Holding

Duty on yarn attaches at the time of its production and clearance for captive consumption; the special procedure merely postpones collection and does not shift liability to the fabric, so yarn produced before 24 July 1972 is chargeable at the rates fixed under Notification No. 62/72 and no further duty is payable.

Summary

The Collector of Central Excise appealed against the order of the Customs, Excise & Gold Control Appellate Tribunal which had allowed a refund to Ashoka Mills Ltd. for yarn produced between 17 March 1972 and 23 July 1972 and cleared for captive consumption before 24 July 1972. The dispute centered on whether the special procedure under Rules 96V and 96W, together with Notification No. 62/72, shifted the incidence of excise duty from the yarn to the woven fabric or merely postponed its collection. The Supreme Court held that duty on yarn attaches at the point of production and clearance for captive consumption and the notification does not shift the liability to the fabric. The proviso to Rule 96W applies only when the notification remains in force and rates change between production and clearance, not when the notification has ceased. Consequently, yarn produced in the specified period is liable to duty at the concessional rates fixed by Notification No. 62/72, and no additional duty is payable. The Court dismissed the Collector’s appeals, upholding the Tribunal’s decision and the refund to the assessee.

Issues considered

The incidence of excise duty on yarn under the special procedure: does it shift from yarn to the woven fabric?
Whether the proviso to Rule 96W applies when the special procedure notification has ceased before clearance of the fabric.
Whether yarn produced between 17‑03‑1972 and 23‑07‑1972 and cleared for captive consumption before 24‑07‑1972 is liable to normal duty under Item 18E or to the concessional rates of Notification No. 62/72.

Legislation cited

Central Excise Rules, 1944s. Rule 96V, s. Rule 96W
Central Excises & Salt Act, 1944s. Schedule Item 18E, s. Schedule Item 19

Subjects

Central ExciseYarnSpecial ProcedureNotification 62/72Rule 96VRule 96WCompounded levyCaptive consumptionExcise duty liabilityRefund

Judgment

COLLECTOR OF CENTRAL EXCISE, AHMEDABAD
A
ETC. ETC.
v.
ASHOKA MILLS LTD. ETC. ETC.

SEPTEMBER 8, 1989
El
[S. RANGANATHAN AND N.D. OJHA, JJ.l.

Central Excises & Salt Act, 1944/Central Excise Rules, 1944-First
Schedule Item 18E and 19/Rules 96 V & Wand_ Notification No. 110/61
dated 20.4.61, No. 146/77 dated 18.6.77, No. 62/72 dated 17.3.72-'Yarn
all sorts not otherwise specified'-Interpretation of-Duty-Levy of-
c Special procedure-Availability of-Yarn produced after 173.72
cleared for captive consumption before 24. 7. 72 but lying in various
departments and not cleared as on 24. 7. 72.

The department took the view that in respect of the yarn
O manufactured between 17 .3. 72 and 23. 7. 72 the assessee is liable to pay
the normal duty payable on yarn under Item 18E so long as the fabrk
manufactured out of such yarn remained uncleared from the factory as
on 24. 7.1972. On the other hand the assessee's contention was that
excise duty on yarn is attracted as soon as it is produced and cleared for
captive consumption.

The Customs, Excise & Gold Control Appellate Tribunal
(CEGAT) accepted the contention of the assessee and held tliat the
yarn cleared for captive consumption during the period from 17.3. 72 to
23. 7. 72 in terms of the special procedure was entitled to the benefit of
the rate fixed under Notification No. 62/72-CE dated 17.3. 72 and that no
F further duty was payable on that quantity of the yarn and a consequen-
tial refund to tbe appellants was directed. Aggrieved by the order of the
Tribunal the department preferred these appeals to this Court. While
.dismissing the appeals and upholding the view taken by the Tribunal,
this Court,

G HELD: Rules 96 V & W of the Central Excise Rules, deal with two
items: cotton yarn or yarn falling under item 18E of the First Schedule
and woollen yarn. Normally, under tbe schedule to the Act, woollen
yarn was being charged to excise duty on an ad valorem basis while
cotton and other yarn was being assessed on weight basis. [92C)

H Yarn 1s an exdsable commodity and. but for the special procedure
86
C.C.E. v. ASHOKA MILLS [RANGANATHAN, J.I 87

and notification, duty thereon is leviable at the point of production and A
clearance for captive consumption. The dnty attached itself at the point
of production and clearance of the yarn. The notification doe.s not alter
this position. It does ncit shift the incidence of duty from yarn to the
woven fabric. [94E-F]
B
The proviso to Rule 96-W does not help the Revenue. It only
contemplates cases where there is a change in the rates prescribed
under the notification between the date of production of the yarn and
the date of clearance of the fabric. [94H; 9SA]

The words of the proviso can be extended to cover a case where
the notification itself has ceased to apply by the date of clearance of the c
fabric. To apply the proviso to such a case would result in its applicabil-
ity to a totally different situation. It would involve a comparison of
unlikes. [9SE]

Crown Spinning & Manufacturing Co. Ltd. v. Collector, [1983]
E.L. T. 2433, referred to. D

CIVIL APPELLATE JURISDICTION: Civil Appeal Nos.
2436-37 of 1987 etc.

From the Judgment and Order dated 2.4.1983 c' the Customs,
Excise and Gold Control Appellate Tribunal, New Delhi in Appeal E
No. ED (T)/SB/64/76-D and ED(SB)(T) A. No. 61/76-D in Order
Nos. D-169 and 170 of 1983.

V.C. Mahajan, A. Subba Rao and C.V. Sobba Rao for the
Appellant.
F
) Soli J. Sorabjee, P.H. Parekh, M.K. Pandit and J.P. Pathak for
the Respondent.

The Judgment of the Court was delivered by

RANGANATHAN, J. These are three appeals by the Collector G
of Central Excise. Two of then relate to Ahmedabad and one to
Bombay. The Ahmedabad appeals are in the case of Mis Ashoka Mills
Ltd. and the Bombay appeal is in the case of Mis Mafatlal hne Sp'o-
ning and Manufacturing Co. Ltd. These appeals raise a very interest-
ing question.
H
88 SUPREME COURT REPORTS [1989] Supp. 1 S.C.R.

The assessee respondents are companies manufacturing yarn and
A cotton fabrics, the manufacture of yarn being a step in the process of.
the manufacture of cotton fabrics. Cotton fabrics (which expression
included all fabrics containing more than 40% by weight of cotton) ..,
were s11bject to excise duty on an ad valorem basis under item 19 of the
tariff in the First Schedule to the Central Excises & Salt Act, 1 944
B (hereinafter referred to as 'the Act'). "Yarn, all sorts, not elsewhere
specified ..... " became liable to duty under item 18E of the First
Schedule under ihe Finance Act, 1972 w.e.f. 17.3.72. The consequ-
ence was that, from 17.3.72, the yarn which was.being produced by the
appellants became liable to duty under item 18E while the fabric
manufactured by them was dutiable under item 19.
c The Central Government decided to give two categories of asses-
sees the benefit of the provisions of Rules 96 V & W of the Central
Excise· Rules: (i) assessees manufacturing woollen yarn; and (ii) asses-
sees manufacturing cotton yarn or yarn falling under Item 18E and
using the same wholly or partly, in the manufacture of fabrics in their
D own factory. These rules appeared in Chapter V of the Rules as Sec-
tion E. VI, headed "Cotton yarn, woollen yarn, yarn falling under
tariff item 18E-Special Procedure". This Section in the rules was
inserted by notification No. 110/61 dated 20.4.61 and omitted by
notification No. 146/77dated 18.6.77. They read thus:

E "96-V Application to avail of special procedure,- •-'
( 1) ·Where a manufacturer who manufactures cotton yarn,
yarn falling under item 18E of the First Schedule to the
Central Excises & Salt Act, 1944 ( 1 of 1944) or woollen
yarn and in the ca~e of cotton yarn of yarn falling under
F item l8E of the First Schedule to the Central Excises & Salt
Act, 1944 ( 1 to 1944) uses the whole or part of the yarn
manufactured by him in the manufacture of cotton fabrics
in his own factory, makes in the proper form an application
to the Collector in this behalf the special provisions con-
tained in this section shall, on such application being
G granted by the Collector, apply to such manufacturer in
substitution of the provisions contained elsewhere than in
this section for the period in respect of which the applica-
tion has been so granted.

(2) Such application shall be made so as to cover a period
H of not less than six consecutive calendar. months, but m_ay
·-~ C.C.E. v. ASHOKA MILLS [RANGANATHAN, J.] 89

be granted for a shorter period in the discretion of the A
Collector.

(3) If at any time during such period, the manufacturer
does not want to avail himself of the special provisions
contained in this section, he shall give a notice in writing to
B
the proper officer of his intention at least one week in
advance; and if he fails to give such notice h~ shall be
precluded from availing himself of such provisions for a
period of 6 months from the date of such failure.

96-W. _Discharge of liability for duty on payment of certain
sum,- c
(1) Having regard to the average production of cotton
fabrics from one kilogram of cotton yarn or yarn falling
under item 18E of the First Schedule to the Central Excises ·
& Salt Act, 1944 ( 1 to 1944) or the average prevailing
D
prices of woollen yarn the Central Government may, by
notification in the Official Gazette, fix from time to time a
rate per square metre of the cotton fabrics produced or per
kilogram of the woollen yarn produced, as the.case may be,
subject to such conditions and limitations as it may think fit
to impose', and if a manufacturer whose application has
been granted under rule 96V pays a sum calculated accord- E
ing to such rate, in the manner hereinafter laid down, such
payment shall be a full discharge of his liability for the duty
leviable on the quantity of cotton yarn of yarn falling under
item 18E of the First Schedule to the Central Excises & Salt
Act, 1944 ( 1 of 1944) manufactured by him and used in the

- manufacture of fabrics in his factory or the quantity of F
woollen yarn produced by him:

1. Provided that if there is an alteration in the rates of duty
and/or in the limit of exemption, the sum payable shall be
recalculated on the basis of the revised rates and/or exemp-
tion limit from the date of alteration and liability for duty G
leviable on the quantity of cotton yarn or yarn falling under
item· 1sE of the First Schedule to the Central Excises & Salt
Act, 1944 (1 to i944) used in the manufacture of cotton
fabrics or woollen yarn produced shall not be discharged
unless differential duty is paid.
H
90 SUPREME COURT REPORTS [1989] Supp. 1 S.C.R.

A (a) in the case of such cotton yarn, or yarn falling under
item 18E of the First Schedule to the Central Excises & Salt
Act, 1944 (1 of 1944) as on the date of clearance of the
aforesaid cotton fabric>, and

(b) in the case of woollen yarn, as on the date of clearance
B
of such woollen yarn from the factory of the manufacturer;
should, however, the amount of duty so recalculated be
less than the sum paid, the balance shall be refunded to the
manufacturer.

(2) The rate specified under sub-rule ( l) shall be separa-
tely and distinctly notified, and shall be separately and dis-
tinctly applied, in respect of (i) cotton yarn and (ii) woollen
yarn.

(3) The sum payable under sub-rule (1) in respect of cotton
yarn shall be paid by the manufacturer along with the duty
ID
on fabrics in the manner prescribed in rule 52.

Provided that where cotton fabrics are allowed to be
removed in hond under rule 96-D from one factory to
another (hereinafter referred to as the processing factory)
for processing and the cotton fabrics also processed are
E
cleared from the processing factory, the duty payable
under sub-rule ( 1) shall be paid by the licensee of the
processing factory.

A notification as envisaged by Rule 96V was issued, being notification
F No. 62/72, on 17 .3. 72. It reads as follows:
"In pursuance of rule 96-W of the Central Excise Rules,
1944, the Central Government hereby directs that the rate
of duty in respect of yarn containing partly more than 40
per cent by weight of cotton and partly any other fibre or
fibres, the wool or silk content being less than 40% by
weight of such yarn (where such yarn contains wool or silk)
and falling under Item No. 18E of the First Schedule to ,
the Central Excises and Salt Act, 1944 and of the descrip- 1
tion specified in column (2) of the Table hereto annexed,
shall be the rate spec:fied in the corresponding entry in
· column (3) of the said Table.
C.C.E. v. ASHOKA MILLS [RANGANATHAN, J.] 91

.THE TABLE
A

S.No. Description of yarn Rate

( 1) (2) (3)
Paise per square metre
B
of the fabric made.
1. Yarn used in making super- 20.00
fine fabrics.
2. Yarn used in making fine fabrics. 12.00
3. Yam used in making medium 6.00
fabrics.
c
4. Yam used in making 4.40
medium fabrics.
5. Yam used in making coarse fabrics. 2.20
D
6. Yarn used in the manufacture 4.40
of cotton fabrics generally
described as Malimo type fabrics
or fabrics in which warp and weft
yarns are connected and fastened
together by chain stiches baned
E
ag·ainst each other.
7. Yarn used in making embriodery The duty for the
in the place in steps or in time being leviable
motifs. on yarn contained in
the base fabrics if
not already paid. F
~
8. Yam used in making fabrics -do-
impregnated or coated with
preparation of cellulose
derivations or of other
artificial plastic materials.
G
Provided that if the manufacturer elects to avail himself of
the special provisions contained in rule 96'W aforesaid, the
procedure set out in that rule in this behalf shall uniformly
apply to all the yam of the description specified in the
above table and used by him in the production of cotton
fabrics in his factory. H
~·
92 SUPREME COURT REPORTS I1989] Supp. 1 S.C.R.

Explanation:
A
For the purpose of this notification

(i) "base fabrics" shall have the same meaning as assigned
to it in tariff item No. 19 of the first schedule to the Central
B Excises & Salt Act, 1944 ( 1 to 1944)

(ii) the average count of yarn in a fabric shall be deemed to
be the count of all yarn contained in such fabric."

Rules 96 V & W, it will be noticed, deal with two items: cotton
C yarn or yarn falling under item 18E of the First Schedule and woollen
yarn. Normally, under the Schedule to the Act, woollen yarn was
being charged to excise duty on an ad valorem basis while cotton and
other yarn was being assessed on weight basis. The rules cited above
and the notification referred to, however, provided an alternative, on
the application of the assessee. On a notification being issued and the
D assessee's option being exercised, duty on woollen yarn became pay-
able on the basis of weight at the rates prevalent at the time of clea-
rance of the yarn from the factory. If the rates had gone up in the
meantime, the assessee had to pay the differential duty and if the rates
had gone down, the assessee would be entitled to a refund. Thus the
assessee was given the option of paying the duty on the woollen yarn
E on weight basis at the rates prevalent on the date of their clearance.
We are not concerned with this here. So far as cotton and other yarn is
concerned, the duty, in cases governed by a notification and applica-
tion under this Section, would be levied not on the weight of the yarn
manufactured but on the extent of fabric manufactured from such
yarn. Naturally, this duty could be calculated only after the fabric had
F been manufactured, on the basis of the area of cloth or fabric
manufactured. This would create a doubt whether the duty on yarn
under the scheme is payable on the production of yarn or on the date
of clearance of the fabrics. Sub-section (3) of section 96-W clears this
doubt. It provides that the duty would be paid along with the duty
payable on the fabrics under rule 52. This clearly shows that it is not
G the inciden~e of liability that is shifted but only the collection of the
duty.

The purpose of the rules,and notifications may be briefly set out
thus. As already mentioned both yarn and fabrics are individual items
exigible to duty. Two levies on the yarn as well as on the cotton
H fabrics, on different bases, may not only impose an undue burden on ..<,..- •
C.C.E. v. ASHOKA MILLS (RANGANATHAN, J.] 93

the manufacturer but may also unnecessarily complicate the process of
A
collection of duty at two stages. The Act, therefore, envisages what
has been described as a scheme of "compounded levy''. Under this
scheme, the excise duty on the yarn is collected only as and when the
manufactured goods, namely, cotton fabrics are cleared from the
factory and no duty is collected at the stage of the production or
manufacture of yarn. The duty paid as per this notification is treated as B
a full discharge of the assessee's liability for the duty leviable on the
yarn used by the assessee for manufacture of fabrics in its factory. To
sum up briefly, rules 96-V and 96-W, together with the notification
issued thereunder are concerned only with the issue of the excise duty
leviable in respect of yarn and what they seek to achieve are:

(a) the alteration of the basis of duty from a rate calculated
c
on the weight of yarn produced to a calculation on the basis of
the area of fabric manufactured therefrom;

(b) the postponement of the collection of the duty till the
point of clearance of the fabrics; and D

(c) the levy of the duty at rates prevalent not on the date of
production of the yarn but on the date of clearance of the fabric.

If the notification of 17.3.1972 had continued in force, there
would have been no difficulty in its application. However, on E
24.7.1972, the Government issued Notification No. 169 of 1972, the
result of which was that the special procedure referred to above was
made inappiicable to the type of yarn manufactured, used for weaving
and cleared by the appellants. The short question hi these appeals is as
to the effect or this omission in respect of yarn produced after 17.3.72
and cleared for captive consumption before 24.7.72 but lying in F
various departments ai various stages of manufacture or in the form of
cotton fabrics not yet cleared as .on 24.7.72. The Department has taken
the view that in respect of the yarn manufactured between 17.3.72 and
23.7.72 the assessee is liable to pay the normal duty payable on yarn
under Item 18E so long as the fabrics manufactured out of such yarn
remained uncleared from the factory as on 24.7.72. On the other hand, G
the assessee's contention is that excise duty on yarn is attracted as soon
as it is produced and cleared for captive consumption though kept in
abeyance and collected, so long as the notification was in force, till the
corresponding fabrics were cleared. The assessee is not iiable to pay
any higher duty in respect thereof unless one could bring it within the
·-' terms of the provi_so to the notificati()_n ..The short contention is that H
94 SUPREME COURT REPORTS [1989] Supp. 1 S.C.R.

the proviso applies only in a case where the notification under section
A
96-W continues to be in force and there is a change in rates under the
scheme of compounded levy introduced by the notification but not
where the difference in rates is one between those prevailing on the
date of production of yarn under the scheme and the date of clearance
of the goods after the abandonment of the scheme.
B
The Customs, Excise & Gold Control Appellate Tribunal
( CEGAT) accepted the contention of the assessee following its earlier
decision dated 2.4.1983 in Mis Raipur Manufacturing Co. v. Collector
of Central Excise, Ahmedabad, [1988] 33 E.L.T. 542. It held that the
yarn cleared for captive consumption during the period from 17.3.1972
to 23. 7 .1972 in terms of the special procedure was entitled to the
c benefit of the rates fixed under Notification No. 62/72-CE dated
17 .3.1972 and that no further duty was payable on that quantity of the
yarn. A consequential refund to the appellants was directed. We
notice that this order of the Tribunal was followed by another Bench of
the Tribunal in its order dated 20.7.1983 and this decision had been
D reported much earlier as Crown Spinning & Manufacturing Co. Ltd. v.
Collector, [1983] E.L.T. 2433. The Collector, Central Excise has pre-
ferred these appeals.

We have come to the conclusion that the view taken by the
Tribunal has to be upheld. 'Yarn' is an excisable commodity and it is
E common ground before us that, normally and but for the special proce·
dure and notification, duty thereon is leviable at the point of produc-
tion and clearance for captive consumption. On that view, the duty
attaches itself at the point of production and clearance of the yarn. The
notification does not alter this position. it does not shift the incidence
of duty from yarn to the woven fabric. It still talks only of the liability
F of the yarn to duty and proceeds to provide only for its postponed
collection. If we are right on this, the duty on such yarn-produced
between 17.3.72 and 24.7.72-has to be determined in accordance
with the rates specified in the notification, though such rates may have
to be calculated in terms of the area of the fabric cleared on or after
24.7.1972. The duty cannot be determined at the rates specified for
G yarn under item 18E as applicable on the dates of clearance of the
fabric manufactured by using the yarn. To hold otherwise would really
mean holding that the incidence of duty on the yarn under the notifica-
tion arises only on the date of clearance of the manufactured fabric.
This, in our view, is not the effect of the notification.

H The proviso to Rule 96-W does not help the revenue. It only
C.C.E. v. ASHOKA MILLS {RANGANATHAN, J.] 95

contemplates cases where there is a change in the rates prescribed
A
under the notification between the date of production of the yarn and
the date of clearance of the fabric. In such a case, an assessee may well
contend, but for the proviso, that the duty having attached itself on the
date of production of the yarn, it has to be calculated only at the rates
I
then prevalent and should not be recalculated at the rates prevalent on
the dates of clearance af the fabrics. The proviso precludes such an B
argument. It would be entirely superfluous and redundant if, as con-
tended for by the revenue, the liability to pay duty on the yarn itself
arises only on the date, of clearance of the fabrics. It is intended to
provide specifically that it is the intention of the Government that in
such a case, the rates prevalent on the date of clearance of the fabric
should govern. The word 'recalculated' used in the proviso also sup-
ports such a conclusion. This word would be inappropriate if the notifi- c
cation envisaged the levy. of duty at the point of cleara.nce of the
fabrics, as contended for by the Revenue, for in that event, there
would be only one calculation as at that point of time and no question
of recalc11lation would arise. In other words, the notification grants a
concession but only subject to change in these concessional rates that D
may occur until the fabrics made out of the yarn are cleared.

We do not think that the words of the proviso can be extended to
cover a case where the notification itself has ceased to apply by the
date of clearance of the fabric. To apply the proviso to such a case
would result in its applicability to a totally different situation. It would E
involve a comparison of unlikes. It would mean the substitution of one
set of rates prescribed in connection with a special procedure on the
basis of the area of cloth by another set ·of rates applicable to yarn in
the normal course which is to be worked out on the basis of weight.
This involves a mix-up of two totally different schemes of levy of duty
on yarn. We do not think it .is correct to place _this construction on F
these provisions. In our opinion, the normal rates de hors the notifica-
tion will apply only in respect of yarn produced on or after 24,7.72 and
not to yarn produced between 17.3.72 and 23.7.72. The assessees hav-
ing paid at the normal rates in respect of the _latter period were rightly
held entitled to seek a refund.
G
We may also point out that the best that can be said for the
de~arttnent is that the. '!}'Stem of compounded levy ceased only on
24, 7.1972. This means that the normal ru1es will become applicable. But
.the normal duty on yam, effective from 24. 7. 72, cannot be retrospec-
tively applied to the yam which had been authorisedly removed fiom
the s_pindles for captive consumption prior to that date. The fact that H
96 SUPREME COURT REPORTS [1989] Supp. 1 S.C.R.

. A the clearance of the fabrics made of such yarn was after 24. 7. 72 would
be irrelevant in computing such normal duty for yarn. There is no
principle or statutory language that compels an assessee to be deprived
of the concessional rate that has been made available to it, under a
special procedure, in respect of the yarn produced by it and utilised for
B, captive consumption.

For these reasons, we agree with the view taken by the Tribunal
and dismiss these appeals. We, however, make no order as to costs.

R.N.J. Appeals dismissed.