REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NOS. 1878-1880 OF 2004

Commissioner of Central Excise, New Delhi .... Appellant(s)

Versus

M/s Hari Chand Shri Gopal & Others etc. etc. …. Respondent(s)

[with CIVIL APPEAL NO. 1631 of 2001 and CIVIL APPEAL NOS.

568-569 of 2009]

J U D G M E N T

K. S. Panicker Radhakrishnan, J.

1.The question that falls for consideration in these appeals is

whether a manufacturer of a specified final product falling under

the schedule of the Central Excise Tariff Act, 1985 (in short “the

Tariff Act”) is eligible to get the benefit of exemption from remission

of excise duty on specified intermediate goods as per Notification

no. 121/94-CE dated 11.8.1994, if captively consumed for the

manufacture of final products on the ground that the records kept

by it at the recipient end would indicate its “intended use” and

“substantial compliance” of the procedure set out in Chapter X of

the Central Excise Rules, 1944 (in short ’the Excise Rules”).

2.The above question was decided by the Customs, Excise and

Service Tax Appellate Tribunal (in short ‘the Tribunal”) in favour of

the respondents-assessees, relying upon the judgments of this

Court in Thermax Private Ltd. v. Collector of Customs (Bombay)

New Custom House (1992) 4 SCC 440 and Collector of Central

Excise, Jaipur v. J.K. Synthetics (2000) 10 SCC 393 on the

ground of “intended use” and the principle of “substantial

compliance”. The matter came up before the three Judge Bench of

this Court which doubted the correctness and the applicability of

the above mentioned judgments and took the view that the

exemption notification called for strict interpretation so far as the

eligibility is concerned especially when an assessee seeks exemption

of duty under a notification issued by the Central Government in

exercise of the powers conferred by Sub-section (1) of Section 5A of

the Central Excise and Salt Act 1944, read with Sub-section(3) of

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Section 3 of the Additional Duties of Excise (Goods of Specified

Importance) Act 1957, which called for compliance of the procedure

set out in Chapter X of the Central Excise Rules 1944. Further, it

was also observed that in Thermax Private Ltd. (supra) and J.K.

Synthetics (supra), this Court was dealt with a situation where

goods were imported, from outside the country, unlike the present

case where specified intermediate goods were locally manufactured,

in some other units of the respondents. The Court ordered that the

matter required reconsideration and referred the matter to a Larger

Bench. The order of reference is reported in The Commissioner of

Central Excise, New Delhi v. Hari Chand Shri Gopal etc. (2005)

8 SCC 164.

3.We may first refer to the facts in Civil Appeal Nos. 1878-1880

of 2004, which is taken as the leading case.

FACTS:

4.The respondents herein M/s Gopal Industries, M/s Hari

Chand Shri Gopal and M/s Gopal Zarda Udyog were engaged in the

manufacture of excisable goods viz. preparation containing chewing

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tobacco falling under Chapter Heading no. 2404.40 of the Tariff Act,

then chargeable to nil rate of duty, which was made leviable to

central excise duty with effect from 1.3.1994. The Intelligence Wing

of the Department came to know that the respondents had been

manufacturing the said goods without applying/obtaining the

certificate of registration as required under Rule 174 of the Excise

Rules and had been removing the same clandestinely from their

factories without payment of central excise duty leviable thereon

and without following any of the prescribed procedures. It was

noticed that a major portion of the above goods manufactured was

consigned to M/s Gopal Zarda Udyog (Meerut), M/s Hari Chand

Shri Gopal, Baddi District, Solan (H.P.) and M/s Gopal Industries,

Baddi (H.P.) under the cover of ‘transfer challans’ describing therein

the said goods as “ADDICTIVE MIXTURES” or “KIMAM/K”. On

28.9.1996, the factories of the respondents at Delhi were inspected

by the Central Excise (Preventive) Officer of MOD IV, Delhi and took

the samples of the finished products and detailed statements were

also recorded from the partners of the firms. The Central Excise

Officers also visited the various factories of the respondents at

Solan and Baddi on 3.10.1996 and it was noticed that the addictive

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Mixture (Kimam) manufactured at the factories at Delhi was being

clandestinely removed for the manufacturing of chewing tobacco.

The Officers noticed that the respondents were manufacturing the

excisable goods Kimam falling under the Tariff Act under Chapter

Sub-heading no. 2404.49 (up to 22.7.1996) and, with effect from

23.7.1996, covered under Chapter Sub-heading no. 2404.40,

packed the same in the containers of different capacities as per the

requirement of buyer/consumer without obtaining Central Excise

Registration Certificate in contravention of the provisions of Section

8 of the Tariff Act read with Rule 174 of the Excise Rules up till

14.10.1996 and removed the same from their factories clandestinely

without payment of central excise duty in contravention of the

provisions of Rules 9(1), 52A, 53, 54, 173B, 173C, 173F and 226 of

the Excise Rules.

5.The Central Excise Officers noticed that, during the period

from 18.3.1994 to 15.4.1995, M/s Gopal Zarda Udyog had

manufactured and removed from their factory a total quantity of

1,52,226.150 Kgs. of preparation containing Kimam, collectively

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valued at Rs.15,27,90,675.00 and the amount of duty involved was

fixed at Rs.6,14,17,770.00.

6.M/s Gopal Industries, during the period from 16.6.1995 to

26.9.1996, had manufactured and removed from their factory a

total quantity of 2,66,648.800 kgs. of preparation containing

Kimam collectively valued at Rs.16,26,68,569.00 and the amount of

duty involved was fixed at Rs.8,13,34,285.00.

7.M/s Hari Chand Shri Gopal also, during the period from

14.6.1995 to 24.9.1996 had manufactured and removed from their

factory a total quantity of 1,51,054.900 kgs. of preparation

containing Kimam collectively valued at Rs.15,86,77,319.00 and the

amount of duty involved was fixed at Rs.7,93,38.660.00.

8.Consequently, on 25.3.1997, notices were issued to the

respondents and their partners to show cause why the amounts of

duty involved should not be demanded from them jointly and

severally under Rule 9(2) of the Excise Rules read with the proviso

to Section 11A(1) of the Tariff Act and interest thereon under

Section 11AB of the Tariff Act, be not demanded from them. Penalty

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under Rule 173Q of the Excise Rules read with Section 11AC of the

Tariff Act and Rule 209A of the Excise Rules was also demanded.

In addition to above, the respondents were also asked to show

cause why the land, building, plant and machinery used in their

respective factories for the manufacture of Kimam should not be

confiscated under Rule 173Q(2) of the Excise Rules.

9.The respondents filed detailed objections to the show cause

notices and disputed their liability and also claimed exemption

under the Notification no. 121/94-CE. The Commissioner (Excise)

by his order dated 20.5.1998 rejected the objections filed by the

respondents against the show cause notices and determined that

M/s Gopal Zarda Udyog, M/s Gopal Industries and M/s Hari

Chand Shri Gopal were liable to pay central excise duty of

Rs.6,14,17,770/-, Rs.8,13,34,285/- and Rs.7,93,38,660/-

respectively and also imposed the penalty of Rs.16,00,000/-,

Rs.18,00,000/- and Rs.17,00,000/- on them under Rule 173Q of

the Excise Rules and ordered confiscation of the goods seized from

the premises of M/s Gopal Industries and M/s Hari Chand Shri

Gopal respectively, with permission to redeem the confiscated goods

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on redemption of fines of Rs. 5,00,000/- and Rs.3,20,000/-

respectively.

10.Aggrieved by the above mentioned orders, appeals were

preferred before the Tribunal and the Tribunal vide order dated

01.10.1999 concurred with the findings of the Adjudicating

Commissioner on duty liability on the goods in question and also on

the issue of limitation as well as the claim for proforma

credit/modvat credit, but ordered re-examination of the limited

question of the applicability of Notification 121/94-CE dated

11.8.1994 since the respondents had raised the contention that

they had substantially complied with the procedures laid down in

Chapter X. The matter was then reconsidered by the Commissioner

as directed by the Tribunal. The respondents contended before the

Commissioner that they had despatched the goods to their final

manufacturing units though transferring challans and the receipts

were recorded in Form-IV Register/Stock Register and the

utilization of the goods was recorded in RG-12 Register. Further, it

was also stated that the final products manufactured by the

respondents could be ascertained from RG-1 Register maintained at

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the recipient end and those records would be sufficient to establish

use of the goods and establish the plea of substantial compliance of

the procedure set out in Chapter X for duty exemption.

11.The Commissioner rejected all the contentions vide his order

dated 16.07.2002 and held that the benefit of the exemption

notification would be available only if the procedures laid down in

Chapter X were complied with and that the records produced by the

respondents would not substantiate a plea of substantial

compliance of the procedure laid down in the above mentioned

Chapter. The imposition of the duty liability, interest and penalty

was therefore confirmed.

12.The respondents, carried the matter in appeal before the

Tribunal. The Tribunal, we have already indicated, placed reliance

on the judgments of this Court in Thermax Private Ltd. (supra)

and J.K. Synthetics (supra) and took the view that the benefit of

the exemption notification should not be denied if “intended use” of

the goods was established, though there was non-compliance of the

procedural conditions of Chapter X. Appeals were accordingly

allowed and the order of the Commissioner was set aside.

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Aggrieved by the said order of the Tribunal, these appeals have been

preferred by the Commissioner of Central Excise, New Delhi.

13.Mr. Vivek Tankha, learned Additional Solicitor General of India

appearing for the Revenue, submitted that the benefit of the

Notification no. 121/94-CE dated 11.8.94 would be available to the

respondents only if the procedures prescribed under Chapter X are

strictly complied with. Learned ASG submitted that the duty

liability was confirmed by the Tribunal which would indicate that

the respondents at the suppliers’ end did contravene the provisions

of Rules 9(1), 52A, 53, 54, 173B, 173C, 173F and 226 of the Excise

Rules and it is, due to that reason, that show cause notices dated

25.03.1997 were served on the respondents. Learned ASG

submitted that the mere fact that the respondents had maintained

some records at the recipient end would not be sufficient to satisfy

the “intended use” or the plea of “substantial compliance” of the

procedure laid down in Chapter X of the Excise Rules. Learned

counsel submitted that an exemption notification must be strictly

complied with and the assessee should bring himself within the

ambit of the notification. Reference was made to the decisions of

10

this Court reported in Novopan India Ltd., Hyderabad v.

Collector of Central Excise & Customs, Hyderabad (1994) Supp.

3 SCC 606, Rajasthan Spinning and Weaving Mills Limited,

Bhilwara, Rajasthan v. Collector of Central Excise, Jaipur,

Rajasthan (1995) 4 SCC 473, Commissioner of Central Excise v.

M.P.V. & Engineering Industries (2003) 5 SCC 333,

Commissioner of Central Excise, Trichy v. Rukmani Pakkwell

Traders (2004) 11 SCC 801, Commissioner of Central Excise,

Chandigarh-I v. Mahaan Dairies (2004) 11 SCC 798,

Commissioner of Central Excise, Allahabad v. Ginni Filaments

Ltd. (2005) 3 SCC 378, Commissioner of Customs (Imports),

Mumbai v. Tullow India Operations Ltd. (2005) 13 SCC 789,

Tata Iron & Steel Co. Ltd. v. State of Jharkhand and Ors.

(2005) 4 SCC 272, Sarabhai M. Chemicals v. Commissioner of

Central Excise, Vadodara (2005) 2 SCC 168, State of

Jharkhand and Others v. Tata Cummins Ltd. and Another

(2006) 4 SCC 57, A.P. Steel Re-Rolling Mill Ltd. etc. v. State of

Kerala & Ors. (2007) 2 SCC 725, State of Orissa and others v.

Tata Sponge Iron Ltd. (2007) 8 SCC 189, Commissioner of

Central Excise, Jaipur v. Mewar Bartan Nirmal Udyog 2008

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(231) ELT 27 (SC), State of Haryana v. Samtel India Ltd. 2008

(15) VST 176 (SC) and G.P. Ceramics Pvt. Ltd. v. Commissioner,

Trade Tax, Uttar Pradesh (2009) 2 SCC 90.

14.Shri Harish Salve, learned senior counsel appearing for the

assessee-respondents, on the other hand, contended that the

assessee had produced documentary evidence to prove that the

entire quantity of kimam were transferred from their one unit to

another and was utilized in the manufacture of branded chewing

tobacco and cleared on payment of duty. Further, it was also stated

that the assessee had produced the transfer challans under which

the Kimam was transferred to the other unit. Learned senior

counsel also made reference to Form IV Register/Stock Register

regarding receipt of the Kimam and also to Form RG-12, kept for

the manufacture of excisable tobacco products. Reference was

made to RG-1 Register, maintained under Rules 47, 53 and 173G.

Learned senior counsel contended that the details furnished in

those records would be sufficient to establish the intended use (the

actual use) of Kimam for the manufacture of final products.

Learned senior counsel submitted that, as per the decisions of

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Thermax Private Ltd. (supra) and J. K. Synthetics (supra), the

benefit of exemption notification cannot be denied if there has been

a substantial compliance of the procedure laid down in Chapter X

and intended use of the goods for the manufacture of final product

has been established. Learned senior counsel submitted that the

conditions stipulated in Chapter X are only procedural in nature

and hence directory, warranting liberal construction, and if so

construed, the benefit of the exemption notification cannot be

denied. Learned senior counsel submitted that the Tribunals and

some of the High Courts are following the above principle, uniformly

applying the principles laid down in Thermax Private Ltd. (supra)

and J.K. Synthetics Ltd. (supra)

15.We may, before examining various contentions raised by the

respective parties, point out that the Respondents had earlier

approached this Court by filing C.A. Nos. 5747-5749 of 2000,

challenging the order of the Tribunal stating that Kimam was

excisable and that the department was right in invoking the

extended period of limitation under the proviso to Section 11(A)(1) of

the Excise Act. This Court partly allowed the appeals holding that

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the department was not entitled to invoke the extended period of

limitation under the proviso to Section 11(A)(1) of the Excise Act,

but held that the addictive mixture Kimam was excisable and

classifiable under Sub-heading 2404.49/2404.40. This Court also

recorded a finding that although there was contravention of the

provisions of Section 6 read with Rule 174 and that they had not

observed regulations in the units at Delhi for the manufacture of

excisable goods, there was no intend to evade payment of duty. The

judgment is reported in Gopal Zarda Udyog v. Commissioner of

Central Excise (2005) 8 SCC 157.

16.In this case, we are only concerned with the question whether

the respondents are entitled to get the benefit of the exemption

notification dated 11.8.1994 on the ground of “intended use” and

“substantial compliance” of the procedure set out in Chapter X of

the Excise Rules.

17.Notification no. 121/94-CE dated 11.8.1994 was issued by the

Central Government in exercise of its powers conferred by sub-

section (1) of Section 5A of the Central Excises and Salt Act, 1944 (1

of 1994) read with sub-section (3) of Section 3 of the Additional

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Duties of Excise (Goods of Special Importance) Act, 1957 (58 of

1957) in the public interest for exempting certain specified

intermediate goods if those goods were captively consumed in the

manufacture of specified final products, falling under heading

numbers or sub-heading numbers of the Schedule to the Tariff Act.

Notification also stipulated that where such use of inputs was in a

factory of a manufacturer, different from his factory where the

goods had been produced, the exemption contained in this

notification would be allowable subject to the observance of the

procedure set out in Chapter X of the Excise Rules. The table, with

which we are concerned, is given below:

S. NoDescription of final

products

Heading number

or sub-heading

number of final

products

Heading

number or sub-

heading

number of

inputs

(1) (2) (3) (4)

1.xxx xxx xxx xxx xxx xxxxxx xxx

2.Chewing tobacco

including preparations

commonly known as

“Khara Masala”,

“Kimam”, “Dokta”,

“Zarda”, “Sukha” and

“Surti”

2401.41 2404.49

xxxxxx xxx xxx xxx xxx xxxxxx xxx

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18.The compliance of the provisions of Chapter X is a pre-

condition for claiming exemption from payment of excise duty on

goods, which otherwise attracted duty. Show cause notices were

issued to the respondents since they had manufactured the

excisable goods (at the supplier end) without obtaining registration

under Section 6 read with Rule 174 by contravening the provisions

of Rules 9(1), 52A, 53, 54, 173B, 173C, 173F and 226 of the Rules

for which duty liability, interest thereon and penalty were imposed.

Even assuming that the respondents were eligible for exemption

from duty, the respondents could not be absolved from the legal

obligation to comply with the statutory requirements for the

manufacture of excisable goods at the supplier end.

19.The purpose and object of the notification dated 11.8.1994

was to exempt those specified intermediate goods, which were

otherwise excisable to duty, and not to exempt or absolve the

respondents from following the statutory requirements for the

manufacture of intermediate excisable goods. The notification

under Chapter X was designed in such a manner to ensure an

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inseparable link between the supplier and recipient of excisable

goods for the manufacture of specified final products. Rule 192 of

Chapter X states that a manufacturer intending to receive duty free

goods under remission is required to make an application in Form

R-1 for obtaining excisable goods to be used for special industrial

purpose giving details of the estimated quantity of each class or

variety of goods and the value of such goods likely to be used

during the year, commodities to be manufactured and estimated

output and clearance of each commodity during the year, manner of

manufacture, purpose for which manufactured product is supplied

and the source from which excisable goods will be obtained.

20.Based on the details furnished in Form R-1, the Registering

Authority has to consider granting permission from remission of

duty. For the said purpose, R-2 Certificate is required to be issued

specifying that the registration certificate is meant for obtaining the

excisable goods under Rule 192. On the basis of R-2 Certificate,

the manufacturer become eligible for getting the excisable goods for

which the remission of duty has been sought. Further, the

applicant is also required to execute a bond with security in Form

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B-8, as required under Rule 192 and the Collector can put further

conditions for filing the B-16 Bond or B-17 Bond during the

permission granted for remission of duty. On such request and

after complying with all the statutory formalities, the jurisdictional

officer is required to issue C-2 Certificate and, on the strength of

that certificate, the applicant can obtain duty free goods. The

jurisdictional officer has also to certify that the said manufacturer

is registered in their Range under Rule 192 and is authorized for

obtaining excisable goods at NIL/concessional rate of duty for use

in special industrial purpose for the manufacture of specified

excisable goods at their factory. Further, on the strength of C-2

Certificate, the excisable goods can be removed from the factory of

source manufacturer without payment of duty or concessional rate

of duty, as the case may be. Further, as per sub-rule (1) of Rule

194, the applicant is required to maintain proper records of such

goods indicating quantity, value, rate and amount of duty, marks

and number/wastage etc. in Form R.G.16 register. Further, the

applicant is also required to file quarterly return in the form of

R.T.11 and in that return, the registered person had to make

entries regarding details of receipt of goods, quantities issued for

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manufacturing, wastage or other losses, description of process in

which excisable goods to be used etc. The supplier of goods is

required to be registered with Central Excise under Rule 174 and is

also required to mention in Column 10(i) or 10(ii) of RT-12 returns

the details of goods despatched to the assessee availing facility

under Chapter X. The supplier of goods can remove the goods only

under proper gate pass GP-1 and is required to mention the details

of CT-2 on the gate pass.

21.Rule 196 provides for payment of duty by the recipient if the

goods obtained under Rule 192 are not accounted for or used in the

manner prescribed under these rules. Similarly, Rule 196A

stipulates that surplus goods so received under Rule 192 can be

cleared on payment of duty. Rule 196AA provides for transfer of

such goods received under Rule 192 to another manufacturer who

has been granted registration under Rule 192 with the prior

approval of the proper officer. Rule 196B provides for the manner

in which goods received under Rule 192 may be disposed of if found

defective or damaged, they can be returned to the original

manufacturer and such returned goods shall be added to the

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original manufacturer and such returned goods shall be added to

the non-duty paid stock of the original manufacturer. Finally, Rule

196BB provides for movement of goods received under Rule 192 as

such, or after partial processing outside the factory for repair and

return. The applicant, though registered under Rule 174, can

receive the remitted goods for use in special industrial purpose only

if it gets an endorsement to that effect on the Registration

Certificate, so given in Form R-2, in advance which in this case was

obtained only on 22.10.1996, after the event. Further, Column 5

of Schedule of R-1 certificate clearly enjoins upon the recipient unit

to furnish additional information viz. description of goods to be

obtained for industrial purpose, estimate quantity in the year,

details of the supplier of the goods etc. Further, it is on the basis of

R-2 Certificate, the jurisdictional Range Officer issues a CT-2

certificate (Certificate for Transfer of Goods) under the cover of

which the remitted goods have to move from the supplier unit to the

recipient unit. CT-2 certificate is required to be shown to the

supplier unit who shall mention the CT-2 number on the Gate Pass

before delivering the goods without payment of duty on the strength

of CT-2 certificate. Compliance of the above mentioned

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requirements, stipulated in Chapter X, is a pre-requisite for getting

exemption from the remission of excise duty on the specified goods.

Exemption Clause – Strict Construction

22.The law is well settled that a person who claims exemption or

concession has to establish that he is entitled to that exemption or

concession. A provision providing for an exemption, concession or

exception, as the case may be, has to be construed strictly with

certain exceptions depending upon the settings on which the

provision has been placed in the Statute and the object and

purpose to be achieved. If exemption is available on complying

with certain conditions, the conditions have to be complied with.

The mandatory requirements of those conditions must be obeyed or

fulfilled exactly, though at times, some latitude can be shown, if

there is a failure to comply with some requirements which are

directory in nature, the non-compliance of which would not affect

the essence or substance of the notification granting exemption. In

Novopan Indian Ltd. (supra), this Court held that a person,

invoking an exception or exemption provisions, to relieve him of tax

liability must establish clearly that he is covered by the said

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provisions and, in case of doubt or ambiguity, the benefit of it must

go to the State. A Constitution Bench of this Court in Hansraj

Gordhandas v. H.H. Dave (1996) 2 SCR 253, held that such a

notification has to be interpreted in the light of the words employed

by it and not on any other basis. This was so held in the context of

the principle that in a taxing statute, there is no room for any

intendment, that regard must be had to the clear meaning of the

words and that the matter should be governed wholly by the

language of the notification, i.e., by the plain terms of the

exemption.

23.Of course, some of the provisions of an exemption notification

may be directory in nature and some are of mandatory in nature. A

distinction between provisions of statute which are of substantive

character and were built in with certain specific objectives of policy,

on the one hand, and those which are merely procedural and

technical in their nature, on the other, must be kept clearly

distinguished. In Tata Iron and Steel Co. Ltd. (supra), this Court

held that the principles as regard construction of an exemption

notification are no longer res integra; whereas the eligibility clause

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in relation to an exemption notification is given strict meaning

wherefor the notification has to be interpreted in terms of its

language, once an assessee satisfies the eligibility clause, the

exemption clause therein may be construed literally. An eligibility

criteria, therefore, deserves a strict construction, although

construction of a condition thereof may be given a liberal meaning if

the same is directory in nature.

DOCTRINE OF SUBSTANTIAL COMPLIANCE AND ‘INTENDED

USE’:

24.The doctrine of substantial compliance is a judicial invention,

equitable in nature, designed to avoid hardship in cases where a

party does all that can reasonably expected of it, but failed or

faulted in some minor or inconsequent aspects which cannot be

described as the “essence” or the “substance” of the requirements.

Like the concept of “reasonableness”, the acceptance or otherwise of

a plea of “substantial compliance” depends upon the facts and

circumstances of each case and the purpose and object to be

achieved and the context of the prerequisites which are essential to

achieve the object and purpose of the rule or the regulation. Such

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a defence cannot be pleaded if a clear statutory prerequisite which

effectuates the object and the purpose of the statute has not been

met. Certainly, it means that the Court should determine whether

the statute has been followed sufficiently so as to carry out the

intent for which the statute was enacted and not a mirror image

type of strict compliance. Substantial compliance means “actual

compliance in respect to the substance essential to every

reasonable objective of the statute” and the court should determine

whether the statute has been followed sufficiently so as to carry out

the intent of the statute and accomplish the reasonable objectives

for which it was passed. Fiscal statute generally seeks to preserve

the need to comply strictly with regulatory requirements that are

important, especially when a party seeks the benefits of an

exemption clause that are important. Substantial compliance of an

enactment is insisted, where mandatory and directory requirements

are lumped together, for in such a case, if mandatory requirements

are complied with, it will be proper to say that the enactment has

been substantially complied with notwithstanding the non-

compliance of directory requirements. In cases where substantial

compliance has been found, there has been actual compliance with

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the statute, albeit procedurally faulty. The doctrine of substantial

compliance seeks to preserve the need to comply strictly with the

conditions or requirements that are important to invoke a tax or

duty exemption and to forgive non-compliance for either

unimportant and tangential requirements or requirements that are

so confusingly or incorrectly written that an earnest effort at

compliance should be accepted. The test for determining the

applicability of the substantial compliance doctrine has been the

subject of a myriad of cases and quite often, the critical question to

be examined is whether the requirements relate to the “substance”

or “essence” of the statute, if so, strict adherence to those

requirements is a precondition to give effect to that doctrine. On

the other hand, if the requirements are procedural or directory in

that they are not of the “essence” of the thing to be done but are

given with a view to the orderly conduct of business, they may be

fulfilled by substantial, if not strict compliance. In other words, a

mere attempted compliance may not be sufficient, but actual

compliance of those factors which are considered as essential.

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25.The details to be furnished in Form No. 1 as per Rule 192 and

the declaration to be made, relate to the “substance” and “essence”

of Chapter X. R-2 Registration Certificate is also pre-requisite to

obtain CT2 Certificate. Further, the execution of bonds as provided

in that chapter is also not an empty formality for obtaining the duty

free excisable goods. Bonds also insist for a declaration. CT-2

Certificate will be issued only if a party gets registered under Form

R-2 from the Registering Authority. Only if CT-2 Certificate is

obtained, the excisable goods could be removed. Form RG16

Register and the details to be furnished in Form RT11 are also

statutory in nature, which relate to the “substance” and “essence”

of the requirements under Chapter X. Indisputedly, those

requirements had not been complied with.

26.The respondents have laid great emphasis on maintenance of

some statutory registers and filing of periodical returns at the

recipient unit, so as to take the shelter under the doctrine of

substantial compliance for remission of duty. Respondents

pointed out that they had identical columns in the registers kept at

the recipient end, hence, the requirement of maintaining separate

26

register at the supplier end and the requirements of Chapter X was

substantially complied with. It may be noted that RG-16 Register

prescribed was specific to Chapter X with the sole intention of

maintaining separate accounts for receipt, issue and usage of duty

free remitted inputs received from the supplier unit. Similarity of

columns and the details furnished therein cannot be considered as

substitute for not maintaining of RG-16 Register or other registers

for remission of duty under Chapter X.

27.We have already indicated that, at the supplier end, no

registration under Rule 174 was obtained and no records were kept.

The applicants, at the recipient end, were also legally obliged to give

various declarations in the statutory forms so as to claim exemption

and such declarations admittedly were not made. Non-compliance

of those conditions enumerated under various rules in Chapter X of

the Excise Rules and non-furnishing of various statutory forms

prescribed under Chapter X, in our view, are fatal to a plea of

substantial compliance and intended use. The respondents,

therefore, on the facts of this case, have not succeeded in

establishing the plea of “intended use” or “the substantial

27

compliance” of the procedure set out in Chapter X so as to claim the

benefit of the exemption notification dated 11.8.1994.

28.We will now examine whether the judgments in Thermax

Private Ltd. (supra) and J.K. Synthetics (supra) require re-

consideration. In Thermax Private Ltd. (supra), the assessee had

cleared imported goods after paying the custom duty as well as the

additional duty (CVD). Later, it was felt that it should have claimed

the concession in respect of CVD on the strength of Notification

nos. 63/85 and 93/76 issued under Section 8 of the Tariff Act.

Therefore, an application for refund of CVD was submitted which

was rejected by the Assistant Collector, but was allowed by the

Collector in appeal. On appeal, the Tribunal took the view that the

assessee had failed to satisfy the conditions laid down in Chapter X.

On appeal by the assessee, this Court took the view that the

Tribunal was in error in holding that the assessee could not get

refund because the procedure of Chapter X of the Excise Rules was

not complied with. This Court mainly relied on the letter of the

Board dated 27.7.1987 wherein it was stated that whenever

intended use of material could be established by the importer, the

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benefit of exemption notification should not be denied on the

imported goods only because the procedural condition falling under

Chapter X was not complied with. It is under such circumstances

that this Court allowed the claim of the assessee and ordered

refund. Reasoning of this Court in Thermax Private Ltd. (supra)

is inapplicable to the facts of the present case. In the instant, case,

we are not concerned with the goods imported from outside the

country. Both the suppliers of specified intermediate goods as

well as manufactures of specified final products are situated in

India and are obliged to follow various statutory provisions, not only

for the manufacture of excisable goods, but also for claiming

exemption under the notification dated 11.8.1994. Consequently,

the plea of intended use of the materials cannot be applied to the

facts of the present case.

29.In J. K. Synthetics (supra), the assessee was the

manufacturer of polyster chips, staple fibre and tow from Mono-

Ethylene Glycol (MEG). On importing those goods, they claimed

exemption from payment of additional duty of customs thereon

because MEG was exempted from the payment of excise duty by

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virtue of notification dated 4.5.1987 issued under Section 8 of the

Tariff Act. In that case, the contention was raised by the Revenue

that the assessee had not followed the conditions laid down in

Chapter X of the Excise Rules. But the Tribunal, on facts, found

that there had been substantial compliance of the procedure by the

assessee, which was approved by this Court without laying down

any principle as such which cannot be applied to the facts of the

present case.

30.Consequently, the decisions of this Court in Thermax Private

Ltd. (supra) and J. K. Synthetics (supra) cannot be applied in all

facts situation and it is declared that the findings recorded in those

decisions would be confined to the facts of those cases.

CIVIL APPEAL NO. 1631 OF 2001

31.Civil Appeal No. 1631 of 2001 arises out of the Order dated

1.12.2000 passed by the Tribunal at New Delhi. The issue involved

in that case is whether the exemption from the payment of central

excise duty was available to the populated Printed Circuit Board

(PCB), manufactured and cleared by the assessee under Notification

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no. 48/94-CE dated 1.3.1994. The Tribunal found that the

assessee was not eligible for the benefit of the notification since the

assessee had not followed the procedure set out in Chapter X of the

Excise Rules by clearing PCB from their unit to the central store at

A-11, Okhla Industrial Area, Phase 1, New Delhi. The Tribunal held

that, under Chapter X, the assessee who wanted to avail of the

benefit of exemption notification had to file application in Form AL-

6 to the jurisdictional Central Excise authorities and had to obtain

L-6 licence and had to follow the other procedures laid down in that

chapter which, in our view, are mandatory requirements for

claiming the exemption from duty in the light of the principles

discussed by us in the other appeals. On facts as well as on law,

we fully endorse the view taken by the Tribunal and the appeal

would stand dismissed.

CIVIL APPEAL NOS. 568-569 OF 2009

32.These appeals have been preferred by the Revenue against the

order dated 6.5.2008 passed by Tribunal at New Delhi, holding that

the assesses are entitled to the benefit of Notification no. 3/2001-

CE and 6/2001-CE, irrespective of the fact that the procedures

31

under Chapter X were followed or not. The Tribunal expressed the

view that the procedure laid down in Chapter X is meant to be

followed only to establish the receipt of goods by the recipient unit

and their utilization.

33.The assessee in these appeals were engaged in the

manufacture of pump parts and gun metal casting falling under

Chapter 84 and Chapter 73 respectively of the First Schedule of the

Tariff Act and claimed the benefit of above mentioned notifications.

The Officers of the Central Excise Department carried out a search

at the factory premises of the assessee on 25.8.2004. On the basis

of that search, the Commission took the view that the assessee had

contravened the procedure of the exemption notification and

removed the excisable goods clandestinely. A notice was issued to

show cause why the central excise duty and the penalty therein be

not imposed on the assessee. The Commissioner, Central Excise,

Ahmedabad vide order dated 31.5.2007 demanded central excise

duty of Rs.15,14,966/- from M/s Neatwell Castings under proviso

to Section 11-A of the Central Excise Act, 1944 by invoking

extended period of five years along with the penalty thereon. In

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appeal filed by the assessee before the Commissioner (Appeals), it

was held that the benefit of the notification could not be denied only

on the ground that the procedure laid down in Chapter X had not

been followed. The decision of the Commissioner (Appeals) was

upheld by the Tribunal in appeal.

34.We find it difficult to sustain the reasoning of the Tribunal

that the procedure laid down in Chapter X, is meant only to

establish the receipt of goods by the recipient unit and their

utilization. The Tribunal completely overlooked the object and

purpose of the procedure laid down in Chapter X. The goods

manufactured at the supplier end were excisable goods and if a

party wants remission of duty, he has to follow certain pre-

requisities, the object of which is to see that the goods be not

diverted or utilized for some other purpose, on the guise of the

exemption notification. Detailed procedures have been laid down

in Chapter X so as to curb the diversion and misutilization of goods

which are otherwise excisable. The plea of “substantial compliance”

and “intended use” is, therefore, rejected for the reasons already

stated.

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35.Consequently, Civil Appeal Nos. 1878-1880 of 2004 and Civil

Appeal Nos. 568-569 of 2009 preferred by the Revenue would stand

allowed and Civil Appeal No. 1631 of 2001 shall stand dismissed.

There will be no order as to costs.

…………………………………………CJ I

(S. H. KAPADIA)

…….……………………..……… .……..J.

(B. SUDERSHAN REDDY)

……………………………………………J.

(K. S. PANICKER RADHAKRISHNAN)

……………………………………………J.

(SURINDER SINGH NIJJAR)

……………………………………………J.

(SWATANTER KUMAR)

New Delhi;

November 18, 2010.

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