ORDER
C. Satapathy, Member (T)
1. The issue in these appeals filed by the Department is whether value of captively consumed yarn used for manufacture of fabrics within the factory shall include the cost of warping and winding. The amount involved is differential duty of Rs. 5,64,086.
2. It is the case of the applicant Commissioner that in terms of Explanation to Rule 49 of the Central Excise Rules, 1944, yarn captively consumed for manufacture of fabrics shall be deemed to have been removed from such factory immediately before such consumption. As such, Revenue claims that the cost of warping and winding has to be included in the value of yarn since these processes take place before the deemed removal of the yarn from the factory, i.e. before consumption in manufacture of the fabrics.
3. Revenue also contends that if yarn is taken out for winding and warping in another factory after paying duty at the spindle stage, no further duty in the second factory will be leviable in view of exemption under Notification No. 5/99 which exempts yarn, subjected to warping, winding and other processes, on which duty of excise has been paid. This facility, according to Revenue, cannot be availed by a composite mill captively consuming yarn for manufacture of fabrics since the deemed clearance occurs after warping and winding before consumption in the manufacture of fabrics and duty on yarn is paid at the fabrics stage.
4. Shri Gajendra Jain, learned C.A. appearing on behalf of the respondents states that in a similar case, another Bench has decided that since processes after spindle stage were exempt from duty, inclusion of the cost of warping etc. cannot find a place in the value of yarn which is fully manufactured at the spindle stage. The Order passed by the said Bench in the case of Maheshwari Silk Mills v. CCE, Ahmedabad bearing No. 731-35/03-ND(A) dtd. 17/12/2003 [reported in 2004 (92) ECC 9 (T)]. also expresses the view that the decisions of the Apex Court rendered in the case of UOI v. J.G. Glass Industries Ltd., 1998 (59) ECC 1 (SC) :1998 (97) ELT 5 (SC) and in the case of Sidhartha Tubes Ltd, v. Collector of CE, 2000 (67) ECC 601 (SC) : 2000 (115) ELT 32 (SC) are not applicable to the case of valuation of yarn. We find that in the case of J.G, Glass Industries (Supra), the Apex Court has held that the ultimate product which happens to be the excisable item at the factory gate is the printed glass bottle and hence the duty is payable on the value of printed glass bottle inclusive of the printing charges even though the process of printing does not amount to manufacture under Section 2(f) of the Central Excise Act, 1944. In the case of Sidhartha Tubes Ltd. (supra) the Apex Court has held that the value of galvanized pipe will include the cost of galvanization even though the process of galvanization does not amount to manufacture. The import of these two decisions of the Apex Court is very clear. If duty paid glass bottles arc printed in another factory, no further duty is chargeable but if the process of printing is carried out in an integrated factory, the duty has to be levied on the printed glass bottles which are cleared from the factory gate. Similarly, if duty paid black pipes are galvanized in another factory, no further duty will be payable. However, value of galvanized pipes cleared from an integrated factory has to pay duty on the value including the cost of galvanization. These two decisions of the Apex Court, in our view, have direct bearing on valuation of yarn subjected to processes of warping and winding in an integrated factory/composite mill. Duty paid yarn if subjected to processes like warping and winding in another factory will not be subjected to further duty in view of the exemption under Notification No. 5/99. In the case glass bottles and black pipes, the processes of printing and galvanizing do not amount to manufacture and hence no further duty is leviable if these processes are carried on in a separate factory. In the case of yarn, the processes of warping and winding amount to manufacture but if carried on in another factory on duty paid yarn have been exempted under an exemption notification. When the same processes are carried on at an integrated factory and under Rule 49 the point of removal is deemed to be immediately before consumption of such yarn in the manufacture of fabrics, applying the ratio of the aforesaid two Apex Court decisions, the value of yarn for the purpose of duty at the stage of such deemed removal has to include the cost of warping and winding. In the case of yarn, the stage at which it is taken for captive consumption and which is defined to be the stage of removal from the factory, the yarn has been subjected to the processes of warping and winding. Even though such processes will not attract further duty if subjected in another factory on duty paid yarn, in the composite Mill, the cost of such processes has to be included in the value of yarn following the afore-cited Apex Court decisions. Same will be the case in respect of such processed yarn which is cleared from an integrated factory on payment of duty, though the actual method of valuation need not be based on cost but on the actual sale price.
5. We also find that in the case of Maheshwari Mills Ltd. (supra) reliance was placed on the decisions of the Apex Court rendered in the case of CCE, Hyderabad v. Divya Enterprises, 2002 (83) ECC 8 (SC) : 2003 (153) ELT 497 (SC) and in the case of Bhilwara Synthetics Ltd. v. CCE, 2002 (S3) ECC 8 (SC) : 2002 (143) ELT 22 (SC) to come to a conclusion that cost of subsequent exempted processes cannot form part of the assessable value. We, however, find no basis for such conclusion in both the cases decided by the Apex Court. The duty on the yarn and fabrics dealt in those two cases was leviable at specific rates and hence these cases did not require determination of value or enunciation of any principle of valuation. In those cases, the Apex Court has merely allowed adjustment of the duty wrongly paid on the finished goods to be adjusted against the duty liability on the inputs which was higher since the quantity of inputs was higher. These cases did not involve any determination of value and hence reliance placed on these decisions to derive a principle of valuation is clearly misplaced and inappropriate. On the other hand, the decisions of the Apex Court in the case of J.G. Glass Industries (supra) and Sidhartha Tubes Ltd. (supra) have a direct bearing on valuation of processed goods cleared from an integrated factory.
6. In view of our finding as above, we are of the view that the impugned Order passed by the Commissioner (Appeals) is contrary to the ratio of the Apex Court decisions in the case of J.G. Glass Industries Ltd. (supra) and Sidhartha Tubes Ltd. (supra) and hence, we set aside the same holding that the cost of warping and winding is includible in the value of yarn taken for captive consumption for manufacture of fabrics. The Department’s appeals are allowed and the Orders-in-original are restored.
Archana Wadhwa, Member (J)
After going through the Order proposed by my learned brother, I find myself not in agreement with the same for the reasons recorded in the following paragraphs.
(1) The issue in dispute is as to whether the cost of warping and winding of the yarn, after the same has discharged duty at the spindle stage is required to be added in the assessable value of the yarn for the purpose of duty or not. In other words, whether the appellant is required to discharge duty on the yarn at the spindle stage or after the same has undergone the process of warping and winding i.e. immediately before they are issued for weaving.
The lower appellate authority has accepted the appellant’s plea that the manufacture of yarn is complete in spinning Section and the yarn duty is payable at that stage when such fully manufactured yarn is removed outside the spinning Section for purpose of consumption for weaving inside the mill; that winding and warping process are subsequent to removal of yarn and are processes preparatory to weaving and therefore, cost of winding and warping are not includable in the cost of yarn. He has observed that manufacture of yarn is fully completed in the spinning Section and therefore, cost components relevant only up to that stage are includible in the assessable value. Cost of the subsequent processes like warping and winding will get reflected in the price of the fabric.
(2) As against the above finding of Commissioner (Appeals), the revenue, in their grounds of appeal, has contended that in terms of Chapter note 1 to Chapter 52 and Chapter note 3 of Chapter 55, any process carried on yarn will amount to manufacture and as such, yarn can be termed as fully manufactured only after the process of warping and winding. They have further contended that though the process of warping and weaving are exempted under Notification No. 5/99-CE if manufactured out of duty paid yarn, the said notification will not apply in case of composite mill.
(3) After considering the above grounds and the Commissioner findings, I find that the important question is as to what is the stage of emergence of yarn. Admittedly the yarn comes into existence at the spindle stage itself. It is by virtue of chapter notes referred to by the Revenue, that further process of warping and winding have to be held as process of manufacture, otherwise, if the yarn was to be considered as completely manufactured only after warping and winding, there was no need to introduce the above chapter notes. Issuance of Notification No. 5/99-CE dated 28.2.99 is also indication of the fact that yarn emerges at spindle stage as an excisable goods with a liability to discharge duty on the same at the time of clearance. Subsequent process after clearance would also attract duty, but for the notification granting exemption, as said processes are to be held as manufacturing processes in terms of the chapter notes,
(4) Now, the question arises as to whether the discharge of duty, by the appellant at the spindle stage was correct or not. After having concluded that the yarn emerges at spindle stage itself, in my view, the discharge of duty by the appellant at the said stage was in accordance with law. Why the clearance stage, after the warping and winding, is to be considered as removal stage in terms of Rule 49 of the Act. Why cannot it be said that in terms of said Rule, spindle stage yarn was removed for warping and winding after payment of duty and the notification was availed for the said two processes, when the warped yarn was further removed for weaving.
(5) The appellants have also referred and strongly relied upon the Tribunal’s decision in the case of M/s Maheshwari Mills Ltd. (Order No. 731-35/03/NB/A dated 17.12.2003) dealing with the same issue. The Tribunal in Para 6 of their judgment has held that yarn emerge at spindle stage and the stage of levy of excise was at the spindle stage. They have further held that subsequent exempted processes cannot form part of assessable value. The said decision has not found favour with my learned brother or the basis of the Hon’ble Supreme Court’s decisions in the case of J.G. Glass Inds. & Siddharth Steel Tubes. I find that the said two decisions were taken note of by the Bench in the case of M/s Maheshwari Mills and the same were held as not applicable by observing as follows in Para 6 of the Order:
“We are of the opinion that the decision in Siddharth Steel Tubes case and J.G. Glass Inds. are not applicable to the present case. In those cases, goods liable to duty were steel tubes and glass. Question arose as to whether cost of galvanization of tubes done outside the factory of production was liable to be included in the assessable value and also whether process of galvanization attracted duty, since galvanizing by itself was not a process of manufacture. Similarly, in the case where glass was manufactured in one unit and cleared to another premises for decoration, the question arose as to whether the cost of decoration was required to be included in the assessable value. The Apex Court held that cost of processes including the processes incidental to manufacture carried out by a manufacturer before the removal of the goods were liable to be included in the assessable value. In both these cases, there was no exemption in favour of the galvanization of steel tubes or decoration of glass. The present case is different, in as much as processes after spindle stage was exempt from central excise duty and yarn had been fully manufactured at the spindle stage. Thus, the inclusion of cost of warping, sizing etc. as held in the impugned Order cannot find place in the valuation of yarn in the present case.
I fully agree with the above reasoning of the Bench. The processes of warping and winding being exempted, there is no justification for the revenue to add the cost of such processes in the yarn manufactured and captively consumed by the appellant. Accordingly I reject the revenue’s appeal.
(Sd/-) Archana Wadhwa
Difference of Opinion
Whether the appeal filed by the Revenue is to be accepted, as held by Member
(Technical) or the same is required to be rejected as held by Member (Judicial).
(Sd/-) C. Satapathy (Sd/-) Archana Wadhwa Order No. A/98,99/WZB/2005-C-II, dt. 25.1.2005, Certified on 2.2.2005 Jyoti Balasundaram, Vice President
I have heard both sides on the difference of opinion. By virtue of Note (1) to Chapter 52 and Note (3) to Chapter 55, the processes of warping and winding are deemed to amount to manufacture. Yarn duty is to be discharged at spindle stage and subsequent processes would also attract duty, but for Notification No. 5/99-CE dated 28.2.99 granting exemption to such processes. The decision in the case of M/s. Maheshwari Mills Ltd. cited supra is squarely applicable to the present case. That decision takes into account decisions of the Supreme Court in Bhilwara Synthetics Ltd. v. CCE, Jaipur, 2002 (83) ECC 8 (SC) : 2002 (143) ELT 22 (SC) and CCE, Hyderabad v, Divya Enterprises Ltd., 2002 (83) ECC 8 (SC): 2003 (153) ELT 497 (SC). The Tribunal also considered the non-applicability of the Supreme Court decision in Siddharth Steel Tubes for the reason that in that case, there was no exemption in favour of galvanization of steel tubes. The Bench also considered the Apex Court decision in the case of J.G. Glass Inds. where there was no exemption for decoration of glass. The Bench has rightly held that the present case is different for the reason that after spindle stage further processes were exempt from duty in terms of Notification No. 5/99-CE and yarn which had been fully manufactured at the spindle stage, discharged duty liability at spindle stage and hence cost of warping and sizing were not to be included the valuation of yarn.
In the light of the above, I agree with the Order recorded by Ld. Member (Judicial) that the appeal of the Revenue is required to be rejected.
The papers are now returned to the Original Bench for passing the majority Order.
(Sd/-)
Jyoti Balasundaram
Vice President
FINAL ORDER
In view of the majority Order, the appeal filed by the revenue is rejected.