Central Excise Tariff Act | Gist of Test Reports Insufficient for Reclassification: Supreme Court Sets Aside Duty Demand
Kiran Raj
The Supreme Court of India Division Bench of Justice Abhay S. Oka and Justice Ujjal Bhuyan held that the re-classification of Benzene and Toluene by the excise authorities based on test reports that were not furnished to the assessee violated the principles of natural justice. The Court set aside the orders of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Commissioner (Appeals), and the Assistant Commissioner. It further declared that the differential duty demand on the two products for the years 1991 to 1993 was unsustainable. The Bench also held that the assessments for January and February 1993 could not be treated as provisional in the absence of the requisite procedural compliance under Rule 9B of the Central Excise Rules, 1944.
The dispute arose out of three civil appeals filed under Section 35L(b) of the Central Excise Act, 1944. These appeals pertained to a set of show-cause notices and subsequent adjudication orders that re-classified Benzene and Toluene manufactured by the appellant company and demanded a differential excise duty for the period between September 1990 and February 1993.
The appellant is a manufacturer of excisable goods falling under Chapters 27, 28, 29, 32, 38, and 39 of the Central Excise Tariff Act, 1985. It had submitted a classification list bearing No. 1/89-90 effective from November 3, 1989, for its excisable products under Rule 173B of the Central Excise Rules, 1944. The classification list was approved by the Assistant Collector of Central Excise, Division-I, Mumbai II Collectorate on April 26, 1990. The appellant had classified Benzene and Toluene under chapter sub-heading 2902.00 and claimed exemption under various notifications.
On October 4, 1990, the department collected samples of Benzene and Toluene for chemical testing. According to a report by the Deputy Chief Chemist dated January 29, 1991, the purity of these products was reportedly less than 96 percent. Based on these findings, the Collector of Central Excise, Mumbai II, directed that an appeal be filed against the classification list previously approved. The Collector (Appeals) allowed the departmental appeal on October 28, 1991, and remanded the matter back to the Assistant Collector for a fresh determination based on further evidence.
In the interim, a show-cause notice dated March 26, 1991, was issued by the Superintendent of Central Excise, proposing re-classification of the two products under headings 2707.10 and 2707.20, which attracted higher duty. It was alleged that if the purity of the products was below 96 percent, they could not be classified under Chapter 29. Subsequent notices were issued for the periods up to December 1992, demanding a total differential duty of Rs. 1,75,30,861 along with interest and penalty.
The appellant contended that the issue of classification was already settled by the Assistant Collector’s approval in April 1990. It also claimed that the test reports forming the basis of the re-classification were never furnished to them, thereby violating principles of natural justice and Rule 56(2) of the Central Excise Rules.
The show-cause notices were adjudicated upon by the Assistant Commissioner, who confirmed the re-classification and levied duty of Rs. 1,97,17,015 along with an equivalent penalty. This order was upheld by the Commissioner (Appeals) on September 28, 2001. The appellant then appealed to the CESTAT.
In a parallel development, the issue of provisional assessment was addressed. A provisional assessment order dated October 18, 1993, was issued for the years 1990–94, including the products in question. However, the department could not provide evidence that the appellant had executed a bond or furnished a bank guarantee as required.
Further, the Deputy Commissioner passed an order on March 3, 2004, demanding Rs. 14,33,36,641 as differential duty under Rule 9B. The Commissioner (Appeals) reduced this to Rs. 11,60,80,465. This revised demand was again challenged and remanded by CESTAT. Upon remand, the Commissioner (Appeals) held on March 31, 2006, that the assessments were not provisional.
The department appealed this decision to the CESTAT, which on May 21, 2010, disposed of the three connected appeals. It upheld the re-classification and confirmed the duty demand of Rs. 1,97,17,015 and Rs. 18,16,304 for the disputed period. It also ruled that assessments for January and February 1993 were provisional.
The Court recorded that “the test reports though formed the basis of the department’s stand...were not furnished to the appellant.” It noted that the department relied entirely on the chemical test reports to demand higher duty, yet failed to provide copies of the reports to the assessee.
The Court stated: “Informing the appellant only the gist of the test reports cannot be said to be in compliance with the principles of natural justice.” It further recorded: “It is axiomatic that documents relied upon by the authority to take a view...should be furnished to the affected party.”
Referring to Rule 56 of the Central Excise Rules, the Court recorded: “The officer is under a positive mandate to communicate to the manufacturer the result of such test.” It observed: “Extracting the gist of the test reports...would clearly be in breach of Rule 56(2) and Rule 56(4)...and would defeat the right of a manufacturer to seek re-test.”
The Court held that “approval of classification list under Rule 173B is not an empty formality...The proper officer has to apply his mind.” It stated: “Belated sampling and still further belated test reports cast a shadow of doubt...This is further compounded by non-furnishing of the test reports.”
On the issue of provisional assessment, the Court examined Rule 9B and stated: “The first and foremost requirement...is that it is the assessee who has to request in writing...for provisional assessment.” The Court noted: “Such directions the proper officer can issue only by passing a written order and not otherwise.”
It further observed: “There is no order of the proper officer under Rule 9B directing that assessments...were provisional. Mere endorsement...cannot make an assessment provisional.”
Citing previous Supreme Court decisions, it recorded: “To establish that the clearances were made on a provisional basis, there should be first of all an order under Rule 9-B...and material to show that goods were cleared on that basis.”
Regarding the assessment order dated October 18, 1993, the Court observed: “It could not render assessments prior thereto...provisional. No evidence could be adduced...that such a bond was executed.”
The Court concluded: “It is implausible that assessments which were regular till December 1992 could become provisional from January 1993...Such findings of CESTAT cannot be sustained.”
The Court allowed the appeals in the following manner:
“Appeal No. E/40/02-NB-C and appeal No. E/3816/03-MUM filed by the appellant before CESTAT are allowed. Consequently, order of CESTAT dated 21.05.2010 in respect of the above two appeals are hereby set aside.”
“Order of Assistant Commissioner dated 27.02.2001 and of Commissioner (Appeals) dated 28.09.2001 which were subject matter of appeal No. E/40/02-NB-C before CESTAT are hereby set aside.”
“Order dated 29.08.2003 of Commissioner (Appeals) which was the subject matter of appeal No. E/3816/03-MUM before CESTAT is set aside.”
“That portion of order dated 21.05.2010 of CESTAT in respect of appeal No. E/2380/06-MUM holding that assessment in respect of Benzene and Toluene for the months of January and February, 1993 were provisional, is set aside.”
The Court made no order as to costs.
Advocates Representing the Parties
For the Appellant(s): Mr. A.K. Prasad, Advocate; Ms. Surabhi Sinha, Advocate; Ms. Pankhuri Shrivastava, Advocate; Ms. Neelam Sharma, Advocate-on-Record; Mr. Alekshendra Sharma, Advocate; Mr. Aditya Kumar, Advocate.
For the Respondent(s): Mr. Mukesh Kumar Maroria, Advocate-on-Record; Mr. G.S. Makker, Advocate-on-Record.
Case Title: M/s Oswal Petrochemicals Ltd. vs. Commissioner of Central Excise, Mumbai-II
Neutral Citation: 2025 INSC 578
Case Number: Civil Appeal Nos. 129-130 & 131 of 2011
Bench: Justice Abhay S. Oka, Justice Ujjal Bhuyan
[Read/Download order]
