<NAME>, J.

1. These are two writ petitions filed by <ORG>, and its Executive Director and raise a common question as to the interpretation of Section 3 of the Central Excises and Salt Act , 1944 and Rules 9 and 49 framed there under (hereinafter referred to respectively as "the Act" and Rules) which we think is practically concluded by the decision of this Court in the case of <ORG> (1979 E.L.T. J 581). We shall, however, first set out the relevant facts to understand the context in which this question comes up for consideration.

2. The petitioner company, inter alia, manufactures different types of electrical wires, for this purpose the petitioner company purchases copper wire bars and aluminium rods/ingots. These wires bars, rods and ingots, after being processed, are coated with varnish for insulation. The varnish was being manufactured by the petitioner from resin. The petitioner held separate licenses for the manufacture of insulated wires, varnish and synthetic resins. We are concerned in this petition with the assessed's process of manufacturing varnish.

3. The petitioner manufactured two types of varnish, one known as TERMEX and the other as FORMADEV. The former was manufactured from POLYESTER RESIN and the latter from PHENOLIC RESIN. Prior to July 1972 POLYESTER RESIN was manufactured by the following process. D.M.T. Ethylone, Glycol, Glycerine and Adipic Acid were first mixed in a reactor with zinc salt as a catalyst and the reaction was carried out gradually increasing the temperature to 235 Degree C. Temperature between 225 Degree C and 235 Degree C was maintained till the process known as alcholists was complete. Thereafter, butyl titanate, which is called a cross linking agent, was added and the reaction was continued at the same temperature. After a particular stage was reached the material was cooled to about 180 Degree C and thereafter transferred to trays manually and then this liquid was allowed to solidify. After room temperature was reached the solid substance was broken in lumps and then packed in drums. The solidified substances is known in the market as polyester resin. This was entered in the register kept for excise purpose and was cleared on payment of duty for further use in the manufacture of the type of varnish known as 'toremex". PHENOLIC RESIN was manufactured by the following process :

Metacresol and Formalin were first mixed in a reactor with a particular catalyst and the reaction was carried to a temperature of 90 Degree C. The water element was then removed by a vacuum process of dehydration at a temperature between 70 Degree C and 80 Degree C. Thereafter, cross linking agent was added and the reaction continued till a particular molecular weight was reached. When that stage was reached a little more metacresol was added and the solution was collected in drums. This solution was called and known in the market as phenolic resin. This solution was entered in the excise register and cleared on payment of excise duty and utilised in the manufacture of Formadev varnish.

4. It will thus be seen that prior to 1972 the assessed's manufacture of varnish was carried out in two stages. In the first stage, the petitioner obtained the substance which was known in the market as polyester resin or phenolic resin and on the manufacture of this substance excise duty was paid. Thereafter, the resin either in solid or solution form was utilised for manufacture of varnish which constituted the second stage of manufacture.

5. We are, however, concerned here with the period subsequent to July 1972 when the petitioner decided to manufacture the varnish by a single continuous process instead of in the above two stages. The process now employed to obtain Termex varnish was the same as it was prior to July 1972 till the point of completion of the process known as alcholists. However, thereafter, instead of adding the cross linking agent to obtain the resin in solid form the previous reaction was continued in a kettle till a particular molecular weight was reached. Thereafter, a small amount of metacresol was added and the whole solution which was still at a temperature of 200 Degree C was directly transferred to a bigger kettle where further quantities of was directly transferred to a bigger kettle where further quantities of metacresol and other ingredients (namely solvent naphtha or equivalents and phenol) were added. After homogeneity was obtained certain other ingredients namely Desmodur CT stable, butyl titanate and zinc naphthanate or octoate were added. The resultant product was taken off in the form of liquid varnish. In other words, the two stages of production of resin and the manufacture of varnish were integrated and some changes made so that there was one continuous manufacturing process leading to the end product, (namely, varnish) without any intermediate product (namely, resin) being collected in trays or drums for being used for the manufacture of varnish. On the other hand, in the new process the material which was boiled for the purposes of the first stage was transferred as a hot molten liquid to a bigger kettle in which the second stage of the manufacture was carried out.

6. In the same manner there was also a modification of the process of manufacture of formadev varnish. As before Metacresol and Formalin were put in a reactor with catalyst, heated to the temperature of 90 Degree C and then subjected to a process of dehydration. At this stage metacresol was added and the temperature was maintained at 70 Degree C till a particular molecular weight was reached. Thereafter, desmodur AP stable solution was added and the mixture was transferred manually to another kettle in which the other ingredients for varnish making were already there. The cross linking agent was then added and the resulting product was the varnish. Here the difference between the old and new process is that the solution which is obtained at the intermediate stage in the old process was the commercial product known as phenolic resin while in the new process the intermediate product contained a component referred to above as Desmodur AP which is a Volatile Solvent and which is not present in Phenolic resin as known to the market.

7. Varnish is one of the items liable to excise duty under Tariff Item 14-II of the First Schedule to the Act. However, by a notification dated 18th January, 1964, the Government had exempted varnish from excise duty where the same was manufactured out of ingredients on which excise duty had been paid and where it was used for insulating electrical wires produced within the same factory. As the petitioner was paying excise duty on resins, it was not being required to pay any excise duty on the varnish which it was manufacturing.

8. The controversy between the parties arose when on 1st July, 1972, the petitioner addressed a letter to the Superintendent of <ORG> stating that it had decided to discontinue the manufacture of resins and to manufacture varnish by a direct process from various raw materials and so would no longer be paying any excise duty on synthetic resins. The petitioner, therefore, requested the officer to cancel the classification list filed by it earlier. This was followed up by another letter dated 2nd October, 1972 by which the petitioner company intimated <ORG> that from 2nd September, 1972 it had discontinued the manufacture of resins and had started manufacturing of varnish by a direct process. It again requested the officer for the cancellation of the earlier classification list and also forwarded the license for manufacture of resins for cancellation.

9. There followed some correspondence, the details of which are not relevant for our present purpose. Ultimately, by an order dated 6th June, 1974 the Assistant Collector of Central Excise held that, during its manufacture of varnish the petitioner was manufacturing polyester resin and phenolic resin which were liable to excise duty under Tariff Item No. 15A(1)(i). The petitioner was advised to apply for a license in Form L-4 to be in a position to manufacture the synthetic resin dutiable and to furnish details regarding the clearance since 2nd September, 1974 of the aforesaid item. The assessed filed an appeal which was rejected on 5th March, 1975 after a hearing. The petitioner company filed a revision petition to <ORG> and relied in support of the petition on the decision of <ORG> in the case of <ORG>, as well as the decision of this Court in case of <ORG> (supra). However, the petition was rejected by an order dated 6th December, 1977.

10. In the meanwhile, on 4th November, 1974, the Superintendent of Excise called upon the petitioner to show cause why excise duty should not be paid and recovered on the Polyester resin and Phenolic Resin manufactured by it between 3rd September, 1972 and June 1974. The petitioner filed a reply pointing out, in particular, that the appeal from the order dated 6th June, 1974 was pending. However, by an order dated 11th February, 1975, the Assistant Collector of <ORG> called upon the petitioner to pay <ORG> Duty amounting to Rs. 1,55,974/- on the basis that the assessed had manufactured polyester resin and phenolic resin which were dutiable items basing himself, in this regard, on a report of the Deputy Chief Chemist dated 19th July, 1974. The petitioner filed an appeal to the Appellate Collector of <ORG>, who rejected the appeal on 30th September, 1975. A revision petition was dismissed by the Government on 17th November, 1977. Similar demands also arose in respect of subsequent periods between July 1974 and 15th February, 1978 and the petitioner was called upon to pay and paid under protest excise duty amounting to Rs. 5,00,283.17, as per the details set out in Annexure S to the writ petition. In these circumstances, the petitioner came to this <ORG> and C-W 219 of 1978 by which it sought for appropriate reliefs against the orders of the respondents dated 6th June, 1974, 11th February, 1975, 5th March, 1975, 30th September, 1975 and 17th November, 1977, for orders restraining the respondents from removing excise duty amounting to Rs. 1,55,974.73 and for further directions to the respondents to refund the excise duty of Rs. 5,00,213.17 illegally collected in respect of the period between July 1974 and 15th February, 1978. A specific prayer for relief in respect of the order dated 6th December, 1977, however, appears to have been omitted from the prayer clause in para 33, of this writ petition, apparently because a prayer for quashing the order dated 6-12-1977 has been made in C.W. 220/78 as pointed out in the following paragraph.

11. We have earlier referred to the fact that on 6th June, 1974 the Assistant Collector of Central Excise called upon the petitioner to take out a license for the manufacture of synthetic resin in the factory, that this order had been confirmed by the Appellate Collector on 5th March, 1975 and that the petitioner had filed a revision petition before <ORG> against the order of the Appellate Collector. But in the meanwhile, to avoid the controversy created by the department because the Termex varnish was being manufactured by, what can be described as, a two kettle process the petitioner proposed to change the process. It wrote to the Assistant Collector on 10th September 1975 informing him that instead to two kettles the petitioner company proposed to employ a single kettle process in which the varnish would be produced in a single continuous process. It is not necessary once again to repeat the process employed by the assessed. It is sufficient to mention that it was now proposed that, after the initial process of boiling certain materials with a catalyst up to a particular temperature the material would be allowed to cool about to 170 Degree C and all the other raw materials necessary for the manufacture of varnish would be added in the same vessel or kettle so that only the finished varnish emerged from the process for being packed in drums after testing. The idea was that the whole reaction from the beginning to the end should take place in only one kettle and that there should be no removal of the product in containers or the transfer from one kettle to another at any intermediate stage. The company informed the Assistant Collector that they proposed to start the new process from 9th October, 1975. However, on 3rd October, 1975 the Superintendent of Central Excise wrote to the petitioners stating that the liability to pay central excise duty on synthetic resin would continue till written permission to the effect that no duty was chargeable was obtained from the Assistant Collector and so the new process was not started. Thereafter, certain correspondence between the parties followed and the factory premises of the petitioners was visited by the deputy Chief Chemist on 11th May, 1976. On that date, the petitioner company for the first and last time employed the single kettle process to enable the Deputy Chief Chemist to carry out this test. Eventually, on 25th June, 1976 the Assistant Collector passed an order stating that, except for the difference that the two stages of the manufacturing process were carried out in the same reaction vessel in the revised process, the new method of manufacturing was basically the same as the earliest process of manufacture and that, therefore, "the petitioner's product, namely termex resin, is correctly classifiable as synthetic resin as at stage 1 and is, therefore, chargeable to excise duty under Item 15A. This was confirmed on appeal by the Appellate Collector on 31st August, 1976 and a further revision petition of the company was disposed by the Government on 6th December, 1977 along with the earlier revision petition, which had been preferred by the petitioner against the order of the Appellate Collector dated 5th March, 1975. The petitioner has stated that, in view of the instructions issued by the Assistant Collector to maintain the status quo, the Company did not employ the one kettle process except on 11th May, 1976. On that date 120 kg. of termex varnish had been produced by that process and cleared after payment of Rs. 871.93 as excise duty under protest. The Company, however, has come to this Court with C.W. 220 of 1978 praying that the orders dated 25th June, 1976, 31st August, 1976 and 6th December, 1977 be quashed and that the respondents be directed to refund the excise duty of Rs. 871.93 illegally collected from the petitioner.

12. We have set out the facts at some length because two types of processes were being employed by the assessed and it is necessary to understand these in order to answer the question that comes up for consideration in these writ petitions. The petitioner's case is that it is engaged in the manufacture of varnish which is being utilised by it for insulating the wires, rods and other electrical materials. This process of manufacture begins at the earliest stage when the raw materials are first fed into the plant. According to the petitioner it makes no difference whether the varnish finally emerges as a result of Chemical reactions in one kettle but there is only one end product manufactured by the petitioner viz. varnish. It may be that in plant and there is only one the course of this single process of manufacture, a product is obtained which may perhaps fall within the description in Item 15A. The petitioner's case is that it does not but that even assuming for purposes of argument that this interim product can be described as polyester or phenolic resin it is not liable to duty because the interim product is only an "in process" product which is neither intended to be, nor is in fact, removed from the place of manufacture. In the single kettle process there is no removal at all and in the two kettle process what is transferred from one kettle to another is a hot molten liquid which passes on to the second kettle as a step or stage in the integrated process of manufacture of varnish carried out by the petitioner. In, these circumstances, it is submitted that, other questions apart, there is no removal of the resin so as to attract duty within the meaning of Rule 9 read with Rule 49 of the Central Excise Rules.

13. It will be necessary for the present discussion, to start with a somewhat detailed reference to the decision of this court in the <ORG> case (supra), because that decision deals with the basic issues involved in this writ petition.

(a) In that case, which was decided as far back as 3-4-1972 the facts were as follows : The petitioner had a refinery to process Crude Oil for production of various petroleum products. To run this refinery a plant had been installed at Visakhapatnam which commenced production in May 1975. The plant of the petitioner at Visakhapatnam, generally speaking, worked in the following manner : There was a Crude Unit in which Crude Oil is First processed resulting in six basic products, namely (i) Gas, (ii) Naphtha Base Stock/Motor Gasoline, (iii) Kerosene Base stock, (iv) Diesel Base Stock, (v) Fluid Catalytic Cracking Unit Feed Stock, and (vi) Intermediate non-marketable Fuel Oil. The Court was concerned with the sixth product. This oil was then transmitted through pipelines to all or any of the three units of the plant, namely, (a) <ORG>, or (b) Bonded Tank, or (c) Tanks 170 and 171. The contention of the petitioner was that this intermediate non-marketable fuel oil, if sent to the <ORG>, was for the purpose of further processing but it might be sent from the <ORG> to Tank 170 and 171 for storage. If this oil was directly sent to Tanks 170 and 171, it was only for the purpose of storing the same for being transmitted there from either to the furnace for heating the P.D. unit or to the furnace for heating the Crude unit. The intermediate non-marketable Fuel Oil might also be sent to the bonded tank via the <ORG> either for being transmitted as such to Tanks 170 and 171 or for marketing the same after adding to it what was called Cutter stock, without adding which, according to the petitioner, the oil was not marketable, due to high viscosity, but could be used and had been used internally for heating the plant of the petitioner to produce various marketable products. According to the petitioner it paid excise duty on such oil stored in Tanks 170 and 171 on its transmission either directly from <ORG> or from the <ORG> or from the bonded tank, which it was not liable to pay inasmuch as in that state the oil was what is described as Burner Fuel oil and not Furnace Oil.

(b) Several contentions were urged on behalf of the petitioner. For our purposes, it is sufficient to refer to contentions Nos. 2 and 3 which have been set out at page 585 of the report :

"2. Excise duty is on production and not on stages of production. Burner Fuel Oil is an intermediate product derived at an intermediate stage in the process of manufacture of finished petroleum product. Burner Fuel Oil is not marketable as such without further processing or blending with other oil, i.e. cutter stock. Therefore, Burner Fuel Oil is not excisable goods and there is no manufacture of goods within the meaning of the said Act.

3. There is no removal of Burner Fuel Oil within the meaning of Rule 49 of the said Rules. Rule 49 is a condition precedent to the recover of excise duty."

On the other hand, the case of the respondent was that the oil in question was not consumed by the petitioner as an inseparable part of an unbroken continuous and uninterrupted process of manufacturing and that what the petitioner describes as Burner Fuel Oil was actually Furnace Oil, the process of manufacture of which had ended prior to removal for consumption. It was argued that once the said oil had been separated from the crude oil it was a finished product liable to excise duty whether it was used in the refinery or was marketed by edition of cutter stock or otherwise.

(c) The judgment of the court was delivered by one of us (<NAME>) At the outset it explained the scope of Section 3 of the Act read with Rules 9, 47 and 49 as follows :-

"The legislative intent for levy and collection of excise duty, on a reading of the Excise Act and the Excise Rules, appears to be that no duty is payable on intermediate products if the intermediate products by themselves are not the end products being manufactured by a particular factory provided, however, the intermediate products and the end products are obtained by one continuous uninterrupted integrated process as opposed to distinct or independent processes. We find force in Mr. <NAME>'s contention that the concept of making assessment only at the stage of removal supports this legislative intent. Indeed through a particular article produced may attract levy of excise duty, as contemplated by section 3 of the Act, which is the charging section, removal is the essence of the crystallisation of the charge as would be apparent from a reading of section 4 of the Act and Rule 49 of the Excise Rules. The quantum of the charge is one the value at the time of removal and the value at the time of removal if the yard-stick for qualifying the charge. Though levy is attracted on production but the power to collect duty is only on removal. There may be circumstances where production may take place and yet the product may not be issued out, utilised, or marketed in which case the scheme of the Act and the Rules tend to show that no excise duty would be collected on the product. For example the glut of a particular article in the market may make it expedient for a manufacturer to hold back his product or financial circumstances may prevent the finished product to be marketed. It is in this context, therefore, that the provisions of Section 3 of the Act and Rules 9 and 49 of the Excise Rules have to be harmonised. Indeed, these provisions complement each other. Section 3 lays down the legislative policy on what products excise duty may be levied. Rule 9 is an injunction on the manufacturer that he has not to remove any excisable goods from the place of manufacture or any specified premises appurtenant thereto, whether for consumption, export or manufactures of any other commodity in or outside such place unless he first pays the excise duty leviable on these goods. Rule 49 is a direction to the excise authorities that the payment of excise duty shall not be demanded until excisable goods are about to be issued out of place or premises specified under Rule 9 or are about to be removed from a store room or other place or storage approved by the Collector under Rule 47. Thus, the point out of time when duty must be paid or may be collected is clearly given. Similarly, it is provided that there must be removal from the specified place to attract the payment of duty. If there is no removal there would be no question of payment. Removal is a positive act and cannot have any reference to disappearance of the product. For example evaporating would not be removal for that taken place by natural causes in the process of manufacture or even afterwards. Similarly, waste, of product while in the pipe-line or in storage may take place on account of natural causes or otherwise. We have, therefore, to see whether in the present case the product in question is (a) only an intermediate product obtained in the process of manufacturing of any other finished petroleum product, (b) whether this product is treated as an end product or only an intermediate product by processing of which may other product is to be obtained, and (c) whether this product can be regarded as having been removed at any stage for any of the purposes mentioned in Rule 9 of the Excise Rules."

It was pointed out that if the product in question i.e. Burner Fuel Oil were first sent to the P.D. Unit and from there to <ORG> and on being blended with cutter stock were marketed as Marketable Fuel Oil, it would be a part of the continuous uninterrupted process of manufacture and would not attract the levy or assessment of excise duty by itself and the product which would be subject to duty will be the end product, namely, the marketable fuel oil. As long as the oil in question was thus in the pipeline of the petitioner's refinery it would continue to be the intermediate product being utilised in one single process for the manufacture of another product.

(d) Applying the principles outlined above to the facts of the case before the court it was further observed him, the learned Judge observed :-

"From what we have been told about the process of manufacture and even in accordance with the contention of the petitioner there can be no manner of doubt that the oil coming into tanks 170 and 171, even if non-marketable as utilised for the purposes of heating the furnace of the various units in the refinery of the petitioner. It has not been shown to us that the oil coming out from tanks 170 and 171 is further processed to be converted into any other product. As already noticed earlier, this very oil if it goes from the Crude Unit to the P.D. Unit and further on to the Fluid Catalytic Cracking unit and thence for addition of cutter stock or blending with cutter stock the oil is being utilised for being converted into some other product but if it comes into tanks 170 and 171 either directly from the Crude Unit or via the P.D. Unit or the bonded tank it is not being utilised for being converted into another product but is thereafter utilised for heating purposes. Oil thus obtained for use as a heating medium either by separating it from Crude oil and other base stocks in the Crude Unit or when this very type of oil goes from the Crude Unit to the P.D. Unit or blending unit to tanks 170 and 171, it is only for one purpose and is to use it as fuel. Therefore, it must be held that the oil which comes into tanks 170 and 171 is really an end product and distinct from an intermediary product utilised in an uninterrupted process of manufacture for obtaining another product."

It was urged on behalf of the petitioner in that case that even where oil was used for heating purposes it was really a self generating fuel obtained the process of manufacture of various petroleum products and that even, if consumed for heating, it was part of an integrated uninterrupted continuous process of manufacture, because the self generating fuel was a necessity for the running of the plant to get the end product. But it was pointed out that Excise Duty is attracted on all excisable goods which are produced as and when the some are removed within the meaning of Rules 9 and 49 and that the only product which is not excisable is the product which itself gets converted into another product which may be excisable as a single continuous process.

(e) The decision of <ORG> in <ORG> v. <NAME>, Assistant Collector and others, (Miscellaneous Case No. 491 of 1963, decided on 30-4-1970) was relied upon on behalf of the petitioner but distinguished as under. In that case the petitioner company employed a continuous and integrated process for the manufacture of Nylon Yarn. At an intermediate stage, the company obtained Polymer Chips which were used or consumed in the further manufacture of the Nylon Yarn without the chips being taken out of the manufacturing equipment. <ORG> had held that polymer chips did not attract the levy of excise duty as the same were utilised in an uninterrupted integrated process for the manufacture of Nylon yarn and there was no removal within the meaning of Rule 49 read with Rule 9 of the Excise Rules. So, it was pointed out that the decision was not helpful in deciding the point in the <ORG> Case. For though there would be no dispute with the proposition that an intermediate product used for obtaining the end product in a single uninterrupted process would not attract duty, the intermediate product would attract duty if it is obtained by one process and was used for being converted into another product by a separate and distinct process.

(f) Elaborating on the scope of Rule 9 in the judgment it was said :-

"The Rule thus contemplates the situs on manufacture as the place from where removal has to take place whether for consumption, export or manufacture of any other commodity. It obviously makes no reference to the plant or equipment. But where there are two distinct plants within the same factory premises removal can take place either outside the factory premises or within the factory premises if the product obtained by working of one plant is sent to another plant for obtaining another product. There can be no removal of a product within the plant itself so long as the product is in the process of manufacture. There can be removal only if the product goes out of one stream of production into another stream of production or if the produce is issued out of or taken out or consumed if no further processing of that product is to be done. The Rule also contemplates that consumption within the place of manufacture would also amount to removal. The consumption of the product contemplated by Rule 9 is consumption of the product by itself and not for converting it into another product, as in the case of Polymer Chips."

(g) It was held on the facts that the moment the oil went out of the pipeline for consumption as fuel the continuous process of manufacture got snapped. There was no putting back of this oil into the process of manufacture if it is consumed for lighting furnaces or for heating the equipment.

14. We think that the above decision completely governs the present case. Like the polymer chips in the <ORG> case (supra), the resin in the present case is converted in the course of the single integrated uninterrupted process of manufacture carried on by the assessed. In the process followed by the petitioner prior to 1972 there were two stages of manufacture. In the first stage it obtained either polyester resin in the form of solidified flakes or phenolic resin in the form of a solution. These were products well known in the market as resins. It was open to the petitioner to deal with the resin in whatever manner it liked. It would be removed for purpose of sale or it could be removed for consumption in the second stage of manufacture. In fact perhaps most of the resin was used for the second stage of manufacture. But in the state of affairs as it then stood, the two stages were totally independent. The link in the chain of manufacture snapped at the point of time when the resin was produced, as in the case of the Burner Fuel Oil in the <ORG> case. Its subsequent use for the manufacture of a different commodity which the assessed also manufacture was of no relevance. But there has been a vital change in the process of manufacture subsequent to July 1972. The process has been converted from a two stage process into a single continuous and uninterrupted process. The question is not whether the Chemical reactions take place in one kettle or in two kettles. The question is whether, as before the petitioner is manufacturing resins and then manufacturing varnish by utilising its own resins or whether the petitioner has switched over to a process of manufacture of varnish which is single integrated, continuous and uninterrupted. We think there can be no doubt that, after July 1972, the position is that, starting from the stage when the raw materials are put in right up to the stage when the solution of varnish emerges, there is only one integrated process of which the end product is varnish. At the intermediate stage no doubt some product which can be Chemically analysed as resin has emerged but this product never comes out of the plant. It is all the time in the plant itself and it is used for manufacturing into the end product. This is, therefore, clearly a case of consumption of the intermediate product for the purposes of converting it into another product like the case of Polymer Chips in the <ORG> case and not consumption of it by itself (as in the case of furnace oil dealt with in the <ORG> case).

15. We may also point out that in <CITATION> - 1980 E.L.T. 320, the question whether excise duty could be levied and recovered on 'Silver' obtained by the petitioner as an "in-process material" in the manufacture of woollen yarn in its factory premises was answered in the negative <ORG> (Supra) and <ORG> - 1978 E.L.T. (J 121) were followed, we are, therefore, clearly of opinion that no excise duty is leviable merely because in the process of manufacture of varnish an intermediate product which may be described as resin also emerges.

16. Reference was made on behalf of the respondent to the decision of <ORG> in <CITATION> (1979 E.L.T. J. 674). In that case, the company was a manufacturer of dry cell batteries. For this purpose the company needed since cans. It purchased zinc ingots, melted them in a furnace and pressed them into moulds to form zinc slabs. The slabs were then heated incrolled into a flat form with the help of rollers out of which callots were punched. From these callots, cans were made by the impact extrusion process. Thereafter, required Chemicals were filled into the cans which after sealing and cladding took the shape of finished dry cell batteries. The question for consideration was whether the rough flat forms of zinc obtained during the process of manufacture which were not removed from the premises but were immediately put to use by feeding them hot into a punching process were excisable as "zinc sheets" falling under Item 26-B(2) of the First Schedule of the Central Excises and Salt Act , 1944. The <ORG> found that the flat form from which callots were punched was a produce commercially known as zinc sheets and accepted the argument on behalf of the <ORG> that though the zinc sheets did not go out the factory premises as such, there was a removal in law as contemplated in Rule 9 because they were admittedly removed from the rolling mill for consumption or for manufacture of another excisable commodity. The Judgment contains no discussion of the contention (which has been upheld in <ORG>) that the entire process of manufacture of dry cell batteries was a continuous one and that the utilisation of the zinc sheets even while they were white hot for the purpose of producing the end product could not be described as removal for purpose of manufacture within the meaning of Rules 9 and 19. The <ORG> relied on Rule 173-G for its conclusion but it seems to us that this rule is not helpful. It only lays down the accounting procedure to be followed where the excisable goods are intended to be, and are, removed within the meaning of Rules 9 and 49 so as to attract excise duty. With respect, we find ourselves unable to agree with the conclusion of the <ORG>, particularly in view of the judgments of this <ORG> earlier referred to.

17. For the above reason, we hold that the petitioner cannot be called upon to pay excise duty in respect of resins on the intermediate product obtained by it. The orders (i) calling upon it to take out a separate license for the manufacture of resins; (ii) requiring it to pay excise duty in respect of the resins manufactured by it; (iii) levying excise duty in respect of such goods including the sum of Rs. 871.93 collected in respect of the manufacture on 11th May, 1976, are all quashed. In view we have taken that the intermediate product was obtained in the course of a single continuous uninterrupted process of manufacture of varnish carried on by the assessed, we did not hear the petitioner and express no opinion on the contention raised by it that the intermediate product in the present case was not a "resin" as known to trade.

18. In the result these writ petitions are allowed to the extent indicated above. We direct, in C.W. 219/78, the issue of a writ of certiorari quashing (a) the orders dated 6-6-1974 and 11-2-1975 of the second respondent (Exhibits 'G' & 'H'), (b) the orders dated 5-3-1975 and 30.9.1975 of the third respondent (Exhibits 'J', & 'P'); and (c) the orders dated 6-12-1977 and 17-11-1977 of the first respondent (Exhibits 'L' & 'R') and the issue of a writ of mandamus directing the respondents to refund to the petitioners the excise duty of Rs. 5,00,283.17 in respect of the period from July, 1974 to 15th February, 1975 illegally collected from it. In C.W. 220/78 we direct the issue of a writ of certiorari quashing the orders dated 6-12-1977 (Exhibit 'I') 31-8-1976 (Exhibit 'G') and 25-6-1976 (Exhibit 'E') and the issue of writ of mandamus directing the respondent to refund to the petitioner the sum of Rs. 871.93 collected from it in respect of the production on 11-5-1976. The petitioners will be entitled to one set of costs. Counsel's fee Rs. 500/-.


JUDGMENT <NAME>, J.

1. Appellant, <ORG> (the Insurance Company) which was the additional 3rd defendant in a suit for compensation has brought this appeal seeking reversal of the decree passed by the Additional Subordinate Judge, <NAME>. The relevant facts out of which the appeal arises lie in a narrow compass and can be briefly stated.

2. One <NAME> who is the son of the plaintiffs-respondents 1 and 2 was employed as a cleaner by the first defendant-3rd respondent in his <ORG> KLR 6093 of which the second defendant-fourth respondent was the driver. On Jan. 4, 1973 at about 5 P. M. the lorry was involved in an accident at Ayakudi on Palani-Dindigal Road in the course of which <NAME> sustained serious injuries leading to his death. The accident, according to the plaintiffs, was caused by the rash and negligent driving of the lorry by the second defendant. He was prosecuted before the Sub-Divisional Magistrate, Dindigal for the offence Under Section 304-A, Penal Code , and on his plea of guilty he was convicted and sentenced to pay a fine of Rupees 200/- with a default sentence of rigorous imprisonment for four months. The first plaintiff brought the suit against the owner and the driver of the lorry, as defendants 1 and 2 claiming compensation of Rupees 20,000/- on account of the death of <NAME>. Subsequently <ORG> was joined as additional 3rd respondent Defendants 1 and 2 contended that it was not correct that the second defendant drove the lorry in a rash and negligent manner and brought about the accident. The first defendant took a further defence that if compensation was to be awarded <ORG> should be directed to pay it. In its written statement <ORG> also denied the rashness and negligence attributed to the second defendant and contended that the suit was bad as all the legal representatives of <NAME> had not been made parties. It was on this contention that <NAME>'s father was joined as additional plaintiff 2. <ORG> disowned liability on the further ground that the lorry had not been insured with it.

3. On the admission of the first defendant as D. W. 1 the <ORG> found that Surendran was a cleaner in the lorry. On the more controversial question whether the lorry was driven rashly or negligently the <ORG> rejected the evidence of the relevant witnesses, P. Ws. 2 and 3 but found that as the second defendant had pleaded guilty to the charge Under Section 304 , Penal Code and suffered a conviction he could be held to have driven the lorry rashly and negligently on his own admission. The <ORG> overruled the 3rd defendant's defence of non-liability finding that the Insurance cover Ext. B1 disclosed that the lorry was covered. On the amount of compensation the <ORG> held that Rs. 9,000/- was a reasonable amount. On those findings the learned Judge gave judgment for the plaintiffs for Rs. 9,000/- with interest at 6% per annum from the date of suit till recovery against the defendants with proportionate costs.

4. Counsel for the appellant opened the appeal contending that the suit should have been dismissed as there was no evidence of rashness or negligence on the part of the driver, the <ORG> having rejected the relevant witnesses P. Ws. 2 and 3. He submitted that the <ORG> erred in relying upon the plea of guilty of the second defendant as sufficient to constitute an admission for this suit on which a finding of rashness and negligence could be entered. He pointed out that the findings in the judgment of the Criminal <ORG> were irrelevant in a civil suit, and that much less is the relevancy of a plea of guilty. While meeting those contentions, Mr. <NAME> counsel for the plaintiffs-respondents raised what he called, a preliminary objection that these defences were not open to <ORG> and they should not be entertained to upset the judgment. We therefore heard full arguments on this point and in the event it became the central issue in the appeal. As we are inclined to uphold the objection of counsel for the respondents it is needless to canvass the merits of the contention raised by the appellant on the adequacy of the evidence.

5. Section 94 of the Motor Vehicles Act makes insurance against third party risk compulsory. Section 95 deals with the requirements of the policies of such insurance and the limits of the liability to be covered thereby. Sub-section (1) provides that a policy of insurance must be a policy which -

"(a) .........................

(b) insures the person or classes of persons specified in the policy to the extent specified in Sub-section (2) -

(i) against any liability which may be incurred by him in respect of the death of or bodily injury to any person or damage to any property of a third party caused by or arising out of the use of the vehicle in a public place."

6. Section 96 (I) lays an obligation upon the insurer who has issued a policy in terms of Section 95 (1) (b) to pay to the person entitled to the benefit of a decree any sum not exceeding the sum assured payable thereunder, as if he were the judgment-debtor, in respect of the liability, together with any amount payable in respect of costs and interest on that sum, Sub-section (2) reads:

"No sum shall be payable by an insurer under Sub-section (1) in respect of any judgment unless before or after the commencement of the proceedings in which the judgment is given the insurer had notice through the Court of the bringing of the proceedings, or in respect of any judgment so long as execution is stayed thereon pending an appeal; and an insurer to whom notice of the bringing of any such proceeding is so given shall be entitled to be made a party thereto and to defend the action on any of the following grounds, namely -

(a) that the policy was cancelled by mutual consent or by virtue of any provision contained therein before the accident giving rise to the liability, and that either the certificate of insurance was surrendered to the insurer or that the person to whom the certificate was issued has made an affidavit stating that the certificate has been lost or destroyed, or that either before or not later than fourteen days after the happening of the accident the insurer has commenced proceedings for cancellation of the certificate after compliance with the provisions of Section 105 ; or

(b) that there has been a breach of a specified condition of the policy, being one of the following conditions, namely:--

(i) a condition excluding the use of the vehicle -

(a) for hire or reward, where the vehicle is on the date of the contract of insurance a vehicle not covered by a permit to ply for hire or reward, or

(b) for organised racing and speed testing, or

(c) for a purpose not allowed by the permit under which the vehicle is used, where the vehicle is a transport vehicle, or

(d) without side-car being attached, where the vehicle is a motor cycle; or

(ii) a condition excluding driving by a named person or persons or by any person who is not duly licensed, or by any person who has been disqualified for holding or obtaining a driving licence during the period of disqualification; or

(iii) a condition excluding liability for injury caused or contributed to by conditions of war, civil war, riot or civil commotion; or

(c) that the policy is void on the ground that it was obtained by the non-disclosure of a material fact or by a representation of fact which was false in some material particular."

7. Sub-section (6) which is the only other provision that falls to be noticed provides :

"No insurer to whom the notice referred to in Sub-section (2) or Sub-section (2A) has been given shall be entitled to avoid his liability to any person entitled to the benefit of any such judgment as is referred to in Sub-section (1) or Sub-section (2A) otherwise than in the manner provided for in Sub-section (2) or in the corresponding law of the reciprocating country, as the case may be."

The scope and impact of those provisions arc not matters of first impression as they have been settled by <ORG> in <CITATION> , AIR 1959 SC 1331. The two suits out of which the appeal arose were for damages suffered by the plaintiffs as a result of the negligent driving of the cars. <ORG> which had issued a third party insurance and was made a party filed written statements taking defences other than those mentioned in Sec-lion 96 (2). The plaintiffs contended that the written statements should be taken off the records on the ground that the insurers could defend the action only on the pleas specified in the sub-section and on no others. <ORG> upheld the plain-tiffs' objection. In the appeal filed by <ORG> in <ORG> the question was whether the defences available to the insurer added as a party under Section 96 (2) are only those mentioned therein. <ORG> discussed the provisions at length and rejected the arguments on behalf of <ORG>, holding that an insurer who is made a defendant to an action is not entitled (o take any defence which is not specified in Sub-section (2). It is enough to reproduce the headnote as it correctly represents the substance of the decision :

"Apart from the statute an insurer has no right to be made a party to the action by the injured person against the insured causing the injury. Sub-section (2) of Section 96 however gives him the right to be made a party to the suit and to defend it. The right therefore is created by statute and its content necessarily depends on the provisions of the statute. Sub-section (2) clearly provides that an insurer made a defendant to the action is not entitled to take any defence which is not specified in it. When the grounds of defence have been specified, they cannot be added to. The only manner of avoiding liability provided for in Sub-section (2) is through the defences therein mentioned. Therefore when Sub-section (6) talks of avoiding liability in the manner provided in Sub-section (2), it necessarily refers to those defences. It cannot be said that in enacting Sub-section (2) the legislature was contemplating only those defences which were based on the conditions of the policy."

In view of this pronouncement -- and our attention was not drawn to any subsequent decision of <ORG> -- it is really unnecessary to discuss the later decisions of the various <ORG> that were cited by counsel. We may however mention the following cases, to acknowledge the industry of counsel, where the above decision has been followed. <CITATION> , AIR 1966 Mad 388; M. M. & G. Ins. <CITATION> , AIR 1974 Mad 318; <CITATION> , AIR 1975 Mad 198; <CITATION> , AIR 1968 Bom 267; <CITATION> , AIR 1981 Andh Pra 227; <CITATION> , 1971 Acc CJ 156; <CITATION> , AIR 1971 Madh Pra 5 (FB); and <CITATION> , 1971 Ker LT 380.

8. What the appellant raises before us are not contentions or defences which are open to it as an insurer Under Section 96 (2), but matters which are outside is provisions. This it cannot be allowed to do for as an insurer it is confined to those defences and is statutorily precluded from taking any other. That the contentions are raised not in the original <ORG> but in the appeal is immaterial as the same provision must govern the appeal which is but a continuation of the suit. It is illogical and unsound to hold that <ORG> is freed of the fetters Under Section 96 (2) once the original <ORG> has given a decision overruling its defence. The appellant has no case, apart from the fact that it has not produced the insurance policy, that any right has been reserved for it to defend the action in the name of the assured, for as pointed out by the Supreme <ORG> in para 16 of the above case "........

the insurer has the right, provided he has reserved it by the policy, to defend the action in the name of the <ORG> and if he does so, all defences open to the <ORG> can then be urged by him and there is no other defence that he claims to be entitled to urge. He can thus avoid all hardship if any, by providing for a right to defend the action in the name of the <ORG> and this he has full liberty to do," As the appellant is seeking to raise defences which are outside the grounds enumerated in Section 96 (2) and as the appellant has not proved that it has reserved any right in that regard in the insurance policy, we cannot entertain those defences. We uphold the respondents' preliminary objection.

9. Counsel for the appellant submitted that in certain reported decisions the prohibition Under Section 96 (2) has been limited to proceedings in suits and has not been extended to proceedings before Motor Accidents Claims Tribunals. And by way of illustration he quoted AIR 1968 Mad 436. It is unnecessary to determine the validity of this distinction as this appeal arises out of a suit as did the appeal before <ORG> in AIR 1959 SC 1331. We might however point out that the decision in AIR 1968 Mad 436 has been dissented from by <ORG> in 1971 Acc CJ 156 and that AIR 1974 Mad 318 and AIR 1976 Raj 173 have applied Section 96 (2) to Courts.

We confirm the decision and dismiss the appeal. The appellant will pay the costs of the appeal to respondents 1 and 2,


JUDGMENT <NAME>, <NAME>

1. Both these special civil applications involve common questions of law and fact and hence we will dispose both of them by this common judgment.

2. Both the petitioners in these two matters are what are known as composite mills, that is, they manufacture cotton yarn or polyester yarn from raw materials, cloth from yarn and also process the cloth manufactured by them. The petitioners in each of these matters manufacture cotton textiles and polyester carbonised textiles. Licences have been issued to the two petitioners under Chapter VIII of the Central Excise Rules for manufacturing cotton yarn, cotton fabrics, polyester yarn and polyester fabrics. Each of these licences is a separate licence for cotton yarn and cotton fabrics and polyester yarn and polyester fabrics. In Special Civil Application No. 707 of 1978, in paragraphs 6.1 and 6.2, the process of manufacturing cotton textiles and polyester carbonised textiles respectively have been set out. The process of manufacturing cotton textiles is described as below:

Cotton purchased from the market is received in the form of bales. The bales are opened and the cotton is processed in the Blow Room, laps are prepared out of the cotton. The laps are then fed into the carding machine and converted in the form of slivers. The slivers are then fed into the Drawing Machine, and are thereafter again put on the Lap Former Machine, and the slivers are reconverted into laps. The laps are then fed into <ORG> and converted into individual slivers. The slivers, after being processed through roving machine are fed into the King Frame Machine where the yarn is spun which is wound on the bobbins. After the yarn is subjected to the further processes like sizing, bleaching etc. the bobbins are put on the weaving machine where the fabric is woven.

The affidavit in reply filed on behalf of <ORG> makes it clear that in the weaving department, yarn is put on beams for length-wise use and bobbins are used for weft and thus, with the warp and the weft, that is, length-wise and width-wise use of yarn through machinery, cotton fabric is prepared. The process of weaving is the same either for the cotton fabrics or polyester carbonised textiles.

3. The material from which polyester yarn is made is received in the form of bales. First, this material is converted into the form of laps in the blow room. The laps are then converted into slivers on the Carding Machine and are mixed in the required percentage with cotton in the drawing machine. The mixed slivers are then fed into the roving machine and thereafter yarn is spun on the Ring Frame machine. The yarn is wound on the bobbins and the bobbins are put on the weaving machine where ultimately the polyester carbonised fabric is woven.

4. It is the case of the petitioners that different processes of preparing laps, slivers, weaving of yarn and weaving of fabrics are carried out on different machines and the movement of material from one machine to another is done through human intervention by manual labour. According to the petitioners, the process of manufacturing fabrics from cotton upto the final stage of preparation of cloth is not a continuous process. According to the petitioners, no machine has yet been invented, so far as petitioners are aware, by which, at one end of machine cotton is fed and at the other end by continuous process the manufactured ultimate product, namely, fabric, comes out. The petitioners point out that even after laps or slivers or yarn are prepared, the same are not ultimately processed into the next stage without loss of time. Quality of laps, slivers or yarn is not affected by passage of time and these different articles do not get deteriorated by storage or being kept in stock. The petitioners contend that though different articles like laps, slivers, yarn, etc. come into existence at different stages of process of manufacture of fabrics, none of these articles is ever removed from the factory premises of the petitioner concerned and none of them is ever sold in the market. The entire quantity of these articles which are produced in the petitioners' textile mills, is used in the manufacture of textiles within the factory premises. The question which the petitioners in these petitions have raised is whether, in law, the central excise authorities can collect excise duty on the yarn which comes into existence at the intervening stage during the course of manufacturing cloth, if such yarn is not removed out of the factory premises but is used for consumption within the factory premises for manufacturing the end product, namely, cotton fabrics or polyester carbonised fabrics. It is the contention of the petitioners that, looking to the Scheme of the Central Excises and Salt Act , 1944 and the Central Excise Rules framed under the Central Excises and Salt Act , 1944 (hereafter referred to as the Act), the respondents have authority in law to collect excise duty only at the time of removal of the goods from the factory premises and if the goods are shown not to have been removed from the factory premises, the central excise authorities have no authority in law to collect excise duty on such goods which are only removed at the intermediate stage from one part of the factory to another part within the factory of the petitioners.

5. In order to appreciate the rival contentions in this case, it is necessary to refer to some of the provisions of the Act and the rules made thereunler. Under Section 2(d) of the Act, "excisable goods" are defined to mean goods specified in the First Schedule as being subject to a duty of excise and includes salt. Under Clause (e) of Section 2 , "factory" has been defined to mean any premises, including the precincts thereof, wherein or in any part of which excisable goods other than salt are manufactured, or wherein or in any part of which any manufacturing process connected with the production of these goods is being carried on or is ordinarily carried on. Under Section 2(f) , the word "manufacture" includes any process incidental or ancillary to the completion of a manufactured product and...in relation to goods comprised in Item No. 18A of the First Schedule, includes sizing, beaming, warping, wrapping, winding or reeling, or any one or more of these processes, or the conversion of any form of the said goods into another form of such goods. "Prescribed" means prescribed by rules made under the Act. Under Section 3 of the Act, 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 First Schedule. Under Sub-section (2) of Section 3 , <ORG> may, by notification in the Official Gazette, fix, for the purpose of levying the said duties, tariff values of any article enumerated, either specifically or under general headings, in the First Schedule as chargeable with duty ad valorem and may alter any tariff values for the time being in force, and under Sub-section (3) of Section 3 , different tariff Values may be fixed for different classes or description of the same articles. Section 4 deals with a situation where excise duty is chargeable ad valorem, that is, where, under the Act, duty of excise is chargeable on any excisable goods with reference to the value of such goods. Such value has to be fixed in accordance with the provisions of Section 4 . In the context of Section 4 , where excise duty is chargeable ad valorem, the value has to be fixed with reference to the place of removal and under Section 4(4)(b) , for the purposes of Section 4 , the place of removal means (i) a factory or any other place or premises for production or manufacture of excisable goods.

6. We are concerned in this case with cotton yarn of all sorts which falls under Item No. 18A of the First Schedule to the Act, and duties on cotton yarn are on the basis of weight, that is, so much per count per kilogram or so much per kilogram. Under Item 18 E. con-cellulosic spun yarn is chargeable to excise duty according to weight, and it is common ground that polyester fibre would fall under Item 18E of the First Schedule. Item 19 deals with cotton fabfic and Item 22 deals with man-made fabrics. There is no dispute that excise duty as provided in the third column of the First Schedule which lays down the rate of duty, is payable in respect of cotton fabrics and polyester fabrics. But, the main question is whether excise duty is payable on yarn which, in the case of each of these two petitioners, is an intermediate product which comes into existence in the factory premises, and since in each of these two cases the factory is a composite textile mill, the entire yarn production of each of the petitioner is utilised for the purpose of manufacturing cotton fabrics or polyester fabrics, as the case may be, in their weaving departments, and both the spinning section where yarn is manufactured and the weaving section where the yarn is woven into fabrics are both located in the premises of the same factory. The plans annexed to each of these petitions go to show that both the spinning section and the weaving section are within one and the same compound and in buildings located near each other.

7. In paragraph 8 of Special Civil Application No. 707 of 1978 and also in the other petition, it has been emphasized that there is no sale of yarn as such. All yarn manufactured by the respective petitioner mill is used for the weaving section in the mills and there is no removal of yarn outside the factory premises.

8. In exercise of the powers conferred by Sections 6 , 12 and 37 of the Act for the purpose of providing for assessment and collection of duty Imposed by the Act and to apply in the adapted form stated below certain provisions of the Sea Customs Act, Rules have been framed called The Central Excise Rules, 1944. Under Chapter 111, provision is made for levy, refund and exemption from duty. We are concerned with Rules 7 and 9. Rule 7 provides for recovery of duty and lays down that every person 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 persons as may be designated, in, or under the authority of these Rules, whether the payment of such duty or duties is secured by bend or otherwise. Under Rule 9, time and manner of payment of duty are provided for. Sub-rule (1) of Rule 9 provides that 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 Collector in this behalf, whether for consumption, export or manufacture of any other commodity in or outside such place, until the excise duty leviable thereon has been paid at such place and in such manner as is prescribed in these Rules or as the Collector may require and except on presentation of an application in the proper form and on obtaining the permission of the proper office on the form. The rest of Rule 9 is not relevant for the purpose of this judgment. Under Rule 9-A, as it was in existence at the relevant date, the rate of duty and tariff valuation, if any, applicable to any excisable goods shall be the rate and valuation in force...(ii) in the case of goods cleared from a factory or a warehouse, subject to sub-rules (2), (3) and (3A), on the date of the actual removal of such goods from such factory or warehouse. Under Rule 49, provision is made for duty chargeable only on removal of goods from the factory premises or from an approved place of storage. Sub-rule (1) of Rule 49 provides that payment of duty shall not be required in respect of excisable goods made in a factory until they are about to be issued out of the place or premises specified under Rule 9 or are about to be removed from a storeroom or other place of storage approved by the Collector under Rule 47. Rule 52 provides for clearance on payment of duty and lays down that when the manufacturer desires to remove goods on payment of duty, either from the place or premises under Rule 9 or from a store-room or other place of storage approved by the Collector under Rule 47, he shall make an application in triplicate (unless otherwise by rule or order required) to the proper officer in the proper Form and shall deliver it to the officer at least twelve hours (or such other period as may be elsewhere prescribed or as the Collector may in any particular case require or allow) before it is intended to remove the goods. The officer shall, thereupon, assess the amount of duty due on the goods and on production of evidence that this sum has been paid into the <ORG> or into to the account of the Collector in <ORG> or <ORG>, or has been despatched to the <ORG> by money-order, shall allow the goods to be cleared. Rule 52A provides for the goods to be delivered on a Gate-pass. Sub-rule (1) of Rule 52A provides that no excisable goods shall be delivered from a factory except under a gate-pass in the proper form or in such other form as the Collector may in any particular case or class of cases prescribe signed by the owner of the factory and counter-signed by the proper officer. Under Sub-rule (2), the gate-pass shall be made out in triplicate with indelible pencil using double-sided carbon and shall contain no mutilations, overwritings, corrections or erasures. The gate-pass shall be presented to the proper Officer for counter-signature at least one hour before the actual removal of the goods from the factory. After counter-signature, the proper Officer shall return the original and triplicate copies of the gate-pass to the manufacturer retaining the duplicate for his record. The original copy shall accompany the consignment to its destination and triplicate has to be retained by the manufacturer. The manufacturer may, with the approval of the proper Officer, make extra copies of a gate-pass for his own use, clearly marked "Extra Copy-Not For Covering Transport." The original copy shall be produced by the carrier on demand by any Central Excise Officer while the goods are in route to such destination from the factory: Provided that in respect of removal of excisable goods consumed within the factory for manufacture of other goods in a continuous process, the manufacturer may make out a single gate-pass at the end of the day. Rule 173G, which is part of the Chapter prescribing for removal of excisable goods on determination of duty by producers, manufacturers and private warehouse licensees, prescribes what is known as self removal process, and under Rule 173-C and G, procedure to be followed by an assessee, when this special procedure is permitted, has been laid down. Under Sub-rule (1), every assessee shall keep an account-current with the Collector separately for each excisable goods falling under different Items of the First Schedule to the Act, in such form and manner as the Collector may require, of the duties payable on the excisable goods and in particular such account (and also the account in Form R.G. 23, if the assessee is availing of the procedure prescribed in Rule 173K) shall be maintained in triplicate by using indelible pencil and double-sided carbon, and the assessee shall periodically make credit in such account-current, by cash payment into the treasury so as to keep the balances in such account-current sufficient to cover the duty due on the goods intended to be removed at any time; and every such assessee shall pay the duty determined by him for each consignment by debit to such account-current before removal of the goods. The proviso (i) to Section 173-G is in these terms:

Provided that the duty on the goods consumed within the factory in a continuous process may be paid at the end of the factory day, except that in the case of cotton yarn in respect of which duty is payable in accordance with the provisions of Sub-rule (1) of Rule 96W the duty may be paid by the manufacturer in accordance with the provisions of the said rule.

It is common ground between the parties that the petitioners are being given the benefit of paying duty on yarn at the end of the factory day instead of every time yarn is removed from the spinning section to the weaving section of the mill concerned. Chapter VIII which commences from Rule 174 onwards provides for licensing. Under Rule 174, every manufacturer, trader or person hereinafter mentioned, shall be required to take out a licence and shall not conduct his business in regard to such goods otherwise than by the authority, and subject to the terms and conditions of a licence granted by a duly authorised officer in the proper form. All manufacturers of goods other than salt and matches have to obtain licence for the manufacture and export of the article concerned. Rule 175 provides for the procedure for obtaining licence and lays down that every person referred to in Rule 174 shall make an application for the grant or renewal, as the case may be, of licence, at the time and in the manner provided for in Rule 176 to the authority who shall be such officer as <ORG> may authorise in this behalf. Rule 178 prescribed the form of licence. Under the scheme of licence set out in Chapter VIII, it is obvious that a manufacturer of every excisable article mentioned in or the other of the Items of the Schedule has to have a licence, and it is because of these requirements that each of the petitioners in the two matters before us has got a separate licence for manufacturing cotton yarn and a separate licence for manufacturing polyester yarn, apart from the licences for manufacturing cotton fabrics and polyester carbonised fabrics.

9. From what we have stated hereinabove regarding the rules, it is obvious that, under Rule 9 referred to above, removal of excisable goods from the place where they are produced or manufactured is not permitted except until the excise duty leviable on them has been paid at such place and in such manner as is prescribed in the rules. Because of the removal procedure referred to in Chapter VII-A in accordance with Rule 173-G, the petitioners before us pay excise duty by making necessary entries in the register maintained by them and by maintaining an account-current in respect of each excisable article manufactured by them.

10. The law relating to intermediate products manufactured in the course of production of a final end-produce, when the intermediate product is also an excisable article, has been clearly laid down by two decisions of <ORG>. <CITATION> . , the law is laid down by <NAME> 3, speaking for <ORG>, in the following terms:

Excise duty is on the manufacture of goods and not on the sale. Mr. <NAME> is therefore right in his contention that the fact that the substance produced by them at an intermediate stage is not put in the market would not make any difference. If from the raw material has been brought into existence a new substance by the application of processes one or more of which are with the aid of power and that substance is the same as 'refined oil' as known to the market an excise duty may be leviable under Item 23 (the present Item 12).

The question before <ORG> was whether refined oil which was an excisable article was in fact produced at an intermediate stage before <ORG> came into existence and, in this connection, <ORG> applied the test of intermediate product of refined oil as known to the market. In the particular case before <ORG>, it was not established by the excise authorities that an article which was known as refined oil to the market did in fact come into existence as an intermediate produce and hence it was held by <ORG> that the particular substance for which the dispute arose was not liable to be subjected to duty.

11. The same principle was reiterated by <ORG> in <CITATION> . In that case, it was pointed out in paragraph 14 by <NAME> speaking for <ORG>, as follows:

The Act charges duty on manufacture of goods. The word 'manufacture' implies a change but every change in the raw material is not manufacture. There must be such a transformation that a new and different article must emerge having a distinctive name, character or use. The duty is levied on goods. As the Act does not define goods, the legislature must be taken to have used that word in its ordinary, dictionary meaning. The dictionary meaning is that to become goods it must be something which can ordinarily come to the market to be bought and sold and is known to the market. That it would be such an article which would attract the act was brought out in <CITATION> contention there was that in the course of manufacture of vanaspati, a vegetable product from groundnut and til oil the respondents brought into existence at an intermediate stage of manufacturing refined oil which fell within the description of "vegetable non-essential oil, all sorts." in Item 23 of the First Schedule.... This Court held that if a new substance was brought into existence from raw materials and that substance was the same as -refined oil' as known to the market it would be subject to duty.

<CITATION> (supra) the question before <ORG> was whether Kiltn Gas was the same thing as the gas which was known to the market as carbon dioxide and, on the material before <ORG>, it was held that Kilm Gas was not carbon dioxide. In paragraph 15, it was observed by Shelat J:

The analogy given by the learned Attorney-General of a manufacturer of cotton cloth also producing at an intermediate stage cotton yarn and such cotton yarn being liable to excise duty would not help the <ORG> as cotton yarn obtained by such manufacturer is known as such in the commercial community and brought to the market for being bought and sold.

Therefore, in paragraph 15, <ORG> proceeded on the footing that, so far as cotton yarn is concerned, if cotton yarn which is an excisable article under Item ISA of the First Schedule to the Act, emerges as an intermediate product in a particular concern, then, cotton yarn will have to be subjected to excise duty.

12. In the light of these two decisions of <ORG>, it is clear that excise duty will have to be paid in the case of cotton yarn which emerges as an intermediate product. But, argues the learned Advocate General, under Section 3 of the Act, excise duty has to be levied as provided for in the Act and has to be collected in such manner as may be prescribed, and since under Rule 9 it is prescribed that the excise duty has to be paid at the time of removal from the place where the excisable article is manufactured, if the article is not removed from the factory, excise duty cannot be collected at all. In the instant case, we are not concerned with a situation where rules do not provide for collection of excise duty and hence the larger question as to whether, if the rules do not prescribe the mode of collection of excise duty, it will be open to collect excise duty at all, does not arise for our consideration. That larger question which was sought to be argued before us can, so far as the present judgment is concerned, be left open.

13. Under Rule 9, it is clear that excise duty must be paid before the goods are removed from the place where they are produced or manufactured and, in the light of Rule 175 and the provisions as to licences, it is clear that in the case of each excisable article, a separate licence has to be taken specifying the particular place where the excisable goods in question are to be manufactured. Unless the place is specified in the licence, it is not open to the manufacturer of any excisable goods to carry on manufacturing activity, and for the purposes of Rule 9, it is the place specified in the licence concerned that is the place where the goods produced or manufactured and it is the removal from the place thus specified in the licence in question that is the place referred to in Rule 9. Once this position is clearly appreciated in the light of the licensing procedure and it is borne in mind that each licence has to specify under the rules the place where excisable goods are to be manufactured, it is obvious that it is removal from the place mentioned in the licence which is material and not removal from the larger compound of the factory where excisable goods are consumed for production of further articles which may or may not be excisable goods. In the case before us, the end-product, namely, cotton fabrics and polyester carbonistd fabrics, are both liable to excise duty as such. But, the question that we have to ask ourselves is whether removal which is spoken of in Rule 9 is removal from the spinning sections which are licensed premises as shown in the affidavits before us, where yarn, an excisable article, is produced or manufactured and in respect of which licence to produce yarn, either cotton or polyester, is issued to each of the petitioners, or whether it is only removal of cotton fabrics from the factory as such is the event which will attract collection of excise duty.

14. In our opinion, it is obvious from the scheme of the rules and particularly in the light of the language of Rule 9 read in the context of licensing procedure and rules relating to licences issued to manufacturers of excisable goods, that excise duty has to be collected and paid by the manufacturer concerned at the time, so far as yarn is concerned, when yarn is removed from the spinning department to the weaving department. This conclusion gets support from the language of proviso to Rule 52A(2). It is possible that for the sake of convenience of collection, particularly in the light of self-removal procedure, under the Chapter VII-A of the Rules, the excise authorities are treating production of yarn and weaving as continuous processes and giving facilities to the petitioners on the footing that proviso (i) to Section 173-G applies, but it is obvious from what the petitioners themselves have stated that the process is not continuous. Merely because a certain facility is given, it does not mean that excise duty is not liable to be collected from the petitioners when yarn is removed from the spinning department to the weaving department.

15. The learned Advocate General appearing on behalf of the petitioners in each of these petitions has relied on the decision of <ORG> in <CITATION> . 1978 Excise Law Times (J 121). In that case, the question before <ORG> was whether excise duty was leviable on calcium carbide produced by <ORG> which was consumed in the manufacture of acetylene gas. It was found as a fact that calcium carbide manufactured by the company was not known to the market as calcium carbide, and one of the contentions which was also urged before <ORG> was that calcium carbide was not removed from the factory of the petitioner and the passage of calcium carbide from the plant where calcium carbide was manufactured to the plant where acetylene gas was manufactured, both plants being located in the same factory, was not tantamount to removal from the factory to any other place. It is obvious from what we have stated in connection with the two cases of <ORG> referred to above that since calcium carbide which was produced by the manufacturer before <ORG> did not amount to a marketable commodity known to the market as such, excise duty was not payable on the intermediate product in that particular case. However, while dealing with the question of removal from the factory, it is to be noted that the provisions of Section 4 were sought to be invoked. Now, as we have stated in the course of this judgment, Section 4 applies in those cases where excise duty is leviable ad valorem and the provisions of Section 4 provide how value has to be determined for the purpose of levying and collection of ad valorem duty. In the case before us where excise duty has to be paid on the basis of weight of yarn, the question of invoking Section 4 does not arise, and whatever has been said by <ORG> in the context of the provisions of Section 4 will, therefore, not apply in the instant case. However, the learned Advocate General relied very strongly on the decision of <ORG> on point 4 at page J-126 of the Report. He relied on the following passage:

The expression 'factory' is defined in Section 2(c) to mean any premises including the precincts thereof wherein or in any part of which excisable goods are manufactured. The definition covers the present case because the calcium carbide is manufactured in one part of the factory while the acetylene gas is manufactured in another part thereof. The definition of 'factory' makes it clear that the meaning of factory is not restricted to only the part in which the excisable goods are manufactured. On the other hand, it includes the whole of the premises in a part of which such goods are manufactured. At any rate the case of the petitioner is that the whole of the premises which comprise both the plants making calcium carbide and acetylene gas are its factory. It is not contended by the respondents that the calcium carbide plant constitutes a separate factory and the acetylene gas plant constitutes another factory. It cannot be said, therefore, that the so-called calcium carbide made by the petitioner is removed from the factory in which it is made. A perusal of Rules 9 and 49 makes it clear the question of collection of any excise duty cannot arise unless and) until the goods are removed from the factory.

16. With great respect to learned Judges of <ORG> who constituted <ORG>, we are unable to agree with the final sentence in the passage quoted above. Rule 9 applies to place where "is able goods are manufactured and not a factory and if the question of intermediate product, which is by itself an excisable article, arises for consideration, it is always a part of the larger factory where intermediate product will be manufactured if it is manufactured in the same larger premises of the factory. But, in view of the licensing procedure and in view of Rule 9, it is the place where a particular excisable article is manufactured that is material so far as collection at the stage of removal is concerned and not the larger factory. Reading in the wording of Rule 9 a factory as equivalent to the place where goods are manufactured is with great respect to learned Judges of <ORG>, not per missible and with great respect we differ from them.

17. Thus, both on the facts of the case, on the provisions of Section 4 which are not applicable to the present case and on interpretation of Rules 9 and 49 where we differ from the learned Judges of <ORG> in our opinion, this decision of <ORG> relied upon by the learned Advocate General cannot help the petitioners in this case.

18. We are not going into the elaborate discussion about Rule 96W or the new Rule 49-A which contemplate a particular type of procedure in the case of cotton yarn used in the manufacture of cotton fabrics, because it is worthwhile noting, as pointed out on behalf of excise authorities in their affidavit in reply, that with effect from June 18,1977. old Rule 90W has been omitted. That rule provided for collection of duty on cellulosic spun yarn or cotton yarn along with duty on fabrics. Old Rule 96W provided for special procedure of fixing of rate of duty when yarn was used by the same manufacturer for the purpose of manufacture of fabrics and Rule 49A now provides that, in addition to the appropriate duty payable on polyester yarn or cotton yarn, one and a half per cent of the duty payable on such cellulosic spun yarn or cotton yarn or both, has to be paid by way of interest on the amount of yarn duty, and when cotton fabrics are cleared after processing, the yam duty is payable along with three per cent interest on the duty payable on such cellulosic spun yarn, cotton yarn or both, as the case may be, and this applies to composite mills which are defined to mean manufacturers who are engaged in spinning of cotton yarn or weaving or processing of cotton fabrics with the aid of power and have a proprietary interest in at least two of such manufacturing activities. Rule 49-A, we are informed, has come into force with effect form the end of November, 1977. This Rule 49-A and old Rule 96-W indicate that so far as composite textile mills are concerned, special procedure has been laid down under the rules for collection of duty leviable on yarn which is consumed by the same manufacturer in a composite mill for the purpose of manufacturing fabrics.

19. Under these circumstances, our conclusion is that removal, for the purpose of Rule 9 of the Central Excise Rules, is removal from the spinning department to the weaving department and not removal from the premises of the factory as a whole. This conclusion is the only conclusion which we can come to in the light of rules relating to licence under Chapter VIII of the Rules. Each of these special civil applications, therefore, fails and is dismissed with costs. Rule discharged with costs in each matter.


PETITIONER: NEW INDIA SUGAR WORKS ETC. ETC. Vs. RESPONDENT: STATE OF UTTAR PRADESH AND ORS. DATE OF JUDGMENT27/02/1981 BENCH: FAZALALI, SYED MURTAZA BENCH: FAZALALI, SYED MURTAZA REDDY, O. CHINNAPPA (J) CITATION: 1981 AIR 998 1981 SCR (3) 29 1981 SCC (2) 293 1981 SCALE (1)422 CITATOR INFO : R 1987 SC1802 (10) F 1987 SC2351 (5,9,12) ACT: Retrospective operation of law-Order levying duty on <NAME> issued-Order, whether applies to existing stocks or only to future stocks-Price fixed less than manufacturing cost-Order, if liable to be quashed. HEADNOTE: On the questions (1) whether an order imposing a levy on <NAME> could have retrospective operation so as to apply to sugar manufactured prior to the date of the order and (2) whether in fixing the price of levy sugar the Government should consider that the price fixed should be sufficient to cover the manufacturing cost. ^ HELD: 1. It is not the question of retrospectivity of a statute but its actual working that is relevant. It is settled law that where a statute operates in future it cannot be said to be retrospective merely because within the sweep of its operation all existing rights are included. Once the notification for imposing the levy was made it will naturally apply to the existing stocks of khandsari with the petitioners irrespective of whether it was manufactured before or after the order. [31B; 30G] 2. The policy of price control has for its dominant object equitable distribution and availability of the commodity at fair price to benefit the consumers. Individual interest, however precious, must yield to the larger interest of the community namely the consumers. Even if the petitioners have to bear some loss there could be no question of the restrictions imposed on them being unreasonable. [32 B] The fixation of price would be in the interest of consumers rather than that of the producers. Moreover since the petitioners were allowed to sell freely at any rate they liked, the remaining 50% of sugar after excluding the 50% which they had to give to levey as also the produce by the second and third processes, the loss, if any, caused to the petitioners, would be minimal. [32 G] JUDGMENT:

ORIGINAL JURISDICTION: Writ Petition Nos. 896/81, 865- 890, 577-591, 592-606, 607-621, 622-628, 629-633, 634-37, 964-88, 544, 545-575, 766-774, 775-776, 902-63, 897-901, 535-37, 532-34, 529-531, 639 and 540-43/81.

(Under Article 32 of the Constitution) <NAME> for the Petitioners in WP 896/81. <NAME> for the Petitioners in WP 865-890/81. <NAME>, <NAME> and <NAME> for the Petitioners in WPs 540-43/81.

<NAME>, <NAME>, <NAME> and <NAME> for the Petitioners in WPs 529-37, 544-575, 577-538, 766-776 and 897-988/81.

<NAME>, <NAME> and <NAME> for the Petitioners in WPs 634-37/81.

<NAME>, Attorney General, <NAME>, and Mrs. <NAME> for the Respondent (State of U.P.) in WPs 540-43, 529-37, 540-43, 544-77 and 577-638/81.

<NAME>. and <NAME> for the State of Madhya Pradesh.

Miss <NAME> for <ORG>.

The Order of the Court was delivered by <NAME>, J. Having heard counsel for the parties at great length we are satisfied that there is no violation of the fundamental right of the petitioners enshrined in Art. 19(1)(g) of the Constitution of India nor is Art. 14 attracted to the facts of the present case. There is, therefore, no good ground to entertain the petitions. We would, however, like to add that on the materials placed before us the <ORG> may consider the desirability of adopting such measures as may soften the rigours of the impugned orders which, though not arbitrary or excessive so as to violate Art. 14 or 19, do merit some consideration by the <ORG> in order to effectuate the policy under which the impugned notification was made.

There are, however, two arguments urged before us which need special mention. In the first place it was submitted that in the U.P. cases the order impugned imposing a levy on the khandsari produced by the petitioners cannot have any retrospective operation so as to apply to the stock of sugar manufactured prior to the date of the order and would apply only to the sugar produced after the coming into force of the impugned notification. So far as this argument is concerned we find no substance in the same because it is not a question of retrospectivity of the statute but its actual working. Once the notification imposing the levy was made it will obviously apply to stock of khandsari produced by the petitioners either before or after the order. This principle has been clearly laid down by the Constitution Bench of this <ORG> in the case of <CITATION> .(1) where <NAME>, J. speaking for the <ORG> regarding the scope of a Rent Act and Amendment in Rent Act observed as follows:

"In this connection it is relevant to distinguish between an existing right and a vested right. Where a statute operates in future it cannot be said to be retrospective merely because within the sweep of its operation all existing rights are included.

This Court followed the dictum of <ORG> in the case of <NAME> v. Gwynne.(1) In the aforesaid case <ORG> while construing an amendment in the Act by which the contract was governed observed as follows:-

" The Act of 1881 thus expressed that in the case of leases made either before or after the commencement of the Act a covenant not to assign without licence should be enforceable just as before.....This section is to be read as if it were contained in the Act of 1881, and is dealing with a subject-matter mentioned in the Act of 1881, and as to which there is in that Act a provision that the enactment shall apply to leases made either before or after commencement of the Act."

<NAME>, M.R. in a concurring judgment while construing second amendment in section 14 of the Conveyancing Act pointed out thus:-

"In the First place, the language of the section is perfectly general, "in all leases," and there is nothing in the section itself to confine it to leases subsequent to the Act.

Almost every statute affects rights which would have been in existence but for the statute."

In these circumstances, therefore, once the notification for imposing the levy was made it will naturally apply to the stock of sugar which was with the petitioners irrespective of the fact that it was manufactured before or after the Order.

It was next strongly contended that in fixation of the price of levy sugar the Government has not taken into consideration the fact that the petitioners would undergo a serious loss because the price would not be sufficient even to cover their manufacturing cost. We are, however, unable to agree with this argument. The policy of price control has for its dominant object equitable distribution and availability of the commodity at fair price so as to benefit the consumers. It is manifest that individual interests, however, precious they may be must yield to the larger interest of the community namely, in the instant case, the large body of the consumers of sugar. In fact, even if the petitioners have to bear some loss there can be no question of the restrictions imposed on the petitioners being unreasonable. <CITATION> .(1) this Court observed as follows:

"If fair price is to be fixed leaving a reasonable margin of profit, there is never any question of infringement of fundamental right to carry on business by imposing reasonable restrictions.

In determining the reasonableness of a restriction imposed by law in the field of industry, trade or commerce, it has to be remembered that the mere fact that some of those who are engaged in these are alleging loss after the imposition of law will not render the law unreasonable." (Emphasis Supplied) Similar view was taken by this <ORG> in the case of <ORG> and <ORG> v. <ORG>) where the <ORG> speaking through <ORG>, observed as follows:

"It has also to be remembered that the object is to secure equitable distribution and availability at fair prices so that it is the interest of the consumer and not of the producer which is the determining factor in applying any objective tests at any particular time."

In this view of the matter the primary consideration in the fixation of price would be the interest of the consumers rather than that of the producers. Moreover, we think that since the petitioners are allowed to sell freely at any rate they like the remaining fifty per cent of sugar (after excluding the fifty per cent which they have to give for levy) as also the produce by the second and third processes, the loss if any caused to the petitioners would be minimal.

Lastly, it was urged that Sub-Clause (5)-which is Sub- Clause (3) in the notification issued by <ORG>

in the impugned notification issued by the U.P. Government is extremely arbitrary inasmuch as by insisting on certificates it deprived the petitioners of the free sale of sugar of the remaining amount of fifty per cent as also the Khandsari produced by second and third processes. We see some force in this argument but the Attorney General frankly conceded that he will see that no inconvenience on this score is caused to the petitioners. He gave an undertaking to the Court that he will get the respective Sub-Clauses 5 and 3 of the impugned orders of the U.P. and Madhya Pradesh Governments deleted or withdrawn so as to allow the petitioners to sell the remaining amount of sugar as also the stock produced by the second and third processes without any hitch or hindrance. This will, however, be subject to routine and quick inspection. In view of this undertaking, therefore we feel that a substantial part of the grievances of the petitioners would be removed. To be on the safe side, however we allow the stay granted in all the petitions to continue until the provisions of respective Sub-Clauses 3 and 5 passed by the State Governments concerned are withdrawn.

We may also emphasise the fact that the amount of sugar taken by the Government through levy should be properly stored and duly protected from rain and rot and be despatched to the various control depots expeditiously in order to ensure a quick and equitable distribution of the commodity amongst the people at moderate rates.

The Government may also consider the desirability of giving a bare minimum hearing to the representative of the owners of the cane crushers in future before fixing the rate at which the levy is taken from the owners so as to see that the owners of the crushers are not put to such great loss that they are completely wiped out from business.

With these observations the petitions are dismissed.

N.K.A. Petitions dismissed.