Excise duty on twisted yarn depends on manufacture test, and later tariff reclassification cannot retrospectively liability.

Twisted cotton/nylon yarn was examined for excisability under Item 18E of the Central Excise Tariff by applying the test of manufacture: duty could arise only if a new, commercially distinct product came into existence. The later tariff reclassification was held irrelevant to the earlier period because it had no retrospective effect, so liability had to be judged on the law then in force. Because the authorities had not properly examined whether twisting amounted to manufacture or whether the product was merely a mixture of duty-paid yarns, the liability question required fresh determination. The procedural notice based on alleged rule contravention could not stand in its existing form, and the refund direction was made conditional on the revised liability finding.

---

---

Issues: (i) Whether twisted cotton/nylon yarn was exigible to excise duty under Item 18E of the Central Excise Tariff during the relevant period; (ii) whether the show cause notice proposing action for contravention of the Central Excise Rules could be sustained and the consequential relief upheld.

Issue (i): Whether twisted cotton/nylon yarn was exigible to excise duty under Item 18E of the Central Excise Tariff during the relevant period.

Analysis: The relevant tariff entry covered yarn not elsewhere specified, but the question remained whether the product in issue was in law a manufactured commodity capable of attracting excise duty. The reclassification that came into force later was held to have no retrospective effect, so the liability had to be judged by the position obtaining during the period in question. The excise authorities had not examined whether the process of twisting amounted to manufacture or whether the resulting product was merely a mixture of already duty-paid yarns. The legal test applied was whether a new substance or commercially distinct product had come into existence as a result of manufacture.

Conclusion: The liability to excise duty under Item 18E was not finally established on the material before the authorities, and the question had to be reconsidered by the appellant.

Issue (ii): Whether the show cause notice proposing action for contravention of the Central Excise Rules could be sustained and the consequential relief upheld.

Analysis: Since the foundational question of excisability had not been properly examined, the notice initiating action for alleged contravention of the procedural rules could not stand in its existing form. At the same time, the later direction regarding refund could not be made unconditional and had to depend upon the fresh determination of liability on remand.

Conclusion: The show cause notice was quashed, and the refund direction was made conditional upon the fresh decision on liability.

Final Conclusion: The assessee obtained relief against the impugned notice, but the revenue was given liberty to determine afresh whether the goods were taxable under the tariff entry in force during the relevant period, making the overall relief only partly in favour of the assessee.

Ratio Decidendi: An article can be subjected to excise duty only if it is shown to be the product of manufacture and the later reclassification of the tariff entry does not retrospectively determine liability for an earlier period.

---