Commissioner
of Central Excise, Nagpur Vs. M/S Ballarpur Industries Ltd
[2007] Insc 881 (30
August 2007)
S.
H. Kapadia & B. Sudershan Reddy Kapadia, J.
This
civil appeal is filed by the Department under Section 35L(b) of the Central
Excise Act, 1944 against the judgment dated 20.7.2001 delivered by the Customs,
Excise and Gold (Control) Appellate Tribunal ("CEGAT") in Appeal No. E/1758/2000.
2. The
issue which arises in this civil appeal is as to whether in the absence of any
"sale", rule 57CC of the Central Excise Rules, 1944 would have any
application or not. The contention of the assessee is that in the case of
"stock transfer" there is no "sale" and, therefore, rule
57CC was not applicable. This contention has been accepted by the Tribunal,
hence this civil appeal.
3. The
assessee is engaged in manufacture of paper falling under Chapter 48 of the
Central Excise Tariff. The assessee is availing the benefit of MODVAT Scheme
under Rule 57A of the Central Excise Rules, 1944 (for short, "1944
Rules"). The assessee is also manufacturing pulp falling under Chapter 47
of the Central Excise Tariff, which is chargeable to nil rate of duty. The said
pulp is captively consumed for the manufacture of paper.
According
to the assessee, a small portion of the pulp is sent to the sister unit of the assessee
at Asthi. According to the assessee, there was no sale of pulp as alleged by
the Department. According to the assessee, a small quantity of pulp
manufactured by the assessee was stock transferred to its sister unit at Asthi.
4. In
this civil appeal, we are concerned with the period September, 1996 to March,
1999. During this period, the assessee had transferred approximately 41000 MT
of pulp to its sister unit and had paid duty at the rate of eight per cent of
the cost price declared by them.
5.
Three show cause notices were issued by the Department dated 21.5.1999,
30.9.1999 and 18.11.1999 in which it was alleged that if comparable prices
obtained by the sister units are taken into consideration then the total duty
payable at the rate of eight per cent would work out to Rs. 4.58 lacs (approx.)
whereas the assessee had paid duty of Rs. 2.67 lacs (approx.). Therefore, it
was alleged that the assessee had evaded payment of duty to the tune of Rs.
1.90 lacs (approx.) and accordingly they were also liable to pay penalty under
Rule 57-I(4) read with Rule 173C of the 1944 Rules.
6.
Vide reply dated 25.6.1999, the assessee contended that there was no sale of
pulp, that it was the case of stock transfer of pulp which was consumed as
raw-material in the manufacture of paper by the sister unit of the assessee.
According to the assessee, a major portion of the pulp manufactured by it was
consumed by the assessee and a very small percentage was stock transferred to
the sister unit, which consumed the transferred pulp in the manufacture of
paper. According to the assessee, in their reply to show cause notices, price
declarations were filed for clearance of pulp to their sister unit at Asthi by
way of stock transfer and, therefore, they adopted the rate of 8 per cent of
the cost price for purposes of reversal of credit on inputs on which credit was
taken. In this connection, the assessee applied rule 6(b)(ii) of the Central
Excise (Valuation) Rules, 1975 (for short, "Valuation Rules 1975").
According to the Department, the assessee should have taken into account 8 per
cent of the selling price of pulp sold by the assessee's sister units in other
states for reversal of MODVAT credit on inputs on which credit was taken by
applying rule 6(b)(i) of the Valuation Rules 1975. If rule 6(b)(i) was to apply
then considering the sale price of pulp cleared in other states, the duty
amount payable by the assessee herein, worked out to Rs.4,57,56,812/- whereas assessee
had paid an amount of Rs.2,67,32,851.
7. At
this stage, it may be clarified that, in this case, three show cause notices
were issued; the first was dated 21.5.1999, which related to the period
September, 1996 to March, 1999, second show cause notice was dated 30.9.1999,
which related to the period April, 1999 to June, 1999, and the third show cause
notice was dated 18.11.1999, which related to the period July, 1999 to
September, 1999. This difference is required to be kept in mind because under
the first show cause notice dated 21.5.1999, the Department has invoked the
extended period of limitation, whereas the second and the third show cause
notices dated 30.9.1999 and 18.11.1999 were for the periods April, 1999 to
June, 1999 and July, 1999 to September, 1999 respectively, which were within
limitation.
8.
Value is the function of price. In every case in which there is an allegation
of evasion, a show cause notice constitutes the foundation on which the demand
made by the Department could stand or fall. Rule 57CC deals with adjustment of
credit on inputs used in the manufacture of exempted final products. It applies
in cases where a manufacturer is engaged in the manufacture of any final
product which is chargeable to duty as well as any other final product which is
exempted from payment of duty or chargeable to nil rate of duty and the
manufacturer takes credit of the specified duty on any inputs, which is used in
manufacture of both the above categories of final products. In such a case, the
manufacturer is required to pay a presumptive amount equal to eight per cent of
the price of the exempted final product charged by the manufacturer for the
sale of such goods at the time of their clearance from the factory.
9. For
the purpose of deciding this matter, we quote hereinbelow sub- rules (1), (7),
(8) and (9) of rule 57CC of the Central Excise Rules, 1944:
"Rule
57CC. Adjustment of credit on inputs used in exempted final products or
maintenance of separate inventory and accounts of inputs by the manufacturer.-
(1)
Where a manufacturer is engaged in the manufacture of any final product which
is chargeable to duty as well as in any other final product which is exempt
from the whole of the duty of excise leviable there on or is chargeable to nil
rate of duty and the manufacturer takes credit of the specified duty on any
inputs (other than inputs used as fuel) which is used or ordinarily used in or
in relation to the manufacture of both the aforesaid categories of final
products, whether directly or indirectly and whether contained in the said
final products or not, the manufacturer shall, unless the provisions of
sub-rule (9) are complied with, pay an amount equal to eight per cent of the
price (excluding sales tax and other taxes, if any, payable on such goods) of
the second category of final products charged by the manufacturer for the sale
of such goods at the time of their clearance from the factory.
xxx
(7) The provisions of sub-rule (1) shall apply even if the inputs on which
credit has been taken are not actually used or contained in any particular
clearance of final products.
(8) If
any goods are not sold by the manufacturer at the factory gate but are sold
from a depot or from the premises of a consignment agent or from any other
premises, the price (excluding sales tax and other taxes, if any, payable) at
which such goods are ordinarily sold by the manufacturer from such depot or
from the premises of a consignment agent or from any other premises shall be
deemed to be the price for the purpose of sub-rule (1).
(9) In
respect of inputs (other than inputs used as fuel) which are used in or in
relation to the manufacture of any goods, which are exempt from the whole of
the duty of excise leviable thereon or chargeable to nil rate of duty, the
manufacturer shall maintain separate inventory and accounts of the receipt and
use of inputs for the aforesaid purpose and shall not take credit of the
specified duty paid on such inputs." (emphasis supplied)
10.
For the sake of convenience, we also quote hereinbelow Section 4(1) and (2) of
the Central Excise Act, 1944 (for short, "1944 Act") as it stood at
the relevant time:
"Section
4. Valuation of excisable goods for purposes of charging of duty of excise. –
(1)
Where under this Act, the duty of excise is chargeable on any excisable goods
with reference to value, such value, shall, subject to the other provisions of
this section, be deemed to be
(a) the
normal price thereof, that is to say, the price at which such goods are
ordinarily sold by the assessee to a buyer in the course of wholesale trade for
delivery at the time and place of removal where the buyer is not a related
person and the price is the sole consideration for the sale :
Provided
that
(i)
where, in accordance with the normal practice of the wholesale trade in such
goods, such goods are sold by the assessee at different prices to different
classes of buyers (not being related persons) each such price shall, subject to
the existence of the other circumstances specified in clause (a), be deemed to
be the normal price of such goods in relation to each such class of buyers;
(1a)
Where the price at which such goods are ordinarily sold by the assessee is
different for different places of removal, each such price shall, subject to
the existence of other circumstances specified in clause (a), be deemed to be
the normal price of such goods in relation to each such place of removal.
(ii)
where such goods are sold by the assessee in the course of wholesale trade for
delivery at the time and place of removal at a price fixed under any law for
the time being in force or at a price, being the maximum, fixed under any such
law, then, notwithstanding anything contained in clause (iii) of this proviso,
the price or the maximum price, as the case may be, so fixed, shall, in
relation to the goods so sold, be deemed to be the normal price thereof;
(iii)
where the assessee so arranges that the goods are generally not sold by him in
the course of wholesale trade except to or through a related person, the normal
price of the goods sold by the assessee to or through such related person shall
be deemed to be the price at which they are ordinarily sold by the related
person in the course of wholesale trade at the time of removal, to dealers (not
being related persons) or where such goods are not sold to such dealers, to
dealers (being related persons), who sell such goods in retail;
(b) where
the normal price of such goods is not ascertainable for the reason, that such
goods are not sold or for any other reason, the nearest ascertainable
equivalent thereof determined in such manner as may be prescribed.
(2)
Where, in relation to any excisable goods the price thereof for delivery at the
place of removal is not known and the value thereof is determined with
reference to the price for delivery at a place other than the place of removal,
the cost of transportation from the place of removal to the place of delivery
shall be excluded from such price."
11. We
also quote hereinbelow Instructions issued by the Central Board of Excise and
Customs based on Circular No. B-42/1/96-TRU; dated 27.9.1996 (1996 (88) ELT
T5):
"Modvat
Reversal of credit for inputs used in the manufacture of exempted product Kind
attention is invited to the provisions of Rule 57CC of the Central Excise Rules
for reversal of Modvat credit in respect of inputs used in the manufacture of
exempted goods or goods chargeable to 'nil' rate of excise duty.
The
provision has been made that where a manufacture uses inputs which are common
to both dutiable goods as well as exempted goods, the manufacturer is required
to debit the amount equal to 8% of the value of the exempted goods when they
are cleared from the factory.
2. In
some cases, the exempted goods cleared by one manufacturer are used as inputs
by another manufacturer.
The
manufacture of exempted goods indicates the amount of Modvat credit reversed on
the invoices issued by him for such exempted goods. In this context, some
doubts have been raised whether the amount of Modvat credit so reversed is
available as Modvat credit to the user of such exempted goods when he uses them
as inputs in his factory.
3. In
this context, it is clarified that the amount reversed is not by way of payment
of excise duty. Accordingly, the amount of Modvat credit reversed and shown in
the invoice by the manufacturer of exempted goods cannot be taken as credit by
the user of exempted goods."
(emphasis
supplied)
12.
Rule 57CC was placed on statute book by Notification No. 14/96-CE dated
23.7.1996. It was issued under Section 37 of the 1944 Act. Sub-rule (1) refers
to a manufacturer who manufactures excisable goods which are chargeable to duty
as well as goods which are exempt or which are chargeable to nil rate of duty.
If the said manufacturer takes credit on inputs, as in the present case, which
he ordinarily uses in the manufacture of both exempt as well as dutiable final
products, he was required to comply with the conditions mentioned in sub-rule
(9). Otherwise, upon removal of final product, which was exempt from payment of
duty, he was required to pay a presumptive amount equal to 8 per cent of the
price charged by him on the exempted final products at the time of clearance.
Sub-rule (2) provided that presumptive amount of 8 per cent was payable either
by debit in RG 23A Part II register or by debit in PLA. Sub-rule (8) provided
that if the exempted goods were not sold at the factory gate, the price at
which such goods were sold at the manufacturer's depot or from the premises of
the consignment agent or any other premises, shall be deemed to be the price for
the purpose of sub-rule (1). Therefore, sub-rule (8) was also based on the
concept of "deemed price". Sub-rule (9) provided that in respect of
common inputs, the manufacturer shall maintain separate inventory and accounts
of the use of inputs used in the manufacture of exempted products and shall not
take credit of duty on such specified inputs. As stated above, if the
manufacturer opts not to maintain separate accounts under sub-rule (9) then
upon removal of final product which is exempt from payment of duty, he would be
required to pay a notional sum equal to 8 per cent of the price charged by him
on the exempted final products at the time of clearance.
Lastly,
sub-rule (7) provided that sub-rule (1) would be attracted even if inputs on
which credit has been taken, are not actually used. However, the said sub-rule
(7) must be read with the phrase "which goods are ordinarily used in the
manufacture of exempted final products and dutiable final products"
mentioned in sub-rule (1). If read together, it becomes evident that in order
to apply sub-rule (7), the Department had to establish that common inputs were
ordinarily used for both the categories of final products.
13.
The object of the rule 57CC(1) was to recover a presumptive sum upon removal of
exempted goods from a manufacturer who also manufactured dutiable goods, but
using common input for both dutiable as well as duty exempted goods and who
took MODVAT credit on such common inputs. Rule 57CC sought, therefore, to
recover a presumptive sum equal to eight per cent of the price of exempted
goods at the time of their removal where the manufacturer did not undertake
maintenance of inventory/accounts of the clearance of exempted final products.
Even sub- rule (7) of rule 57CC was based on "deemed price" if read
with rule 57CC(1). Sub-rule (7) read with sub-rule (1) prevented an assessee
from contending that he was not liable to pay the presumptive sum of eight per
cent of the price of exempted goods on the ground that the said exempted goods
were wholly manufactured out of inputs on which no credit of duty had been
taken under rule 57A. The amount required to be paid at the time of removal of
exempted goods under rule 57CC(1) had to be done in the same manner as was the
case with any other excisable goods as the rate of duty stood determined at the
rate of eight per cent in the rule itself. The said presumptive amount was
required to be paid by debiting in PLA register or by payment in cash. As
stated above, there was an alternative provided under sub-rule (9) which
relieved the manufacturer of the liability to pay eight per cent of the price
of exempted goods at the time of removal of such goods. Under sub-rule (9), the
assessee was required to maintain a separate account and an inventory and that
he was not entitled to take credit on the inputs meant for use in exempted
final product. If such accounts and inventory were maintained, there was no
need to pay a presumptive amount equal to eight per cent of the price of
exempted goods at the time of their removal.
14. In
our view, rule 57CC, therefore, required payment of a presumptive amount of
eight per cent of the price of the exempted goods, net of sales tax and other
taxes. This rule was self contained provision indicating the basis on which
price had to be determined. The rule, however, has not called the said amount
of eight per cent as duty of excise. As indicated in the above circular, quoted
above, the manufacturer who did not maintain account or inventory was required
to debit the amount equal to 8 per cent of the value of exempted goods at the
time of removal of goods from the factory. In our view, the said amount of 8
per cent of the value of the goods at the time of clearance is the measure and
it brings in also the applicability of section 4 of the 1944 Act and the
Valuation Rules 1975 framed thereunder.
15.
Under Section 4(1)(a) normal price was the basis of the assessable value. It
was the price at which goods were ordinarily sold by the assessee to the buyer
in the course of wholesale trade. Under Section 4(1)(b) it was provided that if
the price was not ascertainable for the reason that such goods were not sold or
for any other reason, the nearest equivalent thereof had to be determined in
terms of the Valuation Rules, 1975. Therefore, rule 57CC has to be read in the
context of Section 4(1) of the 1944 Act, as it stood at the relevant time.
Section 4(1)(a) equated "value" to the "normal price" which
in turn referred to goods being ordinarily sold in the course of wholesale
trade. In other words, normal price, which in turn referred to goods being
ordinarily sold in the course of wholesale trade at the time of removal,
constituted the basis of the assessable value. Rule 57CC(1) proceeds on the
basis that the manufacturer has taken credit of the specified duty on
"common inputs" which needs to be reversed at eight per cent (i.e.
the
manufacturer needs to debit an amount equal to eight per cent of the price of
the exempted final product charged for the sale of such goods. This amount is a
presumptive sum calculated at eight per cent of the price charged. The rate of
eight per cent is the measure to calculate the presumptive sum. Further,
reading rule 57CC(1) with rule 57CC(8) one finds that entire rule is based on
"deemed price" and "recovery of presumptive amount" and,
therefore, in our view, the words "price charged at the time of sale"
must be read as "eight per cent of the value of the exempted goods".
Our interpretation stands supported by the Instructions issued by the Central
Board of Excise and Customs based on the circular No.
B-42/1/96-TRU
dated 27.9.1996. This is where section 4 and the Valuation Rules, 1975 come
into play. In the light of the above discussion, the adjudicating authority was
required to adjudicate upon applicability of rule 6(b)(i) and rule 6(b)(ii).
However, it has been held by the adjudicating authority that rule 6(b)(i) is
not applicable, hence, in our view the only issue which remains to be decided
is whether all the requisite elements of costing like wages, profits etc. have
been taken into account by the assessee herein as required under rule 6(b)(ii).
16. In
the case of Union of India and ors. v. Bombay Tyre International Ltd. AIR 1984
SC 420 this Court had drawn a distinction between the nature of levy and the
measure/yardstick on which the tax (duty) is determined.
17. In
the circumstances, rule 57CC is a provision which seeks to recover presumptive
amount at the rate of eight per cent of the price of exempted final product at
the time of removal for sale. In the circumstances, the Tribunal erred in
holding that Rule 57CC is not applicable to the present case as it involves
stock transfer and not a sale. If the view of the Tribunal is to be accepted,
then neither Section 4 of the 1944 Act nor the Valuation Rules, 1975 framed thereunder
could apply. If the nature of the presumptive sum is kept in mind then there
will be no conflict between our view and the view expressed by the Central
Board of Excise and Customs vide Instructions based on circular No.
B-42/1/96-TRU; dated 27.9.1996. We have enunciated the above principles
concerning rule 57CC on account of the total confusion both in the industry as
well as in the Department.
18. In
the case of M/s Continental Foundation Joint Venture Sholding v. CCE, Chandigarh-I
(Civil Appeal No. 3139/2002 etc.) a show cause notice under Section 11A of the
1944 Act was issued to the assessee invoking extended period of limitation on
the grounds of suppression, fraud and collusion. The Division Bench of this
Court, to which one of us, Kapadia, J., was the member, held that where various
circulars, instructions/directions stood issued at different points of time and
where there was no clarity in the views expressed by the authorities, extended
period of limitation cannot be invoked. It was held that the word
"suppression" in Section 11A of the 1944 Act is accompanied by the
words "fraud" or "collusion" and, therefore, the word
"suppression" should be construed strictly. That, mere omission to
give correct information did not constitute suppression unless that omission
was made willfully in order to evade duty. That, suppression would mean failure
to disclose full and true information with the intent to evade payment of duty.
When the facts are known to both the parties, omission by one party would not
constitute suppression. That, an incorrect statement cannot be equated with a
willful mis-statement. The latter implies making of an incorrect statement with
the knowledge that the statement made was not correct.
19.
Applying the above tests to the facts of the present case, we hold that the
Department was not entitled to invoke the extended period of limitation vide
the first show cause notice dated 21.5.99. However, the second and third show
cause notices dated 30.9.1999 for the period April, 1999 to June, 1999 and
18.11.1999 for the period July, 1999 to September, 1999 respectively are within
time. Therefore, we strike down only the first show cause notice dated
21.5.1999. However, we hereby set aside the impugned judgment of the Tribunal
which has held that rule 57CC of the 1944 Rules is not applicable to this case
as there was no "sale". In cases where the manufacturer does not
comply with rule 57CC(9), he shall debit the presumptive sum equal to eight per
cent of the value of the exempted goods at the time of clearance from the
factory gate. This rule would apply to stock transfers also.
20. In
the light of our aforestated interpretation of rule 57CC of the 1944 Rules, we
set aside the impugned judgment of the CEGAT and remit the aforesaid second and
third show cause notices to the Commissioner of Central Excise, who will decide
the question of applicability of rule 6(b)(i) and rule 6(b)(ii) of the
Valuation Rules 1975 in accordance with law.
21.
Before concluding, we may mention that, in the present case, the second and the
third show cause notices are alone remitted. The first show cause notice dated
21.5.1999 is set aside as time barred. However, it is made clear that Rule 7 of
the Valuation Rules 1975 will not be invoked and applied to the facts of this
case as it has not been mentioned in the second and the third show cause
notices. It is well settled that the show cause notice is the foundation in the
matter of levy and recovery of duty, penalty and interest. If there is no
invocation of Rule 7 of the Valuation Rules 1975 in the show cause notice, it
would not be open to the Commissioner to invoke the said rule.
22.
Accordingly, the civil appeal filed by the Department is partly allowed and the
second and the third show cause notices dated 30.9.1999 and 18.11.1999
respectively are remitted to the Commissioner for determination in accordance
with the principles laid down hereinabove. The civil appeal filed by the
Department stands partly allowed with no order as to costs.
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