1986 (6) TMI 38 - HC - Central Excise

Summary

Issues Involved:
1. Liability of excise duty on local anaesthetic manufactured without alcohol.
2. Applicability of Item 1(iii) of the Schedule to the Medicinal and Toilet Preparations (Excise Duties) Act, 1955.
3. Applicability of Entry 14E of the Central Excises and Salt Act, 1944.
4. Time-barred nature of the demand for excise duty.
5. Compliance with the rules of natural justice.

Detailed Analysis:

1. Liability of Excise Duty on Local Anaesthetic Manufactured Without Alcohol:

The respondent, a company engaged in the manufacture and sale of medicines, ceased using alcohol in the manufacture of local anaesthetics from 25-11-1974. Consequently, no excise duty was paid on these products. The appellants demanded excise duty of Rs. 1,97,128.40 for the period from 1-4-1975 to 15-3-1976, arguing that the local anaesthetic itself was a narcotic drug or narcotic under the Act. The Single Judge quashed this demand, holding that the local anaesthetic did not contain any narcotic drug or narcotic as an ingredient.

2. Applicability of Item 1(iii) of the Schedule to the Medicinal and Toilet Preparations (Excise Duties) Act, 1955:

The appellants contended that the local anaesthetic fell under Item 1(iii) of the Schedule to the Act, which included "Medicinal preparations not containing alcohol but containing opium, Indian hemp or other narcotic drug or narcotic." The definition of 'narcotic drug' or 'narcotic' under Section 2(h) of the Act includes substances capable of causing dependence, tolerance, and withdrawal syndromes. The appellants argued that the local anaesthetic, intended to produce insensibility, must contain a narcotic drug or narcotic. The Single Judge, however, relied on a Gujarat High Court judgment and held that the local anaesthetic did not fall under this item as it did not contain a narcotic drug or narcotic.

3. Applicability of Entry 14E of the Central Excises and Salt Act, 1944:

The respondent argued that Item 1(iii) of the Act and Entry 14E of the Central Excises and Salt Act, 1944, are mutually exclusive. Entry 14E covered "Patent or proprietary medicines not containing alcohol, opium, Indian hemp or other narcotic drugs or other narcotics." The Central Government granted an exemption for all anaesthetics under this entry. The respondent contended that the local anaesthetic could not simultaneously fall under both entries, as it did not contain narcotic drugs or narcotics.

4. Time-Barred Nature of the Demand for Excise Duty:

The respondent argued that the demand was time-barred, as it was initiated after six months from the date the duty was allegedly payable. The appellants countered that the case did not fall under Rule 11 of the Rules, which imposes a six-month limitation, but under sub-rule (2) of Rule 9 or Rule 12, which have no such limitation. The Single Judge did not address this issue as the case was decided on the first ground.

5. Compliance with the Rules of Natural Justice:

The court emphasized that the question of whether the local anaesthetic fell under Item 1(iii) of the Act or Entry 14E of the Central Excises and Salt Act involved technical aspects regarding its chemical ingredients. The appellants, having initially accepted that the local anaesthetic was not subject to excise duty, could not change their stance without due notice and an opportunity for the respondent to present its case. The court held that the demand order was issued without complying with the rules of natural justice.

Conclusion:

1. The writ appeal is partly allowed.
2. The finding that the local anaesthetic manufactured by the respondent was not liable to excise duty under the Act is set aside.
3. The order quashing the demand for excise duty is confirmed, leaving the issue open for reconsideration after giving the respondent an opportunity of hearing.
4. The respondent is at liberty to contest any fresh proposal to levy excise duty.
5. No costs are awarded.