1990 (9) TMI 103 - HC - Central Excise

Issues Involved:
1. Classification of 'foundation cloth' under the Central Excises and Salt Act, 1944.
2. Validity of the show cause notice and demand notices issued by the Central Excise authorities.
3. Whether 'foundation cloth' retains its identity as cotton fabric after undergoing the manufacturing process.

Detailed Analysis:

1. Classification of 'Foundation Cloth':
The primary issue revolves around whether 'foundation cloth' should be classified under Tariff Item No. 19-I(b) or Tariff Item No. 68 of the First Schedule to the Central Excises and Salt Act, 1944. Petitioner No. 2 initially classified it under Tariff Item No. 19-I(b) but later reclassified it under Tariff Item No. 68, which was approved by the Assistant Collector. However, the Collector of Central Excise issued a show cause notice to review this classification, asserting that 'foundation cloth' should be classified under Tariff Item No. 19-I(b).

The court examined the manufacturing process of 'foundation cloth,' which involves multiple complex steps including the application of various compounds to cotton fabrics and lamination. The court found that 'foundation cloth' is a distinct and separate product from cotton fabric, and thus, it does not retain its identity as cotton fabric. The court noted that the processes listed under Tariff Item No. 19-I(b) (such as bleaching, dyeing, rubberizing) do not result in a new product but merely enhance the utility of cotton fabric. In contrast, the process for manufacturing 'foundation cloth' results in a new, distinct product, which should be classified under Tariff Item No. 68.

2. Validity of Show Cause and Demand Notices:
The petitioners challenged the show cause notice issued by the Collector on July 8, 1981, and the subsequent demand notices dated September 8, 1981, and October 6, 1981. The court found that the Collector's decision to reclassify 'foundation cloth' under Tariff Item No. 19-I(b) was based on a misconception and was not supported by evidence. The court held that the initial classification under Tariff Item No. 68 by the Assistant Collector was correct and should not have been disturbed. Consequently, the demand notices issued for payment of differential duty were invalid and were struck down.

3. Identity of 'Foundation Cloth' as Cotton Fabric:
The court analyzed whether 'foundation cloth' retains its identity as cotton fabric after undergoing the manufacturing process. It was found that the product is entirely distinct from cotton fabric and is not known as cotton fabric in trade parlance. The court relied on evidence from a dealer in textile fabrics, who confirmed that 'foundation cloth' is a specialized material not dealt with in the same manner as cotton fabrics. The court also noted an admission in the return filed by the Assistant Collector, stating that 'foundation cloth' is a distinct, separate, and identifiable product.

The court concluded that the Collector's reliance on visual inspection to determine the identity of 'foundation cloth' was flawed. The manufacturing process involved multiple steps that significantly alter the cotton fabric, resulting in a new product that cannot be classified as cotton fabric under Tariff Item No. 19-I(b).

Conclusion:
The court set aside the order dated September 2, 1982, passed by the Collector of Central Excise and Customs, Pune, and upheld the orders passed by the Assistant Collector on November 29, 1980, and March 20, 1981, classifying 'foundation cloth' under Tariff Item No. 68. The demand notices dated September 8, 1981, and October 6, 1981, were struck down. Petitioner No. 2 was entitled to apply for a refund, and the bank guarantees furnished by the petitioners were discharged. There was no order as to costs.

← Previous Next →