2025 (4) TMI 1597 - SC - Central Excise

Validity of duty demand based on re-classification of the products Benzene and Toluene from chapter 29 to chapter 27 - re-classification is based on test reports dated 29.01.1991 on samples drawn in October 1990 of which only a gist was provided to the appellant by the respondent vide letter dated 29.01.1991 - test reports can legally form the basis for re-classification of the above products manufactured and cleared during 1991 and 1992 - treating the assessments provisional for the two products Benzene and Toluene for the months of January and February 1993 in the absence of any order passed under Rule 9B of the Central Excise Rules 1944 and without executing any B-13 bond. Whether a duty demand based on re-classification of the products Benzene and Toluene from chapter 29 to chapter 27 is sustainable when such re-classification is based on test reports dated 29.01.1991 on samples drawn in October 1990 of which only a gist was provided to the appellant by the respondent vide letter dated 29.01.1991? - HELD THAT - Sub-rule (1) of Rule 56 says that the manufacturer is under an obligation to permit any officer to take samples of any product manufactured in his factory. Sub-rule (2) says that such an officer shall conduct a test from the samples so taken and communicate the result of such test to the manufacturer. Sub-rule (3) is not relevant for the present discourse. However sub-rule (4) is relevant. According to sub-rule (4) where the manufacturer is aggrieved by the result of the test he may within 90 days of the date on which the result of the test is received by him request the Assistant Commissioner that the samples be re-tested. If at all the department wanted to inquire into the correctness of the classification submitted by the appellant it could have taken samples of the two products prior to the approval at the stage of Rule 173B itself. Approval of classification list under Rule 173B is not an empty formality. The proper officer has to apply his mind and if he considers it necessary he may conduct further inquiry to ascertain the correctness of classification. Therefore such belated sampling and still further belated test reports cast a shadow of doubt about the entire procedure adopted by the respondent. This is further compounded by non-furnishing of the test reports to the appellant - the orders re-classifying the products Benzene and Toluene under chapter sub-heading 2707.10 and 2707.20 respectively and levying consequential differential duty demand cannot be sustained in law. Impugned order of CESTAT justifying such re-classification cannot also be sustained. Whether such test reports can legally form the basis for re-classification of the above products manufactured and cleared during 1991 and 1992? - HELD THAT - Rule 9B is the relevant provision dealing with provisional assessment. As per sub-rule (1) where the assessee is unable to determine the value of excisable goods or the correct classification of the goods he may request the proper officer in writing giving reasons for provisional assessment to duty. The proper officer may direct after making such inquiry as may be considered necessary that the duty leviable on such goods shall be assessed provisionally at such rate or value as may be indicated by him. Such provisional assessment is subject to the assessee executing a bond in proper form binding the assessee for payment of the differential amount of duty as provisionally assessed and as may be finally assessed - If the proper officer is satisfied that the self-assessment made by the assessee is not in order he may direct the assessee to resort to provisional assessment. In any event for an assessment to be provisional in terms of Rule 9B an order is required to be passed. This Court in Coastal Gases and Chemicals Pvt. Ltd. 1977 (4) TMI 41 - SUPREME COURT and in Hindustan National Glass Industries Ltd. 2005 (3) TMI 123 - SUPREME COURT held that in order to establish that the clearances were of provisional basis an order under Rule 9B and payment of duty on provisional basis are essential. There is no order of the proper officer under Rule 9B directing that assessments for the months of January and February 1993 for the two products Benzene and Toluene were provisional. Neither any bond in proper format was directed nor executed by the appellant. Mere endorsement by the concerned Superintendent on two RT-12 returns cannot make an assessment provisional. On the contrary the department had issued a number of show cause notices covering the period from September 1990 to December 1992. Appellant had contested the show cause notices. All the show cause notices were adjudicated upon by the Assistant Commissioner. It is implausible that assessments which were regular till December 1992 could become provisional from January 1993. CESTAT has rightly held that assessments for the period from September 1990 to December 1992 were regular but inexplicably held that assessments for the months of January and February 1993 qua the products Benzene and Toluene were provisional. Such findings of CESTAT cannot be sustained. Conclusion - The re-classification of Benzene and Toluene based on undisclosed test reports was invalid and the consequent duty demand was unsustainable. The assessments for January and February 1993 were not provisional due to non-compliance with Rule 9B requirements thereby invalidating the department s extended duty demand for that period. Appeal allowed.

Summary

The core legal questions considered by the Court in this matter are as follows:

1. Whether a duty demand based on re-classification of the products Benzene and Toluene from chapter 29 to chapter 27 is sustainable when such re-classification is based on test reports dated 29.01.1991 on samples drawn in October 1990, of which only a gist was provided to the appellant?

1A. Whether such test reports can legally form the basis for re-classification of the products manufactured and cleared during 1991 and 1992?

2. Whether the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) was justified in treating the assessments provisional for Benzene and Toluene for January and February 1993 in the absence of any order passed under Rule 9B of the Central Excise Rules, 1944 and without execution of any B-13 bond?

Issue-wise Detailed Analysis

Issue 1 and 1A: Sustainability of Duty Demand Based on Re-classification of Benzene and Toluene

Relevant Legal Framework and Precedents: The classification of excisable goods is governed by the Central Excise Tariff Act, 1985, and the Central Excise Rules, 1944, particularly Rule 173B (classification list filing) and Rule 56 (taking of samples and communication of test results). The principles of natural justice and statutory provisions require that any material relied upon for re-classification and consequent duty demand must be communicated to the manufacturer. Rule 56 mandates that the officer conducting chemical tests must communicate the results to the manufacturer, and the manufacturer has a right to seek re-test within 90 days if aggrieved.

Court's Interpretation and Reasoning: The appellant had filed a classification list on 03.11.1989 classifying Benzene and Toluene under chapter sub-heading 2902.00, which was approved by the Assistant Collector on 26.04.1990. Subsequently, samples were drawn in October 1990 and tested, with reports dated 29.01.1991 indicating purity less than 96%, warranting re-classification under chapter 2707.10 and 2707.20. The department issued show-cause notices based on these test reports but did not furnish the full test reports to the appellant, only a gist was communicated.

The Court emphasized that since the test reports formed the basis for re-classification and consequent higher duty demand, principles of natural justice required that full copies of the test reports be furnished to the appellant. Merely communicating a gist of the test reports was insufficient and violated Rule 56(2) and (4) of the Central Excise Rules as well as the principles of natural justice.

The Court noted that without the full test reports, the appellant was deprived of the opportunity to challenge the results or seek a re-test within the stipulated 90-day period. The Court observed that the CESTAT erred in placing the burden on the appellant to request a re-test when the fundamental right to do so was denied by non-communication of the test reports.

Furthermore, the Court remarked that the department's decision to take samples after the classification list was approved, rather than prior to approval, cast doubt on the procedure's propriety, especially given the non-furnishing of test reports to the appellant.

Key Evidence and Findings: The Deputy Chief Chemist's letter dated 29.01.1991, the show-cause notices lacking annexed test reports, and the appellant's repeated requests for test reports that were not complied with.

Application of Law to Facts: The Court held that the failure to provide the test reports constituted a breach of Rule 56 and natural justice. The re-classification based on undisclosed test reports was unsustainable.

Treatment of Competing Arguments: The department argued that the gist of the test reports was communicated and the appellant did not request a re-test, thereby fulfilling its obligation. The Court rejected this, stating that the right to seek a re-test arises only after receiving the full test report, which was not done.

Conclusions: The Court concluded that the re-classification of Benzene and Toluene based on undisclosed test reports was invalid, and the consequent differential duty demand could not be sustained.

Issue 2: Provisional Nature of Assessments for January and February 1993

Relevant Legal Framework and Precedents: Rule 9B of the Central Excise Rules, 1944, governs provisional assessments. It requires that for an assessment to be provisional: (i) the assessee must request provisional assessment in writing, (ii) the proper officer must direct provisional assessment by passing an order, and (iii) the assessee must execute a bond binding payment of differential duty. The Supreme Court has held in prior decisions that without these conditions, assessments cannot be treated as provisional.

Court's Interpretation and Reasoning: The department contended that assessments for Benzene and Toluene in January and February 1993 were provisional, justifying the differential duty demand beyond limitation. The CESTAT agreed, relying on the Assistant Collector's order dated 18.10.1993 directing provisional assessments and the Superintendent's endorsements on RT-12 returns.

The Court examined the record and found no evidence that the appellant had requested provisional assessment or executed any bond or bank guarantee as required under Rule 9B. The order dated 18.10.1993 could not have retrospective effect to render prior assessments provisional. The Superintendent's endorsements on RT-12 returns were insufficient to convert regular assessments into provisional ones.

The Court further noted that show-cause notices issued for the period September 1990 to December 1992 were adjudicated as regular assessments, making it implausible that assessments suddenly became provisional in January 1993 without procedural compliance.

Key Evidence and Findings: Absence of any written request by the appellant for provisional assessment, lack of bond execution, absence of any formal order directing provisional assessments for the months in question, and prior adjudication of assessments as regular.

Application of Law to Facts: The Court applied the mandatory provisions of Rule 9B and the binding precedents to hold that assessments for January and February 1993 were not provisional.

Treatment of Competing Arguments: The department relied on procedural endorsements and the 18.10.1993 order to justify provisional assessments. The Court rejected these, emphasizing the statutory requirements and lack of compliance.

Conclusions: The Court held that the CESTAT's finding of provisional assessments for January and February 1993 was unsustainable and set aside that portion of the order.

Significant Holdings

"Informing the appellant only the gist of the test reports cannot be said to be in compliance with the principles of natural justice as the test reports formed the sub-stratum of higher duty demand raised by the department thus entailing adverse civil consequences on the appellant."

"The officer who has taken the samples for testing has to communicate the result of such test to the manufacturer. Therefore, the officer is under a positive mandate to communicate to the manufacturer the result of such test."

"Unless a copy of the test report is furnished to the manufacturer, he would not be in a position to seek re-test within the specified period, if he is aggrieved by the result of the test."

"For an assessment to be provisional in terms of Rule 9B, an order is required to be passed, and the assessee must execute a bond in the proper form binding the assessee to pay the differential amount of duty."

"The order dated 18.10.1993 could not render assessments prior thereto provisional and there is no basis for holding assessments for January and February 1993 as provisional."

Core principles established include the mandatory nature of communication of full test reports under Rule 56, the necessity of compliance with procedural safeguards for provisional assessments under Rule 9B, and the application of principles of natural justice in excise classification and assessment proceedings.

Final determinations were that the re-classification of Benzene and Toluene based on undisclosed test reports was invalid and the consequent duty demand was unsustainable; and that assessments for January and February 1993 were not provisional due to non-compliance with Rule 9B requirements, thereby invalidating the department's extended duty demand for that period.