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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.