Retrospective excise on exempt yarn in composite mills was invalid to the extent it revived duty after the exemption period.

Excise duty on yarn used in composite mills is attracted at the stage of manufacture, while collection may be deferred until removal. The notification proviso was invalid to the extent it required duty on cellulosic spun yarn or cotton yarn that had been wholly exempted when used to produce cotton fabrics before 15 July 1977 and remained uncleared on that date, because delegated legislation could not retrospectively reimpose a duty the earlier exemption had removed. For those fabrics, duty remained payable only on cotton fabrics under the main charging clause; the discrimination argument did not save the retrospective operation.

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Issues: Whether clause (b) of the second proviso to Notification No. 226/1977, insofar as it required payment of duty on cellulosic spun yarn or cotton yarn used in the manufacture of cotton fabrics in a composite mill during the period when such yarn had been wholly exempted, was ultra vires the rule-making power and violative of Article 14 of the Constitution of India.

Analysis: Excise duty is attracted by manufacture or production of the excisable goods, though collection may be postponed to the stage of removal for convenience. Under the earlier notification scheme, yarn used in composite mills for manufacturing cotton fabrics was wholly exempted during the relevant interregnum, while cotton fabrics were separately subjected to duty. The impugned proviso, by adding the duty payable on the exempt yarn to the duty on cotton fabrics in respect of fabrics already produced before 15 July 1977 and not yet cleared, in substance sought to recover duty on yarn that had already been exempted when the taxable event occurred. Delegated legislation under Rule 8(1) did not authorise retrospective reimposition of duty, and the clause could not validly operate so as to defeat the earlier exemption. Any discrimination urged from the differing treatment of mills clearing goods before and after the relevant date did not sustain the clause to the extent it operated retrospectively.

Conclusion: Clause (b) of the second proviso to Notification No. 226/1977 was invalid only to the extent that it applied to cotton fabrics produced before 15 July 1977 from exempt yarn in a composite mill and not cleared before that date; for that limited class, duty was payable only on cotton fabrics under clause (a). The challenge succeeded to that limited extent.

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