REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NOS. 1878-1880 OF 2004

Commissioner of Central Excise, New Delhi          .... Appellant(s)

Versus

M/s Hari Chand Shri Gopal & Others etc. etc.    …. Respondent(s)

[with CIVIL APPEAL NO. 1631 of 2001 and CIVIL APPEAL NOS.  568-569 of 2009]

J U D G M E N T

K. S. Panicker Radhakrishnan, J.

1. The question that falls for consideration in these appeals is  

whether a manufacturer of a specified final product falling under  

the schedule of the Central Excise Tariff Act, 1985 (in short “the  

Tariff Act”) is eligible to get the benefit of exemption from remission  

of  excise duty on specified intermediate goods as per Notification  

no.  121/94-CE  dated  11.8.1994,  if  captively  consumed  for  the

manufacture of final products on the ground that the records kept  

by it  at  the  recipient  end would indicate  its  “intended use”  and  

“substantial compliance” of the procedure set out in Chapter X of  

the Central Excise Rules, 1944 (in short ’the Excise Rules”).

2. The above question was decided by the Customs, Excise and  

Service Tax Appellate Tribunal (in short ‘the Tribunal”) in favour of  

the  respondents-assessees,  relying  upon  the  judgments  of  this  

Court in Thermax Private Ltd. v. Collector of Customs (Bombay)  

New Custom House (1992) 4 SCC 440 and  Collector of Central  

Excise,  Jaipur v.  J.K.  Synthetics (2000)  10  SCC  393  on  the  

ground  of  “intended  use”  and  the  principle  of  “substantial  

compliance”.  The matter came up before the three Judge Bench of  

this Court which doubted the correctness and the applicability of  

the  above  mentioned  judgments  and  took  the  view  that  the  

exemption notification called for strict interpretation so far as the  

eligibility is concerned especially when an assessee seeks exemption  

of duty under a notification issued by the Central Government in  

exercise of the powers conferred by Sub-section (1) of Section 5A of  

the Central Excise and Salt Act 1944, read with Sub-section(3) of  

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Section  3  of  the  Additional  Duties  of  Excise  (Goods  of  Specified  

Importance) Act 1957, which called for compliance of the procedure  

set out in Chapter X of the Central Excise Rules 1944.   Further, it  

was also observed that in Thermax Private Ltd. (supra) and J.K.  

Synthetics  (supra),  this  Court  was dealt  with a  situation where  

goods were imported, from outside the country, unlike the present  

case where specified intermediate goods were locally manufactured,  

in some other units of the respondents. The Court ordered that the  

matter required reconsideration and referred the matter to a Larger  

Bench. The order of reference is reported in The Commissioner of  

Central Excise, New Delhi v. Hari Chand Shri Gopal etc. (2005)  

8 SCC 164.    

3. We may first refer to the facts in Civil Appeal Nos. 1878-1880  

of 2004, which is taken as the leading case.

FACTS:

4. The  respondents  herein  M/s  Gopal  Industries,  M/s  Hari  

Chand Shri Gopal and M/s Gopal Zarda Udyog were engaged in the  

manufacture of excisable goods viz. preparation containing chewing  

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tobacco falling under Chapter Heading no. 2404.40 of the Tariff Act,  

then chargeable  to  nil  rate  of  duty,  which was made leviable  to  

central excise duty with effect from 1.3.1994.  The Intelligence Wing  

of the Department came to know that the respondents had been  

manufacturing  the  said  goods  without  applying/obtaining  the  

certificate of registration as required under Rule 174 of the Excise  

Rules and had been removing the  same clandestinely  from their  

factories without payment of  central  excise duty leviable  thereon  

and without  following  any of  the  prescribed procedures.   It  was  

noticed that a major portion of the above goods manufactured was  

consigned to M/s Gopal  Zarda Udyog (Meerut),  M/s Hari  Chand  

Shri Gopal, Baddi District, Solan (H.P.) and M/s Gopal Industries,  

Baddi (H.P.) under the cover of ‘transfer challans’ describing therein  

the said goods as “ADDICTIVE MIXTURES” or “KIMAM/K”.    On  

28.9.1996, the factories of the respondents at Delhi were inspected  

by the Central Excise (Preventive) Officer of MOD IV, Delhi and took  

the samples of the finished products and detailed statements were  

also recorded from the partners of the firms.    The Central Excise  

Officers  also  visited  the  various  factories  of  the  respondents  at  

Solan and Baddi on 3.10.1996 and it was noticed that the addictive  

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Mixture (Kimam) manufactured at the factories at Delhi was being  

clandestinely removed for  the manufacturing of  chewing tobacco.  

The Officers noticed that the respondents were manufacturing the  

excisable goods Kimam falling under the Tariff Act under Chapter  

Sub-heading no. 2404.49 (up to 22.7.1996) and, with effect from  

23.7.1996,  covered  under  Chapter  Sub-heading  no.  2404.40,  

packed the same in the containers of different capacities as per the  

requirement of buyer/consumer without obtaining Central  Excise  

Registration Certificate in contravention of the provisions of Section  

8 of the Tariff Act read with Rule 174 of the Excise Rules up till  

14.10.1996 and removed the same from their factories clandestinely  

without  payment  of  central  excise  duty  in  contravention  of  the  

provisions of Rules 9(1), 52A, 53, 54, 173B, 173C, 173F and 226 of  

the Excise Rules.    

5. The  Central  Excise  Officers  noticed  that,  during  the  period  

from  18.3.1994  to  15.4.1995,  M/s  Gopal  Zarda  Udyog  had  

manufactured and removed from their  factory a total  quantity of  

1,52,226.150  Kgs.  of  preparation  containing  Kimam,  collectively  

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valued at Rs.15,27,90,675.00 and the amount of duty involved was  

fixed at Rs.6,14,17,770.00.    

6. M/s Gopal  Industries,  during  the  period  from 16.6.1995 to  

26.9.1996,  had  manufactured  and  removed  from their  factory  a  

total  quantity  of  2,66,648.800  kgs.  of  preparation  containing  

Kimam collectively valued at Rs.16,26,68,569.00 and the amount of  

duty involved was fixed at Rs.8,13,34,285.00.

7. M/s  Hari  Chand  Shri  Gopal  also,  during  the  period  from  

14.6.1995 to 24.9.1996 had manufactured and removed from their  

factory  a  total  quantity  of  1,51,054.900  kgs.  of  preparation  

containing Kimam collectively valued at Rs.15,86,77,319.00 and the  

amount of duty involved was fixed at Rs.7,93,38.660.00.

8. Consequently,  on  25.3.1997,  notices  were  issued  to  the  

respondents and their partners to show cause why the amounts of  

duty  involved  should  not  be  demanded  from  them  jointly  and  

severally under Rule 9(2) of the Excise Rules read with the proviso  

to  Section  11A(1)  of  the  Tariff  Act  and  interest  thereon  under  

Section 11AB of the Tariff Act, be not demanded from them. Penalty  

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under Rule 173Q of the Excise Rules read with Section 11AC of the  

Tariff Act and Rule 209A of the Excise Rules was also demanded.  

In  addition  to  above,  the  respondents  were  also  asked  to  show  

cause why the land, building, plant and machinery used in their  

respective factories for the manufacture of Kimam should not be  

confiscated under Rule 173Q(2) of the Excise Rules.     

9. The respondents filed detailed objections to the show cause  

notices  and  disputed  their  liability  and  also  claimed  exemption  

under the Notification no. 121/94-CE. The Commissioner (Excise)  

by his order dated 20.5.1998 rejected the objections filed by the  

respondents against the show cause notices and determined that  

M/s  Gopal  Zarda  Udyog,  M/s  Gopal  Industries  and  M/s  Hari  

Chand  Shri  Gopal  were  liable  to  pay  central  excise  duty  of  

Rs.6,14,17,770/-,  Rs.8,13,34,285/-  and  Rs.7,93,38,660/-  

respectively  and  also  imposed  the  penalty  of  Rs.16,00,000/-,  

Rs.18,00,000/- and Rs.17,00,000/- on them under Rule 173Q of  

the Excise Rules and ordered confiscation of the goods seized from  

the premises of M/s Gopal Industries and M/s Hari  Chand Shri  

Gopal respectively, with permission to redeem the confiscated goods  

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on  redemption  of  fines  of  Rs.  5,00,000/-  and  Rs.3,20,000/-  

respectively.    

10. Aggrieved  by  the  above  mentioned  orders,  appeals  were  

preferred before  the  Tribunal  and the  Tribunal  vide  order  dated  

01.10.1999  concurred  with  the  findings  of  the  Adjudicating  

Commissioner on duty liability on the goods in question and also on  

the  issue  of  limitation  as  well  as  the  claim  for   proforma  

credit/modvat  credit,  but  ordered  re-examination  of  the  limited  

question  of  the  applicability  of  Notification  121/94-CE  dated  

11.8.1994  since  the  respondents  had raised  the  contention  that  

they had substantially complied with the procedures laid down in  

Chapter X.  The matter was then reconsidered by the Commissioner  

as directed by the Tribunal.  The respondents contended before the  

Commissioner  that  they  had despatched the goods to  their  final  

manufacturing units though transferring challans and the receipts  

were  recorded  in  Form-IV  Register/Stock  Register  and  the  

utilization of the goods was recorded in RG-12 Register.  Further, it  

was  also  stated  that  the  final  products  manufactured  by  the  

respondents could be ascertained from RG-1 Register maintained at  

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the recipient end and those records would be sufficient to establish  

use of the goods and establish the plea of substantial compliance of  

the procedure set out in Chapter X for duty exemption.  

11. The Commissioner rejected all the contentions vide his order  

dated  16.07.2002  and  held  that  the  benefit  of  the  exemption  

notification would be available only if the procedures laid down in  

Chapter X were complied with and that the records produced by the  

respondents  would  not  substantiate  a  plea  of  substantial  

compliance  of  the  procedure  laid  down  in  the  above  mentioned  

Chapter.  The imposition of the duty liability, interest and  penalty  

was therefore confirmed.    

12. The  respondents,  carried  the  matter  in  appeal  before  the  

Tribunal.  The Tribunal, we have already indicated, placed reliance  

on the  judgments of this Court in  Thermax Private Ltd. (supra)  

and J.K. Synthetics  (supra) and took the view that the benefit of  

the exemption notification should not be denied if “intended use” of  

the goods was established, though there was non-compliance of the  

procedural  conditions  of  Chapter  X.   Appeals  were  accordingly  

allowed  and  the  order  of  the  Commissioner  was  set  aside.  

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Aggrieved by the said order of the Tribunal, these appeals have been  

preferred by the Commissioner of Central Excise, New Delhi.

13. Mr. Vivek Tankha, learned Additional Solicitor General of India  

appearing  for  the  Revenue,  submitted  that  the  benefit  of  the  

Notification no. 121/94-CE dated 11.8.94 would be available to the  

respondents only if the procedures prescribed under Chapter X are  

strictly  complied  with.    Learned  ASG  submitted  that  the  duty  

liability was confirmed by the Tribunal which would indicate that  

the respondents at the suppliers’ end did contravene the provisions  

of Rules 9(1), 52A, 53, 54, 173B, 173C, 173F and 226 of the Excise  

Rules and it is, due to that reason, that show cause notices dated  

25.03.1997  were  served  on  the  respondents.  Learned  ASG  

submitted that the mere fact that the respondents had maintained  

some records at the recipient end would not be sufficient to satisfy  

the “intended use” or the plea of “substantial  compliance” of the  

procedure  laid  down in  Chapter  X of  the  Excise  Rules.  Learned  

counsel submitted that an exemption notification must be strictly  

complied  with and the  assessee  should bring  himself  within  the  

ambit of the notification.   Reference was made to the decisions of  

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this  Court  reported  in  Novopan  India  Ltd.,  Hyderabad v.  

Collector of Central Excise & Customs, Hyderabad (1994) Supp.  

3  SCC 606,  Rajasthan Spinning and Weaving Mills  Limited,  

Bhilwara,  Rajasthan v.  Collector  of  Central  Excise,  Jaipur,  

Rajasthan (1995) 4 SCC 473, Commissioner of Central Excise v.  

M.P.V.  &  Engineering  Industries (2003)  5  SCC  333,  

Commissioner of Central Excise, Trichy v.  Rukmani Pakkwell  

Traders (2004)  11 SCC 801,  Commissioner of Central Excise,  

Chandigarh-I v.  Mahaan  Dairies (2004)  11  SCC  798,  

Commissioner of Central Excise, Allahabad v. Ginni Filaments  

Ltd. (2005)  3  SCC  378,  Commissioner  of  Customs  (Imports),   

Mumbai v.  Tullow India Operations  Ltd. (2005)  13  SCC 789,  

Tata Iron & Steel  Co.  Ltd. v.  State  of  Jharkhand and Ors.  

(2005) 4 SCC 272,  Sarabhai M. Chemicals v.  Commissioner of  

Central  Excise,  Vadodara (2005)  2  SCC  168,  State  of  

Jharkhand  and  Others v.  Tata  Cummins  Ltd.  and  Another  

(2006) 4 SCC 57,  A.P. Steel Re-Rolling Mill Ltd.  etc. v.  State of  

Kerala & Ors. (2007) 2 SCC 725, State of Orissa and others v.  

Tata  Sponge  Iron  Ltd.  (2007)  8  SCC  189,  Commissioner  of  

Central  Excise,  Jaipur v.  Mewar Bartan Nirmal  Udyog 2008  

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(231) ELT 27 (SC),  State of Haryana v. Samtel India Ltd.  2008  

(15) VST 176 (SC) and G.P. Ceramics Pvt. Ltd. v. Commissioner,  

Trade Tax, Uttar Pradesh (2009) 2 SCC 90.

14. Shri  Harish Salve,  learned senior  counsel  appearing for  the  

assessee-respondents,  on  the  other  hand,  contended  that  the  

assessee  had  produced  documentary  evidence  to  prove  that  the  

entire quantity of kimam were transferred from their one unit  to  

another and was utilized in the manufacture of branded chewing  

tobacco and cleared on payment of duty.  Further, it was also stated  

that the assessee had produced the transfer challans under which  

the  Kimam  was  transferred  to  the  other  unit.   Learned  senior  

counsel  also  made  reference  to  Form IV  Register/Stock  Register  

regarding receipt of the Kimam and also to Form RG-12, kept for  

the  manufacture  of  excisable  tobacco  products.   Reference  was  

made to RG-1 Register, maintained under Rules 47, 53 and 173G.  

Learned  senior  counsel  contended  that  the  details  furnished  in  

those records would be sufficient to establish the intended use (the  

actual  use)  of  Kimam  for  the  manufacture  of  final  products.  

Learned  senior  counsel  submitted  that,  as  per  the  decisions  of  

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Thermax Private Ltd. (supra) and  J. K. Synthetics (supra), the  

benefit of exemption notification cannot be denied if there has been  

a substantial compliance of the procedure laid down in Chapter X  

and intended use of the goods for the manufacture of final product  

has been established.  Learned senior counsel submitted that the  

conditions stipulated in Chapter X are only procedural in nature  

and  hence  directory,  warranting  liberal  construction,  and  if  so  

construed,  the  benefit  of  the  exemption  notification  cannot  be  

denied.   Learned senior counsel submitted that the Tribunals and  

some of the High Courts are following the above principle, uniformly  

applying the principles laid down in Thermax Private Ltd. (supra)  

and J.K. Synthetics Ltd. (supra)

15. We may, before examining various contentions raised by the  

respective  parties,  point  out  that  the  Respondents  had  earlier  

approached  this  Court  by  filing  C.A.  Nos.  5747-5749  of  2000,  

challenging  the  order  of  the  Tribunal  stating  that  Kimam  was  

excisable  and  that  the  department  was  right  in  invoking  the  

extended period of limitation under the proviso to Section 11(A)(1) of  

the Excise Act. This Court partly allowed the appeals holding that  

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the department was not entitled to invoke the extended period of  

limitation under  the proviso to Section 11(A)(1) of the Excise Act,  

but  held  that  the  addictive  mixture  Kimam  was  excisable  and  

classifiable under Sub-heading 2404.49/2404.40. This Court also  

recorded  a  finding  that  although there  was  contravention  of  the  

provisions of Section 6 read with Rule 174 and that they had not  

observed regulations in the units at Delhi for the manufacture of  

excisable goods, there was no intend to evade payment of duty.  The  

judgment is reported in Gopal Zarda Udyog v.  Commissioner of  

Central Excise (2005) 8 SCC 157.  

16. In this case, we are only concerned with the question whether  

the  respondents  are  entitled  to  get  the  benefit  of  the  exemption  

notification dated 11.8.1994 on the ground of “intended use” and  

“substantial compliance” of the procedure set out in Chapter X of  

the Excise Rules.   

17. Notification no. 121/94-CE dated 11.8.1994 was issued by the  

Central  Government  in  exercise  of  its  powers  conferred  by  sub-

section (1) of Section 5A of the Central Excises and Salt Act, 1944 (1  

of  1994)  read with sub-section (3)  of  Section 3 of  the Additional  

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Duties  of  Excise  (Goods  of  Special  Importance)  Act,  1957 (58  of  

1957)  in  the  public  interest  for  exempting  certain  specified  

intermediate goods if those goods were captively consumed in the  

manufacture  of  specified  final  products,  falling  under  heading  

numbers or sub-heading numbers of the Schedule to the Tariff Act.  

Notification also stipulated that where such use of inputs was in a  

factory  of  a  manufacturer,  different  from  his  factory  where  the  

goods  had  been  produced,  the  exemption  contained  in  this  

notification  would  be  allowable  subject  to  the  observance  of  the  

procedure set out in Chapter X of the Excise Rules.   The table, with  

which we are concerned, is given below:

S. No Description  of  final  products

Heading number  or  sub-heading  number  of  final  products

Heading  number or sub- heading  number  of  inputs

(1) (2) (3) (4) 1. xxx    xxx   xxx xxx   xxx   xxx xxx    xxx 2. Chewing tobacco  

including preparations  commonly known as  “Khara Masala”,  “Kimam”, “Dokta”,  “Zarda”, “Sukha” and  “Surti”

2401.41 2404.49

xxx xxx    xxx   xxx xxx   xxx   xxx xxx    xxx

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18. The  compliance  of  the  provisions  of  Chapter  X  is  a  pre-

condition for claiming exemption from payment of excise duty on  

goods, which otherwise attracted duty.    Show cause notices were  

issued  to  the  respondents  since  they  had  manufactured  the  

excisable goods (at the supplier end) without obtaining registration  

under Section 6 read with Rule 174 by contravening the provisions  

of Rules 9(1), 52A, 53, 54, 173B, 173C, 173F and 226 of the Rules  

for which duty liability, interest thereon and penalty were imposed.  

Even assuming  that  the  respondents  were  eligible  for  exemption  

from duty, the respondents could not be absolved from the legal  

obligation  to  comply  with  the  statutory  requirements  for  the  

manufacture of excisable goods at the supplier end.   

19. The  purpose  and object  of  the  notification  dated  11.8.1994  

was  to  exempt  those  specified  intermediate  goods,  which  were  

otherwise  excisable  to  duty,  and  not  to  exempt  or  absolve  the  

respondents  from  following  the  statutory  requirements  for  the  

manufacture  of  intermediate  excisable  goods.   The  notification  

under  Chapter  X  was  designed  in  such a  manner  to  ensure  an  

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inseparable  link  between  the  supplier  and  recipient  of  excisable  

goods for the manufacture of specified final products.   Rule 192 of  

Chapter X states that a manufacturer intending to receive duty free  

goods under remission is required to make an application in Form  

R-1 for obtaining excisable goods to be used for special industrial  

purpose giving details  of  the estimated quantity of  each class or  

variety  of  goods  and  the  value  of  such  goods  likely  to  be  used  

during the  year,  commodities  to be manufactured and estimated  

output and clearance of each commodity during the year, manner of  

manufacture, purpose for which manufactured product is supplied  

and the source from which excisable goods will be obtained.    

20. Based on the details furnished in Form R-1, the Registering  

Authority  has to  consider  granting  permission from remission of  

duty.   For the said purpose, R-2 Certificate is required to be issued  

specifying that the registration certificate is meant for obtaining the  

excisable goods under Rule 192.  On the basis of R-2 Certificate,  

the manufacturer become eligible for getting the excisable goods for  

which  the  remission  of  duty  has  been  sought.  Further,  the  

applicant is also required to execute a bond with security in Form  

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B-8, as required under Rule 192 and the Collector can put further  

conditions  for  filing  the  B-16  Bond  or  B-17  Bond  during  the  

permission granted for remission of duty.   On such request and  

after complying with all the statutory formalities, the jurisdictional  

officer is required to issue C-2 Certificate and, on the strength of  

that  certificate,  the  applicant  can obtain  duty  free  goods.    The  

jurisdictional officer has also to certify that the said manufacturer  

is registered in their Range under Rule 192 and is authorized for  

obtaining excisable goods at NIL/concessional rate of duty for use  

in  special  industrial  purpose  for  the  manufacture  of  specified  

excisable goods at their factory.   Further, on the strength of C-2  

Certificate, the excisable goods can be removed from the factory of  

source manufacturer without payment of duty or concessional rate  

of duty, as the case may be.   Further, as per sub-rule (1) of Rule  

194, the applicant is required to maintain proper records of such  

goods indicating quantity, value, rate and amount of duty, marks  

and number/wastage etc.  in Form R.G.16 register.   Further,  the  

applicant  is  also  required  to  file  quarterly  return in  the  form of  

R.T.11  and  in  that  return,  the  registered  person  had  to  make  

entries regarding details of receipt of goods, quantities issued for  

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manufacturing, wastage or other losses, description of process in  

which excisable  goods to be used etc.   The  supplier  of  goods is  

required to be registered with Central Excise under Rule 174 and is  

also required to mention in Column 10(i) or 10(ii) of RT-12 returns  

the  details  of  goods  despatched  to  the  assessee  availing  facility  

under Chapter X.  The supplier of goods can remove the goods only  

under proper gate pass GP-1 and is required to mention the details  

of CT-2 on the gate pass.   

21. Rule 196 provides for payment of duty by the recipient if the  

goods obtained under Rule 192 are not accounted for or used in the  

manner  prescribed  under  these  rules.   Similarly,  Rule  196A  

stipulates that surplus goods so received under Rule 192 can be  

cleared on payment of duty.  Rule 196AA provides for transfer of  

such goods received under Rule 192 to another manufacturer who  

has  been  granted  registration  under  Rule  192  with  the  prior  

approval of the proper officer.  Rule 196B provides for the manner  

in which goods received under Rule 192 may be disposed of if found  

defective  or  damaged,  they  can  be  returned  to  the  original  

manufacturer  and  such  returned  goods  shall  be  added  to  the  

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original manufacturer and such returned goods shall be added to  

the non-duty paid stock of the original manufacturer.  Finally, Rule  

196BB provides for movement of goods received under Rule 192 as  

such, or after partial processing outside the factory for repair and  

return.    The  applicant,  though registered under  Rule  174,  can  

receive the remitted goods for use in special industrial purpose only  

if  it  gets  an  endorsement  to  that  effect  on  the  Registration  

Certificate, so given in Form R-2, in advance which in this case was  

obtained only on 22.10.1996, after the event.   Further, Column 5  

of Schedule of R-1 certificate clearly enjoins upon the recipient unit  

to  furnish  additional  information  viz.  description  of  goods  to  be  

obtained  for  industrial  purpose,  estimate  quantity  in  the  year,  

details of the supplier of the goods etc.  Further, it is on the basis of  

R-2  Certificate,  the  jurisdictional  Range  Officer  issues  a  CT-2  

certificate  (Certificate  for  Transfer  of  Goods)  under  the  cover  of  

which the remitted goods have to move from the supplier unit to the  

recipient  unit.   CT-2  certificate  is  required  to  be  shown  to  the  

supplier unit who shall mention the CT-2 number on the Gate Pass  

before delivering the goods without payment of duty on the strength  

of  CT-2  certificate.  Compliance  of  the  above  mentioned  

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requirements, stipulated in Chapter X, is a pre-requisite for getting  

exemption from the remission of excise duty on the specified goods.  

Exemption Clause – Strict Construction

22. The law is well settled that a person who claims exemption or  

concession has to establish that he is entitled to that exemption or  

concession.   A provision providing for an exemption, concession or  

exception, as the case may be, has to be construed strictly with  

certain  exceptions  depending  upon  the  settings  on  which  the  

provision  has  been  placed  in  the  Statute  and  the  object  and  

purpose to be achieved.   If  exemption is available on complying  

with certain conditions, the conditions have to be complied with.  

The mandatory requirements of those conditions must be obeyed or  

fulfilled exactly, though at times, some latitude can be shown, if  

there  is  a  failure  to  comply  with  some  requirements  which  are  

directory in nature, the non-compliance of which would not affect  

the essence or substance of the notification granting exemption.  In  

Novopan  Indian  Ltd. (supra),  this  Court  held  that  a  person,  

invoking an exception or exemption provisions, to relieve him of tax  

liability  must  establish  clearly  that  he  is  covered  by  the  said  

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provisions and, in case of doubt or ambiguity, the benefit of it must  

go to the State.  A Constitution Bench of this Court in  Hansraj  

Gordhandas v.  H.H. Dave (1996)  2 SCR 253,  held  that  such a  

notification has to be interpreted in the light of the words employed  

by it and not on any other basis.  This was so held in the context of  

the  principle  that  in  a  taxing  statute,  there  is  no  room for  any  

intendment, that regard must be had to the clear meaning of the  

words  and  that  the  matter  should  be  governed  wholly  by  the  

language  of  the  notification,  i.e.,  by  the  plain  terms  of  the  

exemption.    

23. Of course, some of the provisions of an exemption notification  

may be directory in nature and some are of mandatory in nature.  A  

distinction between provisions of statute which are of substantive  

character and were built in with certain specific objectives of policy,  

on  the  one  hand,  and  those  which  are  merely  procedural  and  

technical  in  their  nature,  on  the  other,  must  be  kept  clearly  

distinguished.   In Tata Iron and Steel Co. Ltd. (supra), this Court  

held  that  the  principles  as  regard  construction  of  an  exemption  

notification are no longer res integra; whereas the eligibility clause  

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in  relation  to  an  exemption  notification  is  given  strict  meaning  

wherefor  the  notification  has  to  be  interpreted  in  terms  of  its  

language,  once  an  assessee  satisfies  the  eligibility  clause,  the  

exemption clause therein may be construed literally.  An eligibility  

criteria,  therefore,  deserves  a  strict  construction,  although  

construction of a condition thereof may be given a liberal meaning if  

the same is directory in nature.   

DOCTRINE OF  SUBSTANTIAL COMPLIANCE AND ‘INTENDED  USE’:

24. The doctrine of substantial compliance is a judicial invention,  

equitable in nature, designed to avoid hardship in cases where a  

party  does  all  that  can  reasonably  expected  of  it,  but  failed  or  

faulted in some minor or inconsequent  aspects which cannot be  

described as the “essence” or the “substance” of the requirements.  

Like the concept of “reasonableness”, the acceptance or otherwise of  

a  plea  of  “substantial  compliance”  depends  upon  the  facts  and  

circumstances  of  each  case  and  the  purpose  and  object  to  be  

achieved and the context of the prerequisites which are essential to  

achieve the object and purpose of the rule or the regulation.   Such  

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a defence cannot be pleaded if a clear statutory prerequisite which  

effectuates the object and the purpose of the statute has not been  

met.   Certainly, it means that the Court should determine whether  

the  statute  has been followed sufficiently  so as to  carry  out  the  

intent for which the statute was enacted and not a mirror image  

type of strict compliance.  Substantial  compliance means “actual  

compliance  in  respect  to  the  substance  essential  to  every  

reasonable objective of the statute” and the court should determine  

whether the statute has been followed sufficiently so as to carry out  

the intent of the statute and accomplish the reasonable objectives  

for which it was passed.  Fiscal statute generally seeks to preserve  

the need to comply strictly with regulatory requirements that are  

important,  especially  when  a  party  seeks  the  benefits  of  an  

exemption clause that are important.   Substantial compliance of an  

enactment is insisted, where mandatory and directory requirements  

are lumped together, for in such a case, if mandatory requirements  

are complied with, it will be proper to say that the enactment has  

been  substantially  complied  with  notwithstanding  the  non-

compliance of directory requirements.    In cases where substantial  

compliance has been found, there has been actual compliance with  

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the statute, albeit procedurally faulty.   The doctrine of substantial  

compliance seeks to preserve the need to comply strictly with the  

conditions or requirements that are important to invoke a tax or  

duty  exemption  and  to  forgive  non-compliance  for  either  

unimportant and tangential requirements or requirements that are  

so  confusingly  or  incorrectly  written  that  an  earnest  effort  at  

compliance  should  be  accepted.   The  test  for  determining  the  

applicability  of the substantial  compliance doctrine has been the  

subject of a myriad of cases and quite often, the critical question to  

be examined is whether the requirements relate to the “substance”  

or  “essence”  of  the  statute,  if  so,  strict  adherence  to  those  

requirements is a precondition to give effect to that doctrine.  On  

the other hand, if the requirements are procedural or directory in  

that they are not of the “essence” of the thing to be done but are  

given with a view to the orderly conduct of business, they may be  

fulfilled by substantial, if not strict compliance.    In other words, a  

mere  attempted  compliance  may  not  be  sufficient,  but  actual  

compliance of those factors which are considered as essential.     

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25. The details to be furnished in Form No. 1 as per Rule 192 and  

the declaration to be made, relate to the “substance” and “essence”  

of Chapter X.   R-2 Registration Certificate is also pre-requisite to  

obtain CT2 Certificate.  Further, the execution of bonds as provided  

in that chapter is also not an empty formality for obtaining the duty  

free excisable goods.   Bonds also insist for a declaration.  CT-2  

Certificate will be issued only if a party gets registered under Form  

R-2  from  the  Registering  Authority.   Only  if  CT-2  Certificate  is  

obtained,  the  excisable  goods  could  be  removed.   Form  RG16  

Register  and the  details  to  be  furnished  in  Form RT11 are  also  

statutory in nature, which relate to the “substance” and “essence”  

of  the  requirements  under  Chapter  X.   Indisputedly,  those  

requirements had not been complied with.   

26. The respondents have laid great emphasis on maintenance of  

some  statutory  registers  and  filing  of  periodical  returns  at  the  

recipient  unit,  so  as  to  take  the  shelter  under  the  doctrine  of  

substantial  compliance  for  remission  of  duty.     Respondents  

pointed out that they had identical columns in the registers kept at  

the recipient end, hence, the requirement of maintaining separate  

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register at the supplier end and the requirements of Chapter X was  

substantially complied with.   It may be noted that RG-16 Register  

prescribed  was  specific  to  Chapter  X  with  the  sole  intention  of  

maintaining separate accounts for receipt, issue and usage of duty  

free remitted inputs received from the supplier unit.  Similarity of  

columns and the details furnished therein cannot be considered as  

substitute for not maintaining of RG-16 Register or other registers  

for remission of duty under Chapter X.

27. We  have  already  indicated  that,  at  the  supplier  end,  no  

registration under Rule 174 was obtained and no records were kept.  

The applicants, at the recipient end, were also legally obliged to give  

various declarations in the statutory forms so as to claim exemption  

and such declarations admittedly were not made.   Non-compliance  

of those conditions enumerated under various rules in Chapter X of  

the  Excise  Rules  and  non-furnishing  of  various  statutory  forms  

prescribed  under  Chapter  X,  in  our  view,  are  fatal  to  a  plea  of  

substantial  compliance  and  intended  use.    The  respondents,  

therefore,  on  the  facts  of  this  case,  have  not  succeeded  in  

establishing  the  plea  of  “intended  use”  or  “the  substantial  

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compliance” of the procedure set out in Chapter X so as to claim the  

benefit of the exemption notification dated 11.8.1994.     

28. We  will  now  examine  whether  the  judgments  in  Thermax  

Private  Ltd.  (supra)  and  J.K.  Synthetics (supra)  require  re-

consideration.  In Thermax Private Ltd. (supra), the assessee had  

cleared imported goods after paying the custom duty as well as the  

additional duty (CVD).  Later, it was felt that it should have claimed  

the concession in respect  of  CVD on the  strength of  Notification  

nos.  63/85 and 93/76 issued under  Section 8 of  the Tariff  Act.  

Therefore, an application for refund of CVD was submitted which  

was  rejected by  the  Assistant  Collector,  but  was allowed by  the  

Collector in appeal.  On appeal, the Tribunal took the view that the  

assessee had failed to satisfy the conditions laid down in Chapter X.  

On  appeal  by  the  assessee,  this  Court  took  the  view  that  the  

Tribunal was in error in holding that the assessee could not get  

refund because the procedure of Chapter X of the Excise Rules was  

not complied with.   This Court mainly relied on the letter of the  

Board  dated  27.7.1987  wherein  it  was  stated  that  whenever  

intended use of material could be established by the importer, the  

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benefit  of  exemption  notification  should  not  be  denied  on  the  

imported goods only because the procedural condition falling under  

Chapter X was not complied with.  It is under such circumstances  

that  this  Court  allowed  the  claim  of  the  assessee  and  ordered  

refund.  Reasoning of this Court in Thermax Private Ltd. (supra)  

is inapplicable to the facts of the present case.  In the instant, case,  

we are  not  concerned with the goods imported  from outside  the  

country.   Both the suppliers of specified intermediate goods  as  

well  as  manufactures  of  specified  final  products  are  situated  in  

India and are obliged to follow various statutory provisions, not only  

for  the  manufacture  of  excisable  goods,  but  also  for  claiming  

exemption under the notification dated 11.8.1994.  Consequently,  

the plea of intended use of the materials cannot be applied to the  

facts of the present case.

29. In  J.  K.  Synthetics (supra),  the  assessee  was  the  

manufacturer of  polyster chips,  staple fibre and tow from Mono-

Ethylene Glycol  (MEG).   On importing those goods, they claimed  

exemption  from  payment  of  additional  duty  of  customs  thereon  

because MEG was exempted from the payment of excise duty by  

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virtue of notification dated 4.5.1987 issued under Section 8 of the  

Tariff Act.    In that case, the contention was raised by the Revenue  

that  the  assessee  had  not  followed  the  conditions  laid  down  in  

Chapter X of the Excise Rules.   But the Tribunal, on facts, found  

that there had been substantial compliance of the procedure by the  

assessee, which was approved by this Court without laying down  

any principle as such which cannot be applied to the facts of the  

present case.  

30. Consequently, the decisions of this Court in Thermax Private  

Ltd. (supra) and J. K. Synthetics (supra) cannot be applied in all  

facts situation and it is declared that the findings recorded in those  

decisions would be confined to the facts of those cases.  

CIVIL APPEAL NO. 1631 OF 2001

31. Civil Appeal No. 1631 of 2001 arises out of the Order dated  

1.12.2000 passed by the Tribunal at New Delhi.  The issue involved  

in that case is whether the exemption from the payment of central  

excise duty was available to the populated Printed Circuit  Board  

(PCB), manufactured and cleared by the assessee under Notification  

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no.  48/94-CE  dated  1.3.1994.   The  Tribunal  found  that  the  

assessee was not eligible for the benefit of the notification since the  

assessee had not followed the procedure set out in Chapter X of the  

Excise Rules by clearing PCB from their unit to the central store at  

A-11, Okhla Industrial Area, Phase 1, New Delhi.  The Tribunal held  

that,  under  Chapter  X,  the  assessee who wanted to  avail  of  the  

benefit of exemption notification had to file application in Form AL-

6 to the jurisdictional Central Excise authorities and had to obtain  

L-6 licence and had to follow the other procedures laid down in that  

chapter  which,  in  our  view,  are  mandatory  requirements  for  

claiming  the  exemption  from  duty  in  the  light  of  the  principles  

discussed by us in the other appeals.  On facts as well as on law,  

we fully  endorse  the  view taken by the Tribunal  and the appeal  

would stand dismissed.

CIVIL APPEAL NOS. 568-569 OF 2009

32. These appeals have been preferred by the Revenue against the  

order dated 6.5.2008 passed by Tribunal at New Delhi, holding that  

the assesses are entitled to the benefit of Notification no. 3/2001-

CE and  6/2001-CE,  irrespective  of  the  fact  that  the  procedures  

31

under Chapter X were followed or not.  The Tribunal expressed the  

view that  the  procedure laid  down in Chapter  X is  meant  to  be  

followed only to establish the receipt of goods by the recipient unit  

and their utilization.

33. The  assessee  in  these  appeals  were  engaged  in  the  

manufacture of  pump parts and gun metal  casting falling under  

Chapter 84 and Chapter 73 respectively of the First Schedule of the  

Tariff Act and claimed the benefit of above mentioned notifications.  

The Officers of the Central Excise Department carried out a search  

at the factory premises of the assessee on 25.8.2004.   On the basis  

of that search, the Commission took the view that the assessee had  

contravened  the  procedure  of  the  exemption  notification  and  

removed the excisable goods clandestinely.  A notice was issued to  

show cause why the central excise duty and the penalty therein be  

not imposed on the assessee.   The Commissioner, Central Excise,  

Ahmedabad vide  order  dated 31.5.2007 demanded central  excise  

duty of Rs.15,14,966/- from M/s Neatwell Castings  under proviso  

to  Section  11-A  of  the  Central  Excise  Act,  1944  by  invoking  

extended period of five years along with the penalty thereon.   In  

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appeal filed by the assessee before the Commissioner (Appeals), it  

was held that the benefit of the notification could not be denied only  

on the ground that the procedure laid down in Chapter X had not  

been followed.   The decision of the Commissioner (Appeals)  was  

upheld by the Tribunal in appeal.   

34. We find it  difficult  to  sustain the reasoning of  the Tribunal  

that  the  procedure  laid  down  in  Chapter  X,  is  meant  only  to  

establish  the  receipt  of  goods  by  the  recipient  unit  and  their  

utilization.   The  Tribunal  completely  overlooked  the  object  and  

purpose  of  the  procedure  laid  down  in  Chapter  X.   The  goods  

manufactured at  the  supplier  end were  excisable  goods and if  a  

party  wants  remission  of  duty,  he  has  to  follow  certain  pre-

requisities,  the  object  of  which  is  to  see  that  the  goods  be  not  

diverted  or  utilized  for  some other  purpose,  on the  guise  of  the  

exemption notification.   Detailed procedures have been laid down  

in Chapter X so as to curb the diversion and misutilization of goods  

which are otherwise excisable.  The plea of “substantial compliance”  

and “intended use” is,  therefore,  rejected for the reasons already  

stated.    

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35. Consequently, Civil Appeal Nos. 1878-1880 of 2004 and Civil  

Appeal Nos. 568-569 of 2009 preferred by the Revenue would stand  

allowed and Civil Appeal No. 1631 of 2001 shall stand dismissed.  

There will be no order as to costs.

…………………………………………CJI (S. H. KAPADIA)

…….……………………..……….……..J. (B. SUDERSHAN REDDY)

……………………………………………J. (K. S. PANICKER RADHAKRISHNAN)

……………………………………………J. (SURINDER SINGH NIJJAR)

……………………………………………J. (SWATANTER KUMAR)

New Delhi; November 18, 2010.

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