Gujarat High Court
Acme Skin Care Pvt Ltd & vs Government Of Gujarat & 3 on 10 August, 2017
Author: Akil Kureshi
Bench: Akil Kureshi, Biren Vaishnav
C/SCA/10361/2015 JUDGMENT
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
SPECIAL CIVIL APPLICATION NO. 10361 of 2015
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR.JUSTICE AKIL KURESHI
and
HONOURABLE MR.JUSTICE BIREN VAISHNAV
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1 Whether Reporters of Local Papers may be allowed
to see the judgment ?
2 To be referred to the Reporter or not ?
3 Whether their Lordships wish to see the fair copy of
the judgment ?
4 Whether this case involves a substantial question of
law as to the interpretation of the Constitution of
India or any order made thereunder ?
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ACME SKIN CARE PVT LTD & 1....Petitioner(s)
Versus
GOVERNMENT OF GUJARAT & 3....Respondent(s)
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Appearance:
MR DHAVAL SHAH, ADVOCATE for the Petitioner(s) No. 1 - 2
MR PRANAV TRIVEDI, AGP for the Respondent(s) No. 1 - 4
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CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI
and
HONOURABLE MR.JUSTICE BIREN VAISHNAV
Date : 10-11/08/2017
ORAL JUDGMENT
(PER : HONOURABLE MR.JUSTICE AKIL KURESHI) Page 1 of 15 HC-NIC Page 1 of 15 Created On Mon Aug 21 15:48:47 IST 2017 C/SCA/10361/2015 JUDGMENT
1. Petitioner has challenged an order dated 28.10.2014 passed by the Deputy Secretary, Home Department, Government of Gujarat, confirming an order dated 22.08.2012 passed by the competent authority rejecting the petitioner's application for refund of duty. Brief facts are as under:
2. The petitioner is a company and was engaged in manufacturing of toilet preparations. The petitioner was manufacturing skin cream and selling it under the brand name of Everyuth Natural Orange Peel Off Skin Vitalizer which was packaged in tubes of different sizes containing the product weighing in the range from 08 gms to 80 gms per tube. For its manufacturing purpose, the petitioner would utilize alcohol as one of the inputs for which, the State Excise Authorities had granted license to the petitioner. The petitioner would manufacture the cream in batches; size of each batch would be 275 kilograms. After manufacturing the cream in bulk and shifting it to the storage facility, the petitioner would package it in the tubes for ultimate sale in the market. Out of 275 kilograms of such material so manufactured, depending on the size of the tubes, there would be a projected number of units of the tubes that would be filled up which is referred to as 'hypothetical quantity'. According to the petitioner, for variety of reasons, the number of tubes that may turn out, out of 275 kilograms of manufactured product, would be short of the projected number of tubes. Principal reasons for the shortfall would be manufacturing loss and samples to be retained by the petitioner for possible future Page 2 of 15 HC-NIC Page 2 of 15 Created On Mon Aug 21 15:48:47 IST 2017 C/SCA/10361/2015 JUDGMENT testing purpose as mandated under the law. At the time of clearance of the goods in packaged form, the department had insisted on collecting excise duty under the Medicinal and Toilet Preparations (Excise Duties) Act, 1955 (hereinafter to be referred to as the 'said Act') on the entire hypothetical and projected quantity of tubes and not on the actual number of tubes cleared. According to the petitioner, the authorities would not clear the consignment unless the full duty was paid though, according to the petitioner, the same was not required to be paid. Under compulsion therefore, the petitioner would pay the entire duty inclusive of the disputed component. This, however, would be under protest.
3. The petitioner applied to the competent authority for refund of such duty collected between May 2003 to November 2011 by filing various refund applications. Details of which, are as under:
Refund Claim Refund Claim Amount of refund claims Rs. Period dated filed on covered On differential On Qc Retain quantity sample
04.12.2009 22.12.2009 6,57,491/- 91,047/- May,03 to Oct,09 04.05.2011 04.05.2011 2,01,901/- 44,247/- Nov,09 to March 11 23.05.2011 23.05.2011 3,624/- 950/- April,11 04.07.2011 04.07.2011 16,441/- 4,994/- May,11 to June, 11 03.08.2011 03.03.2011 7,790/- 2,604/- July,11 Page 3 of 15 HC-NIC Page 3 of 15 Created On Mon Aug 21 15:48:47 IST 2017 C/SCA/10361/2015 JUDGMENT 02.09.2011 02.09.2011 6,213/- 1,968/- August,11 25.11.2011 25.11.2011 13,025/- 3,383/- Sept, 11 to 04.11.2011 Total 9,06,485/- 1,49,193/-
4. The competent authority rejected this application mainly on the following grounds:
(i) The entire quantity of 275 kilograms of substance was manufactured. Total quantity of alcohol issued for manufacturing such final product was thus consumed in the manufacturing process. There was no loss or pilferage reported between R.G.- 3 and R.G.- 4 stages. The claim therefore, did not fall within Rule 35 of the Drugs and Cosmetics Rules ['the Rules' for short];
(ii) The petitioner had not maintained necessary records indicating manufacturing loss;
(iii) The claim was highly belated.
(iv) The refund claim on quality check samples was not as per the Rules.
5. Aggrieved by the order of the competent authority, the petitioner preferred appeal. The appellate authority, by the impugned order, rejected the appeal. Hence, this petition.
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6. Learned counsel Mr. Dhaval Shah for the petitioner submitted that the petitioner had reported manufacturing loss and quality check samples to the authorities from time to time. The petitioner had liability to pay duty only on the quantity of goods manufactured and cleared and not on any other quantity. The petitioner had paid differential duty under protest. The authorities would not clear the consignment unless the entire duty including the disputed portion was paid up. The petitioner had therefore, at the relevant time, acted under compulsion and therefore, limitation under Rule 13 of the Rules would not apply. He lastly submitted that since admittedly the tubes short cleared, as compared to the projected quantity, were never sold in the market and the question of passing on the excise duty even on the consumers therefore would not apply. The question of unjust enrichment therefore, would not arise.
7. On the other hand, learned AGP opposed the petition contending that, as held by the competent authority, there was no manufacturing loss till the clearance of the bulk product and storage as was required to be recorded in R.G.- 3 and R.G.-4 Forms. The claim was, therefore, not sustainable in terms of the Rules. In any case, refund application had to be filed before six months, as provided under Rule 3. Issue of unjust enrichment is also required to be examined.
8. Before adverting to the Rules and the contention of the learned Page 5 of 15 HC-NIC Page 5 of 15 Created On Mon Aug 21 15:48:47 IST 2017 C/SCA/10361/2015 JUDGMENT advocates for the parties, we may clear a few factual aspects. There appears to be no dispute, as recorded by the competent authority in the order-in-original that the petitioner did produce the successive batches of 275 kilograms of the cream. However, while filling up the tubes, which would ultimately be put in the market after clearance, the projected number of tubes could not be filled up for two principal causes. One was the loss on account of filling up of the tubes, handling, poor quality of substance etc. and, retention of certain tubes for future testing purpose as required under the relevant laws. As against the actual number of tubes filled up and cleared for market, the petitioner was compelled to pay excise duty on the whole projected number of tubes. The petitioner paid up differential duty under protest. We may also notice that under letter dated 08.06.2011, the petitioner reminded to the Director (Prohibition and Excise), Government of Gujarat to fix the wastage percentage in the manufacturing process. This letter has a reference to earlier letter dated 04.12.2009 in which also, the petitioner had made such a request. It was pointed out that the manufacturing process of the project in question has inherent wastage. The petitioner, therefore, requested that the wastage percentage be fixed at 3% when the pack size is less than 10 gms and, 2% when the pack size is between 30 to 90 gms per tube. The petitioner pointed out the figures of the past manufacturing process leading to such pilferage. We may also notice that the petitioner applied for refund for the first time on 22.12.2009 for the entire period of May 2003 to October 2009.
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Subsequent applications were for later periods.
9. We may peruse the statutory provisions in light of these facts.
10. Section 3 of the Act pertains to duties of excise to be levied and collected on certain goods. Under sub section (1) thereof the duty is levied at the rates specified on all dutiable goods excluding goods for manufacturing special economic zone. Issue of dutiable goods has been defined under section 2(c) as to mean the medicinal and toilet preparations specified in the schedule as being subject to the duties of excise levied under the Act.
11. Section 19 of the Act is a Rule making power of the Central Government. In exercise of such powers, the said Rules have been framed. Rule 9 of the Rules pertains to time and manner of payment of duty. Sub-rule (1) thereof provides that no dutiable goods shall be removed from any place where they are manufactured or any premises appurtenant thereto, which may be specified by the Excise Commissioner in this behalf whether for consumption, export or manufacture of any other commodity outside such place, until the excise duty leviable thereon has been paid in the prescribed manner.
12. Rule 13 of the Rules pertains to no refund of duties or charges erroneously paid etc. and reads as under:
"No duties or charges which have been paid or have been Page 7 of 15 HC-NIC Page 7 of 15 Created On Mon Aug 21 15:48:47 IST 2017 C/SCA/10361/2015 JUDGMENT adjusted in an account current maintained with the Excise Commissioner under Rule 9 and of which repayment wholly or in part is claimed in consequence of the same having been paid through inadvertence, error or misconstruction, shall be refunded unless a written claim is lodged with the proper officer within six months from the date of such payment or adjustment as the case may be."
13. Rule 31 pertains to manufactured dutiable goods and reads as under:
"Each preparation manufactured shall be registered and shall bear a distinctive serial number, which shall be known as its batch number in the register in Form R.G.-3. This Register shall also show the receipt and disposal of all alcohol issued to the laboratory from the spirit store and the quantity of finished medicinal preparation manufactured therefrom. As soon as a preparation is manufactured, it shall be removed to the finished store where, after it has been carefully measured, it shall be stored in vessels provided for the purpose and accounted for in the register in Form R.G.-4. The issue of opium, Indian hemp, narcotic drugs and other narcotics shall be made under the appropriate permit and the advice portion of such permit shall be sent to the officer-in-charge."
14. Under Rule 33 on completion of production of medicinal or toilet preparation, the officer-in-charge would permit the licensee to take free sample of 227 ml or such quantity as he considers necessary for analysis. Any quantity left over after analysis would be destroyed. A separate account of the quantity used for analysis would be maintained. The result of the analysis would be entered in the register in Form R.G- 3.
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15. Rule 34 provides the manner of storage of finished products.
Clause (i) thereof provides that medicinal and toilet preparation shall on completion of production be stored in bulk in jars or bottles each containing not less than 2,273 ml. Rule 35 pertains to deficiency noticed in the finished store and reads as under:
"35. Deficiency noticed in the finished store. - (1) A record shall be kept of all deficiencies in bulk content of any finished medicinal and toilet preparation in store by the officer-in-charge in Form R.G.4 and a report of all such deficiencies, shall be submitted by him at the end of each quarter to the Excise Commissioner.
2) All such loss in the absence of a satisfactory explanation from the licensee shall be subject to levy of duty on the quantity so lost at penal rates which shall not be more than double the rates prescribed.
3)If the Excise Commissioner is satisfied that the deficiency reported under sub-rule (1) was due to natural or unavoidable causes, and if he is satisfied that the alcoholic preparation has not gone into consumption , he may remit the duty."
16. Rule 38 pertains to wastage in manufacture. Sub-rule (1) thereof, which is relevant for our purpose, reads as under:
"(1) The State Government may, from time to time, fix the percentage of wastage in the production of a particular medicinal or toilet preparation . Any wastage that exceeds the allowable limit and is not properly accounted for shall be charged with the duty together with such penalty not exceeding the duty leviable thereon as the Excise Commissioner may deem fit. If the alcohol in strength of a preparation is found by the Chemicals Examiner to exceed the highest allowable limit Page 9 of 15 HC-NIC Page 9 of 15 Created On Mon Aug 21 15:48:47 IST 2017 C/SCA/10361/2015 JUDGMENT by more than 3 proof degrees or to be below the lowest allowable limit, its issue from the bonded manufactory, shall be withheld."
17. Rule 53 requires the Excise Officer to take periodical samples of the medicinal and toilet preparation containing alcohol. Rule 55 provides that the manufacturer shall not be entitled to any compensation for the samples taken for the purpose of analysis under the Rules.
18. From the above Rules, it can be seen that in terms of Rule 38(1), the State Government would fix the percentage of wastage in the production of a particular medicinal or toilet preparation. Any wastage that exceeds such allowable limit and is not properly accounted for would be subjected to duty together with such penalty not exceeding duty leviable thereon as the Excise Commissioner may deem fit. This rule thus provides for fixation of percentage of wastage by the State Government in production of a particular medicinal or toilet preparation. If the wastage reported by a manufacturer is within such tolerance limit, there would be no duty liability on such wasted quantity. We may recall, the petitioner had requested the Government under letter dated 04.12.2009 to fix such limit. Reminder was also sent on 08.06.2011. Despite which the Government did not fix the limit. If the Government, despite reminders from the petitioner, did not fix the tolerance limit, surely the petitioner cannot be penalized for the same. However, to the extent, the wastage exceeds such limit and which is not properly accounted for by the manufacturer, the State Excise Page 10 of 15 HC-NIC Page 10 of 15 Created On Mon Aug 21 15:48:47 IST 2017 C/SCA/10361/2015 JUDGMENT authorities would levy not only duty but a penalty which can go up to the amount of duty.
19. It is, in this respect, the petitioner had urged the State Government under the letter dated 04.12.2009 to fix the wastage percentage under Rule 38. Since no steps were taken, a reminder was sent on 08.06.2011. In such reminder, the petitioner pointed out that the wastage varies principally depending on the size of the tube. In small tubes, the wastage is large and in larger tube the wastage tends to be lesser. The petitioner, therefore, suggested wastage percentage of 3% in smaller tubes and 2% in larger tubes. The State Government did not react to these communications and we believe, had not fixed any such wastage limit.
20. Rule 38 in plain terms expresses that in medicinal or toilet preparation, there would be wastages. Depending on the nature of the product and the normal trend of wastages, the Government would fix a reasonable limit. To the extent of such limit on the wastages reported, there would be no duty liability. Only if the wastage crossed the limit, the Excise authority would question the manufacturer and, if the manufacturer failed to account properly for the same, he would be exposed to duty and penalty liability. The term 'wastage' used here would include all situations where either the product could not be manufactured to the expected quantity level or where due to package loss or any other reason, could not be packed for marketing. Even a situation where under legal compulsion, a Page 11 of 15 HC-NIC Page 11 of 15 Created On Mon Aug 21 15:48:47 IST 2017 C/SCA/10361/2015 JUDGMENT manufacturer is obliged to take out samples from each batch, retain such samples for future testing, retain such samples for prescribed period and destroy them once such period is over, would be included in the expression 'wastage'. The word 'wastage' does not necessarily include loss or damage out of human error or some such failure. The reason of the samples being separated and destroyed later and never being put in market would also be an instance of a wastage. In plain terms, the petitioner cannot be made to pay duty on such quantity of product which, on account of such wastages, was never cleared for sale. In this respect, we may refer to the decisions of Supreme Court in case of Hindustran Zinc Ltd. vs. Commissioner of Central Excise, Jaipur reported in (2005) 2 SCC 662 and in case of Flex Engineering Ltd. vs. Commissioner of Central Excise, U.P reported in 276 ELT
153.
21. Contention of the learned AGP, that no discrepancy was reported between the quantities recorded in R.G.-3 Form and R.G.-4 Form and that therefore, no concession for wastage can be granted, cannot be accepted. Under Rule 31, the manufacturer would maintain a register in Form R.G.-3 which would include the quantity of the material manufactured. The register to be maintained in Form R.G.-4 also referred to in Rule 31 would be at a stage, after the preparation is manufactured and is removed to the finished store where again it will be measured. This material so shifted to the finished store and Page 12 of 15 HC-NIC Page 12 of 15 Created On Mon Aug 21 15:48:47 IST 2017 C/SCA/10361/2015 JUDGMENT measured, would be mentioned in R.G.-4 Form. As it happened in the present case, the loss is reported not between the stages where the substance is manufactured and then removed to the finished store but the wastage is reported after this stage and before putting the product in market in similar packages. The case would be covered under Rule 38.
22. The objection though not raised by the authorities but by the learned AGP of unjust enrichment also cannot be accepted. When the samples taken by the petitioner were never sold in the market, there is no question of collecting duty from the consumers on such produce. Equally, to the extent the number of tubes which could be filled in each batch was short of, the hypothetical or projected number of tubes would also not reach the market and no duty, therefore, would be collected from the consumers.
23. The question of limitation of filing refund claim, however, would survive. Rule 13, as noted, starts with a negative covenant providing that no duties or charges which have been paid or have been adjusted and of which repayment wholly or in part is claimed on the ground of having been paid through inadvertence, error or misconstruction would be refunded unless a written claim is lodged within six months from the date of such payment or adjustment. Rule 13 thus, prescribes limitation of six months for filing refund claim. Such refund could arise out of the duty paid through inadvertence, Page 13 of 15 HC-NIC Page 13 of 15 Created On Mon Aug 21 15:48:47 IST 2017 C/SCA/10361/2015 JUDGMENT error or misconstruction. In the present case, the petitioner paid the duty under the insistence of the departmental authorities who hold a belief that the manufacturer is liable to pay duty on the entire quantity of the toilet preparation manufactured even if ultimately what was cleared and sold.
24. The duty was thus, collected on what can be described as misconstruction of the correct legal position. Even though the petitioner may accuse the department on such misconstruction, nevertheless, the fact remains that the petitioner is seeking refund of the duty paid. Though, the duty may have been paid under protest, period of limitation prescribed under Rule 13 would apply. Counsel for the petitioner, however, relied on the decision of learned Single Judge of Madras High Court in case of Arignar Anna Sugar Mills vs. CEGAT, Chennai reported in 277 ELT 63 and the decision of Division Bench of Kerala High Court in case of Itel Industries Ltd. vs. Commissioner of Central Excise, Calicut reported in 301 ELT 288. Both these judgements referred to section 11B of the Central Excise Act,1944, and hold that on a duty paid under protest, the limitation under section 11B would not apply. Section 11B of the Central Excise Act, however, contains further proviso which provides that the limitation of one year shall not apply where any duty and interest has been paid under protest. There is no such similar provision under Rule 13 of the Rules.
25. In the result, the petition is allowed in part. The Page 14 of 15 HC-NIC Page 14 of 15 Created On Mon Aug 21 15:48:47 IST 2017 C/SCA/10361/2015 JUDGMENT respondents shall grant refund claims of the petitioner on the excise duty collected to the extent such refund claims were made within six months from the payment of duty. This shall be done latest by 30.9.2017. The refund shall carry simple interest @ 8% per annum from the date of payment till actual refund.
The petition is disposed of.
(AKIL KURESHI, J.) (BIREN VAISHNAV, J.) Jyoti Page 15 of 15 HC-NIC Page 15 of 15 Created On Mon Aug 21 15:48:47 IST 2017