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CASE NO.: Appeal (civil)  1854-1855 of 2001

PETITIONER: M/s. Mercantile Company

RESPONDENT: Commnr. of Central Excise, Calcutta

DATE OF JUDGMENT: 11/10/2007

BENCH: ASHOK BHAN & V.S. SIRPURKAR

JUDGMENT: J U D G M E N T

BHAN, J.        1.      Assessee has filed these appeals under section 35L(b) of the  Central Excise Act, 1944 (hereinafter called the \021Act\022) against the  final order no.1419-1420/Cal/2000 dated 31st August 2000 in appeal no.  E/R-156-157/99 passed by the Customs, Excise & Gold (Control) Appellate  Tribunal, Eastern Bench, Calcutta (hereinafter called the Tribunal)  whereby the Tribunal has dismissed the appeal filed by the appellant  herein.

FACTS: 2.      Acting on the basis of intelligence, a team of officers from CPO  of Calcutta I Central Excise Commissionerate, Headquarters visited the  factory-cum-office of the appellant on 5th September, 1997 and  conducted a search operation. Search resulted in seizure of 3 files,  9700 pieces of Philips Ultra cleaner, 500 pieces of degreasing &  cleansing fluid, 700 pieces of Switch cleaning oil all bearing brand  name of Philips. These were detained and later seized on 9th February,  1998. Also, some 13 files belonging to M/s. T. Paul & Sons were  tendered by the partner of the appellant firm. Certain other documents  were also handed over to/seized by the raiding party.        3.      On the basis of the statements made by Shri Arun Kanti Paul  partner of the appellant and other records recovered from the said  premises on the day of search, it was found that the orders were being  received from M/s. Philips India Ltd., by M/s. T. Paul & Sons and the  same were executed by the appellant on the basis of arrangement with  M/s. T. Paul & Sons to the effect that the appellant gets a job charge  of paise 0.20 per 50 ml.  bottle of the said product. The price at  which M/s. T. Paul & Sons raised bills to M/s. Philips India Ltd. is  controlled by M/s. Philips India Ltd. and it appears from the cost  sheet given in the statement of Shri Arun Kanti Paul that M/s. Philips  India Ltd., had allowed a profit of 10%. The raw materials and packing  materials supplied by M/s. T. Paul & Sons was being received directly  at the factory premises of the appellant and the dispatch of the said  products was directly from 298, Rabindra Sarani, Calcutta 700 073 to  the consignment agent of M/s. Philips India Ltd. The goods received  were filtered and put into 50 ml. plastic container by the appellant  both manually and mechanically at its factory premises. After sealing,  bottles were pasted with Philips Labels & holograms. Multi-colour  holograms were received directly from M/s. Philips India Ltd.         4.      Samples of seized goods were got tested from Departmental Chemical  Laboratory at Customs House, Calcutta. The report of the Chemical  Examiner was that Audio Tape Head Cleaner is in the form of colour less  liquid and has the characteristics of methanol. Similarly, for  Degreasing Cleansing Fluid, the report was that it is in the form of

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colour less transparent liquid and has characteristics of iso-prophyle  alcohol. The sample of Switch Cleaning is in the form of colour less  transparent liquid containing mixture of liquid hydrocarbon.        5.      On 18th February, 1998, a show cause notice was issued to the  appellant alleging therein that the activities carried on by the  appellant amounted to manufacture and the products being filtered and  repacked were classifiable under entry 3402.90. The larger period of  limitation was also invoked under the proviso to Section 11A on the  ground that the appellant was guilty of fraud, concealment, etc. with a  view to evade the payment of excise duty.  

6.      Assessee filed detailed reply to the show cause notice explaining  that the activities carried on by the appellant did not amount to  manufacture and that the classification proposed by the department was  incorrect. Various other contentions on limitations as well as on  merits were raised.  According to the appellant, during the said  period, the appellant worked as a job worker undertaking filtering,  repacking and labeling the materials supplied to it and the same would  not amount to manufacture.  

7.      Commissioner of Central Excise Calcutta 1 in its order in original  dated 27th January, 1999, confirmed the demand of duty. It was held  that sub-heading 3402.90 covers surface-active preparations, washing  preparations and cleansing preparations, whether or not containing  soap. Explanatory notes of HSN were referred to and relied upon wherein  it has been provided that washing preparation act on the surfaces by  bringing the soil on the surface into a state of solution or  dispersion.  With reference to the degreasing preparation, it was  stated that these preparations are used with a basis inter alia of  solvents and emulsifiers. That the goods covered under the heading  34.02 are selected basically on the properties/characteristics of the  products than on the basis of the constituents from which the goods  were manufactured.        8.      Chapter note 6 of Chapter 34 which reads as follows:       \0236.    In relation to products of sub-heading No.3402.90,  packing or repacking into smaller packs, including packing or  repacking of bulk packs to retail packs or adoption of any  other treatment to render the product marketable to the  consumer shall amount to \023manufacture\024.\024        was relied upon to hold that the activity of repacking, re-labeling  amounted to manufacture. Chapter note 6 was introduced to Chapter 34  with effect from 1st March, 1994. 9.      On the question of limitation, it was held that the letter dated  8th March, 1994 relied upon by the appellant did not disclose the  entire facts and did not reflect the situation in its proper  perspective.  The Department was not informed about the actual activity  undertaken by the appellant. It was not disclosed as to whether a new  name has been given and the applicability and functions of the products  were not clearly stated. That new and distinctive product came into  existence which was sold and known in the commercial world under a  separate name having different and distinct qualities.  Commissioner of  Central Excise, Calcutta 1, confirmed the demand of duty Rs.42,62,862/-  proposed in the show cause notice and also levied a penalty of Rs.10  lakhs on the appellant under Section 11AC and the interest under  Section 11AB. A redemption fine of Rs.20,000/- was also imposed.

10.     Aggrieved against the order passed by the Commissioner of Central  Excise Calcutta 1, appellant filed the appeals before the Tribunal.          Tribunal upheld the order of the Commissioner. It was held that  the adjudicating authority had rightly held that the various products  are classifiable under heading 3402.90.  The findings recorded on the  question of limitation were also confirmed.  Demand of duty, interest

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and penalty were also upheld.  As regards personal penalty imposed  under the provisions of Section 11AC, it was noted that these  provisions came into existence on 28th September, 1996. Since the  provisions of Section 11AC were not retrospective in nature, the  penalty under the said provision could not be imposed for the period  prior to 28th September, 1996.  For the period prior to the said date,  penalty could be imposed under Rule 173Q only. As no segregation of  quantum of duty confirmed for the period prior to the said date and for  the period after the said date was there, the case was remanded to the  adjudicating authority for imposing penalty for the period prior to  28th September, 1996 in terms of the provisions of Rule 173Q and for  period subsequent to 28th September, 1996 in terms of the provisions of  Section 11AC, depending upon the quantum of duties confirmed for both  the periods.        11.     Demand of duty has been confirmed on the following products by  treating the same as classifiable under sub-heading no.3402.90: - (i)     Ultraclean Audiotape Headcleaner. (ii)    DCF-847-Degreasing and Cleansing Fluid. (iii)   SCO-846-Switch Cleaning Oil-cleans and lubricates switch  controls.

12.     Shri S.K. Bagaria, learned Counsel appearing for the appellant  contended that the activities undertaken by the appellant of filtering,  packing and labeling resulting in emergence of the said product cannot  be a manufacturing activity. That filtering and re-packing thinner,  liquid paraffin and Isoprophile Alcohol, which fell under tariff  heading 3814.00, 2710.90 and 2905.90, respectively of the Central  Excise Tariff Act, from bulk to small containers would not amount to  manufacture. He submits that raw materials are not classifiable under  Chapter 34 and their nature and identity do not get changed after  filtration and re-packing into smaller packs. The said note was  applicable to the products of Chapter 34 only. It is further submitted  that with effect from 1st March, 1997, a note similar to Chapter note 6  of Chapter 34 was inserted in Chapters 29 and 38, and, if at all the  activity undertaken by the appellant amounts to manufacture, then the  same shall be with effect from 1st March, 1997 only.  That re-packing,  re-labeling and re-naming of a product would not amount to manufacture  and the resultant goods shall not be liable to duty.  Marketing of the  product in smaller containers under a different name shall also not  amount to manufacture unless the nature and identity of the product is  changed.  Since in the present case, the identity of the product did  not change, the activity undertaken by the appellant cannot be held to  be manufacture of a new product.           13.    On the point of limitation, it was submitted by him that the  demand has been confirmed from 1st March, 1994 to 5th September, 1997  whereas the show cause notice was issued on 18th February, 1998, well  beyond the period of limitation. It was admitted by him that no  classification list was filed by the appellant.  He has drawn our  attention to a letter dated 8th March, 1994 written by the appellant to  the Assistant Collector of Central Excise, Calcutta disclosing the  activity undertaken by the appellant and requesting the Revenue to let  the appellant know about the Central Excise formalities required to be  observed.  That the writing of the letter well in advance shows the  bona fides of the appellant and that there was no suppression,  misstatement, etc., on the part of the appellant with an intent to  evade payment of duty and the authorities below erred in holding to the  contrary.   

14.     As against this, learned Counsel for the Revenue, Shri M.M.  Paikadey, supported the Commissioner\022s findings recorded in the order- in-original. It was submitted by him that the process undertaken by the  appellant was not as simple as has been projected by him. That the  items in question have been given specific names and the same were used

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for specific purpose for which the raw material cannot be used. The  impugned goods were specially packed in the cardboard packages and are  known differently in the commercial as well as common circles. That the  appellant\022s products are cleansing products and deserved to be  classified under Chapter 34 and the adjudicating authority has rightly  classified them under heading 3402.90.

15.     As regards limitation, it was submitted on behalf of the Revenue  that the letter dated 8th March, 1994 written by the appellant did not  state the entire facts.  The same was vague and lacking in particulars.  In the letter, it was not disclosed by the appellant that the products  were being marketed as \023cleanser\024 and gave the impression as if they  are only re-packing the raw material into smaller packs. It was not  disclosed that a new name has been given to the products. That the  appellant did not disclose the applicability and functions of the  products. The correspondence between T. Paul & Sons and M/s. Philips  India Ltd. clearly indicates that there was a doubt as to whether the  products would invite the Central Excise duty. To overcome this, they  obtained the opinion of an Advocate and the Advocate advised them that  instead of solvent, the word \021thinner\022 should be printed on the carton  to avoid the Central Excise Rules.

16.     Counsels for the parties have been heard at length.      

17.     It would be necessary to refer to the relevant entries to Chapters  34, 27, 29 and 38 to appreciate the controversy involved in the case.               18.     Chapter 34 deals with soap and organic surface-active agents, etc.  Heading No. 34.02 reads as under: -

______________________________________________________________________ Heading Sub-Heading     Description of goods                  Rate of  No.             No.                                                                          duty (1)             (2)                             (3)                                          (4) 34.02                           Organic surface-active agents                                         (other than soap); surface-active                                         preparations, washing prepara-                                         tions (including auxiliary washing                                         preparations) and cleaning prepar-                                         ations, whether or not containing                                         soap.

               3402.10 -       Sulphonated caster oil, fish oil or                           sperm oil                               NIL                 3402.90 -       Other                                             30%          

19.     Chapter 27 deals with Minerals Fuels, Mineral Oils & Products of  Their Distillation: Bituminous Substances; Mineral Waxes. Sub-heading  27.10 reads as under:  

______________________________________________________________________ Heading Sub-Heading     Description of goods                  Rate of  No.             No.                                                                          duty (1)             (2)                             (3)                                         

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(4) 27.10                           Petroleum oils and oils obtained                                         from bituminous minerals, other                                         than crude; preparations not                                         elsewhere specified or included,                                         containing by weight 70% or                                         more of petroleum oils or of oils                                          obtained from bituminous                                          minerals, these oils being the                                         basic constituents of the                                          preparations.                 2710.11 -       XXX                 2710.12 -       XXX                 2710.13 -       XXX                 2710.14 -       XXX                 2710.90 -       Other                                           10%      

20.     Chapter 29 deals with Organic Chemicals. Sub-heading 29.05 reads  as under: ______________________________________________________________________ Heading Sub-Heading     Description of goods                  Rate of  No.             No.                                                                          duty (1)             (2)                             (3)                                          (4)                         II. ALCOHOLS AND THEIR HALOGENATED,                             SULPHONATED, NITRATED OR NITRO-                             SATED DERIVATIVES.

29.05                           Acyclic alcohols and their       halogenated,       sulphonated, nitrated       or nitrosated derivatives.

               2905.10         Methanol                                            20%                 2905.90         Other                                          20%                        

21.     Chapter 38 deals with Miscellaneous Chemicals Products. Sub- heading 38.14 reads as under:

______________________________________________________________________ Heading Sub-Heading     Description of goods                  Rate of  No.             No.                                                                        d uty (1)             (2)                             (3)                                        ( 4) 38.14   3814.00         Organic composite solvents                                         and thinners, not elsewhere                                         specified or included; prepa-                                         red paint or varnish removers.      20%                                 22.     Chart (as per appellant) showing the material supplied and the  relevant headings under which the said material would fall, activity  undertaken and the description on the labels put on the bottles reads  as under: - S.No. Materials supplied to  the Appellant

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Activities  undertaken by  the Appellant Description on the  labels (a) Thinners falling  under SH 3814.00 Filtering,  packing in  small plastic  containers or  bottles and  pasting of  labels and  holograms of  Phillips India  Ltd.

Ultraclean Audio Tape  Head cleaner (Special  thinner for cleaning all  kinds of recording head,  pinch rollers and  capstans of audio tape- recorders). (b) Liquid Paraffin  falling under SH  2710.90

-do- SCO- 845 \026 Switch  cleaning oil \026 cleans  and lubricates  switch  controls (c) Isopropyl Alcohol  falling under SH  2905.90              

-do- DCF 847 \026 de-greasing  and cleaning fluid  (specially packed for  servicing audio/video  industry).

23.     It is not in dispute that the raw materials out of which the  impugned goods have been manufactured by way of filtering, repacking,  etc. were classifiable under a separate heading prior to the activities  undertaken by the appellant.         24.     The goods covered under heading 34.02 are selected basically on  the properties/characteristics of the products than on the basis of  constituents from which the goods are manufactured.        25.     The outer coverage of 3 products shown to us during the course of  hearing shows that the ULTRA CLEAN-AUDIO TAPE HEAD CLEANER is a special  thinner for cleaning all kinds of recording heads pinch rollers and  capstans of audio tape recorders.  SWITCH CLEANING OIL cleans and  lubricates switch controls. DEGREASING AND CLEANING FLUID is used for  servicing in the Audio/Video recorders industry.  The above shows that

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the products in question are different commercial commodities than the  raw materials out of which the same were manufactured.  The impugned  goods became fit for commercial use by the target consumers only after  the process undertaken by the appellants.  Chapter Note 6 of Chapter 34  provides that the packing or repacking of products of sub-heading  No.3402.90 into smaller packs, including packing or repacking of bulk  packs to retail packs or adoption of any other treatment to render the  product marketable to the consumer shall amount to \021manufacture\022.        26.     The basic property of mixture is cleansing as is evident from the  statement of the partner of M/s. Thinner & Company.

27.     Extracts of H.S.N. under Chapter 34 sub heading No. 3402.90  provides: -       \023Cleaning preparation whether or not containing soap,  other than those heading 34.01 and cleaning preparation serve  for cleaning floors, windows, or other surface.\024        28.     The clause of \021manufacture\022 with reference to repacking from bulk  packs to retail packs introduced by the Finance Act from 1994 clearly  points to the fact that even if the bulk material is identifiable  excisable goods, the fact of repacking from bulk to retail pack would  render the product separately classifiable. Admittedly, the product  manufactured by the appellant is used as cleanser.  It no longer  remained the product which was supplied to the appellant.  It was known  in the market by a different name and for a different use. The same  would not fall either under Chapter 27, 29 or 38. The same would fall  under sub-heading No. 34.02 as a cleansing product.          29.     Contention of the counsel for the appellant that a note similar to  Chapter Note 6 of Chapter 34 was introduced in Chapter 29 and 38 with  effect from 1.3.1997 and till that date the repacking or re-labeling of  the goods supplied to it which were classifiable under Chapters 27, 29  and 38 could not be covered under Chapter 34 cannot be accepted as the  goods after repacking were being supplied and marketed as cleansing  products, which is evident from the outer cover of the 3 products shown  to us by the appellant during the course of hearing.    

30.     On the question of limitation, the submission made by the counsel  for the appellant that the letter dated 8th March, 1994 disclosed the  entire facts to the authorities regarding the items manufactured by the  appellant cannot be accepted.  The letter dated 8th March, 1994 did not  disclose the entire facts.  The letter did not disclose the situation  in its proper perspective.  The authorities were not informed about the  actual activity undertaken by the appellant.  The authorities were also  not informed that a new name has been given to the products.    The  applicability and functions of the new products was also not clearly  stated.  The new and distinct product which had come into existence was  sold and known in the commercial world under a separate name having  different and distinct qualities.  The appellant had not produced  sample of the subject goods along with the letter.  For the aforestated  reasons, it cannot be held that the authorities had full knowledge  about the activities undertaken by the appellant.        31.     It appears that duty liability under the Central Excise Act &  Rules was well known to the appellant as is evident from the  correspondences made by Shri Arun Kanti Paul (who is the common partner  of M/s. T. Paul & Sons and the appellant) on 23rd August, 1995 with  M/s. Philips India Ltd.    Shri Arun Kanti Paul, in his letter has  stated that they could avoid Central Excise liability by printing  \021thinner\022 instead of \021solvent\022 on the packs of bottles. M/s. Philips  India Ltd., by its letter No. HD/CE/ACCY dated 6th September, 1995,  endorsed the same and permitted M/s. Paul & Sons to print \021thinner\022  instead of \021solvent\022 on the outer pack.  The direction of M/s. Philips  India Ltd. was actually executed by the appellant by printing \021thinner\022

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instead of \021solvent\022 on the cartons.  Shri Arun Kanti Paul during  examination, when asked to throw some light on the correspondence with  M/s. Philips India Ltd., stated that he had some doubt about the excise  liability of these products and accordingly he obtained legal opinion  regarding the same and persuaded M/s. Philips India Ltd., to allow them  to print \021thinner\022 against \021solvent\022 on the cartons.  It clearly shows  that the appellant although was conscious of the fact that the products  manufactured by them could attract the Excise Duty, made a deliberate  attempt to evade the same by printing \021thinner\022 instead of \021solvent\022 on  the cartons.  

32.     The Tribunal has rightly come to the conclusion that the  department could under the circumstances invoke larger period of  limitation.

33.     For the reasons stated above, we do not find any merit in these  appeals and dismiss the same with no order as to costs.