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CASE NO.: Appeal (civil)  1354 of 1980

PETITIONER: HYDERABAD INDUSTRIES LTD.AND ANR.

RESPONDENT: UNION OF INDIA AND ORS.

DATE OF JUDGMENT: 11/05/1999

BENCH: S.P.BHARUCHA & B.N.KIRPAL & S.RAJENDRA BABU & S.S.M.QUADRI & M.B.SHAH

JUDGMENT: JUDGMENT

DELIVERED BY: B.N.KIRPAL, J.

     Levy of additional duty of customs under Section 3 (1) of  the  Customs  Act, 1975 on import of asbestos  fibre  is challenged  by  the appellants in these appeals  by  special leave.

     The  appellants,  who  use  asbestos fibre  as  a  raw material,  imported  the same into India.  We are  in  these cases  concerned  with  the imports made prior to  the  year 1986.   On the import so made the department sought to raise a  demand of additional duty of customs under Section 3  (1) of  the  said  Act.  The appellants represented  that  on  a correct  interpretation  no  duty was  payable  inasmuch  as asbestos  fibre which was imported had not been manufactured or  produced but was a natural mineral and thus no duty  was leviable.    The  Collector,   Central  Excise,   Hyderabad, however,  issued  a trade notice on 3rd August, 1997  taking the  view that asbestos fibre as processed and graded had  a distinct character differing from asbestos rock and the said item was covered within Tariff Item 22 (F) of the Excise Act and  on  the same there was a liability to pay the  duty  of excise.  The Government of India and the Ministry of Finance also  informed  the appellants, namely,  Hyderabad  Asbestos Cement Products vide Ministry of Finances letter dated 17th August,  1997  that the process by which the asbestos  fibre was  obtained was a process of manufacture and the said item correctly fell within Tariff Item 22 (F) of the 1st Schedule to  the  Excise Act.  The consequence of this was  that  the demand  under  Section  3  (1) of the said  Act  was  raised because  the  imported  item,  namely,  asbestos  fibre  was regarded  as  an article which was liable to duty of  excise under the Excise Act.

     The  appellants  then  filed  various  writ  petitions before  the High Court of Delhi.  The main contention of the appellants  was  that the asbestos fibre which was  imported had  not been manufactured or produced and, under Section  3 (1)  of  the Customs Tariff Act, additional duty of  customs could be levied only if the article which is imported is one which is produced and manufactured in India and is liable to payment  of  excise duty.  The submission was that  asbestos

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fibre  had not undergone any manufacturing or other  process and, therefore, no additional duty could be charged.

     The  High  Court  dismissed   the  writ  petitions  by accepting  the contention of the respondents that extracting or  removing  the asbestos fibre from the rock  amounted  to manufacturing  process  being   undertaken  and,  therefore, excise  duty  was  leviable  and,   as  a  result   thereof, additional  duty under Section 3(1) of the Tariff Act  could be imposed on the import of the asbestos fibre into India.

     These  appeals by special leave were first heard by  a Bench  of three Judges.  After examining the material relied upon by the High Court and also by referring to Encyclopedia of   Natural  Chemical  Analysis,   Vol.II   and   Brussels Nomenclature the bench in its decision reported as Hyderabad Industries  Ltd.   and  Another Versus Union  of  India  and Others  [(1995)  5  Supreme  Court Cases 338]  at  page  342 observed as follows:

     We  are satisfied upon the material placed before us, as indicated in the judgment under appeal quoted above, that all  that the appellants in Civil Appeal No.1354 of 1980  do is  to separate the asbestos fibre from the rock in which it is  embedded  by manual and mechanical means.  The  asbestos that  is so removed from the parent rock is in every respect the  asbestos  that  was  embedded in  it.   No  process  of manufacture  can  be  said  to have  been  employed  by  the appellants  nor  is a new or a distinct  commodity  realised therefrom.

     The  bench also referred to the judgment of this Court in  Minerals  and Metals Trading Corpn.  Of India Ltd.   Vs. Union  of  India [(1972) 2 SCC 620] and Moti Laminators  (P) Ltd.  Vs.  CCE [(1995) 3 SCC 23] and held as follows:

     Assuming  that  Tariff Item 22-F, when it  refers  to asbestos  fibre  and yarn, covers asbestos fibre that  has been   separated  from  its  parent   rock  in  the   manner aforementioned,  such asbestos fibre is not the result of  a process  of  manufacture, it is not a new  and  commercially identifiable  article  and it is, therefore, not  liable  to excise duty.

     What all the appellants import is, it is not disputed, asbestos  fibre that has been separated from its parent rock in the manner aforementioned.

     An  argument had been raised on behalf of the Union of India  to the effect that the asbestos fibre imported by the appellant  was exigible to additional duty regardless of the fact  that  it was not produced as a result  of  manufacture and,  therefore, not exigible to excise duty.  In support of this contention reliance was placed on this Courts judgment in  Khandelwal Metal & Engineering Works Vs.  Union of India [(1985)  3 SCC 620].  After discussing the said judgment the Bench  was  of  the view that the decision in  the  case  of Khandelwal  Metal & Engineering Works required consideration by  a  larger bench.  It is pursuant to this direction  that this Bench has been constituted.

     Sh.    C.S.   Vaidyanathan,   the  learned  Additional Solicitor General, sought to contend that the High Court was right  in  coming to the conclusion that the  separation  of

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asbestos  fibre  from  the parent rock was as  a  result  of process  of  manufacture  and, therefore,  excise  duty  was leviable  and  even if it was not manufactured  or  produced excise duty was leviable under Tariff Item 22 F.

     The  aforesaid question had been considered at  length and  decided  against the revenue in this very case when  it was  heard by the Three Judge Bench in the reported decision referred  to hereinabove.  The conclusion which was  arrived at  was  that separation of asbestos fibre from  the  parent rock  was  not the result of process of manufacture and  was not  a  new  and commercially viable article  and  was  not, therefore,  liable  to excise duty.  The question  regarding the  exigibility  of  asbestos fibre to  excise  duty  under Tariff Item 22-F thus stands concluded by the said decision. The  Union  of  India cannot be allowed  to  re-agitate  the question  which  already  stands  decided.   What  has  been referred  to this bench is whether the decision in the  case of Khandelwal Engineering requires reconsideration.  This is the  only  aspect  of the case to which we have  to  address ourselves.   In  doing  so we proceed on the basis  that  it stands  concluded that the asbestos fibre which was imported had  not  undergone any process of manufacture and  was  not liable to excise duty.

     Chapter  V of the Customs Act, 1962 deals with levy of and  exemption  from  customs  duty.  Section  12  which  is contained in this Chapter reads as follows:

     SECTION 12.  Dutiable goods - (1) Except as otherwise provided in this Act, or any other law for the time being in force,  duties  of customs shall be levied at such rates  as may  be specified under [the Customs Tariff Act, 1975 (51 of 1975)],  or  any other law for the time being in  force,  on goods imported into, or exported from, India.

     [(2) The provisions of such-section (1) shall apply in respect  of all goods belonging to Government as they  apply in respect of goods not belonging to Government.]

     The  Customs  Tariff  Act, 1975 was enacted so  as  to consolidate  and  amend  the law relating to  customs  duty. Sections  2  and  3 of the said Act read  as  follows:   2. Duties  specified in the Schedules to be levied - The  rates at which duties of customs shall be levied under the Customs Act,  1962  (25  of 1962), are specified in  the  First  and Second Schedules.

     3.  Levy of additional duty equal to excise duty - (1) Any article which is imported into India shall, in addition, be  liable to a duty (hereafter in this section referred  to as  the  additional duty) equal to the excise duty  for  the time  being  leviable  on  a like  article  if  produced  or manufactured  in  India  and if such excise duty on  a  like article  is  leviable  at any percentage of its  value,  the additional  duty  to which the imported article shall be  so liable  shall be calculated at that percentage of the  value of the imported article.

     Explanation  -  In this section, the  expression  the excise duty for the time being leviable on a like article if produced or manufactured in India means the excise duty for the  time  being in force which would be leviable on a  like article  if produced or manufactured in India or, if a  like

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article  is not so produced or manufactured, which would  be leviable  on  the class or description of articles to  which the imported article belongs and where such duty is leviable at different rates, the highest duty.

     (2)  For the purpose of calculating under this section the additional duty on any imported article, where such duty is leviable at any percentage of its value, the value of the imported  article shall, notwithstanding anything  contained in  Section 14 of the Customs Act, 1962 (52 of 1962), be the aggreage of -

     (i) the value of the imported article determined under sub-  section (1) of the said Section 14 or the tariff value of such article fixed under sub-section (2) of that section, as the case may be;  and

     (ii)  any  duty of customs chargeable on that  article under  Section 12 of the Customs Act, 1962 (52 of 1962), and any  sum  chargeable on that article under any law  for  the time  being  in  force as an addition to, and  in  the  same manner  as  a  duty of customs, but nor including  the  duty referred to in sub-section (1).

     (3)  If the Central Government is satisfied that it is necessary  in  the public interest to levy on  any  imported article  [whether  on  such article duty is  leviable  under sub-section  (1)  or  not]  such additional  duty  as  would counter-balance   the  excise  duty   leviable  on  any  raw materials, components and ingredients of the same nature as, or  similar to those, used in the production or  manufacture of  such  article, it may, by notification in  the  Official Gazette,  direct  that  such   imported  article  shall,  in addition,  be liable to an additional duty representing such portion  of the excise duty leviable on such  raw-materials, components  and  ingredients  as,  in either  case,  may  be determined  by rules made by the Central Government in  this behalf.

     (4)   In  making  any  rules   for  the  purposes   of sub-section (3), the Central Government shall have regard to the  average  quantum of the excise duty payable on the  raw materials,  components or ingredients used in the production or manufacture of such like article.

     (5) The duty chargeable under this section shall be in addition  to any other duty imposed under this Act or  under any other law for the time being in force.

     (6)  The  provisions of the Customs Act, 1962  (52  of 1962),  and  the  rules  and  regulations  made  thereunder, including those relating todraw-backs, refunds and exemption from  duties,  shall,  so far as may be, apply to  the  duty chargeable  under this section as they apply in relation  to the duties leviable under that Act.

     Section  3(1) of the Customs Tariff Act, 1975 provides for  levy  of  an additional duty.  The duty  is,  in  other words,  in  addition  to  the customs  duty  leviable  under Section  12  of the Customs Act read with Section 2  of  the Customs  Tariff  Act.  Secondly this duty is leviable  at  a rate equal to the excise duty for the time being leviable on a  like article to the one which is imported if produced  or

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manufactured  in India.  The explanation to this sub-section expands  the meaning of the expression the excise duty  for the  time  being leviable on a like article if  produced  or manufactured  in  India.  The explanation to Section 3  has two  limbs.   The  first  limb   clarifies  that  the   duty chargeable  under  sub-section (1) would be the excise  duty for the time being leviable on a like article if produced or manufactured  in India.  The condition precedent for levy of additional duty thus contemplated by the explanation is that the  article  is  produced or manufactured  in  India.   The second  limb to the explanation deals with a situation where a  like  article is not so produced or manufactured.   The use  of  the  word  so  implies  that  the  production  or manufacture  referred to in the second limb is relatable  to the  use of that expression in the first limb which is of  a like article being produced or manufactured in India.

     The  words if produced or manufactured in India does not  mean that the like article should be actually  produced or  manufactured  in  India.  As per the explanation  if  an imported  article  is  one which has  been  manufactured  or produced  then  it  must  be presumed, for  the  purpose  of Section 3(1), that such article can likewise be manufactured or  produced  in  India.   For  the  purpose  of  attracting additional  duty  under  Section  3  on  the  import  of   a manufactured  or produced article the actual manufacture  or production  of a like article in India is not necessary.  As observed  by  this  Court  in Thermax  Private  Limited  Vs. Collector  of  Customs,  Bombay [(1992) 4 SCC  440  at  page 452-453  that  Section  3  (1) of  the  Customs  Tariff  Act specifically  mandates  that the CVD will be equal  to  the excise duty for the time being leviable on a like article if produced  or manufactured in India.  In other words, we have to  forget  that  the goods are imported, imagine  that  the importer  had manufactured the goods in India and  determine the  amount  of excise duty that he would have  been  called upon  to  pay  in that event. To our mind  the  genesis  of Section  3(1) of Customs Tariff Act has been brought out  in the  aforesaid  observations of this Court, namely, for  the purpose of saying what amount, if any, of additional duty is leviable  under  Section 3(1) of the Customs Tariff Act,  it has  to  be  imagined that the articles  imported  had  been manufactured  or  produced  in India and then  to  see  what amount of excise duty was leviable thereon.

     Section  12  of the Customs Act levies duty  on  goods imported into India at such rates as may be specified in the Customs  Tariff  Act, 1975.  When we turn to Customs  Tariff Act  1975,  it is Section 2 which states that the  rates  at which  duties of customs are to be levied under Customs  Act 1962  are those which are specified in the First and  Second Schedules of the Customs Tariff Act, 1975.  In Section 12 of the  Customs  Act  there  is no reference  to  any  specific provision  of  the Customs Tariff Act 1975.  In other  words for  the purpose of determining the levy of customs duty  on goods  imported into India what is relevant is Section 12 of the Customs Act read with Section 2.

     On  the  other  hand  levy of  additional  duty  under Section  3  is equal to the excise duty for the  time  being leviable on the like article which is imported into India if produced  or manufactured in India.  The rate of  additional duty under Section 3(1) on an article imported into India is not  relatable  to the First and the Second Schedule of  the Customs  Act  but the additional duty if leviable has to  be

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equal  to the excise duty which is leviable under the Excise Act.   This  itself shows that the charging section for  the levy of additional duty is not Section 12 of the Customs Act but is Section3 of the Customs Tariff Act, 1975.  This apart sub-sections  (3),  (5)  and  (6)  of  Section  3  refer  to additional  duty  as being leviable under sub- section  (1). In  sub-section (5), for instance, it is clearly stated that the  duty chargeable under Section 3 shall be in addition to any other duty imposed under this Act or under any other law for the time being in force.

     There are different types of customs duty levied under different  acts or rules.  Some of them are;  (a) a duty  of customs  chargeable  under  Section 12 of the  Customs  Act, 1962;  (b) the duty in question, namely, under Section 3 (1) of  the  Customs  Tariff Act;  c additional duty  levied  on raw-materials,  components  and ingredients under Section  3 (3)  of  the  Customs Tariff Act;  and (d)  duty  chargeable under  Section 9A of the Customs Tariff Act, 1975.   Customs Act  1962 and the Customs Tariff Act, 1975 are two  separate independent  statutes.  Merely because the incidence of  tax under  Section  3 of the Customs Tariff Act, 1975 arises  on the   import  of  the  articles   into  India  it  does  not necessarily  mean that the Customs Tariff Act cannot provide for  the  charging  of a duty which is  independent  of  the customs duty leviable under the Customs Act.

     The  Customs  Tariff  Act, 1975 was  preceded  by  the Indian  Tariff  Act, 1934.  Section 2 A of the  Tariff  Act, 1934 provided for levy of countervailing duty.  This section stipulated  that  any article which was imported into  India shall be liable to customs duty equal to the excise duty for the  time  being leviable on a like article if  produced  or manufactured  in  India.   In the notes to  clauses  to  the Customs  Tariff  Bill  1975 with regard to clause 3  it  was stated  that  Clause 3 provides for the levy of  additional duty  on  an imported article to counter-balance the  excise duty  leviable on the like article made indigenously, or  on the  indigenous  raw  materials, components  or  ingredients which  go  into the making of the like  indigenous  article. This  provision  corresponds to Section 2-A of the  existing Act,  and  is  necessary to safeguard the interests  of  the manufacturers  in India.  Apart from the plain language  of the  Customs Tariff Act, 1975 even the notes to clauses show the  legislative intent of providing for a charging  section in  the Tariff Act 1975 for enabling the levy of  additional duty  to be equal to the amount of excise duty leviable on a like article if produced or manufactured in India was with a view  to  safeguard  the interests of the  manufacturers  in India.  Even though the impost under Section 3 is not called a  countervailing  duty there can be little doubt that  this levy  under Section 3 is with a view to levy additional duty on  an imported article so as to counter-balance the  excise duty  leviable  on the like article indigenously  made.   In other  words  Section 3 of the Customs Tariff Act  has  been enacted  to provide for a level playing field to the present or future manufacturers of the like articles in India.

     In  the  case of Khandelwal Metal & Engineering  Works the applicability of Section 3 (1) of the Customs Tariff Act arose  in  connection with the import of brass  scrap.   The contention  of  the  importers was that no  additional  duty could be levied because imported brass scrap which consisted of damaged articles like taps and pipes was not manufactured in  India  or elsewhere.  It was submitted  that  additional

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duty  of customs under Section 3 (1) could be levied only if the  article which was imported into India was  manufactured or  produced here.  Dealing with this contention this  Court held that the charging Section was Section 12 of the Customs Act  and not Section 3(1) of the Tariff Act.  At page 627 it observed  that  The levy specified in Section 3(1)  of  the Tariff  Act  is a supplementary levy, in enhancement of  the levy  charged  by Section 12 of the Customs Act and  with  a different  base constituting the measure of the impost.   In other  words, the scheme embodied in Section 12 is amplified by  what  is  provided in Section 3(1).   The  customs  duty charged  under Section 12 is extended by an additional  duty confined  to  imported articles in the measure set forth  in Section  3(1).  Thus, the additional duty which is mentioned in  Section 3 (1) of the Tariff Act is not in the nature  of the  countervailing duty.  At page 628 it held that We are unable to accept the argument of the appellants that Section 3(1)  of the Tariff Act is an independent, charging  section or  that, the additional duty which it speaks of is not  a duty  of  customs  but  is  a  countervailing  duty.  After referring  to the explanation to Section 3 (1) the Bench  at page 630 held that These provisions leave no doubt that the duty  referred to in Section 3(1) of the Tariff Act does not bear  any  nexus  with the nature and quality of  the  goods imported  into  India.   On  this  aspect  the  Court  then concluded  by observing at page 630 that For these reasons, we  must  reject  the argument of Mr.  Sorabjee and  of  the other  learned counsel for the appellants that Section  3(1) of  the  Tariff  Act is not attracted because,  the  damaged articles,  which  are  in  the nature of  brass  scrap,  are outside  the scope of that since, such articles are not  and cannot  be  produced  or manufactured. The  basis  of  this conclusion,  therefore,  was  that  additional  duty  was  a customs  duty,  Section  12  of the Customs  Act  being  the charging  section, which was leviable on the import of goods into  India and it had no nexus with the nature and  quality of goods so imported.  Another reason which was given by the Bench  while  upholding  the levy was that the  brass  scrap which  was imported was a bye-product and was, therefore, in any case a manufactured product.

     The  decision  in Khandewal Metal & Engineering  Works case  to  the  effect  that additional duty  of  customs  is leviable  merely on the import of the article even if it  is not  manufactured or produced in India does not appear to be correct  inasmuch  as  the said conclusion is based  on  the premise  that Section 12 of the Customs Act, and not Section 3(1) of the Tariff Act, is the charging section.  As we have already observed on a correct interpretation of the relevant provisions  of the two acts there can be no manner of  doubt that  additional duty which is levied under Section 3(1)  of the  Tariff Act is independent of the customs duty which  is levied  under  Section 12 of the Customs Act.  Secondly,  it has  been  held by the Three Judge Bench in this  case  that excise  duty  is  leviable  if  the  article  has  undergone production  or  manufacture.  The observation in  Khandelwal Metal  & Engineering Works case which seems to suggest  that even  if  no process of manufacture or production has  taken place  the  imported articles can still be subjected to  the levy  of  additional  duty  does not appear  to  be  correct inasmuch  as the measure for levy of additional duty is  the quantum  of excise duty leviable on a similar article  under the Excise Act.  Duty under the Excise Act can be levied, as has  been  held  earlier,  if  the  article  has  come  into existence  as  a  result of production or  manufacture.   In

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other  words  when  articles  which   are  not  produced  or manufactured cannot be subjected to levy of excise duty then on  the  import of like articles no additional duty  can  be levied under the Customs Tariff Act.  The levy of additional duty  being with a view to provide for counter balancing the excise  duty  leviable, we are clearly of the  opinion  that additional  duty  can  be levied only if on a  like  article excise  duty  could be levied.  The decision  in  Khandelwal Engineering  Works  case to the extent it takes  a  contrary view,  does  not  appear to lay down the correct  law.   Sh. Vaidyanathan  contended that this Court should be  reluctant to reconsider a judgment which has held the field for a long time,  but in our opinion public interest requires that  law be  correctly interpretted more so in a taxing statute where the  ultimate burden may fall on the common man.  We  hasten to  add  that we are not over-ruling the Khandelwal Metal  & Engineering  Works  case in its entirety because  the  Court also  held in that case that brass scrap was in any case  an item  which was manufactured and, therefore, excise duty was leviable.   We  have  not examined, in  the  present  cases, whether  brass  scrap  can  or   cannot  be  regarded  as  a manufactured  item  for that question does not arise in  the present cases.

     As  a  result of the aforesaid discussion  it  follows that  on  the  asbestos  fibre   imported  into  India   the appellants  were not liable to pay any duty under Section  3 of the Customs Tariff Act.  The High Court, therefore, erred in discussing the writ petitions filed by the appellants.

     What  relief is to be granted in these appeals is then the question.  It was contended on behalf of the respondents that the duty demanded under Section 3 of the Customs Tariff Act must have been added in working out the selling price of the  ultimate  product in which the imported fibre was  used and  applying the principle of unjust enrichment not  only no  refund of duty paid should be ordered but the appellants should pay an amount equal to the extent of duty realised by them  which  they  had passed on to  their  customers.   The learned  counsels  for  the appellants  submitted  that  the principle  of unjust enrichment has no application in  the present  case where the duty was on the raw material and not on  the  finished  product.  This apart, it  was  submitted, there  is  nothing  on  record to show that  this  duty  was ultimately included in the selling price of the manufactured goods.

     During  the  pendency of these appeals interim  orders were  passed as a result of which some amount of  additional duty was paid by the appellants, approximately fifty percent of  the demand raised, and in respect of the balance  amount bank  guarantees  were  furnished.  In the  absence  of  any material  on record we do not propose to decide whether  the principle of unjust enrichment is applicable in these cases. Normally  with the appeals being allowed the consequence  of refund  of additional duty paid follows.  In these  appeals, however,  we have held that the decision in Khandelwal Metal &  Engineering Works case does not lay down the correct  law as  indicated  in  this  judgment.    Having  come  to  this conclusion  about  fourteen  years  after  the  decision  in Khandelwal  Metal  & Engineering Works case was rendered  it would  not be equitable to require the refund of  additional duty  paid into the public exchequer.  At the same time  the appellants having succeeded in these appeals cannot be asked to pay an additional amount towards the illegal demand.

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     We,  accordingly, allow these appeals with the  result that  the  writ  petitions  filed by  the  appellants  stand allowed.   The demand of additional duty from the appellants is quashed but the respondents shall not be liable to refund any  additional  duty realised so far from  the  appellants. The parties will bear their own costs.