Judgment
1. In this appeal filed by the Revenue, the matter relates to the duty liability on cotton yarn manufactured and used in the same factory for the manufacture of cotton fabrics. Under Rule 49A of the Central Excise Rules, 1944 (hereinafter referred to as the 'Rules'), the Central Excise duty leviable on the cotton yarn could be paid with the duty on the cotton fabrics in whose manufacture such cotton yarn was used. When cotton yarn is used in the manufacture of cotton fabrics, certain wastages of yarn occur. The issue for consideration is whether from the duty leviable on such cotton yarn at the stage of manufacture of cotton fabrics, reduction is permissible to the extent of the duty ascribed to the waste arising after the yarn is taken off, the spindle and used in the weaving of cotton fabrics. The Asstt. Collector of Central Excise, who had adjudicated the matter observed that cotton yarn is fully manufactured, excisable and dutiable item prior to its taking in weaving section for weaving of cotton fabrics. The duty liability is fixed at this stage prior to its use in weaving. Rule 49A postpones the collection of central excise duty and it does not provide for any exemption from the duty already leviable. He held that the argument that yarn waste arising at the time of weaving is exempted under Notification No. 95/61-C.E., dated 1-4-1961 could not be accepted. He confirmed the demand in respect of cotton yarn waste arising in the Weaving Department of the assessee - M/s. Modern Mills Ltd. out of cotton yarn issued for weaving and cleared by them without payment of duty. On appeal by the assessee, the Collector of Central Excise (Appeals) in his Order-in-Appeal, dated 14-10-1992 observed that Notification No. 95/61-C.E., dated 1-4-1961 extended exemption to waste cotton yarn and that this exemption will be available even to the waste cotton yarn occuring at the weaving stage. In appeal, the Revenue had submitted that the yarn is fully manufactured at spindle stage and it is accounted for at spindle stage. Yarn becomes dutiable at that spindle stage. Under Rule 49A although payment of duty on yarn is postponed and was to be collected along with the fabric stage duty, weight of yarn leviable to duty remained the weight of yarn at the spindle stage. The exemption under Notification No. 95/61-C.E. in favour of yarn waste could only relate to the stage prior to or at the stage of duty liability on the yarn. It has been pleaded by the Revenue in their appeal that the duty on yarn is liable to be paid at the spindle stage; it is the concession to assessee to pay duty at the time of clearance of fabric under Rule 49A, subject to payment of interest as specified in the said Rule. The waste generated after the spindle stage at the time of manufacture of the fabric was not covered by the exemption under Notification No. 95/61-C.E.2. The matter was heard on 11-6-1999 when Shri M. Udhoji, JDR submitted that duty on yarn is leviable when the yarn is manufactured. Its subsequent use in the manufacture of fabrics was towards the levy of duty on fabrics. No exemption could apply, after the stage of levy of duty is already over. He referred to the grounds of appeal in appeal filed by the Revenue and pleaded for restoring the Order-in-Original passed by the Asstt. Collector of Central Excise. He relied upon the Tribunal's decision in the case of Commissioner of Central Excise, Jaipur v. Jagajit Cotton Textiles Mills Ltd. -1997 (94) E.L.T. 339 (Tribunal) wherein it had been held that the waste occurring during the course of weaving was not eligible for exemption but the waste occurring at stage precedent to weaving was eligible for exemption.3. Shri C.S. Lodha, Advocate referred to the provisions of Notification No. 95/61-C.E., dated 1-4-1961 under which waste cotton yarn had been exempted from duty and submitted that the exemption notification did not refer to any tariff heading in the Tariff. The notification had to be interpreted on its own merits and nothing could be added to the Notification and nothing could be substracted from it and no item number of the Tariff was mentioned in the Notification. The waste arising at the stage of weaving will also be eligible for the benefit of the said exemption Notification. He also submitted that if there are two notifications equally applicable then the one which is beneficial to the assessee had to be applied. He relied upon the Supreme Court's decision in the . case of U.O.I. v. Tata Iron and Steel Co. Ltd., Jamshedpur - 1977 (1) E.L.T. (J 61) wherein it had been held that where the duty paid pig iron is mixed with non-duty pig iron then the set off cannot be refused on the ground that non-duty paid material has also been used.
4. We have carefully considered the matter. Under Notification No, 95/61-C.E., dated 1-4-1961 (as amended) (a) waste cotton twist (b) waste cotton yarn (c) waste cotton thread (d) twist spun from cotton waste (e) yarn spun from cotton waste and (f) thread spun from cotton waste, were extempted from the whole of the duty of excise leviable thereon. It was explained that for the purpose of Notification No.95/61-C.E., the terms "waste cotton yarn" was to mean :- (1) Short lengths of cotton yarn in tangled mass not capable of being disentangled without considerable labour or (2) Short lengths not exceeding three metres of cotton yarn even if they are not in the form of an entangled mass.
5. Central Excise duty on cotton yarn becomes payable when such cotton yarn in any form is removed from the place of its manufacture for further processing; for consumption, export or manufacture of any other commodity in or outside such place of manufacture of cotton yarn. Once yarn is manufactured even for captive consumption in the Spinning department, it becomes liable to pay excise duty, as a commercial commodity had emerged. In the case of Collector of Central Excise, Bombay v. Kohinoor Mills -1995 (77) E.L.T. 42 (S.C.), the Supreme Court in para 5 of their judgment had observed that "it has to be kept in view that charge under the Central Excise Act fastened on a manufactured item once manufacture takes place. But the liability to pay the duty thereon will have to be decided in the light of the appropriate tariff applicable at the time when such manufactured commodity is cleared by the manufacturer as per the provisions of the Excise rules." In para 6, the Hon'ble Supreme Court after referring to the provisions of Rule 9(2) of the Rules had held that "if a manufactured item covered by the charge of excise duty by the charging provisions of the Central Excise Act is captively consumed, it would amount to removal of such manufactured item. Consequently once the yarn is manufactured in the Spinning Department of the composite textile mill and is taken to the Weaving Department for being captively utilised by way of consumption in Weaving Department and gets consumed, it is deemed to have been removed within the meaning of Rule 9(1). Once that happens the liability of such manufactured yarn to pay excise duty at the then prevalent rate of duty is crystallised. Thereafter the question as to when subsequently the fabric is manufactured or emerges or is removed from factory gate becomes irrelevant for the purpose of deciding the question of liability of excise duty on such captively consumed yarn". In that case, the yarn was removed for being utilised for captive consumption in the manufacture of fabrics prior to 15-7-1977 when under Notification No. 132/77-C.E., dated 18-6-1977 Yarn was wholly exempted from payment of excise duty. The Apex Court held that such yarn will not be liable to bear any excise duty as per the latter Notification dated 15-7-1977.
6. Thus, after the stage of dutiability of the cotton yarn is crossed and the duty liability is crystallised, no further duty could be demanded with regard to such quantity of yarn. On the same analogy after such a stage is reached no exemption could be applied to such yarn. The charge of duty arises when excisable goods are sought to be removed from the manufacturing premises for consumption, export or manufacture of any other commodity in or outside such place. Cotton yarn is a distinct specified excisable commodity. Its manufacture is complete when it is removed in any form (hank, reel etc.) from the Spinning Section, for manufacture of cotton fabrics in the present case. The object of incorporating an extended definition of "manufacture" in Section 2(f) of the Central Excise Act, 1944 was to collect the duty if straight reeled hank yarn was cleared after availing full exemption from duty and was later converted into some other form (cross-reeled, hank etc.) of cotton yarn. This was clearly evident from Clause (iii) of the Proviso to Notification No. 131 /77-C.E., dated 18-6-1977 (refer Collector of Central Excise, Bhubaneshwar v. Orissa Weavers Cooperative Spinning Mills -1985 (21) E.L.T. 348 (Tribunal).
7. Even for the period prior to 18-6-1977 when Rules 96V and 96W were in force, the Gujarat High Court in Mahendra Mills Ltd. v. U.O.I. - 1988 (36) E.L.T. 563 (Gujarat) had observed that when the Rules permitted the manufacturer to pay the duty in respect of cotton yarn along with the duty on fabrics it cannot be said that the liability to pay excise duty on yarn arose for the first time when the duty was actually paid under the concessional procedure under the Rules 96V and 96W. It was held "on the contrary it must be held that liability to pay excise duty on manufactured yarn arose the moment the manufacturing of yarn was completed at spindle stage (para-9).
Similarly in the case of Kamala Mills Ltd., Bombay v. U.O.I. - 1988 (34) E.L.T. 539 (Bombay) the Bombay High Court had observed that the advantage of payment of composite duty is conferred upon the manufacturer as a special procedure and it merely postpones the stage of collection of duty but that cannot be confused with the liability to pay duty which arises out of the manufacture of the yarn.New Great Eastern Spinning and Weaving Company Ltd. v. C.C.E. - 1988 (36) E.L.T. 502 (Tribunal), the Tribunal had narrated that the special procedure for levying duty on yarn used in composite mills for manufacture of fabrics on the basis of square metrage of different fabrics at different rates was done away within the Budget of 1977 when a new rate structure was provided for levy of duty on yarn irrespective of their use in the composite mills or otherwise. Doing away with that special procedure meant reversion to normal procedure i.e. charging of duty on yarn on the basis of their count/denierage at the time of its removal for weaving of the fabric in the same factory.
Introduction of Rule 49A in November, 1977 was to facilitate the trade by postponing the collection of duty on yarn but with interest thereon.
The Tribunal held that the waste yarn arising in the Weaving Department after manufacture of the yarn in the Spinning Department was not eligible for exemption under Notification No. 172/72-C.E., dated 24-7-1972. The Tribunal had observed that the terms of exemption in Notification No. 95/61-C.E., dated 1-4-1961 and Notification No.172/72-C.E., dated 24-7-1972 before its amendment in 1982 were essentially the same.
9. The matter is also covered by the Tribunal's decision in the case of Collector of Central Excise, Indore v. Raj Kumar Mills Ltd., Appeal No.ED/SB/369/85-D and Appeal No. ED/SB/886/85-D wherein similar facts and the same Notification No. 95/61-C.E., dated 1-4-1961 cameup for consideration before the three Member Bench of the Tribunal. Under their Order Nos. 218 and 218A/86-D, dated 14-4-1986 the Tribunal observed that the Rule 49A envisaged only a postponement of the collection of duty leviable on cotton yarn till the stage of clearance of cotton fabrics made therefrom and that the postponed duty leviable on the cotton yarn was to be included in the duty leviable on the fabrics. Notification No. 95/61-C.E., dated 1-4-1961 was for consideration before the Tribunal. In the appeal filed by the Revenue, it had been pleaded that the respondents, M/s. Raj Kumar Mills were liable to pay duty on the entire quantity of yarn issued for manufacture of fabrics and that it follows that the wastage which occurs since the issue of yarn and during the weaving of the fabrics was also liable to be charged to duty and that such waste was not exempted in terms of Notification No. 95/61-C.E., dated 1-4-1961.
Extracts from Para 11 of that decision are given below :- "11. Rule 49A, on the face of it, only permits postponement of payment of duty on cellulosic spun yarn or cotton yarn till the time of clearance of cotton fabrics manufactured out of such yarn. It is obvious that, in the absence of any express provision, the duty liability thus postponed is of the full amount of duty payable on the yarn which would otherwise have been payable at the time of removal of such yarn for manufacture of fabrics. In other words, the rule is no authority for the respondents (M/s. Raj Kumar Mill's) contention that duty is payable only on the actual yarn contained in the fabric cleared. The appellants' (Revenue's) contention that duty is payable on the yarn wasted or lost between the spindle stage and weaving stage is thus correct." 10. In view of the above discussion, we do not agree with the ld.Collector of Central Excise (Appeals) that any waste cotton yarn which arose during any stage of manufacture would be covered by Notification No. 95/61-C.E. and that this Notification also apply to the waste cotton yarn occur-ring at the weaving stage. We set aside the impugned Order-in-Appeal and insofar as this issue is concerned, restore the Order-in-Original, dated 14-10-1992 passed by the Asstt. Collector of Central Excise, Division A, Bombay-I.As a result, the appeal filed by the Revenue is allowed. Ordered accordingly.