Dharampal
Satyapal Vs. Commissioner of Central Excise, Delhi-I, New
Delhi [2005] Insc 274
(21 April 2005)
S.N.
Variava, Dr. Ar. Lakshmanan & S.H. Kapadia Kapadia, J.
Whether,
in the facts and circumstances of this case, the Tribunal was justified in upholding
the order of the commissioner dated 28.4.1998 with respect to
(a) the
excisability of the kimam and classification thereof under sub- heading 2404.49
prior to 23.7.1996 and under sub-heading 2404.40 w.e.f. 23.7.1996;
(b) rationale
for invoking the extended period of limitation under the proviso to section
11A(1); and
(c)
eligibility for the benefit of proforma/modvat credit in respect of the chewing
tobacco kimam, is the question which arises for determination in these civil
appeals filed by the appellant - assessee under section 35-L(b) of the Central
Excise Act, 1944 (hereinafter referred to for the sake of brevity as "the
1944 Act").
Briefly,
the facts of the case are that M/s Dharampal Satyapal (assessee), having its
head office at 7/22, Ansari Road, Darya Ganj, New Delhi and factories at 96, Okhla
Industrial Estate, Phase-III, New Delhi / E-1, Maharani Bagh, New Delhi was
found engaged in the manufacture of compound (kimam) containing chewing tobacco
under sub-heading 2404.40/2404.49. The assessee, a partnership firm, was not
registered with the Central Excise department as a manufacturer. The assessee
appeared to have been manufacturing and clearing the said compound (kimam)
without the knowledge of the department.
During
the investigations carried out by the department, the assessee claimed that the
compound (kimam) manufactured by them was moved in "balties" on stock
transferred basis to their three branded chewing tobacco manufacturing
factories located at 68/2, Okhla Industrial Estate, Phase-II, New Delhi, Noida
(UP) and Barotiwala (HP). The assessee claimed that the compound (kimam) was an
intermediate item, not marketable as such and was, therefore, not excisable.
Enquiries were made by the department at Barotiwala (HP), where the assessee
claimed to have transferred the compound (kimam). The said enquiries indicated
receipt of the said compound (kimam) in balties at Barotiwala during the period
16.2.1995 to 20.12.1996.
Based
on the above investigations carried out by the department, it appeared that the
compound (kimam) was excisable and had been manufactured and cleared without
obtaining registration and without payment of duty on the clearances during the
period 1.4.1994 to 3.10.1996.
Accordingly,
a show-cause notice dated 19.6.1997 answerable to the commissioner was served
upon the assessee demanding duty under rule 9(2) of the Central Excise Rules,
1944 read with proviso to section 11A(1) of the said 1944 Act with interest
under section 11AB. By the said show-cause notice, penalty under rule 173Q and
section 11AC was also proposed to be levied. The show-cause notice alleged
suppression of material facts with intent to evade payment of duty. It referred
to manufacture of the compound (kimam) without obtaining registration. It also
referred to clandestine clearance of the said compound (kimam) without
maintenance of statutory records.
After
considering the defence put forth by the assessee, the commissioner held, vide
order dated 28.4.1998, that sada kimam (raw-material) was purchased by the assessee
and blended with saffron, spices, perfumes and menthol; that consequent upon
such blending, a compound (kimam) emerged, which was a separate identifiable
product; that from time to time, the assessee used to purchase from the market
a similar compound (Lucknowi kimam) from M/s Globe Traders and M/s Laxmi
Fragrances Pvt. Ltd.; that the compound (kimam) was used in the manufacture of
the chewing tobacco which was sold under the brand name "Tulsi Zafrani Zarda".
The commissioner further found that M/s Globe Traders and M/s Laxmi Fragrances
Pvt. Ltd. were manufacturers of similar compound. That, the said M/s Globe
Traders and M/s Laxmi Fragrances Pvt. Ltd. were manufacturing their compound in
their registered units; they were license holders; they were maintaining
records under the excise law. In the circumstances, the commissioner came to
the conclusion that the compound (kimam) manufactured by the assessee in their
unregistered/unlicensed factories at 96, Okhla Industrial Estate, Phase-III,
New Delhi / E-1, Maharani Bagh, New Delhi was excisable. By the impugned
decision, the commissioner came to the conclusion that the assessee had
deliberately and without any reason whatsoever suppressed its affairs and they
had deliberately failed to obtain registration which circumstances constituted
evidence of suppression and, therefore, the department was right in invoking
the extended period of limitation.
Aggrieved
by the above order of the commissioner dated 28.4.1998, the assessee challenged
it in Customs, Excise & Gold (Control) Appellate Tribunal, New Delhi
(hereinafter referred to as the "tribunal") inter-alia on the ground
that the said compound (kimam) was neither chewing tobacco nor preparations for
chewing tobacco; they were not capable of being used as such and could be used
only after dilution; their manufacturing formula was secret and the said
compound (kimam) was not sold in the market but it was sent to the assessees'
own factories at 68/2, Okhla Industrial Estate, Phase- II, New Delhi, Noida (UP)
and Barotiwala (HP). The order of the commissioner was also challenged on the
ground that the assessee was under a bonafide impression that no duty was leviable
on the compound (kimam); the full quantity of the compound (kimam) manufactured
at 96, Okhla Industrial Estate, Phase-III, New Delhi / E-1, Maharani Bagh, New
Delhi was used captively and, therefore, proforma credit / modvat credit was
available to the assessee and, therefore, there was no intention to evade
payment of duty. That, the assessee was entitled to exemption under
notification no.121/94-CE dated 11.8.1994 even though the assessee had not
complied with the procedure under chapter-X.
After
hearing both the sides, the tribunal upheld the commissioner's order dated
28.4.1998 with respect to :
(a) the
excisability of the goods in dispute and the classification thereof under
sub-heading 2404.49/2404.40;
(b) the
rationale for invoking the extended period of time under proviso to section
11A; and
(c) inadmissibility
of proforma credit / modvat credit. However, as regards applicability of
notification no.121/94, the tribunal observed that though the assessee had not
followed the chapter-X procedure, if substantial compliance was shown regarding
receipt and utilization of the input material then the rigours of chapter-X
procedure could be diluted in the interest of the natural justice.
The
tribunal noted that the commissioner had not recorded any finding in his order
to the extent of the compliance of the conditions mentioned in the notification
no.121/94. Hence, the tribunal remanded the case back to the commissioner for
re-examination of the limited question of applicability of the said
notification no.121/94. The tribunal also directed the commissioner to give to
the assessee an opportunity to present their case and reconsider the quantum of
penalty, fine, interest etc. in the light of his findings as to the
applicability of the notification no.121/94.
Being
aggrieved by the impugned decision of the tribunal dated 1.10.1999, the assessee
has come to this Court by way of civil appeals under section 35L(b) of the 1944
Act.
On the
question of excisability, Mr. V. Lakshmikumaran, learned counsel appearing on
behalf of the assessee submitted that the compound (kimam) which emerged on
account of blending of sada kimam (raw-material) with spices, saffron,
perfumes, menthol etc. had no use as such; it had no market; it was highly
concentrated; that it was an intermediate product captively consumed in the
three factories of the assessee at Okhla Industrial Estate, Phase-II, Noida
(UP) and at Barotiwala (HP); that, the blending was based on a trade secret and
that the said compound was neither a chewing tobacco nor a preparation thereof.
It was further submitted that the said compound (kimam) was not akin to Lucknowi
kimam; that the components thereof differed; that Lucknowi kimam was edible
whereas the compound in question was not edible and, therefore, the same was
not excisable. It was urged that though the assessee had bought Lucknowi kimam
from the above traders the ratio of Lucknowi kimam in the final product, which
contained tobacco leaves/flakes, was 1:1 whereas the ratio of the compound in
question in the final product was 1:5. According to the learned counsel, the
ability of the manufacturer to prepare a compound (kimam) and utilize the same
for his own purpose would not make the said compound (kimam) a marketable
commodity as the preparation was exclusive for the assessees' own use as an
intermediate product. In the circumstances, it was urged that the said compound
(kimam) was neither a chewing tobacco nor a preparation containing chewing
tobacco and, therefore, it was neither marketable nor excisable.
On the
rationale for invoking extended period, learned counsel submitted that the assessee
was under a bonafide impression that the compound (kimam) was not excisable;
the full quantity of the compound (kimam) was used captively and, therefore, proforma
/ modvat credit was available and, therefore, there was no intent to evade
payment of duty. In this connection, it was submitted that prior to 1.3.1994,
branded chewing tobacco including preparations therefrom came under 2404.41 and
were made liable to duty whereas unbranded products falling under 2404.49 were
chargeable to nil rate.
However,
after 1.3.1994, the nil rate on unbranded products was given a go by and
consequently, the unbranded items falling under 2404.49 attracted duty and duty
was again required to be paid on the branded item under 2404.41 which created
an anomaly. Therefore, on and from 8.3.1994, the benefit of proforma credit was
made available for the duty paid on the unbranded item, which was to be set-off
against the payment of duty on the branded item. Learned counsel, therefore,
submitted that the history of levy, exemption and benefit of modvat credit
during the period 1.3.1994 up to 23.7.1996 indicated that the Government did
not intend to collect duty on the unbranded item. Learned counsel submitted
that w.e.f. 23.7.1996, chewing tobacco and preparations containing chewing tobacco,
whether branded or unbranded, stood classified under sub-heading 2404.40 and modvat
credit was also extended to the unbranded items. In the circumstances, learned
counsel submitted that though the assessee was entitled to the benefit of proforma
/ modvat credits as well as to the benefit of exemption vide notification
no.121/94 dated 11.8.1994, the assessee did not avail of such credit and,
therefore, there was no intention to evade payment of duty, particularly when
the assessee had paid much higher duty on the branded item, namely, Tulsi Zafrani
Zarda, manufactured in the above three licensed units of the assessee at Okhla
Industrial Estate, Phase-II, New Delhi, Noida (UP) and Barotiwala (HP).
Mr. A.
Subba Rao, learned counsel appearing on behalf of the department, on the other
hand, submitted that the compound (kimam) which emerged on account of blending
was identifiable, transportable and purchasable in the market;
that,
in fact it was captively consumed in the manufacture of chewing tobacco; that
merely because the assessee had refused to sell the product, it was not open to
the assessee to say that there was no market and that the item was not
marketable.
Learned
counsel submitted that if such an argument was to be accepted, it would be open
to all producers of monopoly products to contend that their item was not
marketable since they have refused to sell the same in the market. Learned
counsel further submitted that the compound in question was not a by-product.
On the
question of limitation, learned counsel submitted on behalf of the department
that the assessee had suppressed the following facts from the department. The assessee
had manufacturing units at 96, Okhla Industrial Estate, Phase-III, New Delhi / E-1, Maharani Bagh, New Delhi, which fact was not disclosed to
the department. They had manufactured and cleared the impugned goods without
informing the department and without payment of central excise duty. Further,
the assessee had not obtained registration for their above units at 96, Okhla
Industrial Estate, Phase-III, New Delhi /
E-1, Maharani Bagh, New
Delhi. That, they
have not filed declarations / returns required under the said 1944 Act and the
rules framed thereunder. Learned counsel further submitted that in the original
hand-written challans, the compound in question was indicated by the word
"balties" whereas in the computerized challans, the word "balti"
was replaced by "perfumed mixture + kimam poly bags". In this
connection, it was submitted that the assessee was fully aware that if they had
used the word "compound / additive mixture", it would have indicated
"manufacture". That, to mislead the department, the assessee had
changed the word "balti" and had replaced it by the words
"perfumed mixture + kimam poly bags" to show that perfumed mixture
and kimam were dispatched in separate packings from the factory. According to
the learned counsel, the entire exercise was to conceal the activity of
manufacture and to evade payment of duty. Further, the assessee had failed to
maintain statutory accounts for the manufacture of the compound at 96, Okhla
Industrial Estate, Phase-III, New Delhi/
E-1, Maharani Bagh, New
Delhi. They have also
not maintained records of clearances from the above two unlicensed units. That,
all these circumstances constituted evidence of suppression and, therefore, the
department was right in invoking the extended period of limitation.
Learned
counsel further submitted that the entire adjudication was regarding two
issues, namely, excisability of the impugned compound and the clandestine
manufacture and clearance of the compound without payment of duty from 96, Okhla
Industrial Estate, Phase-III, New Delhi / E-1, Maharani Bagh, New Delhi units;
that, despite opportunity, the assessee had failed to explain the reasons for
not registering the above two units at 96, Okhla Industrial Estate, Phase-III,
New Delhi and E-1, Maharani Bagh, New Delhi, particularly when they were in the
trade buying similar compounds (kimam) from other traders who had licensed
units.
In these
civil appeals, four issues, namely, excisability and classification of the
compound, quantum of duty confirmed, rationale for invoking the extended period
of limitation, and inadmissibility of proforma and modvat credits, arise for
determination.
At the
outset, we may clarify that the investigations by the department were focussed
on excisability and manufacture and clearance of the said "compound"
without payment of duty from 96, Okhla Industrial Estate, Phase-III, New Delhi / E-1, Maharani Bagh, New Delhi.
EXCISABILITY
& CLASSIFICATION:
The
main contention advanced on behalf of the assessee herein was that the compound
(kimam) was neither a chewing tobacco nor a preparation for chewing tobacco
under chapter sub-heading 2404.49 prior to 23.7.1996 and under 2404.40 w.e.f.
23.7.1996; it was neither edible nor consumable; it was made by the assessee
from a secret formula and that the entire production was captively consumed by
their three factories at Okhla Industrial Estate, Phase-II, New Delhi, Noida (UP)
and Barotiwala (HP).
We do
not find merit in the above submissions.
Marketability
is an attribute of manufacture. It is an essential criteria for charging duty.
Identity of the product and marketability are the twin aspects to decide
chargeability.
Dutiability
of the product depends on whether the product is known to the market. The test
of marketability is that the product which is made liable to duty must be
marketable in the condition in which it emerges. Marketable means saleable.
The
test of classification is, how are the goods known in the market. These tests
have been laid down by this Court in a number of judgments including Moti
Laminates Pvt. Ltd. v. Collector of Central Excise, Ahmedabad [1995 (76) ELT
241];
Union of India v. Delhi Cloth & General Mills Co. Ltd. [1997 (92) ELT
315]; Cadila Laboratories Pvt. Ltd. v. Commissioner of Central Excise, Vadodara
[2003 (152) ELT 262].
Applying
the above tests to the facts of this case, we find that sada kimam was bought
by the assessee as a raw material which was then blended with saffron,
perfumes, menthol etc. to form a compound which was then packed in "balties"
and cleared to the above three licensed units at Okhla Industrial Estate,
Phase-II, New Delhi, Noida (UP) and Barotiwala (HP), where Tulsi Zafrani Zarda
was manufactured. That, the assessee used to buy a similar compound (Lucknowi kimam)
from the market from time to time and used in the manufacture of their final
product. That, the compound (kimam) prepared by the assessee at 96, Okhla Industrial
Estate, Phase-III, New Delhi and at E-1, Maharani Bagh, New Delhi, in the
highly concentrated form, was cleared therefrom and taken to the above three
licensed factories where it was diluted and used in the manufacture of Tulsi Zafrani
Zarda. In their reply to the show-cause notice, the assessee admitted that the
said "compound" was not capable of being used for any purpose, other
than for manufacture of branded chewing tobacco (underline supplied by us).
This
statement of the assessee in reply to the show-cause notice establishes that
the said compound (kimam) was not edible, it was not capable of consumption as
such, however, it was used as preparation in the manufacture of Tulsi Zafrani Zarda
which was a branded chewing tobacco manufactured in the licensed factories of
the assessee at Okhla Industrial Estate, Phase-II, New Delhi, Noida (UP) and Barotiwala
(HP). Further, from time to time, the assessee herein bought from the market a
similar compound (Lucknowi kimam) and used it in the manufacture of the final
product which indicated that on blending of sada kimam with saffron, spices,
menthol etc., the compound in question (kimam) which emerged was a distinct,
identifiable product, known to the market as kimam. Hence, we do not find any
infirmity in the impugned judgment of the tribunal which has held that the said
compound (kimam) was marketable and classifiable as chewing tobacco or a
preparation for chewing tobacco under chapter sub-heading 2404.49/2404.40.
INVOCATION
OF THE EXTENDED PERIOD OF LIMITATION AND ADMISSIBILITY OF PROFORMA & MODVAT
CREDITS:
At the
outset, it may be stated that the investigation in this case was focussed on
the excisability, manufacture and clearance of the compound (kimam) without
payment of duty from the said two unlicensed units at 96, Okhla Industrial
Estate, Phase-III, New
Delhi and E-1,
Maharani Bagh, New
Delhi. That, the
admissibility of the proforma / modvat credits, which could have warranted an
enquiry at the end of the above three factories at Okhla Industrial Estate,
Phase-II, New Delhi, Noida (UP) and Barotiwala (HP) as to receipt and
utilization of the said compound, was not the subject of investigation.
Therefore,
the show-cause notice was confined to demand for duty on the goods manufactured
and cleared from the two unlicensed and unregistered units at 96, Okhla
Industrial Estate, Phase-III, New Delhi and
E-1, Maharani Bagh, New
Delhi.
As
stated above, assessee was in the business of manufacturing Tulsi Zafrani Zarda
for couple of years. It used to buy similar compounds from the market from time
to time.
That,
other traders, namely, M/s Globe Traders and M/s Laxmi Fragrances Pvt. Ltd.
used to manufacture compounds similar to the compound manufactured by the assessee;
that they had their units duly licensed / registered with the excise
department; that they had maintained their books and documents in accordance
with the rules under the said 1944 Act; and that they paid duty on clearances
of their compound. On the other hand, the assessee carried on their business of
manufacturing the said compound without disclosing the existence of their
units; they did not get their units licensed / registered; they did not
maintain any records under the excise law; that they clandestinely manufactured
their compound without informing the department; and in the circumstances, the
department was right in invoking the extended period of limitation.
It was
urged that the assessee was under a bonafide impression that no duty was leviable
on the goods; the full quantity of disputed goods was used captively and,
therefore, proforma credit / modvat credit was available in respect thereof
and, therefore, there was no intent to evade payment of duty. In support of the
aforestated submissions, it was urged that suppression or breach of rules by
itself would not amount to intention to evade; that some positive act of
deliberate suppression or breach of rules was required to be shown by the
department; that, if the assessee showed that credit available to it was equal
to the demand then there may not be the case of intention to evade payment of
duty. In this connection, reliance was also placed on the judgments of this
Court in Amco Batteries Ltd. v. Collector of Central Excise, Bangalore reported
in 2003 (153) ELT 7; Padmini Products v. Collector of Central Excise reported
in 1989 (43) ELT 195; and Formica India Division v. Collector of Central Excise
reported in 1995 (77) ELT 511.
We do
not find merit in the above contentions. In this matter, we are concerned with
the application of the above judgments to the facts of this case. The words
"wilfulness" and "intent" in section 11A are expressions of
mental state at the time of manufacture and clearance of the goods. The situs
of the levy of central excise is on manufacture. Pricing and value of
clearances are matters specially within the knowledge of the assessee. As
stated above, the assessee herein was in the business of manufacture of chewing
tobacco and its preparations for last couple of years. In the course of
business, the assessee had dealt with similarly situated traders. It was fully
aware that those traders who produced similar compounds had their units
licensed or registered and yet the assessee herein did not take steps to get
the above two units, in which the impugned compound (kimam) was manufactured,
registered or licensed. As stated above, it has been buying a similar kimam
from various traders. These circumstances constituted evidence of suppression
brought on record by the department in answer to which it was contended on
behalf of the assessee that they were under a bonafide impression that the
compound was not excisable and that the benefit of proforma and modvat credit
together with the benefit of exemption under notification no.121/94 dated
11.8.1994 was substantially equal to the demand for duty herein and, therefore,
there was no intention to evade payment of duty.
We do
not find any merit in these submissions. As stated above, the adjudication in
this case was confined to the question of excisability and concealment of the
existence of two units in which the compound (kimam) was manufactured. No
explanation has been given by the assessee for not disclosing the affairs of
these units, particularly when the assessee was in business for couple of years
and when the assessee had been dealing with other traders who operated from
licensed factories.
It was
for the assessee to explain the reasons for not getting the units registered or
licensed. It was for the assessee to explain its failure to maintain the
records under the 1944 Act and rules thereunder. In each of the above
decisions, we find that there was substantial compliance of the rules under the
said Act. In each of the decisions the findings indicate technical non-
compliance and not total non-compliance of the rules. It was for the assessee
to explain the basis of its alleged bonafide impression. In this connection, no
evidence was put before the commissioner about receipt and utilization of the
compound in the manufacture of Tulsi Zafrani Zarda. No evidence was led to show
that the amount of proforma / modvat credits was equal to the duty demanded,
although it was urged that after 3/94, the liability to duty on inputs stood
shifted to the final product.
Modvat
is basically a duty collecting procedure which provides relief to the
manufacturer on the duty element borne by him in respect of the inputs used by
him. The relief is given under the modvat scheme on the actual payment of duty
on the input. On such payment, the assessee gets a right to claim
adjustment/set-off against the duty on the final product. The question of duty
adjustment/set-off against duty on the final product was not in issue. In any
event, no record on credit entitlement was produced. A right to claim proforma/modvat
credit against duty on final product was different from the defence of bonafides
in a case where circumstances mentioned in the proviso to section 11A(1) stands
proved by the department for invoking larger period of limitation. The burden
to prove the defence of bonafides was on the assessee and the assessee in this
case has failed to prove its bonafides. Under modvat, excisable finished
products made out of duty-paid inputs are given relief of excise duty to the
extent of duty paid on inputs. In the circumstances, we are satisfied that the
department was justified in invoking the extended period of limitation under
the proviso to section 11A(1).
On the
applicability of the notification no.121/94 dated 11.8.1994, the tribunal
remanded the case back to the commissioner for re-examination of the limited
question of its applicability. The tribunal also directed the commissioner to
reconsider the quantum of penalty, fine etc. in the light of its findings on
the applicability of the said notification. We do not wish to express any
opinion on the applicability of the notification dated 11.8.1994. Suffice it to
state, that, on the issue of excisability and clandestine manufacture and
removal of the compound (kimam) from the two unlicensed/ unregistered units at
96, Okhla Industrial Estate, Phase-III, New Delhi / E-1, Maharani Bagh, New
Delhi, we do not find any infirmity in the impugned judgment.
Accordingly,
these civil appeals filed by the assessees are dismissed with no order as to
costs.
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