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CASE NO.: Appeal (civil)  1373 of 2002

PETITIONER: Commissioner of Central Excise, Nagpur

RESPONDENT: M/s Ballarpur Industries Ltd

DATE OF JUDGMENT: 30/08/2007

BENCH: S. H. Kapadia & B. Sudershan Reddy

JUDGMENT: J U D G M E N T

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

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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.

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(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 \026

(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 \026

(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

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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 \026 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

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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

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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

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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.