1985 (8) TMI 188 - AT - Central Excise

Issues Involved:
1. Whether the conversion of grey yarn into dyed yarn amounts to manufacture attracting excise duty.
2. Whether the demand for duty on dyed yarn constitutes double taxation.
3. Applicability of Rule 56A for credit on duty already paid on grey yarn.
4. Limitation period for the demand of duty.

Detailed Analysis:

1. Whether the conversion of grey yarn into dyed yarn amounts to manufacture attracting excise duty:

The appellants argued that dyeing grey yarn does not constitute manufacture under Section 2(f) of the Central Excises and Salt Act, and thus should not attract excise duty. They cited several judgments, including the Government of India in In-re: Eastern Dyeing Company, Ludhiana, and the Kerala High Court in Deputy Commissioner of Sales Tax v. Sadasivan, to support their contention that dyeing does not create a new commodity.

However, the respondent cited the Supreme Court judgment in Empire Industries Limited v. Union of India, which established that processes like dyeing amount to manufacture as they create a new product with a distinctive name, character, and use. The Tribunal agreed with the respondent, noting that dyed yarn is distinct from grey yarn in the market and thus constitutes a manufactured commodity subject to excise duty.

2. Whether the demand for duty on dyed yarn constitutes double taxation:

The appellants contended that taxing dyed yarn after already taxing grey yarn amounts to double taxation, which is impermissible. The Tribunal refuted this argument, stating that double taxation occurs only if the same goods are taxed repeatedly. Since dyed yarn is a distinct product from grey yarn, taxing both does not constitute double taxation.

3. Applicability of Rule 56A for credit on duty already paid on grey yarn:

The appellants argued that they should be allowed credit under Rule 56A for the duty paid on grey yarn. The Tribunal noted that the appellants had not followed the prescribed procedure for claiming such credit. The respondent contended that without following the procedure, the benefit under Rule 56A could not be granted. The Tribunal agreed, emphasizing that procedural compliance is necessary for claiming benefits under Rule 56A.

4. Limitation period for the demand of duty:

The demand covered the period from 30-8-1976 to 18-7-1977, with the show cause notice issued on 24-8-1977. The appellants argued that part of the demand was time-barred. The Tribunal referred to its decision in Atma Steels Private Limited, which held that the period of limitation applicable is the one in force at the time of issuing the show cause notice. Since the limitation period was six months on 24-8-1977, the Tribunal restricted the demand to six months prior to this date.

Separate Judgment by K.L. Rekhi:

K.L. Rekhi dissented, arguing that there was no evidence to show that dyed woollen yarn is a different commodity from grey woollen yarn in trade parlance. He emphasized that the tariff entry for woollen yarn does not distinguish between grey and dyed yarn. Rekhi cited the Supreme Court judgment in Collector of Customs and Central Excise v. Oriental Timber Industries, which held that duty under a single tariff entry could only be charged once. He concluded that taxing dyed yarn again under the same entry is not permissible and quashed the demand for additional duty. Rekhi also noted that the refusal to grant proforma credit under Rule 56A would result in discrimination against processors like the appellants.

Conclusion:

The majority judgment upheld the demand for duty on dyed yarn but restricted it to six months prior to the show cause notice date. The dissenting judgment by K.L. Rekhi quashed the demand, emphasizing the lack of evidence to treat dyed yarn as a different commodity and the need to grant proforma credit to avoid discrimination.

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