SSM Processing Mills Ltd. vs Union of India (UOI)

K. Govindarajan, J.—In these writ petitions, the petitioners have challenged the impugned circular issued by the Government of India,

Ministry of Finance, dated 27-2-1999.

The petitioners are engaged in the process of cotton fabrics. According to the petitioners, the final products of the petitioners had been

subjected to ad valorem levied u/s 4 of the Central Excise Act, 1944 (hereinafter called the Act).

No tax shall be levied or collected except by an authority of law as contemplated under Article 265 of the Constitution of India. u/s 4 of the Act,

the duty of excise is chargeable on any excisable goods with reference to their value and such value shall be the duty to be normal price thereof,

that is to say, the price at which such goods will be ordinarily sold by the assessee to a buyer in course of wholesale trade for delivery at the time

and place of removal. Even the rate of excise duty can be fixed only by notification. u/s 4 of the Act guidelines to departmental officers to

determine the value for the purpose of collection of duty has been prescribed. According to Section 3 of the Act, such a levy and collection of duty

can be done only in such manner as may be prescribed on all excisable goods which are produced or manufactured in India at the rate mentioned

under the Central Excise Tariff Act, 1985.

A new scheme was introduced under Act 26 of 1997 by inserting Section 3 which came into effect with effect from 14-5-97. According to the

said provision, the Central Government was given power to charge excise duty on the basis of capacity of production in respect of notified goods.

A Notification No. 41/98-C.E. (N.T.) to 44/98-CE. (N.T.) and 36/98-C.E., dated, 10-12-98 was issued in this regard. The said new scheme

applies to only independent processors of specified textile fabrics. According to the said notification, the rate of duty applicable is Rs. 1,50,000/-

per chamber per month of a unit whose average value of processed textile fabrics does not exceed Rs. 38/- per sq. metre and Rs. 2,00,000/- per

chamber per month for the unit whose average value exceeds Rs. 30/- per sq. metre. The Chamber for a hot air stenter having a rail length up to

3.05 metres on each side and fraction thereof calculated on pro rata basis is one chamber for the purpose of Hot Air Stenter.

Since certain doubts had been raised about the said Notification regarding the interpretation of various provisions of the new scheme of

compulsory compounded levy in respect of processed fabric manufactured by independent processors which was notified u/s 3A of the Central

Excise Act, 1944, certain clarifications were issued.

The petitioners have now challenged a portion of the clarification on the ground that it is contrary to the intention of the said Act and notification

issued.

Learned Senior Counsel appearing for the petitioners submitted that since this clarification is contrary to the scope of the said Act and the

notification, the same cannot be sustained in law. According to him, though the Central Board of Excise and Customs has power to issue directions

and clarifications u/s 37B of the Central Excise Act, 1944, such clarifications can be issued only by way of administrative directions, without any

interference with the quasi judicial powers of such authorities. On that basis, the learned Senior Counsel submitted that though the authorities who

are assessing the Central Excise are entitled to assess the same strictly in accordance with the provisions and notification, by issuing the impugned

clarification, assessing authorities are compelled to take into consideration the gallery portion also, though it is not having any aid in the process of

heat setting or drying of fabrics. Explanation I to Rule 3 of the Rules framed u/s 3A of the Central Excise Act, 1944 contemplates installation or

attachment of float drying machine or any other equipment of like nature. On that basis, learned Senior Counsel submitted that the said explanation

makes it clear that ""other equipment"" mentioned therein must be installed for aiding the process of heating or drying of fabrics so as to take the

same into consideration for determining the duty and a mere gallery without any machinery to aid the process of heat setting or drying of fabrics

cannot be taken into consideration for determining the annual capacity of production of independent processors for the purpose of levying excise

duty.

Learned Additional Solicitor General appearing for the respondents submitted that the circular is only clarificatory in nature, and even if the case

of the petitioners is acceptable with respect to the clarification, it does not bind on the assessing officers as they should go only by the provisions of

the said Act and notifications and the authorities have to decide each case independently on the basis of the notifications. He has also submitted

that a mere gallery cannot be taken into consideration, but if it is installed as an integral part of the stenter and aids the process of heat setting or

drying of fabrics, it should be taken into consideration for the purpose of determining the annual capacity of production for levy of excise duty.

Since the petitioners have not suffered any order on the basis of the circular they cannot sustain these writ petitions at this stage.

With a view to introduce a new scheme to determine excise duty on the basis of capacity of production in respect of notified goods, Section 3A

of the Act was inserted by enacting an Act No. 26 of 1997. According to the said provision, notwithstanding anything contained in Section 3,

having regard to the nature of the process of manufacture or production of excisable goods of any specified description, the extent of evasion of

duty in regard to such goods or such other factors as may be relevant is of the opinion that it is necessary to safeguard the interest of revenue

specify, by notification in the Official Gazette, such goods as notified goods and there shall be levied and collected duty of excise on such goods in

accordance with the provisions of that Section 3A of the Act. The said provision gives power to the Central Government to frame rules so as to

enable them to implement the said provision. Accordingly, the Central Government issued Notification Nos. 41/98-C.E. (N.T.) to 44/98-C.E.

(N.T.) and 36/98-C.E., dated 10-12-98 under Notification No. 41/98, the Central Government specified the goods as notified goods on which

there shall be levied and collected duty of excise in accordance with the provision of Section 3A of the Act. ''Independent processor'' has also

been defined therein. Under Notification No. 42/98, the Central Government has framed Rules called Hot Air Stenter Independent Textile

Processors Annual Capacity Determination Rules, 1998. Under Notification No. 43/98, the Central Government introduced fourteenth

Amendment to Central Excise Rules, 1998 by inserting certain rules in Central Excise Rules, 1944. Notification No. 44/98 amended the

notification of the Government of India in the Ministry of Finance No. 29/96-C.E. (N.T.). By inserting paragraphs 7B and 7C, in the said

notification. From the above, it is clear that the said provision is a code by itself and it applies to independent processors of specified textile fabrics

which the petitioners are dealing with.

Rule 3 of the Rules framed u/s 3A of the Central Excise Act states, inter alia that annual capacity of production should be determined with

reference to the number (both the length and width in centimetres) of chambers in each of the Hot Air Stenter. It is further stated that the annual

capacity of production should be determined keeping in view the number of chambers of the Hot Air Stenter, and each chamber is to have a rail

length of up to 3.05 metres of each side. It means where the rail length is up to 3.05 metres, it constitutes one chamber. Should be computed on

pro rata basis. Explanation I to the said Rule contemplates installation or attachment of float drying machine or any other equipment for aiding the

process of heat setting or drying of fabrics. If the length of these equipments, namely float drying machine or any other equipment is 3.05 metres,

the same will be deemed to be a chamber of Stenter. If it exceeds 3.05 metres, their fractions will also have to be treated as a chamber on a pro

rata basis.

Certain doubts were raised about the notification. One of the doubts raised was as follows :-

(IV) Whether closed spaces known as ''galleries'' on either side of the stenter which are meant mainly for heat-insulation purposes are to be taken

into account for purposes of computing the production capacity and number of chambers; and further whether for purposes of capacity

determination the length of each chamber is to be measured separately or whether by dividing the total rail length of a stenter by the No. of

chambers.

The same has been clarified as follows :-

As regards points (IV) and (V), it is clarified that as ''galleries'' are installed or attached to the stenter and aid the process of heat setting or drying

of the fabrics. These ''galleries'' provide heat insulation on either side of the stenter. As per Explanation I to Notification No. 42/98-CE. (N.T.), a

float drying machine or any other equipment of a length 3.05 metres installed in or attached to a stenter for aiding the process of heat setting or

drying of the fabrics shall be deemed to be one chamber of a stenter and any fraction of such length shall be computed on a pro rata basis. It is

thus clarified that they should be taken into account for the purposes of computation of the production capacity and the number of chambers.

However, it is clarified that the padding mangle attached to the stenter shall not be taken into account for the purposes of computing the production

on capacity and the number of chambers, as it has little relation to heat-setting or drying of fabrics. It is also clarified that for the purposes of

capacity determination, the length of each chamber is to be measured separately, and any additional rail length of the stenter as a part of the

''galleries'' shall be computed as per Explanation I to the Hot Air Stenter Independent Textile Processors Annual Capacity Determination Rules,

1998.

So, now the question to be decided is whether such clarification is sustainable as contended by learned Senior Counsel appearing for

petitioners.

It is no doubt true that the Rules and Notifications permit the authorities to take into consideration the rail length of a float drying machine or

any other equipment of like nature for the purpose of determining the annual capacity of production. As submitted by learned Senior Counsel

appearing for petitioners, ""other equipment"" mentioned in Explanation I to Rule 3A of the Rules must be an equipment aiding the process of heat-

setting or drying of fabrics, and the galleries themselves though situated on either side of the chamber of a stenter cannot be taken into

consideration for such determination and so the stand taken by the department under the clarification that the gallery itself aiding the process of heat

setting/drying of fabrics has to be taken into account for computing the production cannot be sustained, and it is contrary to the real intention to the

Rules.

But, on that basis the said clarification need not be set aside merely on assumption that the authorities may take into consideration the gallery

for the purpose of determining the annual capacity of production by taken into consideration the length of gallery also, though equipment is attached

to the gallery. In the decision of CEGAT, Northern Bench, New Delhi, in 2002 (82) ECC 196 , it is held that a gallery which is having not rail, fan

or radiator attached to it, cannot come within the purview of the term ""any other equipment"" as contemplated under Explanation I to Rule 3 of the

Rules, 1998. Though the said decision is not having any binding force upon this court, definitely it will bind the respondents.

As held by the Apex Court in the decision in Union of India and others Vs. Kamlakshi Finance Corporation Ltd., , the Department should pay

utmost regard to judicial discipline and give effect to orders of higher appellate authorities which are binding on them. Further, the Apex Court has

held as follows:-

Shri Reddy is perhaps right in saying that the officers were not actuated by any mala fides in passing the impugned orders. They perhaps

genuinely felt that the claim of the assessee was not tenable and that if it was accepted, the Revenue would suffer. But what Shri Reddy overlooks

is that we are not concerned here with the correctness or otherwise of their conclusion or of any factual mala fides but with the fact that the

officers, in reaching their conclusion by-passed two appellate orders in regard to the same issue which were placed before them, one of the

Collector (Appeals) and the other of the Tribunal. The High Court has, in our view, rightly criticized this conduct of the Assistant Collectors and

the harassment to the assessee caused by the failure of these officers to give effect to the orders of authorities higher to them in the appellate

hierarchy. It cannot be too vehemently emphasised that it is of utmost importance that indisposing of the quasi judicial issues before them, revenue

officers are bound by the decisions of the appellate authorities. The order of the Appellate Collector is binding on the Assistant Collectors working

within his jurisdiction and the order of the Tribunal is binding upon the Assistant Collectors and the Appellate Collectors when function under the

jurisdiction of the Tribunal. The principles of judicial discipline require that the orders of the higher appellate authorities should be followed

unreservedly by the subordinate authorities. The mere fact that the order of the appellate authority is not acceptable to the department in itself an

objection phrase and is the subject-matter of an appeal can furnish no ground for not following it unless its operation has been suspended by a

competent Court. If this healthy rule is not followed, the result will only be undue harassment to assessees and chaos in administration of tax laws.

The impression or anxiety the Assistant Collector that, if he accepted the assessee''s contention. The department would lose revenue and would

also have no remedy to have the matter rectified is also incorrect, Section 35E confers adequate powers on the department in this regard. Under

Sub-section (1), where the Central Board of Excise and Customs (Direct Taxes) come across any order passed by the Collector of Central Excise

with the legality or propriety of which it is not satisfied, it can direct the Collector to apply to the Appellate Tribunal for the determination of such

points arising out of the decision or order as may be specified by the Board in its order. Under subsection (2) the Collector of Central Excise,

when he comes across any order passed by an authority subordinate to him. If not satisfied with its legality or propriety, may direct such authority

to apply to the Collector (Appeals) for the determination of such points arising out of the decision or order as may be specified by the Collector of

Central Excise in his order and there is a further right of appeal to the department, the position now, therefore, is that if any order passed by an

Assistant Collector or Collector is adverse to the interests of the Revenue the immediately higher administrative authority has the power to have the

matter satisfactorily resolved by taking up the issue to the Appellate Collector or the Appellate Tribunal, as the case may be, in the light of these

amended provisions there can be no justification for any Assistant Collector or Collector refusing to follow the order of the Appellate Collector or

the Appellate Tribunal, as the case may be, even where he may have some reservations on its correctness. He has to follow the order of the higher

appellate authority. This may instantly cause some prejudice to the Revenue but the remedy is also in the hands of the same officer. He has only to

bring the matter to the notice of the Board or the Collector so as to enable appropriate proceedings being taken under S. 35E(1) or (2) to keep

the interests of the department alive. If the officers view is the correct one, it will no doubt be finally upheld and the Revenue will get the duty.

Though after some delay which such procedure would entail.

But unfortunately, the Commissioner of Central Excise and Customs, Coimbatore informed one of the petitioner that the above-mentioned

order of 2002 (82) ECC 196 , cannot be accepted, as an appeal against the same was contemplated, and they follow only the circular issued. This

attitude of the Commissioner is contrary to the principles laid down by the Apex Court and against the principles of judicial discipline. Merely

because filing of an appeal is contemplated or an appeal is filed and the same is pending. It cannot be a ground for not following the same, unless

its operation has been suspended by the competent authority or Court. In the present cases on hand, admittedly, though an appeal was filed, no

interim order had been granted.

In view of the fact that there is an order passed by CEGAT as stated above in which it had been decided that the question as to whether a

gallery as such can be construed as ""other equipment"" the authorities cannot simply ignore the said order and follow the clarification which is

impugned in these writ petitions. Such a clarification cannot run counter to the findings given by the CEGAT in the decision in 2002 (82) ECC 196

In the said order, it is specifically stated that gallery itself cannot be construed as ""other equipment"", if it is not having any rails, fan or radiator

attached to it. So, the petitioners also cannot contend that all the galleries even if they are attached with any equipment cannot be taken into

consideration at all. It depends upon the facts of that case and the authorities have to appreciate such facts as to whether the equipment has been

provided in the said gallery to aid the process of heat setting/drying of fabrics.

In view of the above said facts, I am not inclined to set aside the impugned circular/clarification, as I need not go into the correctness of the

same, as the order of the Tribunal mentioned above has to be followed and not the impugned circular while determining the duty of excise u/s 3A

of the Act.

With the above observations, these wrrtgetitions are disposed of accordingly. No costs. Connected pending W.M.Ps. are closed.