2002 (11) TMI 90 - SC - Central Excise

Revenue demand under Tariff Item 68 barred by limitation under Section 11A; no Rule 9B provisional classification found

METAL FORGINGS & ANR. Versus UNION OF INDIA & ORS.

SC held the Revenue's demand under Tariff Item 68 is barred by limitation. The Court found no Rule 9B order or evidence that clearances or duty payments ... Classification of the products under Tariff Item 68 - demand of the Revenue is barred by limitation - Held that:- It is clear that to establish that the clearances were made on a provisional basis, there should be first of all an order under Rule 9B of the Rules, and then material to show that the goods were cleared on the basis of said provisional basis, and payment of duty was also made on the basis of said provisional classification. These facts in the instant case are missing, therefore, in our opinion there is no material in the instant case to establish the fact that either there was a provisional classification or there was an order made under Rule 9B empowering the clearance on the basis of such provisional classification. In the absence of the same, we cannot accept the argument of the Revenue that in fact the order of the Assistant Collector dated 21-1-1976 is a provisional order based on which clearance was made by the appellants or that they paid duty on that basis. On the contrary, as held by the Judicial Member the said order of classification was a final order, therefore, the Revenue cannot contend the limitation prescribed under Section 11A does not apply. In the absence of a show cause notice it is not open to the Revenue to make a demand on the appellants even assuming that the contention of the Revenue in regard to classification as held by the Tribunal is correct. In view of our finding on this question of limitation which precludes the Revenue from making a demand on the appellants because of the bar of limitation, we think it unnecessary to go to the first question as to the correctness of the classification made by the Tribunal in the impugned order. In favour of assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether the forged steel products subjected to subsequent processes (polishing, trimming, removal of superfluous skin) are classifiable under Tariff Item 68 or remain within the earlier classification (Tariff Item 26AA(ia)). 2. Whether the Department's demand for duty under Section 11A of the Act in respect of the relevant period is barred by limitation given that no formal show cause notice (as required by law) was issued. 3. Subsidiary to (2): Whether prior correspondence, orders or an Assistant Collector's classification order could be treated as a provisional classification or as constituting a show cause notice sufficient to preserve the limitation period (including the effect of interim court orders and Explanation to Section 11A). ISSUE-WISE DETAILED ANALYSIS Issue 2 (Limitation / Requirement of Formal Show Cause Notice) Legal framework: Section 11A of the Central Excises & Salt Act (statutory demand procedure) and Rule 10 (relevant rules) require issuance of a show cause notice specifying the amount demanded and affording opportunity to be heard; limitation periods (six months or five years as applicable) operate subject to statutory conditions and Explanation to Section 11A. Precedent treatment: Earlier decisions were examined-decisions emphasising that notice is a condition precedent to demand and that a mere stay of collection does not suspend issuance of notice (illustrative authorities relied upon by the Court include precedents holding that correspondence/orders cannot substitute for statutory show cause notice; Samrat International and Coastal Gases analyzed in relation to provisional assessment; Gokak Patel Volkart and J.K. Cotton Mills treated as authority that a stay of collection does not necessarily stay issuance of notice). Interpretation and reasoning: The Court holds that issuance of a show cause notice in a prescribed form is mandatory. General correspondence, suggestions, advice or parts of orders cannot be treated as a show cause notice under Rule 10/Section 11A. The document must indicate amount demanded and call upon the assessee to show cause, and must be served within the statutory limitation period. The Tribunal's attempt to treat various letters and orders as fulfilling the statutory requirement is rejected: both the Technical Member and the Judicial Member's reservations on substituting correspondence for formal notice are endorsed. The Court further reasons that the Explanation to Section 11A cannot be invoked to exclude periods of interim orders unless the interim order specifically restrains issuance of notice; a stay limited to collection of duty does not bar issuance of the statutory notice. The Court reviews Samrat International and Coastal Gases: Samrat International was fact-specific and cannot be read as a general principle permitting treating every disputed classification/clearance as provisional absent Rule 9B compliance; Coastal Gases confirms need for material showing Rule 9B procedure and provisional payment/clearance. Ratio vs. Obiter: Ratio-the statutory requirement of a formal show cause notice is mandatory and cannot be satisfied by miscellaneous correspondence or orders; absence of such notice within the limitation period renders any demand under Section 11A time-barred. Ratio-the Explanation to Section 11A does not extend limitation merely because an interim order stayed collection (absent an explicit restraint on issuance of notice). Observations distinguishing Samrat International and discussing Rule 9B are consequential but operate as binding guidance in analogous fact patterns (ratio to the extent they constrain application of Samrat International; commentary on peculiar facts of Samrat is partly obiter as applied to different facts here). Conclusion: In the absence of a formal show cause notice, the Revenue cannot sustain a demand under Section 11A for the relevant period; the demand is barred by limitation. The Court rejects the contention that various communications or an Assistant Collector's order qualify as the statutory notice or that an interim stay froze the limitation period. Issue 3 (Provisional Classification / Rule 9B / Assistant Collector's Order) Legal framework: Rule 9B (procedure for provisional assessment/classification) and established principles that provisional assessment requires compliance with the statutory procedure and evidence that clearances and duty payments were made provisionally pursuant to such order. Precedent treatment: Samrat International was relied upon by Revenue/Tribunal majority to treat classification/clearances as provisional. Coastal Gases clarified Samrat International as confined to its peculiar facts and required material showing Rule 9B procedure. Interpretation and reasoning: The Court examines whether the Assistant Collector's order of 21/22-01-1976 was provisional. It emphasizes that to characterize clearances as provisional there must be an order under Rule 9B, evidence that goods were cleared pursuant to that provisional classification, and that duty (if any) was paid on that provisional basis. Those facts are absent on the record. The Court therefore holds that the Assistant Collector's order was a final classification order and could not be treated as provisional merely because appeals and revisions were pending. The Court cautions against a broad reading of Samrat International that would allow every disputed classification to be retroactively deemed provisional without Rule 9B compliance. Ratio vs. Obiter: Ratio-provisional classification can be recognized only where statutory provisional-assessment procedure (Rule 9B) has been invoked and is supported by material showing clearance/payment on that basis; absent such facts an order is final notwithstanding pendency of appeals. Obiter-comments limiting Samrat International to its facts and warning against expansive application. Conclusion: The Assistant Collector's order cannot be treated as a provisional order freezing limitation; therefore the Revenue cannot rely on a purported provisional classification to avoid the bar of limitation. Issue 1 (Classification of Goods under Tariff Item 68) Legal framework: Statutory tariff classification principles; question whether subsequent minor processes (polishing, trimming, removal of superfluous skin) transform the forged product into a distinct dutiable article under Item 68 rather than the original classification. Precedent treatment: The appellants relied on Tata Iron & Steel (contended to favour non-classification under Item 68). The Tribunal majority concluded classification under Item 68; the Court notes conflicting Tribunal opinions (Judicial Member and third Member for classification; Technical Member for remand). The Court reviews precedent and parties' submissions but declines to decide classification on merits because of the limitation finding. Interpretation and reasoning: The Court recognizes that classification is primarily a question of fact and that the Tribunal is the fact-finding authority; the Tribunal majority found classification under Item 68 and the Technical Member dissented on process-of-manufacture grounds and on adequacy of material. However, because the Court has determined that any demand is time-barred in the absence of the statutory show cause notice, the Court deems it unnecessary to adjudicate the classification dispute. The Court does note that arguments about whether polishing/trimming constitute manufacture of a new product were contested and supported by precedent, but does not resolve factual or classification issues. Ratio vs. Obiter: Obiter-the Court's observations that classification is largely a factual determination for the Tribunal and that existing precedent (e.g., Tata Iron & Steel) was relied upon by the parties; the non-determination of classification is dispositive and hence not part of the ratio. Conclusion: The Court declines to adjudicate the classification issue because the demand is barred by limitation; therefore classification need not be decided in these appeals. Cross-References Refer to Issue 2 and Issue 3: The findings on provisional classification (Issue 3) and the insufficiency of correspondence as notice (Issue 2) collectively underpin the conclusion that limitation bars the Revenue's demand and render determination of classification (Issue 1) unnecessary. Final Disposition The Court allows the appeals on the ground of limitation-there being no valid show cause notice and no material to establish provisional assessment under Rule 9B-sets aside the impugned orders and precludes the Revenue from recovering duty for the contested period; classification issue remains undetermined for lack of necessity to decide it.