1991 (7) TMI 93 - HC - Central Excise

Writ jurisdiction - Payment and recovery of duty under mistake of law - Manufacture - Phenolic moulding powder

Summary

Issues Involved:
1. Applicability of Exemption Notifications dated June 1, 1971, and February 27, 1980, to phenolic moulding powder.
2. Determination of whether the transformation of phenolic formaldehyde resin into phenolic moulding powder constitutes 'manufacture'.
3. Legality of the excise duty levied and collected on phenolic moulding powder.
4. Entitlement to a refund of excise duty paid from 1962 onwards.
5. Consideration of the doctrine of unjust enrichment in the context of refund claims.

Detailed Analysis:

1. Applicability of Exemption Notifications:
The petitioners claimed that the manufacture of phenolic moulding powder fell within Item 3 read with Explanation III of the Notification dated June 1, 1971, which reduced the duty to 20% ad valorem. Despite this, the Department levied and recovered duty at 40% ad valorem as prescribed under Item 15A of the First Schedule. The petitioners challenged this through Writ Petition No. 413 of 1975, which was allowed, and the Department was directed to refund the excess duty paid. However, the subsequent Notification No. 7/80 issued on February 27, 1980, was not considered in the initial judgment.

2. Transformation of Phenolic Formaldehyde Resin into Phenolic Moulding Powder:
The Department initially held that the products manufactured by the Company were not covered under the Exemption Notifications and were liable to pay excise duty at the tariff rate. However, a circular issued on May 5, 1982, by the Central Board of Excise and Customs, based on the opinion of the Chief Chemist, stated that the transformation of phenolic formaldehyde resin into phenolic moulding powder did not amount to manufacture. This was confirmed by the Government of India on October 6, 1982, which declared that no further duty of excise could be levied on phenolic moulding powder.

3. Legality of the Excise Duty Levied:
The Court found that the duty paid by the Company and recovered by the Department was under a mutual mistake of fact and law, as the transformation of phenolic resin into phenolic moulding powder did not constitute manufacture. Consequently, the recovery of duty by the Department from 1962 onwards was without authority of law.

4. Entitlement to Refund:
The Court referred to the Supreme Court's decision in Salonah Tea Company Ltd. v. Superintendent of Taxes, which held that taxes collected without authority of law should be refunded. The Court found that the mutual mistake became known only in 1982, and thus, the Company was entitled to a refund of the duty paid from 1962 onwards. The Court rejected the argument that the refund should be limited to a period of three years prior to the date of knowledge of the mistake, as the recovery was without jurisdiction.

5. Doctrine of Unjust Enrichment:
The Department argued that the refund should be denied based on the doctrine of unjust enrichment, claiming that the excise duty was passed on to consumers. The Court, however, found no evidence in the Department's affidavit to support this claim. The Full Bench of the Court had previously held that the burden of tax being passed on to consumers should not be presumed without evidence. Thus, the Court rejected the unjust enrichment argument and declared that the Department was liable to refund the duty wrongfully recovered.

Conclusion:
The petition succeeded, and it was declared that the process of manufacturing phenolic moulding powder from phenolic resin was not liable to payment of excise duty. The petitioner Company was entitled to claim a refund of duty paid from 1962 onwards. The Department was directed to allow the refund after proper verification and without raising objections of limitation under Section 11B of the Act. The order dated September 7, 1981, and any other adverse orders were vacated, and the Bank guarantees furnished by the petitioners were discharged. The rule was made absolute with no order as to costs.