Supreme Court Quashes Excise Duty Demand Due to Violation of Natural Justice

The Supreme Court of India delivered a significant judgment on April 28, 2025 in the case of M/s Oswal Petrochemicals Ltd. vs. Commissioner of Central Excise, Mumbai – II, setting aside a differential excise duty demand of over Rs. 2.15 crore. The bench comprising Justices Abhay S. Oka and Ujjal Bhuyan ruled in favor of the appellant company, holding that the excise authorities had violated principles of natural justice by not providing complete test reports that formed the basis for reclassification of products and consequent duty demand.

The dispute centered around the classification of two petrochemical products – Benzene and Toluene – manufactured by Oswal Petrochemicals. While the company had classified these under Chapter sub-heading 2902.00 (attracting lower duty), the excise department later reclassified them under Chapter sub-headings 2707.10 and 2707.20 respectively (attracting higher duty) based on test reports showing purity below 96%. This reclassification led to the disputed duty demand for the period 1990-1993.

The appellant’s counsel argued forcefully that: “Once the classification of the above two products under chapter sub-heading 2902 was approved, the same could not have been erroneously and arbitrarily unsettled by the Collector (Appeals).” They emphasized that “the test reports of the samples drawn in October, 1990 were never communicated to the appellant”, depriving them of the opportunity to challenge the results or seek re-testing.

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The respondent excise department countered that they had communicated the gist of test results through show-cause notices, and that the appellant never disputed these results or sought re-testing. They maintained that “appellant did not write a single letter after receipt of the test reports that it had upgraded the facility and that the test conducted in its laboratory indicated that purity of Benzene and Toluene was more than 96 percent.”

The Supreme Court’s analysis provides important clarity on two key aspects of excise law. First, it reaffirmed that “documents relied upon by the authority to take a view different from the one existing and which would have adverse civil consequences upon the affected party should be furnished to the affected party.” The Court held that merely providing a gist of test results in show-cause notices violated both Rule 56 of Central Excise Rules and principles of natural justice.

Second, the Court clarified the mandatory requirements for provisional assessments under Rule 9B, noting that “Neither any bond in proper format was directed nor executed by the appellant. Mere endorsement by the concerned Superintendent on two RT-12 returns cannot make an assessment provisional.”

The judgment sets an important precedent on the rights of assessees in excise matters, particularly regarding access to documents relied upon by tax authorities and the procedural requirements for provisional assessments. It reinforces that tax authorities cannot demand additional duties without following due process and providing assessees a fair opportunity to contest the basis of such demands.

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Petitioner Name: M/s Oswal Petrochemicals Ltd..
Respondent Name: Commissioner of Central Excise, Mumbai – II.
Judgment By: Justice Abhay S. Oka, Justice Ujjal Bhuyan.
Place Of Incident: Mumbai, Maharashtra.
Judgment Date: 28-04-2025.
Result: allowed.

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