Holding

The waiver of arrears of excise duty under the consent terms and the 1989 letter pertained only to the unpaid 75% liability and did not confer a right to refund the 25% duty already paid.

Summary

The petitioners, ship‑breakers, were directed by the Central Excise authorities to pay duty on ship scrap, which they contested as not being ‘manufacture’ under the Central Excises and Salt Act, 1944. The Gujarat High Court, in an interim order, allowed them to clear the scrap on payment of 25% of the duty, subject to a bond for the remaining 75%. The parties later entered consent terms whereby the government agreed to waive the arrears of duty (the unpaid 75%) and to consider a reduction in duty, but made no reference to refunding the 25% already paid. A subsequent 1986 notification exempted ship scrap from duty prospectively, and a 1989 letter authorised withdrawal of show‑cause notices for the arrears. The petitioners sought a refund of the 25% duty; the High Court ordered a refund, which the Union appealed. The Supreme Court held that the consent terms, the 1989 letter and the 1986 notification dealt only with the unpaid arrears and could not be construed as granting a right to refund the duty already paid. Consequently, the High Court’s refund order was set aside and the writ petitions dismissed.

Issues considered

Whether the withdrawal of show‑cause and confirmed demand notices and the 1989 letter, in accordance with the consent terms, entitle the petitioners to a refund of the 25% excise duty already paid.
Whether the 1986 notification exempting ship scrap from excise duty operates retrospectively to cover the period before its issuance.
Whether the consent terms between the parties included any provision for refund of the duty paid under the High Court’s interim order.

Legislation cited

Central Excise Rules, 1944s. Rule 8(1)
Central Excises and Salt Act, 1944s. 2(f)
Central Excise Tariff Act, 1985
Customs Tariff Act, 1975s. Section 3

Subjects

excise dutyship breakingwaiver of arrearsrefund of dutyconsent orderCentral Excise Actretrospective applicationshow cause noticegovernment notification

Judgment

A UNION OF INDIA AND ORS.
v.
ALANG SHIP BREAKERS PVT. LTD., BHAVNAGAR AND ORS.

AUGUST .27, 1993
B
[KULDIP SINGH AND S.C. AGRAWAL, JJ.]

Central Excises and Salt Act, 1944-Central Excise Rules, 1944-Rule
~Whether withdrawal of show cause notice and confonned demand notices,
relating to payment of excise duty, in pursuant to consent tenns of agreement
C between the parties, for waiver of a"ears of excise duty, after payment of 25%
of the duty in compliance with interim order of High Court, entitled the payer
to obtain refund of the portion of duty paid-Whether communication about
waiver of excise duty, related to waiver of the unpaid balance duty only.

D The respondents, are engaged in business of breaking/dismantling
of old unserviceable ships. After breaking/dismantling the old vessels, they
sell the metal scrap in open market. In 1985, the Central Excise authorities
concerned, required the respondents to pay excise duty on the said
material taking the view that dismantling or breaking the unserviceable
ships constitute 'manufacture'. Notices were issued to show cause as to
E why excise duty under Tariff item, 25 (d) of Central Excise Tariff be not
levied and collected. Respondents filed writ petition in Gujarat High Court
for injuction restraining the Excise authorities from levying or collecting
duty on such scrap or interfering with clearance or removal of scrap,
contending that excise duty was not leviable on the scrap. The High Court
F passed interim order that respondents shall be entitled to clear the goods
on payment of 25% of excise duty payable and shall execute personal bonds
for payment of the balance 75% duty, if writ petition is dismissed. The
question regarding refund of 25% duty paid was to abide by final direction
of the Court. Thereafter, the parties arrived at agreement and filed consent
G terms in the High Court to the effect that the excise authorities shall not
enforce personal bonds, the Government will consider appropriate reduc-
tion in excise duty after withdrawal of writ petition and the Respondents
shall abide by government decision and that the Government would also
evolve suitable scheme to ensure waiver of arrears of excise duty. The High
Court made final order in terms of the parties consent terms and disposed
H of writ petition, without any directions about 25% of duty paid by Respon-
48
U.0.1. v. ALANG SHIP BREAKERS PVT.LTD. 49

dents, Interim relief was vacated. Thereafter, Government of India issued A
notification dated August 2, 1986, under Rule 8(1) of Central Excise 1944,
exempting ship scraps from excise duty. Under Secretary to Government
of India, Department of Revenue sent a letter dated April 6,1989, to
Collectors concerned that it has been decided to waive duty on ship scraps
for the period prior to notification dated August 2, 1986 and accordingly B
show cause notices and confirmed demand notices may be withdrawn. ·
Respondents on rejection of their applications for refund of 25% of duty
paid, filed writ petition in the High Court for directions to the Appellants
to refund the amount with interest. The writ petition was allowed by the
High Court. Union of India filed appeal against the order of the High
Court. This Court allowed the appeal on consideration of contents of the C
consent terms of the parties, the fact that the High Court had not made
any order relating to refund of the portion of duty paid, while disposing
of the writ petition and that the notification dated August 2, 1986, was
prospective, and not operative retrospectively, and

HELD : The letter dated April 6, 1989, is confined in scope to consent
D
terms, which is limited to ''waiver of the arrears of excise duty". It cannot
be construed as referring to payment of 25% of the duty paid. Waiver of
arrears of excise duty can only mean waiver of something which has not
been paid. The direction to withdraw the show causes notices and con-
firmed demand notices, only means that no further action be taken for E
recovery of arrears namely 75% of excise duty and cannot be construed to
mean, refund of 25% of duty paid under High Court order. [55-B-E]

CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 4301-
4346 of 1993.
F
From the Judgment and Order dated 4.12.90 of the Gujarat High
Court in C.A. Nos. 5599/89, 5855/89, 5856/89, 300/90, 301/90, 302/90, 525/90
to 529/90, 531/90 to 543/90, 546/90 to 562/90, 641/90, 854/90, 2927/90,
2928/90, 2929/90.
G
D.N. Dwiedi, Additional Solicitor General, A.Subba Rao and D.S.
Mehra for the appellants.

G.L. Sanghi, B.K. Mehta,, Mahesh Agarwal, E.C. Agrawala, Ms.
Purnima Kak and H.J . .Jhaveri for the respondents. H
50 SUPREME COURT REPORTS [1993] SUPP. 2 S.C.R.

A The Judgment of the Court was delivered by :

S.C. AGRAWAL, J. Special leave granted.

We have heard learned counsel for the parties.

B Respondents (hereinafter referred to as 'the petitioners') are
engaged in the business of breaking or dismantling of old unserviceable
ships. They carry on the said business at their ship breaking yard at Alang
and Sachana in the State of Gujarat. Old ships/vessels are imported by
Metal Scrap Trading Corporation Ltd. (for short MSTC), a canalising
agency for importing old and unserviceable ships and vessels for breaking.
c Ships and vessels are allotted to the ship breakers who are registered with
MSTC. The petitioners are registered ship breakers who obtain the ships
and vessels from MSTC. After dismantling/breaking the old vessels, the
petitioners sell the metal scrap in open market. In 1985, the Central Excise
authorities took the view that dismantling of breaking of old unserviceable
D ships constitutes 'manufacture' within the meaning of Section 2(f) of the
Central Excises and Salt Act, 1944 (hereinafter referred to as 'the Act')
and the petitioners were, therefore, required to pay excise duty on the said
material and in this connection show cause notice were issued requiring
them to show cause as to why duty of excise leviable under Tariff Item
25(d) of the erstwhile Central Excise Tariff be not levied and collected on
E
the materials arising from breaking or dismantling of ships. The petitioners
filed writ petitions under Article 226 of the Constitution in the Gujarat
High Court wherein they submitted that the scrap recovered from breaking
or dismantling of old unserviceable ships was not leviable to excise duty
under the Act and they prayed for an injunction restraining the excise
F authorities from levying or collecting duty of excise on such scrap or
interfering with clearance or removal of such scrap by the said petitioners.
In the said writ petitions the Gujarat High Court had passed an interini
order on November 29, 1985 whereby it directed :

"........ .. pending hearing of the petitions, the petitioners shall be
G entitled to clear the goods on payment of 25% of the Central
Excise duty payable on the goods cleared, on condition that the
petitioners shall execute personal bonds before the concerned
authority of Central Excise and Customs without any surety of
security to pay the balance of 75% of the amount of excise duty
H in dispute in the event of the petitions being dismissed ......... It is
U.0.1. v. ALANGSHIPBREAKERS PVT. LTD. (AGRAWAL,J.] 51

also.clarified that the question regarding refund of 25% of the duty . A
of excise paid by the concerned petitioners pursuant to the present
order shall abide by the final direction that may be issued by this
Court after hearing the concerned parties on all relevant points, if
ultimately the petitioners.succeed in the petitions."

During the pendency of the said writ petitions, the parties arrived at B
an agreement and the following consent terms bearing the signatures of the
advocates for both the parties were filed in the writ petitions on May 1,
1986:

"The petitioner herein applies for the aforesaid petition being C
withdrawn pursuant to the agreement reached between the parties
hereto regarding levy of central excise duty on ship scrap.

1. The respondents agree that they shall not cause enforcement of .
the personal bonds/security/surety executed by the petitioner in
respect of 75% excise liability and allow the undertaking to be D
revoked.

2. Upon withdrawal of the court case, Government would consider ~
an appropriate amount of reduction in excise duty on ship scrap
and petitioner shall abide by such decision. E

3. Government would also evolve a suitable mechanism to ensure
waiver of the arrears of excise duty on ship scrap for the past
period.

4. There will be no order as to costs." F
The writ petitions were disposed of by the High Court in accordance
with the said consent terms on May 1, 1986, by the following order :

"The parties have filed consent terms signed by the learned counsel ·
appearing for the respective parties in these special civil applica- G
tions. The said consent terms are recorded and there will be an ,
order in terms of the consent terms in each of these petitions.
Petitions disposed of accordingly. No order as to costs. Rule
discharged in each of these petitions. Interim relief will stand
vacated." H
52 SUPREME COURT REPORTS [1993] SUPP. 2 S.C.R.

,A. Thereafter on August 20, 1986, the following notification was issued :
"NOTIFICATION
NO. 386/86-CENTRAL EXCISES

0.5R (E) - In exercise of the powers conferred by sub- rule (1) of
B rule 8 of the Central Excise Rules, 1944, and in supersession of
the notification of the Government of India in the Ministry of
Finance (Department of Revenue) No. 146/86- Central Excises,
dated the 1st March, 1986, the Central Government hereby ex-
empts the goods, falling under heading Nos. 72.15 and 73.09 of the
c Schedule to the Central Excise Tariff Act, 1985 (5 of 1986), from
the whole of the duty of excise leviable thereon which is specified
in the said Schedule :

Provided that the said goods have been obtained from breaking
of ships, boats and other floating structures -
D
(i) on which duty of customs leviable thereon under the first
Schedule to the Customs Tariff Act, 1975 (51 of 1975) has
been paid at the rate of .Rs. 1400 per light displacement
tonnage, or

E (ii) imported on or before the 28th day of February, 1986, and
on which appropriate additional duty leviable thereon under
Section 3 of the Customs Tariff Act, 1975 (51 of 1975) has
been paid.

Sd/-
F (S.C. Jana)
Under Secretary to the Govt. of India"

By letter No. F. No. 139/49/86-CX.4 dated April 6, 1989 sent by the
Under Secretary to the Government of India, Ministry of Finance, Depart-
G ment of Revenue, Central Board of Excise & Customs to the Collectors of
Central Excise, Admedabad and Rajkot, it was directed as under :

"2. The question of giving effect to term (3) of the consent order
has been engaging the attention of the Government with a view to
devising a suitable mechanism for waiving of the arrears of duty
H on ship-scrap for the past period. It has been decided to waive the
U.0.1. v. ALANG SHIP BREAKERS PVT. LTD. [AGRAWAL, J.] 53

duty on ship-scrap leviable under erstwhile T.I. 25, or Chapter 72 A
or 73 of the Central Excise Tariff Act, 1975, for the period prior
~ to the issue of notification No. 386/86-Central Excises, dated the
20th August, 1986. Accordingly, the show cause notices and the
confirmed demand notices may be withdrawn in these cases."

The petitioners thereafter applied for refund of the 25% of the B
... central excise duty paid by them in accordance with interim order passed
by the High Court in the writ petitions. The said applications for refund
were, however, rejected by the Assistant Collector, Central Excise in the
case of some of the petitioners and in the rest of the matters no orders
were passed for refund of the said amount by the Assistant Collector, c
Central Excise. The petitioners, therefore, filed fresh writ petitions in the
Gujarat High Court whereby they prayed for issue of an appropriate writ
or direction or order directing the appellants herein (respondents in the
writ petitions) to refund the amounts deposited by them with interest. The
said writ petitions have been allowed by a Division Bench of the Gujarat
High Court by the judgment under appeal. The High Court has directed D
the appellants to refund the excise duty paid by the petitioners in pur-
suance to the interim order passed by the High Court in the earlier writ
petitions. Feeling aggrieved by the said decisioif of the High Court, the
appellants have filed these appeals.
E
The learned Additional Solicitor General has raised two.contentions
before us : (i) in the consent terms there is no reference to the refund of
the amount of 25% of the excise duty which had been paid by the
petitioners during the pendency of the writ petitions and the High Court
was, therefore, not justified in directing refund of the said amount; and (ii)
the petitioners have passed on the excise duty deposited by them to the F
consumer/purchaser of the scrap and the refund of excise duty would result
in unjust enrichment of the petitioners which is impermissible .
.,
We have already set out the consent terms on the basis of which the
I
earlier writ petitions filed by the petitioners herein were disposed of bythe
G
High Court. In paragraph· 1 of the said consent terms the appellants
(respondents in the writ petitions) had agreed not to enforce the personal
bonds/ security/surety executed by the petitioners in respect of 75% excise
liability and allow the undertaking to be revoked. In paragraph 2, it was
agreed that upon withdrawal of the writ petitions, the Government would
consider an appropriate amount of reduction in excise duty on ship scrap H
54 SUPREME COURT REPORTS [1993} SUPP. 2 S.C.R.

A and the petitioners shall abide by such decision. In paragraph 3, it was
agreed that the Government would also evolve a suitable mechanism to
ensure waiver of the arrears of excise duty on ship scrap for the past
period. In none of the clauses of the said consent terms was there any
refen:nce to the refund of 25% of the duty of central excise that was paid
by the petitioners in pursuance of the interim order passed by the High
B Court. It may be recalled that in the interiin order dated November 29,
1985 it was specifically stated that the question regarding refund of 25%
of the duty of excise paid by the concerned petitioners would abide by the
final direction that may be issued after hearing the concerned parties on
all relevant points, if ultimately the petitioners succeed in the petitions. The
interim order thus postulated a specific direction by the High Court with
c regard to refund of 25% of the duty of excise paid in pursuance of the
interim order. The order dated May 1, 1986 passed by the High Court
disposing of the writ petitions in terms of the consent terms is completely
silent on the question of refund of 25% of the duty of excise paid by the
petitioners. This woul~ mean that while disposing of the writ petitions the
D High Court did not give any direction with regard to refund of 25% of the
duty of excise paid by the petitioners in pursuance of the interim order
passed by the High Court.

The notification dated August 20, 1986 was issued in accordance with
paragraph 2 of the consent terms. By the said notification, the Central
E Government exempted the goods falling under heading Nos. 72.15 and
73.09 of the Schedule to the Central Excise Tariff Act, 1985 from the whole
of the ·duty of excise leviable thereon which is specified in the said Schedule
subject to the conditions laid down in the proviso. The said notification is
prospective in nature and operates for the future with effect from August
F 20, 1986. It does not relate to the period anterior to the date of the said
notification. The said notification has, therefore, no bearing on the matter
of refund of 25% of the duty of excise deposited by the petitioners.

The only other document is the letter dated April 6, 1989 from the
G Under Secretary to the Government of India, Ministry of Finance, Depart-
ment of Revenue addressed to the Collectors of Central Excise, Ah-
medabad and Rajkot. The said letter appears to have been issued in
pursuance of paragraph 3 of the consent terms wherein the Governemnt
had agreed to evolve a suitable mechanism to ensure waiver of arrears of
excise duty on ship scrap for the past period. The High Court has con-
H strued the said letter to mean that the entir~ excise duty including 25%
U.0.1. v. ALANGSHIPBREAKERSPVT.LTD. (AGRAWAL,J.] 55

that was paid in pursuance of the interim order had been waived by the A
Government and in this context the High Court has laid emphasis on the
words "accordingly show cause notices and confirmed demand notices may
be withdrawn in these cases" in paragraph 2 of the said letter. We are
unable to agree with this interpretation of the letter dated April 6, 1989 by
the High Court. In our opinion the letter dated April 6, 1989 is confined
in its scope to the matter referred to paragraph 3 of the consent terms.
The said paragraph is confined to "waiver of the arrears of excise duty". At
the time when the consent terms were agreed upon by the parties the only
arrears of excise duty were the balance amount of 75% of duty of excise,
the recovery of which had been stayed by the High Court. Paragraph 3 of
the consent terms was thus related only to the waiver of the liability in C
respect of the said 75% of the duty of excise. 25% duty of excise, which
had already been paid by the petitioners in pursuance of the interim order,
could not be treated as part of the arrears of excise duty and, therefore,
neither paragraph 3 of the consent terms nor the letter dated April 6, 1989
can be construed as referring to the payment of 25% of duty of excise made D
by the petitioners in pursuance of the interim order passed by the High
Court. The expression "waiver of the arrears of excise duty" can only mean
waiver of something which has not been paid and is payable. The direction
to withdraw the show cause notices and the confirmed demand notices in
the letter dated April 6, 1989, only means that no further action be taken
for the recovery of the arrears, namely, 75% of duty of excise. The said E
withdrawal cannot be construed to mean that 25% of duty of excise which
had been deposited by the petitioners in pursuance of the interim order of
the High Court is required to be refunded.

In that view of the matter, we are unable to uphold the direction
given by the High Court for refund of 25% of the duty of central excise F.
deposited by the petitioners in pursuance of the interim order passed by
the High Court in the earlier writ petitioners. Since the first contention
urged by the learned Additional Solicitor General merits acceptance we
do not consider it necess'ary to go into the second contention urged by him.

The appeals are, therefore, allowed, the judgment and order of the
High Court of Gujarat dated December 4, 1990 is set aside and the writ
petitions filed by the respondents-petitioners are dismissed. There is no
orders as to costs.

l.S ..Q. Appeals allowed.