Judgment:
1. The Assistant Collector of Central Excise, Mirzapur has argued his case well, in his order C.No.V. 68(3) Demand/158/82/2797-99 dated 17-7-1984 (there is another date 13-7-84 on the order).
2. He says that cryslite, aluminium flouride, borax, lime cannot be termed raw materials for the purpose of manufacture of aluminium to gain the benefit under notification No. 201/79-CE amended by notification No. 105/82-CE which provides for duty exemption on goods in the manufacture of which any goods falling under item 68 have been used as raw materials or component parts. The exemption is from so much of the duty of excise as is equivalent to the duty of excise already paid on the raw materials or component parts. The reasons he gives for holding that the cryolite, aluminium flouride and others are not raw materials are reproduced below :- The term raw material is not defined in the Central Excises & Salt Act, Central Excise Rules or Notification No. 201/79 (as amended).
Therefore, we shall have to consider the popular meaning of the words "raw material", the dictionary meaning of "raw material" is Material (often in its natural state) that serves as the starting point of a manufacturing or technical process and that out of which something is made or may develop. "(Chamber's 20th Century Dictionary). According to McGraw Hill Dictionary of Scientific and Technical Terms II edition Raw Material (Ind. Eng.)" means a crude unprocessed or partially processed material used as feed stock for a processing operation; for example crude petroleum is the raw material from which naphtha is obtained. Naphtha is the raw material from which Benezene, Teluene-Xylene are obtained." The figurative view of the above definitions reveals that raw material is material out of which the product comes. In other words if the final product is either a constituent of the material that as starting point of the process or some part of this material is in the final product, only then the material will be entitled to be called a raw material for the final product. Yarn is a raw material for the cloth since yarn is a constituent of the cloth. Again when plain cloth and colour and dyes are raw materials for the printed cloth as plain cloth and dyes combine and emerge and come out in the form of printed cloth. Barium carbonate is used to remove impurities from the salt solution in the manufacture of caustic soda. But it is not considered as raw material for the manufacture of caustic soda as none of its constituents are represneted in the final product, the caustic/soda.
The discussions by the Asstt. Collector are sound; but in the context of the problem, they lead to even greater problems, for which his reasoning will provide no solution. It is quite correct that crude petroleum is the raw material from which naphtha is obtained; and naphtha is the raw material from which benzene, toluene, xylene are obtained. It is also correct to say that yarn is the raw material for the manufacture of cloth, and that yarn is a constitutent of the cloth.
3. However, by this reasoning, no exemption can be given under notification No. 201/79-CE. Naphtha does "not fall under item 68 nor does yarn. For the matter of that, most of the goods in the tariff do not have for their raw materials goods which fall under Item 68. To take a few examples: the raw material for paper is wood, bamboo, grass etc. The raw materials for petrol, keroserte, diesel oil and mineral lubricant is naphtha made from crude petroleum; for iron and steel, it is pig iron, whose own raw material is iron; cigarettes have their origin in tobacco and paper while chemicals in other chemicals; plastics start their lives as resins. Cotton fabric has its raw material in cotton yarn which begins its life on the cotton boll. Glass occurs in sand which is its starting point and raw material. None of these raw materials are assessable under Item 68; hence in effect notification No. 201/79-CE will remain a dead law, un-implementable and unworkable.
4. While the logic of the Assistant Collector are admirable, the result of his syllogism will upset the pattern that is clearly not the desire of the law makers. The only meaningful interpretation we can see is to say that substances, articles, items, that are used and consumed in the process of production as part of the system of manufacture should qualify as raw materials under notification No. 201/79-CE. The Assistant Collector himself correctly and fairly admitted that cryolite, aluminium flouride, borax, lime are used in the manufacture of aluminium. To use his own words: "in this case there is no doubt that borax, lime, aluminium flouride and cryolite are used in the manufacture of aluminium as process of manufacture of aluminium is not commercially viable without the use of these materials but this only is not sufficient to allow the party to avail set-off of duty paid on these materials against the duty payable on aluminium". There is no further need to labour the point further or to establish use of these goods; but it will be wise to briefly explore the function of these materials. The Assistant Collector has given useful hints.
5. Lime is added to and mixed with bauxite before digestion with caustic soda for the control of phosphates, sulphates and carbonates contained as impurities in the bauxite and for the in-plant causticisation of liquor. It also helps in the separation and settling all red mud from the liquor. Lime is thus consumed in the manufacture of aluminium oxide. On borax the Assistant Collector says that it is added in the reduction cells along with alumina to suppress the detrimental effects of titanium, vanadium, zirconium and chromium which form their respective borides and thus help in the manufacture of electrical conductors grade aluminium. Aluminium metal can be manufactured without borax but to remove certain harmful elements borax is added.
6. Cryolite contains aluminium as one of the elements. It is used to disolve the alumina at the operating temperature of the bath. During the electrolysis on alumina a process by which aluminium is liberated from alumina, cryolite does not get electrolytically dissociated to give aluminium. Aluminium flouride is added to the bath from time to time to maintain suitable sodium: flourine ratio so as to compensate the loss of flourine due to evaporation and to prevent deposition of sodium.
7. But the Assistant Collector concludes that these goods are not raw materials as they do not satisfy the criterion of raw materials since they are not constituents of the aluminium. Only alumina does as it dissociates into aluminium and oxygen, which leads to the manufacture of aluminium; that is to say, it is a constituent of the metal. But the Assistant Collector overlooked something. The alumina is not a constituent of aluminium - only the aluminium part of it; the oxygen is liberated. Would the Assistant Collector allow exemption only equal to the duty paid on aluminium on alumina? How does he calculate it? 8. In his own way, the Assistant Collector is not incorrect and his ratiooination would be tolerable if the matter stopped there. But it does not stop there; it begins there: if one took just the alumina, one would have a long, long wait for the aluminium to come out, and even then it would not. The cryolite borax, lime are necessary to the reduction and decomposition of the alumina to free the metal, aluminium, to a recoverable state. And come to it, the Assistant Collector does not say if he allowed exemption on the aluminium on account of the aluminium oxide - evidently not, the reason, perhaps being that duty under item 68 was not paid on the aluminium oxide.
9. Use of these materials is inescapable and the manufacture of aluminium would be impossible without these chemicals and substances.
While it is true that they do not form constituents in the final product, aluminium, their use in the process of manufacture in the system is imperative if aluminium is to be obtained from the bauxite.
In fact at present there is no commercially acceptable method to make aluminium in which these and other substances are not used and consumed without becoming constituents of aluminium. If we follow the Assistant Collector's analysis, nothing will be able to obtain the exemption under notification No. 201/ 79-CE for the manufacture of aluminium; to say nothing of the fact that the aluminium cannot be manufactured.
10. One of the objections raised by the manufacturer before the Assistant Collector was that rule 56A of the central excise rules and Section 11A of the Central Excises and Salt Act, 1944 were not applicable and that the demands are not maintainable. The Assistant Collector's answer to this is far from convincing. He says only that it was well established that even if the section or rule quoted is wrong, the demand would be maintainable if the facts can justify the demands, and records that the demands were not time barred as they have been served within the time limitation prescribed in Section 11A. The show cause notices of demand themselves record Section 11A as the section under which the demands were made. This section however does not permit such demands to be made and there is no authority under this section for such action. This section deals with any duty of excise which "has not been levied or paid or has been short levied or short paid or erroneously refunded." The credit held to be wrong by the Assistant Collector are not duties of excise which have not been levied or which have been short levied or short paid, and this Assistant Collector has no authority to recover duty on the cryolite, lime, borax, aluminium etc. because these are not goods whose assessment he has any powers over. If any duty on these goods is short levied or short paid, the Assistant Collector at the factory where they were made is the only authority which can issue demands under Section 11A. We are not even old that there were any short payment or short levy on the lime borax etc. and therefore no demand of duty under Section 11A in respect of these goods can be issued; nor can the Assistant Collector issue under Section 11A a demand for the credit that he says has wrongly been taken on these goods. His demand, therefore, is illegal.
11. One last point which invalidates these proceedings by the Assistant Collector is that notification No. 201/79-CE allows exemption to the finished products "from so much of the duty of excise leviable thereon as is equivalent to the duty of excise already paid on the inputs".
There was no authority for the central excise department, the Range or the Assistant Collector to deviate from this clear injunction of the law; they should have allowed such exemption only to the extent of the duty paid on the inputs, but it seems they gave a credit of the duty paid on the lime, borax etc. as if the exemption was a proforma credit under Rule 56A of the central excise rules. Notification No. 201/79-CE does not allow proforma credit as given by Rule 56A; it allows only an input-to-finished product proportional reduction of duty determined by the duty already paid on the input. The proceedings before the Assistant Collector are afflicted by 100 many inconsistencies and infirmities, besides being based on reading of the uses of raw material that one cannot agree with.
13. I agree with the reasonings set out by the learned brother, Shri H.R. Syiem. I may also add that the Tribunal in 1985(6) ETR 38 (Collector of Central Excise, Bhubaneswar v. Titaghur Paper Mills) has held that there is no authority to say that an input or raw material must go directly into the finished product. As long as it is consumed and utilised in a way that results or helps in the production or manufacture of the article in which the system is engaged, it is a raw material and is an input for that finished product. That was also a case concerned with the exemption given under Notification No. 201 of 1979. In view of the reasonings stated by the learned brother and also in the light of the prior decision of the Tribunal, I agree that the departmental appeal should be dismissed.