raw materials for the manufacture of finished goods.   Therefore,  it  is  clarified  that  benefit  of concessional  rate  of  duty  under  Notification

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No.8/97-C.E.  dated  01.03.1997  (as  amended)  should not  be denied to export  oriented units  using imported consumables  with  capital  goods  provided  all  other conditions of notification are satisfied.”

10. Mr. Bagaria went on to argue that the issue was no more res integra as

this Court had already taken a view on this aspect, favourable to the

assesses/manufacturers.   In  this  direction,  he  pointed  out  that  the

Chennai Bench of the Tribunal in the case of Super Spinning Mills Ltd.

v.  Commissioner  of   Central  Excise,  Tiruchirapalli1 which  was

concerned with identical type of case, took the view in the process of

waxing of hosiery cotton yarn which was done at the winding stage, wax

could not be considered as raw material but was only consumable and

on that basis, held that the use of imported wax would not debar the

assessee  from  claiming  benefit  of  the  exemption  Notification

No.8/97-C.E. dated 01.03.1997.  In order to show the parity of that case

with the instant matter, learned senior counsel referred to the discussion

contained in para 2 of the said decision of the Tribunal, which reads as

under:

“2.  We have heard both sides on the appeal against the order.  The process of waxing of hosiery cotton yarn is  done  at  the  winding  stage  (whether  auto-cone  or manual cone).  In the auto-coner machine, the imported wax disc is kept in the yarn path and the yarn is allowed to  pass  through  the  wax  disc  while  the  wax  disc  is rotated to ensure uniform waxing.  The waxed yarn is subsequently  conditioned  by  “Yarn  Conditioning Process”  in  which  yarn  is  conditioned  by  steam

1

2013 (296) ELT 133

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injection  in  a  vacuum auto-clave at  low temperature. Wax is present in the final product.  Waxing is done to maintain co-efficient of friction between yarn and metal in  order  to  avoid  excessive  yarn  breaks  as  well  as needle breaks.  The purpose of waxing is the same as that of M/s. Forbes Gokak Ltd. who also cleared cotton yarn to DTA claiming the benefit of the same notification and  the  benefit  stands  extended  by  the  Hon'ble Karnataka High Court as seen from 2010 (250) E.L.T. 186 (Kar.)  holding that  wax cannot  be considered as raw  material  but  as  consumable  and  upholding  the Tribunal's order reported in 2005 (192) E.L.T. 1000 to this effect.  The Karnataka High Court's decision cited supra  is  applicable  on  all  fours  to  the  facts  of  the present case.  Although, ld. JCDR seeks to rely upon the remand and order of the Apex Court in  Vanasthali Textiles  Industries  Ltd.  v.  CCE,  Jaipur  [2007  (218) E.L.T. 3 (S.C.)] to examine whether sizing material was a raw material for the manufacture of terry towels and draws the attention of the Bench to the remand orders of  the  Tribunal  in  CCE,  Coimbatore  v.  Meridian Industries  Ltd.[2007  (217)  E.L.T.  576]  and  in  direct decision of  the Hon'ble Karnataka High Court  on the same item, namely wax, we follow the ratio thereof to hold  that  the  benefit  of  the  exemption  under  the relevant notification cannot be disallowed on the ground of use of imported wax as wax has already been held by the Hon'ble High Court to be a consumable and not a raw material, set aside the impugned order and allow the appeal.  CO disposed of accordingly.”

11. He also brought to the notice of this Court that against the aforesaid

judgment  of  the  Tribunal,  the  Revenue/Department  had  preferred  an

appeal in this Court, being Civil Appeal No.5294-5299/2010 which was

dismissed by this Court on 08.07.2010 with the following order:  

“The appeal is dismissed on the ground of delay as well as on merits.”

He, thus, made passionate plea that this appeal be also allowed on the

basis of parity.

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12. Ms.  Shirin  Khajuria,  advocate  with  the  guidance  of  Mr.  K.

Radhakrishnan,  senior  advocate  argued  the  matter  on  behalf  of  the

Revenue/respondent and stoutly refuted the aforesaid submissions of

the  appellant's  counsel.   Main  thrust  of  her  argument  was  that  the

decision of Super Spinning Mills Ltd. was not applicable to the facts of

the present case and in this behalf,  she endeavoured to draw subtle

distinction between the facts of the two cases.  She further submitted

that the Tribunal had appreciated the same in the impugned decision

appropriately discerning the facts of the present case and, therefore, the

impugned order did not warrant any interference.  We shall take note of

the arguments of Ms. Khajuria in some detail at the later stage.  At this

point of time, we would like to deal with the contentions raised by the

learned senior counsel for the appellant.   

13. 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

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possible, one which favours the Department is to be resorted to while

construing an exemption notification.   

14. 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.  However,

the refutation of the appellant is that wax is not 'raw material' and it is

only used as 'consumable' in the process of manufacturing cotton yarn.

The  Export  and  Import  Policy  1997-2002,  which  is  applicable  in  the

instant case, defines both the expressions, namely, 'consumables' and

'raw material' and, therefore, it would be apposite to take note of these

definitions:

“Consumables” means any item which participates in or is required for a manufacturing process, but does not form  part  of  the  end  product.   Items  which  are substantially  or  totally  consumed  during  a manufacturing  process  will  be  deemed  to  be consumables.

“Raw material” means:

(i)  basic  materials  which  are  needed  for  the manufacture  of  goods,  but  which  are  still  in  a  raw, natural, unrefined or unmanufactured state; and

(ii)   for a manufacturer, any materials or goods which are  required  for  the  manufacturing  process,  whether they have actually been previously manufactured or are

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processed or are still in a raw or natural state.”

15. As is evident from the aforesaid definitions,  a particular  item, though

required for a manufacturing process or participates in the said process

would be treated as 'consumable', if it does not form part of end product

and  instead  it  gets  substantially  or  totally  consumed  during  the

manufacturing process.  In contrast, as per sub-para (ii) of the definition

of  raw  material,  if  any  materials  or  goods  are  required  for  the

manufacturing process, such materials or goods would be treated as the

'raw material', whether they have actually been previously manufactured

or are processed or are still in a raw or natural state.

16. These expressions have come up for interpretation before this Court on

earlier occasions in few cases.  Some of these judgments were taken

note  of  in  the  case  of  Vanasthali  Textiles  Industries  Ltd.  v.  CCE,

Jaipur2.  We may clarify at the outset that the Court in that case was

concerned with the provisions at the relevant time that did not contain

the  definition  of  'raw  material'  and,  therefore,  it  banked  upon  the

meaning that has to be given in ordinary connotation in the common

parlance of those who deal with the matter.  At the same time, some

observations made in the said case, particularly, 'dominant ingredient

test', which was applied were pressed into service by the appellant and,

therefore, the discussion in the said judgment becomes relevant.  As far

2 (2007) 12 SCC 115

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as term 'raw material' is concerned, following discussion followed in the

said judgment:

“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 case (1989) 4 SCC 566 it was inter alia observed as follows: (SCC p. 572, para 14)

“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,  as  a  result  of interaction  with  other  chemicals  or  ingredients, might themselves undergo chemical or qualitative changes and in such altered form find themselves in  the  end  product;  those  which,  like  catalytic agents,  while  influencing  and  accelerating  the chemical  reactions,  however,  may  themselves remain  uninfluenced  and  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  of  the  valid tests, in our opinion, could be that the ingredient should  be  so  essential  from  the  chemical processes  culminating  in  the  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 consumption on  burning  up  is  its  quality  and  value  as  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 impossible. This quality should coalesce with the requirement  that  its  utilisation  is  in  the

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manufacturing  process  as  distinct  from  the manufacturing apparatus.”

14. CEGAT had held in that case that the use of indigo dye is as a raw material in the manufacture of denim fibre. According to the High 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  manufactured  from  cotton.  Therefore, placing reliance on Ballarpur case, 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  the  total  production  cost.  The  denim  is manufactured  from  cotton  and  not  from  indigo.  The condition for getting the benefit of the notification is that the end products should be wholly manufactured from the raw material produced and sold in India.

16. It is to be noted that dominant ingredient test has not been applied in the instant case; so also the effect of value addition. In  Ballarpur case it was held in para 19 as follows: (SCC p. 573)

“19. 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 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 account of value. Stress is on the word “wholly”.  In the Circular dated 5-5-1998 it is stated as follows:

“3(b) In respect of Situation (ii) a unit is eligible for the benefit of Notification No. 8/97-CE ibid., even

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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. Korchagin and A. Matelsky it has been stated as follows:

“In industry, textile fonning (fibrous) items used for manufacturing (main activity) a textile product are referred to  as  raw material  e.g.  cotton,  viscose, wool, silk, nylon, polyester, etc. or their blends in different  compositions.  Whereas,  (non-fibrous) items  used  for  chemical  processing  of  textile product  (ancillary  activity)  are  referred  to  as consumables e.g. starches, variety of chemicals, several  colouring  matters  such  as  dyes  and pigments,  etc.  Power  and  water  are  other consumable items in addition to fuel oil, lubricating agents  and  packing  materials.  It  is  a  common practice in textile industry and trade to identify and categorise raw material and consumables on such basis.”

19. 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.

20. Dealing with a case under a sales tax statute i.e. the Andhra  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  utilised  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 “consumables” fall  within the broader scope of  the words “raw materials”.  Reference in this connection can be made to the view expressed in  Dy. CST v. Thomas Stephen & Co. Ltd  (1988) 2 SCC 264

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and Coastal Chemicals Ltd. v. CTO (1999) 8 SCC 465. In  the  cases  at  hand  “consumables”  are  treated differently from “raw materials”.

17. In that case, the Court was concerned with the same notification wherein

the  appellant-company,  which  was  100%  EOU,  claiming  partial

exemption from duty in terms of Notification No.8/97 in respect of goods

sold in DTA.  One of the conditions for availing the benefit of the said

notification was that the goods could have been manufactured  wholly

from  the  raw  material  produced  or  manufactured  in  India.   For

manufacturing the goods in question, the said assessee had procured

the  raw  material  from  domestic  manufacturer  in  India  and  had  also

imported (1) carboxymethyl cellulose which is used for sizing of single

yarn to give strength to the yarn during weaving after which the woven

towels are washed to remove completely the sizing materials and (2)

ultrafresh N.M. which is used for anti-bacteria and anti-fungus treatment

of  terry  towels.   The  question  that  fell  for  consideration  was  as  to

whether the aforesaid imported material used while manufacturing the

goods could be termed as 'raw material' or was only 'consumable'.  The

Tribunal  had  accepted  the  stand  of  the  Department  holding  that  the

assessee was using carboxymethyl cellulose which is sizing material in

the manufacture of finished product and since it was imported material,

the  assessee  was  not  entitled  to  the  benefit  of  the  notification.   In

support  of  its  conclusion  that  the  sizing  material  is  an  essential

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ingredient of weaving terry towel, reliance was placed on the decision of

this Court in CCE v. Ballarpur Industries Ltd.3 wherein this Court has

held that the valid tests to determine whether the ingredient 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.   

18. As  already  pointed  out  above,  Export  and  Import  Policy  1997-2002

provided the definition of 'consumables' and 'raw material'. The definition

of 'consumables'  suggest that  if  a particular  item participates in or  is

required for a manufacturing process, but does not form part of the end

product  and  instead  it  is  specifically  or  totally  consumed  during  a

manufacturing process,  the same would be treated as 'consumables'.

On the other hand, 'raw material',  inter alia, includes any materials or

goods that is required for the manufacturing process for a manufacturer.

Though, these terms were not specifically defined at the relevant time

when  Vanasthali  Textiles  Industries  Limited  and  Ballarpur  Industries

Limited  cases were decided, going by the dictionary meaning, almost

similar test was applied to determine whether a particular input would be

treated as 'consumable' or 'raw material'.

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

3 (1989) 4 SCC 566

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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.   

20. Concentrating on this pertinent aspect, let us revisit the manufacturing

process of cotton yarn by the assessee, which is the 'end product' as far

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as the assessee is concerned.

21. 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

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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.

  22. 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.

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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.   

23. As a result, this appeal fails and is hereby dismissed with costs.

.............................................J. (A.K. SIKRI)

.............................................J. (ROHINTON FALI NARIMAN)

NEW DELHI OCTOBER 27, 2015.