of Central Excise,Mumbai-Iv Vs. M/S. Damnet Chemicals Pvt. Ltd. Etc  Insc
907 (10 September 2007)
Chatterjee & B. Sudershan Reddy
APPEAL NOs. 3821-23 OF 2005 B. SUDERSHAN REDDY, J.
These appeals preferred under Section 35L(b) of the Central Excise Act, 1944
(hereinafter referred to as 'the Act') are directed against a common order
dated 22.12.2004 passed by the Customs, Excise and Service Tax Appellate
Tribunal (hereinafter referred to as 'CESTAT') West Regional Bench, Mumbai by
which Appeal Nos. E/304/2004, E/314/2004 and E/315/2004 filed by the
respondent-assessee were allowed.
facts briefly stated are as follows:
respondents - M/s. Danmet Chemicals Pvt. Ltd. (hereinafter referred to as
'DCPL') were manufacturing the products 'CRC 2-26 Aerosol' and 'CRC Acryform
Aerosol' since 1983. They were claiming exemption under Notification No.
120/84-CE dated 11.5.1984 for the product 'CRC 2-26' and SSI exemption under
Notification No. 175/86-CE dated 1.3.1986 for the product 'CRC Acryform'.
their declarations they claimed the classification of the products 'CRC 2-26'
under Chapter 2710.99 and 'CRC Acryform' under Chapter 3203.40.
the basis of the material gathered during the routine transit checks and other
information the Department issued show cause notice dated 12.2.1993 to the
respondent-assessee calling upon it to show cause as to why Central Excise duty
of Rs. 56,69,872.80p should not be demanded and recovered for the period
26.2.1988 to 24.10.1992. In the said show cause notice mainly 4 issues were
That the product 'CRC 2-26' was not a blended lubricating oil and was,
therefore, not entitled to the benefit of Notification No. 120/84-CE dated
That the product 'CRC Acryform' was not entitled to the benefit of Notification
No. 175/86CE dated 1.3.1986 inasmuch as the product carried on it the brand
name/trademark of a person not entitled to the benefit of the Notification;
That the respondent-assessee was a dummy or a fagade of Bharat Bijlee Ltd. (for
short 'BBL') and also that the respondent and BBL were related persons and that
therefore the price at which BBL sold the respondent's products should be taken
as the assessable value;
That the respondent-assessee had suppressed the facts with intent to evade duty
and therefore the proviso to Section 11A (1) of the Act had been invoked.
Department issued 12 six-monthly show cause notices between 27.10.1997 to
3.4.2003 for the period April, 1997 to 31.10.2002, demanding an aggregate
amount of Rs. 22,55,444/-
matter was initially adjudicated by the Commissioner (Adjudication) vide order
dated 31.8.1998 which was challenged by the respondent-assessee in appeal and
the Tribunal having set aside the order of the Commissioner remitted the case
to the Commissioner for de novo adjudication. Accordingly, the Commissioner
adjudicated all the show cause notices vide his order dated 31.10.2003 whereby
and whereunder it was held that the respondent-assessee is not entitled to
exemption of duty under Notification No. 120/84-CE for the product 'CRC 2-26'
and exemption under Notification No. 175/86-CE in case of product 'CRC Acryform'.
Aggrieved by the said decision the respondent- assessee filed an appeal against
the aforesaid order dated 31.10.2003 passed by the Commissioner, Central
Excise, Mumbai-IV. The CESTAT decided all the issues that had arisen for its
consideration and accordingly allowed the appeal preferred by the respondent-assessee.
We shall refer to those issues adjudicated by the CESTAT in detail
appropriately. Being aggrieved by the decision of the Tribunal, Commissioner of
Central Excise, Mumbai-IV preferred these appeals.
have heard Shri Vikas Singh, learned Additional Solicitor General for the
appellant and Shri D. B. Shroff, learned Senior Counsel for the respondent-assessee.
Elaborate submissions were made by both the counsel. We have perused the orders
passed by the Commissioner as well as the Tribunal. We have also gone through
the material available on record.
The learned Additional Solicitor General mainly contended that the product 'CRC
2-26' manufactured by the respondent-assessee cannot be characterized as
lubricating oil as it was predominantly anticorrosive in nature and was used
for air conditioners, panel boards and other electrical and electronic gadgets
primarily to prevent corrosion and for improving electrical properties. It was
also submitted that the respondent-assessee was not entitled to SSI exemption
for 'CRC Acryform' since the respondent-assessee manufactured and cleared goods
in the brand name of M/s. BBL and also the logo of M/s. CRC Chemicals Europe.
Further submission was that DCPL and BBL are related persons and relation led
to under valuation of the goods. The respondent-assessee is guilty of
suppression of facts warranting invocation of the extended period.
D.B. Shroff, learned senior counsel for the respondent-assessee supported the
findings and conclusion recorded by the Tribunal and reiterated the case of the
respondent-assessee that he is entitled for the benefit of both the
Notifications referred to hereinabove.
Broadly, the following issues arise for our consideration in these appeals
Whether the product 'CRC 2-26' is a blended lubricating oil and thus is
entitled to exemption under Notification No. 120/84?
Whether the respondent is entitled to the benefit of Notification No. 175/86 in
respect of the product 'CRC Acryform'?
Whether there was any willful misstatement or suppression of facts with intent
to evade duty with regard to the products 'CRC 2-26' and 'CRC Acryform' or
about the relationship between the respondent and BBL so as to enable the
Department to invoke the proviso to Section 11A(1) in show cause notice dated
12.2.1993 and whether the demand raised in the said show cause notice is
Whether the Department can impose any penalty?
Whether the respondent was a fagade or dummy of BBL and/or whether the
respondent and BBL are related persons within the meaning of Section 4 (a) and
4 (3) (b) of the Act? ISSUE NO.1: Whether the product 'CRC 2-26' is a blended
lubricating oil and thus is entitled to exemption under Notification No.
The material available on record suggests that 'CRC 2- 26' mainly contains
petroleum base oil 25%, mineral oil 72% and rust preventives 3%. It is the case
of the respondent-assessee that these ingredients are blended together with a
stirrer until thoroughly mixed. This blended lubricating oil is sold and used
as a penetrating lubricating oil by many industries including government owned
for the purposes of lubricating the ball and roller bearings, circuit breakers,
connectors, switches, push buttons etc. The petroleum base oil undisputedly is
also mineral oil has lubricating properties and is the most important
ingredient in 'CRC 2-26'. Its main function is lubrication. It is explained
that when it is sprayed on moving parts, the product forms a thin film on the
surface and this film lubricates the parts. The film forming property is called
lubricity. As corrosion and rust increases friction amongst moving surfaces, a
small percentage of proprietary rust preventives is also added so as to keep
the surface rust free as far as possible for effective lubrication by the film.
The certificates issued by various industrial concerns including the government
industries are part of record. Their genuineness is not put in issue. The test
report on 'CRC 2- 26' carried out by Prof. M.C. Dwivedi, Professor of IIT
categorically states that 'CRC 2-26' is a blended lubricant and that the
lubricating oil used in the formulation conforms with the requirements of the
Bureau of Indian Standards requirements. The Department did not controvert the
expert opinion given by the Professor.
that as it may, the Department itself drew samples on the said products on more
than one occasion i.e. in 1984, 1990 and 1993. The Deputy Chief Chemist has
given the test reports and communicated the same vide letter dated 3.5.1985
stating that the sample which forms of a liquid is composed of mineral oil and
small amount of additives; 1990 analysis has been communicated vide letter
dated 15.4.1991 stating that the sample is composed of mineral oils and
additives, the percentage of mineral oil is more than 70% and the result of
1993 analysis was communicated vide letter dated 10.1.1994 specifically stating
that it is a product primarily used as lubricant though it has anticorrosive
properties also. It is well settled and needs no restatement at our hands that
the test reports given by the Chemical Examiner are binding upon the Department
in the absence of any other acceptable evidence produced by it in rebuttal. In
the present case, the Department has neither produced any evidence to rebut the
reports of the Chemical Examiner nor impeached the findings of the test
Much reliance was sought to be placed by the Department on the label affixed on
the container which says that " 'CRC 2-26' is a precision blended multi purpose
lubricating oil that prevents malfunction due to the deteriorating effects of
moisture and corrosion, extends operational life, claims, protects metal,
reduces downtime and maintenance." Under the heading Directions, it is
mentioned that 'CRC 2-26' is to be used to clean, lubricate, protect precision
mechanism. We fail to appreciate as to how this information contained in the
label supports the plea of the Department. It is true that the product in some
measures contains anti-corrosive properties. The HSN explanatory notes
specifically declares that oils classified under the head remain classifiable
if various substances have been added to render them suitable for particular
uses, provided the product contains by weight 70% or more of petroleum oil or
oils obtained from bituminous minerals as the base and that they are not
covered by a clear specific heading. There is no dispute whatsoever the product
in question to be a preparation containing 70% or more of mineral oil apart
from 20% petroleum oil. The product is predominantly a blended lubricating oil.
percentage of rust preventives does not make the product in question to be a
rust preventive one. The plea of the Department that the product is not a
lubricating oil is untenable. There is no material or evidence in support of
the said plea. The findings recorded by the Tribunal based on material and
evidence available on record in our considered opinion do not suffer from any
error requiring our interference in exercise of our appellate jurisdiction.
NO.2: Whether the
respondent is entitled to the benefit of Notification No. 175/86 in respect of
the product 'CRC Acryform' ?
The contention of the Department in this regard mainly was that labels 'CRC Acryform'
carried the logos "B" of BBL and 'CRC' of CRC Chemicals Europe, who
admittedly are not entitled to the benefit of notification. It was submitted,
in the circumstances 'CRC Acryform' is not entitled to the benefit of
Notification No. 175/86. There is no dispute that the respondent-assessee has
been using the trademark 'CRC Acryform' as its own ever since 1987. It had
applied to the Trademarks Registrar for registering the trademark as early as
in the year 1992. The Trademark Registrar has registered 'CRC Acryform' as
respondent's trademark on 14.10.1992 with retrospective effect from the date of
use in the year 1987. It is true the registration of the trademark on
14.10.1992 after the commencement of lis between the parties by itself may not
be binding on the Department but its evidentiary value cannot be altogether
ignored. So far as the CRC Chemicals Europe is concerned it had given an
affidavit and a certificate specifically stating that they do not manufacture
and have not manufactured or sold any product under the name and style "Acryform"
or "CRC Acryform" either in India or abroad and they have not claimed any title, right or ownership in
the aforesaid names. This affidavit has been ignored altogether by the
Commissioner on the ground that it was procured by the respondent-assessee and
it was a false document. There is no evidence made available by the Department
that the same trade name or brand name is used by some other company apart from
the respondent-assessee. There is also no evidence available on record
indicating any connection between the 'CRC Acryform' and CRC Chemicals Europe.
In the absence of any specific statement in the show cause notice to this
effect burden in this regard cannot be cast on the respondent-assessee.
Admittedly the use of the logo was discontinued from 1990 and the same was
informed to the Department. So far as the 'CRC Acryform' is concerned it bears
the mark 'CRC Acryform' which is registered and shown in the trademark
also not impressed by the submission made on behalf of the Department that 'CRC
Chemicals Europe' could not have permitted the manufacture of the product and
supply the concentrate without having title to the trademark for the simple
reason that the licence agreement referred to and relied upon by the Department
merely permits the respondent-assessee to manufacture 'CRC Acryform' from the
concentrate supplied by 'CRC Chemicals Europe'. The Commissioner mis-interpreted
the clause in the agreement relating to the product 'CRC 2-26' and made it
applicable to 'CRC Acryform'. The licence agreement dated 30.9.1986 is nothing
but extension to the license agreement dated 1.10.1983 for 'CRC 2-26' of course
in addition permitting the manufacturer of 'CRC Acryform' to label it as such.
It is nowhere mentioned in the original license agreement and in the subsequent
agreement dated 30.9.1986 that 'CRC Acryform' is a trademark or brand name of
CRC Chemicals Europe. The Tribunal upon appreciation of the evidence available
on record came to the correct conclusion that respondent-assessee continues to
be a small- scale industry and entitles to the benefit of Notification No.
175/86 in respect of 'CRC Acryform'. We find no error in the conclusion so
arrived at by the Tribunal.
No. 3: Whether
there was any willful misstatement or suppression of facts with intent to evade
duty with regard to the products CRC 2-26 and CRC Acryform or about the
relationship between the respondent and BBL so as to enable the Department to
invoke the proviso to Section 11A(1) of the Act, in the show cause notice dated
12.2.1993 and whether the demand raised in the said show cause notice is
The classification lists filed by the assessee from time to time categorically
mention in the column relating to the process of manufacture as "blending
of various anti- corrosive chemicals and solvents with mineral
mentioned that the product is a blended lubricating oil manufactured by
blending mineral turpentine oil with anti- corrosive in a base of corrosive oil.
The stand taken by the assessee is consistent as is evident from the letter
dated 20.3.1985 addressed to the Superintendent of Central Excise that they
were the manufacturers of 'CRC 2-26' which was a blended lubricant comprising
of various anticorrosive oils and mineral turpentine oil and that the same was
fully exempted under Notification No. 120/84.
required information was supplied to the Superintendent of Central Excise when
he visited the factory of the respondent-assessee. Samples were again drawn in
1990 and 1993 to determine whether the product was not a lubricating oil. We
have already referred to the analysis of the Deputy Chief Chemist who opined
that the samples contained mineral oil which was more than 70% and additives.
The chemical test reports so obtained by the Department were never put in
issue. No dispute has been raised in this regard. The declarations furnished by
the respondent-assessee were totally inconformity with what has been stated in
the test reports of the Deputy Chief Chemist. It is true that the exemption
under Notification No. 120/84 was applicable to lubricating oil and greases
which had a primary and permanent function of lubrication and not for the
product having a primary function of anti- corrosive protection. But the
evidence available on record reveals that the quantum of rust preventives in
'CRC 2-26' is only 3% whereas mineral oil is 70%. The evidence of the people in
the trade, testimonials given by them including various government bodies
reveal that the product 'CRC 2- 26' is primarily used as a lubricating oil. The
test reports of the Deputy Chief Chemist coupled with the evidence referred to
hereinabove lead to one and only one irresistible conclusion that the product
was primarily used for the lubricating purposes. No evidence has been produced
by the Department to rebut the voluminous evidence made available by the
the circumstances, we find it difficult to hold that there has been conscious
or deliberate withholding of information by the assessee. There has been no
willful misstatement much less any deliberate and willful suppression of facts.
It is settled law that in order to invoke the proviso to Section 11A(1) a mere
misstatement could not be enough. The requirement in law is that such
misstatement or suppression of facts must be willful. We do not propose to
burden this judgment with various authoritative pronouncements except to refer
the judgment 2005 (188) ELT 149 (SC)] wherein this Court held:
find that "suppression of facts" can have only one meaning that the
correct information was not disclosed deliberately to evade payment of duty,
when facts were known to both the parties, the omission by one to do what he
might have done not that he must have done would not render it suppression. It
is settled law that mere failure to declare does not amount to willful
suppression. There must be some positive act from the side of the assessee to
find willful suppression."
is clear from the material available on record that the Excise Authorities had
inspected the manufacture process, collected the necessary information and
details from the respondent-assessee and even collected the samples and sent to
chemical analysis. The Authorities were aware of the tests and analysis reports
of the products manufactured by the respondent-assessee. The relevant facts
were very much within the knowledge of the Department Authorities. The
Department did not make any attempt to lead any evidence that there was any willful
misstatement or suppression of facts with intent to evade payment of duty.
For the reasons aforesaid, we are of the view that the Tribunal did not commit
any error in holding that the extended period of limitation was not available
to the Department for initiating the recovery proceedings under Section 11A (1)
of the Act.
far as 'CRC Acryform' is concerned, the allegation was that the respondent-assessee
did not mention about the license agreement in the classification lists. But
the fact remains the copies of the labels on the product which were furnished
to the Department at the time of filing declarations and classification lists
contain information that 'CRC Acryform' was manufactured under the license of
CRC Chemicals Europe. The Department had even taken samples of 'CRC 2-26' which
had contained labels of the aforesaid product. This Court in O.K. Play (India) Ltd. vs. Commissioner of Central
Excise, Delhi-III, Gurgaon [2005 (188) ELT 300 (SC)] while dealing with the
effect of approval of the classification lists observed:
classification lists were duly approved by the department from time to time.
All the facts were known to the department, whose officers had visited the
factory of the assessee on at least 12 occasions. In the circumstances, we do
not find any infirmity in the reasoning given by the Tribunal in coming to the
conclusion that there was no willful suppression on the part of the assessee
enabling the department to invoke the extended period of limitation under the
proviso to Section 11A (1) of the 1944 Act."
The same principle is reiterated in Commissioner of 2005 (182) ELT 308 (SC)].
the facts of the case, we hold that non-mentioning of the license agreement in
the classification lists does not lead to the conclusion that there has been
willful suppression of facts with intent to evade duty. The demand in respect
of 'CRC Acryform' is, therefore, totally time barred.
NO.4: Whether the
Department can impose any penalty?
The only ground for levying the penalty is that the respondent-assessee had
suppressed the facts and had evaded the payment of duty. In view of our
conclusion that there has been no suppression whatsoever, the question of
imposition of penalty does not arise. The duty demanded by invoking the
extended period of limitation itself is untenable and unsustainable for the
aforesaid reasons. In such view of the matter no elaborate discussion on this
aspect is necessary.
NO.5: Whether the
respondent was a fagade or dummy of BBL and/or whether the respondent and BBL
are related persons within the meaning of Section 4 (a) and 4 (3) (b) of the
The Department in the show cause notice dated 12.2.1993 alleged that:
assessee-respondent is a dummy/facade of BBL;
assessee-respondent and BBL are related persons.
in response to show cause inter alia contended that it is a wholly independent
and separate company incorporated under the Companies Act, 1956 as early as on
21.5.1983 having two directors, namely Mr. N.J. Danani and his wife. A
manufacturing unit was registered as a small-scale unit. It has no borrowings
or loans from BBL or any other manufacturing unit. The machineries required for
the purposes of manufacturing the products are purchased and owned by the
respondent- company. The required raw materials and packing materials for
manufacturing and packing the products were always purchased from its own
resources and BBL in no manner exercises any supervision or control over the
affairs of the respondent-company.
is no doubt true that the registered office of BBL and the respondent-company
was located in the same premises. The BBL owns the industrial gala in which
respondent's factory exists for which the respondent- company pays market rent
for its operation. The BBL before entering into a lease agreement on each
occasion obtained a valuation report from an independent Valuer for the
purposes of fixing the quantum of rent. The BBL entered into a lease agreement
with the respondent-company under the Board Resolution of the company. Mere
fact that both the registered offices are situated in the same premises and the
manufacturing unit of the respondent-company is situated in the industrial gala
owned by the BBL would not make both the companies are related to each other.
There is no mutuality of interest between both the companies.
BBL admittedly does not hold any shares in respondent-company nor the
respondent-company owns any shares in BBL. One of the Directors in both the
companies appears to be common. The respondent- company was incorporated in
1983 and at that time Mr. N.J. Danani was only an employee of BBL and became
its Director in June, 1988 and was one out of seven Directors.
required to appreciate that the respondent first started manufacturing 'CRC
2-26' in the year 1984. The manufacture of 'CRC Acryform' was started after
September, 1986 but well before Mr. N.J. Danani became Director of BBL.
There is no evidence on record in support of the allegation that the transactions
between the respondent- company and BBL were not on a principle to principal
Commissioner found that the transaction between both the companies was not a
simple relationship between manufacturer and seller, because respondent-company
manufactured the product but did not mention its name on the product or carton,
but mentioned that the product was marketed by BBL and put the logo of BBL
thereon and that BBL did not pay any consideration to the respondent- company
in that regard. This is totally contradictory to the evidence available on
record as held by the Tribunal. The name of the manufacturer is also mentioned
on the product. There is no evidence to arrive at any conclusion that there was
a hidden flow back of money between both the companies. The respondent did not
take any loan or advances from BBL. The appellant did not produce any evidence
to show that BBL has an interest in the respondent-company's business. The
appellant however, placed much reliance upon the finding of the Commissioner
which is as follows:
respondent had a list price beyond which BBL could not sell and the arrangement
between the parties was that BBL would be billed at 60% of the list price and
that the difference in the prices would recover the cost incurred by BBL for
providing security services, and for expenses incurred by respondent for
putting the logo and the name of BBL as also the cost of printing the leaflets,
advertisement material provided to BBL."
The Tribunal after elaborate consideration of the matter and upon appreciation
of the evidence found that BBL was a bulk buyer of the product manufactured by
the respondent-assessee and there is nothing wrong in giving 40% discount. It
was a normal trade practice. This Court in Madras [ 1995 (75) ELT 449 (SC)]
a special trade discount is given to such a customer who is a buyer of 90% of
goods, it would amount to a normal trade practice. At any rate it would not be
an impermissible trade practice. In fact such type of concessions are usually
given by manufacturers whose goods are lifted by whole-buyers whose
availability avoids lot of marketing and advertising costs for the manufacturer
and also ensures a guaranteed quantity of sales year after year. In order to
keep such a wholesale monopolistic buyer attached to it, if under such
circumstances by way of business expediency, the manufacturer offers him a
special trade discount, it cannot be said that it is not in accordance with
normal practice of wholesale trade."
There is no evidence available on record that the respondent-assessee received
something further from BBL other than the price charged. There is no evidence
to suggest that the profit made by the BBL had flown into the
respondent-company. BBL obviously is a distributor and not a relative within
the meaning of Section 4 (a) and 4 (3) (b) of the Act. 1984 (17) ELT 323 (SC)]
treating the customer as a related person, the first part of the definition of
'related person' as given in Section 4 (4) (c) requires that the person who is
sought to be branded as a 'related person' must be a person who is so
associated with the assessee that they have interest directly or indirectly in
the business of each other. Thus, it is not enough that the assessee has an
interest directly or indirectly in the business of the person alleged to be a
related person nor is it enough that the person alleged to be a related person
has any interest directly or indirectly in the business of the assessee. It is
essential to attract the applicability of the first part of the definition that
the assessee and the person alleged to be a related person must have interest
direct or indirect in the business of each other.
equality and degree of interest which each has in the business of the other may
be different; the interest of one in the business of the other may be direct
while the interest of the latter in the business of the former may be indirect,
but that would not make any difference so long as each has got some interest
direct or indirect in the business of the other. In cases, where 50% share of
the manufacturing company is held by7 the customer company, the customer
company can be said to be having interest in the manufacturing company as a
shareholder but for this reason, it cannot be said that the manufacturing
company has any interest direct or indirect, in the business carried on by one
of its shareholders even though the shareholding of such shareholders may be
50%. In the absence of mutuality of interest in the business of each other, the
customer company holding shares in the manufacturing company cannot be treated
to be a 'related person'."
such view of the matter it cannot be said that the respondent-assessee and BBL
were related persons. The finding arrived at in this regard by the Tribunal is
interference is called for.
view of our findings, it is not necessary to go into the various alternative
submissions made during the course of hearing of these appeals.
The appeals fail and are accordingly dismissed with no order as to costs.