LPA Nos. 114 / 1999, 16 / 1999, 17 / 1999 & 53 / 1999, decided on 12.12.2000.

Central Excise Rules, 1944 - R.7A - Liability to pay excise duty levied by the Government on molasses produced by Khandsari Sugar Factory put on procurers - Appellants who were procurers of molasses challenged the validity of the said rule on the ground that it provided for recovery of duty from persons who were not manufacturers - Held : Rule 7A is fully within the ambit and powers of the Central Government conferred under section 3 (1) of the Act.

Advocates who appeared in this case :
M/s P. Kohli,, Ajay Gupta, R.K. Gupta and A.. Gupta Advocates for the appellants
Mr. N.A. Chowdhary, Advocate for respondents

2. The appellant is engaged, inter alia, in the business of manufacture and production of India-made foreign liquor and spirit. For use as a raw material in the manufacture of Indian made foreign liquor and spirit, the appellant purchases molasses produced in khandsari sugar factory . Excise duty is leviable on molasses under the Central Excise Act, 1944 ("Act") at the rate of Rs.500/- per tonne (Entry 17.03 of Tariff Act, 1985). Till Ist March 1997, molasses produced in Khandsari sugar factory were exempt from payment of excise duty. By Central Excise (Amendment) Rules 1997 (Amendment Rules), framed by the Central Government in exercise of powers conferred under section 37 of the Act, 1944, certain amendments were made in certain rules of the Central Excise Rules relevant for levy and collection of excise duty on molasses. The following proviso was added to rule 7 of the Rules, which provides for recovery of duty :

"Provided that nothing contained in this rule shall apply to molasses produced in a khandsari sugar factory".

A new rule, namely, rule 7A was inserted to provide for recovery of excise duty on molasses produced by khandsari sugar factories. Consequential amendments were also made in rule 9A. By insertion of rule 9C, provision was made for recovery of duty on molasses produced by a khandsari sugar factory from a person who procures such molasses. In other words, the procurer of molasses was made responsible for the payment of duty as against the manufacturer of molasses.

3. The appellant and three other procurers of molasses challenged the validity of the above rule before this Court by filing writ petitions on the ground that it provides for recovery of duty from persons like the appellants who are not manufacturers .The case of the appellants was that what was charged from them under rule 7A of the Rules was, in effect, not excise duty but a tax on purchase of molasses which is not contemplated by entry 84 list I of the Seventh Schedule to the Constitution of India. The learned Single Judge rejected the contention of the appellants and held that the excise duty collected under rule 7A was a duty on the manufacture of the molasses produced by khandsari sugar factory and not tax on purchases as contended by the appellants. The learned Judge observed that the mere fact that it was collected from the appellants who were not manufacturers but purchasers of molasses would not change the character of the excise duty. The learned Judge held that the taxing event was "manufacture of molasses" and the fact that it was collected from a person who was himself not a manufacture would not invalidate the levy. In view of the above, the learned Single Judge dismissed the writ petitions. Aggrieved by the judgement and order of the learned Single Judge, the appellants are before us by way of the present appeals.

4. We have heard Sri Pramod Kohli, learned counsel for the appellants .We have also heard Sri R. K Gupta, Sri A. V. Gupta and Sri Ajay Gupta, learned counsel for the other appellants. Mr. Kohli contended that Rule 7A of the Rules is ultra vires section 3(1) of the Act because it purports to levy purchase tax in the garb of excise duty. It is contended by the learned counsel that excise duty being a duty on the production and manufacture of an article, can be levied only on a person who produces or manufactures the same or on a person who is directly connected or related to the manufacture or the manufacturing process - it cannot be levied and/or collected from a purchaser who has nothing to do with the manufacture or production of the same. The contention of the learned counsel, in other words, is that in exercise of the powers under the Excise Act, the Central Government cannot provide for levy and/or collection of duty from any person other than the manufacturer or the producer. The learned counsel submits that the appellants, who are the manufacturers of Indian made foreign liquor and spirit, are not manufacturers of molasses. They have nothing to do with the manufacture of molasses in the khandsari sugar factories. They have not even purchased molasses from the factories. They have purchased the same in open market from persons who are not manufacturers. It is contended that in such a situation the appellants cannot be made liable to pay excise duty on molasses manufactured by someone else. The learned counsel submits that the levy in effect and in sum and substance is a levy of purchase tax not excise duty because the taxing event is the purchase of molasses by the appellants and not the manufacture or production thereof. He submits that in that view of the matter, Rule 7A of the Rules is clearly violative of section 3(1) of the Act. The learned counsel for the respondent supports the judgement of the learned Single Judge.

5. We have carefully considered the submission of learned counsel for the appellants. We have also perused the relevant provisions of the Act and the Rules. Section 3(1) of the Central Excise Act is the charging section. It provides for the levy and collection of duties of excise on all excisable goods, which are produced or manufactured in India. Section 3(1) of the Act in so far as relevant, as it stood at the material time, reads as follows :

"3.Duties specified in the Schedule to the Central Excise Tariff Act, 1985 to be levied. - (1) There shall be levied and collected in such manner as may be prescribed duties of excise on all excisable goods other than salt which are produced or manufactured in India and a duty on salt manufactured in, or imported by land into, any part of India as, and at the rates, set forth in the Schedule to the Central Excise Tariff Act, 1985. "

"Assessee" has been defined in Rule 3 of the Central Excise Rules, 1944 (Rules )as follows :

" Assessee" means any person who is liable for payment of duty assessed and also includes any producer or manufacturer of excisable goods or a registered person of a private warehouse in which excisable goods are stored.

It is clear from the above definition that the expression ‘assessee’ has been defined in very wide terms to mean any person who is liable for payment of the duty assessed.

6. Chapter III of the Rules deals with levy and refund of, and exemption from duty. Rule 7, which deals with recovery of the duty, prior to its amendment by the impugned amendment with effect from Ist March 1997, read as follows :

"7. Every persons who produces, cures or manufactures any excisable goods, or who stores such goods in a warehouse, shall pay the duty or duties leviable on such goods, at such time and place and to such person as may be designated in, or under the authority of these rules, whether the payment of such duty or duties is secured by bond or otherwise"

By the impugned amendment, the following proviso was added to the above rule 7 to take out the recovery of duty on molasses produced in a khandsari sugar factory from the purview of the said rule :

The following new rule, namely rule 7A , was added to provide for recovery of duty on malasses produced by a khandsari sugar factory :

"7A. Recovery of duty on molasses produced by a khandsari sugar factory - Every person who procures molasses produced in a khandsari sugar factory, whether directly from such factory or otherwise, for use in the manufacture of any commodity, whether or not excisable, shall pay the duty or duties leviable on such molasses, as if such molasses has been manufactured by the procurer, at such time and to such persons as may be designated under these rules, whether the payment of such duty or duties be secured by bond or otherwise"

Rule 9 of the Rules deals with the time and manner of payment of duty. Prior to amendment, it read as under :

"9. (1) No excisable goods shall be removed from any place where they are produced, cured or manufactured or any premises appurtenant thereto, which may be specified by the Commissioner in this behalf, whether for consumption, export or manufacture of any other commodity in or outside such place, until the …and on obtaining the permission of the proper officer on the form.

Provided that such goods may be deposited without payment of duty in as store-room or other place of storage approved by the Commissioner under Rule 27 or rule 47 or in a warehouse appointed or registered under rule 140 or may be exported under bond as provided in rule 13."

Rule 9A deals with the date for determination of duty and tariff valuation. Sub-rule (1) of the said rule reads :

"9A(1) The rate of duty and tariff valuation, if any, applicable to any excisable goods shall be the rate and valuation in force :

(i) in the case of goods removed from the premises of a curer on payment of duty, on the date on which the duty is assessed.

(ii) In the case of goods removed from a factory or a warehouse, subject to sub-rule (2), (3) and (3A), on the date of the actual removal of such goods from such factory or warehouse.

The following clause (iii) was inserted by the 1997 Amendment Rules:

"(iii) in the case of molasses manufactured in a khandsari sugar factory, on the date of receipt of such molasses in the factory of the procurer."

A new Rule, Rule 9C was also inserted by the 1997 Amendment Rules to provide for application of the Central Excise Rules to a " procurer". It reads :

"9C. Rules to apply to procurer. -The provisions of these rules shall apply to a procurer of molasses as if such molasses has been manufactured by him."

It may also be pertinent to notice here the definition of "procurer" which was inserted in Rule 2 by insertion of clause (ixa). The said definition reads:

"(ixa) procurer means any person who receives molasses manufactured in a khandsari sugar factory, whether directly from such factory or otherwise, for use in the manufacture of any commodity, whether or not excisable, and is liable for payment of duty assessed on such molasses."

7. It is clear from a reading of Chapter III of the Rules, in particular Rules 7, 7A, 9, 9A, 9B and 9C, that by the impugned Amendment of the Rules, the liability to pay excise duty on the manufacture or production of molasses has been shifted from the manufacturers or producers to the persons who procure molasses produced and manufactured in khandsari sugar factory for use in the manufacture of any commodity liable for payment of duty imposed under the Act. The question that arises for consideration is whether this action of the Central Government is in consonance with section 3(1) of the Act or is ultra vires the said provision.

8. We have perused section 3(1) of the Act. It is clear from a reading of the said provision that duties of excise on all excisable goods are levied and collected "in such manner as may be prescribed". The rate of excise duty, however, would be that which is set forth in the schedule to the Tariff Act, 1985. The expression "prescribed" has been defined in clause (g) of section 2 of the Act to mean, "prescribed by rules made under this Act". Section 37 of the Act empowers the Central Government to make rules to carry into effect the purposes of the Act. The Amendment Rules of 1997 have been framed by the Central government in exercise of the power conferred under section 37 of the Act. There is thus no infirmity in the framing of the Rules by the Central Government to prescribe for the levy and collection of excise duty. The only question that arises for consideration is whether in exercise of the rule- making power, the Central Government can provide for recovery of excise duty from any person other than a manufacturer. In other words, whether excise duty can be legally levied by the Central Government on a person who has nothing to do with the manufacture or production of the excisable goods.

9. We have given our careful consideration to the above controversy. It is true that excise duty is a duty imposed on production/manufacture of articles. It is also a fact that ordinarily it is the manufacturer and the producer from whom excise duty is collected. The question that arises for consideration is whether excise duty can be collected from persons other than the manufacturer or producer. This controversy, in our opinion, is no more res integra in view of a catena of decisions of the Privy Council and the Supreme Court. More than six decades back, in 1939, in In re Central Provinces and Berar Sales of Motor Spirit and Lubricants Taxation Act, 1938, AIR 1939 FC 1 , in the context of duties of excise, it was observed :

"…a brief examination of those duties shows that in practically all cases it is the producer or manufacturer from whom the duty is collected. But there can be no reason in theory why an excise duty should not be imposed even on the retail sale of an article, if the taxing Act so provides. Subject always to the legislative competence of the taxing authority, a duty on home produced goods will obviously be imposed at the stage which the authority find to be the most convenient and the most lucrative, wherever it may be; but that is a matter of the machinery of collection and does not affect the essential nature of the tax. The ultimate incidence of an excise duty, a typical indirect tax, must always be on the consumer, who pays as he consumes or expends; and it continues to be an excise duty, that is, a duty on home-produced or home-manufactured goods, no matter at what stage it is collected."

10. In Province of Madras v Boddu Paidanna and Sons AIR 1942 FC 33, in the context of a question that arose under the Madras General Sales Tax Act, 1939, the scope of excise duty was restated in the following words:

"There is in theory nothing to prevent the Central Legislature from imposing a duty of excise on a commodity, as soon as it comes into existence, no matter what happens to it afterwards, whether it be sold, consumed, destroyed, or given away. A taxing authority will not ordinarily impose such a duty, because it is much more convenient administratively to collect the duty (as in the case of most of the Indian Excise Acts) when the commodity leaves the factory for the first time, and also because the duty is intended to be an indirect duty which the manufacturer or producer is to pass on to the ultimate consumer, which he could not do if the commodity had, for example, been destroy in the factory itself. It is the fact of manufacture, which attracts the duty, even though it may be collected later…"

11. In Governor General in Council v Province of Madras AIR 1945 PC 98, the following observations made by the Privy Council about the difference between the excise duty and sales tax are pertinent :

"The two taxes, the one levied on a manufacturer in respect of his goods, the other on a vendor in respect of his sales, may, as is there pointed out, in one sense overlap. But in law there is no overlapping. The taxes are separate and distinct imposts. If in fact they overlap, that may be because the taxing authority, imposing a duty of excise, finds it convenient to impose that duty at the moment when the excisable article leaves the factory or workshop for the first time on the occasion of its sale. But that method of collecting the tax is an accident of administration; it is not of the essence of the duty of excise, which is attracted by the manufacture itself."

(Emphasis supplied)

12. The Judicial Committee, in Governor General in Council v Province of Madras (supra), observed :

"…Excise duty is primarily a duty on the production or manufacture of goods produced or manufactured within the country. It is an indirect duty which the manufacturer or producer passes on to the ultimate consumer, that is, its ultimate incidence will always be on the consumer. Therefore, subject always to the legislative competence of the taxing authority, the said tax can be levied at a convenient stage so long as the character of the impost, that is, it is a duty on the manufacture or production, is not lost. The method of collection does not affect the essence of the duty, but only relates to the machinery of collection for administrative convenience. Whether in a particular case the tax ceases to be in essence an excise duty, and the rational connection between the duty and the person on whom it is imposed ceased to exist is to be decided on fair construction of the provisions of a particular Act."

(Emphasis supplied)

13. In R. C. Jall v Union of India AIR 1962 SC 1281, the excise duty which was to be collected by the Railway Administration by way of surcharge on freight from the consignor or consignee was challenged. In that case, by Ordinance No.39 of 1944, duty was imposed on the manufacture or production of coal and coke. Section 5(2) thereof conferred in express terms a power on the Central Government to make rules, inter alia, to provide for the manner in which the duties imposed by the Ordinance shall be collected and the persons who shall be liable to pay the duty. Rule 3 of the Rules made by the Central Government provided for the recovery of excise duty on the coal produced; under the said rule it was to be collected by the Railway Administration by means of a surcharge on freight and such duty of excise was recoverable from the consignor, if the freight charges were being prepaid at the time of consignment, or from the consignee, if the freight charges were collected at the destination of the consignment. The duty was challenged on the ground that it was not a duty of excise because it was levied on the consignee who was in no way concerned with the manufacture or production of coal. It was contended that excise duty could not be levied on the consignor who had nothing to do with the manufacture or production of coal. Repelling this contention, the Supreme Court held :

"…The machinery provided for the collection of the tax is, in our view, a reasonable one. Having regard to the nature of the tax, that is, the tax being an indirect one to be borne ultimately by the consumer, it cannot be said that there is no rational connection between the tax and the consignee. When the consignor pays, it cannot be denied that it is the most convenient stage for the collection of the tax, for it is the first time the coal leaves the possession of the consignor. The fact that the consignee is made to pay, in the contingency contemplated by R.3 (b) of the Rules cannot affect the essence of the tax, for the consignor, if he had paid the freight, would have passed it on to the consignee and instead the consignee himself pays it. The Central Government was legally competent to evolve suitable machinery for collection without disturbing the essence of the tax or ignoring the rational connection between the tax and the person on whom it is imposed. We hold that the machinery evolved under the Rules for collection of the duty satisfies the said conditions and therefore the exigibility of the tax at the destination point in the hands of the consignee cannot legitimately be questioned."

14. It may also be expedient in this connection to refer to the decision of Gujarat High Court in Brooke Bond India Ltd v Union of India 1992 (60) ELT 88 (Guj.) wherein it was held that excise duty can be levied even on retail sales. Speaking for the Bench, M. B. Shah J. (as he then was) observed :

"…(I)t is open to the legislature to devise proper and appropriate machinery to recover duty of excise at appropriate stages. Duty of excise can be levied and collected at any stage before consumption of the product. In other words, duty of excise can be levied and collected from the time when the commodity is produced or manufactured and till it reaches the consumer. Therefore, duty of excise can be levied and collected even on retail sale of an article."

(Emphasis supplied)

15. It is clear from the above decisions that the nature of excise duty would not change with the person who is made liable to pay the same. The mode of recovery of excise duty is left to the Central Government. The Central Government can decide at what point of time it should be levied and from whom it should be collected. The power of the Central Government under section 3 to prescribe the manner is not restricted to collection of duty, but also applies to the levy of duty. The only condition is that the basic character of excise duty should not change. The duty should be relateable to the manufacture and production of the article. In the instant case, the duty is levied by the Central Excise Act. The rate of duty is specified by the Central Excise Tariff Act, 1985. As per entry 17.03, the duty is payable at the rate of Rs.500/- per tonne. It appears that the Central Government wanted to restrict the levy of excise duty on molasses produced and manufactured in khandsari sugar factory only to that part of molasses produced or manufactured which is used in the manufacture of any commodity and not to levy any excise duty on the molasses used for any other purpose. It is in that context that a new proviso was added to Rule 9 to provide that molasses produced in a khandsari sugar factory might be removed without payment of duty leviable thereon and the duty of excise leviable on such molasses shall be paid by the procurer, as if such molasses had been manufactured by him on the date of receipt of such molasses in his factory. The liability to pay excise duty on the molasses produced in a khnadsari sugar factory has thus been put on the procurer who purchases the same for use in the manufacture of any commodity because it is at that stage only that it can be known that the molasses would be used in the manufacture of an article. We do not find any infirmity in this action of the Central Government. By the impugned amendment of the rules, only the method of collection of duty has been changed. It is well settled that the method of collecting excise duty is an accident of administration; it is not of the essence of the duty of excise. Duty of excise can be levied and collected at any stage before consumption of the product. It can be levied at any convenient stage so long as the character of the impost, that is, it is a duty on the manufacture or production, is not lost. The method of collection does not affect the essence of the duty, but only relates to the machinery of collection for administrative convenience. In other words, duty of excise can be levied and collected from the time when the commodity is produced or manufactured and till it reaches the consumer. Duty of excise can be levied and collected even from the purchaser of an article if it is found to be the most convenient method of levy and collection. It is a part of the machinery of collection and does not affect the essential nature of the duty. The ultimate incidence of the duty continues to remain on the person who consumes or expends the excisable goods. The duty continues to be an excise duty, that is, a duty on excisable goods produced or manufactured in India, no matter at what stage it is collected.

16. In the instant case, admittedly, molasses were purchased by the appellants for use in manufacture of Indian made foreign liquor and spirit and, in fact, used for that purpose. That being so, there is a direct nexus between the duty of excise and the manufacture and production of molasses. The duty in this case being not ad valorem, section 4 of the Act has no application. The incidence of duty would be the same no matter from whom it is recovered - whether from the manufacturer or from the procurer. The appellants, who are the procurers, use the molasses purchased by them in the manufacture of a commodity. They are the last persons in the chain. The Central Government, in its wisdom, thought it administratively more convenient and beneficial to levy and collect excise duty on molasses from the procurers instead of manufacturers because, at the stage of manufacture, it is difficult to know which part of the molasses manufactured and produced were going to be used in the manufacture of a commodity. The Central Government, by framing Rule 7A, has identified the person who would use use it in the manufacture of a commodity and made him responsible for the payment of the excise duty. Even if this duty had been levied on the manufacturers or collected from them, the ultimate incidence on the appellants who are the actual consumers would have been the same. The incidence of duty in that case also would have been Rs.500/- per tonne.

17. In the premises, we do not find any merit in the challenge to the validity of rule 7A on the ground that it is inconsistent with section 3(1) of the Act. In our opinion, rule 7A is fully within the ambit and powers of the Central Government conferred under section 3(1) of the Act. The Central Government has not fixed the rate of excise duty, which has been fixed by the Central Excise Tariff Act. They have merely fixed the stage at which the excise duty levied by the Act, at the rate specified under the Tariff Act, is to be collected. There is no infirmity in this action of the Central Government. In that view of the matter, in our opinion, the learned Single Judge was justified in dismissing the writ petitions.

18. One alternate ground on which the levy of excise duty on the appellants was sought to be challenged is that the appellants were entitled to exemption in view of the notification issued by the Central Government in favour of small-scale industrial units. The learned Single Judge did not go into this contention of the appellants as, in his opinion, it was a matter to be considered by the respondents at appropriate stage at their own level. The learned counsel for the appellants fairly stated that statutory appeals wherein similar relief has been claimed on the ground of exemption notification issued by the Central Government were pending. The learned counsel fairly stated that in that view of the matter, the appellants would not like this Court to go into that controversy in the present appeals The learned counsel states that the appellants would like to challenge the decision of the authorities in appeal, if it goes against them, in appropriate proceedings before this Court. He seeks liberty to do so. We do not think that any observation in that regard is required from this Court at this stage. Appellants are free to avail of any legal remedy available to them against the orders passed in appeal and for that purpose they do not require leave of this Court because this Court at no stage has gone into that controversy nor has it been raised by the appellants before this Court.