1987 (10) TMI 51 - SC - Central Excise

Rules 9 and 49 permit excise on goods at intermediate production stages, but not on yarn once sized

JK. COTTON SPINNING AND WEAVING MILLS LTD. AND ANOTHER Versus UNION OF INDIA AND OTHERS

SC upheld the High Court and dismissed the appeal, confirming that deeming provisions in Rules 9 and 49 are valid and may treat goods produced at an ... Challenged the Central Board of Excise - wrongly issued a Circular dated September 24, 1980 purporting to interpret Rules 9 and 49 of the Central Excise Rules, 1944 ('the Rules') and directed the subordinate Excise authorities that 'use of goods in manufacture of another commodity even within the place/premises that have been specified in this behalf by the Central Excise Officers in terms of the powers conferred under Rule 9 of the Rules, will attract duty' - Whether yarn obtained and further processed within the factory for the manufacture of fabrics could not be subjected to duty of excise? Held that:- It is well settled that a deeming provision is an admission of the non-existence of the fact deemed. Therefore, in view of the deeming provisions under Explanations to Rules 9 and 49, although the goods which are produced or manufactured at an intermediate stage and, thereafter, consumed or utilised in the integrated process for the manufacture of another commodity is not actually removed, shall be construed and regarded as removed. The Legislature is quite competent to enact a deeming provision for the purpose of assuming the existence of a fact which does not really exist. It has been already noticed that the taxing event under Section 3 of the Act is the production or manufacture of goods and not removal. The Explanations to Rules 9 and 49 contemplate the collection of duty levied on the production of a commodity at an intermediate stage of an integrated process of manufacture of another commodity by deeming such production or manufacture of the commodity at an intermediate stage to be removal from such place or premises of manufacture. It is for the convenience of the taxing authority that duty is collected at the time of removal of the commodity. There is, therefore, nothing unreasonable in the deeming provision and, as discussed above, it is quite in conformity with the provision of Section 3 of the Act. The contention that the amendments to Rules 9 and 49 are ultra vires Clause (b) of sub-section (4) of Section 4 of the Act, is without substance and is overruled. Rule 9(1), in our opinion, does not require the Collector to specify the place where the excisable goods are produced, cured or manufactured. The words 'which may be specified by the Collector in this behalf' occurring in Rule 9(1) of the Rules do not qualify the words 'any place where they are produced, cured or manufactured', but relate to or qualify the words 'any premises appurtenant thereto'. In other words, if the place of removal is not the place where the goods are produced, cured or manufactured, but any premises appurtenant to such place, in that case, the Collector has to specify such premises for the purpose of collection of Excise duty. Thus the contention of the appellants that the Collector has to specify the place of manufacture and also any premises appurtenant thereto under Rule 9(1) of the Rules, is without any substance. In the instant, case, the appellants are liable to pay Excise duty on the yarn which is obtained at an intermediate stage and, thereafter, further processed in an integrated process for weaving the same into fabrics. Although it has been alleged that the yarn is obtained at an intermediate stage of an integrated process of manufacture of fabrics, it appears to be not so. After the yarn is produced it is sized and, thereafter, subjected to a process of weaving the same into fabrics. Be that as it may, as we have held that the commodity which is obtained at an intermediate stage of an integrated process of manufacture of another commodity, is liable to the payment of Excise duty, the yarn that is produced by the appellants is also liable to payment of Excise duty. In our view, the High Court by the impugned judgment has rightly held that the appellants are not liable to pay any Excise duty on the yarn after it is sized for the purpose of weaving the same into fabrics. No distinction can be made between unsized yarn and sized yarn, for the unsized yarn when converted into sized yarn does not lose its character as yarn. Appeal dismissed. Issues Involved:1. Validity of the Central Board of Excise Circular dated September 24, 1980.2. Constitutional validity of Section 51 of the Finance Act, 1982.3. Interpretation of amended Rules 9 and 49 of the Central Excise Rules, 1944.4. Retrospective application of the amendments to Rules 9 and 49.5. Specification requirement under Rule 9(1) for deemed removal.Detailed Analysis:1. Validity of the Central Board of Excise Circular dated September 24, 1980:The appellants challenged the Circular issued by the Central Board of Excise, which directed subordinate Excise authorities to levy and collect duty on goods used in the manufacture of another commodity within the same premises. The Delhi High Court had previously ruled that yarn obtained and further processed within the factory for the manufacture of fabrics could not be subjected to duty of excise. Despite this, the Board issued the Circular interpreting Rules 9 and 49 to levy duty on such goods. The Supreme Court examined this issue in the context of the amendments to Rules 9 and 49 and their retrospective application.2. Constitutional validity of Section 51 of the Finance Act, 1982:The appellants contended that Section 51 of the Finance Act, 1982, which amended Rules 9 and 49 with retrospective effect from February 28, 1944, was arbitrary and unreasonable. They argued that the retrospective operation of the amendments exposed them to excessive hardship and violated Articles 14 and 19(1)(g) of the Constitution of India. The Court acknowledged that while the Legislature is competent to make laws retrospectively, excessive retrospective operation could be burdensome and arbitrary. However, the Court held that Section 51 does not override Section 11A of the Act, which limits the recovery of duties to six months, thus mitigating the hardship.3. Interpretation of amended Rules 9 and 49 of the Central Excise Rules, 1944:The Court analyzed the amendments to Rules 9 and 49, which included an Explanation deeming goods produced or manufactured at an intermediate stage and consumed or utilized in a continuous process to be removed immediately before such consumption or utilization. The Court held that the deeming provision was consistent with Section 3 of the Act, which imposes duty on the production or manufacture of goods. The Court rejected the argument that the amendments were arbitrary or unreasonable, affirming their validity.4. Retrospective application of the amendments to Rules 9 and 49:The Court addressed the appellants' concern about the retrospective effect of the amendments, which could lead to enormous amounts of duty being payable for goods produced and consumed within the factory premises since 1944. The Court clarified that Section 11A of the Act limits the recovery of duties to six months, except in cases of fraud or wilful misstatement, where the period extends to five years. The Court emphasized that the retrospective effect of the amendments is subject to Section 11A, thereby alleviating the appellants' apprehensions.5. Specification requirement under Rule 9(1) for deemed removal:The appellants argued that the deemed removal provision under the amended Rules 9 and 49 could not be applied without the specification of the place of manufacture or premises appurtenant thereto by the Collector. The Court clarified that Rule 9(1) does not require the Collector to specify the place of manufacture, but only any premises appurtenant thereto. The Court rejected the appellants' contention that without such specification, the deemed removal provision could not be enforced.Conclusion:The Supreme Court upheld the amendments to Rules 9 and 49 and Section 51 of the Finance Act, 1982, as legal and valid. The Court affirmed the Delhi High Court's judgment that the appellants are liable to pay excise duty on yarn obtained at an intermediate stage and further processed in an integrated process for weaving into fabrics. The appeal was dismissed with no order as to costs.