JUDGMENT
1. The petitioners are a Company registered under the [ACT], and inter alia carry on business of manufacturing cotton fabrics. The petitioners have a Textile Mill at Parel, Bombay, and have the necessary licence for the manufacture of cotton fabrics as well as the cotton yarn. The petitioners have followed the Self Removal Procedure for the purpose of Central Excise duty as prescribed under the [ACT] framed under the [ACT] (hereinafter referred to as the Act). As required by the Rules, the petitioners from time to time filed the classification list in respect of cotton fabrics and cotton yarn manufactured by them and the same were duly approved by the authorities concerned.
2. The petitioners manufacture a certain type of cotton fabrics which are called "Quality No. 1410" and "Quality No. 1435". The composition of these fabrics contains in the weft yarn 82% cotton yarn and 18% Twinkle Nylon Yarn. The petitioners have paid the duty for the cotton yarn as well as for the fabrics which is prepared from the weft yarn. The petitioners have also paid a compounded duty on the yarn used in making cotton fabrics. The petitioners purchase the duty paid Twinkle Nylon Yarn from the open market. In the classification list submitted by the petitioners on August 14, 1973 and January 17, 1975 the process by which the weft yarn is manufactured is specifically set out. On September 20, 1971 the petitioners applied for permission to avail of the special procedure under [SECTION], [SECTION] and [SECTION] of the [ACT], and in accordance with this application, the requisite permission was granted from time to time.
3. On March, 17, 1972, by [ACT] [SECTION] was introduced in the First Schedule to the [ACT] and by this Item duty was levied on "yarns of all sorts not elsewhere specified". After the [SECTION] was introduced, the petitioners filed classification list on August 14, 1973 and set out the process by which weft yarns was manufactured. Even this classification list was duly approved by the Excise Authorities. On September 3, 1974, the Central Board of Excise and Customs issued Circular inter alia stating that the earlier Circular dated April 30, 1963 was withdrawn and doubled yarn or the weft yarn was a new product and was separately excisable under Tariff Item No. 18E. On the basis of the said Circular, the Collector, Central Excise, issued Trade Notice on September 4, 1974. In pursuance of this Trade Notice, the petitioners were informed by the Superintendent of Central Excise on September 2, 1975 not to clear the goods until further instructions from the office as the goods were excisable under/Tariff Item No. 18E. On September 3, 1975, the Assistant Collector, Enforcement Branch, effected a seizure of the fabrics of Quality No. 1410 and 1435 under a panchanama. The petitioners requested for the clearance of the seized goods on execution of bond and thereafter the petitioners filed a fresh classification list, under protest, classifying the weft yarn under [SECTION] The petitioners protested against the action of the Department in claiming that the weft yarn was a new product liable to excise duty under [SECTION].
4. On February 10, 1976, the Assistant Collector of Central Excise, Bombay Division Branch served the show-cause notice on the petitioners claiming that the petitioners have contravened the provisions of [SECTION], [SECTION], [SECTION], [SECTION], [SECTION] and [SECTION] of the [ACT]. The show cause notice recites that the petitioners have manufactured and remove 50,671 kgs and 44,506 kgs of cotton yarn falling under Tariff Item No. 18A involving duty amounting to Rs. 5,06,710/- for the purpose of doubling with Twinkle Nylon Yarn brought from outside during the period from 16/17th March, 1972 to September 30, 1975 without determining and paying the excise duty. Secondly, it was claimed that the petitioners removed the cotton yarn as mentioned hereinabove and removed the quantity of 62,142 kgs. of doubled (twisted) yarn falling under Item 18E of the First Schedule during the period commencing from March 17, 1972 to September 30, 1975 without determining the duty amounting to Rs. 9,94,272/-. The third claim made in the show cause notice is that the petitioners used doubled yarn, for which no duty has been paid, for the manufacture of cotton fabrics and out of the fabrics so manufactured certain quantity was attached under the panchnama and that is liable to confiscation. The show cause notice, therefore, called upon the petitioners to explain as to why the duty amounting to Rs. 5,06,710/- and Rs. 9,94,272/- should not be recovered under [SECTION] of the Rules and certain fabrics should not be confiscated under [SECTION] and a penalty should not be imposed under [SECTION], [SECTION], and [SECTION] of the Rules. The petitioners thereafter approached this Court by filing the present petition on March 29, 1976, and the petition was admitted on the same day.
5. The petition came up for hearing before Mr. Justice [ENTITY] on February 4, 1980, and the learned Judge directed the Department to adjudicate the show cause notice without reference to the Tariff Advice and the Trade Notice. The learned Judge adjourned the hearing of the petition till the disposal of the adjudication proceedings by the Department. The petitioners filed their detailed reply to the show cause notice on March 25, 1980, and claimed that the process undertaken by the petitioners for weft yarn could not lead to the manufacture of new product. The petitioners also raised various other contentions in answer to the show cause notice. On April 24, 1980, the Department informed the petitioners that the authorities would rely only on the material which was set out in the show cause notice. The Assistant Collector thereafter gave a personal hearing to the petitioners on May 8, 1980. At that hearing, the petitioners filed as many as 8 affidavits of textile experts and traders claiming that the twinkling yarn or weft yarn was not a new product. The deponents were made available for cross-examination, but the Collector of excise declined to cross-examine anyone. The Collector passed the order on May 30, 1980 confirming the show cause notice and rejecting the petitioner's contention. Thereafter the petitioners amended the petition and challenged the legality of the order of the Collector of Excise.
6. The petition was then posted for hearing before Mr. Justice [ENTITY] on August 20, 1980. The learned Judge, after hearing the parties, set aside the order passed by the Collector of Central Excise on May 30, 1980 and directed that the fresh hearing by officer other than one who passed the order on May 30, 1980 should be given and a fresh order of adjudication should be passed. The petition was accordingly adjourned till December 15, 1980. In pursuance of the order passed by the learned Judge, respondent No. 6 was appointed as an Adjudicating Officer. Respondent No. 6 fixed the hearing on April 4, 1981 and the petitioners, in addition to the material previously produced, filed two affidavits of Mr. [ENTITY], Vice President of the petitioner Mill and of Mr. [ENTITY], Quality Control Manager of Morarjee Mills. Respondent No. 6, by his order dated May 26, 1981 rejected the claim of the petitioners and confirmed the show cause notice. The petitioners thereafter again amended the petition and challenged the legality of the order passed by respondent No. 6. After amendment the petition is now posted before me for final hearing.
7. Respondent No. 6 by his impugned order has come to the conclusion that the weft yarn was produced by process of manufacture and the said yarn was identifiable as having different use, characteristic and utility. The weft yarn, according to respondent No. 6, were "goods" distinct from either cotton yarn or nylon yarn. The respondent No. 6 felt that the yarn manufactured by the petitioners through a process of inter-twining nylon yearn round cotton yarn was not covered under [ACT] as cotton yarn but under [SECTION] as yarn not elsewhere specified. Respondent No. 6 also held that the claim of the petitioners that the weft yarn or twinkle yarn was not a new product nor the process amounts to a manufacture was without any merit. Respondent No. 6 also rejected the contention of the petitioners that as the entire weft yarn was consumed in the factory itself for the production of the end product, i.e., fabric, the excise duty was not leviable. The challenge of the petitioners that [SECTION] was not attracted because the removal was not clandestine was also turned down, so also the ground of limitation urged to claim that the show cause notice was issued after the prescribed period.
8. Shri [ENTITY], the learned counsel appearing in support of the petition, has broadly raised three or four contentions to challenge the legality of the order. The learned counsel urged that the product weft yarn or the twinkle yarn was not a new product and the process undertaken by the petitioners would not amount to a manufacture as contemplated under [SECTION] of the Act. The learned counsel pointed out that the process undertaken by the petitioners would establish beyond doubt that the weft yarn was not a new product nor was known in the trade circle as a distinct product. It was further urged that the respondent No. 6 was in error in over-looking the business. Secondly, Shri [ENTITY] urged that even assuming that the product manufactured by the petitioners was a distinct product attracting duty under [SECTION], still duty could not have bene levied as the petitioners had not removed the product outside the factory. It was urged that as admittedly the entire weft yarn was consumed in the factory premises itself, for the production of the end-product, that is fabrics, levy of excise duty was in contravention of the provisions of the Act and [SECTION]. The third submission of the learned counsel was that respondent No. 6 was in error in holding that the petitioners have contravened [SECTION] as the removal of goods was not a clandestine one, but the Department was given full factual data as regards the process and the manufacture by the classification lists filed from time to time. Shri [ENTITY], the learned counsel appearing on behalf of the Department, on the other hand urges that the petition should not be entertained because the petitioners have other alternative efficatious remedy to challenge the order of respondent No. 6 by filing an appeal and there is no occasion to entertain the present petition. The learned counsel further argued that the finding recorded by respondent No. 6 that the weft yarn was a new product was correct and requires no interference. Shri [ENTITY] further urged the mere fact that the entire production is consumed in the factory itself is no answer to the levy of duty because the Rules, which stand amended from the year 1968 onwards, clearly provide that duty should be levied even if the goods were not removed from the factory but consumed by the manufacturer. The learned counsel finally urged that the petitioners have violated provisions of [SECTION] as the relevant material about the manufacture of new product was not made known to the Department.
9. In view of these rival contentions, it is necessary first to deal with the preliminary objection raised by Shri [ENTITY] to the maintainability of the petition. There cannot be any dispute that an appeal lies against the order passed by respondent No. 6 on May 26, 1981. Shri [ENTITY] submitted that even on the previous occasion this objection was raised on behalf of the Department but this Court permitted the amendment and allowed the petitioners to challenge the legality of the order and there is no reason why an identical course should not be followed. Apart from the submission of Shri [ENTITY], I inquired from Shri [ENTITY] as the whether the Appellate Collector is willing to dispose of the appeal on merits within three months from the date the petitioner lodges such appeal. Shri [ENTITY] at one stage agreed to do so, but showed his inability to assure that the appeal would be disposed of on merits and not on the ground of limitation. Shri [ENTITY] felt that as the period provided for filing the appeal is over the Appellate Authority is not bound to condone the delay and here the appeal on merits. As Shri [ENTITY] was not inclined to make a statement that the Appellate Authority would dispose of the appeal on merits, in my judgment, the preliminary objection raised by him could not be entertained. Accordingly, preliminary objection is over-ruled.
10. The main question which falls for determination in this petition is whether the weft yarn or the twinkle yarn used by the petitioners for manufacture of end product is itself a product which comes into existence on process of manufacture as contemplated under [SECTION] of the Act. Before adverting to the process adopted by the petitioners, it would be relevant to site two decisions of the Supreme Court to appreciate which activities could be treated as the manufacturing activities and when it could be claimed that the new product has come into existence. The first decision is in the case of The [PRECEDENT] where the Supreme Court laid down the test while considering the provisions of [SECTION] of the [ACT]. Mr. Justice [ENTITY], speaking for the bench observed as follows :
"[SECTION] envisages the consumption of a commodity in the manufacture of another commodity. The goods purchased should be consumed, the consumption should be in the process of manufacture, and the result must be the manufacture of other goods. There are several criteria for determining whether a commodity is consumed in the manufacture of another. The generally prevalent test is whether the article produced is regarded in the trade, by those who deal in it, as distinct in identity from the commodity involved in its manufacture. Commonly, manufacture is the end result of one or more processes through which the original commodity is made to pass. The nature and extent of processing may vary from one cause to another, and indeed there may be several stages of processing and perhaps a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. But it is only when the change, or a series of changes, take the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognised as a new and distinct article that a manufacture can be said to take place. Whether there is no essential difference in identity between the original commodity and the processed article it is not possible to say that one commodity has been consumed in the manufacture of another. Although it has undergone a degree of processing, it must be regarded as still retaining its original identity."
The learned Judge referred with approval to a passage from the decision of the American Court in the case of [PRECEDENT], in paragraph 10, and the passage reads as under :
"Manufacture implies a change, but every change is not manufacture, and yet every change in an article is the result of treatment, labour and manipulation. But something more is necessary There must be transformation; a new and different article must emerge, "having a distinctive name, character or use."
"At some point processing and manufacturing will merge. But where the commodity retains a continuing substantial identity through the processing stage we cannot say that it has been 'manufactured'."
From this decision it is obvious that every process is not necessarily a manufacture and where there is no essential difference in identity between the original commodity and the processed article, it is difficult to hold that the another product was manufactured.
11. Another decision of the Supreme Court to which reference can be usefully made is in the case of [PRECEDENT]. The Supreme Court was considering the question as to whether the mining iron ore in the course of blending and loading of the blended ore into the ship constitutes manufacture or processing under the Code. Mr. Justice [ENTITY], speaking for the Court, observed in paragraph 5 of the Judgment as follows :
Now it is well settled as a result of several decisions of this Court, the latest being the decision given on 9th May, 1980 in [CASE NUMBER], [PRECEDENT] : (), that the test for determining whether manufacture can be said to have taken place is whether the commodity which is subjected to the process of manufacture can no longer be regarded as the original commodity, but is recognised in the trade as a new and distinct commodity. This Court speaking through one of us ([ENTITY], K.) pointed out :
"Commonly manufacture is the end result of one or more processes through which the original commodity is made to pass. The nature and extent of processing may vary from one case to another, and indeed there may be several stages of processing and perhaps a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. But it is only when the change, or a series of changes, take the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognised as a new and distinct article that a manufacture can be said to take place." The test that is required to be applied is : does the processing of the original commodity bring into existence a commercially different and distinct commodity ?"
From these two decisions, it is obvious that the mere blending or some process at some stage would not necessarily lead to the conclusion that a commercially different and distinct commodity comes into existence. With this background, it would be appropriate to find out the process undertaken by the petitioners.
12. As mentioned hereinabove, the petitioners manufacture cotton yarn on which duty is paid under [ACT]. The petitioners purchase duty paid nylon yarn from the open market. After blending the cotton yarn into the nylon yarn, the end product, that is the fabric, comes into existence and the petitioners have paid duty on the end product also. The dispute is as to whether a new product comes into existence by blending or twisting of nylon yarn and the cotton yarn. There is not dispute between the parties about the process undertaken by the petitioners. The cotton yarn manufactured by the petitioners is taken to a machine called "Doubler Winder Machine". In the said machine, one strand of the cotton yarn is fed with one strand of the nylon yarn to form into a "Cheese" which is subsequently fed to a Doubling Machine where a few turns are given to the parallel yarns (cotton and nylon) and wound on a wooden pirn. The pirn in its turn, is fed on the loom as weft yarn by inserting the pirn in the shuttle on the loom. This is one uninterrupted process. The process starts with the Doubler Winder Machine and ends with the emergence of the cloth.
13. At this stage it would be also convenient to make a reference to the affidavits filed by some of the textile experts in yarn. Shri [ENTITY], is a Professor and Head of the Textile Manufacturers Department of Victoria Jubilee Technical Institute, Matunga, Bombay, and holds a Masters Degree of the Bombay University in Textile Technology. The deponent has stated that as per the accepted conventions in Textile Technology, a doubled or twisted yarn is normally produced out of two yarns of the same or similar characteristics, the purpose of twisting being to achieve enhanced physical properties like strength, elongations, thickness etc. The deponent further stated that to achieve these properties, the twists or turns to be given have to be adequately high. The deponent after examining the yarn used in the weft by the petitioners found that only about four to five turns are given per inch, while the normal turns per inch should be 32 and hence the characteristics of the doubled or twisted yarn in the conventional sense was not achieved. The deponent further stated that the process adopted by the petitioners was using two yarns as weft, though cotton yarn and nylon yarn could be fed by such shuttles involving increased cost of manufacture, technical difficulties and time consuming process. It was further claimed that when both the yarns are inter-twined no new product conventionally known to the technology comes into existence.
Shri [ENTITY], has filed the affidavit and the deponent who is the Quality Control Manager of Morarjee Mills, Bombay, has stated that any yarn available in the market is always available on a cone and it would be impossible to wind the twisted yarn manufactured by the petitioners on a cone as it is likely to snap at a number of places and thereby disintegrate in the process of winding on a cone. The deponent further stated that the nylon element and the cotton element have a tendency to separate themselves because of the very low twist used and if such twisted yarn was wound on bobbins, the cost of it would become uneconomical and commercially not feasible. The deponent also stated in the affidavit filed on earlier occasion, i.e., at the time of hearing of the mater before Mr. [ENTITY], that the twisted yarn manufactured by the petitioners could be easily separated and in the process the identity of cotton and nylon yarn is retained and at any time both can be separated.
14. From the process of manufacture mentioned in the above paragraphs and in respect of which there is no dispute, it is obvious that by merely inter-twining the strands of cotton yarn and nylon yarn it is difficult to hold that the new product comes into existence. Shri [ENTITY] is right in his submission that the process adopted by the petitioners could not be treated by holding as manufacture under [SECTION] of the Act. Shri [ENTITY] submits that the weft yarn in question was nothing but a combination of two duty paid yarns and the weft yarn was neither spun nor made capable of being used in the weaving of fabrics. Shri [ENTITY] invited my attention to the decision of the Supreme Court reported in [CASE NUMBER] in the case of [PRECEDENT], and pointed out that yarn is not being defined either in the Act and the Rules or under any notification. According to the Oxford Dictionary yarn means "Any spun thread specially of kinds prepared for weaving, knitting or rope-making." While Webster's New World Dictionary defines it as "Any fibre, as wool, silk, flax, cotton, nylon, etc., spun into strands for weaving, knitting or making thread." The Supreme Court, after quoting the dictionary meanings, observed that the fibre in order to answer the description of 'yarn' in the ordinary commercial sense must have two characteristics firstly, it should be a spun strand, and secondly, such strand should be primarily meant for use in weaving, knitting or rope-making. Respondent No. 6 in his order in paragraphs 18 and 19 has made reference to the conditions and has observed that the second condition was satisfied. Respondent No. 6 has not recorded any finding about the first condition. Shri [ENTITY] submits that the twinkling yarn did not satisfy the first condition, that it should be spun and therefore respondent No. 6 was in error in treating it as a new product being a twinkle yarn. Respondent No. 6 has observed in paragraph 17 of his order that the weft in question was used for making closely woven fabrics and that indicates that the weft yarn could not be in loose state. According to respondent No. 6, that implies that the yarn was closely twisted and the nylon yarn constituted in the twist had become an integral part in the double yarn so that any attempt to separate one from the other was rendered difficult and could not be done without damaging the form of the yarn. This finding of respondent No. 6 is clearly contrary to the affidavit filed by Shri [ENTITY] and to which a reference is made hereinabove, where the deponent has stated that the two yarns could be separated without any damage to the yarn. Respondent No. 6 in paragraph 20 of the impugned order held that the petitioners adopted the process of blending of cotton yarn and nylon yarn with a desire to give a twinkling effect to the fabrics and therefore the yarn manufactured by intermixing had a distinct use and utility, and therefore the product was qualified for being treated as goods. It is difficult to accept this finding, because in every case when a process is carried out on any article, it is with intention or desire to have a better effect or use of the original article. The mere fact that the blending was done with a desire to give a twinkling effect to the fabric is no answer to the claim that design or blending did not bring into existence a new product. In my judgment, the view taken by the respondent No. 6 that the process undertaken by the petitioners amounted to manufacture and the result of blending was to bring into existence a new product is not correct. The respondent No. 6 was clearly in error in holding that the different product came into existence by virtue of the composition and process of manufacture as the two different yarns were combined.
15. There is another aspect of the matter which cannot be overlooked. It is not in dispute that the process of blending adopted by the petitioners was unique in the case of the petitioner Mill and such blended yarn was not available in the open market. It is also not in dispute that the blended material was totally consumed by the petitioners in their own Mills for the purpose of production of end product i.e., fabrics. The affidavits filed by the petitioners of traders dealing in textiles and yarns clearly indicate that the twinkle yarn was not a product known in the trade circles, nor it was available in market. With this background it is obvious that the product was not known in the trade circles as a distinct or a separate product, and the conclusion of respondent No. 6 that by blending the cotton yarn and the nylon yarn a new product has emerged is not correct.
16. In this connection the reliance by Shri [ENTITY] on the decision of the Division Bench of this Court reported to 1980 E.L.T. 249 in the case of [PRECEDENT]. is appropriate. The Division Bench was considering the question as to whether the nylon twine falls under Item 18 or has to be classified under residuary Item 66 for the purpose of excise duty. The Division Bench observed that the nylon yarn was covered by Tariff Item 18 and nylon twine is considered as special type of nylon yarn. It is a special type of yarn which is prepared for other purposes, mainly to make it suitable for being utilised in a manufacture of fishing nets and cords. The Division Bench found that by mere application of a special process or giving it a different name would not debar the nylon twine from being considered as a nylon yarn. Shri [ENTITY] submits that respondent No. 6 was in error in assuming that the product of the petitioners was a new product because blending of various yarns are known in the market as fancy yarn. The learned counsel urged that in the first instance there is no material whatsoever to hold that such blended yarns are available and are known as fancy yarn in the market, and secondly, even otherwise merely because such blended yarn are known as fancy yarn that would not make it a different product. The submission is correct and deserves acceptance. In my judgment, respondent No. 6 was clearly in error in holding that it was a different product which by virtue of its composition and process of manufacture fell under the category of yarn not elsewhere specified under [SECTION] of the [ACT]. This finding itself is sufficient to set aside the order passed by respondent No. 6 and to quash the proceedings commenced by the show cause notice.
17. In view of my finding on the main point, it is not necessary to consider in detail the other two contentions urged by Shri [ENTITY] to challenge the legality of the impugned order. I propose merely to refer to the submissions of the learned counsel in respect of the other contentions advanced at the bar. Shri [ENTITY] submitted that even assuming that the twinkle yarn was a new product manufactured by the petitioners, excise duty is not leviable as the petitioners have not removed the product outside the factory and in support of the submission reliance was placed on the decision of the Division Bench of this Court in the judgment reported in [CASE NUMBER] in the case of [PRECEDENT] an another and the decision of Delhi High Court reported in [CASE NUMBER] in the case of [PRECEDENT] Shri [ENTITY] on the other hand submitted that the decision of the Division Bench of this court was rendered in respect of procedure which was available prior to the year 1968 and could have no application to the Self Removal Procedure as provided by the Rules for the period subsequent to the year 1968. The learned counsel invited my attention to [SECTION] and to [SECTION] proviso of [ACT] and also to [SECTION] of the [ACT] in support of his submission. Shri [ENTITY] urges that Mr. Justice [ENTITY], as he then was, had taken a view in [CASE NUMBER] decided on April 30, 1970, that [SECTION] does not contemplate removal of product outside the factory premises. The learned counsel also pointed out that the Division Bench of Gujarat High Court has taken a contrary view to that of the Delhi High Court in the decision reported in [PRECEDENT] in the case of [PRECEDENT]. In my judgment, it is not necessary to determine this controversy in the present petition in view of my finding on the main issued.
18. Shri [ENTITY] also urged that even assuming that the petitioners have manufactured a new product and have removed it from the factory, still the Department could not proceed on the ground of contravention of [SECTION] of the [ACT] because the removal by the petitioners could by no stretch of imagination be termed as clandestine. The learned counsel relied upon the decision of the Supreme Court in the case of [ENTITY], Assistant Collector of Central Excise, Bombay and Ors. v. Weaving Mills Co. Ltd. and urged that [SECTION] would be attracted provided the removal of goods was clandestine. It was urged that the petitioners have filed classification lists from time to time and in every list the petitioners have set out the process and pointed out that the percentage of cotton and twinkle yarn in the weft is 82 per cent and 18 per cent respectively and that was sufficient disclosure of the relevant facts and consequently the removal could not be termed as clandestine. The submission is no doubt attractive. Shri [ENTITY], on the other hand points out that respondent No. 6 in paragraphs 33 and 34 of the order has observed that the material information was not brought to the notice of the Excise Officers by the petitioners and the suppression of relevant facts entitles the Officer to exercise jurisdiction for contravention of Rule 9(2 of the [ACT]. In my judgment, it is not necessary to investigate the matter any further in view of my finding that the petitioners have not manufactured any new product. The petitioners are entitled to succeed and the order of respondent No. 6 cannot be sustained.
19. Accordingly, the petition succeeds and the rule is made absolute and the impugned order dated May 26, 1981 passed by respondent No. 6 and the copy of which is annexed as Exp. Q to the petition, is quashed. Consequently, the bond B-11 executed by the petitioners in pursuance of the Respondents' letter dated 22nd September 1975 is cancelled and the respondent are directed to refund the amount of Rs. 65,000/- within four weeks from today.
In the circumstances of the case, there will be no order as to costs.