Custom, Excise & Service Tax Tribunal
Pallipalayam Spinners Pvt Ltd vs Salem on 7 October, 2025
CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL
CHENNAI
REGIONAL BENCH - COURT No. I
Excise Appeal No. 41124 of 2015
(Arising out of Order-in-Original No. 12/2014(C.Ex.-Commr.) dated 26.12.2014 passed by
Commissioner of Central Excise, No. 1, Foulks Compound, Anai Road, Salem - 636 001)
M/s. Pallipalayam Spinners Private Ltd. ...Appellant
Nilavarapatti Vilage,
Trich Main Road,
Salem - 636 201.
Versus
Commissioner of GST and Central Excise ...Respondent
Salem Commissionerate,
No. 1, Foulks Compound,
Anai Road,
Salem - 636 001.
APPEARANCE:
For the Appellant : Mr. M.N. Bharathi, Advocate
For the Respondent : Ms. Anandalakshmi Ganeshram, Authorised Representative
CORAM:
HON'BLE MR. VASA SESHAGIRI RAO, MEMBER (TECHNICAL)
HON'BLE MR. AJAYAN T.V., MEMBER (JUDICIAL)
FINAL ORDER No. 41119 / 2025
DATE OF HEARING : 09.04.2025
DATE OF DECISION : 07.10.2025
Per Mr. VASA SESHAGIRI RAO
This Central Excise Appeal No. E/41124/2015
has been filed by M/s. Pallipalayam Spinners Private Limited
(hereinafter referred to as 'Appellant') assailing the Order-in-
Original No. 12/2014 dated 26.12.2014 passed by
Commissioner of Central and Service Tax, Salem.
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2. Briefly stated the facts are: -
i. That Appellants are manufacturers of various counts of
Yarn of Viscose, Polyester, Viscose/ Polyester,
Poly/Cotton, Viscose Flax, etc., falling under Chapter
55.
ii. The Show Cause Notice bearing Sl.No. 17/2014 (C.Ex.)
(Commr.) was issued to them alleging contravention of
the provisions of Rules 4, 6, 8, 10 and 12 of the Central
Excise Rules 2002, Rule 5 of the Central Excise
(Removal of Goods at Concessional Rate of duty for
manufacture of Excisable Goods) Rules, 2001 and also
provisions of Notification No. 29/2004-CE dt. 9.7.2004,
30/2004-CE, dt. 9.7.2004 & 43/2001- CE(NT) dt.
26.6.2001 (Annexure Procedure).
iii. M/s. PSPL are availing CENVAT credit on a portion of
the Viscose Staple Fibre and clear Man Made Fibre yarn
on payment of duty as per Notification No. 29/2004-CE
dt. 09.07.2004 as amended, to (1) local market, (2) for
Export under claim for Rebate and (3) clear yarn
without payment of duty for Export under Bond. For the
remaining portion of the raw materials, they do not
avail CENVAT credit, but clear the yarn without
payment of duty by availing exemption under
Notification No.30/2004-CE dt. 1.3.2004 as amended.
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iv. Since January 2011, they had procured VSF fibre under
Annexure without payment of duty (Notification
No.43/2001-CE (NT) dt.26-06- 2001) and exported the
yarn.
v. In their Form IV Register they are maintaining separate
stock account for each fibre under three categories, viz.
a) "LOCAL": with reference to home clearance
without payment of duty under
Notifn.No.30/2004-CE, dated 9.7.2004.
b) "EXPORT": with reference to Exports under Bond
without payment of duty & Exports under Rebate
claim and home clearance on payment of duty
and
c) "ANNEXURE": with reference to purchase of
Viscose Staple Fibre without payment of duty
under Annexure procedure for export clearance.
vi. During the course of audit of M/s. PSPL, the Internal
Audit Group, Hqrs. Office, Salem, scrutinized the above
Form IV Registers along with the Sales invoices and
other records of the assessee for the period from April
2010 to August 2011, which revealed the following
facts -
a) As per Form IV "Local Account", 9,29,344.870 Kgs.
of VSF fibre have been issued for the manufacture of
yarn intended to be cleared without payment of
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duty. However as seen from the sales invoices,
29,51,495.500 kgs of yarn and waste containing
14,30,586 kgs of VSF fibre have been cleared locally
without payment of duty. Taking into account the
Opening Balance of yarn stock, the excess VSF fibre
content works out to 4,78,637.126 Kgs.
b) As per Form- IV-"Export Account", 30,24,658.030
Kgs of VSF fibre have been issued for the
manufacture of yarn intended to be cleared for
Export under Bond, Export under claim for Rebate
and home clearance on payment of duty. However,
as seen from the Sales invoices, content of VSF fibre
was 26,83,785.022 Kgs. Taking into account the
Opening Balance of yarn stock, shortage of VSF fibre
content works out to 4,18,368.988 kgs.
3. Consequent to the Audit, the Show Cause Notice
No. 17/2014 (CEX) (COMMR) dated 17.04.2014 was issued
by the Commissioner of Central Excise, Salem alleging: -
i. That the appellant have diverted duty paid VSF fibre
and used it in the manufacture and clearance of yarn
containing VSF fibre without payment of duty as
discussed above with an intention to evade payment of
duty. As such, they are also liable for penal action
under Rule 25 of Central Excise Rules, 2002 read with
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Section 11AC of the Central Excise Act, 1944, ibid for
contravention of Rule 4, 6, 8, 10 and 12 of the Central
Excise Rules, 2002 and Rule 5 of the Central Excise
(Removal of Goods at Concessional Rate of duty for
manufacture of Excisable Goods) Rules, 2001.
ii. That as to why the extended period under erstwhile
proviso to Section 11A should not be invoked for
demanding duty beyond the normal period a duty of
Rs. 1,06,18,580/- as detailed above as quantified in as
detailed in the notice should not be demanded from
them under erstwhile Section 11A(1), Section 11A(4),
of the Central Excise Act 1944 read with the relevant
rules of the Central Excise Rules.
iii. That appropriate interest should not be demanded
under Section 11AA of the Central Excise Act and,
iv. That penalty under Rule 25 of Central Excise Rules and
Section 11AC of the Central Excise Act should not be
imposed for contravention of the various rules indicated
earlier.
4. The Appellant vide their reply dated 15.12.2014
refuted the above allegations on the following grounds: -
i. That the shortage arrived by the Department at
4,78,637.126 Kgs (4,18,368.988 Kgs + 60,268.138
Kgs) is an assumed figure and department had failed to
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consider work in process stock while arriving at the
final stock.
ii. That Department failed to consider usable waste stock
in process which was issued for production purposes.
iii. That Department while issuing the notice in Para 4(ii)
had mentioned that presumably a quantity of 60268.13
kgs has been diverted for local sale without payment of
duty. The Department cannot issue notice based on
assumptions and presumptions. In support of their
contention, reliance was placed on the following
judgments: -
a) VST Industries vs. Commissioner of C. Ex Hyderabad
[2001 (138) ELT 549 Tri CESTAT Chennai]
b) Punjab Fibres Limited vs. Commissioner of Central
Excise [2002 (141) ELT 819 (CESTAT Delhi)]
iv. That the Appellant admitted the usage of usable waste
of 4,55,653.80 kgs for the manufacture of exempted
goods and informed that they remitted the applicable
excise duty of Rs.6,75,825 towards the same.
v. That the Department's presumption of diversion of
60263.13 kgs is not correct.
vi. That demand was hit by time bar and extended period
cannot be invoked in the present situation.
vii. That the unit was financially sick and is unable to
perform functions further.
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5. The Commissioner of Central Excise and Service
Tax after perusing the records, confirmed the demand inter-
alia on the following grounds: -
i. That the fact of in-process stock related information
was not provided during the time of reply nor at the
time of personal hearing. Even assuming that in-
process stock is considered, the shortage of fibre still
comes to 4,04,931 kgs. However, no corroborative
evidence has been shown to substantiate the same.
ii. Regarding utilization of usable waste, the details given
are not authenticated by a responsible person and no
evidence has been produced to substantiate the
generation of usable waste. Further, for the subsequent
period there is no difference in the stock register which
goes on to prove that useable waste theory provided by
Appellant is not evidence worthy.
iii. That the audit Department had clearly pulled out the
details with respect to shortfall on quantity basis after
thorough scrutiny of records and the contention that
audit has worked out the duty liability based on
assumptions and presumption is devoid of any merit.
iv. That but for the audit, this diversion would not have
surfaced, and hence extended period of limitation is
correctly invoked.
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v. Since the Appellant have deliberately diverted the
goods in contravention of the provisions of the Act,
Rules and Notifications made thereunder, they are
liable to pay penalty both under Section 11AC of
Central Excise Act, 1944 and Rule 25 of Central Excise
Rules, 2002.
6. Aggrieved by the aforesaid impugned order
dated 26.12.2014, the Appellant has filed this appeal before
this Tribunal.
7. The Ld. Advocate Mr. M.N. Bharati have argued
for the Appellant and submitted as follows: -
i. That demand is based on presumptions and
assumptions.
ii. That Appellant explained to audit officials about usage
of usable waste which will be mixed with original fibre
for manufacture of domestic yarn as requirement of
less quality yarn in the domestic market is much higher
and usage of usable fibre will be cost effective,
iii. That the wastage of 455,653.80 kgs of VSF is an
inherent and unavoidable outcome of the yarn
manufacturing process which is subsequently used for
production of domestic yarns. Such utilization is an
acceptable industry practice.
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iv. That shortage of 4,78,637.126 kgs mentioned in show
cause notice is based on assumption and does not
account for opening stock, work in process stock and
usable wastage.
v. That the entire demand is barred by limitation as there
was no suppression of facts, willful misstatement or
intent to evade duty. In support of this, reliance was
placed on the following judicial precedents:
a) Cosmic Dye Chemical vs Collector of Central Excise
[1995 (75) ELT 721 (SC)]
b) Orissa Bridge & Construction Corp Ltd vs CCE
Bhubaneshwar [2011 (264) ELT 14 (SC)]
c) Xomox Sanmar Ltd vs the Commissioner of GST &
Central Excise, Trichy [2025 (1) TMI 1318-CESTAT
Chennai]
d) RR Polymers vs the Commissioner of GST & Central
Excise, Madurai [2025 (1) TMI 1375-CESTAT Chennai]
e) M/s. P& C Constructions (P) Ltd vs Commissioner of GST
and Central Excise, Salem [2025 (1) TMI 1321 CESTAT
Chennai]
f) Galaxy Indo-Fab limited vs Commissioner of C.Ex
Allahabad [2004 (176) ELT 218 (Tri- Del)]
g) Tony Electonics Limited vs Commissioner of Central
Excise [2004 (176) ELT 398 (Tri-Del)]
h) Commissioner of Central Goods and service Tax,
Customs and Central Excise Alwar vs M/s. Kesri Steels
limited [2024 (6) TMI 492 CESTAT New Delhi]
8. The Ld. Authorized Representative
Ms. Anandalakshmi Ganeshram for the Department re-
iterated the findings in the impugned order and prayed that
the Appeal be dismissed.
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9. Heard both sides and considered the rival
submissions including the evidence available on appeal
records and the case laws relied upon.
10. The issues that arises for consideration are: -
i. Whether the invocation of extended period is
sustainable when the audit of the appellants unit took
place in September 2011 and Show cause has been
issued on 17.04.2014.
ii. Whether stock on which credit has been taken and
which are meant for purpose of export have been
diverted to domestic market under Notification
No.30/2004 dt.09.07.2004.
11. On the issue of invoking extended period, it is
not disputed that the shortage was quantified on the basis of
stock challenge and based on the stock registers maintained
by the Appellant during the Audit. We have to observe that
duty demand was quantified on the basis of alleged
shortages and investigation has not unearthed evidence of
clearance of the dutiable goods. Further, it is a settled
proposition of law that when facts are culled out from the
assessee's own statutory records and returns, which were
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duly maintained and produced before the Department, there
can be no allegation of suppression or intent to evade duty.
12. Here, the entire basis of the demand emanates
from the records and returns filed by the Appellant. It is not
the Department's case that the Appellant failed to file
returns. In the present case, the Appellant has regularly filed
its returns with the department. The fact that the
Department could not detect the alleged short payment until
audit only reflects an omission on the part of the Department
in timely scrutinizing returns and not suppression by the
assessee.
13. In this regard, we find that the Appellant on
07.11.2011, itself, has replied to an Audit Observation
establishing that these facts were within the knowledge of
the Department. Whereas the show cause notice in the
present case has been issued only on 17.04.2014, beyond
the normal period of limitation. Therefore, when these facts
were clearly within the knowledge of the Department there
cannot be any scope for the department to plead that the
assessee is guilty of wilful misstatement or suppression of
facts with an intent to evade payment of duty.
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14. In this connection, it would be appropriate to
refer to the decision of the Principal Bench of this Tribunal in
the case of Maruti Udyog Ltd. v. CCE reported in 2002 (147)
ELT 881 (Tri-Del), wherein the Tribunal followed the decision
of the Hon'ble Supreme Court in the case of ITO v. Lakhmani
Mewal Das reported in 1996 (103) ITR 437, wherein it was
held as under: -
"The duty of the assessee in any case does not extend
beyond making a true and full disclosure of primary facts.
Once he has done that his duty ends. It is for the Income-
tax officer to draw the correct inference from the primary
facts. It is no responsibility of the assessee to advise the
Income-tax Officer with regard to the inference which he
should draw from the primary facts."
15. The scrutiny of returns is not an empty
formality; it is a statutory duty of the proper officer to verify
returns and seek clarifications if necessary. Having failed to
discharge this responsibility, the Department cannot now
turn around and allege suppression to invoke extended
period.
16. We have consistently expressed such a view in
Final Order No.41524/2024 dated 28-11-2024 in the case of
M/s. Xomox Sanmar Ltd, Unit II v. Commissioner of CGST &
Central Excise, Trichy, Final Order No.40567/2025 dated
30.05.2025 in the case of M/s. Nobel King Purchase
Solutions Pvt Ltd v Commissioner of GST and Central Excise,
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Chennai and in Final Order No.40664/2025 dated 26-06-
2025 in the case of M/s. Exide Industries Ltd v Commissioner
of GST and Central Excise, Salem. We also note that in the
decision reported in Uniworth Textiles v CCE, Nagpur, 2013
(288) ELT 161 (SC), relied upon by the appellant, while
considering the ingredients required to invoke the extended
period of limitation, the Supreme Court observed that it is a
cardinal postulate of law that the burden of proving any form
of mala fide lies on the shoulders of the one alleging it. We
also note that a similar view has also been taken by this
Tribunal in the case of Aarya Construction Vs. Commissioner
of GST and Central Excise [Appeal No. 40999/2019 dated
09.07.2025]
17. Accordingly, in the present case, the allegation
of suppression with intent to evade duty is wholly
unsustainable. Since the demand is founded exclusively on
audit verification of disclosed records, invocation of the
extended period under Section 11A(4) is barred in law.
18. In continuation to the above, where the Returns
have been regularly filed, extended period of limitation is not
invokable as per the ratio of the Hon'ble Allahabad High
Court in the case of CCE, Noida v. Accurate Chemicals
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Industries [2014 (310) ELT 441 (All.)], wherein it has been
held as under:
"6. Having considered the judgment of the Tribunal, we
see no reason to interfere with the finding of fact that if a
scrutiny had been made by the Range Officer of the ER-1
returns, that would have revealed that the assessee had
cleared its MS tanks and radiators to the owning company
for the manufacture of transformers. This indicated that
there was no fraud, collusion, misstatement or suppression
of facts. Besides, since the situation was revenue neutral,
no intent to evade the payment of duty could be ascribed
to the assessee. Once, there was no intent to evade the
payment of duty, the Tribunal was justified in coming to
the conclusion that the extended period of limitation under
the proviso to Section 11A(1) of the Act, would not be
attracted. Hence, no substantial question of law arises in
the appeal. It is, accordingly, dismissed."
19. Additionally, the law on invocation of extended
period of limitation for the purpose of recovery of tax dues is
settled. The Hon'ble Supreme Court in the case of Pushpam
Pharmaceuticals Company vs. Collector of Central Excise,
Bombay [1995 (78) E.L.T. 401 (SC)], held as under: -
"2. ......The Department invoked extended period of
limitation of five years as according to it the duty was
short levied due to suppression of the fact that if the
turnover was clubbed then it exceeded Rupees Five lakhs.
.....
.....
4. A perusal of the proviso indicates that it has been used in words company of such strong words as fraud, collusion or willful default. In fact it is the mildest expression used in the proviso. Yet the surroundings in which it has been used it has to be construed strictly. It does not mean any omission. The act must be deliberate. In taxation, it can have only one meaning that the correct information was not disclosed deliberately to escape from payment of duty. Where facts are known to both the parties the omission by one to do what he might have done and not that he must have done, does not render it suppression." 15
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20. In view of the above, the alleged suppression of facts should be deliberate. The above ratio had subsequently come to be followed by the Hon'ble Supreme Court in the case of Anand Nishikawa Co. Ltd. vs. Commissioner of Central Excise, Meerut [(2005) 7 SCC 749)], wherein it was held as under: -
"27. Relying on the aforesaid observations of this Court in the case of Pushpam Pharmaceuticals Co. v. CCE we find that "suppression of facts" can have only one meaning that the correct information was not disclosed deliberately to evade payment of duty. When facts were known to both the parties, the omission by one to do what he might have done and not that he must have done, would not render it suppression. It is settled law that mere failure to declare does not amount to wilful suppression. There must be some positive act from the side of the assessee to find willful suppression. Therefore, in view of our findings made hereinabove that there was no deliberate intention on the part of the appellant not to disclose the correct information or to evade payment of duty, it was not open to the Central Excise Officer to proceed to recover duties in the manner indicated in the proviso to Section 11-A of the Act. We are, therefore, of the firm opinion that where facts were known to both the parties, as in the instant case, it was not open to CEGAT to come to a conclusion that the appellant was guilty of "suppression of facts."
21. Furthermore, there are other catena of judgments wherein various High Courts as well as this Tribunal has consistently held that when the assessee is registered and filing returns regularly, the range officer has a duty to scrutinize returns, detect irregularity, and to raise pertinent queries in this regard and that in light of any negligence or failure to do so, the allegation of suppression by the assessee cannot be sustained.
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22. In view of the above facts, since audit was conducted in August, 2011 and the Appellant has replied to the same on 07.11.2011, itself, it is clear the facts of the same were within the knowledge of the Department. This being the case, there is no reason as to why the show cause notice issued for the period from April, 2010 to August, 2011 was issued only in the year 2014 (17.04.2014) i.e., beyond the normal period of limitation, thereby the Show Cause Notice issued is barred by limitation.
23. In this context, we find that the Hon'ble Allahabad High Court in the case of CCE v. Monsanto Manufacturer Pvt. Ltd. 2014 (35) STR 177 (All.) had held as follows: -
"Once that be the position and the Tribunal having came to the conclusion that the extended period of limitation could not have been validly applied, the Tribunal, in our view, acted outside its jurisdiction in entering upon the merits of the dispute on whether the demand for duty should be confirmed. Once it is held that the demand is time barred, there would be no occasion for the Tribunal to enquire into the merits of the issues raised by the Revenue."
24. Following the above decision this Tribunal in the case of M/s. AAM India Manufacturing Corporation Pvt. Ltd. V. Commissioner of GST & Central Excise reported in 2025 (8) TMI 1655 CESTAT CHENNAI, held that the demand was wholly barred by limitation and accordingly, we had refrained from delving into the merits of the issue in detail. Following 17 E/41124/2015 the same principle in the instant case, we hold that the demand is barred by limitation and therefore refrain from going into the merits of the matter. Accordingly, the entire demand, interest and penalty is set aside.
25. Thus, the appeal is allowed with consequential relief, if any, as per the law.
(Order pronounced in open court on 07.10.2025) Sd/- Sd/-
(AJAYAN T.V.) (VASA SESHAGIRI RAO) MEMBER (JUDICIAL) MEMBER (TECHNICAL) MK