Migs Express Company vs Assistant Collector of Central Excise

Petitioner No. 2 S. G. Mittal is the sole proprietor of petitioner No. 1, namely, Migs Express Company. The petitioner entered into six leave and licence agreements dated 31-8-1980 with six different persons whose names are set out in the Order of the Collector of Central Excise dated 5-7-1982. These leave and licence agreements are identically worded. Under each of these agreements the owner of the power-looms in question as set out in each agreement, gave to the petitioner leave, and licence to use the powerlooms and to operate a powerloom factory. The agreements provide that the petitioner would be in charge of the entire management and working of the powerlooms. He along would purchase yarn and other stores, spares and accessories. He would manufacture textiles. The property in the goods would vest in the petitioner. The petitioner also had the right to dispose of these goods. Under the agreements, the owner had no right, title or interest in the goods so manufactured. The petitioner was merely was merely required to pay a certain monthly compensation to the owner of the powerlooms.

As a result of these agreements the petitioner obtained full use and control of 22 powerlooms which were kept by him in one shed and on which the petitioner manufactured cotton fabrics for the period 1-9-1970 to 17-9-1976.

Cotton fabric is covered under Tariff Item 19 of the Central Excise Tariff. These goods manufactured by the petitioner fell under Tariff Item 19-I(ii). In respect of a manufacturer who produces cotton fabric on powerlooms there is a special procedure for clearance and removal prescribed under Rules 96(i), 96(j) and 96(k) of the Central Excise Rules, 1944. The petitioner had availed of the special procedure for clearance under Rules 96(i), 96(j), 96(k) in the name of the original owners/licensors although the goods were not manufactured by them, but were, in fact, manufactured by the petitioner. Instead the petitioner had filled in Form AR 6 which is prescribed under the Central Excise Rules, making an application for removal of cotton fabrics produced on powerlooms in the name of the original owner as the manufacturer. This form was signed by the petitioner as the authorised agent of the manufacturer and/or licensee. During the material period the petitioner also did not have a Central Excise Licence in respect of these powerlooms. The twenty-two powerlooms which were used by the petitioner were not registered with the Textile Commissioner in the name of the petitioner. 18 powerlooms were registered under the names of the respective owners of these powerlooms and the Central Excise Licenses were granted to the original owners. The remaining four powerlooms were not registered with the Textile Commissioner, and there was no valid Central Excise Licence in respect of these four powerlooms.

In exercise of powers under Rule 96(j) of the Central Excise Rules, 1944 the Central Government by a notification bearing No. 41/65, dated 28-2-1965 has laid down rates of excise duty to be paid in respect of cotton fabrics produced on powerlooms. The rates are based on the number of powerlooms installed by or on behalf of a person in one or more premises for the manufacture of unprocessed cotton fabrics. Under the table initially prescribed, where four or less than four powerlooms are installed, the rate of duty payable per year per powerlooms is 25 rupees; where more than four, but not more than 24 powerlooms are installed, the duty per year for each powerloom is Rs. 75/-; and where more than 24 but not more than 49 powerlooms are installed the rate of duty is Rs. 150/- per year for each powerloom. These rates were subsequently increased from time to time. At the material time the rate of duty per year was Rs. 300/- where more than four but not more than 24 powerlooms were installed.

Under a proviso to this notification it is stated :

"Provided further that any person who on or after the 28th February, 1965 applies in pursuance of Rule 174 or other relevant provisions of the Central Excise Rules, 1944 for a licence for the first time to manufacture unprocessed cotton fabrics on powerlooms, or for amendment of any licence issued before that date, for the manufacture of such fabrics so as to effect a change in the number of powerlooms or the location of the factory or the ownership of the powerlooms as specified in the licence shall be required to pay at the rate of Rs. 80/- per powerloom per quarter or Rs. 300/- per powerloom per year till he has obtained the Textile Commissioner''s permission in that behalf."

Under this notification the petitioner on behalf of the alleged manufacturers paid the rate of duty on the basis that either less than four powerlooms were installed or more than four but not more than 24 powerlooms were installed by each of the owners.

It seems that on 17th September, 1976 during the course of a transit check officers of the Bombay Central Excise division intercepted a tempo loaded with 11 packages. The 2nd petitioner was accompanying these packages. He claimed to be the owner of the packages and stated that these packages contained powerloom cotton fabrics manufactured by him on twenty-two powerlooms situated at Goregaon (East), Bombay - 400063. Thereafter investigations took place and it was discovered that the petitioner was manufacturing cotton fabrics on twenty-two powerlooms without these powerlooms being registered in his name with the Textile Commissioner and without a valid Central Excise licence in his name. It is not necessary to go into the various proceedings which took place against the petitioner in detail.

The petitioner was served with a show cause notice. After giving a hearing to the petitioner an order was passed by the Collector of Central Excise, dated 23rd September, 1978 holding that the petitioner was manufacturing fabrics on powerlooms on his own behalf and was clearing the same without complying with the provisions of the Rules 96I, 96J, 96K of the Central Excise Rules.

Under Rule 96MMMM notwithstanding anything contained in that section the Collector may at his discretion and subject to such condition as may be laid down apply the provisions contained in that section to a manufacturer who has failed to avail himself of the special procedure or has failed to comply with any condition laid down in that section within the prescribed limit. The Collector exercised his powers under Rule 96MMMM and condoned the failure on the part of the petitioner to make an application for adopting the procedure under Rules 96I, 96J and 96K. He ordered the recovery of duty at enhanced rate under the proviso to the notification dated 28-2-1965 on the total number of powerlooms at the rate of duty then prevailing when the unprocessed textile material was manufactured. I am not concerned with the other parts of his order which deal with confiscation of goods and penalty. From this order the petitioners preferred an appeal to the Central Board of Excise and Customs at New Delhi. The appeal was rejected as time barred.

Thereafter the petitioner preferred a writ petition in this Court being Writ Petition No. 985 of 1981. In the meanwhile the petitioners have also filed a revision application. The learned Single Judge directed the respondents to dispose off the revision application within six weeks on merit. Accordingly, the revision application was disposed off by an order dated 18th September, 1981. Under this order the other particulars of the original order of the Collector were upheld. It was, however, held that the Collector had ordered recovery of duty at enhanced rate but had not specified the rate or amount of enhanced levy. To this extent the order was incomplete and vague. The Government therefore remanded the case to the Collector of Central Excise for a de novo adjudication on the limited question of fixing the duty liability of the petitioner in accordance with law. A direction was also given to the Collector to indicate the exact amount of duty recoverable. On remand, the Collector has passed an order dated 5th July, 1982.

The Collector has ordered payment of duty at the enhanced rate as per second proviso to Notification No. 41/65, dated 28-2-1965. The total amount calculated is Rs. 54,010/-. In addition, duty of Rs. 1832.31 is to be paid in respect of cotton fabrics falling under Tariff Item 19I(1A). This order is now under challenge.

The petitioner contends that he was not a defaulter under Rule 9(2) of the Central Excise Rules, 1944 because he has removed the goods under the special procedure of Rules 96I, 96J and 96K after filling in AR 6 forms under Rule 96K. Under Rule 96L of the Central Excise Rules, during the period in respect of which any manufacturer has been permitted to avail himself of the special procedure of clearance under Sections 96I, 96J and 96K, he shall be exempt from the operation of all the provisions of Rule 9. Rule 9(1) prescribes the time and manner of payment of duty. Under Rule 9(2) if any excisable goods are, in contravention of sub-rule (1), removed from any place specified therein, the manufacturer is liable to pay duty and penalty as prescribed in the Rule and goods are also liable to confiscation.

Mr. Shah, learned advocate for the petitioner, submits that since the goods have been cleared by availing of the special procedure laid down in Rules 96I, 96J and 96K, Rule 9 sub-rule (2) cannot be applied to him. The levy of enhanced duty is in excess of powers under Rule 9(2). Hence the order levying enhanced duty is bad in law. This submission is misconceived. AR 6 forms under Rule 96K are signed by the petitioner only as the authorised agent or licensee of the "manufacturer". The owners of the powerlooms are not the manufacturers of cotton fabrics. It is the petitioner who is the manufacturer of cotton fabrics. Hence the petitioner has not cleared the goods in accordance with the relevant rules of removal under the Central Excise Rules. The petitioner has not applied for permission to avail of the provisions of the relevant rules nor has cleared the goods under the rules in question. He is, therefore, not exempt from the operation of Rule 9.

What is more, since the petitioner has not applied for permission to clear goods under the special procedure laid down under Rule 96I, 96J and 96K he would ordinarily become liable to payment of a much larger amount of duty on the goods in question under Rule 9. I am told that such liability would come to over Rs. 5 lakhs. The Collector therefore has exercised his discretion under the powers given to him by Rule 96MMMM and has applied the provisions of Rule 96I, 96J and 96K to the petitioner for the calculation of enhanced duty and has considered his case as covered by the second proviso to the notification of 26-2-1965.

Now, the table of duty prescribed under the Notification applies only when the manufacturer has been allowed to use the procedure under Rule 96I, 96J and 96L and where he had applied and obtained a licence for the manufacture of cotton fabrics on powerlooms. The petitioner has not done so.

The second proviso covers the period during which an application for licence is pending and has not been granted. Under Rule 96MMMM the Collector has power to apply this notification or such part of it as he deemed proper to a manufacturer who has failed to avail himself of the special procedure. He has, therefore, ordered the petitioner to pay enhanced duty calculated at the rates specified in the second proviso. This is invalid exercise of powers and for valid reasons.

It is next submitted by the petitioner that the respondents were aware of the leave and licence agreements between him and the owners. He was allowed by the respondents to clear the goods. The submission also cannot be accepted. Leave and licence agreements were not known to the respondents. They were only produced after the show cause notice was issued. The respondents came to know about the manufacturing activity of the petitioner only when the tempo containing the goods manufactured by him was intercepted on 17th September, 1976.

The only part of the order challenged in this petition relates to calculation of duty at its enhanced rate. This challenge fails for reasons set out above.

In the result the petition is dismissed and the rule is discharged with costs.