1. The captioned appeals have been filed by the Commissioner of Central Excise, Coimbatore. As per the impugned orders, the Commissioner dropped the proposal to deny the exemption from duty extended by Notification No. 253/82 dated 08/11/82 to 'cotton polyester blended lungi fabrics' falling under the CSH. 52.06 of Central Excise Tariff processed and cleared by the respondents. Following intelligence received, premises of SSM were searched on and the processed lungi fabrics of value Rs. 46,830.74 were seized. The declared processes undertaken by the respondents were curing, scouring, stentering, calendaring etc. Scrutiny of the private records of the respondents revealed that the respondents had subjected the impugned fabrics to chemical padding and special finishing. The exemption contained in Notification No. 253/82 dated 08/11/82, was not available to goods which were subjected to processes other than those specified in the notification. The processes such as padding with chemicals and special finishing processes were not specified in the notification. The highest amount proposed to be demanded from the respondents pertained to SSM.SSM was alleged to have undertaken also the process of mercerizing which disqualified their clearances of lungi fabrics for the exemption under the said notification. Therefore, we examine in detail the eligibility of SSM to the exemption first. After due process of law, the Commissioner decided that SSM did not undertake any process which constituted manufacture.
2. In adjudication, the Commissioner found that the process of padding with starch and chemicals and special processes undertaken by SSM did not impart a characteristic of lasting nature to the fabrics. As per Board's Circular No. 52/10/89- CXI dated 18/10/89 and clarification dated 24/10/89, assessees could avail exemption when padding process was undertaken using starch and chemicals. After arranging verification of the assessee's claim of consumption of starch in the process of production of lungi fabric, the Commissioner concluded that starch was used in the padding process by SSM. He found that 'special finishing' did not refer to any specific process in technological parlance. It meant only use of certain chemicals in the various processes undertaken by SSM to add softness and gloss to the fabrics. As regards mercerization, after referring to its meaning in the technical dictionary, he found that mercerization of dyed fabrics was technically infeasible.
3. In the appeal before us, Revenue has taken the ground that by availing exemption under Notification No. 253/82, the respondents themselves had agreed that chemical padding undertaken by them amounted to process of manufacture. Another ground taken is that there was no standard definition of 'standard of permanence'. Though CBEC vide their letter F. No. 52/10/89-CX dt. 18.10.89 had clarified that use of chemicals in addition to natural starch would not deprive the benefit of notification, there was no evidence of use of natural starch in padding process. Shri Elavarasan, one of the Directors, had not mentioned use of starch in the process in his statement. There was no account of consumption of starch in the Form IV register of the respondent SSM. Documents recovered from the assessee's premises showed that their customers had asked for mercerized finishing or had indicated that mercerizing done earlier was not required in respect of certain orders. The mercerizer note book contained overwritten entries.
These facts did not justify Commissioner's finding that mercerizing was not done, especially in the absence of specific claim to that effect by the respondent supported by evidence. The Commissioner had dropped the proposal to penalize the respondents under Section 11AC and under Rule 173Q without justification. The appellant prayed for modifying the impugned order which dropped the demand of duty of Rs. 2,14,87,266.67 on processed cotton polyester fabrics, demand of differential duty of Rs. 46,830.74 on the seized goods and did not impose penalties under Section 11AC and Rule 173Q.4. In the written submissions filed by the respondents it is submitted that the activity of stentering alone was undertaken on the lungies.
Stentering machine was different from padding machine. All the processes cited in the Notification 253/82-CE wore off. The same was not true in the case of processes like printing, bleaching, dyeing, mercerizing, waterproofing and organdie processing which imparted lasting character on the fabrics. Special finishing was not a process amounting to manufacture. It referred only to the softness of the fabric and had no other meaning.
4.1. The impugned processes did not amount to manufacture and were covered by Notification No. 253/82 for exemption. As per the various case law relied on by the Commissioner, in order for a process to constitute manufacture, it should impart a new and lasting character to the fabrics. It is not the case of the department that the processes undertaken impart lasting character to the fabrics. The effect of the processes undertaken by the respondents did not remain after one or two washes. As per Tariff Advice No. 36/84 dt. 27.07.84, padding solution containing ingredients like small amount of optical whitening agent, wetting agent, and fillers like china clay would also be covered by the term padding in Notification 253/82 dated 08/11/82. The Commissioner ascertained the transient nature of the effect of the process of padding based on trade enquiries. There was no finding to the contrary on record, he observed.
4.2. The processes mentioned in the notification amounted to manufacture as held by the Apex Court and Tribunal. As regards padding, the Apex Court decided in Susma Textiles Pvt. Ltd. 2004 (167) ELT 487 (S.C.) that padding did not amount to manufacture. Padding was not a process like printing and dying which imparted a lasting character.
That the assessee had claimed the benefit of the notification could not be a ground to allege that the process amounted to manufacture.
Processes like padding, stentering, calendaring etc., mentioned in the Notification No. 253/82-CX could not be a ground to infer that the impugned process amounted to manufacture. Unless there was a deeming provision in the tariff, a process to be exigible, the same should constitute manufacture. They relied on Shyam Oil Cake Ltd. v. CCE Jaipur 4.3. The process under taken, namely, chemical padding-was eligible for exemption under Notification No. 253/82, in as much as natural starch was used in the process. The Commissioner referred to the claim of the respondents regarding consumption of starch in the processing of lungi fabrics and had entered a finding that 'an exercise of verification was carried out towards this end. It fairly confirms to the consumption pattern brought out in great detail by SSM.' 4.4. Once the usage of starch is established, the allegation in the show case notice fails. Shri Klavarasan, partner did not state that search was consumed in the process carried out on lungi fabrics as no such question was put to him. An inference that search was not used did not follow from his deposition. The presence of starch in processed lungi tabrics was confirmed by the test conducted by South India Textile Research Association vide Test Report dated 27.04.99 on the sealed sample drawn and furnished to the respondents by the department.
Department had drawn the sample or 19.09.89 (test memo No. 2/89 for chemical analysis). Despite several reminders, department had not divulged the result of test. Therefore, the respondents had approached SITRA.4.5. As regards mercerizing, the Commissioner held that mercerizing was not feasible on the dyed fabrics and the said process could only damage the dyed fabrics. The test report of SITRA categorically confirmed that the process of mercerizing was not done on the fabrics. These were not controverted in the appeal. The Commissioner found that the overwriting in the mercerizer note book was more by mistake and no motive could be assigned.
4.6. Special finishing was a generic term used for conveying softness and glow achieved through curing, scouring, padding and stentering processes. The Commissioner had taken a considered view that providing special finishing did not disqualify the lungi fabrics for the exemption.
4.7. The Ld. Counsel for the respondents relied on the findings of the Apex Court in Siddheswari Cotton Mills Pvt. Ltd. v. UOI in pleading that the impugned processes undertaken by the respondents did not amount to manufacture. The issue in dispute was not whether these processes are covered by the exemption notification.
Liability to duty of a product was not determined on the basis of an exemption but on the question whether the process was one of manufacture.
5. We have carefully considered the case records and the rival submissions. The allegation against the SSM is that they engaged in padding of cotton polyester lungi fabrics with chemicals and also special finishing processes. Notification No. 253/82 did not extend the exemption from duty to fabrics falling under CSH 52.06 subjected to processes other than those specified in the notification. The fabrics proceed by SSM were alleged to have been subjected also to mercerizing.
In adjudication, the Commissioner found that the respondents had undertaken padding of cotton polyester dyed lungi fabrics with the solution of starch and chemicals. He rejected the departments plea that the partner of SSM had not shown use of starch in the processes undertaken by them. The Commissioner found that Sri Klavarasan's not mentioning processing with starch could not lead to a finding of SSM not using starch. As contended by SSM, Sri. Elavarasan gave only answers to the questions put to him and he was not asked whether starch was used in any process. Therefore, the tentative conclusion in the Show Cause Notice, had no reliable basis. He arranged verification and was satisfied from the records of consumption of raw materials that SSM had used starch. Moreover, we find that results of test of a sample drawn by the department to ascertain application of padding solution which contained starch was never divulged to SSM despite persistent requests by them. The Commissioner did not give any finding in this regard. However, he found that SITRA, which had tested a copy of the sealed sample drawn by the department referred to above, had found starch in the sample. The test result also certified that it was infeasible to impart a lasting characteristic by applying starch in padding on fabrics which are dyed at the yarn stage.
5.1. As per CBEC Circular F. No. 51/18/83-CX-II dated 27/07/84 the Chief Chemist had opined that the object of the exemption was to cover such fabrics which were treated only to achieve a temporary effect of sizing (stiffening) and gloss, and addition of wetting agent, optical whitener, fatty matter and fillers were meant only to help padding process so as to give a temporary brightness to sized fabrics, to soften the starchy film left on the fabric and to give a better and fuller appearance. These additives got removed from the fabrics when the starch was washed up. It was decided that padding solution containing ingredients like small amount or optical agent, wetting agent, fatty matter and fillers like china clay, would also be covered by the term padding referred to in Notification No. 253/82 dated 08.11.82. In Circular 16/CE/89-CX 1 dated 24/10/89, it was clarified that padding with Taffinol Anu alone, without starch would not be eligible for exemption under Notification No. 152/82.
5.2. In the review order of the Board, it is averred that the processes mentioned in the Notification No. 153/82 did not impart a lasting characteristic. The effects wore off in case of all processes. Thus the Revenue does not contest the finding that the process of padding with starch solution does not impart a permanent character to the cotton polyester lungi fabric. Alleged special processes also are found to render the fabrics sheen and softness. These also do not impart any effect of a lasting character.
5.3. As regards mercerizing found against SSM in the Show Cause Notice, the Commissioner concluded that the proposal was rooted in a mis-reading of over-written entries in the records of SSN. There is no other evidence to establish that respondents had cleared mercerized fabrics.
5.4. As per Note 3 to Chapter 52 of the tariff, in relation to products of headings 5204, 5205, 5206 and 5207, the process of dyeing, printing, bleaching, mercerising, twisting, texturising, doubling, multiple-folding, cabling or any other process or 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'.
5.5. In Siddheswari Cotton Mills (supra), the Apex Court observed that the expressions 'bleaching, mercerizing, dyeing, printing, water proofing, rubberizing, shrink-proofing, organdie processing' which preceded the expression 'or any other process' contemplated processes which imported a change of a lasting character to the fabric by either the addition of some chemical into the fabric or otherwise. These were not unrelated to the concept of manufacture and 'Any other process' in the section must share one or the other of these incidents. The expression 'any other process' is used in the context of what constitutes manufacture in its extended meaning and the expression 'unprocesed' in the exempting notification draws its meaning from that context. As per the ratio or the above judgment, any activity such as padding with starch and chemicals, and special finishing are not processes of manufacture. Therefore subjecting cotton polyester dyed lungi fabrics to padding and the special processes, we find, do not constitute manufacture. We concur with the Commissioner in his finding that the allegations and proposals against SSM were not well founded.
Accordingly, we dismiss the appeals filed by the Revenue against the Order in Original No. 10/99 dated 21.09.99.
6. Notification No. 153/82 CX exempted cotton fabrics, falling under Chapter 52 of the Schedule to the Central Excise Tariff Act, 1985 when subjected to any process or processes specified in the table annexed, from the whole of the duty of excise leviable thereon. However no such exemption shall apply if such cotton fabrics are subjected to any process or processes specified in the said table within the same factory in which they have been subjected to any process other than the processes specified. The following is the table.
Singeing, that is to say, burning away of knots and loose ends in the fabrics Scouring, that is to say, removing yarn size and natural oil found in cotton Padding, that is to say, applying starch or fatty material on one or both sides of the fabric Hydro-extraction with the aid of power, that is to say, mechanically extracting or mechanically squeezing out water from the fabric.
6.1 In deciding the issue, the only relevant question is whether padding with starch and the special processes involve a process amounting to manufacture as defined in the Section 2(f)(v) of the Central Excise Act. That the exemption notification does not cover or cover a process for exemption is not material. By applying starch with some chemicals and the special process identified, the fabrics acquire the quality of stiffness and sheen which vanishes after a couple of washes. Such a process which does not bring into existence goods with a new name, properties or uses cannot be held to be manufacture. Apex Court has found that the Note 3 to Chapter 52 does not in effect lay down a deeming provision as regards manufacture. Therefore the impugned goods cannot be subjected to further duty liability on account of the impugned process.
7. In respect of the other respondents, no sample was tested and it was not reliably verified that they did not use starch in the padding process. In view of our above findings in the case of SSM, similar findings of the Commissioner on such activities of padding and special processes in respect of M/s. Manjula Textile Processors (P) Ltd., M/s.
Rajalakshmi Textile Processors (P) Ltd., M/s. J.K.K. Textile Processors Mills (P) Ltd., and M/s. Jansons Textile Processors, have to be held to constitute no manufacture. In the case of all respondents except M/s.
J.K.K. Textile Processors Mills (P) Ltd, there was also the allegation that they had undertaken mercerizing. The impugned clearances were of processed cotton polyester dyed lungi fabrics. The Commissioner had found with the aid of technical literature that it was in feasible to mercerise dyed fabrics invoked in all cases. In the circumstances we find that the impugned orders have to be sustained. Accordingly, we dismiss all the appeals filed by the revenue.