1986(11)LCX0041

BEFORE THE CEGAT, SPECIAL BENCH ‘D’, NEW DELHI

S/Shri G. Sankaran, Vice-President (T) and V.T. Raghavachari, Member (J)

RATTAN CHAND AND SONS

Versus

COLLECTOR OF CENTRAL EXCISE, ALLAHABAD

Order No. 933/86-D, dated 26-11-1986

Advocated By :  Shri K. Narasimhan, Advocate, for the Appellant.

 Shri K.C. Sachar, JDR, for the Respondent.

[Order per : V.T. Raghavachari, Member (T)]. - The appellants M/s. Rattan Chand & Sons are manufacturers of Shoddy woollen yarn. In their classification list they had claimed benefit of exemption Notification No. 167/CE, dated 1-9-1973 and the successor notifications 112 of 1974, dated 10-7-1974 and 30 of 1975, dated 1-3-1975. According to them their product fell under serial No. 3(2) of the table attached to notification. Subsequently show cause notice dated 19-11-1976 was issued to them for recovery of a sum of Rs. 42,714.15 paise in respect of clearances between 1-4-1974 to 31-3-1976 on the basis that it was only serial No. 3(3) of the table attached to the notifications that would be applicable to their product and not serial No. 3(2). The appellants resisted the demand. The demand has been issued under Rule 10 and 10-A of the Central Excise rules. Subsequently under corrigendum dated 25-4-1978, the reference to Rule 10 was dropped from the demand confirming the demand under Rule 10-A only. After adjudication, the Assistant Collector under his order dated 5-10-1978 confirmed the demand and an appeal against the same was dismissed by the Appellate Collector by order dated 29-9-1982. This appeal is against the said order.

2. We have heard Shri K. Narasimhan, Advocate for the appellants and Shri K.C. Sachar for the department.

3. Serial No. 3(2) of the table attached to the notifications mentioned earlier read “Yarn (containing not less than 60% of wool and not more than 5% of virgin wool) commonly known as shoddy”. It is this description that the appellants had mentioned in their classification lists dated 6-3-1974, 27-8-1974 and 17-3-1975 in claiming benefit under the respective notifications 167 of 1973, 112 of 1974 and 30 of 1975. Shri Narasimhan further points out that following the approval of these classification lists the appellants were regularly submitting monthly returns in RT 12 forms which were regularly assessed by the Superintendent during all the months in question from April, 1974 to March, 1976.

3A. The case of the appellants is that they were spinning shoddy woollen yarn out of pulled and garnetted wool mixed with spinning waste obtained from other mills. It is therefore the contention of Shri Narasimhan that no virgin wool at all was being used by the appellants in the manufacture of shoddy yarn by them. He therefore contends that since their product admittedly contained not less than 60% of wool, the said yarn fell under serial No. 3(2) of the notification and not under serial No. 3(3) which read “all others”. If the yarn fell under serial No. 3(2), it would certainly stand excluded from serial No. 3(3) which is a residuary item.

4. In this connection, Shri Narasimhan points out that the show cause notice appears to have been issued on the basis of an objection raised by an audit party, the observation in the audit report being extracted in the reply dated 12-4-1977 to the show cause notice. The said extract reads as follows :

“The review of form IV register reveal that the factory was not using virgin wool at all for the manufacture of yarn. As such the product could have been classified under 18-B 3(3) (SIC) and duty paid accordingly”.

Shri Narasimhan contends that, even so, in issuing the show cause notice the ground was substantially modified. The said ground (as seen from the copy filed of the show cause notice) reads as follows :

“Indian Pure Wool, received out of manufacturing process of woollen yarn under TI No. 18B containing more than 5% of virgin wool was classified under serial No. 3(2) of Notification No. 37/74, dated 1-3-1974 were cleared under serial No. 3(2) of above notification whereas it should have been cleared under serial No. 3(3) of the above quoted notification”.

The wording appears a little confused. Apart from that we may observe that the notification should really have been 30 of 1975, dated 1-3-1975 and not 37 of 1974, dated 1-3-1974 since notification 37 of 1974, had no relevance to the yarn in question. In any event, as Shri Narasimhan points out, this ground mentioned in the show cause notice reads as if the charge against the appellants was that their product contained more than 5% virgin wool. We are unable to discover the basis of the change of front, from non-use of virgin wool (as mentioned in the audit report) to use of more than 5% of virgin wool (as mentioned in the show cause notice). The order of the Assistant Collector makes a reference to a letter dated 21-3-1977 of the Supdt. containing the basis for the demand. No copy of the said letter has been produced before us either by the appellants or by the Department. The order of the Assistant Collector proceeded on the basis that from the records it is evident that more than 5% of virgin wool had been used in the mixture for spinning of shoddy yarn. As already stated, we are unable to discover the basis of this assertion.

5. In any event, the argument of Shri Narasimhan is that no virgin wool at all had ever been used by the appellants since they had been utilising only pulled and garnetted wool occasionally mixed with spinning waste got from other mills. It is this spinning waste that has been held by lower authorities as constituting the virgin wool portion. The Assistant Collector holds that “virgin wool which has undergone the process of spinning continues to be virgin wool even though it may be claimed by the manufacturers as waste wool”. The Appellate Collector held “sweeping and the waste obtained from carding, combing and cleaning of virgin wool would still contain virgin wool because such sweepings etc. cannot be said to contain processed wool”. He further observes that virgin wool is a technical term and implies unprocessed wool.

6. According to the appellants the wool waste purchased by them from other manufacturers is waste arising during the course of carding, combing, cleaning and spinning of virgin wool into yarn. The Appellate Collector referred to the first three processes only and omitted the last process, though he gives no reason why the last process is not considered by him. When questioned whether the term “virgin wool” is defined in any glossary published by the Indian Standards Institution, both sides stated that there was none. The Appellate Collector himself has mentioned that virgin wool would mean unprocessed wool. Therefore, if wool fibre was subjected to the process of carding, combing, cleaning and spinning and waste arises during any one of these processes we are unable to understand why such waste would not be processed wool, since the same had undergone one or other of the abovesaid processes and rejected thereafter. In the circumstances, we are unable to agree with the contention of the department that such waste would be unprocessed wool and would therefore be virgin wool.

7. The result is that in so far as the materials used by the appellants in their manufacture of shoddy yarn is either pulled or garnetted wool or a mixture thereof with spinning waste obtained from other mills they cannot be said to have used any virgin wool at all in their manufacture.

8. As earlier mentioned, serial No. 3(2) of the notification in question relates to yarn (containing not less than 60% of wool and not more than 5% of virgin wool) commonly known as shoddy. The result of the earlier discussion is that the yarn manufactured by the appellants would admittedly contain not less than 60% wool but no virgin wool. As earlier mentioned, this appears to have been the finding of the audit party on the basis of which they had raised an objection. Shri Sachar contends that in order to qualify under serial No. 3(2) of the table appended to the notification in question the shoddy yarn should not merely contain not less than 60% of wool but must contain some virgin wool which should not exceed 5%. We are unable to accept this contention since the description in serial No. 3(2) is that the yarn should contain not more than 5% virgin wool. We would read the words to mean that a given lot of shoddy yarn to qualify for the concession should contain not less than 60% wool. But, if it contains virgin wool, the latter should not exceed 5%. That, in our view, would be the proper meaning. The words used would not indicate that the presence of virgin wool is a must.

9. Therefore, even on merits the demand for the differential duty on the basis that the yarn fell under serial 3(3) and not under serial 3(2) is without substance.

10. Shri Narasimhan further contends that in any event the demand was barred by time and could not be enforced. It has been already seen that the demand was initially issued relying upon Rule 10 as well as Rule 10-A of the Central Excise Rules. As has been held by various decisions, which have all been considered in the recent decision of the Supreme Court in the case of D.R. Kohli and others v. The Atul Products Ltd. 1985 (20) ELT 212 = 1985 Vol. 6 EEC 113 Rule 10-A would come into operation as a residuary rule when the applicability of Rule 10 stands excluded. Therefore, the issue of the notice relying on both Rule 10 and 10-A was certainly improper. In their reply, the appellants had contended that Rule 10 alone would apply on the facts mentioned in the show cause notice and not Rule 10-A. Subsequently the department had issued corrigendum dated 25-4-1978 under which the Department relied upon Rule 10-A only and deleted reference to Rule 10. The penultimate paragraph in the order of the Assistant Collector postulates the question “it is to be examined whether this amount is due to the Government and in that case Rule 10-A is maintainable to recover the amount of duty demanded”. He thereafter proceeded to consider the question whether virgin wool has been used and if so whether the percentage thereof exceeded 5%. He concludes that more than 5% of virgin wool was used by the appellants and therefore concludes “from the records it is evident that the party did not disclose this fact at the time of submitting classification list and suppressed this material fact”. After recording this finding he merely states in the next paragraph “having carefully considered all the facts, the written defence reply as well as the oral submission and records of the case, I hereby confirm the demand of Rs. 42,714.15 paise”. Thus after having postulated the question whether Rule 10-A shall be attracted, the Assistant Collector records no specific finding on the same. The Appellate Collector in his order considers this question and takes notice of the arguments in the appeal that the Central Excise Officers had been checking both the raw material accounts and other records and had finalised assessment in many cases. The Appellate Collector agreed that assessment had been so completed. But he held that as the percentage of virgin wool had not been properly declared by the appellants there had been a wrong assessment, though finalised, and there cannot be any objection in invoking Rule 10-A. According to him there is no other provision of law in a situation like that and therefore rule 10A was applicable. Before us also Shri Sachar contends that the proper rule would be Rule 10-A only.

11. The show cause notice had been issued on 19-11-1976. On that date Rule 10 applied to cases where duty had been short levied through inadvertance error, collusion, or misconstruction on the part of an officer or through misstatement as to quantity, description or value of such goods on the part of owner. As earlier seen the charge against the appellants was that they had not properly disclosed in their classification list the percentage of virgin wool used by them since they had declared that such percentage was less than 5% while the percentage was really more than 5%. This charge, it appears to us, would only amount to a charge of misstatement as to the description of the goods. In that event Rule 10 would be squarely attracted.

12. The contention of Shri Sachar is that the word “misstatement as to description” would not cover cases of suppression of fact. He invited us to look into the words of Rule 10 as it stood before 6-8-1977 and as it stood after amendment on 6-8-1977. He points out that after amendment the Rule covered, with reference, to the larger period of limitation provided therein, cases of short levy by reason of fraud, collusion or any wilful misstatement or suppression of fact. He therefore contended that wilful misstatement would be distinct from suppression of fact and that what the appellants were guilty of was suppression of fact and not merely misstatement. We had seen the words of Rule 10 as they stood on the date of issue of the show cause notice. We are unable to accept the contention of Shri Sachar that as the rule then stood it did not cover the charge against the appellants as made in the show cause notice since the charge was that the appellants, in spite of using more than 5% virgin wool in their product, had failed to disclose the same in their classification list. That charge, it appears to us, would be a charge of misstatement as to the description of the goods and would, therefore, if true, attract the provisions of Rule 10, as it then stood.

13. The question then would be whether if Rule 10 would be applicable the demand would not survive at least for the period 20-11-1975 to 31-3-1976 if the finding on merits is to be against the appellants. The contention of Shri Narasimhan is that since the department, after issue of a notice under Rule 10 and Rule 10-A, subsequently amended the same to rely upon Rule 10-A only, they could not subsequently be permitted to rely upon Rule 10 to sustain the demand for the period which would be within time under Rule 10. In this connection Shri Sachar relies on the decision in the case of J.K. Steels Ltd. (1978 ELT J355) to contend that if the exercise of a power can be traced to a legitimate source the fact that the same was purported to have been exercised under a different power does not vitiate the exercise of the power in question. In that case the demand was purported to be made under Rule 9(2). The Supreme Court held that Rule 9(2) was clearly inapplicable. The Government had confined the demand (in the proceeding before the Government) to the period covered by Rule 10. The contention for the assessee was that the demand having been made under Rule 9, and there being no indication that it was made under Rule 10, the Revenue cannot change its position and justify the demand under Rule 10. The Supreme Court overruled the said objection and made the observation quoted earlier.

14. But it appears to us that it would not be appropriate to rely on that observation of the Supreme Court to justify the demand in the present instance. The Revenue initially relied upon Rule 10 as well as Rule 10A. Subsequently they expressly gave up the demand under Rule 10 and specifically relied upon Rule 10-A only. Before us also Shri Sachar contended that Rule 10-A was the proper Rule. In the circumstances once the applicability of Rule 10-A is ruled out, it would not be proper to permit the department to rely on the provisions of Rule 10 (reliance on which they themselves had expressly abandoned) to confirm a part of the demand under the said Rule 10. Therefore, on the question of limitation also we are of the view that in the particular circumstances of this case, the demand, made under rule 10-A, could not be justified.

15. Accordingly we hold that the orders of the lower authorities are not correct. This appeal is allowed and the orders of the lower authorities are set aside with consequential relief.

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Equivalent 1987 (27) ELT 533 (Tribunal)