Central Excise Tariff Act | Test Reports Justifying Reclassification Must Be Disclosed to Manufacturer : Supreme Court

The Supreme Court ruled that when a test report forms the basis for reclassification of the petrochemical products, necessitating a higher duty, than the copy of such test reports ought to be furnished to the manufacturer-taxpayer.

The bench of Justices Abhay S. Oka and Ujjal Bhuyan set aside the ₹2.15 crore central excise duty demand against M/s Oswal Petrochemicals Ltd., holding that the revenue authorities had violated principles of natural justice by failing to share key evidence—such as the test report used to justify the reclassification of the petrochemicals, which led to the higher duty.

The disputes arose from the reclassification of two products, i.e., Benzene and Toluene, under the Central Excise Tariff Act, 1985, leading to demands for differential excise duty.

The Respondent-department issued show-cause notices for differential duty totaling ₹1.97 crore (1990–1992) and ₹18.16 lakh (January–February 1993), alleging misclassification. The Customs, Excise, and Service Tax Appellate Tribunal (“CESTAT”) upheld the demand in 2010, prompting Oswal to approach the Supreme Court.

Setting aside the impugned order, the judgment authored by Justice Bhuyan noted that the test reports justifying reclassification were never shared with the Appellant, depriving it of its right to seek a re-test under Rule 56(4) of the Central Excise Rules, 1944.

Rule 56(2) mandates full disclosure of test results to assesses so that they can claim a re-test under Rule 56(4). However, no disclosure was made to the Appellants in this case, therefore, the department's failure to share test reports vitiated the entire reclassification process.

“We are afraid we cannot subscribe to such sweeping generalizations made by CESTAT. There is no dispute that the test reports formed the basis for re-classification of the two products Benzene and Toluene. Department had entirely relied upon the test reports to alter the classification from 2902.00 to 2707.10 and 2707.20, thereby necessitating a higher duty demand resulting in levy of differential duty demand. Therefore, principles of natural justice required that copies of such test reports ought to have been furnished to the appellant. Informing the appellant only the gist of the test reports cannot be said to be in compliance with the principles of natural justice as the test reports formed the sub-stratum of higher duty demand raised by the department thus entailing adverse civil consequences on the appellant. It is axiomatic 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. Otherwise, it will be a clear case of breach of the principles of natural justice.”, the court observed.

“Unless a copy of the test report is furnished to the manufacturer, he would not be in a position to seek re-test within the specified period, if he is aggrieved by the result of the test. Therefore, a copy of the test report has to be furnished to the manufacturer. In such circumstances, extracting the gist of the test reports, that too in the show-cause notices, would clearly be in breach of Rule 56 (2) and Rule 56 (4) of the Central Excise Rules. Such a procedure is not contemplated under Rule 56. That apart, it will defeat the right of a manufacturer to seek re-test if he is aggrieved by the result of the test.”, the court added.

Accordingly, the Court allowed the appeal.

Case Title: M/S OSWAL PETROCHEMICALS LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE, MUMBAI – II

Citation : 2025 LiveLaw (SC) 500

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Appearance:

For Appellant(s) Mr. A. K. Prasad, Adv. Ms. Surabhi Sinha, Adv. Ms. Pankhuri Shrivastava, Adv. Ms. Neelam Sharma, AOR

For Respondent(s) Mr. Arijit Prasad, Sr. Adv. Mr. Mukesh Kumar Maroria, AOR Ms. B. Sunita Rao, Adv. Mr. Udai Khanna, Adv. Mr. Sarthak Karol, Adv. Ms. Neelakshi Bhaduria, Adv. Mr. Gunmaya S. Mann, Adv.