Full Judgment Text
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CASE NO.:
Appeal (civil) 1506-1508 of 2000
PETITIONER:
Dharampal Satyapal
RESPONDENT:
Commissioner of Central Excise, Delhi-I, New Delhi
DATE OF JUDGMENT: 21/04/2005
BENCH:
S.N. VARIAVA, Dr. AR. LAKSHMANAN & S.H. KAPADIA
JUDGMENT:
J U D G M E N T
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
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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
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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
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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
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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
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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
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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-
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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.