1986 (11) TMI 193 - AT - Central Excise

Issues Involved:
1. Classification of shoddy woollen yarn under the correct serial number of the exemption notification.
2. Basis and validity of the show cause notice.
3. Definition and interpretation of "virgin wool."
4. Applicability of Rule 10 and Rule 10-A of the Central Excise Rules.
5. Limitation period for issuing the demand notice.

Issue-Wise Detailed Analysis:

1. Classification of Shoddy Woollen Yarn:
The appellants, M/s. Rattan Chand & Sons, claimed that their shoddy woollen yarn fell under serial No. 3(2) of the exemption notifications, which described yarn containing not less than 60% of wool and not more than 5% of virgin wool. The department contended that the product should be classified under serial No. 3(3), which is a residuary item. The appellants argued that since their yarn contained no virgin wool, it should be classified under serial No. 3(2). The tribunal concluded that the yarn manufactured by the appellants contained not less than 60% wool and no virgin wool, thus falling under serial No. 3(2).

2. Basis and Validity of the Show Cause Notice:
The show cause notice was issued based on an audit party's objection, which initially stated that the factory was not using virgin wool. However, the notice later alleged that the product contained more than 5% virgin wool. The tribunal found the wording of the notice confusing and noted that the Assistant Collector's order was based on an unsupported assertion that more than 5% virgin wool had been used. The tribunal was unable to discover the basis for this assertion and found the demand for differential duty to be without substance.

3. Definition and Interpretation of "Virgin Wool":
The appellants contended that they used only pulled and garnetted wool mixed with spinning waste from other mills, which should not be considered virgin wool. The lower authorities had held that spinning waste still constituted virgin wool. The tribunal disagreed, stating that waste arising during the processes of carding, combing, cleaning, and spinning should be considered processed wool, not virgin wool. Therefore, the tribunal concluded that the appellants did not use any virgin wool in their manufacture.

4. Applicability of Rule 10 and Rule 10-A:
The demand was initially issued under Rule 10 and Rule 10-A of the Central Excise Rules. The department later relied solely on Rule 10-A. The tribunal noted that Rule 10-A is a residuary rule applicable only when Rule 10 is excluded. The Assistant Collector did not provide a specific finding on the applicability of Rule 10-A. The tribunal found that the charge against the appellants amounted to a misstatement as to the description of the goods, which would attract Rule 10. Since the department had expressly abandoned reliance on Rule 10, the tribunal held that the demand under Rule 10-A could not be justified.

5. Limitation Period for Issuing the Demand Notice:
The show cause notice was issued on 19-11-1976. The tribunal noted that Rule 10, as it stood at the time, covered cases of short levy due to misstatement as to the description of goods. Since the department had amended the notice to rely solely on Rule 10-A, they could not subsequently rely on Rule 10 to sustain the demand for any period within the limitation under Rule 10. The tribunal held that the demand was barred by time and could not be enforced.

Conclusion:
The tribunal allowed the appeal, setting aside the orders of the lower authorities and providing consequential relief to the appellants.

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