By TIOL News Service

NEW DELHI, JULY 26, 2013: THE Supreme Court order states, "This is a typical case where at every stage of the litigation irrelevant legal principles were pressed into service resulting in colossal waste of time of adjudicators including time of this Court."

The respondent company is engaged at least from 1985 in the business of manufacturing of various counts of cotton yarn falling under heading 52.03 of the Central Excise Tariff Act, 1985 at the relevant point of time. It appears that at the relevant point of time the rate of tax on the yarn manufactured depended on the count/finesse of the yarn. Higher the count higher the duty. On 30.08.1993, the officers of the Central Excise Department inspected the factory premises of the respondent company and recovered two registers and a file. In the show-cause notice dated 24.06.1994 issued by the department which resulted in the present litigation, the contents of the seized documents are described as under:

"The officers found TWO REGISTERS showing the datewise details on count, strength and the Court Strength Product of various counts of yarn manufactured by them pertaining to the period 14.12.1985 to 31.12.1990 and A FILE containing the yarn test reports of various counts manufactured by M/s. Ayyappan Textiles Limited and tested at Sitalakshmi Mills Group Central laboratory, Madurai on a weekly basis. The said two Registers and file were recovered from the party.

Perusal of the two registers and the files revealed that the assessee was manufacturing higher counts over and above the tolerance limit in respect of the following counts declared to the department and cleared the same without payment of appropriate duty on the higher counts, (1) 40s (ii) 43s (iii) 60s (iv) 82s. ”

A Show Cause Notice was issued demanding a duty of Rs.4 ,98,034 /-. The Collector of Central Excise vide order dated 4.10.1994 confirmed the demand to the extent of Rs.1 ,33,573 /- holding that the assessee did not dispute his liability to pay higher tax on the basis of the material contained in the two registers recovered with respect to the balance of the demand based on the material contained in the FILE:-

"...I find that the assessee's contention has considerable force as the count determined on the basis of test conducted on the basis of sample drawn on a particular day's production during a week cannot be the representative of the whole weeks production."

The department was aggrieved and approached the Tribunal. The Tribunal remanded the matter for fresh adjudication. This time a Deputy Commissioner adjudicated the case and confirmed the full amount of Rs.4 ,98,034 /- as demanded in the Show Cause Notice. The aggrieved assessee appealed to the Commissioner (Appeals) who allowed the appeal and confirmed the amount of Rs. 1,33,583 originally confirmed by the Collector.

The Department was again aggrieved and took the matter to the CESTAT, which dismissed the appeal. The aggrieved department took the matter to the Supreme Court.

The department's question ‘ whether for demanding differential duty test report is applicable only to the goods produced on the date of drawal of samples or from the date of previous sample drawn to the date of next drawal of samples .'

In Ramalinga Choodambikai Mills Ltd. v. Government of India & Others , the High Court had held that If the department on inspection of a manufacturing premises on a particular day detects that goods of a particular specification are being manufactured, the department is entitled in law to presume that (until the manufacturer proves the contra) goods of the same specification are continued to be manufactured.

But the Supreme Court found that the case on hand is not a case where the above principle can be applied as no samples were drawn at all for the department to draw an initial presumption. The content of the recovered FILE and the statements of the employees of the respondent must be examined to ascertain the fact whether the respondent manufactured during the period covered by the FILE - yarn of a higher count than the declared count. Only after establishing such fact the department would be entitled to draw a presumption. On the other hand the 1st appellant authority found that the defence of the respondent - that the test reports obtained by the respondent for a different purpose but not to ascertain the count of a day are not representative of the count of the production of the entire week - is a tenable defence.

The Supreme Court observed that the Tribunal instead of deciding the correctness of such a conclusion went into the questions of law unwarranted by the facts of the case.

Having regard to the paltry amount involved in the matter, the long and chequered history of the litigation and the resultant wastage of time of the various fora, coupled with the fact, the 1st appellate authority found some substance in the defence of the respondent, the Supreme Court was not inclined to interfere with the judgment under appeal.

The appeal is dismissed.

(See 2013-TIOL-34-SC-CX)