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REPORTABLE

IN THE SUPREME COURT OF INDIA  CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 8359  OF 2003

Commnr. Of Central Excise, Chennai-III Appellant(s) VERSUS

Grasim Industries Respondent(s)

J U D G M E N T

A.K. SIKRI, J.

The issue involved in the present case pertains to the  applicability of the doctrine of unjust enrichment in the  case  of  refund  of  duty  paid  on  'capital  goods'  used  captively.  The  factual  matrix  under  which  the  aforesaid  issue arises for consideration is taken note of, in short,  hereinbelow:   

The  respondent  herein  purchased  Electro  Static  Precipitators (ESPs for short) from M/s. BHEL, Ranipet.  In  terms  of  Notification  No.78/1990-CE  dated  20.3.1990,  the  respondent was entitled to buy the said ESPs at concessional  rate of duty which was 5% ad valorem in contra distinction  to the normal rate of 15% ad valorem duty.  This concession

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rate becomes payable on the condition that an officer not  below  the  rank  of  Deputy  Secretary  in  the  Ministry  of  Environment  and  Forests  (MoEF)  certifies  that  the  goods  manufactured are meant for pollution control purpose.  The  dispute arose as to whether the respondent was entitled for  concessional  rate  of  duty  or  not.   It  paid  the  duty  at  normal rate and fought for refund of the extra duty paid on  the ground that only concessional rate of duty at 5% could  have  been  charged.   Respondent  succeeded  in  its  attempt  before  the  judicial  fora.  In  view  thereof,  question  of  refund of duty paid which was in the tune of Rs.27,66,970/-,  arose  for  consideration.   The  Revenue/appellant  herein,  refused to release this refund and rejected the application  of the respondent in this behalf on the ground that the  respondent had passed on  the burden and therefore refunding  the extra duty paid would result in unjust enrichment to the  respondent.  Against that order the respondent filed the  appeal before the Commissioner of Central Excise (Appeal)  Chennai, who also dismissed the said appeal vide order dated  21.9.2000.   Challenging  that  order  the  respondent  filed  further  appeal  before  the  CESTAT.   In  this  appeal  the  respondent  has  succeeded  as  vide  impugned  judgment  dated  17.6.2003, the CESTAT has allowed the appeal and set aside  the order of the Commissioner (Appeal) thereby directing the  refund of the additional duty paid by the respondent.

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A perusal of the order of the CESTAT would reveal that  the CESTAT was grapping with the question as to whether the  doctrine of unjust enrichment will be applicable in case of  refund  of  duty  paid  on  capital  goods,  which  are  used  captively.  The CESTAT has taken note of certain judgments  including judgment of this Court in case of Union of India  vs. Solar Pesticides Pvt. Ltd. (2000 (2) SCC 705 which was  relied upon by the Revenue.  However, the said judgment is  distinguished as not applicable in the instant case on the  ground that this Court in the said case was not concerned  with  the  issue  of  unjust  enrichment  in  connection  with  capital goods used captively.

It is in this backdrop the issue, as formulated in the  first para above, arises for consideration.

Since the judgment  Solar Pesticides Pvt. Ltd.  has  been distinguished and held not applicable to the facts of  the present case, we shall start our discussion by analysing  the said judgment.  In the said case the question which was  formulated for decision was as under:

“Whether the doctrine of unjust enrichment  is  applicable  in  respect  of  raw  material  imported and consumed in the manufacture of  a final product is the question which arises  for consideration in these appeals.”

The Court in detail discussed the principle of unjust

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enrichment. At the outset it took  note of the Constitution  Bench judgment in  Mafatlal Industries Ltd. and Others vs.  Union  of  India  and  Others (1997  (5)  SCC  536)  and  the  principles laid down therein.  Thereafter the position in  law on this aspect is succinctly summed up in paras 17 to 20  which are reproduced below:

“  17.   Section 11-B, along with Section 11-A, was  introduced by Customs, Central Excises and Salt  and Central Board of Revenue (Amendment) Act,  1978  with  effect  from  17-11-1980,  a  fact  mentioned  hereinbefore.  Until the  enactment  and enforcement of Sections 11-A and 11-B, the  recovery  and  refund  of  excise  duties  was  governed by the Rules. Rule 11 which dealt with  claims for refund of duty, as in force prior to  6.8.1977 read as follows.

11. No refund of duties or charges  erroneously  paid,  unless  claimed  within three months.-- No duties or  charges which have been paid or have  been adjusted in an account current  maintained with the Collector under  Rule  9,  and  of  which  repayment  wholly  or  in  part  is  claimed  in  consequence of the same having been  paid through inadvertence, error or  misconstruction,  shall  be  refunded  unless  the  claimant  makes  an  application  for  such  refund  under  his signature and lodges it with the  proper  officer  within  three  months  from  the  date  of  such  payment  or  adjustment, as the case may be."

18. Rule 11 was amended with effect from 6-8- 1977 and it remained in force till the coming  into  force  of  Section  11-B.  Rule  11,  as  it  obtained  during  the  said  period,  read  as  follows:

11.Claim for refund of duty.--  (1) Any person claiming refund of any

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duty  paid  by  him  may  make  an  application for refund of such duty  to the Assistant Collector of Central  Excise  before  the  expiry  of  six  months  from  the  date  of  payment  of  duty.  Provided that the limitation of six  months shall not apply where any duty  has been paid under protest.  Explanation.-- Where any duty is paid  provisionally  under  these  rules  on  the basis of the value or the rate of  duty, the period of six months shall  be  computed  from  the  date  on  which  the  duty  is  adjusted  after  final  determination  of  the  value  or  the  rate of duty, as the case may be.  (2)  If  on  receipt  of  any  such  application  the  Assistant  Collector  of Central Excise is satisfied that  the  whole  or  any  part  of  the  duty  paid  by  the  applicant  should  be  refunded to him, he may make an order  accordingly.  (3) Where as a result of any order  passed  in  appeal  or  revision  under  the Act, refund of any duty becomes  due to any person, the proper officer  may refund the amount to such person  without his having to make any claim  in that behalf.  (4) Save as otherwise provided by or  under these rules no claim for refund  of any duty shall be entertained.     Explanation.   --    For   the  purposes  of  this  rule,  `refund'  includes  rebate   referred  to  in  Rules 12 and 12A."

19. We may now set out Section 11-B, as amended  by Act 40 of 1991. (Even subsequent to 1991,  there have been certain minor amendments to the  said section.) As it stands today, Section 11-B  reads as follows (portions not necessary for  the  purposes  of  the  present  controversy

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omitted):  "11B. Claim for refund of duty.-- (1)  Any person claiming refund of any duty  of excise may make an application for  refund of such duty to the Assistant  Commissioner of Central Excise before  the  expiry  of  six  months  from  the  relevant date in such form and manner  as  may  be  prescribed  and  the  application  shall  be  accompanied  by  such  documentary  or  other  evidence  including the documents referred to in  section  12A  as  the  applicant  may  furnish to establish that the amount  of duty of excise in relation to which  such refund is claimed was collected  from,  or  paid  by,  him  and  the  incidence of such duty had not been  passed on by him to any other person:  

Provided  that  where  an  application for refund has been made  before the commencement of the Central  Excises and Customs Laws (Amendment)  Act, 1991, such application shall be  deemed to have been made under this  sub-section as amended by the said Act  and the same shall be dealt with in  accordance with the provisions of sub- section (2) substituted by that Act:  

Provided  further  that  the  limitation  of  six  months  shall  not  apply  where  any  duty  has  been  paid  under protest. (2)  If,  on  receipt  of  any  such  application,  the  Assistant  Commissioner  of  Central  Excise  is  satisfied that the whole or any part  of  the  duty  of  excise  paid  by  the  applicant is refundable, he may make  an order accordingly and the amount so  determined  shall be  credited to  the  Fund:

Provided  that  the  amount  of  duty of excise as determined by the  Assistant  Commissioner  of  Central  Excise under the foregoing provisions  of this sub-section shall, instead of

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being credited to the Fund, be paid to  the  applicant,  if  such  amount  is  relatable to--  (a)  rebate  of  duty  of  excise  on  excisable goods exported out of India  or on excisable material used in the  manufacture  of  goods  which  are  exported out of India;  (b) unspent advance deposits lying in  balance  in  the  applicant's  account  current  maintained  with  the  Commissioner of Central excise;  (c) refund of credit of duty paid on  excisable  goods  used  as  inputs  in  accordance with the rules made, or any  notification issued, under this Act; (d)  duty  of  excise  paid  by  the  manufacturer, if he had not passed on  the  incidence  of  such  duty  to  any  other person; (e) the duty of excise borne by the  buyer, if he had not passed on the  incidence of such duty to any other  person;  (f) the duty of excise borne by any  other such class of applicants as the  Central  Government  may,  by  notification in the Official Gazette,  specify:  Provided further that no notification  under clause (f) of the first proviso  shall be issued unless in the opinion  of  the  Central  Government  the  incidence of duty has not been passed  on  by  the  persons  concerned  to  any  other person. (3)  Notwithstanding  anything  to  the  contrary  contained  in  any  judgment,  decree,  order  of  direction  of  the  Appellate Tribunal or any Court or in  any other provision of this Act or the  rules made thereunder or any other law  for the time being in force, no refund  shall be made except as provided in

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sub-section (2). Explanation.--  For  the  purposes  of  this section, ......... (B) `relevant  date' means --  (f) in any other case, the date of  payment of duty."

20.The said Amendment Act also amended Section  11-C, besides introducing Section 11-D and an  entire new chapter, Chapter II-A. Since Section  11-C does not fall for our consideration, we  need not refer to it.  Section 11-D reads as  follows:

11D. Duties of excise collected from  the buyer to be deposited with the  Central  Government  (1)  Notwithstanding  anything  to  the  contrary  contained  in  any  order  or  direction  of  the  Appellate  Tribunal  or  any  court  or  in  any  other  provision of this Act or the rules  made thereunder, every person who has  collected any amount from the buyer  of  any  goods  in  any  manner  as  representing  duty  of  excise,  shall  forthwith pay the amount so collected  to  the  credit  of  the  Central  Government.  (2) The amount paid to the credit of  the  Central  Government  under  sub- section (1) shall be adjusted against  duty of excise payable by the person  on the finalisation of assessment and  where any surplus is left after such  adjustment,  the  amount  of  such  surplus shall either be credited to  the  Fund  or,  as  the  case  may  be,  refunded to the person who has borne  the  incidence  of  such  amount,  in  accordance  with  the  provisions  of  section 11B and the relevant date for  making  an  application  under  that  section in such cases shall be the  date  of  the  public  notice  to  be  issued by the Assistant Commissioner  of Central Excise."

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Two  things  which  emerge  from  the  reading  of  the  aforesaid judgment and need to be emphasized are as under:  

(i)  in attracting the principle of unjust enrichment it is  not only the actual burden which is passed on to the another  person that would be taken into consideration  even if the  incident of such duty had not been passed on by him to any  other person;

(ii) the principle of unjust enrichment shall be applicable  in the case of captive consumption as well.  According to  the  Court  the  principle  of  unjust  enrichment  would  be  applicable in both the circumstances.

This  case,  therefore,  makes  it  clear  that  the  principle of unjust enrichment is applicable even when the  goods are used for captive consumption.  No doubt, in the  said case the goods with which the Court was concerned was  raw material,  imported and consumed in the manufacture of  the  final  product.  The  question  is  as  to  whether  this  principle would be extended to capital goods also, as it was  in respect of raw material. This was left open in Mafatlal  Industries  case. As  it  falls  for  determination  in  the  present case, we are addressing this issue. To answer this  issue, we may drawn some sustenance from the judgment of  this  Court   in  the  case  of  Indian  Farmers  Fertiliser

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Coop.Ltd. vs.  C.C.E.Ahmedabad (1996  (86)  ELT  177  (S.C.).  Though  that  case  is  concerned  with  the  exemption  of  Raw  Naptha was used to produce ammonia which is used in effluent  treatment  plant.  Notification  No.187/61-CE  provided  for  exemption to such Raw Naptha as is used in the manufacture  of ammonia provided such ammonia is used elsewhere in the  manufacture of fertilizers.  The question was as to whether  the  ammonia  used  in  the  off-site  plants  is  also  ammonia  which is used elsewhere in the manufacture of fertilizers.  The court answered the question in the affirmative thereby  holding that exemption provided under Notification 187/61-CE  shall be available to the assessee.

However, what follows from the reading of the said  judgment  is  that  if  a  particular  material  is  used  for  manufacture of a final product, that has to be treated as  the cost of the product.  Insofar as cost of production is  concerned, it may include capital goods which are a part of  fixed  cost  as  well  as  raw  material  which  are  a  part  of  variable  cost.   Both  are  the  components  which  come  into  costing of a particular product.  Therefore it cannot be  said that the principle laid down by the Court in  Solar  Pesticides would not extend to capital goods which are used  in  the  manufacture  of  a  product  and  have  gone  into  the  costing  of  the  goods.   In  order  to  come  out  of  the  applicability of the doctrine of unjust enrichment, it

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therefor becomes necessary for the assessee to demonstrate  that in the costing of the particular product, the cost of  capital goods was not taken into consideration. We, thus,  are of the opinion that the view taken by the Tribunal is  not correct in law.   

We  also  find  from  the  reading  of  the  judgment  of  Tribunal that the Tribunal has observed that capital goods  viz.  ESPs  have  been  only  used  captively  for  pollution  control purpose and the same is not used for processing or  manufacturing of any final product and therefore there is no  question of passing on the burden of duty to any one.  These  observations are clearly erroneous in law in view of the  judgment of this Court in  Indian Farmers Fertilisers COOP.  Ltd.

Accordingly,  the  judgment  of  the  Tribunal  is  set  aside.  However, in the facts of the present case we are of  the opinion that one opportunity should be granted to the  respondent to demonstrate to the assessing authority that  the  cost  of  the  capital  goods  was  not  included  in  the  costing of the machinery.  Only if the respondent is able to  prove  the  aforesaid  aspect  it  shall  be  entitled  to  the  refund and not otherwise.

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The appeal is allowed in the above terms.

....................J. (A.K. SIKRI)

…....................J. (ROHINTON FALI NARIMAN)

New Delhi; Date: 13.3.2015.

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ITEM NO.103               COURT NO.14               SECTION III                S U P R E M E  C O U R T  O F  I N D I A                        RECORD OF PROCEEDINGS Civil Appeal  No(s).  8359/2003 COMMNR. OF CENTRAL EXCISE, CHENNAI                 Appellant(s)                                 VERSUS M/S. GRASIM INDUSTRIES                             Respondent(s) (with appln. (s) for ex-parte stay and office report) Date : 13/03/2015 This appeal was called on for hearing today. CORAM :           HON'BLE MR. JUSTICE A.K. SIKRI          HON'BLE MR. JUSTICE ROHINTON FALI NARIMAN For Appellant(s)  Mr. Ashok Panda,Sr.Adv.

Mr. Arijit Prasad,Adv.(Argued by)  Ms. Sushma Manchanda,Adv.

                    Mr. B. Krishna Prasad,Adv.                       For Respondent(s)  Mr. A.K.Chitale,Sr.Adv.

Mr. Sumit Kumar Sharma,Adv.                      Mr. Niraj Sharma,Adv.                                 UPON hearing the counsel the Court made the following                              O R D E R

The appeal is allowed in terms of the signed order.   

  (SUMAN WADHWA)          AR-cum-PS

        (SUMAN JAIN)          COURT MASTER

(SIGNED ORDER IS PLACED ON THE FILE)