1987 (7) TMI 106 - HC - Central Excise

Summary

Issues Involved:
1. Discrimination in excise duty rates due to exemption notification proviso.
2. Justification of classification created by the proviso.
3. Rational relation between classification and object sought to be achieved.
4. Refund of excess excise duty paid by the petitioners.
5. Discharge of bank guarantees furnished by the petitioners.

Issue-wise Detailed Analysis:

1. Discrimination in excise duty rates due to exemption notification proviso:
The petitioners, manufacturers of aluminium products, were affected by an exemption notification dated December 3, 1981, which included a proviso that created a disparity in excise duty rates. The proviso stipulated that the exemption on finished products would apply only if the raw material duty was paid as per the specified rate in the notification. This led to a situation where manufacturers who paid a higher duty on raw materials under previous notifications could not benefit from the reduced rates for finished products, resulting in a higher effective duty compared to their competitors who paid lower duty on raw materials after the new notification.

2. Justification of classification created by the proviso:
The petitioners argued that the proviso created two classes of manufacturers: those who paid higher duty on raw materials and those who paid lower duty. This classification resulted in discrimination, as similarly situated manufacturers were subjected to different excise duties on their finished products. The court referred to a similar case, A. Match Industries v. Union of India, where a classification based on output for excise duty purposes was struck down as discriminatory and violative of Article 14 of the Constitution of India.

3. Rational relation between classification and object sought to be achieved:
The government attempted to justify the proviso by arguing that it maintained parity between the duty on raw materials and finished products, preventing manufacturers from profiting from duty differences. However, the court found this reasoning incomprehensible and unjustifiable. The principle of proforma credit, which allows manufacturers to deduct the duty paid on raw materials from the duty on finished products, should apply uniformly. The classification created by the proviso lacked a rational relation to any legitimate object, leading the court to deem it arbitrary and discriminatory.

4. Refund of excess excise duty paid by the petitioners:
The court ruled that the proviso was arbitrary and struck it down. Consequently, the government was directed to refund the excess excise duty paid by the petitioners due to the application of the proviso. The refund was to be processed within three months from the date of the judgment.

5. Discharge of bank guarantees furnished by the petitioners:
During the interim stage of the petition, the petitioners had furnished bank guarantees. With the proviso being struck down, the court ordered that these bank guarantees be discharged, cancelled, and returned to the petitioners within six weeks from the date of the judgment.

Conclusion:
The court found the proviso to the exemption notification discriminatory and violative of Article 14 of the Constitution of India. The classification created by the proviso lacked a rational basis and resulted in unjustifiable discrimination between similarly situated manufacturers. The court ordered the refund of excess excise duty paid and the discharge of bank guarantees furnished by the petitioners, thereby providing relief to the petitioners.