1994 (2) TMI 174 - AT - Central Excise

Issues Involved:
1. Demand of differential duty on ripped tobacco.
2. Applicability of Rule 196 and Section 11A of the Central Excises and Salt Act, 1944.
3. Validity of the show cause notice and limitation period.
4. Interpretation of Notification 356/86 and related CBEC Circulars.
5. Applicability of Rule 196B(i) for the return of ripped tobacco.

Issue-wise Detailed Analysis:

1. Demand of Differential Duty on Ripped Tobacco:
The appellants, manufacturers of Panama brand cigarettes, used cut tobacco classified under sub-heading 2404.13. They were initially bringing cut tobacco on payment of duty under Notification 356/86, which was amended on 1-3-1989. The department found that from 1-3-1989 to 30-6-1990, the appellants had sent back ripped tobacco to their processors, DTPL. The department argued that ripped tobacco is essentially cut tobacco and should have been used in cigarette manufacture. Since it was not, the department demanded full duty without exemption.

2. Applicability of Rule 196 and Section 11A of the Central Excises and Salt Act, 1944:
The department issued a show cause-cum-demand notice under Rule 196(1), arguing that the ripped tobacco had not been used for the purpose for which remission of duty was granted. The appellants contended that the demand should be under Section 11A, which requires a formal show cause notice and is subject to a limitation period. The Collector held that Rule 196 did not specify the issue of a show cause notice and demanded duty under this rule.

3. Validity of the Show Cause Notice and Limitation Period:
The appellants argued that the demand was barred by limitation in the absence of a formal show cause notice under Section 11A. The Collector noted that the demand raised and subsequently dropped by the Assistant Collector was included in the present notice. The appellants contended that the demand could only be made under Section 11A, which was time-barred without a formal notice.

4. Interpretation of Notification 356/86 and Related CBEC Circulars:
The appellants pointed out that the CBEC Circular No. 58/89 stated that ripped tobacco could be returned to the original manufacturer under Rule 196B(i). The Assistant Collector had previously treated the despatches of ripped tobacco as removal under Rule 196B(i) as per the Board's circular. The Collector, however, concluded that Rule 196B(i) could not apply as the cut tobacco was not found to be unsuitable but was used in cigarette manufacture, resulting in ripped tobacco from defective cigarettes.

5. Applicability of Rule 196B(i) for the Return of Ripped Tobacco:
The Board's Circular and Trade Notices clarified that ripped tobacco could be returned to the original manufacturer under Rule 196B(i). The Tribunal's decision in the case of Tractors and Farm Equipment supported the appellants' case, stating that goods found defective before use could be returned under Rule 196B(i). The Collector's reasoning for recovery of duty was found unsustainable, leading to the allowance of the appeals.

Conclusion:
The appeals were allowed, and the reasoning for recovery of duty as contained in the impugned orders of the Collector of Central Excise, Allahabad, and Collector of Central Excise (Appeals) was not sustainable. The Cross-Objections were dismissed as misconceived.

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