1979 (1) TMI 101 - HC - Central Excise

Fabrics - Processing of grey cloth - Taxable event - Demand notice - Duty paid under mistake of law - Admissibility of refunds

Issues Involved:
1. Levy of excise duty on processed fabrics.
2. Interpretation of "manufacture" under the Central Excises and Salt Act, 1944.
3. Applicability of items in the First Schedule to processed fabrics.
4. Refund of excise duty paid on processed fabrics.
5. Jurisdiction of High Court under Article 226 for refund claims.
6. Alternative remedy and maintainability of petitions.

Issue-wise Detailed Analysis:

1. Levy of Excise Duty on Processed Fabrics:
The petitioners, processors of fabrics, objected to the levy of excise duty under the First Schedule to the Central Excises and Salt Act, 1944. The key contention was whether the processing of fabrics, such as bleaching, dyeing, and printing, constitutes "manufacture" and thereby attracts excise duty under Item 19 or Item 22 of the Schedule.

2. Interpretation of "Manufacture" under the Act:
The court examined the definition of "manufacture" under Section 2(f) of the Act, which includes any process incidental or ancillary to the completion of a manufactured product. It was debated whether processing existing fabrics (grey cloth) into finished products amounts to the manufacture of a new product.

3. Applicability of Items in the First Schedule to Processed Fabrics:
The court analyzed Items 19 and 22, which pertain to cotton fabrics and man-made fabrics, respectively. It was noted that these items include fabrics that are embroidered, impregnated, or coated but do not explicitly mention processed fabrics. The court referred to previous judgments, including the Supreme Court's decision in South Bihar Sugar Mills Ltd. v. Union of India, which emphasized that a new and different article must emerge from the manufacturing process to levy excise duty.

4. Refund of Excise Duty Paid on Processed Fabrics:
The court held that the petitioners were entitled to a refund of the excess excise duty paid on processed fabrics. The excise duty should be calculated based on the value added by the processing, as per Item 68, which covers "All other goods not specified elsewhere manufactured in a factory." The court directed the excise authorities to refund the excess duty collected within three years preceding the filing of the petitions, along with interest at 12% per annum.

5. Jurisdiction of High Court under Article 226 for Refund Claims:
The court addressed the maintainability of the petitions under Article 226 of the Constitution, despite the availability of an alternative remedy. It referred to the Supreme Court's decisions in Union of India v. Delhi Cloth and General Mills Ltd. and South Bihar Sugar Mills Ltd. v. Union of India, which upheld the High Court's jurisdiction to quash illegal demand notices and order refunds in cases of illegal excise duty levies.

6. Alternative Remedy and Maintainability of Petitions:
The respondents argued that the petitioners should seek a refund through the prescribed machinery under the Act. However, the court rejected this contention, stating that the petitions were maintainable as the excise duty levied was illegal and ultra vires. The court emphasized that the special remedy under Article 226 is not intended to supersede civil suits but can be invoked when the levy is without authority of law.

Conclusion:
The court concluded that the processing of fabrics does not constitute the manufacture of a new product under Items 19 and 22 of the First Schedule to the Act. Consequently, the excise duty levied on processed fabrics was illegal. The petitioners were entitled to a refund of the excess duty paid, along with interest. The court granted leave to appeal to the Supreme Court, recognizing the substantial question of law involved.

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