Full Judgment
2. A brief background to the issue is called for along with an understanding of the chapter note in question and the notification cited above.
3. The appellants manufacture polyester sewing thread and art silk embroidery thread. The allegation is that the appellants cleared these goods without payment of duty. The allegation itself is based on the audited balance sheet of the appellants, which shows that a certain quantity of the said excisable goods were manufactured and cleared, the statements of various persons involved and the delivery challans, which indicated that the said excisable goods were cleared without payment of duty Irbisblr. The Commissioner held that the appellants manufactured sewing thread and embroidery thread as the activity of winding duty paid yarn on smaller cones amounts to manufacture in terms of chapter No. 2 to chapter 55, which reads as follows: "In relation to products of heading No. 55.09 and 55.10, dyeing, printing, bleaching, twisting, mercerizing, texturing, doubling, multiple folding, cabling or any other process or any one or more of these processes, or the conversion of any one or more of these processes, or the conversion of any form of the said products into another form of such products shall amount to "manufacture." 4. The third issue namely applicability of Notification No. 35/95- CE dated 16/03/1995 as amended to the yarn both polyester and viscose was not raised before the Commissioner. We have no finding in this regard in the Commissioner's order. The said notification at serial No. 5 of the table annexed to it, exempts yarn subject to beaming, warping, wrapping, winding or reeling or any one or more of the processes with or without aid of power if produced out of yarn on which the appropriate duty of excise or additional duty leviable under Customs Tariff Act has already been paid. The appellant procures viscose yarn in hanks, dyes it and then reels it on small cones. The plea of the appellant is that viscose yarn in hank form when reeled on to cones after dying the same, attracts Nil rate of duty under the said notification.
6. Certain facts, which emerge out of the order of the Commissioner as well as out of the appeal memo have to be noted first. The appellants procure duty paid polyester doubled yarn from the market. Such polyester yarn is received in the factory in big cones. The appellants only reel the yarn on to smaller reels, which is then sold as sewing thread. In so far as viscose yarn is concerned, the appellants receive duty paid yarn in hanks, dye it and then reel it into smaller reels.
The product is called embroidery thread.
8. In so far as the contention of the appellant that the Commissioner only relied on the figures mentioned in the audited balance sheet to determine the production as such reliance is not sustainable in view of several judgments in this regard, we observe that in fact the Commissioner relied on a good deal of evidence gathered during the course of investigation such as statements of various persons closely connected with the activity of the appellants, documentary evidence in the form of delivery challans coupled with the figures indicated in the balance sheet, which is audited to conclude that the appellants indeed manufactured excisable goods of a certain quantity. In a world of deteriorating standards of morality a balance sheet is still considered sacrosanct. To admit that the balance sheet is fudged and therefore should not be relied upon is to shake the faith of this Bench in that document which is often touted, by the appellants in support of their argument that a particular concern is badly off financially. In this case there is other evidence as well to say that the appellants produced excisable goods of a certain quantity. We observe that the Commissioner was right in holding that the appellant did produce goods as stated in their balance sheet on which duty is payable. Weare concerned with two types of goods, polyester and viscose yarn. We will now deal with the activity undertaken by the appellant in respect of these two types of goods.
9. It is not disputed that the appellant procures doubled polyester yarn in bigger cones. It is never in question that such yarn is duty paid. The Commissioner relies on the chapter note cited supra to hold that reeling of yarn from bigger cones to smaller ones is a process of manufacture and therefore, duty is payable when one undertakes such activity. According to him, each time someone winds yarn on to a smaller reel from a big cone of yarn, manufacture takes place. This is an unacceptable proposition. The chapter note quoted above does not support the theory that winding of yarn on small cones so as to make the reel useful to a small consumer amounts to changing the form of the yarn. We therefore, hold that this part of the activity undertaken by the appellant on the polyester yarn does not amount to manufacture. No duty is payable on the polyester yam wound on smaller reels.
10. In so far viscose yam is concerned the appellants procure it in hank form, dye it and then reel it on smaller cones. The learned advocate argued that yarn in hank form subjected to this process is exempt from payment of duty as per serial No. 5 of Notification No.35/95. He argues that viscose yarn in hank town when dyed is not marketable and becomes so only when it is reeled and such reeled yarn is subjected to Nil rate of duty as per Notification No. 35/95. We are unable to agree with this proposition. Dying is a process of manufacture as per the chapter 2 cited supra. Viscose yarn in hank form is dyed by the appellant and therefore a new product comes into being.
Duty becomes payable on such dyed yarn. The appellants have not discharged the duty. If duty on dyed yarn is discharged then according to Notification No. 35/95, Nil rate of duty is attracted on the yarn, which is reeled on to cones. In other words, Notification No. 35/95 is applicable only when appropriate duty is discharged on the product at an earlier stage. In the case before us no duty has been paid on this dyed yarn and therefore Notification No. 35/95 is not applicable. We uphold the Commissioner's conclusion in so far as duty on the viscose yarn goes.
11. There is some difficulty here, which will have to be sorted out by the department. While demanding duty on both polyester yarn and viscose yarn, the Commissioner has not indicted separately the duty liability on each of these products. Now that we hold that no duty is payable on the polyester yarn (sewing thread) demand therefore needs to be revised on the basis of total viscose yarn manufactured by the appellant during the period in question.
12. Penalty under Section 11-AC is not imposable, as this provision has come into the statute only w.e.f September 1996. We are concerned with a period, which is prior to this.
13. Under the circumstances, penalty under Rule 173-Q is reduced to Rs. 2.00 lakhs.
(e) The appellant shall pay the duty on viscose yarn as and when it is worked out and indicated to him by the department.