1. The appellants are aggrieved of the central excise duty amounting to Rs. 72,33,577.20 demanded from them under Rule 9(2) of the Central Excise Rules, 1944 and the penalty of Rs. 75,000.00 imposed on them under Rule 173-Q by the Collector in the impugned order.
2. Brief facts of the matter are that during the course of investigation in the case made against M/s. Swastik Investment Company, Bombay, the central excise officers found that some of the consignments of the material described in the documents as crimped uncut waste and cleared from M/s Swadeshi Polytex Ltd., Ghaziabad, during the period from January, 1974 to December, 1977, were purchased by the appellants and utilised in the manufacture of polyester staple fibre. Shri S.N.Kabra, Sales Manager and Authorised Representative of the appellants, furnished particulars of their purchases and gave a statement under Section 14 of the Central Excises and Salt Act, 1944 saying that the material purchased by them was in running length and that after manually sorting and straightening the said material they cut it into staple fibre with the help of five power-operated fibre cutting machines installed in their factory. On adjudication of the matter, the Collector held that the so-called crimped uncut waste purchased by the appellants was in fact polyester fibre tow, that tow and staple fibre were commercially two distinct products, that they had carried on manufacture of polyester staple fibre from tow without making any declaration to the Department and without obtaining the requisite central excise licence and that they were liable to pay the duty on the staple fibre manufactured by them less the duty already proved to have been paid on the so-called crimped uncut waste. The appellants filed an appeal before the Central Board of Excise & Customs against the Collector's order. The said appeal was transferred by the Board to this Tribunal in pursuance of Section 35P and is now the subject-matter of these proceedings before this Bench.
3. During the hearing before us, both sides placed material to show the distinction between tow and staple fibre. We reproduce below an extract from the Ministry of Finance (Department of Revenue's) own circular on the subject which was relied on by the appellants :- "Tow is a collection of many parallel continuous filaments without twist which are grouped together in rope like form.
Tow is used for the same purpose for which staple fibre is used. Tow is mainly converted into staple fibre, and only a negligible quantity is converted directly into yarn. It has been therefore decided that duty should be levied on Tow at the rate applicable to staple fibre [M.F. (D.R. & I) F. No. 50/7/71-CX. 2, dated 22-12-72]." To put it in simple words, tow is fibre in running length while staple fibre is obtained by cutting tow into required short lengths (1" to 6").
4. During the material period, polyester fibre waste was chargeable to duty at the rate of Rs. 5.00 per kg. under exemption Notification No.53/72-C.E., dated 17-3-72. The same notification defined waste as "a tangled mass of short lengths not capable of being disentangled without considerable labour". With effect from 12-8-77, the rate of duty on waste was increased to Rs. 9.00 per kg. The rate of duty for staple fibre and tow, during the material period, was Rs. 40.00 per kg. under exemption Notification No. 47/73-C.E., dated 1-3-73, later reduced to Rs. 36.00 per kg. under the successor Notification No. 28/75-C.E., dated 1-3-75. However, both these notifications contained a proviso to the effect that where staple fibre was made out of tow which had already paid the appropriate amount of the duty of excise or the countervailing duty, the duty payable on such staple fibre was nil.
5. The appellants put forth the following arguments in support of their case : - (1) There was no evidence that the material purchased by the appellants from the Bombay market was tow and not waste. No samples of the material had been drawn by the Department. The appellants had to employ manual labour for sorting and straightening the material before cutting it. This showed that the material was waste. It is also evident from the fact that the resultant yarn manufactured by the appellants from the said material was sold as sub-standard yarn.
(2) Assuming that the material purchased by the appellants was tow, all that they did in relation to that material was simply cutting of running length fibre into short length fibre which did not involve 'manufacture' of a different article of commerce. They relied on the Supreme Court judgment in the case of Commissioner of Sales Tax, U.P., Lucknow v. Harbilas Rai and Sons (Sales Tax Cases Vol. XXI page 18).
In this case, the Supreme Court had held that boiling, Washing and sorting of pig bristles did not result into manufacture of a new commercial article as pig bristles remained pig bristles only. In the same way, there was no manufacture involved from fibre to fibre in the case of the appellants.
(3) Liability to pay duty at the correct rate was that of the manufacturer of the material purchased by the appellants; the said liability could not be fastened on the buyers of the material (reliance on the Delhi High Court judgment in Sulekh Ram and Sons v. U.O.I, and Ors. reported at 1978 E.L.T. 525). [While on this point, it may be stated that on 13-9-83 the appellants named M/s. Swadeshi Polytex Ltd., Ghaziabad, as the manufacturers of the material purchased by them but on 15-2-84 they stated that the investigation linking the material with the goods removed from M/s. Swadeshi Polytex Ltd., Ghaziabad, had not been put to the appellants in the Collector's show cause notice. However, in the same breath they added that their appeal may be kept pending till the main case against M/s. Swadeshi Polytex Ltd., which was under adjudication, was decided.] (4) In the absence of any allegation of fraud or suppression of facts in the show cause notice, the extended time-limit of Rule 9(2) was not applicable. Though, the appellants had not made any formal declaration or applied for a central excise licences the fact of their purchasing crimped uncut waste and utilising it for the manufacture of man-made yarn was within the knowledge of the Department as the appellants maintained the prescribed Raw Materials Register and submitted R.T. 5 returns. Limitation was a procedural matter and time-limit of six months as on the date of issue of the show cause notice applied. Consequently, the show cause notice issued on 9-4-79, covering the period from January, 1974 to December, 1977, was time-barred.
(5) In similar circumstances, the neighbouring Collector of Central Excise, Bombay-I, dropped the proceedings against M/s. Swastik Investment Company and two others by his adjudication order dated 16-12-81. The Central Board of Excise & Customs also, in their appellate capacity, allowed the appeals of M/s. Bharat Commerce & Industries Ltd., Patiala and M/s T.I.T., Bhiwani, holding that once duty had been paid on fibre waste, the fibre manufactured out of it by a tow cutting machine could not be assessed to duty again as it would amount to double taxation under Tariff Item 18.
6. The Department's representative countered the arguments of the appellants as under :- (1) The evidence on record showed that all the material purchased by the appellants had been used up and no real waste resulted. This showed that the material was of good quality fibre. Further, it was in running length. The material thus conformed to the definition of tow. Waste as defined in Notification No. 53/72-C.E. had to be tangled mass of short lengths not capable of being disentangled without considerable labour. Running length of the material purchased by the appellants alone was sufficient to show that it was not entitled to pay duty at the rate applicable to waste under this notification as the notification specifically applied to short lengths only.
(2) Tow was a distinct commercial product different from staple fibre. Tow was a stage earlier than staple fibre. Tow as such could not be used for spinning of yarn; it had to be converted into staple fibre to facilitate such spinning. He relied on the earlier orders of this Tribunal wherein processes like doubling of yarn and powdering of pyrites had been held to be processes of manufacture which brought into existence commercially distinct products. In the same way, cutting of polyester fibre tow into polyester staple fibre was also a process of manufacture. The Sales Tax case of Harbilas Rai and Sons relied on by the appellants could not be applied to central excise matters as the definition of "manufacture" in the Sales Tax law was not pari materia with the central excise definition. The Department's case, in brief, was that really tow was cleared from the factory of M/s. Swadeshi Polytex Ltd., Ghaziabad, but on payment of duty applicable to waste and that since the appellants had manufactured staple fibre by cutting the running length tow, they should pay the differential duty. The argument of double taxation was not valid as the proviso incorporated in Notifications Nos. 47/73-C.E. and 28/75-C.E. took care to avoid double taxation.
(3) If description of the goods as given in the documents did not tally with the goods themselves, payment of duty on the goods available in the market could not be presumed. Since in the appellants' case the goods were really tow and not waste, they were not entitled to take advantage of Sulekh Ram's case.
(4) Since the appellants had manufactured polyester staple fibre from polyester tow without any declaration or licence and had not paid any duty on the staple fibre so manufactured, their case was one of unauthorised removals under Rule 9(1) and not one of short-levy under Rule 10 and hence Rule 9(2) had been correctly applied. In support, reliance was placed on the authorities reported at 1981 E.L.T. 97 (Delhi), 1983 E.L.T. 338 (Bombay) and 1983 E.L.T. 578 (CEGAT).
(5) The cases decided by the Collector of Central Excise, Bombay-I, and the Board were distinguishable on facts as in those cases it had been accepted that the material purchased by the parties involved in those cases was waste.
7. We have carefully considered the matter. For the purpose of deciding the present appeal, we do not consider it necessary to trace the origin of the material purchased by the appellants, i.e., whether the said material was manufactured and cleared by M/s. Swadeshi Polytex Ltd., Ghaziabad, or some other manufacturer. Without hearing the concerned manufacturer(s), it would not also be fair for us to record any finding on the origin of the material.
8. As regards the question whether the material purchased by the appellants was tow or waste, we were told by the appellants that the material purchased by them was packed in gunny bags and that tow was generally not marketed or at least it was never packed in gunny bags.
The appellants may be right in saying that tow is not packed in gunny bags. But in the background of this case, one must consider as to what a person desiring to clear a high duty item like tow but wanting to pay the very low duty as applicable to waste would do. In order not to make the evasion of duty self evident, he must at least pack the material in the manner in which waste is packed, i.e., in gunny bags. Such packing would no doubt result in some jumbling up or tangling of the loose rope like material in running length. But this could be set right by employing some manual labour to sort out and straighten the fibre before cutting it. The evidence on record shows that this is what happened in the case of the material purchased by the appellants. No real waste resulted when they used this material except uneven end cuttings which too were used by them after carding. This proves that their material was of good quality. Further, it was indisputably in running length. It has, therefore, to be held that the material was not waste as defined in Notification No. 53/72-C.E. The material substantially conformed to the definition of tow although in the documents it was described as crimped uncut waste and presumably paid duty as applicable to waste.
9. The next question which we have to consider is whether there was any liability on the part of the appellants to obtain a licence and pay the differential duty. Liability for the duty could arise only under Item 18 of the Central Excise Tariff which related to rayon and synthetic fibres and yarn. Within this item, the relevant sub-item contained a single entry for man-made fibres, without any further distinction based on the nature, form or length of the fibre. There was not even a separate mention of tow and staple fibre in the tariff entry. The entry was divided into two sub-entries - (i) non-cellulosic, (ii) cellulosic in 1977. But this is not relevant for the matter before us as here we are concerned only with polyester fibre which was a non-cellulosic fibre. The material which the appellants purchased was already a man-made fibre but in running length. All that they did in relation to it was to cut it into staple length after some manual sorting and straightening. The question before us is whether cutting the long fibre into short fibre by them resulted into a new and different article of commerce. It is now well-settled that this question must be answered by the test laid down by the Hon'ble Supreme Court in their famous judgment in the D.C.M. case [reported at 1977 E.L.T. (J 199)]-that 'manufacture' means bringing into existence a new substance and does not mean merely to produce some change in a substance. When the appellants cut the running length fibre (tow) into short length fibre (staple fibre), it can hardly be said that they brought into existence a new substance. The character and use of the substance (man-made fibre) remained the same. With the change in length of the fibre, it, no doubt, acquired a new name. But since the tariff entry in this case recognised a single description 'man-made fibres' with no further sub-division based on length of the fibre and without even a distinct enumeration of various forms of the fibre, it has to be held that by cutting long fibres into short ones, the appellants brought no new product into existence so as to attract a fresh levy under the same tariff entry. What they purchased was man-made fibre and what they obtained by cutting it was also man-made fibre. Such cutting, therefore, involved no manufacture and hence no duty liability for them. We notice further that even the exemption Notifications (47/73-C.E. and 28/75-C.E.) placed staple fibre and tow on par in a single composite entry and fixed a common concessional rate for the two. The Department relies on the proviso to the notifications. But all that the proviso said was that the rate of duty on staple fibre made out of duty-paid tow would be 'nil'. In other words, the proviso avoided double taxation on such staple fibre. The proviso was a part of the exemption notification. Such a notification issued under Rule 8(1) can only grant exemption-full or partial-vis-a-vis the duty leviable under the Tariff. An exemption notification clearly is not a charging provision and it cannot be interpreted so as to create a duty liability where none existed under the Tariff entry. What attracted the levy under the tariff was the manufacture of man" made fibres. The particular fibre involved in this case was polyester fibre. Manufacture of polyester fibre starts with the chemicals DMT and MEG or with their polycondensation product called polyester chips. It goes through the processes of spinning, drawing, crimping and cutting. It requires a huge plant costing crores of rupees. The appellants had nothing of the sort. All that they had were five tow cutting machines which cut long fibre into short fibre of staple length. In the circumstances, we uphold the appellants' contention that they were not liable to take out a licence or to pay duty for their fibre cutting activity. Before concluding, we wish to make it clear that we are not laying down any general rule that cutting is not a process of manufacture. The decision in each case must depend upon the facts of that particular case, including what the goods were before cutting, what they became after cutting and what the relevant tariff entry said. Secondly, it appears to us that if the Department holds that the original manufacturer of the material cleared it on payment of lower duty as applicable to waste while the material did not conform to the definition of waste as laid down in the relevant notification, the action of the Department should really have to be directed against that manufacturer. We may add here that while concluding the hearing before us, the Department's representative also admitted that if the original manufacturer paid the correct duty on the material cleared by him, there would be no liability on the appellants.
10. Since we are in agreement with the appellants on the substantive issue, we do not consider it necessary to go into the question of time bar.
11. The appeal is allowed. The duty demanded from the appellants and the penalty imposed on them are set aside.