Full Judgment
3. The appellants are engaged in the manufacture of cotton/yarn and cotton fabrics covered by T.I. ISA and 191 of the Central Excise Tariff 1944 (sic) up to 28-2-1986 and thereafter under Chapters 54 and 55 of the Central Excise Tariff Act, 1985 and also of man-made fabric and yarn covered by T.I. 221, 181-11 and 18E of the Central Excise Tariff 1944 upto 28-2-1986 and thereafter under Chapters 54 and 55 of the Central Excise Tariff Act, 1985. They are holders of the Central Excise licence, L-4 CF/21/49 CY-1/61 and ASF-48/63. On 16-6-1987 the appellants filed for the first time, classification list bearing No. 1, dated 16-6-1987 in respect of coated and laminated with Low Density Polyethylene Cotton Fabrics covered by Chapter Heading 5903.11 of the Central Excise Tariff Act, 1985. They have got approved bonded store rooms G-7 and G-9 located in the licensed premises, as required under the provisions of Rule 47 of the Central Excise Rules. M/s. Mafatlal Apparel Mfg. Co. Ltd. wholly owned subsidiary of the appellants, are engaged in the manufacture of garments and in the year 1981 they imported ICL machine for the manufacture of coated interlining fabric and installed the same in the mill of the appellants. The appellants started manufacturing the coated fusible interlining fabrics on that machine out of grey fabrics received from M/s. Mafatlal Apparel Mfg.
Co. Ltd. and thereafter supplied the entire quantity so manufactured to them (M/s. Mafatlal Apparels). The appellants in order to evade the Central Excise duty wrongly classified the cotton fabric coated and laminated with High Density polyethylene under T.I. 191(b) instead of T.I. 191-11 during the period September 1981 to February 1986 and thereafter from 28-2-1986 to 17-6-1987 under Chapter Heading 52.06 of the new Tariff, instead of properly classifying under sub-heading 5903.19. They also after 17-6-1987 wrongly classified the product under sub-heading 5903.11 and Heading 52.06 as against proper classification Chapter sub-heading 5903.19. The officers of the Bombay Division G-II visited the premises of some of the customers of the appellants and made enquiries. They recorded statement of Mukesh Chawala who was a partner in the standard agencies and quality traders, the customers of the appellants on 7-3-1988. The samples of the fusible interlining fabrics purchased from M/s. Mafatlal Apparel Mfg. Co. Ltd. were also drawn by the officers on 8-3-1983 and documents were also seized. The statements of Shri B.R. Desai, Deputy Sales Manager of M/s. Mafatlal Apparel Mfg. Co. Ltd. was recorded. The preliminary investigations by way of scrutiny of all the records showed that M/s. Mafatlal Apparel Mfg. Co. Ltd. did procure ICL machine in the year 1981 and installed the same in the premises of the appellants' factory who manufactured fusible interlining fabric on that machine and cleared the same by misclassifying only as cotton fabrics instead of as coated fabric. The Central Excise Officers also visited the Head Office of the appellants and of M/s. Mafatlal Apparel Mfg. Co. Ltd. on 23-3-1988 and withdrew the records and documents of the last five years under statements of Shri B.D. Datar, Secretary of the appellants' Mill and V.H. Kapadia, Chief Accountant of M/s. Mafatlal Apparels Mfg. Co. Ltd. During the course of enquiries, the appellants came forward with a letter 23-3-1988 and gave cheque for Rs. 30 lakhs drawn on the Central Bank of India on account of the duty leviable, if any, on the sale of the fabrics made by them to M/s. Mafatlal Apparels Mfg. Co. Ltd. They also did not dispute that the fabric did not satisfy the definition as given in the erstwhile Tariff T.I. 191-11 and in Chapter 59.03 of the new Tariff w.e.f. 1-3-1986. They only alleged that by mistake the fabric was not classified under sub-heading 5903.19 and offered to pay the differential duty without prejudice to their right in this case.
4. The report of the Deputy Chief Chemist to whom the samples for analysis were sent showed that the fabric was HDPE coated fusible interlining and coating was visible to the naked eyes. Similarly, report of Chemical Analysis conducted by the Deputy Chief Chemist, of Moulding Powder used by the appellants, showed that it was high density polyethylene synthetic resin.
5. Show cause notice was accordingly issued to the appellants for having misclassified the product with a view to evade the Central Excise duty and concealed the true facts from the Excise department and removed the goods in a clandestine manner without paying proper duty.
They were called upon to pay the differential duty and penalty was also proposed to be imposed on them. The appellants, however, contested the correctness of the show cause notice. They denied the allegations made therein. They denied of having misdeclared HDPE coated fusible interlining fabric as bleached sheeting, dye sheeting, mafinised sheeting etc. under T.I. 191-11 of the erstwhile 1st schedule of the Central Excises & Salt Act, 1944 instead of declaring the same as HDPE coated fabric classifiable under T.I. 19-11 of erstwhile Tariff up to 27-2-1986. They also disputed of having misdeclared the product under Heading 62.06 of the new Tariff Act, 1985 up to 16-6-1987 instead of under Heading 59.03 and sub-heading 5903.19.
6. The controversy before the Collector centred round the three questions, namely (i) misclassification of the product, (ii) undervaluation and (iii) clandestine removal. The Collector, as is evident from his order in original under appeal has based his findings on the misclassification of the product on the basis of the statements of the witnesses recorded during investigation and the reports of the Deputy Chief Chemist. He accepted the Revenue's contention that the correct classification of the cotton fabric coated and laminated with HDPE during the period 9/81 to 2/1986 was under T.I. 19 II while the appellants wrongly classified it under T.I. 191 (b) of the old Tariff.
He had also held that during the period 3/86 to 17-6-1987 the product was classifiable under sub-heading 5903.19 while the appellants wrongly classified it under Heading 52.06. Similarly the Collector had observed that instead of classifying the product under sub-heading 5903.19 from 17-6-1987 onwards the appellants classified illegally under Heading 59.06 of the new Tariff. The other two issues regarding the undervaluation and clandestine removal of the product had also been decided by the Collector against the appellants.
7. Feeling aggrieved with this order in original the appellants have come in appeal.
9. The learned Counsel for the appellants has at the outset contended that there had been violation of principles of natural justice while adjudicating the matter as the Collector did not afford them opportunity to cross-examine the witnesses on the statements of which he had recorded the findings about the classification of their product under sub-heading 5903.19 by holding it as cotton fabric coated and laminated with HDPE Moulding powder. Therefore, the impugned order deserves to be set aside and the case to be sent back for readjudication after allowing them opportunity to cross-examine the witnesses.
10. The learned JDR, on the other hand, has not been able to controvert this contention of the counsel with any forced as he has not been able to deny that the cross-examination of the witnesses whose statements were recorded during the investigation was not allowed to the appellants.
11. We have gone through the order in original of the Collector and its perusal shows that while coming to the conclusion that the fabric manufactured by the appellants was classifiable under Heading 59.03 (sub-heading 5903.19) of the new Tariff being fabric impregnated, coated/laminated with plastics which was visible to the naked eyes had relied upon the statements of the witnesses recorded during enquiry.
But those witnesses were never allowed to be cross-examined by the appellants in order to prove their version that their product did not fall under Heading 59.03 being partially or discreetly coated with plastic and was covered by Clause (3) of Section Note 2 of Chapter 59 under which certain types of fabrics had been excluded from the ambit of Heading 59.03. The reading of Section Note 2 of Chapter 59 makes it clear that Heading No. 59.03 applies only to textile fabric, impregnated, coated, covered or laminated with plastics other than the fabric mentioned in its sub-clauses (1) to (5). It has also no application to the textile fabric partially or discreetly coated with plastics being covered by Clause (3) of the Section Note 2.
12. This has certainly resulted in miscarriage of justice when the appellants had not been afforded proper opportunity to substantiate their version. Therefore, on this score alone, the impugned order of the Collector deserves to be set aside and the case has to be remanded to the Collector for readjudication afresh after complying with the principles of natural justice by affording proper opportunity to the appellants to cross-examine the witnesses whose statements were recorded during the course of investigation at their back by the Central Excise Officers. The Collector has also failed to take note of the fact that the classification lists was also filed in respect of the product not only under the old Tariff when the same was in force, but also under the new Tariff and there is nothing on the file to suggest that the same were ever rejected or modified by the department by classifying the product under T.I. 19-11 of the old Tariff and under Chapter 59.03 (sub-heading 5903.19) of the new Tariff. In such a situation the law laid down by the Apex Court in C.C.E., Baroda v.Cotspim, 1999 (113) E.L.T. 353 that the reclassification of the goods and consequential demand could only be effective prospectively from the date of show cause notice and not retrospectively, was also required to be kept in mind by the Collector but he had not so done.
12. In view of the discussion made above, the impugned order of the Collector is set aside. The case is sent back to the Collector for readjudication of the matter afresh in accordance with law after affording proper opportunity to both the parties.