Customs, Excise and Gold Tribunal - Bangalore
Sparr Engineering, Shri S. ... vs The Commissioner Of Central Excise on 10 October, 2006
Equivalent citations: 2007(114)ECC155, 2007ECR155(TRI.-BANGALORE), 2007(207)ELT545(TRI-BANG)
JUDGMENT
T.K. Jayaraman
1. These appeals have been filed against the Order-in-Original No. 01/2004 BNG-II dated 3.3.2004 passed by the Commissioner of Central Excise, Bangalore-II Commissionerate.
2. The appellants are manufactures of the Down the Hole Pneumatic Hammers (DTH Hammers) and parts, which are used in the mining/drilling industry. On the basis of information received, the officers of the Directorate General of the Central Excise Intelligence conducted thorough investigations into the affairs of the appellant unit. The searches were conducted on 13.6.2001. In the course of the search, apart from voluminous records and documents, an amount of Rs. 1,15,400/- alleged to be the sale proceeds of the clandestinely removed DTH hammers was also seized. Statements of persons concerned with the company in managing the day-to-day affairs, job workers who had undertaken job work for the company, raw material suppliers and transporters were recorded under Section 14 of the Central Excise Act 1944. On the basis of the investigations, Show Cause Notices dated 10.12.2001 and 26.6.2002 were issued answerable to the Adjudicating Authority. The first Show Cause Notice proposes to confiscate cash seized and further, penalties were proposed on the company and on Shri Ravichandra, General Manager. The second Show Cause Notice has proposed the following actions.
(i) Demand of Central Excise duty of Rs. 1,39,68,505/- being the duty payable on the hammers and their parts manufactured and clandestinely cleared during the period from 1999-2000 to 27.6.2001.
(ii) Demand of duty of Rs. 3,18,196/- being duty payable on the waste/scrap generated during the manufacture of hammer/parts during the above period.
(iii) Demand of duty of Rs. 6,32,068/- being the differential duty payable on the DTH Hammers and their parts manufactured and cleared from 28.6.2001 to 21.11.2001 by irregular availment of SSI Exemption Notification.
(iv) The above demands were made under proviso to Section 11A of Central Excise Act 1944.
(v) Demand of interest under Section 11AB.
(vi) Imposition of penalties on the unit under various provisions of Central Excise Act and Rules.
(vii) Imposition of penalties under Rule 209A of Central Excise Rules 1944/Rule 26 of Central Excise Rules 2001 on the following persons.
a. S. Ravichandra, General Manager b. P. Ramakrishna, General Manager c. Samiulla Khan, Manager (Sales)
3. The Adjudicating Authority took up both the Show Cause Notices. On the basis of his findings, he passed the impugned order. The gist of the impugned order is as follows.
(i) Demand of duty of Rs. 1,26,58,428/- being duty on DTH hammers and parts manufactured and cleared clandestinely from 1999-21.11.2001 under proviso to Section 11A.
(ii) Demand of Rs. 2,74,306/- on the waste/scrap generated in the course of manufacture of hammers and parts from 1999 to 27.6.2001 under proviso to Section 11A.
(iii) Confiscation of cash of Rs. 1,15,400/- seized from the residence of Shri S. Ravichandra under Section 12 of the Central Excise Act, 1944 read with Section 121 of the Customs Act 1962.
(iv) Penalty of Rs. 1,29,32,734/- on the appellant unit under Section 11AC.
(v) Interest under Section 11AB.
(vi) Penalty of Rs. 10,00,000/- under Rule 173Q read with Rules 9(2), 52A and 210 of the erstwhile Central Excise Rules 1944/Rules 25 and 27 of the Central Excise Rules 2001.
(vii) Penalties under Rule 209A of the erstwhile Central Excise Rules, 1944/Rule 26 of the Central Excise Rules 2001 on the following persons.
Sl. No. Name of the person Penalty
1. S. Ravichandra, General Manager Rs. 5,00,000/-
2. P. Ramakrishna, General Manager Rs. 1,00,000/-
3. Samiulla Khan, Manager (Sales) Rs. 1,00,000/-
The appellants strongly challenge the findings in the impugned order and therefore, they have come before this Tribunal for relief.
4. Shri G. Shivadass, the learned Advocate appeared on behalf of the appellant and Shri K. Sambi Reddy, the learned JDR appeared for Revenue.
5. The learned advocate urged the following submissions.
(i) The learned advocate stated that with the limited machinery available, the appellants manufacture parts of hammer assembly. They avail SSI Exemption. The appellants clear the excisable goods under cover of the invoices. The clearances so effected by them are well within the SSI exemption limit. Reference was invited to pages 508 and 509 of additional paper book filed on 18.7.2006. In order to meet the orders received from the customers, which is beyond the manufacturing capacity, the appellants get the various of parts of hammer assembly manufactured on job work basis from a number of job workers.
(ii) The learned advocate brought the different parts of a hammer assembly and showed it to the Bench. A hammer assembly consists of the following parts.
a. Top unit b. Body c. Chuck d. Striker e. Stem Sleeve f. Control Tube g. Air Distributor h. Bit Holder The appellants procure, various grades of steel and supply the same to the job workers under cover of their document called as Material Out (MTO). The various processes are cutting, rough machining, which includes drilling, boring and turning, milling, induction hardening, honing, heat treatment and finish machining. Different job workers undertake different processes. In respect of certain job workers, the parts emerges finished products. These finished products are returned to the appellants under cover of document called Material In (MTI) and thereafter, the appellants account the same as parts in their stock record. Based on the customers' requirement, the appellants either put together all parts into an assembly called Hammer Assembly and sell the same or alternatively the appellant sell the parts as such to the customers.
(iii) The appellants requested for cross-examination of 20 witnesses, out of which only 11 witnesses were made available for cross-examination by the Commissioner. The witnesses denied the statement tendered by them during the investigations.
(iv) The Show Cause Notice dated 26.6.2002 proposed classification of the Hammer Assembly under Chapter Heading 82.07 of the Central Excise Tariff. The Commissioner has upheld the above classification. The classification of goods under Chapter Heading 82 is subject to the provisions of Note -1 to Chapter 82. According to Note -1, Chapter 82 covers only goods with a blade, working edge, working surface or other working part, which would be made of either base metal or metal carbides/cermets or precious/semi-precious stones/adhesive material. The product, which emerges as a process of manual assembling, is only a hammer, which contains the bit holder. The bit, which contains the tungsten carbide buttons essential for drilling and which constitutes the working edge of the hammer, is neither manufactured by the appellants nor is it bought by the appellants and supplied by them to their buyers. The bit is always purchased by the customer, who attaches the same to the assembly before using it. This fact is confirmed by the deposition of the buyers both during investigation and during cross-examination. Therefore in the absence of the working edge, the hammer assembly cannot be classified under Chapter Heading 82.07 as finished tools in view of Chapter Note-1 to Chapter 82. It was urged that classification has to be done only as per the Chapter Notes and Section Notes. The following case laws were relied on:
a. Nelton India Ltd. v. CCE, Vadodara .
b. Hindustan Packaging Co. Ltd. v. CCE .
For the above reasons, demand of duty on DTH hammers under Chapter Heading 82.07 is not sustainable.
(v) Once it is established that the assembled hammer cannot be considered as a rock drilling or an earth boring tool in the absence of a bit, the question is whether the assembly of various individual items would amount to manufacture. The various parts, which constitute the Hammer Assembly were received in fully finished conditions from the job workers. This is evident from the computer extracts relied upon by the Department. As against the factual position evident from the relied upon documents, the narration of the process of manufacture in Paras 17 to 24 of the Show Cause Notice is inaccurate. Between the positions as indicated in the documents and the Show Cause Notice, the former would prevail as it is an evidence relied by the department. Once the documents relied on by the department shows that all the operations culminating in the finished machining is done at the job workers premises, then the activity that is done by the appellants would be mere collection of various items and selling them. The activity of collecting the various components, parts and materials cannot be considered as an activity amounting to manufacture. The following case laws were relied on.
(a) Bartronics India Ltd. v. CCE .
(b) T.I. Diamond Chain Ltd. v. CCE 2000 (126) ELT 790 (affirmed by the Supreme Court as .
(c) XI Telecom Ltd. v. Supt. of Central Excise .
(d) Yamuna Gases and Chemicals Ltd. v. CCE, New Delhi .
(e) Circular No. 583/20/2001-CX dated 20.8.2001.
(vi) Assuming but not admitting that the appellants had undertaken the finishing operations like machining, inspection, etc., it is submitted that these processes do not amount to manufacture. Neither under Section Note XV nor Chapter 82 contains any Chapter Note stating that these processes amount to manufacture, in contradistinction to Section XVI where a specific note exists that these processes amount to manufacture.
(vii) Evidence on record shows that the goods as emerging at the job workers premises clearly had the essential characteristics of individual parts. Hence applying Interpretative Rule 2(a) of Central Excise Tariff, the parts as emerging at the job workers premises would be classified under Chapter 82.07 for the purposes of levy of Excise duty.
(viii) The appellants supply raw materials to job workers and receive back the finished goods. Therefore, the job workers are the manufacturers and they are liable to pay appropriate duty, if any. The following case laws were relied on.
(a) Motor Industries Co. Ltd. v. CCE (affirmed by Supreme Court as reported in 1999 (111) ELT A195).
(b) CCE v. M.M. Khambatwala
(c) Hindustan Zinc Ltd. v. CCE 2005 (71) RLT 63.
(d) Telco v. CCE.
(ix) On the basis of investigation, Show Cause Notice dated 10.12.2001 was issued. Subsequently, on the basis of the same facts another Show Cause Notice dated 26.6.2002 invoking proviso to Section 11A has been issued. This is not permissible and therefore, the second Show Cause Notice is not sustainable. The following case laws were relied on.
(a) Nizam Sugars Ltd. v. CCE 2006 (197) ELT 465.
(b) Order dated 17.7.2006 of the Hon'ble High Court of Karnataka in the case of M/s. Bripranil Synthetics (P) Ltd.
(x) The duty demand on scrap to the tune of Rs. 2,74,306/- is not maintainable, as it is based on assumptions and presumptions. The quantum of scrap has been arrived at by considering the weight of the raw material used and the weight of the finished products and that too on the basis of statements tendered by individuals. There is no evidence to show actual manufacture and sale of scrap.
(xi) The Commissioner has confirmed the demand of Rs. 5,94,036/- for the year 2001-2002 on the ground that the appellants had crossed the aggregate value of clearances of Rs. 3 crores during 2000-2001. Since the demand of duty itself for 2000-2001 is not sustainable, the order denying the benefit of exemption for 2001-2002 and consequent demand of Rs. 5,94,036/- is not sustainable.
(xii) For the above reasons, the entire duty demand is not sustainable. Assuming that evidence furnished by the appellants to support their case that the duty liability in respect of parts would still lie on the appellants for the reason that no correlation between the parts dispatched and parts received by the appellants from the job workers under MTI is possible, then the duty liability would be confined only to parts. During the hearing, the learned advocate submitted Annexure-A along with the synopsis of the case, wherein the duty liability has been worked out. According to the Annexure, if they have to discharge the duty on parts, then it would amount only to Rs. 18,73,745/-. It was also brought to our notice that during the investigations the appellants had paid an amount of Rs. 18,62,055/-.
6. The learned SDR reiterated the OIO. It was contended that the contention of the learned Advocate that job workers are the manufacturers of the parts is not sustainable as in many cases, the finishing processes were undertaken by the appellants themselves. It was further contended that there is ample documentary evidence to sustain the allegations of clandestine production and removal without payment of duty. Hence, he said that the appellants are liable for penalty and requested the Bench to confirm the OIO in toto.
7. We have gone through the records of the case carefully. The Adjudicating Authority has considered the following points in the impugned order and given his findings:
(a) The Show Cause Notice has been issued on assumptions and presumptions.
(b) The allegation of clandestine removal is neither factually correct nor legally tenable and is without any evidence.
(c) The noticee unit cannot be considered as the manufacturer of DTH Pneumatic hammers, but only the job workers,
(d) The classification of the product made by the Department under the Chapter Sub-heading 8207.00 is incorrect,
(e) The quantification of duty demand is erroneous as no deduction has been allowed on transportation charges nor any modvat credit is granted on the duty paid on the inputs,
(f) Statements from various persons were recorded by employing pressure tactics and the same cannot be relied upon for demand of duty.-
The Commissioner has given his detailed findings in each of the issues and held the case against the appellants.
7.1 We find that the appellants have questioned the classification of the hammer assembly manufactured by them. It was submitted that they would not fall under CSH 8207.00 in view of the Note 1 to Chapter 82. The contention of the appellants is that according to Note 1 to Chapter 82, that Chapter covers only goods with a blade, working edge, working surface or other working part which would be made of either base metal or metal carbides/cermets or precious/semi-precious stones/adhesive material. The learned Advocate took pains to impress upon the point that the bit, which contains the tungsten carbide buttons essential for drilling and which constitutes the working edge of the hammer is neither manufactured by the appellants nor bought by them and supplied to their buyers. In other words, the hammer assembly assembled by the appellants do not contain the working edge. We reproduce below Chapter Note 1 to Chapter 82:
1. Apart from blow lamps, portable forges, grinding wheels with frame-works, manicure or pedicure sets, and goods of heading No. 82.04, this Chapter covers only goods with a blade, working edge, working surface or other working part of:
(a) Base metal;
(b) Metal carbides or cermets;
(c) Precious or semi-precious stones (natural, synthetic or reconstructed) on a support of base metal, metal carbide or cermet; or
(d) Abrasive materials on a support of base metal provided that the articles have cutting teeth, flutes, grooves, or the like of base metal, which retain their identity and function after the application of the abrasive.
By virtue of Note 2 of Chapter 82, the parts of DTH Hammer would be falling under CH 82.07. Therefore, we find force in the contention of the appellant that the hammer assembly cleared by them would not fall under CH 8207.00. On the other hand, the parts of Hammer assembly/DTH Hammer would be classifiable under CH 82.07. The question arises as to under what Central Excise Tariff Heading the Hammer Assembly should be cleared. The appellants contended that the assembly of the various individual items to form hammer assembly does not amount to manufacture. It was pointed out that neither under section Note XV nor the Chapter 82 contain any Note stating that the processes carried out by the appellant amounts to manufacture in contradistinction to Section XVI where a specific note exists that the processes of finishing operations like machining, inspection, etc. amount to manufacture. The point made by the appellants is that the hammer assembly cannot be considered as DTH hammer in the absence of the cutting/drilling bit and in that view the same cannot be classified under CH 82.07. To put it differently, the hammer assembly would not be excisable. Hence, the value of the hammer assembly cleared has to be excluded from the total value of clearances. The Commissioner has not examined the classification of the hammer assembly by referring to Chapter Note 1 of Chapter 82. Since we find merit in the contention raised by the appellant in the course of personal hearing, we hold that the value of clearances of hammer assembly should be excluded from the total value of clearances made by the appellants.
7.2 The investigation with regard to the clandestine removal is very detailed and the Commissioner has given a finding relying on the enormous documentary evidences unearthed by the investigating agency. On this point, there is no serious challenge by the appellants. A point was made by the learned Advocate that the job workers should be considered as the manufacturers of the various parts of the hammer assembly. On this point, the Commissioner has given his finding in page 13 of the impugned order. The Commissioner has not thoroughly gone through the records relied on by the Revenue. The learned Advocate took us through the computer statement relied on by the Revenue. In respect of each part, the raw material is sent to the job workers for various operations. The various parts of the Hammer Assembly had already been enumerated by the learned Advocate. The raw materials sent to the job workers undergo various operations in the job worker's premises. The raw material is transported through a document known as MTO. After completion of the job work, the part manufactured by the job worker is received under a document known as MTI. It is the contention of the appellant that what is received from the job worker is a complete manufactured product. The evidence is available in the computer statement which contains all the details. Therefore the conclusion arrived at by the Adjudicating Authority that the appellant only is the manufacturer of the parts of Hammer Assembly is not borne out by the factual records relied by the Revenue. For example, in respect of a part known as 'Chuck', there are three operations like Buttress Threading, Direct Hardening and Finish Machining. From the operations undertaken, it is seen that the item is completed by the job worker Bluemoon Industries. In this case, in view of the various decided case-laws, we have to hold that the job worker only is the manufacturer. Similarly, in respect of other parts also, there is evidence to show that the finished parts have been received by the appellant under documents known as MTI. In view of this factual position, we do not agree with the Commissioner that the appellant is the manufacturer of the parts. In our view, based on the voluminous data relied on by the Revenue, we hold that the various parts of the Hammer Assembly have been manufactured by the job workers and the duty liability rests with the job workers and not with the appellant. However, the learned Advocate, in the course of personal hearing, conceded that in certain cases, some finishing operations were carried out by the appellant and they are conceding with the duty liability in respect of the parts which are cleared by them.
7.3. The appellant has also made a point that on the basis of the investigation, one Show Cause Notice dated 10.12.2001 was issued. Subsequently on the basis of the same facts, another Show Cause Notice dated 26.06.2002 invoking proviso to Section 11A has been issued. It was urged that in view of the Supreme Court's decision in Nizam Sugars Ltd. v. CCE (cited supra), the demand is not sustainable. We do not agree with the appellants on this point. Even though there was only one investigation, we find that the first Show Cause Notice was for confiscation of the amount alleged to be the sale proceeds of goods cleared without payment of duty. On the other hand, the second Show Cause Notice, invoking proviso to Section 11A, is for the demand of duty for the same period relating to the investigation. It is not the case of the appellant that Revenue has invoked extended period for a subsequent period. Hence, the ratio of Nizam Sugar Ltd.'s case cannot be made applicable for the present appeal. Since there is ample documentary evidence for clandestine removal, invocation of proviso to Section 11A is justified.
7.4. In view of our finding on the excisability of hammer assembly assembled by the appellant, the duty liability is to be re-computed. In the course of personal hearing, the learned Advocate furnished the following working sheet prepared on the basis of the documents relied on by the Revenue to show their actual liability on the goods cleared. The clearances are as per Show Cause Notice for the relevant periods. The value of hammer assemblies are excluded. We accept this stand in view of our earlier finding that hammer assembly is not excisable. After excluding the value of the hammer assemblies, the exemption as per SSI Notification is to be given and the cum-duty benefit as per the decision in Shri Chakra case should be given to them. As per the work sheet, the duty liability comes to Rs. 18,73,745/-. The work-sheet is reproduced below:
"Assessable Value as per Show Cause Notice Rs.
07.10.1999 to 31.03.2000
-1,56,98,500 01.04.2000 to 31.03.2001
-4,98,14,500 01.04.2001 to 20.04.2001
- 42,46,500 21.04.2001 to 27.06.2001
- 63,97,505 (As per invoices) TOTAL Values as per work sheet to Show Cause Notice 01.04.1999 to 31.03.2000
- 2,22,24,239 LESS: Value of hammer assemblies
-1,56,98,500 Balance 65,25,739 LESS: First exemption of Rs. 50lakhs 50,00,000 Balance 15,25,739 Cum-duty value 14,53,085 5% duty 15,25,739 In excess of Rs. 50/- lakhs 72,654 01.04.2000 to 31.03.2001 6,52,23,724 LESS: Value of hammer assemblies 4,98,14,500 Balance 1,54,09,224 LESS: First exemption of 1 Cr.
1,00,00,000 Balance 54,09,224 Cum-duty value 46,63,124 16% duty 7,46,100 01.04.2001 to 27.06.2001 1,82,92,691 LESS: Value of hammer assemblies 1,06,44,005 Balance 76,48,686 Cum-duty value 65,93,695 16% duty 10,54,991 TOTAL DUTY 18,73,745 In view of the above findings, the duty liability in respect of the hammer assembly and parts cleared during the period from 1999-2000 to 2001-2002 is limited to Rs. 18,73,745/- after giving them the benefit of SSI exemption. There is no reason for denial of SSI exemption to the appellants.
7.5. The demand of Rs. 2,74,306/- on Waste and Scrap generated for the relevant period is seriously contested by the appellant on the ground that there is no evidence for the actual sale of Scrap. The Adjudicating Authority, in para 23 of the impugned order, has stated that during the relevant period, there was a requirement for payment of duty on the Waste and Scrap generated. He has stated that there are no evidences to prove that the waste and scrap were either returned to the appellants or cleared by the job workers from their premises on payment of duty. The appellant has no satisfactory answer for this. Looking to the totality of the circumstances, we find that the demand is justified and we do not want to interfere with this portion of the Commissioner's order.
7.6 There is overwhelming evidence for clearance of goods without payment of duty. Therefore, the confiscation of Rs. 1,15,400/- seized from the residence of Shri S. Ravichandra, General Manager under Section 12 of the Central Excise Act, 1944 read with Section 121 of the Customs Act, 1962 is upheld.
7.7. The penalty on the company under Section 11AC is reduced to Rs. 10,00,000/-. Penalty under Rule 173Q read with the other provisions to the tune of Rs. 10,00,000/- is set aside in view of the imposition of penalty under 11AC.
7.8 Interest under Section 11AB is recoverable on the duty liability in terms of law.
7.9. The appropriation of Rs. 18,62,055/- voluntarily paid during the investigation is upheld.
7.10. In view of the overwhelming documentary evidence, penalty under Rule 209A of Central Excise Rules, 1944/Rule 26 of the Central Excise Rules 2001 is justified on S/Shri Ravichandra, Ramakrishna and Samiullah. However, taking into account the modified duty liability, the penalties are modified in the following manner:
(a) Shri S. Ravichandra - Rs. 80,000/-
(b) Shri P. Ramakrishna - Rs. 15,000/-
(c) Shri Samiulla Khan - Rs. 15,000/-
(Pronounced in open Court on 10 Oct. 2006)