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Judgment
Pendse, J.—Petitioner No. 2 is a private limited company having factory at Pimpri Industrial Area, Pimpri, in Pune district, while petitioner No. 1 is a public limited company having factory at Bombay - Pune Road, Pimpri. Petitioner No. 1 company is engaged in the manufacture of a product known as ''card clothing''. The product is used in textile mills along with machines known as ''carding machines. For the purpose of making card clothing, an intermediate product known as ''foundation cloth'' is required. The card clothing is a highly specialised product and there are only two or three manufacturers in India. Foundation cloth which is an intermediate product is also a specialised product and can be used only for the purpose of making card clothing. Foundation cloth is not used for any other purpose and is also not available in the market. Petitioner No. 1 company supplies cotton fabrics to petitioner No. 2 company and petitioner No. 2 manufactures foundation cloth by subjecting cotton fabrics to a number of processes. Petitioner No. 2 company then returns the foundation cloth to petitioner No. 1 company for the manufacture of card clothing.
Petitioner No. 2 company which is manufacturing foundation cloth classified the said manufacture initially under Tariff Item No. 19-I (b) of the First Schedule to the Central Excises and Salt Act, 1944 (hereinafter referred to as the ''Act''). Petitioner No. 2 company before any clearance was made realised that an error was committed in classifying the foundation cloth and thereupon by letter dated October 3, 1980. addressed to the Superintendent of Central Excise submitted a fresh classification list classifying foundation cloth under Tariff Item No. 68 which is a residuary item under First Schedule to the Act. The Asst. Collector by communication dated November 29, 1980 informed petitioner No. 2 that the classification under Tariff Item No. 68 is approved. On February 16, 1981, the Assistant Collector of Central Excise, Pune informed petitioner No. 2 company that the question of classification of foundation cloth stands reopened and the company should file reply, if any. The Asstt. Collector after examining the reply filed by the company by order dated March 20, 1981 again accepted the claim of the company and held that manufacture of foundation cloth is liable to payment of excise duty under Tariff Item No. 68 of the First Schedule.
On July 9, 1981, the Collector of Central Excise and Customs, Pune, served show cause notice u/s 35A of the Act on petitioner No. 2 company to show cause why the order passed by the Assistant Collector classifying foundation cloth under Tariff Item No. 68 of the First Schedule should not be reviewed. The show cause notice inter alia claims that foundation cloth is liable to payment of excise duty under Tariff Item No. 19-I(b) of the First Schedule.
On September 8, 1981, the Superintendent of Central Excise, Pune, served show cause-cum-demand notice on petitioner No. 2 company demanding an amount of Rs. 2,27,964.25 towards excise duty for clearance of foundation cloth from the factory for the period commencing from September 16, 1980 and ending with March 16, 1981. Another notice dated October 6, 1981 was served on the company demanding a sum of Rs. 5,29,116.54 for clearance effected for the months of April to July 1981. The petitioners thereupon filed the present petition under Article 226 of the Constitution on April 5, 1982 to challenge the issuance of show cause notice by the Collector on July 8, 1981 for review of the order passed by the Assistant Collector and also to challenge demand notices dated September 8, 1981 and October 6, 1981. The petition was admitted on April 12, 1982 and interim relief was granted on April 27, 1982. By interim relief, the Collector was permitted to proceed with the hearing of suo motu notice issued for reviewing the order passed by the Assistant Collector approving the classification of foundation cloth under Tariff Item No. 68. The demand notices calling upon petitioner No. 2 company to pay diverse amounts for clearance of foundation cloth were stayed on the petitioners furnishing bank guarantees. The petitioners were also directed to furnish bank guarantees in respect of differential duty on foundation cloth cleared during the pendency of petition. In pursuance of the interim order passed by this Court, the Collector of Central Excise, Pune, by order dated September 2, 1982, confirmed the suo motu notice issued and set aside the classification approved by the Assistant Collector and held that the product ''foundation cloth'' should be reclassified under Tariff Item No. 16-I (b) of the First Schedule. The petitioners, thereafter, amended the petition and challenged the order passed by the Collector of Central Excise.
Mr. Setalvad, learned counsel appearing on behalf of the petitioners, submitted that the order passed by the Collector on September 2, 1982 is contrary to the well-settled principles and the classification of foundation cloth under Tariff Item 19-I (b) is entirely incorrect. The learned counsel urged that the Collector examined the question on misconception that the burden to establish that foundation cloth is liable to duty under Tariff Item No. 68 is upon the assessee. Mr. Setalvad also submitted that the Collector did not appreciate that foundation cloth cannot be treated as cotton fabric for the purpose of levy of duty under Tariff Item No. 19-I (b) as after the process undertaken by petitioner No. 2 company, the product which comes into existence is totally distinct and different from cotton fabric. As cotton fabric loses its identity and a new product ''foundation cloth'' comes into existence, the Collector was not right in holding that foundation cloth should classified under Tariff Item No. 19-I(b). Mr. Setalvad also submitted that the Collector was in error in ignoring the evidence led by the petitioners as to how the product is known in trade parlance by persons who are dealing in cotton fabrics. The learned counsel disputed the approach of the Collector of visual inspection of the foundation cloth to suggest that identity of the cotton fabrics is not entirely lost. It was also contended that the decision recorded by the Central Government in exercise of revisional jurisdiction while examining the application under Tariff Item No. 19-III was ignored by the Collector on an unsustainable ground. Mr. Desai, learned counsel appearing on behalf of the revenue, on the other hand, submitted that Tariff Item No. 19 defines what ''cotton fabrics'' means and Item No. 19-I (b) and urged that the foundation cloth is manufactured merely by placing layers after layers of rubber upon cotton fabrics and, therefore, the identity of the cotton fabrics is not lost when foundation cloth is manufactured. Mr. Desai also submitted that though the Collector was not right in suggesting that the burden of proof is upon the assessee to establish that foundation cloth is liable to payment of excise duty under Tariff Item No. 68, the Collector was justified in discarding the evidence led by the petitioners to establish how foundation cloth is known in commercial market and the expression is understood by trade parlance. In view of the rival submissions, the principal question which requires determination is whether cotton fabrics on which process is done by petitioner No. 2 company to manufacture foundation cloth still retains its identity as cotton fabric and is liable to pay excise duty under Tariff Item No. 19-I(b) of the First Schedule.
It would be appropriate to set out the relevant part of Tariff Item No. 19 :-
"Cotton fabrics :
"Cotton fabrics" means all varieties of fabrics manufactured either wholly or partly from cotton and includes dhoties, sarees, chadders, bed-sheets, bedspreads, counter-panes, table-cloths, embroidery in the piece, in strips or in motifs, fabrics impregnated, coated or laminated with preparations of cellulose derivatives or of other artificial plastic materials and fabrics covered partially or fully with textile flocks or with preparations containing textile flocks, if (i) in such fabrics cotton predominates in weight, or (ii) such fabrics contain more than 40 per cent. by weight of cotton and 50 per cent. or more by weight of non-cellulosic fibres or yarn or both :
Provided that in the case of embroidery in the piece, in strips or in motifs, fabrics impregnated, coated or laminated with preparations of cellulose derivatives or of other artificial plastic materials, and fabrics covered partially or fully with textile flocks or with preparations containing textile flocks, such predominance or percentage, as the case may be, shall be in relation to the base fabrics which are embroidered or impregnated, coated or laminated or covered, as the case may be -
Cotton fabrics, other than (i) embroidery in the piece in strips or in motifs, (ii) fabrics impregnated, coated or laminated with preparation of cellulose derivatives or of other artificial plastic materials and (iii) fabrics covered partially or fully with textiles flocks or with preparations containing textile flocks -
Before examining the issue as to whether foundation cloth is liable to payment of excise duty under Tariff Item No. 19-I (b), it would be appropriate to set out the method by which foundation cloth is manufactured by petitioner No. 2 company. The natural rubber is plasticised on two roll mills. Then zinc oxide and stearic acid are added. The fillers and plasticisers are also added and finally, sulphur and accelerators are added to get the compound. This compound is applied to cotton fabrics and according to the requirements, 4 and 9 such rubber coated fabrics are laminated and bonded by natural rubber. The product is thus obtained by lamination of several layers of rubber coated cotton fabrics and assembled/pressed by rubber compound and natural rubber. There is no dispute about the process undertaken by petitioner No. 2 company for manufacture of foundation cloth. The Collector in the impugned order has set out the process undertaken. The order of the Collector indicates that the twill side of the special cotton fabric is coated with mix B by spreading on the spreading machine and the reverse side of the fabric is coated with mix B by spreading on the spreading machine and the reverse side of the fabric is coated with mix A by frictioning on a calendar machine. Bottom ply of the foundation cloth is coated on one side only and since in friction coating the compound penetrates and comes out of the other side and likely to spoil the appearance and finish, the bottom ply is again coated with mix A after dissolving in solvent. The fabrics are then bonded together on the doubling machine starting from the bottom ply. After bonding, mix is applied on one side and curing effect or the valcanising effect is achieved by bringing mix in contact with both the sides. The Collector, after setting out this process, held that in manufacture of foundation cloth, identity of cotton fabrics is not lost and this conclusion was arrived at only on the basis of visual inspection. Mr. Setalvad very rightly submitted that the question as to whether the cotton fabric which is used for the purpose of manufacture of foundation cloth loses its identity cannot be made dependent upon visual inspection of the Collector. It is undoubtedly true that in manufacture of foundation cloth, cotton fabric is one of the ingredients, but it is a far cry to suggest that cotton fabric retains its identity even after the foundation cloth comes into existence. To determine as to whether the foundation cloth retains its identity and known as ''cotton fabrics'' the petitioners relied upon letter dated February 23, 1982 addressed by M/s. B. Maganlal Goolabchand & Sons of Pune. This letter was written in answer to the enquiry made by petitioner No. 1 company by communication dated February 12, 1982. M/s. B. Maganlal Goolabchand & Sons are dealers in textile fabrics of various types, including cotton fabrics, for over 50 years as agents of M/s. Binny Ltd., a well-known manufacturing company of cotton fabrics. Petitioner No. 1 company forwarded samples of foundation cloth and enquired whether M/s. B. Mangal Goolabchand & Sons could supply such foundation cloth. M/s. B. Maganlal Goolabchand & Sons were also requested to furnish names and addresses of traders who could supply foundation cloth. In answer to the request, M/s. B. Maganlal Goolabchand & Sons addressed letter dated February 23, 1982 and expressed their inability to supply foundation cloth. The letter recites that M/s. B. Maganlal Goolabchand & Sons had never dealt in foundation cloth nor M/s. Binny Ltd., because foundation cloth is a specified material. The letter expresses inability to supply supply the names of suppliers of foundation cloth is a specialised material. The letter expresses inability to supply the names of suppliers of foundation cloth. Mr. Setalvad submitted, and in our judgment with considerable merit, that the dealer in cotton fabrics for over 50 years does not deal in foundation cloth which is a specialised material and, therefore, it is obvious that in trade parlance, foundation cloth is not considered as cotton fabric. The Collector brushed aside this evidence by observing that the dealer deals only in cotton fabrics as are commonly used and, therefore, would not store other varieties of cotton fabrics. This is an easy way of avoiding evidence which is not palatable to the conclusion reached by the Collector. It must be noted that the department did not produce any evidence or material to indicate that foundation cloth is known or understood in trade as cotton fabric. In our judgment, the Collector was clearly in error in ignoring the evidence led by the petitioners as to how the foundation cloth understood by the traders. It is also required to be stated that the Collector in the impugned order observed that the fact that cotton fabric is not a predominant part of foundation cloth is not relevant while determining the classification of foundation cloth. In our judgment, the observation is not accurate. Merely because cotton fabric is one of the ingredients in the manufacture of foundation cloth, it cannot be concluded that foundation cloth which is a separate article still retains its identity as cotton fabric. In this connection, it would be appropriate to make reference to return filed by B. S. Pawar, Assistant Collector of Central Excise and Customs, Pune. In para 8 of the return, it is claimed that foundation cloth by itself is a distinct, separate and identifiable product. This admission in the return, in our judgment, clearly supports the submission of Mr. Setalvad that foundation cloth is a separate identifiable article and cotton fabric which is used as one of the ingredients loses its identity when foundation cloth comes into existence.
Mr. Desai strenuously relied upon Tariff Item No. 19-I(b) to urge that when cotton fabrics is subjected to the process of rubberisation, it would still retain the identity of cotton fabric and is liable to payment of excise duty under Tariff Item No. 19-I(b). It was urged that the manufacture of foundation cloth is nothing but coating layer after layer of rubber on cotton fabric. The submission is not correct and it is not accurate to suggest that the process undertaken for manufacture of foundation cloth is nothing but putting layers after layers of rubber on cotton fabric. As pointed out hereinabove, the process is a complicated one and foundation cloth comes into existence after several steps are taken. Tariff Item No. 19-I(b) comes into play when cotton fabric is subjected to process of bleaching, mercerising, dyeing, printing, water-proofing, rubberising, shrink-proofing, organdie processing or any other process or any two or more of these processes. What is crucial to be understood is that in spite of these modes of processing, cotton fabric does not lose its identity. The processes set out under tariff item like bleaching, mercerising, dyeing, printing, etc. are only to increase the value and utility of cotton fabric. By process of bleaching, mercerising, dyeing, or printing the cotton fabrics which are referred to under Tariff Item No. 19 like duties, sarees, chadders, bedsheets, etc. are made marketable. The process is undertaken merely with a view to increase the utility and to refine the cotton fabric and in spite of all these processings, the identity of the cotton fabric is never lost. The process undertaken is for improvement of the cotton fabric and for commercial sale of the fabrics and by these processing''s, another article different and distinct from cotton fabric does not come into existence. Once this aspect is understood, then it is obvious that foundation cloth which is manufactured by petitioner No. 2 can by no stretch of imagination be treated as cotton fabrics. The foundation cloth, as mentioned hereinabove, even according to the department, is a different, distinct and identifiable article and, therefore, it is not permissible to equate foundation cloth with cotton fabrics to attract levy of excise duty under Tariff Item No. 19-I(b). In our judgment, the Collector was clearly in error in disturbing the conclusion reached by the Assistant Collector and holding that foundation cloth should be classified under Tariff Item No. 19-I(b).
The reliance placed by Mr. Setalvad on Order No. 1169-1171 of 1980 passed by the Government of India in revision application on October 28, 1980 and copy of which is annexed as exhibit ''C'' to the petition is also appropriate. In that case, the goods manufactured were P.V.C. conveyor belting. The Excise authorities had held that the goods should be classified as cotton fabric under under Tariff Item No. 19-III and rejected the claim of the manufacturer that conveyer belting is not known in the trade or in commercial parlance as cotton fabrics. The Government in revision held that the goods which are not marketed as cotton fabrics in commercial parlance did not attract levy of duty under Tariff Item No. 19 of the First Schedule. The Government further held that even if one goes by the extended meaning of cotton fabrics, the end product, viz., P.V.C. belting which is produced by fusion of various layers with fabrics dipped in a special type of solution loses its identity as cotton fabric and, therefore, cannot be said to fall within the expression of ''cotton fabrics'' under Tariff Item No. 19. In our judgment, in the present case also, the final product, viz., foundation cloth which is produced by fusion various layers with fabrics dipped in a special type of solution loses its identity as cotton fabric and, therefore, cannot fall within the expression of ''cotton fabrics'' under Item No. 19-I(b). The Collector in the impugned order bypassed the decision of the Government on a specious ground that the decision was in relation to Tariff Item No. 19-III and, therefore, has no application. The Collector should have realised that the decision is relied upon to establish as to how Tariff Item No. 19 is not attracted when cotton fabric loses its identify after undergoing complicated process. In our judgment, the order of the Collector in these circumstances cannot be sustained as the conclusion reached by the Collector is almost perverse. The entire approach of the Collector proceeds on the misconception that the burden was upon the assessee to establish that duty is not payable under Tariff Item No. 19-I(b). Once it is found that the manufacture of foundation cloth is not liable to payment of duty under Tariff Item 19-I(b), then the liability to pay duty arises only under residuary Item No. 68. In our judgment, the conclusion reached by the Assistant Collector initially on November 29, 1980 and subsequently on March 20, 1981 was accurate and was not required to be disturbed by the Collector.
As we are holding in favour of the petitioners on this aspect, it is not necessary to examine other contentions raised by Mr. Setalvad like (a) the Assistant Collector had no jurisdiction to reopen the approval granted to classification on November 29, 1980; and (b) the weight of cotton in foundation cloth being less than 50 per cent. the product cannot be liable to duty under Tariff Item No. 19-I(b). As the manufacture of foundation cloth is liable to payment of duty under Tariff Item No. 68, the demand notices dated September 8, 1981 and October 6, 1981 issued by the Superintendent of Central Excise, Pune, for payment of differential duty are required to be struck down.
Accordingly, petition succeeds and order dated September 2, 1982 passed by the Collector of Central Excise and Customs, Pune and copy of which is annexed as exhibit ''U'' to the petition is set aside and orders passed by the Assistant Collector of Central Excise, Pune, on November 29, 1980 and March 20, 1981 and copies of which are annexed as exhibits ''D'' and ''H'' to the petition are upheld. The demand notices dated September 8, 1981 and October 6, 1981 issued by the Superintendent of Central Excise, Pune, are struck down. Petitioner No. 2 company is entitled to apply for refund as a consequence of this order and such refund application shall be disposed of by the Superintendent of Central Excise as early as possible. The bank guarantees furnished by the petitioners in pursuance of the interim order to stand discharged. In the circumstances of the case, there will be no order as to costs.