Customs, Excise and Gold Tribunal - Calcutta
Kusum Products Ltd. vs Collector Of Central Excise on 22 June, 1989
Equivalent citations: 1990(48)ELT50(TRI-KOLKATA)
ORDER K. Sankararaman, Member (T)
1. The appeal by M/s. Kusum Products Limited, Calcutta is directed against the order-in-appeal passed by Collector of Central Excise (Appeals), Calcutta upholding the order of Assistant Collector of Central Excise, Rishra Division, whereby the latter had rejected the application of the Company for availing Modvat benefit in respect of duty paid on polythene granules received by them and got converted into polythene bags (polypacks) by outside job workers for return and use by them for packing their product, Organic Surface Active Agent (detergent).
2. The appeal attacks the order of the Collector (Appeals), inter alia, on the following grounds -
(i) It relied upon Rule 57D of the Central Excise Rules, which, as they had been contending all along is not applicable in their case.
(ii) It wrongly mentions that they had urged that polypacks were generated in the process of making the final product. They never said so.
(iii) Rule 57J and Notification No. 351/86 which unequivocally allows the enjoyment of the credit as prayed for by them had not been correctly applied.
(iv) The Assistant Collector had held in the operative part of his order that the polypacks are intermediate products, but disallowed credit on the grounds that they are exempt from duty. This cannot deny Modvat Credit within law vide Notification No. 351/86.
(v) The Collector (Appeals) failed to traverse all the grounds urged in the appeal petition which led to denial of natural justice.
(vi) The Assistant Collector had already made up his mind to deny the credit as the notice issued to them was a show cause notice and adjudication order rolled into one. The Collector failed to appreciate this fact.
(vii) The Collector failed to appreciate the fact that other assessees of the Collectorate were enjoying Modvat Credit facilities on granules sent outside for conversion by job workers. (They submitted evidence in this regard by way of a photocopy of a challan).
3. When the appeal was taken up for hearing the learned Consultant, Shri N.C. Chakraborty appearing for the appellants reiterated the submissions in the appeal and stressed the following points :
Their case is covered by Rule-57J and Notifications 214/86 dated 25-3-1986 and 351/86 dated 20-6-1986. He also referred to the answer given to question No. 42 in the Guide to Modvat brought out by the Central Board of Excise and Customs which deals with the question whether raw materials can be received directly by the job worker for manufacturing intermediate products and how the primary manufacturer will avail Modvat facilities in respect of the duty on the raw material. It has been clarified in the Answer to this Question that the primary manufacturer can arrange to send the raw materials directly to the job worker, get the intermediate products manufactured under Job Work Notification No. 214/86 and take the credit of the duty paid on the raw materials after the exempted intermediate products are received in his factory. This facility is available for all items covered by Modvat vide Notification No. 351/86-CE dated 20-6-1986. He cited the judgment of the Calcutta High Court in Raghunandan Jalan v. Collector of Central Excise, West Bengal reported in 1981 (8) ELT 476 (Cal.) in support of the contention in the appeal that the Assistant Collector's action in issuing a show cause notice and adjudication order rolled into one would indicate that he had already prejudged the issue.
4. The Assistant Collector has rejected the claim referring to Rule 57D(2) which is not at all applicable in their case. In fact, he had admitted that the polypacks are intermediate goods, but he rejected their request for Modvat Credit facility on the ground that the said intermediate products were exempt from duty under Notification No. 132/86 dated 1-3-1986. The learned Consultant also pointed out that there was discrimination against them as while their request was turned down, other manufacturers in the Collectorate have been granted the same facility. He referred to the copy of the Challan submitted by them along with the appeal to substantiate his contention on such discrimination. He cited the judgment of the Gujrat High Court in Suhrid Geigy Ltd. v. Union of India [reported in 1980 (6) ELT 538 (Guj.)] in this regard wherein the discrimination involved in non-uniform collection of duty from two manufacturers in identical situations has been adversely commented upon by the Court. In answer to a question from the Bench as to how the polythene granules used in the manufacture of polypacks (packaging material) can be considered to be used in the manufacture of their finished product, detergent powder. Shri Chakraborty, the learned Consultant for the appellants cited the decision of the Tribunal in Hindustan Lever v. Collector of Central Excise, Bombay (reported in 1984-ECR-2006-CEGAT) wherein processed vegetable oil was held to be eligible for the exemption granted to it if used for the manufacture of soap, notwithstanding the fact that the oil was first converted to vegetable tallow which was exempt from duty. He handed over a photostat extract of the above-said decision. He also referred to a clarification issued by the Government in respect of processed vegetable non-essential oil used for manufacture of paints though an intermediate product, Alkyd Resin, which is exempt from duty is first obtained. This clarification contained in their letter No. 56/24/70-CX-3 dated 12-7-1971 was referred to by Allahabad High Court in their judgment in Nagrat Paints v. Union of India [reported in 1978 (2) ELT J-39 (All.) ]. It was observed by the High Court that the credit in respect of Vegetable Non-Essential Oil cannot be denied to the manufacturers merely because it was converted at an intermediate stage into alkyd resin. The learned Consultant also submitted a copy of the Kar-nataka High Court judgment in the case of N. G.E.F. Ltd. v. Collector of Central Excise, Bangalore. It was held by the High Court that notwithstanding the emergence of an exempted intermediate product viz. die-cast-rotors, the starting material electrical stampings was held to be used in the manufacture of the final product, electric motors to satisfy the condition of the relevant exemption notification.
5. Replying to the arguments of the learned Consultant, Shri P.C. Jain, the learned J.D.R. appearing on behalf of the respondent Collector reiterated the grounds relied upon in the impugned order. He pointed out that the case laws cited by the learned Consultant were rendered in the context of proforma credit or other exemption notifications and not with reference to modvat facility which is the subject matter of the present appeal.
6. On the last-mentioned point the learned Consultant for the appellants submitted that the Modvat Scheme is a liberalised extension of the proforma credit scheme as made clear in the Finance Minister's speech while introducing the Modvat Scheme in the 1986 Budget. The principle laid down in the judgments/decisions relating to Proforma Credit Scheme would equally apply upon the Modvat Scheme also.
7. We have considered the submissions made in the appeal petition and the arguments advanced during the hearing of the appeal made by both the sides. We have also examined the order in original and the impugned order-in-appeal in the light of the contentions raised in the appeal. We find that as pointed out in the appeal there are certain inconsistencies. On the basic objection raised that the show cause notice and the adjudication order have been rolled into one and they have been given the notice after the Assistant Collector had already made up his mind, we find that in the notice dated 1-1-1988 the Assistant Collector has stated, "in going through the relevant records it is taken into consideration that the polythene bags cannot be treated as intermediate products of the final product, OSAA on the ground that polythene bags are manufactured from duty-paid polythene granules supplied by the Assessee and neither the granules nor the polythene bags are produced intermediately in course of manufacture of the final product (OSAA). In other words, the polythene bags are final and independent product made from duty-paid granules and used as packaging material of the said final dutiable product (OSAA). Hence the provisions under Notification No. 351/86 dated 30-6-1986 as amended are not applicable in the instant case. Without prejudice to what has been stated hereinabove, and assuming the polythene bags as intermediate product of OSAA it appears that your application would be liable to rejection as per provision laid down in the proviso to Rule 57D(2) of the Central Excise Rules, 1944.
In view of the above, you are, therefore, requested to show cause as to why your application should not be rejected on the ground as stated hereinabove...."
The show cause notice has been assailed as having rolled the adjudication order and the notice into one with the preformed desire to deny the credit. Reliance has been placed by the appellants on the judgment of Calcutta High Court in Raglninandan Jalan v. Collector of Central Excise, West Bengal & Ors. [reported in 1981 (8) ELT 476 (Cal.)]. We have gone through this judgment. We find that it relates to a customs case involving seizure of five pieces of gold bars and Indian Currency. Along with the show cause notice there was brief outline stating, inter alia, that from the facts and circumstances of the case it is abundantly clear that five pieces of gold bars were illicitly imported into India in violation of....The gold bars are liable to confiscation. The Court held that the officer had already made up his mind that the gold bars were illicitly imported into the country. In that event, the question of giving a hearing or explanation to the show cause notice becomes an idle formality and mere farce. It is incumbent for the officers to keep an open mind till they come to a decision regarding the illicit importation of gold into India. If they have already closed their minds, the quasi-judicial proceedings cannot be in accordance with law or in compliance with the principles of natural justice. Examining the present show cause notice in the light of the above decision of the Calcutta High Court, we find that two alternative and mutually exclusive points have been raised and the Company asked to show cause why their application should not be rejected. Words like - "it is abundantly clear ...." - which marred the Department's case in the Raghunandan Jalan matter supra, are not there in the present show cause notice. The notice here hints that polythene bags cannot be treated as intermediate products. It does not say that these are not intermediate products. The other alternative point raised is -
"if the polythene bags are assumed to be intermediate products of OSAA, it appears that the Company's application would be liable to rejection" - as per Provision laid down in the proviso to Rule 57D(2) of the Central Excise Rules, 1944. These, we find, do not go beyond the requirements and limits of a show cause notice. Further, the notice is tentative, as is not categoric about the actual charge that may be ultimately decided. The reply to the show cause notice would have had its say in the actual decision. In that view of the matter, we are of the view that the show cause notice does not indicate that the Assistant Collector had prejudged the issue. A show cause notice has, after all, to make it clear to the party to whom it is issued as to what is alleged against him so that suitable defence could be set up by him. The notice in question did nothing more than this and the proceedings original as well as the subsequent appellate one, do not deserve to be struck down as invalid or illegal as made out in the appeal. We are in agreement with the appellants, however, as regards their objection to the decision by the Assistant Collector disposing of their application quoting Rule 57D(2). Not only has the Assistant Collector specifically referred to the polythene bags as intermediate goods but his reliance on Rule 57D(2) for rejecting the appellant's application also points to the same conclusion since Rule 57D applies only to intermediate goods. Sub-rule (2)of this Rule lays down that credit shall not be denied or varied on the ground that any intermediate had come into existence during the course of manufacture of the final product and that such intermediate product is exempt from duty. The apparent paradox of a provision granting a facility being applied to reject the application is due to the proviso laying down that the intermediate products are used within the factory of production. The polythene bags are produced by the job workers in their factory and are put to further use in the factory of the appellants thereby not satisfying the condition of the proviso. But the question is whether Rule 57D is at all applicable, in which case only the question whether the proviso thereto is applicable will arise. Rule 57D will be relevant only if the polythene bags are intermediate goods in the course of manufacture of the appellants' final product, synthetic detergent powder which is packed in such polythene bags. The Collector (Appeals) has held in his order "the credit of duty paid on granules supplied and used in the manufacture of packing goods (polythene bags) through job-workers after availing benefit of Notification No. 214/86 dated 1-3-1986 by the appellants cannot be considered as an intermediate product generated in course of process of manufacturing in the factory of origin for use in the final product." This conclusion, though appearing somewhat obscure, holds the clue to the problem. His conclusion is that polythene bags are not intermediate products in the course of manufacture of synthetic detergents which are the final products of the appellants. This would take care of and negative the claim of the appellants for being covered by Rule-57J and Notification 351/86. The Rule and the Notification, lay down the eligibility and procedure for regulating exemption of intermediate products arising in the course of manufacture of final products. Since the Collector (Appeals) has held that the polythene bags cannot be considered as intermediate products as claimed, the benefits claimed by the appellants in terms of Rule-57J and Notification 351/86 dated 20-6-1986 will not be applicable. We agree with the view taken by the Collector (Appeals) in this regard for the reasons discussed below.
8. The final product manufactured by the appellants are synthetic organic detergents. The credit of duty which is under dispute is the duty paid on polythene granules from which plastic bags are obtained. No doubt, the detergent powder is packed in such bags. But on that score they cannot acquire the status of intermediate products. The detergent powder already comes into existence before the bags are put to use for its packing.
9. The cases cited by the learned Consultant during the hearing of the appeal are distinguishable from the present matter because the products involved in the said cases arose from the raw materials and marked an intermediate stage in the course of manufacture of the final products because such intermediate stage products were themselves converted into the final products. Such is not the case with the polythene bags in the present matter which is not converted into the final product in order to be reckoned as intermediate product.
10. It will be necessary to examine certain provisions in Central Excises and Salt Act and the Central Excise Rules to see if the polythene bags can be considered to be intermediate products in the manufacture of detergent powder. Section 2(f) defines manufacture as including any process incidental or ancillary to the completion of a manufactured product. This does not assist the case of the appellants as the process of manufacture of detergent powder has already been completed before the bags are put to use.
11. Section 4(4)(d) defines value of goods as including the cost of packing where the goods are delivered at the time of removal in a packed condition. Here the special inclusive definition of value is applicable only in this specific context and for this purpose and does not extend to the process of manufacture of the finished product.
12. In the explanation to Rule-57A relating to Modvat Credit which is what is claimed by the appellants, the term - input - has been given an inclusive coverage whereby packaging materials are included. The inputs in question are polythene granules. These are not packing materials, as such. Using them bags which are packaging materials are manufactured. The bags represent the final stage of manufacture as far as they are concerned. They do not constitute intermediate products for the detergent powder. It has been contended by the appellants that the term - intermediate product - has not been defined in the Central Excise Rules. The term can only mean the products obtained from the raw materials in the course of manufacture of the final product. Here the final product is detergent product and it is not manufactured from either polythene granules or plastic bags which are made therefrom to enable the latter to be considered as the intermediate products for detergent powder. For the purpose of Rule 57J it is not as if any product that is used in or in relation to the manufacture of final product that will get covered thereunder, but only intermediate products. The matter has already been examined by us from this angle and it has been decided by us that plastic bags are not raw materials in the manufacturing process of Synthetic Organic Detergents. Hence the decision by the Collector (Appeals) that the polythene bags are not intermediate products generated in the course of manufacture in the factory of origin for use in the final product is modified to reach conclusion that the polythene bags are not intermediate products in the course of manufacture of detergent powder. The question whether such polythene bags are produced in the factory of the appellants or their job workers is irrelevant and to this extent the lower authorities erred in placing reliance on Rule 57D(2) proviso. But the decision of Collector (Appeals) that the polythene bags are not intermediate products in the manufacture of the final product of the appellants deserves to be upheld for the reasons outlined by us. We accordingly reject the appeal. It may be noted that in show cause notice it was alleged that polythene bags are not intermediary products.
13. Before parting with the case we should take note of the fact that the appellants had alleged discrimination against them. They are justified in their contention. There should be uniformity of treatment for situations and products placed in similar circumstances. The authorities below may look into the matter how in similar circumstances another manufacturer has been permitted to avail of the benefit which has been denied to the appellants and take steps to rectify the position.