Custom, Excise & Service Tax Tribunal
4. Whether Order Is To Be Circulated To ... vs Cce, Delhi I on 15 April, 2008
IN THE CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL West Block No. 2, R.K. Puram, New Delhi 110 066. Principal Bench, New Delhi COURT NO. II Excise Appeal No. 5651-5655 of 2004 [Arising out of the Order-in-Original No. 27-29/2004 dated 31/08/2004 passed by The Commissioner of Central Excise, Delhi-I. ] For Approval and signature : Honble Shri S.S. Kang, Vice President Honble Shri Rakesh Kumar, Member (Technical) 1. Whether Press Reporters may be allowed to see : the Order for publication as per Rule 27 of the CESTAT (Procedure) Rules, 1982? 2. Whether it would be released under Rule 27 of : the CESTAT (Procedure) Rules, 1982 for publication in any authoritative report or not? 3. Whether their Lordships wish to see the fair : copy of the order? 4. Whether order is to be circulated to the : Department Authorities? M/s Diwan Saheb Fashions Pvt. Ltd. & Ors. Appellant Versus CCE, Delhi I Respondent
Appearance S/Shri V.L. Kumaran, Ravi Kumar, Advocates for the appellant.
Shri Virender Choudhary, Authorized Representative (DR) for the Respondent.
CORAM:Honble Shri S.S. Kang, Vice President Honble Sh. Rakesh Kumar, Member (Technical) DATE OF HEARING : 15/04/2008.
DATE OF DECISION:__________ Order No. ________________ Dated : ,,,,,,,,,,,_____________ Per. Rakesh Kumar :-
These five appeals have been filed by M/s Diwan Sons (India) Pvt. Ltd., 23/5, East Patel Nagar, Delhi (hereinafter referred to as Diwan Sons); Shri Surinder Diwan, Director Diwan Sons; Shri Sudhir Diwan, Director Diwan Sons ; Shri M.L. Diwan, Proprietor, - East West Attire, B-2, Basement, Sunder Kiran Building, 6/41, W.E.A. Karol Bagh, New Delhi, and Mrs. Usha Diwan, Proprietor M/s Ethnocity, B-1, Basement, Sunder Kiran Building, 6/41, WEA Karol Bagh, New Delhi against order in original No. 27-29/2004 dated 31/08/04 passed by Commissioner of Customs, Delhi I in respect of three Show Cause Notices SCN No. CE-20/Misc Inv/Diwan Sons/R-28/4/2001 dated 7/5/02 for demand of duty amounting to Rs. 39,68,880/- for period from April 2001 to September 2001; SCN No. CE-20/Misc-Inv/Diwan Sons/R-28/4/2001 dated 27/9/02 for demand of duty amounting to Rs. 61,50,000/- for the period from October 2001 to March 2002 and SCN No. IV/(hdqr. Prev.)12/01/03 dated 12/8/2003 for demand of duty amounting to Rs. 1,05,27,577/- for the period from April 2001 to March 2003. The Commissioner by this order
(a) confirmed the demand of duty amounting to Rs. 2,06,46,457/- (37,68,880 + 61,50,000 + 1,05,27,577) against Diwan Sons under provision to Section 11 A (1) of the Act, along with interest on this duty at the applicable rate under Section 11 AB of the Act ;
(b) imposed penalty of Rs. 2,05,46,457/- on Diwan Sons under Section 11 AC of the Acts and penalty of Rs. 25 lakhs each on Shri Surinder Diwan and Sudhir Diwan under Rule 26 of the Central Excise Rules, 2001/2002 and
(c) imposed penalty of Rs. 5 lakh each on Sh. M.L. Diwan and Mrs. Usha Diwan under Rule 26 of the Central Excise Rules, 2001/2002.
1.1 Diwan Sons is a private limited company with Shri Surinder Diwan and Shri Sudhir Diwan, who are real brothers as its Directors. M/s East West Attire is a proprietorship firm with Shri M.L. Diwan as its proprietor. Shri M.L. Diwan is the father of Shri Surinder Diwan and Sudhir Diwan. Ethnocity is also a proprietorship firm owned by Mrs. Usha Diwan, wife of Shri Surinder Diwan. Both East West Attire and Ethnocity were started in the year 2001 and closed down in 2003. During the period of dispute, all the three firms were engaged in manufacture (as merchant manufacturer) of Articles of Apparel, not knitted or crocheted falling under heading 62.01 of the tariff and these apparels were being sold from various sales outlets of Diwan Sons under the barand names Diwan Saheb, Ethnic Fusion: Ethno, Cupra Club etc. During the period of dispute, only Diwans Sons had taken Central Excise Registration under Rule 174 of Central Excise Rules, 1944/Rule 7 of Central Excise Rules 2001/2002, were availing SSI exemption and were paying duty on the clearances in a financial year, in excess of the threshold limit for full duty exemption. M/s Ethnocity and M/s East West Attire had not taken any Central Excise registration, and were not paying any duty, as they were claiming full duty exemption. Entire production of garments of East West Attire and Ethnocity was being cleared to Diwan Sons who were marketing the same under the brand names mentioned above.
1.2 From the sale outlets of Diwans Sons, in addition to the garments merchant manufactured by them, East West Attire and Ethnocity, fabrics of Raymonds, Digjam etc. are also sold and the customers purchasing the fabrics have option to get the garment stitched through Diwans Sons for which they are separately charged. About 85% of the customers buying fabrics from Diwan Sons, also get the garments stitched through them. The persons who have purchased the fabrics elsewhere can also come to Diwan Sons for getting the garments stitched. The tailoring activity has been outsourced by Diwan Sons to M/s Heritage Tailoring Co. However, lining, branded buttons, labels etc. are provided by Diwans Sons.
1.3 In January 2003 the Officers of Central Excise Commissionerate, Delhi I searched the premises of Diwan Sons, East West Attire, Ethnocity and of their associate concern and conducted detailed inquiry with the Directors/Proprietors of Diwan Sons, East West Attire, Ethnocity etc. and also with their employees and on completion of enquiry, three Show Cause Notices, mentioned above, were issued. The allegations in the Show Cause Notices are that :-
(a) the garments made on account of tailoring activity of Diwan Sons i.e. the garments stitched through Diwan Sons for the customers out of the fabrics purchased by them from Diwan Sons, would also attract Central Excise Duty which has not been paid ; and
(b) East West Attire and Ethnocity, are dummy units created by Diwan Sons for the purpose of duty evasion and clearances of these units is liable to be clubbed with the clearances of Diwan Sons for the purpose of SSI exemption.
The Show Cause Notices dated 07/05/02 and 27/9/02 demand duty from Diwan Sons on the garments made as per the specifications of the customers, out of the fabrics purchased by them for Diwan Sons that is, on the garments manufactured as part of tailoring activity. In the third Show Cause Notice dated 12/8/03, in addition to the above issue, the duty demand has also been raised by denying the benefit of SSI exemption to East West Attire and Ethnocity by clubbing the clearances of these two firms during period from 1/4/01 to 31/3/03 with the clearances of Diwan Sons during this period.
It is these three Show Cause Notices which have been adjudicated by the impugned order, which is under challenge.
2. Heard both the sides.
2.1. Shri V. Laxmi Kumaran, Advocate, the learned counsel for the appellants made the following arguments :-
(i) Though the process of converting fabrics into garments amounts to manufacture, no duty is payable on the garments stitched as per the customers specifications, as such garments are not marketable, as the same cannot be sold to any other customer for the reason that the same would not fit any other customer. The garment tailored for a customer as per his measurement and specifications, have to be returned to the same customer. Therefore, such garments are not excisable.
(ii) Making garments out of the fabrics purchased by a customer Diwan Sons shop, as per the customers specifications and measurements, is a tailoring activity amounting to rendering of service and hence the same would not attract excise duty. In this regard, reliance is placed on the following judgments of Honble Supreme Court :-
(1) STO vs. B.C. Kame reported in 1977 (1) SCC 634 (2) Hindustan Shipyard Ltd. vs. State of A.P. reported in 2000 (6) SCC 579
(iii) Without prejudice to the above submissions, even if the garments, in question, are held to be liable to Central Excise Duty, in terms of the provisions of Rule 7AA of the Central Excise Rules, 1944, and its successor Rule 4 (3) of the Central Excise Rules, 2001/2002, duty is liable to be paid by the customers who is the owner of the fabric and not the appellant Diwan Sons, through whom only the tailoring job had been done. Even the individual customers would not be liable for pay duty as from the Boards Circular No. 4/5/2001-TRU dt. 30/4/01, issued at the time of introduction of levy of excise duty on garments and which acts as contemporanea expositio, it is clear that the words produced or manufactured on his account on job-work in Rule 7AA of Central Excise Rules, 1944/Rule 4 (3) of Central Excise Rules, 2001/2002, only refer to a person who acts as a merchant manufacture and not the person who uses the product from his own consumption with no further intention to trade in garments.
(iv) Most of the garments made by Diwan Sons as part of tailoring activity, as per the individual customers specifications have considerable embroidery work on them and hence the same are classifiable as handicrafts and therefore exempt from duty under Notification 76/86-CE. In this regard a certificate from Assistant Director, (Handicrafts) had been produced before the adjudicating authority, but the same was not considered.
(v) Diwan Sons had no connection with East West Attire and Ethnocity and these two firm were never controlled and supervised by Surinder Diwan and Sudhir Diwan of Diwan Sons, as held by the Commissioner.
(vi) Since the first two Show Cause Notices dated 07/5/02 for period from April 2001 to September 2001 and dated 27/9/02 for period from October 2001 to March 2002 had been issued without invoking proviso to Section 11 A (1), there is no justification for invoking extended issued under proviso to 11 A (1) in the 3rd Show Cause Notice dated 12/8/2003 for period April 2001 to March 2003 and therefore major portion of duty demand raised by this Show Cause Notice is time barred. In this regard, reliance is placed on Honble Supreme Courts judgment in case of Nizam Sugar Factory vs. CCE, reported in 2006 (197) E.L.T. 465 SC.
(vii) Since duty demand itself is liable to be set aside, there is no question of imposing any penalty.
2.2 Shri Virender Choudhary, learned departmental representative, emphasized that the garments, in question, even if made as per individual customers specifications, are excisable as a product is marketable even if it is salable to just one person. He pleaded that if the appellants plea is accepted, no excise duty can be charged on the machine tools and machines manufactured by a manufacturer as per the designs and specifications given by a customer. He also emphasized that since for the garments made as per individual customers specifications and measurements, the sale takes place at the time of delivery of the stitched garments, it is Diwan Sons who would be liable to pay the duty. He, however, fairly conceded that on the point as to whether in terms of the provisions of Rule 7AA of Central Excise Rules, 1944/Rule 4 (3) of Central Excise Rules, 2001/2002, Diwan Sons can be considered as the person liable to pay the duty in respect of the garments got stitched by Diwan Sons as per the individual customers measurements and specifications, out of the fabrics purchased by the customer, there is no finding in the adjudication order. On the issue of clubbing and on the point as to whether the garments, in question, can be considered as handicraft, he reiterated the adjudicating authoritys findings.
3. Diwans Sons get the readymade garments manufactured through job-workers and sell the same under brand names Diwan Saheb etc. and there is no dispute about exciseability and liability to pay duty in respect of these merchant manufactured garments. The sale outlets of Diwan Sons, in addition to selling garments merchant manufactured by them, also sell fabrics and a customer buying fabrics has option to get the garments stitched as per his measurements and specifications through Diwan Sons, which after being stitched, are affixed with brand name Diwan Saheb. The main point of dispute is about exciseability and liability to pay duty in respect of these garments got stitched by Diwan Sons through a tailoring firm out of the fabrics purchased by the customers and as per the specifications of the customers. Second point of dispute is as to whether the garments, in question, most of which, according to appellants, have substantial embroidery, are handicrafts, and hence eligible for full duty exemption under Notification No. 76/86-CE dt. 10/2/86. The third point of dispute is whether East West Attire and Ethnocity, are dummy units floated by Diwan Sons and whether the clearance of East West Attire and Ethnocity are liable to be clubbed with the clearance of Diwan Sons for the purpose of SSI exemption benefit. The fourth point of dispute is whether the major portion of duty demand raised vide Show Cause Notice dated 12/8/03 is time barred.
4. Eligibility for exemption under Notification 76/86-CE dated 10/2/86 :- This notification provides for full duty exemption to handicrafts. Whether a particular item would merit classification as a handicraft depends upon factor like intricacies of designs, quantum of individual artistic skill, extent of value addition on account of ornamentation by hand. The nature and extent of ornamentation by hand and value addition on account of it would be different in different garments and this has to be individually ascertained. In this case, the sale of the garments, in question, stitched as per the measurements and specifications of individual customers had take place during April 01 to March 03 period and at that time no such claim was made. Even during investigation, no such claim was made. Therefore, at the time of adjudication such a claim can not be accepted as the garments, in question, are no longer available for inspection for ascertaining as to whether the same are handicrafts. Producing at the stage of adjudication, certificates from Development Commission, Handicrafts Certifying that the garments being manufactured by the appellants are handicrafts is meaningless as these certificates are not in respect of the garments cleared during the period of dispute. Therefore, the adjudication authority, has correctly rejected the appellants claim for benefit of Notification 76/86-CE.
5. Clubbing the clearances of East West Attire and Ethnocity with the clearances of Diwan Sons for the purpose of SSI exemption :- On carefully considering the evidence on record and the rival submissions in this regard, we, for the reasons given below, confirm the Commissioners finding in this regard :-
(a) Then these firms are not only controlled by members of the same family, from the statement dated 8/1/2003 of Shri M.L. Diwan and statement dated 14/1/03 of Mrs. Usha Diwan it is clear that it is Shri Surinder Diwan who was actually running East West Attire and Ethnocity. It is Shri Surinder Diwan who was deciding as to at what price the garments manufactured in the name of Ethnocity and East West Attire would be sold to Diwan Sons.
(b) Shri Bahadur Prasad, the common storekeeper of East West Attire and Ethnocity, in his statement dated 3/1/03 has stated that fabrics, accessories and brand name label Ethnic Fusion and Ethno for both the units were being received from Diwan Sons and the same were being sent to M/s Impex India, WEA, Karol Bagh, New Delhi for stitching. This shows that all the raw materials including the brand name labels Ethnic Fusion (of East West Attire) and Ethno (of Ethnocity) were being supplied by Diwan Sons. Besides this, the designer the three units was common.
(c) Shri Surinder Diwan in his statement dated 22/4/03, confirming the statements of his father and his wife, has stated that East West Attire in the name of his father Shri M.L. Diwan and Ethnocity in the name of his wife Mrs. Usha Diwan had been started in 2001 when excise duty was imposed on apparels and the clearances of garments by their main company - Diwan Sons had exceeded Rupees One Crore. Both these units Ethnocity and East West Attire were closed down in the year 2003 after booking of the case of duty evasion against them.
(d) From the above, it is clear that the production of Diwan Sons had been artificially split up into three units while the three units continued to function under the control and supervision of Surinder Diwan and Sudhir Diwan, the Directors of Diwan Sons.
6. Is the major portion of duty demand raised vide Show Cause notice dated 12/8/03 for period from April 2001 to March 2003 time barred.
6.1 The first two Show Cause Notices dated 7/5/2002 and dated 27/9/2002 which demand duty on the garments manufactured as part of tailoring activity of Diwan Sons are within the normal limitation period. In the third Show Cause Notice dated 12/8/03, which covers period from April 2001 to March 2003 and in which longer limitation period under proviso to Section 11 A (1) has been invoked, demand of duty on the garments manufactured as part of tailoring activity is not the only issue and duty demand linked with this issue is within the normal limitation period. The other issue on account of which duty demand has been made and which had not been raised in the earlier two Show Cause Notices is the clubbing of the clearances of East West Attire and Ethnocity with the clearance of Diwan Sons for the purpose of SSI exemption. Since the clubbing issue based on the allegation that all the three units were actually being run by the Directors of Diwan Sons is a new issue not raised in the earlier two Show Cause Notices, the Show Cause Notice dated 12/8/03 is not hit by the ratio of the Honble Supreme Courts judgment in the case of Nizam Sugar Factory vs CCE (supra) and the Show Cause Notice is not time barred.
7. Exciseability of the garments made by Diwan Sons as tailoring activity as per the measurements and specifications of individual customers and out of the fabrics purchased by them from Diwan Sons and liability to pay the duty in respect of the same.
7.1 We do not accept the Appellants contention that this is nothing but tailoring activity which would not attract any excise duty and that the garments made as per an individual customers measurements and specifications are not marketable and hence not excisable as the same cannot be sold to any other person and cannot be displayed in a showroom for sale. For attracting Central Excise Duty, three conditions must be satisfied (a) there must be a manufacturing event ; (b) the manufacturing process results in emergence of new product/products, which are goods in the sense that the same are marketable and (c) these goods must be specified in the Central Excise tariff as liable to duty. In this case, there is no dispute that the process of conversion of fabrics into garment is manufacture and garments, not knitted or crocheted are specifically covered by heading 62.01 of the tariff. However, according to the Appellants, the garments, in question, being tailor-made for individual customers as per their respective specifications are not salable in a showroom and hence are not goods and not excisable. This plea is wrong as a product has to be treated as marketable even if it is salable to a single person only. For salability it is not necessary that a product must be salable in a showroom or in a shop. As regards the argument that making garments for an individual customers as per his specifications is tailoring activity, not attracting excise duty, this argument is also incorrect as difference between large scale manufacture of garment by a job-worker for a merchant manufacturer out of the fabrics and accessories supplied to the job-worker and making of a few garments by a person for his customers out of the fabrics supplied by the customers as per the customers specifications, is only of scale and if the former is accepted as manufacture attracting excise duty, the latter also has to be accepted as a process of manufacture attracting excise duty.
7.2 However the most important plea of the Appellants is that even if the goods, in question, are held to be excisable and not eligible for the handicraft exemption Notification No. 76/86-CE, in terms of the provisions of Rule 7AA of the Central Excise Rules, 1944 and its successor Rule 4 (3) of Central Excise Rules 2001/2002, Diwan Sons are not liable to pay duty in respect of the garments made as part of their tailoring activity, as per the individual customers specifications as
(a) there is no dispute about the fact that it was not compulsory for a customer purchasing fabrics from sale outlets of Diwan Sons to get the garments stitched through them only ; and
(b) Stitching of garments took place after the sale of the fabrics to the customers and according to the appellants, for this reason the garments cannot be said to have been made on account of Diwan Sons.
7.2.1. We find that though this plea had been made before the adjudicating authority and the same has been recorded in para 32 of the adjudication order, the Commissioner has not given any finding on this vital issue. This issue has to be decided at the original adjudication level only.
8. In view of the above, while holding that
(a) the clearances of Ethnocity and East West Attire are liable to be clubbed with the clearances of Diwan Sons for the purpose of SSI exemption notification and duty demand on this basis raised vide Show Cause Notice dated 12/8/03 is not time barred and ;
(b) the garments made as part of tailoring activity as per individual customers measurements and specifications are excisable and the same are not eligible for exemption under Notification No. 76/86-CE, we remand the matter to the adjudicating authority for determining whether in terms of the provisions of Rule 7AA of the Central Excise Rules, 1944 and its successor Rule 4 (3) of the Central Excise Rules 2001/2002, the liability to pay the duty in respect of the garments made as part of tailoring activity of Diwan Sons, as per individual customers measurements and specifications is of Diwan Sons and re-determining the duty liability of Diwan Sons and also the quantum of penalties on Diwan Sons and other Appellants in the light of his findings on this point. Appellants are to be given an opportunity of personal hearing before decision on the above issues. The appeals are disposed of in the above terms.
(Pronounced in open court on ____________) (S.S. Kang) Vice President (Rakesh Kumar) Member (Technical) PK