Customs, Excise and Gold Tribunal - Tamil Nadu
Cce vs Madurantakam Co-Op. Sugar Mills Ltd. on 26 October, 2006
Equivalent citations: 2007(114)ECC340, 2007ECR340(TRI.-CHENNAI), 2007(208)ELT433(TRI-CHENNAI)
ORDER P.G. Chacko, Member (J)
1. M/s. Madurantakam Co-op. Sugar Mills Ltd. (M/s. MCSM for short), appellants in Appeal No. E/1768/99 and respondents in the Department's Appeals viz. E/1753 & 1754/99, are manufacturers of sugar and molasses [Heading No. 17.01 of the CETA Schedule]. They had started their factory in the year 1960 and, over the years, certain parts of the machinery became unusable due to wear and tear, rust, repairs, etc. and such machinery parts were disposed of as scrap during the period 23.3.96 to 6.4.98. Show-cause notice dated 20.10.1998 issued by the department alleged that the above goods removed by M/s. MCSM without payment of duty were 'waste and scrap' falling under SH 7204.90 and hence dutiable. It accordingly demanded duty to the extent of Rs. 1,56,892.50 by invoking the proviso to Section 11A(1) of the Central Excise Act on the ground of suppression of facts and also proposed to impose penalty on the noticee under Section 11AC of the Act. M/s. MCSM replied by submitting that the above goods had been discarded as worn-out and unusable and that no manufacturing activity was involved and therefore any duty was not leviable on the items. It was also contended that they were under the bonafide belief that waste and scrap were not excisable and therefore they could not be alleged to have suppressed any fact with intent to evade payment of duty. The proposal for penalty was also contested on the ground that any mens rea was not involved in the removal of the goods. In adjudication of the dispute, the jurisdictional Deputy Commissioner confirmed the demand of duty against M/s. MCSM and imposed on them penalties of Rs. 1,46,011/- and Rs. 16,000/- under Section 11AC of the Act and Rule 173Q of the Central Excise Rules, 1944 respectively. In the appeal preferred by the party against the above decision of the original authority, learned Commissioner (Appeals) sustained the demand of duty to the extent of Rs. 1,37,501/- only and set aside the rest of the demand of duty raised by the lower authority. The appellate Commissioner set aside the Section 11AC penalty and reduced the Rule 173Q penalty to Rs. 1,000/-. Appeal No. 1753/99 before us is by the department aggrieved by the dropping of a part of the demand of duty raised by the original authority as also by the dropping of Section 11AC penalty and reduction of Rule 173Q penalty. Appeal No. 1768/99 is by the party challenging the demand of duty as well as penalty sustained by the appellate Commissioner.
2. The Deputy Commissioner had, in his order, dropped the proposal for imposing Section 11AC penalty for the period prior to 28.9.96, against which the department preferred appeal to the Commissioner (Appeals) and the appellate authority rejected the said appeal. The present Appeal No. 1754/99 is against the decision of the appellate authority with regard to the proposal for imposing penalty on the party under Section 11AC for the period prior to 28.9.96.
3. Heard both sides. Learned Counsel for M/s. MCSM relied on the Tribunal's decision in K.M. Sugar Mills Ltd. v. CCE, Allahabad , wherein it had been held that the burden was on the Revenue to prove that any waste and scrap had arisen out of capital goods in respect of which Modvat credit had been availed. Learned Counsel also referred to Note 8(a) under Section XV of the Schedule to the Central Excise Tariff Act, which reads:
8. In this Section, the following expressions have the meanings hereby assigned to them:
(a) Waste and Scrap:
Metal waste and scrap from the manufacture or mechanical working of metals, and metal goods definitely not usable as such because of breakage, cutting-up, wear or other reasons.
It was submitted by counsel that, as the goods in question admittedly had not arisen from the manufacture or mechanical working of metals and were not shown by the department to be usable as such, the same would not be 'waste and scrap' as defined under the above Section Note. In this context, it was also pointed out that the show-cause notice had not specifically alleged that the goods in question had arisen out of manufacture or mechanical working of metals or that the same were usable as such. It was also submitted that, in a letter dated 17.7.98 issued by the jurisdictional Superintendent of Central Excise long before the issue of the show-cause notice, it had been stated that the goods in question had arisen due to wear and tear of metal goods like plant and machinery. According to learned Counsel, the case of the department in the show-cause notice was different from what had been made out by the Superintendent in the above letter. With reference to the finding of the lower authorities that M/s. MCSM had also manufactured castings & machinery, brass rings, bolts & nuts, etc. and some of the scrap had arisen out of such process, it was submitted by counsel that the department had no such case in their show-cause notice. Finally, learned Counsel claimed that, on the facts of the case, the allegation that waste and scrap as defined under Section Note 8(a) had been removed by the party from their factory during the period of dispute was not sustainable and hence the entire demand of duty and penalty were liable to be set aside. In the Department's Appeal No. 1754/99, learned Counsel submitted that the appeal was only liable to be dismissed in view of the Supreme Court's ruling that no penalty was imposable under Section 11AC for any period prior to 28.9.96, the date on which the provision came into force.
4. Learned SDR also relied on the definition of "waste and scrap" given under Section Note 8(a) in her endeavour to establish that the machinery parts removed by the party from their factory during the period of dispute without payment of duty were dutiable. In this connection, she harped on the expression "wear and other reasons" used in the above definition, and submitted that some of the above machinery parts, though not generated from the manufacture or mechanical working of metals, were definitely not usable as such because of "wear and other reasons", thereby falling within the scope of the above definition of 'waste and scrap'. Further, it was submitted that some other items removed from the factory as above had been generated from the manufacture of certain machinery components, bolts &, nuts, etc. in the factory. Contextually, it was pointed out that M/s. MCSM used to manufacture some of the machinery parts within their factory. The waste and scrap which arose out of this activity fell within the above definition under Section Note 8(a). Learned SDR also submitted that it was not correct on the part of the Commissioner (Appeals) to set aside Section 11AC penalty while sustaining the demand of duty [albeit to a lesser extent than what was confirmed by the lower authority] under the proviso to Section 11A(1) of the Central Excise Act. However, she did not seem to be pressing for Section 11AC penalty for any period prior to 28.9.96.
5. We have carefully examined the records and considered the submissions. The substantive allegation in the show-cause notice was as under:
Whereas, it appears that the scrap cleared by the assessee will fall under the category of "waste and scrap" as defined in the above said section note and hence should have suffered duty @ 15% advalorem under chapter sub-heading 7204.90 of Central Excise Tariff Act, 1985 at the time of clearance from their factory, irrespective of the fact whether such scrap has arisen out of inputs/capital goods on which Modvat credit has been availed or not or for that matter whether such waste and scrap has arisen during the course of manufacture or not.
None of the factual requirements for categorizing the subject goods as "waste and scrap" defined under Section Note 8(a) was alleged in the notice. On the other hand, it appears from the notice that the requirement of goods to arise during the course of manufacture, for being categorized as "waste and scrap", was considered to be irrelevant vide the clause reading "whether such waste and scrap has arisen during the course of manufacture or not". It further appears that the department could not say for certain as to how much of the goods in question had arisen during the course of manufacture of castings & machinery, brass rings, bolts & nuts, etc. and how much was generated due to "wear or other reasons". None of these things was alleged in the show-cause notice. Hence the appellate Commissioner's decision to demand duty on that part of the goods in question which was found to have arisen during the course of manufacture of castings & machinery, brass rings, bolts & nuts, etc. cannot be sustained. In this connection, it is also pertinent to note that M/s. MCSM were engaged in the manufacture of sugar and molasses only, for which purpose they were holding registration with the department. They were not engaged in the manufacture of castings & machinery, brass rings, bolts & nuts, etc. The department has no case that M/s. MCSM were holding registration with the department for this activity. Yet another pertinent point is that the Superintendent's letter dated 17.7.98 had also demanded duty on the goods in question on the ground that the goods had arisen due to wear & tear of the metal goods like plant & machinery and hence duty was recoverable thereon as "waste and scrap". When it came to issue of show-cause notice later, the department avoided pleading the necessary facts and chose to demand duty on the goods on the strength of Section Note 8(a) without pleading the factual requirements. In the circumstances, beyond doubt, the demand of duty raised in the show-cause notice is not sustainable for the simple reason that the goods in question were not shown to be "waste and scrap" falling under SH 7204.90. The Tribunal's decision in KM. Sugar Mills (supra) is also in support of the assessee's case. It was held in that case that the burden was on the Revenue to prove that waste and scrap arose out of capital goods on which Modvat credit had been availed of so that duty could be demanded on such waste and scrap in terms of Rule 57S(2) of the Central Excise Rules, 1944. This burden was not discharged by the department in the present case.
6. Hence the assessee's appeal against the demand of duty and penalty has to be allowed and it is ordered accordingly. Consequently, the department's appeal No. E/1753/99 gets dismissed. The remaining appeal of the department [E/1754/99] against dropping of Section 11AC penalty also gets dismissed.
(Operative portion of the order was pronounced in open court on 26.10.2006)