Full Judgment
2. After granting a personal hearing the Collector of Central Excise, Chandigarh rejected the contention of the appellants and held the charges made in the show cause notice duly established. He, therefore, demanded duty of Rs. 59,082.48 paise on the 2735.300 Kgs of yarn (after making allowance for wastage out of the quantity of fibre received) falling under TI 18-B(ii) CET and further imposed a penalty of Rs. 60,000/-. On appeal to the Central Board of Excise and Customs, the Central Board under order dated 29.12.1981 confirmed the duty demand but reduced the penalty to Rs. 10,000-00, accepting the submissions of the appellants that the increase of the nylon contents in the yarn was unintentional. It is against the said order that the appellants preferred the present appeal.
3. We have heard Smt. Archna Wadhwa, Advocate for the appellants and Shri K.C. Sachar for the department.
4. Smt. Wadhwa contended that when, after receipt of the results of the retest, the appellants asked for a further test also the same should have been granted by the department and when the same was declined there has been a failure in following principles of natural justice and for that reason itself the orders are liable to be set aside. The authenticity of the sample was never in dispute. When a test was done and the result was communicated the appellants wanted a retest. The department rightly conceded the demand and a retest was done on the remnant sample. The result of the retest was to reveal excess over the 16.66% of nylon contents required under item 18-B(i). When there had thus been two tests, the result in both of which was against the contention of the appellants, it was not necessary for the department to order a further test also merely because the appellants required the same. We therefore reject this argument.
5. Smt. Wadhwa then pointed out that there was a variation in the percentage of nylon fibre contents in the two tests conducted and therefore neither should have been accepted as proper. We are unable to accept this contention also since the variation in the result of the two tests was not very significant.
6. Smt. Wadhwa claims that the spinning in the unit of the appellants was on the worsted system and in this system there was bound to be variation in the percentage of the constituent fibres, depending upon the defects in the machine as well as the atmospheric conditions. This argument is also not very valid when it is seen that in both the tests the percentage of nylon contents was higher than claimed by the appellants.
7. The appellants had been contending at all times that they had been receiving the constituent fibres (wool tops, nylon tops and viscose tops) piece-meal on several dates and not all on a single occasion and therefore the blending of the different constituent fibres was not on one occasion, leading to spinning therefrom thereafter, but that the fibres were blended on different occassions, depending upon receipts from the customer on several dates, and therefore the department was in error in proceeding on the result of the test as conclusive for the entire lot. In their reply dated 22.6.1981 they had mentioned "as would be observed from the blend register in the custody of the department the tops were received in piece-meal and the same were blended piece-meal manner." They had reiterated this contention before the Collector during adjudication. In their appeal to the Board also they had claimed that the Collector had failed to properly appreciate their plea that the results of the tests of the representative sample could not be applied to the whole quantity of lot No. 25 for the reasons explained to the Collector. Smt. Wadhwa has raised the same contention before us also. But Shri Sachar refers us in this connection to the following observation in paragraph 11.1 of the order of the Collector : I observe that the sample of blended yarn in this case was drawn by the Sector Officer on 15.7.1980 from running lot No. 25 which comprised of blended tops weighing 2931.300 kgs. as per entries made by the assessee in their blend register. Since it is a well known fact that particular lot No. is allotted to a given lot of raw materials from which yarn of a particular quality (having same fibre composition, count, No. of twists per inch etc.) is to be spun, I do not accept the defence plea that the lot No. is allotted from the point of view of colour of tops only and not on the basis of percentage of different tops (i.e. composition) used in the manufacture of any yarn." 8. Shri Sachar therefore contends that the fact that the sample drawn represented the entire quantity spun into yarn by the appellants would not admit of any dispute. But we may note in this connection that the appellants have produced copies of letters under which their customer, Lakshmi Hosiery, had sent them the tops. These letters are dated 8.7.1980, 11.7.1980, 14.7.1980, 15.7.1980 and 21.7.1980. The supplies thereunder are seen to be as follows:Date Wool tops Nylon tops Viscose tops------------------------------------------------------------------------------8.7.1980 700. kg 208.3 kg 202.8 kg.11.7.1980 324.6 kg 101.7 kg 75.5 kg14.7.1980 689.1 kg - -15.7.1980 288.2 kg 92.4 kg 198.9 kg21.7.1980 - 40.8 kg 9.0 kg------------------------------------------------------------------------------ 2001.9 kg 443.4 kg 486.4 kg------------------------------------------------------------------------------ It is thus seen that it was only after receipt on 21.7.1980 also that the total quantity received amounted to 2931.300 kgs. Therefore the sample drawn on 15.7.1980 could certainly not have been representative of this total quantity of 2931.300 kgs. as mentioned in the show cause notice issued on 5.4.1981. Unfortunately no copy of the memo drawn at the time of drawal of samples has been produced before us, nor a copy of the test memo. It is therefore not clear to us whether in the memo drawn at the time of drawing samples the quantity of blended fibre then available had been shown and the sample described as representative of that quantity. It is apparent that the appellants have been blending three types of tops as and when received and had been spinning yarn out of the blended mixture. This blending was obviously not done on a single occasion but evidently took place as and when sufficient quantity of each variety of tops was available in order to prepare a blend for manufacture of a yarn that would have 70% wool, 15% nylon and 15% viscose. It is also apparent that on 15.7.1980 a portion of the blended fibre alone could have been available for drawal of samples, the rest having already been spent in the spinning. In the circumstances, the order of the Collector as if the sample drawn was, or could have been, representative of the entire quantity of 2931.300 kgs. of lot No. 25 cannot be correct. It is explained for the appellants that lot number is allotted with reference to the colour of the yarn to be spun and since the entire yarn to be spun and delivered to Lakshmi Hosiery was of one colour there was only one lot number allotted, though the blend was prepared not on a single occasion but piece-meal.
9. We are therefore satisfied that in view of the special circumstances of the case the learned counsel is correct when she contends that the result of analysis of the test sample drawn could not be applied to the entire quantity of yarn spun by the appellant out of the material supplied by the customer but could be applied only to that quantity of the available blend from which the sample was drawn on 15.7.1980.
10. Another reason stated by the Collector for his conclusion, that the test result was to apply to the entire quantity of yarn spun, is that the weight of the nylon tops supplied was more than 1/6th of the total weight of different types of tops supplied. He, therefore, concludes that if this quantity of nylon tops had been blended with the other tops received the resultant yarn would necessarily have had more" than 1/6th of nylon fibre contents. This conclusion of the Collector does not also appear to be correct. The tabular extract supra would show that the total quantity of tops received was 2931.300 kgs. of which the nylon tops totalled 443.400 kgs. This would amount to a little over 15% only. Therefore the conclusion drawn by the Collector, based on the percentage of nylon tops in the total weight of tops received, is also not correct.
11. Smt. Wadhwa further relies on the following decisions for supporting her plea that the result of test of a sample could be relevant only with reference to the lot from which sample had been drawn and not other lots. As earlier mentioned her contention is that lot No. 25 had been allotted with reference to the colour and not with reference to blend that was prepared when the lot number was allotted, the blend being prepared periodically as and when constituent tops were received from the customer. The decisions relied on by her are New Era Hindustan Woollen Mills (1978 ELT-J 661 A, decision of the Government of India); Howrah Enterprises [1982 ELT 420, a decision of the Central Board of Excise and Customs], National Textile Corporation Ltd. [1982 ELT 639 - decision of Government of India]; Aggarwal Metal Works [1982 ELT 689 - Decision of the Government of India] and Madhu Wool Spinning Mills [1983 ELT 2200 decision of the Bombay High Court]. As earlier mentioned, the peculiar facts of this case support the contention that the result of the test of the sample drawn could be true only with reference to quantity of blended fibre that was available when the sample was drawn and not with reference to quantity already spun into yarn or quantity blended subsequently.
12. Smt. Wadhwa further contended that so far as penalty is concerned the Board should have set aside the entire penalty in view of its own finding that it accepted the appellant's submission that the increased use nylon fibre was unintentional. The Board had found as a question of fact that the appellants had no intention to evade duty by using more of nylon fibre than was permissible under TI 18-B(i), CET. We agree that on this finding the order of the Collector regarding imposition of penalty should have been fully set aside and not merely partly.
13. Accordingly we hold that the appeal should be allowed to the extent of setting aside the penalty in full and also modifying the orders of the lower authorities in respect of demand for duty by confining the demand under TI-18-B(ii) CET with reference to yarn spun out of the quantity of the blended fibre from which the sample had been drawn on 15.7.1980. The appeal is allowed on the above terms.