K.K. Desai, J.
1. In this petition under Article 226 of the Constitution the Petitioner Company has challenged the legality of three different reassessments of and/or claims for payment of excise duty for respective periods of (i) May 26, 1966 to October 25, 1967, (ii) October 26, 1967 to November 15, 1967 and (iii) November 16, 1967 to February 15, 1968 and the three notices of demand respectively dated April 12, 1968, February 16, 1968 copies whereof are annexed respectively as Exs. I. D and C to the petition.
2. The facts leading to the institution of the petition may be shortly summarised as follows :-
The Petitioner Company carries on business of processing, bleaching, dyeing, printing and mercerising cotton textiles and other man-made fabrics. The Petitioner Company has no proprietary interest in any factory engaged in the spinning of yarn or weaving of cotton fabrics. Admittedly, the business of the Petitioner Company is of 'independent processor' within the meaning of that phrase in the Central Excise Rules, 1944, made under the Central Excises and Salt Act, 1944 hereinafter referred to as the Act.
3. Under Item 19 in the First Schedule to the Act, excise duty is levied on cotton fabrics. The rate of duty fixed in respect of these goods in the First Schedule has never been enforced, except in respect of sub-item (5) which is Cotton fabrics, not otherwise specified'. At the material time the rate of duty for that sub-item was 83 paise per sq. metre. The rate of duty as regards the other four sub-items of Item 19 was by the Notifications issued under sub-rule (1) of rule 8 of the Central Excise Rules continuously charged at much lower rates specified in the Notifications issued from time to time. By the Notification dated July 4, 1958 for the first time these sub-items (1) to (4), (viz. Cotton fabrics, (i) Superfine, (ii) Fine, (iii) Medium, and (iv) Course were expanded so as to levy excise duty so that even independent processors became liable to pay duty of excise for processing 'grey' cotton fabrics produced by other manufacturers. Now, this Notification and the subsequent Notifications dealing with the same subject took notice of the fact that duty might have been paid in respect of 'grey cotton fabrics' falling in one of the sub-items (1) to (4) and that to the extent duty was collected from such manufacturers of previous processors should not once again be charged to and collected from independent processors like the Petitioner Company. These Notifications accordingly provided that 'if duty has already been paid at the rate applicable to the varieties specified in column 2 of the Notification, the fabrics specified in column 3 thereof shall be exempt from so much duty as is in excess of the duty specified in the corresponding entry in column 4 therof'. The above was the appropriate language for giving exemption to independent processors from payment of duty to the extent already paid by manufacturers and/or previous processors.
4. The Petitioner's case, and the fact, is that throughout the relevant period 'grey cotton fabrics' called 'lappet full voile' and Butta voile' manufactured in factories commonly known as powerlooms was delivered to the Petitioner Company by diverse dealers for processing, that is to say for the purposes of 'bleaching, dyeing and/or printing'. The Petitioner's case is that during the relevant period the powerloom manufactured Grey Cotton Fabrics Superfine which were delivered to the Petitioner Company for processing had been already charged to excise duty under sub-item (1) of Item 19 in the First Schedule to the Act before these goods were removed from manufacturers' factory or godown. In fact, on the above footing in respect of 'Superfine goods', processed by it duty was charged to the Petitioner Company (as independent processors) after giving credit in respect of the duty recoverable for 'grey cotton fabrics' from the original manufacturers. The Petitioner Company had to pay having regard to the Notifications issued in the connection only 8 paise per sq. metre by way of duty. This levy of 8 paise per sq. metre has referred to in the arguments as excise duty levied against the Petitioner Company for 'processing' cotton fabrics. After the Petitioner Company paid duty at the above rate of 8 paise per square metre in respect of the three periods mentioned above, that is, May 26, 1966 to October 25, 1967, October 26, 1967 to November 15, 1967, and November 16, 1967 to February 15, 1968, the goods processed by the Petitioner Company were allowed to be removed from the licensed and specified godown maintained by the Petitioner Company. In January, 1968 the Excise Authorities decided that the excise duty in respect of 'lappet full voiles' and 'Butta voiles' was not chargeable on the footing that these were cotton fabrics superfine falling in sub-item (1) of Item 19, i.e., these goods were 'Cotton fabrics, not otherwise specified' and were liable to pay excise duty at the rate of 80 paise per sq. metre. The three impugned reassessments and the notices of demand were made on the above footing. By the notices of demand dated April 12, 1968, copy whereof is Ex. I to the Petition, in respect of the period May 26, 1966 to October 25, 1967 under rule 10A of the Excise Rules, the Petitioner Company was called upon to pay Rs. 3,48,571.94. By the two notices of demand both dated February 16, 1968, copies whereof are respectively Exs. D and C, as subsequently modified by a further notice dated March 23, 1968 copy whereof is Ex. H to the Petition, in respect of the two respective periods of October 26, 1967 to November 15, 1967 and November 16, 1967 to February 16, 1968, the Petitioner Company was called upon respectively to pay Rs. 55,591.44 and Rs. 2,95,452.08. The first of the notices (Ex. D) was issued under rule 10A, while the second notice (Ex. C) was issued under rule 10. These demands were challenged initially by the correspondence mentioned in para 8 of the Petition. As representation made by the correspondence was not accepted, this Petition was filed on April 16, 1968.
5. The main contention advanced on behalf of the Petitioner Company at the hearing is stated in diffused manner in grounds (a), (b), (c), (g), and (h) of para 12 of the Petition. That contention is that the basis of the reassessments and claims for the above three amounts is that the goods processed by the Petitioner Company are 'cotton fabrics, not otherwise specified' falling in sub-item (5) of Item 19 in the First Schedule to the Act and that the Petitioner Company was liable to pay duty at the rate of 80 paise per sq. metre. But these goods had been manufactured as grey goods by third party manufacturers. The levy of excise duty under this sub-item (5) at the rate of 80 paise was always chargeable against and payable by the manufacturers and no one else. The duty was recoverable from those manufacturers prior to the release and removal of the manufactured goods from the factory of such manufacturers. In respect of goods falling within sub-item (5), independent processors were never liable to pay any excise duty. The plain language of the sub-item (5) provided for levy of duty against the manufacturers only and not independent processors. The manufacturer of the cotton fabrics mentioned in this sub item (5) was in all respects complete and the goods were released to and sold in the market after duty was levied on the collected from the manufacturers. The processing of the goods released in the above manner was not manufacturing of any goods or new artiles. The 'lappet voiles' and the 'Butta voiles' bleached, dyed and/or printed by the Petitioner Company were completed cotton fabrics known by those names at the date of the release and removal of the goods from the godown of the third party manufacturers. The subsequent processing of these goods by the Petitioner Company was not manufacturing of any new exciseable goods the duty now sought to be collected from the Petitioner Company was always payable by the other manufacturers of these fabrics. If duty was short-levied the same was liable to be recovered from those manufacturers. The attempt to recover the same excise duty from the Petitioner Company was an attempt to collect twice over the duty that was recoverable from those manufacturers. Law does not permit collection of duty twice over in respect of any of the excisable goods mentioned in the First Schedule to the Act. As the duty claimed was never levied and or payable by the Petitioner Company, the reassessments and the demands are without jurisdiction and illegal.
6. The further subsidiary contentions, which we will not be required to dispose of in detail, were that having regard to the circumstances mentioned above, the Central Excise Department had knowledge that the Petitioner Company was not liable to pay any further duty and the demand made was accordingly fraudulent exercise of power. The Department had found it impossible to make the claim for the alleged short levy of duty against the original manufacturers and therefore, the Department had been arbitrarily and capriciously attempting to recover duty payable by those manufacturers from the Petitioner Company. In connection with the reassessments made, the Department had failed to serve any notice and had failed to give any hearing to the Petitioner Company. Rules of natural justice have been violated. It was pointed out by reading the contents of the trade notice dated February 27, 1968 that the Department had realised that the amounts claimed from the Petitioner Company were in fact not payable by the Petitioner Company, and even so an attempt was being made to secure payments of the amounts claimed on a provisional basis from the Petitioner Company. It was also contended that the Department was wrong in the finding that these goods were liable to pay excise duty under sub-item (5) of Item 19. In fact, these goods were of the description in sub-item (1) Cotton fabrics Superfine - and on that footing, duty at the rate of 8 paise per sq. metre. had already been rightly recovered from the Petitioner Company as Independent processors. The basis of the charge of duty in respect of these goods under sub-item (5) was accordingly unjustified.
7. In connection with the two notices of demand issued under rule 10A in the submission was that the demand was in fact for short-levy. The appropriate rule for making demand in respect of short-levy was rule 10. This rule provided that the claim for short levied duty must be made with three months from the date on which the duty was initially paid. Notices were sought to be issued under rule 10A because the Department was aware that the above period of three months has expired. The period of three months mentioned in the rule 10 had expired. The demand for recovering short-levied duty was time barred. The Petitioner Company was not liable to pay amounts claimed under two notices issued under rule 10A.
8. In reply to the contentions made above, Mr. Advani for the Respondents strongly relied upon the contents of the sub-items (1) to (4) of Item 19 in the First Schedule to the Act. On the basis of these contents, he argued that even in respect of the 'Cotton fabrics, not otherwise specified' mentioned in sub-item (5) of Item 19, it could justifiably be held that the fabrics mentioned in this item could be charged to duty of 80 paise at the four following stages :
(a) Grey (unprocessed);
(b) Bleached and/or dyed and/or printed;
(c) Mercerised and/or water proofed whether not-proofed or not (including rubberised); and
(c) Processed in any other manner, including shrink proofed and/or organdie processed.
His emphatic submission was that the arguments advanced by Mr. Joshi on behalf of the Petitioner Company were on the wrong footing that goods falling under this sub-item (5) were not liable to pay excise duty at the above three different stages of processing of grey fabrics. The effect of the submission.......... was that the lappet full voile and Butta-voile recovered by the Petitioner Company for processing were merely grey goods. By processing them, that is, by bleaching, dying and/or printing the Petitioner Company had produced now excisable goods. This article was once again liable to pay duty as falling under sub-item (5) of Item 19, that is, as 'Cotton fabrics, not otherwise specified'. For the above reason, in his submission, there was no substance in the contention of Mr. Joshi that in respect of the same article, duty was sought to be recovered by the above demands twice over from two manufacturers. He developed this argument by stating that the price of the 'grey' lappet voile and Butta-voile sold in the market would always be altogether different from the bleached, dyed and/or printed lappet voil and Butta voile ultimately manufactured by the Petitioner Company. The goods processed by the Petitioner Company must, therefore, be held to be a new marketable product and the Petitioner Company must accordingly be held to be 'manufacturers' for the purposes of the Act. In that connection he strongly relied upon rules 49 and 56A of the Central Excise Rules which provide for payment of duty by each manufacturer on removal of excisable goods from his factory and enable a manufacturer by making an application to get relief in respect of the user of duty paid goods as component parts and otherwise in the goods to be manufactured by the applicant. The submission was that under rule 49, it was incumbent upon the Petitioner Company as manufacturer to pay duty when bleached, dyed and/or printed lappet voile and Butta-voile was released from the godown of the Petitioner Company. He strongly relied upon the fact that the Petitioner Company paid duty as manufacturer on release of these goods when the goods were held to fall within the description of 'Cotton fabrics - Superfine' under sub-item (1) of item 19. The submission was that an independent processor was for all purposes a manufacturer within the meaning of the Act. In that connection, he argued that even the powerloom owner, who manufactured the grey goods, would be liable to pay further duty if he took his grey cotton fabrics to some factory and got them processed for sale by himself. There was no reason why he was not liable to pay duty of 80 paise on his goods first when they were in grey condition and next (once again) when they were processed, that is, bleached, dyed and/or printed or otherwise dealt with.
9. In connection with the contention of Mr. Joshi that the goods received by the Petitioner Company had been charged to and had paid duty of excise and the reliance placed on certain exemptions relating to collection only of compounded duty from the powerloom manufacturers, Mr. Advani relied upon Notifications issued under rule 96J and the rule itself. Relying on the language of rule 96J the connection of Mr. Advani was that the compounded duty was recovered from the powerloom manufacturers of cotton fabrics only when these goods were unprocessed. There was no compounding of duty payable in respect of these very goods when subsequently processed. This submission was developed by once again contending that cotton fabrics when grey and unprocessed were one kind of excisable goods and these very goods when subsequently processed were new and different kind of excisable goods. The Petitioner Company never applied for relief under section 56A and was, therefore, liable to pay duty at the rate of 80 paise per sq. metre in respect of the goods processed by it on the footing that these were new goods falling in sub-item (5) of Item 19. In that connection he argued that the goods in question were even more sophisticated than the Cotton fabrics, Superfine mentioned in sub-item (1). It was impossible that for such highly sophisticated goods duty was not payable under sub-item (5). He pointed out that under the scheme of the Act there were several items where duty was charged on the same goods more than once. He relied upon item 4 in the First Schedule to the Act relating to tobacco, which has sub-items of 'unmanufactured tobacco' and 'manufactured tobacco' whereunder there are further sub-items reading 'cigars' and 'cheroots' as well as 'cigarettes' and 'Biris'. The submission was that there was nothing novel in recovering excise duty in respect of goods for which excise duty might already have been paid. Tobacco charged to duty as such was once again charged to duty when converted into cigarettes and Biris. In respect of the goods processed by the Petitioners Company duty was levied and charged against processors. The fact that in respect of such goods the powerlooms manufacturers might have paid duty was not any obstruction to collection of duty. This could not be described as double taxation. He further argued that by reason of the compounding of duty, full duty of 80 paise was never charged on the powerloom manufacturers. There was, threrfore, no obstruction in levying the full duty payable under sub-item (5) of Item 19 against the Petitioner Company.
10. As regards the other consequential submissions made by Mr. Joshi Mr. Advani argued that the facts of the case as discussed by him justified the action of the Department in making reassessments and in issuing notices of demand which are challenged in the petition. There was no justification in the contention that these involved fraudulent exercise of power on that the demands were arbitrary or capricious. He submitted that the findings made by the Department that these cotton fabrics did not fall within sub-item (1) and fell............ within sub-item (5) was binding on the Petitioner Company and this Court. That finding was not liable to be disturbed. He also submitted that the facts of the case justified the demand for excise duty which had not been paid by the Petitioner Company under rule 10A. The Department was accordingly justified in issuing the two notices dated April 12, 1968 and February 16, 1968, which were issued under rule 10A.
20th August 1970.
11. In connection with these rival contentions, it is of importance to notice that under charging section 3 of the Act the duty of excise is levied and is directed to be collected on all excisable goods produced or manufactured in India. Excisable goods are defined to mean goods specified in the First Schedule as being subjected to a duty of excise. The word 'manufacture' has been defined to include any process incidental or ancillary to the completion of a manufactured product. It requires to be emphasised and will have to be remembered in this matter that the charging section does not purport to levy duty on what cannot be described as excisable goods, that is, what is not specified item in the First Schedule to the Act. Now, the only relevant item in the present case is Item 19 in the First Schedule. That item as contained in the First Schedule runs as follows :
'19 COTTON FABRICS -
* * * * (1) Cotton Fabrics, Superfine -
* * * * (2) Cotton Fabrics, Fine -
* * * * (3) Cotton Fabrics, Medium -
* * * * (4) Cotton Fabrics, Coarse -
* * * * (5) Cotton Fabrics, not otherwise specified.'
* * * *
The completed manufactured product which is excisable goods under this Item must be cotton fabrics of the description contained in the above sub-item (1) to (5). Now, in connection with the collection of the duty in respect of the goods which fall within these sub-items (1) to (5) and each and all excisable goods specified in the First Schedule, with the object of collection of duty, the excise rules provide inter alia for compulsory storage of all excisable goods manufactured in any factory in the licensed premises and thereupon finally and wholly to collect duty when the goods are with the consent and permission of the excise officers removed from such licensed premises which are described as warehouses. The intent and purpose of the above scheme for collection of excise duty charged under section 3 on excisable goods mentioned in the First Schedule is that the duty levied must once for all and once only be collected and recovered in respect of all and sundry excisable goods from the manufacturer thereof at the time the goods are removed for the first time from the licensed warehouses. Apparently the scheme of the Act and the Rules made thereunder do not contemplate and never intended collection of excise duty in respect of the same excisable goods twice over. Towards this very intent and purpose in rule 19 of the Excise Rules provision was made for recovering short-levied duties from the same manufacturer. This rule and the general scheme of the Act and the Rules have in connection with the present question the effect of providing that as regards excisable goods of the description of the cotton fabrics, duty can be charged on the manufacturer who produces these goods which may fall in any of the descriptions and/or categories mentioned in the 5 sub-items once and once only. It is right to state that if, in respect of cotton fabrics already charged to duty under any of the 5 sub-items, further duty could justifiably be collected from third party dealers innumerable complications not intended by the Act would arise. If such was the law, trade and commerce must cease to exist in respect of excisable goods mentioned in the First Schedule. This requires to be illustrated by reference to one of the 5 sub-items of cotton fabrics with which we are concerned. If a manufacturing mill gets released, say, 50 bales of cotton fabrics superfine manufactured by it after payment of duty, the goods will travel into free market for being dealt with by wholesale and retail dealers on the footing that excise authorities were not entitled to make any claims on the goods. That would be so in connection with goods falling in sub-items (1) to (5) of cotton fabrics manufactured by any mills and released to trade. If the duty was short-levied, it could only be Collected from the manufacturer who got the goods released. No dealer in the market who dealt with such goods would be concerned with the failure of the excise authorities in not collecting wholly and completely the duty payable in respect of such goods, nor will such dealer in the market be concerned with mistakes which might have been committed as regards the true item of excise which was applicable to such released goods. The questions raised in this petition will have to be decided in this case on the footing of the above general propositions.
12. It is necessary in the first instance to mention that the rate of duty prescribed in the First Schedule to the Act in respect of the excisable items was always on a high scale. Administration has always proceeded to enforce duty of excise on the footing that the rates prescribed in the First Schedule were generally not to be enforced. It is for this reason that in connection with the item of 'cotton fabrics' as well as in connection with almost all items appearing in the First Schedule, the Administration has from time to time issued innumerable Notifications under sub-rule (1) of rule 8, exempting the excisable goods from the payment of rates of duties prescribed under the First Schedule and fixing the rates at much lower scales. Thus in connection with the rates of duty chargeable on 'cotton fabrics' we have been first referred to Notification dated March 19, 1958 which was in supersession of similar prior Notification dated September 1, 1956. Under this Notification the excise duty payable in respect of sub-items (1) to (4) of Item 19 was fixed as follows :
Duty perSq. metrePaise1. Cotton Fabrics, Superfine* * * ... ... ... 22II. Cotton Fabrics, Fine* * * ... ... ... 17III. Cotton Fabrics Medium :* * *(a) Dhoties and sarees. ... ... ... 7(b) All other sorts ... ... ... 9IV. Cotton Fabrics. Coarse* * *(a) Dhoties and sarees ... ... ... 3(b) All other sorts ... ... ... 6
13. It requires to be noticed that further classification of cotton fabrics falling under the above 4 sub-items was not made by the above Notification and was never made up to July 4, 1958. By the Notification dated July 4, 1958 issued under sub-rule (1) of rule 8 further sub-classification of cotton fabrics falling into these 4 sub-items was enacted as follows :
Duty persq. meterPaise(1) Cotton Fabrics, Superfine :-(a) Grey (unprocessed) ... ... 2(b) Bleached and/or dyed and/or printed ... ... 32(c) Mercerised and/or water proofed, whethernot-proofed or not (including rubberised) ... ... 52(d) Processed in any other manner including shrinkproofed and/or organdie processed ... 67
Exactly similar sub-classification was made and different rates of excise duty were prescribed in respect of the 3 next sub-items, i.e. Cotton Fabrics (1) Medium A and B Fine (2), and Coarse (3). Now, in this matter we are not concerned with the legality or otherwise of the sub-classifications made by Notifications issued under sub-rule (1) of rule 8. Apparently, in respect of cotton fabrics falling into each of the above 4 sub-items different rates of duty were prescribed when the goods were in four different conditions mentioned in each of the four sub-classifications quoted above. Superfine cotton fabrics when grey were liable to pay only 22 paise per sq. metre. These very goods if they were bleached and/or dyed and/or printed were liable to pay 32 paise per. sq. metre. The rate of duty was increased for the next two sub-classifications to 52 paise and 67 paise per sq. metre. Now apparently before sub-classification of each of the sub-items was made in the above manner, duty was levied on cotton fabrics, superfine once and for all and at the same rate. The question is what is the difference that was brought about under the above Notification by sub-classification of the cotton fabrics falling in the above sub-items superfine, fine, medium and coarse. Now, a composite mill could manufacture cotton fabrics of the description of each of the above 4 sub-items completely processed into condition mentioned in the sub-classification. A composite mill may manufacture superfine cotton fabrics 'processed in any other manner including shrink-proofed and/or organdie processed'. The duty charged on such goods would be calculated at the rate of 67 paise per sq. metre. The question is whether in connection with the goods which are liable to pay duty at the above maximum rate of 97 paise per sq. metre, the composite mills must pay and/or was liable to pay duty when these very goods were only in the 'grey' stage at the rate of 22 paise per sq. metre and when they were at the stage of bleached and/or dyed and/or printed further 32 paise and when mercerised and/or water proofed at the further 52 paise. It is quite clear to us that it was not the purpose of the Notification to charge a composite mill with any such quadruple duty. But this must be the effect of the submissions made by Mr. Advani which we are unable to accept as the submissions are entirely contrary to the purpose and object of the Notification. Now, it is true that the four sub-classifications in respect of each of the first 4 sub-items of Item 19 under the above Notification, was enacted with intent to levy and recover larger duty if the goods were processed in each superior manner as described in the sub-classifications. The result of the sub-classification was that a manufacturer of grey fabrics would only have to pay duty at the lowest rate. Thus, the manufacturer, who only produces grey goods and is not composite manufacturer, will have released his cotton fabrics after payment of duty at the lowest rate prescribed. Now, if these goods are processed by a manufacturer so that the goods fall into any of the descriptions contained in each of the remaining three sub-classifications larger duty would have to be paid. This larger duty was not intended to be in addition to the duty paid by the manufacturer for grey goods. Similarly, in respect of goods falling into the 4th sub-classification, that is 'processed in any other manner, including shrink-proofed and/or organdie processed', for which duty was fixed at 67 paise per sq. metre, it was not intended that the duty paid by the manufacturer of grey goods or the processors who manufactured the goods which might have fallen into the 2nd and the 3rd sub-classification, should be recovered once again by charging the whole of the sum of 67 paise per sq. metre prescribed to be levied for the goods falling within the 4th sub-classification. This was made clear when in this Notification the following was stated :
'Provided that if duty has already been paid at the rate applicable to the varieties specified in column (2) of the Table below the fabric specified in column (3) thereof shall be exempt from so much duty as is in excess of the duty specified in the corresponding entry in column (4) thereof.'
14. The Table appearing after the above quoted provision is for the purpose of giving credit for the duty already paid in respect of the goods further processed by 3rd party processors. Thus, difference in the three rates of duty in respect of superfine cotton fabrics, that is 22 paise, 52 paise and 67 paise, when paid was not recovered from the ultimate processors. Similar is the scheme with reference to the sub-classification in the sub-items (2), (3) and (4) of Item 19. In this notification the scheme contained in this Notification becomes more clear when the Notification is read with the first above referred Notification, dated March 19, 1958. There was no sub-classification of the sub-items (1) to (4) of item 19 in the Notification. There was accordingly no question of higher duty to be paid in respect of the goods falling in any of these four sub-items after they were relapsed from the original manufacturer's licensed warehouse. Apparently under the present Notification, dated March 1, 1966, the question of the higher rate of duty prescribed for goods mentioned in three more sub-classifications could justifiably be raised where grey goods manufactured by another are processed by some other independent processor. These parties who do not manufacture at all cotton fabrics but who process them have been described in the Notifications as 'independent processors'. Since the rate of duty charged on the processed goods differently described in the further three sub-classifications is higher the independent processors would be liable to pay the differential higher duty prescribed in respect of goods processed by them. Now, to this extent, they must be called 'manufacturers' within the meaning of the Act.
15. But the contention on behalf of the Petitioner Company is that the sub-classifications as appearing in respect of the sub-items (1) to (4) of Item 19 have never been applied to and/or enacted in connection with sub-item (5) of Item 19, that is, 'cotton fabrics, not otherwise specified'. We understand that the rate of duty prescribed for goods falling in sub-item (5) at the relevant time was 80 paise per sq. metre. The goods processed by the Petitioner Company were cleared by the manufacturers on the footing that they fall in sub-item (4), that is 'Cotton fabrics, Superfine', and in grey condition. The Petitioner Company having acted as processors of these goods by bleaching and/or dyeing and/or printing the same, produced goods of the description falling into the 2nd sub-classification that is, 'Bleached and/or dyed and/or printed' of cotton fabrics, superfine. The goods so processed by the Petitioner Company were released from its factory upon payment by the Petitioner Company differential duty prescribed in respect of the processed goods. The release was on the footing that the goods fell into sub-item 1 of Item 19 and were superfine cottonfabrics. This was done continuously during the relevant period that is between May 26, 1966 to November 15, 1967 and even prior that thereto. In connection with this liability to pay duty, there was no dispute between the parties. Now, in January 1968 the Petitioner Company was informed that the goods processed by the Petitioner Company fell into sub-item (5) of Item 19 and were 'Cotton fabrics, not otherwise specified'. This led to the impugned reassessments and the impugned notices of demand. Now Mr. Joshi is right in his submission that the goods falling in sub-item (5) of Item 19, have not been further sub-classified as done in connection with the sub-items (1) to (4) of Item 19. The question accordingly is as to whether, when the Petitioner Company processed the goods which were brought to it by its customers in grey condition, the Petitioner Company manufactured cotton fabrics falling in the sub-item (5). As discussed above, when there was no sub-classification of any kind of the cotton fabrics mentioned in sub-items (1) to (4), the duty of excise could only be recovered once and once only from the manufacturer of those goods. No difference has been made in connection with the duty to be collected for the cotton fabrics falling in sub-item (5) of Item 19 by enactment of sub-classification as has been done in connection with the fabrics falling into sub-items (1) to (4) of Item 19. It is, therefore, abundantly clear that in respect of cotton fabrics falling within the description of sub item (5) of item 19, duty could be recovered once and once only and from the manufacturer of such fabrics. Mr. Advani submits that since the Petitioner Company processed the goods already manufactured, they must be considered to have produced new goods falling within the description of sub-item (5) of Item 19 and, therefore, they must be considered 'manufacture' and must pay duty in respect of these goods. It is difficult to respect this submission made by Mr. Advani because even originally when the processed goods were clear from the factory of the Petitioner Company, only processing duty and differential duty was recovered from them on the finding that the goods were of the third party manufacturers who are liable to pay duty in respect thereof in grey condition. This finding continues to be binding on the Department. There is no reason why in this petition the question of liability of the Petitioner Company to pay excise duty can be considered on any other footing. It requires to be repeated and clarified that since cotton fabrics falling in the description of sub-item (5) of item 19 have not been sub-classified as has been done in respect of the sub-items (1) to (4) duty chargeable on goods falling in sub-item (5) was liable to be paid only by manufacturers and not by any processors and third parties in the market. Independent processors dealing with goods falling in sub-item (5) of Item 19 have never been made liable to pay excise duty for processing of such goods.
16. In this connection it requires to be noticed that it was incumbent on the excise authorities to collect excise duty in respect of goods falling in this sub-item (5) when the goods were released by the original manufacturers from their factory. The failure, if any, of the excise authorities to recover such duty from such manufacturers can never be recovered from dealers and traders who might deal with the released goods in such manner as they choose.
17. But Mr. Advani contends and points out the true facts that admittedly in respect of the goods processed by the Petitioner Company the manufacturer had not been charged duty at the rate of 80 paise as prescribed in the First Schedule. Now, this situation has arisen because, it appears from the legislative history in that connection, the manufacturers producing Cotton fabrics and silk fabrics in factories commonly known as powerlooms without spinning plants have been held to be entitled to protection and, therefore, certain reliefs and exemptions from excise duty. In that connection, excise rules 96 I and 96 J were enacted and 96 J in respect of the goods produced by such manufacturers extremely low compounded rates of duty were prescribed by diverse notifications. The prescribed duty of excise was not charged to these manufacturers. There is no dispute that the powerloom goods received and processed by the Petitioner Company might not have been charged to duty except at compounded rates and accordingly on a very small scale. The compounded rates and accordingly on a very small scale. The compounded rate of duty was only for unprocessed (Grey) fabrics. Mr. Advani contends that when these grey powerloom manufactured goods were subsequently processed by the Petitioner Company they were saleable in the market with different description at much higher prices than grey goods. The result, accordingly to him, was that the Petitioner Company was manufacturer of new goods falling into sub-item (5) of Item 19 and irrespective of the release of the goods from the factories and warehouses of powerloom manufacturers and the duty charged to such manufacturers, the Petitioner Company became liable to pay once again duty of 80 paise per sq. metre as prescribed in the First Schedule. We have not been able to appreciate this submission made by Mr. Advani. We have to repeat that as cotton fabrics mentioned in this sub-item (5) have not been sub-classified into goods of different descriptions in the manner done with reference to the fabrics mentioned in the sub item (1) to (4) of Item 19, duty in respect of the goods falling in sub item (5) can only be charged and collected from the first manufacturers of goods and once and once only. It is difficult for us to accept the position that in respect of the goods falling in sub-item (5), duty can be charged on independent processors which duty can only be levied and collected from the original manufacturers of goods. This is so because, though in connection wish the fabrics falling in the first four sub-divisions which relate to processed goods, independent processors are manufacturers of excisable goods in respect of goods falling in sub-item (5), they cannot be manufacturers of new and/or excisable goods. This can be explained as follows. Duty paid goods manufactured by 3rd parties can be considered for payment of extra and/or further charging of excise duty and new excisable goods if by notifications like the notifications in respect of the sub-items (1) to (4), they are mentioned in the 1st Schedule. In the absence of such notifications, and sub-classifications the duty charged would be full duty prescribed under the First Schedule and it would be incumbent on the excise authorities to collect such full duty from the original manufacturers.
18. That by reason of the legislative provisions and/or notifications issued under rule 96 J, the original manufacturers were not liable to pay the full duty prescribed under the First Schedule and paid duty only at compounded rates does not make any difference to the above findings. Reference made in this connection to rule 49 appears to be entirely irrelevant. That rule contains the well-known normal provision that only in respect of excisable goods will no be required to be paid, except upon removal of goods from the licensed warehouses. Reliance was placed on rule 56A which provides for special procedure for movement of duty-paid or countervailing duty-paid materials or component parts for use in the manufacture of finished excisable products. Under this rule, the Collector of Excise is authorised to give relief and credit in respect of the user of duty-paid goods or component parts in manufacturing different alternative excisable goods. Mr. Advani referred to this rule because his case was that the powerloom manufactured goods subsequently processed by the Petitioner Company were stated to have been duty-paid goods. In his submission the Petitioner Company was not entitled to any credit for the duty already collected on grey fabrics processed by it, because an application as required under rule 56-A had not been made by the Petitioner Company. Now, there is no substance in this connection, because the question of application under rule 56-A does not arise and could not arise unless the product subsequently manufactured by use of the duty-paid goods falls into another different Item (of excisable goods) mentioned in the First Schedule. This can be made more clear by referring to the excisable goods in Item 24, which is silver. Now, if once the manufacturer of silver mentioned in this item has got released silver of his manufacture from nis factory, apparently there would be no reason why a jeweller or a trader who uses such silver in manufacturing ornaments and wares of silver could be liable to pay duty fixed by the First Schedule again in respect of the same silver. On the contrary, a manufacturer of a refrigerator, which is exisable under Item 29A in the First Schedule, would necessarily use in manufacturing process electric motors which are excisable goods under Item 30 in the First Schedule. If the manufacturer of refrigerator desires to get credit for the duty paid in respect of electric motors used in his refrigerator, he would have necessarily to make an application under rule 56A and get credit (by executive action of the Collector of Excise) for the duty paid in respect of the electric motors. Thus, the question of application under rule 56-A arises only for goods which are subject to duty of excise under more than one items of excisable goods mentioned in the First Schedule. Admittedly, in this case, duty of excise is claimed against the Petitioner Company on the basis that the goods processed by the Petitioner Company were cotton fabrics not otherwise specified thus falling in sub-item (5) of item 19. The goods are the same as were originally manufactured, except that they are processed. The goods are the same as have been subjected to payment of excise duty when they were released from the factories of the manufacturers. In respect of the goods which have already borne excise duty and do not fall into a different item of excisable goods in the First Schedule, it is impossible that duty could once again be levied and/or recovered. This submission of Mr. Advani accordingly fails. There is no parallel in the illustration of the duty levied in respect of Item 4 Tobacco, unmanufactured tobacco the first instance and cigars, cheroots and cigarettes and Biris in the next instance and the facts of the present case. This is so because by sub-classifications made in item 4 inspite of levy of duty on manufactured tobacco, provision is made for levy of further duty in respect of the same goods when manufactured and sold as cigars and cheroots as well as cigarettes and Biris. In respect of cotton fabrics falling in sub-item (5) of Item 19, sub-classification has not been made in the above manner.
19. It requires to be noticed that if duty was short-levied for any reason in respect of the goods processed by the Petitioner Company, the same could always be charged only on the manufacturers of the goods and not the Petitioner Company who must be treated as ordinary purchasers of the manufactured goods in open market. For the above reasons, the reassessments of the duty against the Petitioner Company for the above period commencing from May 26, 1966 to February 15, 1968 were entirely illegal and without authority of law. Jurisdiction vested in the Excise Authorities for reassessment has been exercised in the manner not warranted by law. Levy of the reassessed duty and the demands made were illegal and are liable to be set aside. The first contention made by Mr. Joshi accordingly succeeds.
20. Reliance has been placed on the trade notice dated February 27, 1968 in support of the submission that the impugned demands were arbitrary and capricious and without any application of mind to the relevant facts. The demands were made only because the superior authority had given instructions to proceed to make reassessments which were not warranted in law. As we have made findings on the main issue arising between the parties, it would not be appropriate to refer here all the contents of the trade notice. It is sufficient to state that the contents of the trade notice go to show that the authorities which made impugned demands were aware that in all probability the demands were illegal and not justified. It is therefore, clear that it was most improper for the authorities concerned to proceed to make demands because they were instructed to do so by higher authorities.
21. It is unnecessary to decide the contentions raised regarding violation of rule of natural justice. These contentions were merely stated and argument's were not advanced in that connection.
22. In connection with the contention that the notices of demand dated April 12, 1968 and February 16, 1968 (No. 2 of 1968) purporting to have been issued under rule 10A of the Excise Rules are invalid. Reference must be made to the provisions in rules 10 and 10A. Rule 10 provides for recovery of duties or charges short-levied or erroneously refunded and runs as follows :
'10. When duties or charges have been short-levied through inadvertence, error, collusion or mis-construction on the part of an officer or through mis-statement as to the quantity description or value of such goods on the part of the owner,..... ........ the person chargeable with the duty or charge so short-levied...... shall pay the deficiency............................. on written demand by the proper officer being made within three months from the date on which the duty or charge was paid...................'
Rule 10A provides for residuary powers for recovery of sums due to Government and runs as follows :
'10A. Where these rules do not make any specific provision for the collection of any duty, or of any deficiency in duty if the duty has for any reason been short-levied................. such duty, deficiency in duty or sum shall, on a written demand made by the proper officer, be paid.................'.
23. Apparently, the three impugned notices of demand were addressed to the Petitioner Company and the reassessments were made for the reason that duty was charged to the Petitioner Company in respect of the goods in question on the footing that they fell in sub-item (1) of Item 19, whilst in fact higher duty was payable for these goods as they fell in sub-item (5) of Item 19. The short-levy accordingly was due to inadvertence, error or misconstruction on the part of the officer who collected duty or it was due to mis-statement of description of the goods by the Petitioner Company in the A.R. form. The claims for such short levied duty were necessarily claims envisaged in rule 10. Provision having been made is rule 10 for recovering duties short-levied, there was no warrant for issuing the notices of demand dated April 12, 1968 and February 16, 1968 (No. 2 of 1968) under rule 10A. Resort to and reliance on rule 10A has been made in the above two notices only because the authority concerned was aware that the three months' period mentioned in rule 10, which was in fact applicable had expired. This question of law is discussed in greater details in the judgment of the Division Bench of this Court in the matter of Appeal No. 69 of 1963 decided on July 1, 1965. For the reasons discussed above and following the decision in the above appeal, we are bound to hold that the above two notices of demand issued by resorting to rule 10A which was not applicable were illegal. These notices are accordingly liable to be set aside. All the three notices are liable to be set aside for the main reasons which we have already discussed above.
24. In the result, the rule is made absolute. The three reassessments mentioned in the petition and the three notices of demand and the letter of modification of demand dated March 22, 1968 are held illegal and are set aside. Rule absolute. The Respondents will pay costs of the Petitioners fixed at Rs. 2000/-