Goods rendered unfit for marketing by injunction qualify for excise-duty remission under Rule 21.

M/s Dhariwal Industries Pvt. Ltd. manufactured pan masala, gutkha and tobacco products under the brand name “Manikchand”.

On 16 March 2004, the District Judge, Mandleshwar, Madhya Pradesh, granted an ex parte ad-interim injunction restraining use of the “Manikchand” trademark. The respondent consequently stopped using that brand and commenced production under the “RMD” brand.

Stocks of goods already packed under the “Manikchand” brand remained unused because they could not be marketed or sold during the pendency of the injunction.

The respondent applied under Rule 21 of the Central Excise Rules, 2002, seeking remission of excise duty of Rs. 2,70,17,147 and permission to destroy the goods under departmental supervision. It also reversed Cenvat credit of Rs. 13,65,766 relating to the goods proposed to be destroyed.

The Commissioner rejected the remission application by order dated 6 June 2017, holding that the goods could have been repacked under the “RMD” brand and sold in the domestic market.

The Customs, Excise and Service Tax Appellate Tribunal allowed the respondent’s appeal on 27 November 2018, holding that the goods were incapable of being marketed because of the injunction and were covered by Rule 21.

The Principal Commissioner challenged the Tribunal’s order before the Gujarat High Court under Section 35G of the Central Excise Act, 1944.

Whether the Tribunal’s order was contrary to law for failing to properly consider Rule 21 of the Central Excise Rules, 2002 and the facts relevant to remission of duty?

Whether the Tribunal’s conclusion that the goods were covered by Rule 21 prevented the Commissioner from independently deciding the matter on merits in remand proceedings?

The Court applied Section 35G of the Central Excise Act, 1944, governing appeals to the High Court on substantial questions of law.

It primarily applied Rule 21 of the Central Excise Rules, 2002, under which remission of duty may be granted in respect of excisable goods that have been lost or destroyed, or have become unfit for consumption or marketing, owing to circumstances beyond the assessee’s control, subject to the prescribed conditions and departmental verification.

The Court also applied the principle that the authority deciding a remission application must make a proper factual inquiry into the condition and marketability of the goods and cannot reject remission merely by substituting its own business judgment for that of the manufacturer.

The Court agreed with the Tribunal that the injunction against use of the “Manikchand” trademark made the goods, in the form in which they were packed, incapable of being marketed.

The Commissioner’s reasoning was internally inconsistent: although acknowledging that the respondent had shifted to the “RMD” brand, the Commissioner simultaneously assumed that the old “Manikchand”-branded goods could simply be repacked and sold under the new brand.

The Court held that the feasibility, practicability and commercial viability of repacking or exporting the goods could not be presumed by the Commissioner without a factual inquiry.

The Department had not verified the actual condition of the stock or whether the goods remained fit for consumption when the remission application was considered.

Since the respondent specifically asserted that the goods had become unusable and unfit for consumption, the Department was required to verify that assertion; if the goods were found fit, the suggested alternative course could then be considered.

On that basis, the Tribunal’s conclusion that the goods were covered by Rule 21 was upheld.

The High Court dismissed the Tax Appeal and affirmed the Tribunal’s order allowing remission of duty in respect of the goods packed under the “Manikchand” brand.

Since the Commissioner’s order dated 6 June 2017 had been set aside by the Tribunal and that decision was affirmed by the High Court, the consequential show-cause notice dated 18 March 2019 was quashed and set aside.

The connected Special Civil Application was accordingly allowed.