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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.