Supreme Court clarifies provisional assessment rules under Central Excise Act: Oswal Petrochemicals vs. Commissioner of Central Excise (28 April 2025)

Introduction

Date of the Judgment: 28 April 2025

Citation: 2025 INSC 578

Judges: Abhay S. Oka, J., Ujjal Bhuyan, J.

Can excise duty be levied based on re-classification of goods without proper communication of test reports? The Supreme Court of India addressed this critical question in the case of M/S Oswal Petrochemicals Ltd. vs. Commissioner of Central Excise, Mumbai – II. This judgment clarifies the requirements for re-classification of goods and the conditions under which provisional assessments can be made under the Central Excise Act, 1944. The bench comprised Justice Abhay S. Oka and Justice Ujjal Bhuyan.

Case Background

M/S Oswal Petrochemicals Ltd. (hereinafter referred to as ‘the appellant’), a manufacturer of excisable goods, filed a classification list effective from 03.11.1989. This list included:

• ✓ Dripolene ‘C’ under chapter sub-heading 2713.90, claiming concessional duty under Notification No. 75/84.
• ✓ Cyclo Hydro Carbons (BTX and BVR) under chapter sub-heading 2902.00.
• ✓ Benzene and Toluene under chapter sub-heading 2902.00, claiming exemption under various notifications.
• ✓ Ethylene and Propylene under chapter sub-heading 2901.90, claiming exemption under various notifications.

The Assistant Collector of Central Excise approved this classification list on 26.04.1990. However, on 04.10.1990, the department collected samples of Benzene and Toluene for chemical testing. The analysis, communicated on 29.01.1991, indicated a purity level below 96%, potentially warranting re-classification under headings 2707.10 and 2707.20.

Subsequently, the Collector of Central Excise directed the Assistant Collector to appeal the initial approval. The department filed an appeal, arguing that the appellant had misclassified its products. Despite the approved classification, a show-cause notice dated 26.03.1991 was issued, proposing re-classification and seeking differential excise duty, along with penalties and interest, for the period from September 1990 to January 1991. Similar notices followed, covering February 1991 to December 1992, demanding a total excise duty of Rs. 1,75,30,861.00.

Timeline

Course of Proceedings

The initial approval of the classification list by the Assistant Collector was challenged by the department before the Collector (Appeals). The Collector (Appeals) remanded the matter back to the Assistant Collector for re-determination of the classification. Aggrieved by this remand order, the appellant appealed to the Customs and Excise and Gold (Control) Appellate Tribunal, which remanded the matter to the Commissioner of Central Excise (Appeals) to decide the issue of limitation afresh.

The show-cause notices issued to the appellant were adjudicated by the Assistant Commissioner, who confirmed the re-classification and levied duty and penalty. The Commissioner (Appeals) dismissed the appellant’s appeal against this order. Subsequently, the Deputy Commissioner finalized the provisional assessments, demanding differential duty, which was partially reduced by the Commissioner (Appeals) on appeal. The CESTAT then remanded the matter back to the Commissioner (Appeals) for reconsideration of the provisionality of assessments.

On remand, the Commissioner (Appeals) held that the disputed products were not under provisional assessment, a decision that the department challenged before the CESTAT. Finally, the CESTAT disposed of all appeals, leading to the current appeals before the Supreme Court.

Legal Framework

This case primarily revolves around the interpretation and application of the Central Excise Act, 1944, and the Central Excise Rules, 1944. Key provisions include:

• ✓ Section 35L(b) of the Central Excise Act, 1944, which provides for appeals to the Supreme Court.
• ✓ Rule 173B of the Central Excise Rules, 1944, concerning the filing of classification lists by manufacturers.
• ✓ Rule 56 of the Central Excise Rules, 1944, which outlines the procedure for taking samples for excise purposes and communicating test results.
• ✓ Rule 9B of the Central Excise Rules, 1944, which governs provisional assessments to duty.

Rule 56(2) of the Central Excise Rules, 1944 states:

“The officer referred to in sub -rule (1) shall conduct the test from the samples taken under that sub -rule and communicate to the manufacturer the result of such test.”

Rule 9B(1) of the Central Excise Rules, 1944, as it then existed, states:

“Notwithstanding anything contained in these rules, – (a) where the assessee is unable to determine the value of excisable goods in terms of section 4 of the Act on account of non -availability of any document or any information; or (b) where the assessee is unable to determine the correct classification of the goods while filing the declaration under rule 173B; the said assessee may request the proper officer in writing giving the reasons for provisional assessment to duty…”

Arguments

Appellant’s Arguments:

• ✓ The re-classification of Benzene and Toluene from Chapter 29 to Chapter 27 was based on test reports, samples of which were drawn *after* the approval of the classification list No. 1/89-90.
• ✓ The test reports dated 29.01.1991 were never communicated to the appellant, depriving them of the opportunity to challenge the reports or request a re-test.
• ✓ CESTAT erred in placing the burden on the appellant to prove that the communicated test results were incorrect.
• ✓ Non-communication of test reports violated principles of natural justice and Rule 56 of the Central Excise Rules.
• ✓ CESTAT failed to consider that the appellant had upgraded its manufacturing process, achieving purity levels above 96%.
• ✓ Assessments cannot be deemed provisional merely because some RT-12 returns were marked as provisional.
• ✓ The department’s own records indicated that assessments were not provisional, as no order under Rule 9B of the Central Excise Rules was passed, and no B-13 bond was executed.

Respondent’s Arguments:

• ✓ There is no bar to re-classification based on fresh facts. Samples were drawn and tested after the initial approval of the classification list.
• ✓ The gist of the test reports was communicated to the appellant on 29.01.1991. The appellant never claimed that this gist was incorrect or requested a re-test.
• ✓ The appellant did not inform the department about any upgrades to its facilities or provide test results indicating purity levels above 96%.
• ✓ CESTAT correctly observed that RT-12 returns were assessed provisionally for January and February 1993.
• ✓ The appellant did not challenge the endorsements made by the Superintendent on the RT-12 returns indicating provisional assessments.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for reconsideration:

1. Whether a duty demand based on re-classification of Benzene and Toluene from chapter 29 to chapter 27 is sustainable when such re-classification is based on test reports dated 29.01.1991 on samples drawn in October, 1990, of which only a gist was provided to the appellant vide letter dated 29.01.1991?
2. Whether CESTAT was justified in treating the assessments provisional for Benzene and Toluene for January and February 1993 in the absence of any order passed under Rule 9B of the Central Excise Rules, 1944, and without executing any B-13 bond?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

• ✓ Rule 56 of the Central Excise Rules, 1944: Pertains to taking samples for excise purposes.
• ✓ Rule 9B of the Central Excise Rules, 1944: Deals with provisional assessment to duty.
• ✓ Coastal Gases and Chemicals Pvt. Ltd Vs. Assistant Collector of Central Excise, Visakhapatnam [(1997) 7 SCC 223]: Dealt with the requirements for establishing clearances on a provisional basis.
• ✓ Metal Forgings Vs. Union of India [(2003) 2 SCC 36]: Reaffirmed the necessity of an order under Rule 9B and payment of duty on a provisional basis to establish provisional clearances.
• ✓ Commissioner of Central Excise, Calcutta Vs. Hindustan National Glass & Industries Ltd [(2005) 3 SCC 489]: Reinforced the criteria for establishing provisional clearances.

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• ✓ **Rule 56 of the Central Excise Rules, 1944**: The Court emphasized the mandatory nature of this rule, particularly sub-rule (2), which requires the officer taking samples to communicate the test results to the manufacturer. The Court found that providing only a gist of the test reports did not comply with this rule and violated the manufacturer’s right to seek a re-test.
• ✓ **Rule 9B of the Central Excise Rules, 1944**: The Court outlined the requirements for provisional assessment under this rule, including a written request from the assessee, an order from the proper officer, and the execution of a bond. The Court found that these requirements were not met in this case, and therefore, the assessments could not be treated as provisional.
• ✓ **Coastal Gases and Chemicals Pvt. Ltd Vs. Assistant Collector of Central Excise, Visakhapatnam [(1997) 7 SCC 223]**: The Court relied on this case to emphasize that an order under Rule 9B and payment of duty on a provisional basis are essential to establish that clearances were made on a provisional basis.
• ✓ **Metal Forgings Vs. Union of India [(2003) 2 SCC 36]**: The Court reiterated the view that to establish provisional clearances, there must be an order under Rule 9-B and evidence that goods were cleared and duty was paid on that basis.
• ✓ **Commissioner of Central Excise, Calcutta Vs. Hindustan National Glass & Industries Ltd [(2005) 3 SCC 489]**: The Court referred to this case to support the view that compliance with Rule 9B is necessary for provisional assessments.

What weighed in the mind of the Court?

The Supreme Court’s decision in M/S Oswal Petrochemicals Ltd. vs. Commissioner of Central Excise was primarily influenced by concerns over procedural fairness and adherence to legal requirements. The Court placed significant emphasis on the following:

• ✓ **Violation of Natural Justice:** The Court was deeply concerned that the appellant was not provided with complete test reports, which formed the basis for re-classifying their products. This lack of transparency and opportunity to challenge the findings was seen as a fundamental violation of natural justice.
• ✓ **Non-Compliance with Rule 56:** The Court underscored the mandatory nature of Rule 56 of the Central Excise Rules, which requires the communication of test results to the manufacturer. The Court found that providing only a gist of the test reports was insufficient and did not meet the requirements of the rule.
• ✓ **Failure to Follow Rule 9B:** The Court highlighted the procedural requirements for provisional assessments under Rule 9B of the Central Excise Rules. The absence of a formal order and the lack of a bond executed by the appellant were critical factors in the Court’s decision that the assessments could not be treated as provisional.
• ✓ **Belated Sampling and Testing:** The Court noted that the department’s belated sampling and testing, long after the approval of the classification list, cast doubt on the entire procedure.

The Court’s sentiment analysis reveals a strong emphasis on due process, transparency, and adherence to legal procedures. The Court was keen to ensure that the appellant was treated fairly and had an adequate opportunity to challenge the actions of the excise department.

Sentiment Analysis Ranking

Fact:Law Ratio Analysis

The Fact:Law ratio indicates that while the factual aspects of the case were important, the legal considerations, particularly the interpretation and application of Rule 56 and Rule 9B of the Central Excise Rules, played a more significant role in the Court’s decision.

Logical Reasoning: Re-classification Issue

Judgment

The Supreme Court allowed the appeals filed by M/S Oswal Petrochemicals Ltd., setting aside the order of CESTAT and related orders of the Assistant Commissioner and Commissioner (Appeals). The Court’s decision was based on the following key findings:

• ✓ The re-classification of Benzene and Toluene from chapter 29 to chapter 27 was not sustainable because the test reports, which formed the basis of the re-classification, were not fully furnished to the appellant. This violated the principles of natural justice and Rule 56 of the Central Excise Rules.
• ✓ The assessments for January and February 1993 could not be treated as provisional because there was no order passed under Rule 9B of the Central Excise Rules, and no B-13 bond was executed.

The Court emphasized the mandatory nature of Rule 56, stating that “The use of the word shall in sub-rule (2) is indicative of the mandatory nature of the provision. The officer who has taken the samples for testing has to communicate the result of such test to the manufacturer.”

Regarding provisional assessments, the Court reiterated that “in order to establish that the clearances were of provisional basis, an order under Rule 9B and payment of duty on provisional basis are essential.”

The Court concluded that the department’s actions were not in accordance with the law and that the appellant was entitled to relief.

Key Takeaways

• ✓ Excise departments must ensure that manufacturers are provided with complete test reports when re-classification of goods is based on such reports.
• ✓ Provisional assessments require strict adherence to the procedures outlined in Rule 9B of the Central Excise Rules, including a formal order and execution of a bond.
• ✓ Failure to comply with procedural requirements can render duty demands unsustainable.

This judgment reinforces the importance of transparency and due process in excise proceedings and provides clarity on the conditions under which provisional assessments can be made.

Directions

No specific directions were issued by the Supreme Court, other than setting aside the orders of CESTAT and related authorities.

Development of Law

The *ratio decidendi* of this case is that any re-classification of excisable goods based on test reports requires full disclosure of those reports to the manufacturer. Furthermore, provisional assessments must strictly adhere to the procedural requirements of Rule 9B of the Central Excise Rules, including a formal order and execution of a bond.

This judgment reinforces existing legal positions regarding the importance of procedural fairness and compliance with legal requirements in excise proceedings.

Conclusion

In M/S Oswal Petrochemicals Ltd. vs. Commissioner of Central Excise, the Supreme Court held that the re-classification of excisable goods based on test reports requires full disclosure of those reports to the manufacturer, and provisional assessments must strictly adhere to the procedural requirements of Rule 9B of the CentralExcise Rules. The Court allowed the appeals filed by the appellant, setting aside the orders of CESTAT and related authorities.