SWADESHI POLYTEX LTD.versusCOLLECTOR OF CENTRAL EXCISE

                        SWADESHI POLYTEX LTD.
A                                 v.
                  COLLECTOR OF CENTRAL EXCISE

                            NOVEMBER 23, 1989

B          [SABYASACHI MUKHARJI AND B.C. RAY, JJ.]

          Central Excises and Salt Act. 1944: Sections 4 and 35L-Asses-
    see-Manufacturing polyester fibre-inputs ethylenl!l glycol and
    dimethye tetraphthalaie--Whether entitled to claim set off of duty on
    ethylene glycol.
c         The appellant was engaged in the manufacture of polyester fibre
    (man-made) falling under tariff item 18 of the erstwhile Central Excise
    Tariff. In its manufacture, the appellant was using, among other .
    things, ethylene glycol and DMT (Dimethyle Tetraphthalate}--duty paid
    ethylene glycol falling under tariff item N_o. 68._D_uring the course of
D   manufacture of polyester fibre, two basic raw materials DMT and
    Glycol interact and thereby certain waste comes into existence. This
    interaction alSo gave rise to methanol, a by-product.

          Notification No. 201/79 dated 4.6.1979 exempted all excisable
    goods on which duty of excise was leviable and in the manufacture of
E   which any goods falling under tariff item 68 had been used, from so
    much of the duty of excise as was equivalent to the duty of excise paid on
    the imputs.

          Exemption notification No. 201/79 was amended by notification
    No. 102/81 with effect from 11th April, 1981. By this amended notifica-
F   tion, a second proviso was added which provided that the credit of the
    duty allowed in respect of Inputs could not be denied or varied on the
    ,ground that part of the inputs was contained in any waste, refuse or
    by-product arising during the manufacture, irrespective of the fact that
    such waste, refuse or by-product was exempt from the whole of duty of
    excise leviable thereon or was chargeable to nil rate of duty.
G
        Earlier, -in the case of proforma credit procedure under rule 56-A of
  the Central Excise Rules, clarification had been issued by the Collector
  of Central Excise, under trade notice dated 19.7.1980 to the effec.t that
  proforma credit was permissible even where at an intermediate state of
  manufacture, a rfual product which was fully exempt from duty came
H into being, provided that the fully e.xempted product was consumed in

                                       262
                       SWADESHJ POLYTEX v. C.C.E                          263

the production or manufacture of the finished product. This trade
notice categorically stated that the clarification would also be applicable       A
to exemption notification No. 201/7?·

       The appellant claimed set off of duty paid on ethylene glycol used
in the manufacture of polyester fibre under notification No. 201/79. The
Assistant Collector of Central Excise held on 6.8.1980 that no proforma           B
credit was allowable in respect of ethylene glycol used/consumed in the
methanol, the ethylene glycol residual waste and polyester fibre waste.

     The Collector of Central Excise (Appeals); however, allowed the
appeals filed by the appellant and set aside the Assistant Collector's
order and the .demands. The Collector observed that the procedure
under notification No. 201/79 was materially the same as the procedure            c
under rule 56A of the Central Excise Rule.

      The revenue went up in appeal before the Customs, Excise & Gold
(Control) Appellate Tribunal. Before the Tribunal, it was contended on
behalf of the revenue that prior to 11th April, 1981 there was no provi-          D
sion in notification No. 201/79 entitling the manufacturer to obtain
 credit of the duty of excise already paid on the inputs resulting in waste.
 or by-products or refuse which arose in the manufacture of excisable
products which used the inputs; that the trade notice issued pertained to
rule 56-A and not to the notification; that the rule and notifications
were different enactments and tl)e provisions of one could not be read            E
into another even after 11th April, 1981; that the exemption was only in
respect of duty on inputs in the ·manufacture of excisable goods and
their waste, by-product or refuse; and that since methanol was not
excisable, it was not eligible for set off of duty on the glycol content in its
manufactnre.
                                                                                  F
      On behalf of the appellant, however, it was contended that glycol
was used totally in the production of polyester fibre;. that methanol
resulted out of the reaction of DMT and glycol; and that the Govern-
ment always maintained parity between rule 56-A and notification No.
201/79.
                                                                                  G
      The Tribunal was of the opinion that the Collector's observation
that the procedure under notification No. 201/79 was materially the
same as the procedure under rule 56-A and consequently the amending
notification deemed to have retrospective effect was not, in the absence
of any such indication, acceptable. In the premises, the Tribunal
allowed the appeals, of the Revenue.                                              H
     264         SUPREME COURT REPORTS                  [ 1989] Supp. 2 S.C.R.

A          Allowing the appeals, this Court,

           HELD: (l) On •an analysis and comparison of the notilications
     No. 201/79, No. 102/81 and the circulars, it is clear that the clarification
     in the form of trade notice issued in respect of rule 56-A was as much
     applicable to that rule as to notification No. 201/79. (2720]
B
         (2) It is true that when in a fiscal provision, is benefit of exemp-
  tion is to be considred, this should be strictly considered. But the strict-
  ness of the construction of exemption notification does not mean that
  the full effect to the exemption notification should not be given by any
  circuitous process of interpretation. Aller all, exemption notilications
C are meant to be implemented and trade notices in these matters clarify
  the stand of the Government for the trade. [272E-F]

        (3) The quantity of ethylene glycol required to produce a certain
  quantum of polyester fibre is determined by the chemical reaction. It is
D not possible to use a lesser quantum of the ethylene glycol to prevent
  methanol from arising for producing a certain quantity of polyester
  fibre. It is not as if the appellants have used excess ethylene glycol
  wantedly to produce the methanol. It is also clear that the appellants
  are not engaged in the production of methanol but in the production of
  polyester fibre. [272H; 273A]
E
            (4) The Tribunal, in the instant case, failed to interpret the words
     of the exemption notilication No. 201/79 properly and fully. The said
     ,notification exempted all excisable goodf on which the duty of excise
     was leviable and in the manufacture of which any goods falling under
     Tariff Item"No. 68 (i.e. inputs) had been used from so much of the duty
JF   of excise already paid on the inputs. The excisable goods, namely,
     polyester fibre, were not wholly exempt from duty nor chargeable to nil
     rate of duty. It cannot be read in the notification that the notification
     would not be available in case non-excisable goods arise during he
     course of manufacture. In fact, the Tribunal seems to have erred in not
     bearing in mind that exemption notification was pressed in $ervice in
     respect of polyester fibre which is excisable goods and not in respect of
G    methanol which arises as a bjf-product as a l'art and parcel of chemical
     reaction. It appears further 011 a comparison of the rnle 56-a and the noti-
     fication No. 201/79 that these deal with identical situations. [272F; 273C-D]

           Indian Aluminium Co. Ltd. & Anr. v. A.K. Bandyopadhyay &
     Ors., [1980] ELT 146, referred to.
H
             SWADESHI POLYIEX v. C.C.E IMUKHARJI, J.J              265

      CIVIL APPELLATE JURISDICTION: Civil Appeal No. 3988-
90 of 1988.                                                               A

      From Order No. 590-592/1988 dated 18.8.1988 of the Customs
Excise and Gold (Control) Appellate Tribunal, New Delhi in Appeal
Nos. E 375/84-D, S.A. No. 991/88-D & 992/88--D with C.O. No. 283/
84-D.                                                                     B

     V. Lakshmikumaran, Madhava Rao and V. Balachandran for
the Appellant.

      A.K. Ganguli and P. Parmeshwaran for the Respondent.

      Judgment of the Court was delivered by                              c
     SABYASACHI MUKHARJI, J. This is an appeal under section
35L of the Central Excises & Salt Act, 1944 (hereinafter referred to as
'the Act') against the judgment and order dated 18th August, 1988
passed by the Customs, Excise & Gold (Control) Appellate Tribunal,        D
New Delhi (hereinafter referred to as 'the tribunal').

      The appellant was at all relevant times engaged in the manu-
facture, inter alia, of polyester fibre (man-made) falling under tariff
item 18 of the erstwhile Central Excise Tariff. In the manufacture of
the aforesaid, the appellant was using, amongst other inputs, ethylene    E
glycol and DMT (Dimethyl Tetraphthalate )-duty paid ethylene
glycol falling under tariff item No. 68 of the erstwhile Central Excise
Tariff received by the appellant and used in the manufacture.

      The notification No. 201/79 dated 4.6. 79, mentioned hereinafter,
exempted, according to the appellant, all excisable goods on which duty   F
of excise was leviable and in the manufacture of which any goods
falling under tariff item 68 had been used, from so much of the duty of
excise as was equivalent to the duty of excise paid on the inputs. The
appellants claimed set off of duty on ethylene glycol used in the
manufacture of polyester fibre under notification No. 201/79 dt.
23.6.1979. In response to the appellant's seeking set off the duty paid   G
on ethylene glycol, they received a letter from the Assistant Collector
of Central Excise, Ghaziabad, dated 6th August, 1980 by which the
Asst!. Collector held that no proforma credit was allowable in respect
of ethylene glycol for the following:

      (a) Methanol which is not excisable and is cleared without pay-     H
    266         SUPREME COURT REPORTS                [ 1989] Supp. 2 S.C.R.

  ment of duty; (b) Glycol residual waste which was being destroyed by
A the appellants by throwing in the field; and (c) Polyester fibre waste
  which was used in the recovery of DMT and exempt from payment of
  duty under Central Excise Notification dt. 19th May, 1976.

        The appellants were further directed to furnish the exact per-
B centage of ethylene glycol content used/consumed in the methanol,
  the ethylene glycol residual waste and polyester fibre waste; and that
  not to utilise the proforma credit or set off credit till the data was
  furnished and the same was authenticated by the Chemical Engineer.
  The classification list submitted by the appellants was modified in
  ternis of the said letter.
c       Thereafter, classification list was filed claiming set off of duty on.
  ethylene glycol falling under tariff item 68 under exemption notifica-
  tion No. 201/79 as amended by notification No. 102/81 dt. 13th May,
  1981. By this amended notification, a second proviso was added which
  provided that the credit of the duty allowed in respect of inputs could
D not· be denied or varied on the ground that part of the input was
  contained in any waste, refuge or by-product arising during the
  manufacture, irrespective of the fact that such waste, refuse or by-
  produce was exempt from the whole of duty of excise leviable thereon
  or was chargeable to nil rate of duty.

E       Hence, it is the case of the appellants that from 11th April, 1981
  even though some part of the input may be contained in any waste,
  refuge or by-product which is chargeable to nil rate of duty, the credit
  of the duty paid on the inputs could not be denied. By this order the set
  off of duty in respect of duty paid ethylene glycol was allowed from
  11th April, 1981 onwards except in the case of ethylene glycol used/
F consumed in polyester waste used for recovery of DMT on the ground
  that this polyester waste was chargeable to nil rate of duty. Similarly,
  duty paid on ethylene glycol which was used for recovery of DMT was
  held not to be allowable while paying duty on polyester fibre.

        Aggrieved thereby, an appeal against the said order to the Col-
G lector of Central Excise, Ghaziabad was filed.

       The main contentions of the appellants were that the ethylene
  glycon received in the factory after payment of duty was consumed in
  the manufacture of polyester fibre only. During the course of
  manufacture of polyester fibre, two basic raw materials DMT and
H Glycol interact and thereby certain waste comes into existence. This
              SWADESHI POLYTEX v. C.C.E [MUKHARJJ, J.]                267         •

waste is recycled with glycol for the recovery of DMT in DMT recov-
                                                                             A
ery plant, within the factory. Hence, the entire set off of duty was to be
allowed since no part of DMT produced was diverted for any other use
other than production of polyester fibre nor was it taken outside the
factory. The appellants contended that in case of proforma credit pro-
cedure under r11le 56-A of the Central Excise Rules, clarification had
been issued by the Collector of Central Excise, under trade notice No.       B
72-CE/80 dt. 19. 7 .1980 to the effect that proforma credit is permissible
even where at an intermediate state of manufacture, a final product
which is fully exempt from duty comes into being, provided that the
fully exempted product is consumed in the production or manufac-.ure
of the finished product. This trade notice categorically states that this
clarification would also be applicable to exemption notification No.
201/79.
                                                                             c
      By an order dated 17th November, 1981 the Asstt. Collector held
that the appellants were entitled to credit of duty paid on the ethylene
glycol only to the extent of the percentage content as determined by
the Chief Chemical Engineer, CRCL, New Delhi. The order covered              D
the period from 17. 7.1979 to 10.4.1981.

     As mentioned before, the notification was amended from 11th
April, 1981 whereby the credit of the duty on any inputs was not to be
denied to any waste, refuse or by-product arising during the
manufacture of the output irrespective of whether the waste, refuse or       E
by-product was chargeable to nil rate of duty or not.

       By a letter dated 27th November, 1981 the appellants were
informed that set off for Rs.15,41,673.60 was inadmissible. By a subse-
quent letter of the Superintendent of Central Excise, Ghaziabad,
dated 17th December, 1981 it was stated to the appellant that they had       p·
received Rs.15,42,740.16 as set off which was inadmissible. The period
mentioned was 17.7.1979 to 10.4.1981. The appellants case was that
this related only to ethylene glycol content in methanol.

      There was a second appeal preferred to the Collector of Central
Excise, Delhi, against the order dated 17.11.1981 of the Asstt. Col-         G
lector disallowing the set off of duty credit paid on ethylene glycol
content in methanol and ethylene glycol waste and polyester fibre
waste. A third appeal was filed before the Collector (Appeals) against
the duty demand of Rs.15.42,740.16.

      Thereafter, the appellants received a letter dated 23rd April,         H
         268         SUPREME COURT REPORTS               [1989] Supp. 2 S.C.R.

     A 1983 from the Superintendent of Central Excise which stated that the
       stand of the appellants that the ethylene glycol contribute only H
·'
       positive and not OH negative, has been accepted by the Chief Chemi-
       cal Engineer, CERL, New Delhi. Consequently, since the ethylene
       glycol content in the methanol, wherein the ethylene glycol contribute
       only H positive and not OH negative ions, the amount of inadmissible
     B set off would stand reduced to Rs.90,749,76.

            The aforesaid three appeals were decided by the· Collector of
       Central Excise (Appeals), by passing a single order dated 15th
       December, 1983, wherein he observed that the procedure under notifi-
       cation No. 201/79 was materially the same as the procedure under rule
     C 56A and in the circumstances allowed all the appeals and set aside the
       Asstt. Collector's order and the demands.

                Aggrieved thereby, the revenue went up in appeal before the
         tribunal. The tribunal after examining the aforesaid contentions noted
         the contention of the parties. It was the case of the revenue that prior
     D to 11th April, 1981 there was no provision in notification No. 201/79
         entitling the manufacturer to obtain credit of the duty of excise already
         paid on the inputs resulting in waste or by-product or refuge which
         arose in the manufacture of excisable products which used the inputs.
         Hence, it was argued that the duty element in the quantity of glycol
         which was contained in the glycol residual waster, polyester fibre
     E waste and methanol (by-product) which was non-excisable, did not
         qualify for credit which could be subsequently used for discharging
         duty liability on dutiable finished product. The provision contained in
         notification No. 102/81 was not available prior to I Ith April, 1981 it
         was submitted ~n behalf of revenue. It was further submitted that the
         trade notice issued by Pune Collectorate pertained to rule 56-A only
     F and not to the notification. It was further submitted that the rule and
         notifications are different enactments and the provisions of one cannot
         be read into another even after 11th April, 1981 and the exemption
         was only in respect of duty on inputs in the manufacture of excisable
         goods and their waste, by-product or refuge. It was submitted that
         since methanol was not excisable, it was not eligible for set off of duty
     G . on the glycol content in its manufature. On behalf of the appellants,
         however, it was conten_ded that glycol is used totally in the production
         of polyester fibre. Methanol results out of the reaction of DMT and
         glycol; and that the Government always maintained parity between
          rule 56-A and notification No. 201/79, hence, the appellants were
         eligible to full set off. On behalf of the appellants reliance was placed
     H on the decision of the High Court of Bombay in Indian Aluminium Co.
             SWADESHI POLYTEX v. C.C.E [MUKHARJI, J.]                269

Ltd. & Anr. v. A.K. Bandyopadhyay & Ors., [1980] ELT 146. The
                                                                            A
question that the tribunal had to decide was whether the set off of duty
paid on inputs was admissible only if the finished excisable goods
manufactured therefrom, was not exempted from duty. The process of
manufacture and the outcome of ethynol are not in dispute. The
tribunal was of the view that the judgment of the Bombay High Court
had held that dross skimmings thrown off in the process of manu•            B
facture and aluminium sheets were not end products or finished or
by-products merely because such refuge might fetch some price in the
market. The High Court had further held that proviso to sub-rule 56-A
will have no application and the skimmings cannot be said to be
finished excisable goods. These were not exempted from the whole of
duty of excise or chargeable to nil rate of duty whereas the sub-rule
prescribed that the credit is admissible if the material is used in the     c
manufacture of finished goods which are exempt from duty or are
chargeable to nil rate of duty. The Tribunal was of the opinion that the
factual background· of the case before the Bombay High court was
different and therefore, it was of the opinion that the said decision was
not applicable in the instant case.                                         D

      The Tribunal was of the opinion that the revenue was right that
rule 56A and notification No. 201/79 were different enactments and
the amendment to one could not be read into the other. In that view of
the matter, the Tribunal was of the view that the Collector's observa-
tion that the procedure under notification No.201/79 was materially         E
the same as the procedure under rule 56A and consequently the
amending notification deemed to have retrospective effect was not, in
the absence of any such indication, acceptable. In the premises, the
Tribunal allowed the appeals and rejected the cross-objection.

      The question involved in these appeals, is whether the Tribunal       F
was right. On behalf of the appellants, Shri V. Lakshmikumaran con-
tended that the Tribunal failed to appreciate that the provisions of rule
56A and notification No. 201/79 were para materia. It appears to us
that the provisions of rule 56A and the notification No. 201/79 are
identical. The relevant provisions of Rule 56A are as follows:
                                                                            G
            "56A( 1) . . . . . . . ..

           56A(2) The Collector may, on application made in this
           behalf and subject to the conditions mentioned in sub-rule
           (3) and such other conditions as may, from time to time, be
           prescribed by the Central Government, permit a manu-             H
    270        SUPREME COURT REPORTS                 [1989] Supp. 2 S.C.R.

                facturer of any excisable goods specified under sub-rule (1)
A
                to receive material or component parts of finished product
                (like Asbestos Cement), on which the duty of excise or the
                additional duty under section 3 of the Customs Tariff Act,
                1975 (51 of 1975) (hereinafter referred to as the counter-
                vailing duty), has been paid in his factory for the manufac-
B               ture of these goods or the more convenient distribution of
                finished product and allow a credit of the duty already paid
                on such material or component parts or finished product,
                as the case may be:

                Provided that no credit of duty shall be allowed in respect
                of any material or component parts used in the manufac-
c               ture of finished excisable goods-

                (i) if such finished excisable goods produced by the
                manufacturer are exempt from the whole of the duty of
                excise leviable thereon or are chargeable to 'nil' rate of
D               duty, and

                (ii) ..... .

                Explanation.-Credit of the duty allowed in respect of any
                material or component parts shall not be denied or varied
E               on the ground that part of such material or component
                parts is contained in any waste, refuse or by-product arising
                during the process of manufacture of the finished excisable
                goods irrespective of the fact that such waste, refuse or
                by-product is exempt from the whole of the duty of excise
                leviable thereon or is chargeable to nil rate of duty or is not
F               notified under sub-rule ( 1):

                Provided . . . . . . . .. "

         The notification No. 201/79 prior to 1lth April, 1981 in so far as
    relevant for the present purpose was as follows:
G               "Set off of duty on all exciseable goods on use of duty paid
                goods falling under Item 68 (Tariff Items 1 to 68): In exer-
                cise of the powers conferred by sub-rule ( 1) of rule 8 of the
                Central Excise Rules, 1944, and in supersession of the
                notification of the Government of India in the Ministry of
                Finance (Department of Revenue) No. 178/77-Central
H               Excise, dated the 18th June, 1977, the Central Government
            SWADESHI POLYTEX v. C.C.E [MUKHARJI, J.J                 271

           hereby exempts all excisable goods (hereinafter referred as
                                                                            A
           ··'the said goods"), on which the duty of excise is leviable
           and in the manufacture of which any goods falling under
           Item No. 68 of the first Schedule to the Central Excises and
           Salt Act, 1944 ( 1 of 1944) (hereinafter referred as "the
           inputs") have been used, from so much of the duty of
           excise leviable thereon as is equivalent to the duty of excise   B
           already paid on the inputs:

           Provided that the procedure set out in the Appendix to this
 •         notification is followed:

           Provided further that nothing contained in this notification
           shall apply to the said goods which were exempted from the       c
           whole of the duty of excise leviable thereon or are charge-
           able to nil rate of duty."                              ·

       The amending notification No. 102/81 dated 11th April, 1981 is
as follows:                                                                 D

           "Provided also that credit of the duty allowed in respect of
           the inputs shall not be denied or varied on the ground that
           part of such inputs is contained in any waste, refuse or
           by-product arising during the process of manufacture of the
           said goods, irrespective of the fact that such waste, refuse     E
           or by-product is exempt from the whole of the duty of
           excise leviable thereon or is chargeable to nil rate of duty
           or is not mentioned in the declaration referred to in the
           Appendix to this notification."

     Central Board of Excise & Customs issued Circular No. 6/81-            F
CX. 6, dated 3 lstJanuary, 1981, which reads as follows:

           "Central Excise-Rule 56A-Proforma Credit of duty paid
           on material/component parts contained in waste, refuse or
           by-product arising during the process of manufacture-
           regarding.                                                       G

           A doubt has been raised whether proforma credit of duty
           paid on material/component parts used in manufacture of
           the finished excisable goods notified under rule 56A of the
           Central Excise Rules, 1944, is to be denied to the extent
           such material or component parts are contained in any            H
    272         SUPREME COURT REPORTS                [ 1989] Supp. 2 S.C.R.     (
                waste, refuse or by-product arising during the process of
A               manufacture of the notified finished excisable goods on the
                grounds that such waste, refuse or by-product is either fully
                exempt from duty or not notified under sub-rule (1) of rule
                56A.

B              2. Since the Government's intention has been not to deny
               the benefit of proforma credit in such situation, an Expla-
               nation has been added to sub-rule (2) of rule 56A, so as to
               remove the ambiguity in the rule. Notification No. 8/81-CE
               dated 31.1.1981 amending rule 56-A is enclosed. It may,
               however, be noticed that such credit cannot be utilised for
               payment of duty Ieviable on such waste, refuse or by
c              product."                                                        J
                                                                                I
                                                                                ~
         On an analysis and comparison of aforesaid, it is clear that the
  clarification in the form of trade notice issued by the Pune Collectorate
  in respect of rule 56A was as much applicable to that rule as to notifi-
D cation No. 201/79. In the premises, it is clear that the Tribunal should
  have held that even though a part of the ethylene glycol was contained
  in the by-product methanol, yet the credit of duty could not be reduced
  to the extent of the ethylene glycol contained in the mathanol as ineli-
  gible. It is true that when in a fiscal provision, if benefit of exemption
  is to be considered, this should be strictly considered. But the strict-
£ ness of the construction of exemption notification does not mean that
  the full effect to the exemption notification should not be given by any
  circuitous process of interpretation. After all, exemption notifications
  are meant to be implemented and trade notices in these matters clarify
  the stand of the Government for the trade. It is clear, therefore, that
  the Tribunal failed to interpret the words of the exemption notification
F No. 201/79 properly and fully. The said notification exempted all
  excisable goods on which the duty of excise was leviable and in the
  manufacture of which any goods falling under Tariff Item 68 (i.e.
    inputs) had been used fron1 so 1nuch of the duty of excise leviable
  thereon as was equivalent to the duty of excise already paid on the
  inputs. It is clear, however, that ethylene glycol was used in the
G manufacture of polyester fibre. It appears that methanol arises as a
  part and parcel of the chemical reaction during the process of
  manufacture when ethylene glycol interacts with DMT to produce
  polyester fibre. It is not possible to use a lesser quantum of the
  ethylene glycol to prevent methanol from arising for producing acer-
  tain quantity of polyester fibre. Thus, the quantity of ethylene glycol
H required to produce a certain quantum of polyester fibre is determined
                 SWADESHI POLYTEX v. C.C.E (MUKHARJI, J.]                 273

    by the chemical reaction. It may be mentioned herein that it is not as if
                                                                                 A
    the appellants have used excess ethylene glycol wantonly to produce
    the- methanol. It is clear that the appellants are not engaged in the
    production of methanol but in the production of polyester fibre. That
    position is undisputed. Therefore, it appears that the Tribunal erred
    when it held that the appellants were not entitled!<) a part of the credit
    of duty since ethylene glycol when it interacts with DMT also gives rise     B
    to methanol. This construction would frustrate the object of exemp-
    tion if something which evidently arises out of the interaction is denied
    Credit. Even prior to amendment to notification No. 201/79 with
    effect from 11th April, 1987, the only situafion where the credit of the
    duty paid on the inputs could be denied was only where the final
    products were wholely exempt from the duty of excise or chargeable to
    nil rate of duty. In the present case, the excisable goods, namely,          c
    polyester fibre were not wholely exempt from duty nor chargeable to
    nil rate of duty. It cannot be read in the notification that the notifica-
    tion would not be available in case non-excisable goods arise during
    the course of manufacture. In fact, the Tribunal seems to have erred in
    not bearing in mind that exemption notification was pressed in service       D
    in respect of polyester fibre which is excisable goods and not in respect
    of methanol which arises as a by-product as a part and parcel of chemi-
    cal reaction. It appears further on a comparison of the rule 56A and
    the notification No. 201/79 that these deal with the identical situation.

          In this connection, reference may be made to the decision of the       E
    Bombay High Court in Indian Aluminium Co. and Anr. 's case (supra).
    In that case, the High Court came to the conclusion that dross and
    skimmings were merely the refuge, scum or rubbish thrown out in the
    process of manufacture of aluminium sheets and could not be said to
    be the result of treatment, labour or manipulation whereby a new and
•   different article emerged with a distinctive name, character or use          F
    which can ordinarily come to the market to be bought and sold. The
    High Court further held in that case that merely because such refuse or
    scum may fetch some price in the market does not justify it being
    called a by-product, much less an end product or a finished product. In
    the light of that fact, the High Court was of the view that in that case
    the end-product was aluminium sheets manufactured from aluminium             G
    ingots and dross or skimmings. Therefore, the High Court was of the
    view that these were neither 'goods' nor 'end products' nor 'finished
    products' liable to duty under item 27 of Central Excise Tariff. The
    High Court was of the view that under proviso to section 56A(2),
    proforma credit was not admissible if the material is used in the
    manufacture of finished excisable goods which are exempt from duty           H
    274         SUPREME COURT REPORTS                [ 1989] Supp. 2 S.C.R.

A or chargeable to nil rate of duty. Since dross and skimmings are mere
  'ashes', these could not be said to be finished excisable goods, nor they
  were exempt from the whole of duty of excise or chargeable to 'nil'
  rate of duty. Therefore, proviso to sub-rule (2) of rule 56A would not
  have any application. The High Court was of the view that refuse or
  skum thrown off during the process of manufacture could not by any
8 stretch of imagination be considered as a by-product and merely
  because such refuse or scum may fetch some price in the market they
  could not be said to be 'finished excisable goods'. Under rule 56A, the
  High Court was of the view, if the material is used in the manufacture
  of any finished excisable goods, and during the course of manufacture
  any non-excisable by-product emerged, then it could not be said that
C the raw material was not used in the manufacture of the finished excis-
  able goods.

        In our opinion, the same analogy and reasoning would apply
  when the methanol arises as a result of chemical reaction and not as a
  result of any by-product. In the instant case, the methanol was non-
0 excisable. Just because methanol arises as a part and parcel of the
  chemical reaction during the process of manufacture, it cannot be said
  that methanol was not used in the manufacture of polyester fibre. The
  intention of the Government is evident furthermore, from the trade
  notice of Pune Collectorate No.· 31/81. The Tribunal, therefore,
  should have taken into consideration the trade notice for interpreta-
E tion of exemption notification No. 201/79, which was para materia
  with rule 56A.

           In the aforesaid view of the matter, we are of the opinion that the
    Tribunal was in error in coming to the conclusion it did. The appeals
    are, therefore, allowed and the order and the judgment of the Tribunal
F   are set aside and the combined orders of the Collector (Appeals) Nos.
    284-286/CE/MT/83 dated 15th December, 1983 are restored. In the
    facts and the circumstances of the case, there will be no order as to
    costs.

    R.S.S.                                                  Appeals allowed.