Union of India vs Sheel Thermoplastics Ltd.

Pendse, J.—This is an appeal preferred by Union of India against judgment dated April 15, 1988 delivered by learned single Judge in Writ Petition No. 1795 of 1986. By the impugned judgment the learned Judge set aside the order dated March 20, 1986 passed by the Assistant Collector of Central Excise and also the notice issued on July 14, 1986 in pursuance of that order. The learned Judge held that the Item manufactured by the respondent Company was liable to be classified under Tariff Item No. 68 of the Central Excise Act and the Company was entitled to the exemption from payment of excise duty in accordance with exemption Notification No. 182/82. The learned Judge further directed the appellants to finalise the refund claim filed by the Company within period of eight weeks and then refund the amount along with interest at the rate of 12% per annum. The facts giving rise to passing of the impugned order are as follows.

Respondent No. 1 Company was incorporated as a Private Limited Company and in the factory situated at Tarapur manufactures P.V.C. Leather cloth. In May, 1981 the Company had acquired Central Excise Licence under Central Excises and Salt Act, 1944. The product manufactured is a plastic article and the process undertaken is by applying several layers of P.V.C. paste on thin cotton fabric. The cotton fabric is first treated with non-thermo-plastic compound which fills intrinsic holes and makes it suitable for carrying the P.V.C. The several layers of P.V.C. are then applied and the end product P.V.C. compound is 6 to 10 times in weight as compared to the base cotton fabric. The percentage of cotton fabric in the final product is only 8% to 15%, and the end product has special properties and the characteristics of foamed plastic. The Excise Department provisionally classified the product on August 5, 1981 under Tariff Item 19(iii) of the First Schedule to the Central Excises & Salt Act. The Company was thereafter clearing the goods manufactured by paying the excise duty under the said Tariff Item.

It is the claim of the Company that duty was paid under Tariff Item 19(iii) under mistake of law and the mistake was realised is August 1985 on delivery of a judgment by the Supreme Court reported in Union of India (UOI) and Others Vs. Ahmedabad Manufacturing and Calico Printing Co. Ltd. (Calico Mills), Ahmedabad, . The Company claimed that the duty was payable only under the residuary Tariff Item No. 68 and the excess duty was paid under mistake of law. The company thereupon filed re-classification claim on October 21, 1985 and on November 26, 1985 sought refund of duty paid from September 1981 onwards. The Company further claimed that on May 11, 1982 the Central Government published exemption Notification No. 182/82 in respect of the items liable to duty under Tariff Item No. 68 and therefore from that date onwards the Company was not liable to pay any amount of duty.

The Assistant Collector of Central Excise, Division IX by order dated March 20, 1986 held that the claim of the Company that coated cotton fabric is liable to be classified under Tariff Item No. 68 is not correct and the item is correctly classifiable under Tariff Item 19(iii). The Assistant Collector thereupon rejected the claim for re-classification of the manufactured article as plastic goods. The Assistant Collector also served show cause notice dated July 14, 1986 on the Company to explain why the refund claim should not be rejected on the ground that it was barred by limitation under provisions of Section 11B of the Central Excise Act and also on the ground that the duty recovered under Tariff Item 19(iii) was in accordance with law. The order of the Assistant Collector declining to reclassify the item manufactured by the Company and service of show cause notice calling upon the Company to explain why refund claim should not be rejected was challenged by filing Writ Petition under Article 226 of the Constitution of India before the learned single Judge.

The learned single Judge accepted the claim of the Company that the item manufactured is liable to payment of excise duty under Tariff Item No. 68 and the claim of the Department that duty is payable under Tariff Item 19(iii) was turned down. The learned Judge held that as the duty is payable under Tariff Item No. 68, the Company is entitled to the advantage of exemption Notification dated May 11, 1982 and from that date onwards the Company was not liable to pay any duty. The Department was directed to finalise the refund claim within period of eight weeks from the receipt of the statement by the Company setting out the particulars of the refund amount claimed. The decision of the learned single Judge is under challenge.

Shri Desai, learned counsel appearing on behalf of the Department, raised four contentions to challenge the legality of the judgment. The first submission of the learned counsel is that the learned single Judge was in error in concluding that the item manufactured by the Company is liable to payment of excise duty under the residuary Tariff Item No. 68. Shri Desai submitted that the classification sought to be done by the Department under Tariff Item 19(iii) of the First Schedule to the Central Excises and Salt Act was accurate and was not required to be disturbed. It is not possible to accede to the submission of the learned counsel. Tariff Item 19 reads as follows :-

"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 -

I. Cotton fabrics, other than (i) embroidery in the piece in strips or in motifs, (ii) fabrics impregnated, coated or laminated with preparations of cellulose derivatives or of other artificial plastic materials and (iii) fabrics covered partially or fully with textile flocks or with preparation containing textile flocks - (a) Cotton fabrics, not subjected to any process. Twenty per cent ad valorem. (b) Cotton fabrics, subject to the process Twenty per cent of bleaching mercerising, dyeing, printing, ad valorem. waterproofing, rubberising, shrink-proofing, organdie processing or any other process or any two or more of these processes. II. Embroidery, in the piece, in strips or The duty for the in motifs, in or in relation to the manufacture time being of which any process is ordinarily carried leviable on the on with the aid of power. base fabrics if not already paid plus twenty per cent ad valorem. III. Cotton fabrics impregnated, coated The duty for the or laminated with preparations of cellulose time being derivatives or of other artificial plastic leviable on the materials. base fabrics if not already paid plus thirty per cent ad valorem. IV. Cotton fabrics covered partially or The duty for the fully with textile flocks or with time being preparations containing textile flocks leviable on the such as flock printed fabrics. base fabrics, if not already paid, plus thirty per cent ad valorem.

Explanation I : "Base fabrics" means fabrics falling under sub-item I of this item which are subjected to the process of embroidery or which are impregnated, coated or laminated with preparations of cellulose derivative or of other plastic materials or which are covered partially or fully with textile flocks or with preparations containing textile flocks."

The plain reading of the expression "cotton fabrics" which has been defined under Tariff Item No. 19 makes it clear that cotton fabric will cover all derivatives of fabrics manufactured either wholly or partly from cotton. The expression takes in its sweep fabrics impregnated or coated with preparations of artificial plastic materials, provided (a) in such fabrics cotton predominates in weight, or (b) such fabric contains more than 40 per cent by weight of cotton and 50 per cent or more by weight of non-cellulosic fibres or yarn. The plain reading of the Tariff Item makes it clear that the final product manufactured by the Company known as P.V.C. yarn cannot attract duty under the said Tariff Item. It is not in dispute that the basic ingredients for manufacture of P.V.C. is cotton fabric. The process of manufacture set out hereinabove establishes that several layers of artificial plastic material are coated on the cotton fabric and the final product, which comes into existence is totally different and distinct from the cotton fabric which was used as one of the ingredient. It was not seriously disputed on behalf of the Department that the identity of the cotton fabric is lost of process being undertaken to bring into existence P.V.C. Shri Desai could not dispute that in the final product manufactured by the Company the cotton fabric is not predominant in weight nor such fabric consist more than 40% of weight. It is therefore clear that the Department was not right in treating the final product as cotton fabric liable to duty under Tariff Item No. 19.

Shri Desai made a valiant attempt to urge that the expression "base fabrics" has been defined under explanation I to Tariff Item 19 and means the fabrics which are coated with preparation of cellulose derivatives or of other plastic materials. The learned counsel urged that the expression "base fabrics" occurs in proviso to the definition of ''cotton fabric'' and therefore, while determining whether the fabrics cotton predominates in weight, or such fabrics contain more than 40% by weight, the comparison should not be with the final product. We are afraid we are unable to appreciate the argument that while assessing whether the product is liable to duty under a particular Tariff Item the final product should not be taken into consideration but one of the ingredient used for manufacturing the final product. In our judgment, it is futile to suggest that as cotton fabric was one of the ingredient used for bringing into existence the final product of P.V.C., the final product itself is liable to excise duty under Tariff Item No. 19 which is enacted for levy of duty on cotton fabric. Once the identity of the cotton fabric is lost by process of manufacture undertaken to bring into existence P.V.C., then it is not open for the department to levy duty or recover duty under Tariff Item No. 19 on the final product. In our judgment, the view taken by the learned single judge does not suffer from any infirmity and the contention of Shri Desai that the final product cannot be brought within the residuary Item No. 68 cannot be accepted.

The second contention urged by Shri Desai is that the learned single Judge was in error in holding that the company was entitled to the advantage of exemption Notification No. 182/82 dated May 11, 1982. The notification was published by the Central Government in exercise of powers conferred by sub-rule (1) of Rule 8 of the Central Excise Rules and articles made of plastic falling under Item No. 68 of the First Schedule to the Central Excise Act were exempted from whole of the duty payable thereon. The learned single Judge held by accepting the claim of the Company that as the final product falls under Tariff Item No. 68, the whole of the duty leviable thereon stands exempted from May 11, 1982 onwards. Shri Desai submitted that even assuming that the duty was leviable under Tariff Item No. 68, still the benefit of exemption notification was not available unless the requirements of the notification were satisfied. The requirements were that (a) articles are produced out of the artificial resins or plastic materials in any form falling under sub-item (1) of Item No. 15A of the First Schedule and in respect of which the duty of excise or the additional duty has already been paid, and (b) such articles are produced out of the scrap of plastic. Shri Desai submitted that unless and until these conditions are satisfied, it is not permissible for the Company to claim exemption under the notification. The submission is not correct. The Company sought refund of the duty by claiming advantage under the exemption notification. The Assistant Collector did not decline to grant relief on the ground that the exemption notification is not attracted because of non-compliance of the requirements. It is undoubtedly true that the Assistant Collector had merely issued show cause notice and had not finally determined the merits of the refund claim. Before the learned single Judge though the Company specifically averred in the petition that the Company is entitled to the advantage of the exemption notification in the return filed on behalf of the Department, it was not claimed that the exemption notification is not available for non-compliance of the requirements. The only defence to the claim of the Company was that the duty was leviable under Tariff Item No. 19 and not under Item 68. The question as to whether the requirements of the notification are satisfied or not is a pure question of fact and unless the Department had chosen to raise it before the learned single Judge it is not permissible to raise it for the first time in appeal. Indeed Shri Desai had to concede that before the learned single Judge this contention was not raised even during the arguments.

Shri Desai then submitted that the learned single Judge was in error in awarding interest on the amount of refund payable. We do not find any infirmity which requires interference in appeal. The interest had been awarded at the rate of 12% per annum and we do not wish to disturb the said order. The direction is discretionary one. The Company had paid the amount under mistaken notion of law and was entitled to the refund. The Company was deprived of the amount and direction to refund with interest is correct.

Shri Desai then submitted that the Company is not entitled to the refund in view of the enactment of Central Excises and Customs Laws (Amendment) Act, 1991. The learned counsel urged that under the amended Section 11B it is obligatory on the part of the Company to prove to the satisfaction of the Assistant Collector that duty of excise paid by the Company has not been passed on to the customer. The learned counsel urged that as the Company has not proved that fact the order of the learned single Judge cannot be sustained. We are unable to find any merit in this submission. The stage or proving that fact may arise when the Assistant Collector will compute the amount of duty repayable to the Company. Shri Vahanvati submitted that the validity of the amended provisions are under challenge in the Supreme Court. We are not determining the validity of the amended provisions in the present proceedings. The learned Judge has held that the Company is entitled to the amount of refund and we do not find any infirmity in that conclusion. It is for the Assistant Collector to examine the amount refundable and whether the department is bound to refund the said amount in view of the amended provisions. We do not express any opinion on the merits of the contentions either of the Department or of the Company.

Accordingly, appeal fails and is dismissed with costs. We direct the Department to compute the amount of refund within the period of eight weeks from to-day. The Department is directed to complete the computation within period of eight weeks and pass speaking order. In case the Assistant Collector finds that amount is refundable, the said shall be refunded within four weeks from the date of the order.

On July 26, 1988 the Division Bench directed the Government to deposit sum of Rs. 75 lacs in this Court on Notice of Motion No. 1817 of 1988 take out by the Department. In case such amount was deposited, then the same should be allowed to be withdrawn by the appellants, along with interest accrued, if any.