http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 7  

CASE NO.: Appeal (civil)  5747-5749 of 2000

PETITIONER: M/s Gopal Zarda Udyog etc.               

RESPONDENT: The Commissioner of Central Excise,New Delhi.                                    

DATE OF JUDGMENT: 30/09/2005

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 the case, the  tribunal was justified in holding that the ’additive mixture’  processed by the three appellants herein was excisable and  classifiable under chapter sub-heading 2404.49 of Central  Excise Tariff Act, 1985 and that the department was right in  invoking the extended period of limitation under the proviso to  section 11A(1) of Central Excise Act, 1944 (hereinafter referred  to as "the Act").          Briefly, the facts of the case are that M/s Hari Chand Shri  Gopal, M/s Gopal Industries and M/s Gopal Zarda Udyog were  the three assessees engaged in the manufacture of Chewing  Tobacco (Final Product) falling under sub-heading 2404.40 of  Tariff Act, 1985.  In the manufacture of the final product, they  were using an inter-mediate product known as "additive  mixture".  An intelligence was collected by the officers of the  preventive wing of the Commissionerate to the effect that the  appellants were manufacturing the said "additive mixture"  without obtaining registration certificate under section 6 of the  1944 Act read with rule 174 of the Central Excise Rules, 1944;  that they have been removing the said goods clandestinely from  their factories situated in Delhi; that they were unauthorisedly  clearing the said goods under transfer challans to their factories  in UP and HP (where the final product was manufactured).  On  the basis of the aforestated intelligence, various premises  belonging to the three appellants were searched.  Enquiries  were also made from traders dealing in the kimams as well as  from the manufacturers and the suppliers of the raw material.   The partners of the three appellant firms were also examined.   The department was informed that the said "additive mixture"  consisted of various ingredients like raw-kimam, menthol,  aromatic chemicals, spices, gulab jal, attar and perfumes etc.  The process of preparing additive mixture was explained in  detail by the partners.  On the aforestated investigations, three  separate show-cause notices were issued, all dated 25.3.1997.   In the said show-cause notices, it was alleged that the appellants  were clandestinely manufacturing and clearing additive mixture  falling under sub-heading 2404.49 (up to 22.7.1996) and falling  under sub-heading 2404.40 on and after 22.7.1996, in  contravention of the provisions of the said 1944 Act and the  Rules with intention to evade duty/assessment.  The show-cause  notices further record that on 15.10.1996 M/s Gopal Industries  and M/s Hari Chand Shri Gopal voluntarily obtained  registration certificates for the manufacture of the said mixture  under rule 174.  The three show-cause notices were in respect  of the period 18.3.1994 to 26.9.1996 under the proviso to

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 7  

section 11A(1) of the 1944 Act.  In the case of M/s Gopal Zarda  Udyog, the department demanded duty for the period 18.3.1994  to 15.4.1995; in the case of Hari Chand Shri Gopal, the demand  was for the period 14.6.1995 to 24.9.1996; but in the case of  M/s Gopal Industries, the department demanded duty for the  period 16.6.1995 to 26.9.1996.

       On dated 21.11.1997, replies were given to the three  show-cause notices.  The appellants submitted that they were  engaged in the activity of manufacturing chewing tobacco,  which was an excisable product on which they have been  paying duty.   In the reply, the appellants explained at length  the process by which the additive mixture came to be produced  in the three factories in Delhi.  According to the appellants, the  additive mixture was not a final product; that it was a transient  product; it was not noticeable to the naked eye and that it was  unsaleable and useless for any other purpose.  According to the  appellants, the composition of additive mixture was known only  to the blender.  According to the appellants, the entire process  was shrouded in secrecy and was known only to the blender.    In the said reply, the appellants alleged that the details of the  process of manufacturing the final product as well as the  formulation of the additive mixture at the intermediate stage  was known to the department since 1992-93; that their records  and registers stood verified by the department since 1992-93;  that the said records indicated the receipt and utilization of the  additive mixture in the manufacture of the branded chewing  tobacco (final product) and that the said records were duly  checked by the department from time to time.  That, the  partners of the appellants were also examined in 1992 by  Superintendent of Central Excise, New Delhi, when the entire  process of mixing and blending of the raw-material and the  status of transfer of the additive mixture from their units in New  Delhi to their factories in UP and HP was explained.  In support  of what is stated above, the appellants placed reliance on the  panchnama dated 20.10.1992, under which their units were  searched by the department and which indicated the stock  position of the raw-material, additive mixture and the branded  chewing tobacco.  According to the department, in 1993, the  Superintendent of Central Excise had personally visited their  factories and had also studied in detail the process of  manufacturing the branded chewing tobacco.  The appellants  further contended that there was no intent to evade as the said  mixture was non-dutiable.  In this connection, they relied on the  notification no.121/94-CE dated 11.8.1994 under which  additive mixture (input) falling under chapter sub-heading  2404.49 captively consumed in the manufacture of chewing  tobacco (final product) stood exempted from payment of duty.   That, the department had not denied their entitlement to  exemption under the said notification in the show-cause notices.   That, in fact, after seizure the said mixture was released/cleared  under the above notification without levy of duty and, therefore,  the department was not entitled to invoke the extended period  of limitation.

       By order dated 20.5.1998, the commissioner confirmed  the demand.  On the question of excisability, the commissioner  found that the additive mixture was a kimam, which was  manufactured by mixing sada kimam with spices, menthol,  aromatic chemical and perfumes etc.  Further, the commissioner  found that the said kimam was marketable as a distinct  identifiable product.  In this connection, he relied upon the  statements recorded under section 14 of M/s Globe Traders,  M/s Laxmi Fragrances (P) Ltd., M/s Gulab Gandhi Tobacco  Co. etc.  That, after 1994, the said mixture (kimam) became

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 7  

classifiable under chapter sub-heading 2404.49/2404.40 and  that despite the said changes, the appellants failed to get their  units registered with the department.  That, the evidence  brought forth by the appellants regarding inspection of their  factories pertained to the years 1992 and 1993, during which  period the said mixture was not chargeable to duty.  That, the  appellants were in the business of manufacturing and marketing  of chewing tobacco and, therefore, the fact that kimam was  chargeable to duty must have been in their knowledge and that  by bringing the above facts on record, the department had  discharged its initial burden of proving the conditions  mentioned in the proviso to section 11A(1) of the Act.

       Aggrieved by the decision of the commissioner dated  20.5.1998, the matter was carried in appeal by the assessees to  the Customs, Excise and Gold (Control) Appellate Tribunal,  New Delhi (hereinafter referred to as "the tribunal").   The  appeals filed by the appellants herein were heard along with the  appeals filed by M/s Dharampal Satyapal.   

       By judgment dated 1.10.1999, the tribunal held that the  said additive mixture was a kimam; that it was excisable under  chapter sub-heading 2404.49/2404.40 of 1985 Tariff Act and  that the appellants had failed to disclose their activities in their  Delhi Units.  In this connection, the tribunal expressly relied  upon the statement of Shailender Kumar Aggarwal, partner of  M/s Gopal Industries dated 28.9.1996 recorded under section  14 of the Act in which he has stated that M/s Gopal Industries  did not obtain registration certificates under a mistaken belief  that the activity of mixing/blending did not constitute  "manufacture".  The tribunal further found that the  manufacturing activities in Delhi units were suppressed from  the department; that the appellants had failed to obtain excise  registration; and that the appellants had not fully complied with  the procedure of chapter X of 1944 rules subject to which the  benefit of exemption under notification no.121/94-CE was  available.  The tribunal thereafter took note of the various  decisions of the tribunal which has taken the view that even  substantial compliance of the chapter X procedure was  sufficient for exemption and accordingly, the tribunal remitted  the matter to the commissioner to ascertain the question of  substantial compliance.

       On remand, the commissioner came to the conclusion  vide his order dated 16.7.2002 that there was no substantial  compliance of the procedure under chapter X of 1944 rules.

       Aggrieved by the said decision dated 16.7.2002, the  appellants herein preferred appeals to the tribunal.  By  judgment and order dated 7.7.2003, the tribunal held that there  was substantial compliance of chapter X as there was evidence  on record indicating receipt and utilization of additive mixture  (input) in the manufacture of branded chewing tobacco (final  product) and following the judgment of this court in the case of  Thermax Private Ltd. v. Collector of Customs reported in 1992  (61) ELT 352, the tribunal held that the said additive mixture  was entitled to exemption under notification no.121/94-CE.   

       Against the said decision of the tribunal dated 7.7.2003,  the department has come to this Court by way of Civil Appeals  No.1878-1880 of 2004, which is a matter of separate judgment.   Therefore, the present civil appeals are filed by the assessees on  the question of excisability and limitation whereas the Civil  Appeals No.1878-1880 of 2004 are filed by the department on  the question of compliance of exemption notification

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 7  

no.121/94-CE.

       At the outset, we may point out that in the case of  Dharampal Satyapal  v. Commissioner of Central Excise, New  Delhi reported in 2005 (183) ELT 241, this Court held that the  compound manufactured by M/s Dharampal Satyapal was a  kimam which was moved in balties on stock transfer basis to  their branded chewing tobacco factories located in UP and HP  constituted independent, distinct and identifiable product  known to the market as such and, therefore, the said kimam was  excisable and classifiable under sub-heading 2404.49/2404.40.   On the question of limitation, this Court on examination of facts  found that M/s Dharampal Satyapal used to buy from the  market a compound, similar to the compound which it used to  manufacture in its own units, and such similar compound was  used in the manufacture of Tulsi Zafrani Zarda (final product).   This court further found that M/s Dharampal Satyapal had  failed to disclose the existence of their units, they did not  maintain any records under the excise law, 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 argued on  behalf of the assessee in that case that there was no intent to  evade duty as the entire quantity of kimam was captively  consumed; that the assessee was entitled to modvat credit equal  to the demand and, therefore, the department was not entitled to  invoke the extended period.  This argument was rejected by this  Court on the ground that no explanation was given by the  assessee for not disclosing the affairs of the units in which  kimam was manufactured; no explanation was given for not  getting the units registered or licensed; and no explanation was  given for failure to maintain the records under the 1944 Act.  In  the circumstances, this Court found in the case of M/s  Dharampal Satyapal total non-compliance of the 1944 rules.   This Court observed that it was for M/s Dharampal Satyapal to  explain the basis of its alleged bona fide impression.  It was  further found in that case that there was no evidence of receipt  and utilization of the kimam in the manufacture of Tulsi Zafrani  Zarda.  In the circumstances, this Court dismissed the civil  appeals filed by M/s Dharampal Satyapal.  This court held that  the burden to prove the defence of bona fides was on the  assessee and that the assessee in that case, M/s Dharampal  Satyapal, had failed to prove its bona fides.  However, on the  question of applicability of notification no.121/94-CE dated  11.8.1994, this Court upheld the directions of the tribunal  remanding the case back to the commissioner for re- examination.  This remand was made by the tribunal because it  was argued on behalf of M/s Dharampal Satyapal, as by the  appellants herein, that there was no revenue implication as the  assessee was entitled to the benefit of the exemption under the  notification no.121/94.   

       The main point which arises for determination in these  civil appeals is whether the department was right in the facts  and circumstances of this case in invoking the extended period  of limitation.   

       In the case of Padmini Products  v.  Collector  of  Central Excise reported in 1989 (43) ELT 195, this Court held  that in a given case where there is a scope for believing that the  goods were not excisable and consequently no license was  required to be taken then the extended period of limitation was  inapplicable.  Mere failure or negligence on the part of the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 7  

manufacturer either not to take out the licence or not to pay  duty in cases where there is a scope for doubt, does not attract  the extended period of limitation.  Unless there is evidence that  the manufacturer knew that the goods were liable to duty or he  was required to take out a licence, there is no scope to invoke  the proviso to section 11A(1).  For invoking the extended  period of limitation, duty should not have been paid or short- levied or short-paid or erroneously refunded on account of  fraud, collusion or wilful suppression or mis-statement of facts  or wilful contravention of the Act or the Rules with the  intention to evade payment of duty.  These ingredients postulate  a positive act, therefore, failure to pay duty or to take out a  licence is not necessary due to fraud, collusion etc.  Likewise,  suppression of facts is not a failure to disclose the legal  consequences of a certain provision.

       In case of M/s Dharampal Satyapal (supra), the assessee  used to buy Lucknowi Kimam from the market from time to  time and used the same in the manufacture of branded chewing  tobacco (final product).  In the case of  M/s Dharampal  Satyapal, apart from compound prepared in its unit, it used to  buy Lucknowi Kimam from the market which was similar to  the compound produced by the assessee and the same was  cleared to the licensed factories in UP and HP, where it was  diluted and used in the manufacture of Tulsi Zafrani Zarda.   In  that matter, the commissioner had recorded a categorical  finding that the assessee M/s Dharampal Satyapal knew that  kimam was liable to duty and that it was required to obtain ’L- 6’ licence because M/s Dharampal Satyapal used to buy  Lucknowi Kimam from the other manufacturers, who used to  manufacture Lucknowi Kimam after obtaining registration and  the requisite licence.  There is no such finding by the  commissioner in the present case.  In the circumstances, on the  question of invocation of extended period of limitation, the  judgment of this Court in the case of M/s Dharampal Satyapal  (supra) will not apply.         In the case of Cosmic Dye Chemical v. Collector of  Central Excise, Bombay reported in [1995 (75) ELT 721], this  Court held that so far as fraud and collusion are concerned,  intent to evade duty is built into these words.  However, so far  as "mis-statement" or "suppression of facts" are concerned,  they are clearly qualified by the word "wilful" preceding the  words "mis-statement or suppression of facts", which means  "with the intent to evade duty".   It was further observed that  the next set of words in the proviso to section 11A(1) which  refers to contravention of the provisions of the Act or the Rules  are qualified by the words "with intent to evade payment of  duty".  Therefore, this Court has held that there cannot be a  suppression or mis-statement of fact which is not wilful.  Mis- statement or suppression of facts must be wilful.  In that case,  on facts, this court found that the assessee was under a bona  fide impression that the value of its product was not includible  in its declaration for the reason that the said product was  exempt from duty under the notification dated 23.11.1961,  because two High Courts have taken the view that the product  was exempt from duty whereas two other High Courts had  taken contra-view.  In the aforestated circumstances, this court  held that the mis-statement in the declaration filed by the  assessee or the suppression of facts therein was not wilful.

       Applying the above test to the facts of the present case,  we find that the substance of the show-cause notices issued in  the present case was based on clandestine removal of the  kimam from the units in Delhi with an intention to evade  payment of excise duty or assessment.  The show-cause notices

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 7  

also alleged contravention of the provisions of the Act and the  Rules on the part of the appellants in failing to get their units  registered under section 6 read with rule 174 of the 1944 Rules.   However, we find from the facts that on 14.7.1992, stock  verification was carried out by the department inside the  premises of the appellants by anti-evasion department as also  by the jurisdictional central excise officer.  On 20.10.1992, the  partner of the appellant was required to remain present before  the Superintendent, Central Excise, New Delhi.  His statement  was recorded under section 14.  In that statement, he has stated  that in their units in New Delhi, there were three rooms in  which raw-material was stored.  In the said statement, he has  further stated that the appellants were blending and mixing the  additive mixture which was then transferred to their factories at  UP and HP for manufacture of branded chewing tobacco. In the  panchnama dated 20.10.1992, under which the premises of the  appellants in Delhi were searched, the manufacturing process of  additive mixture was specifically indicated.  Even at that time,  there was stock verification of the various raw-materials used in  the manufacture of chewing tobacco.  Under item 59 of that  panchnama, the stock of additive mixture has been specifically  indicated.  Further, on 30.4.1993, the Superintendent of Central  Excise had also visited the factory of the appellants and had  actually studied the process of manufacture in Delhi.  On  3.5.1993, a letter was addressed to the appellants in which the  appellants were called upon to supply all information regarding  the process of obtaining additive mixture which was used in the  manufacture of chewing tobacco.  On receipt of the said letter,  the appellants clearly indicated the ingredients used by them in  the manufacture of additive mixture.  On 20.9.1993, the officers  of the department again visited the various premises of the  appellants.  They conducted physical stock checking.  They saw  registers maintained by the appellant in respect of different  types of additive mixtures.  All the registers were checked and  verified on that day.  There is no finding in the present case that  the appellants did not answer the queries made by the  department.  Moreover, the tribunal in the connected appeal has  recorded a finding that the appellants were maintaining transfer  challans under which the said kimam was transferred to other  units.  The tribunal has further recorded a finding in the  connected civil appeals no.1878-1880 of 2004 that the  appellants were maintaining form-IV register as well stock  register regarding receipt of kimam in their factories in UP and  HP from their factories in Delhi.  That, after the change in the  entries in 1994, no show-cause notice was ever issued.  In the  circumstances, although there was contravention of the  provisions of section 6 read with rule 174 and although there  was contravention in not obtaining registration of the units in  Delhi, we are of the view that there was no intent to evade  payment of duty.

                For the aforestated reasons, we hold that "additive  mixture" (kimam) was excisable and classifiable under chapter  sub-heading 2404.49/2404.40 of 1985 Tariff Act, as held in the  case of Dharampal Satyapal  (supra), however, on the facts  and circumstances of this case, the department was not entitled  to invoke the extended period of limitation under the proviso to  section 11A(1) of the said Act. Accordingly, these civil appeals  are partly allowed, with no order as to costs.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 7