Customs, Excise and Gold Tribunal - Mumbai
Thermax Ltd. vs Collector Of Central Excise on 25 May, 1993
Equivalent citations: 1993(44)ECC49, 1993ECR639(TRI.-MUMBAI)
ORDER
R. Jayaraman, Member
1. This is an appeal against the Order-in-Original passed by the Collector of Central Excise, Pune bearing Order No. 26/C.Ex/1991 dated 10.7.91.
2.1. The appellants are a multidivisional company engaged in the manufacture of steam boilers, process heat equipment, hot-water generator, thermo container, pollution control equipment, painting systems, post-harvest equipments etc. We are, in this appeal, concerned with pollution control equipment which are dealt with by their Enviro division. As per their write-up given to the Assistant Collector (vide their letter dated 27.7.88) products handled in this Division are not package type but are erected at the site on turnkey basis and the various parts dispatched to the site are cleared on payment of duty at the Chinchwad factory. The Chinch wad factory is having the L4 licence for manufacture of these parts. They had filed declaration for availing Modvat Credit in respect of inputs for the manufacture of pollution control equipments and were availing of Modvat Credit of duty paid on such inputs. It is reported that prior to introduction of Modvat and when such equipments were classifiable under the erstwhile Tariff item 68, they were following the procedure under Rule 56c of the C.Ex Rules (now deleted) by sending the inputs for fabrication outside and getting the fabricated goods back from job workers. During that period, they in their letter dated 22.8.83, addressed to the Range Superintendent of Central Excise intimated that they were having one storage godown in the premises of Anant Machinery (P) Ltd. (herein after referred to as Anant Machinery premises--abbreviated as 'A.M.P.'). This premises have already been sought to be deleted from the bonded area of Anant Machinery Ltd. and this place is strictly for their godown and they are stocking only the bought out items in their premises.
2.2. On an information received by the Department on 22.6.88, the Supdt. and his staff visited the premises 'A.M.P.'. They noticed filters in finished condition lying in the open yard. It is also alleged that the officers noticed manufacturing activities in that premises, for which M/s. Thermax did not possess any L4 licence covering the activity in that premises. They also noticed that the inputs, in respect of which Modvat Credit had been taken by 'Chinch wad factory' "were found stored in 'A.M.P.'.
On enquiry it was learnt that M/s Anant Machinery Ltd. have rented out part of the premises to M/s. Thermax. Thereafter, the officers recorded the statement of Shri S.S. Kadam, Executive (Material) of the appellants, factory, who revealed that the inputs were sent to job workers from the premises and the items fabricated were received back to this place again and the finished goods emerging out of job work were directly sent to the customers from that place. The trucks, in which the fabricated goods were loaded for despatch to the customer, were first taken to the main gate of the Chinchwad factory for making entries in the security register and this was alleged to be intentionally undertaken to show that goods were being cleared from the Chinchwad factory. The statements of Shri R. Krishnan, Excise Officer of the appellants and Shri M.K. Kanade, General Manager (Finance) also confirmed this position that inputs required for manufacture of equipments by job workers were not received in the Chinchwad factory but at the A.M.P. and inputs were sent from 'A.M.P.' and fabricated goods were also received at AMP, from where the fabricated parts of pollution control equipment were sent to the customers site, after payment of duty at Chinchwad factory.
2.3 In view of the above investigation, it was alleged by the Department by issue of Show Cause Notice dt. 31.1.90 that during the period prior to the visit of officers on 22.6.88
(i) the appellants were found to have manufactured goods in unlicensed premises in A.M.P. in contravention of Rule 174.
(ii) had contravened Rules 9 & 49 of the Central Excise Rules, by storing the goods in hired premises and cleared the goods from a place not approved by the proper officer in a manner otherwise than prescribed in the Rules.
(iii) had contravened Rule 57G, by taking Modvat credit on the inputs which were never brought inside the licensed factory and they had failed to observe the procedure laid down under Rule 57F(2)
(iv) had contravened Rule 57 F(2), since they had sent the inputs to various job workers from the A.M.P. without obtaining permission.
(v) by maintaining a parallel RG 23A register in A.M.P. and by suppressing material facts connected with receipt of inputs in A.M.P. and despatch of goods from that premises deliberately, they had availed Modvat credit to the extent of Rs. 18,89,145 (basic) plus Rs. 8,658.58 (special) which should be recovered in terms of proviso to Rule 57-I of the Central Excise Rules read with Section 11-A of the Central Excise Act, as they had not disclosed these facts with an intention to evading payment of duty.
3. In the adjudication proceedings held by the Collector, Pune, he confirmed the demand for reversal of Modvat Credit and ordered that the same should be recovered from RG 23A Part II to the extent available and the balance to be paid in cash/debit in PLA. A penalty of Rs. 10 lakhs was also imposed on the appellants. The present appeal is against the above order.
4. Heard the elaborate arguments from both the sides and perused the records made available to us in two paper books.
5. The main thrust of the arguments of the Ld. advocate can be summed up as below--
5.1. The department themselves have accepted that they manufacture parts of pollution control equipment in A.M.P., which is not included in their licensed premises. He, however, agrees that as per the deposition of the persons in-charge of this division, A.M.P. is only a storage place for their bought out item and no manufacture, as much, takes place in A.M.P. They receive input materials in A.M.P. and send them to various job workers. The fabricated products are sometimes tested and packed in A.M.P., but otherwise sent in the same condition to the site. Prior to 1986, they were following the procedure in terms of erstwhile Rule 56c, where under they, as principal manufacturers, could send the materials to various job workers and get the fabricated items back. These activities were done in A.M.P. and for this purpose, they had also informed the Range Supdt. about their storing the bought out goods in A.M.P. (vide their dated 22.8.83) (sic). This was continued even after 1986. There is no doubt an omission on their part in not informing the Department that under the Modvat scheme, the Modvat inputs received would also be stored in A.M.P. and dispatched from there.
5.2. This omission is blown out of proportion for justifying the extended period. The A.M.P. premises are just 500 yards from Chinchwad factory. For want of storage space, they have taken up additional premises in AMP on rental basis, which they intimated to the department in 1983. They did not seem to realise the requirement of specifically getting permission for storage of Modvat inputs in A.M.P. after they switched over to Modvat in 1986. Hence no malafides could be attributed. This cannot be construed to be wilful misstatement or deliberate suppression for evading duty. Though in the context of these omission, their statements for obtaining permission under Rule 57F and declarations for Modvat may give an impression of misstatements it cannot be termed willful misstatement; because, there is no deceit involved for defrauding Government revenue. Strictly speaking, such an activity of sending the goods to job workers and getting the finished parts from them may not amount to manufacture either in Chinchwad factory or in A.M.P. But since they are engaged in the turnkey project of setting up Pollution Control system at the site, they have assumed themselves the role of manufacturer and paid duty on these parts to the tune of Rs. 1.11 Crores, as against the Modvat Credit availed for payment of above duty, being only to the extent of Rs. 19.49 lakhs. He referred to the affidavit filed by Shri G.K. Gureja, Director in this regard and pleaded that all these activities have since been shifted to their own premises and the department have no objection to the Modvat being availed now.
5.3 Had their intention been to evade duty, they would have sent the inputs by endorsing the gate passes in favour of job workers and made the job workers pay lower duty, as small scale units and dispatched the fabricated parts direct to the site. By holding themselves out to be manufacturers, they have themselves paid duty at the normal effective rate. Hence in such a circumstance, there cannot be an intention of evading duty of availing Modvat Credit, with a view to paying lower duty. Since their action does not lead to such a conclusion of deceit for defrauding revenue, any omission committed foolishly or unwittingly, in not following the right procedure, should not come in the way of substantive benefit of Modvat credit.
5.4 Had they applied for L4 licence for A.M.P. or had sought for permission for storage of Modvat inputs in A.M.P., they would have got it. Mere omission to do that cannot justify invoking proviso to Rule 57-I. It will still come under Sub-rule (1) of Rule 57-I as an error or an act of omission. Hence, demand can be justified only for a period of six months from the date of credit, even if it is held that the procedural omissions come in the way of availment of Modvat credit.
6.1 Shri Mondal's argument on behalf of the Department can be briefly summed up as below:
6.2 Though the allegations in the S.C. N. and findings of the Collector are to the effect that they carried on manufacture in A.M.P. the appellants emphasise the there is no manufacture of any goods in A.M.P. and it was only a place of storage, where Modvat inputs were received, sent to job workers and finished goods received back in that premises were sent to the customers, by making a show of clearance of those goods from Chinchwad factory. This position on fact is not rebutted even now, by the Id. counsel for the appellants. Hence even assuming A.M.P. to be an extended arm of the Chinchwad factory not covered by L4 licence, Modvat credit cannot be taken, when there is no manufacture involved in A.M.P. on the fabricated items returned by job workers.
6.3 He referred to the provisions of Rule 57F(2) to urge that the facility given is to enable the manufacturer to send inputs in respect of which Modvat credit has been taken, to carry out certain processes outside by job workers. But the rule emphasises that the processed goods are to be returned by job workers to the assessee taking Modvat Credit and to be utilised in further manufacture of the final product. Here, when no further manufacture is done, even in A.M.P. on the fabricated items returned by the job workers, the question of availing facility under Rule 57F(2) does not arise. If the argument of the Id. counsel to the effect that they could have endorsed the gate passes to job workers leaving the job workers to take credit and pay duty on fabricated items is accepted, then what the appellants have done, would only amount to trading activities. Modvat scheme does not extend to trading activities but is available only for a manufacturer, so as to avert cascading effect of the levy on inputs.
6.4. Hence if their contention that they are not manufacturing any goods in A.M.P. is accepted, extension of Modvat per-se is not applicable. If, on the other hand, they are treated as manufacturing the parts of pollution control system in A.M.P., even then Modvat credit cannot be taken, when they were not even under licensing control in respect of the premises. Their declaration for Modvat purposes is with regard to bringing of inputs for manufacture of these products in Chinchwad factory. There is no valid declaration in respect of inputs to be received for manufacture of final products in A.M.P. It has been laid down by the Bench as also by other Benches that filing of declaration cannot be dispensed with for availing Modvat benefit and where this essential requisite is not complied with, how can they take Modvat Credit without even filing a proper declaration in respect of inputs received in A.M.P.?
6.5. On the question of applying the extended period, he pleaded that the question to be looked into is whether their actions are deliberate or innocent. In this case, they had filed declaration for bringing duty paid inputs only in their Chinchwad Unit, which is a licensed factory. The Dept. was not made aware of the receipt of such inputs in A.M.P. and they have not declared or obtained permission for receipt of Modvat inputs in A.M.P. On the contrary, even in their letter dated 22.8.83 they intimated that A.M.P. hired by them is strictly for storage of bought out item. There is no whisper in that letter that they are bringing back fabricated parts from job workers and they were utilising the premises (A.M.P.) for Rule 56C purposes. Hence their plea that they continued to do these activities out of ignorance or unwittingly is hardly credible. On the contrary, their attempt to maintain a parallel RG 23A (not authenticated by the Department) in A.M.P. and their removal of fabricated parts received from job workers to their customers, after bringing the trucks to the main gate of Chinchwad factory for making entries in the security register indicate their calculated design to create an impression that they are complying with requirements of all the Rules under Modvat Credit, to which they are not entitled otherwise. There is no dispute that these activities were not made known to the department. Hence there is a deliberate suppression of facts and wilful statement, justifying the extended period under Rule 57-I. 6.6. The Id. counsel's contention that had their intention been to evade duty, they would not have paid duty to this extent of Rs. 1.11 crores on these finished goods, just to avail of Modvat credit for Rs. 19 lakhs is not acceptable. Had they not chalked out this design, they would have to pay even this Rs. 19 lakhs, which they have sought to evade. Hence extended period as also penalty are justified.
7.1. Before considering the rival contentions, it would be necessary to have our say on the factual position, which is somewhat nebulous.
7.2. The main thrust of the allegation in the S.C. N, is that (i) the appellants manufactured excisable goods in a portion of premises hired on rental basis from M/s. Anant Machinery without obtaining Central Excise licence in contravention of Rule 174, (ii) the finished goods were stored in that hired premises which was not an approved place of storage, which is in contravention of Rules 9 & 49 of the Central Excise Rules (iii) the inputs were never brought into Chinchwad factory and have not filed declaration in respect of inputs received in A.M.P., which is in contravention of Rule 57 F(2). It is also alleged that the appellants had suppressed the fact that they do not receive the inputs in their Chinchwad factory, wherein Modvat credit is taken in respect of these inputs which were actually received in AMP, and a parallel RG 23A register was maintained in A.M.P. without any authority. These allegations, clearly indicate that the appellants manufactured and cleared the pollution Control equipments from A.M.P., which is an unlicensed premises and they have received Modvat inputs in this hired unlicensed premises (A.M.P.), for which the declaration has not been filed and prior permission not obtained. The Collector in his findings also holds that the process of manufacture was completed at the rented premises in A.M.P. and such finished goods were found in A.M.P. He also held that the appellants are the manufacturer of these goods in the A.M.P. Since not a single process was carried out in Chinchwad factory, the Modvat credit availed of by debiting in RG 23A register maintained at Chinchwad factory is not in order and they have fooled the Dept. by showing as though the goods had entered the Chinchwad factory for further processing. In other words, the Collector has also come to the conclusion that whatever manufacture is required, it is completed only in A.M.P. and neither the inputs nor the finished goods ever entered the Chinchwad factory for further processing and subsequent clearance.
7.3. Shri Sridharan, during the arguments, accepts this factual position, though he does not contest the depositions of S/Shri Kadam and Krishnan to the effect that the Modvat inputs received in A.M.P. were sent to job workers and fabricated goods received from job workers were cleared as such in many cases without any further processing either in Chinchwad factory or in A.M.P. and in some cases they were packed or tested in A.M.P. before despatch to the site for erection. He also pleads that strictly speaking such an activity does not come within the purview of manufacture and they need not have paid the duty on these goods but could have sent the inputs to job workers after duly endorsing gate passes and making the job workers pay duty as applicable to the job workers. Since, however, they have accepted the status of 'manufacturer' since long, even when the goods were classified under TI 68, following the provisions of Rule 56c, they had continued this arrangement under Modvat scheme. He also admits that there is an omission on their part in not declaring the A.M.P. for receipt of Modvat inputs and return of finished goods, their storage and subsequent clearance from the A.M.P. This omission, according to him, cannot be construed to be a wilful misstatement or suppression to avail of Modvat credit not entitled to them or to defraud Govt, revenue.
7.4. From the above, it is clear that both the Dept. and the appellants have accepted that the appellants are manufacturers of the fabricated goods returned by job workers and the entire S.C. N. proceeds only on this basis. It is not open for either side to contend at this stage that the appellants are not manufacturers of the goods returned by job workers. The Dept. have held the appellants to be manufacturers and the appellants have, undoubtedly, accepted this position and had been paying duty since long on these goods, holding themselves out to be the manufacturer. It is not expected of us to expected of us to consider whether this is legally correct or otherwise; because the issue before us is not the question of dutiability of the finished goods at the hands of the appellants. The issue before us is only limited to the question whether in the context of inputs being received in unlicensed premises, stored and despatched to job workers therefrom and finished goods received back in that unlicensed premises and despatched as such or after packing and testing from that premises could be held to be in substantive compliance with the provisions of Modvat scheme.
8.1. This is what we propose to do in the context of the circumstances discussed above. The main thrust of the Department's objection is that inputs were received in AMP (not a licensed premises) and sent to job workers from a premises not approved and finished goods received back and manufacture completed in the A.M.P., but Modvat credit taken and utilised, making a show that the goods have been brought in the licensed Chinchwad factory and cleared therefrom. The following facts are not disputed (i) No inputs other than those declared by the appellants were received in A.M.P. and sent to job workers.
(ii) The inputs received at AMP were sent to job workers and fabricated goods were received from job workers in AMP, where manufacture is said to have been completed, as per Collector's findings. (It is however pleaded by Shri Mondal that there is no manufacture or process carried out in A.M.P. over the goods returned by job workers and it is only a commercial activity and hence Modvat is not admissible. However, we are to observe that this is not the allegation either in the S.C.N. or confirmed in the findings of the Collector. The Collector holds that manufacture is complete at A.M.P. and no further manufacture has taken place in Chinchwad factory. The Dept. have treated the appellants as manufacturer of these equipments and the appellants also have accepted this since long and had been paying duty on the finished goods despatched from AMP to the site. Hence we are to hold that whatever manufacture was required has been completed at A.M.P.)
(iii) The finished goods manufactured and cleared from AMP have been removed on payment of duty, major portion of which was paid through PLA and part by debit in RG 23A Part III. Both the PLA and RG 23A were maintained at Chinchwad factory only.
(iv) The appellants have many divisions, out of which Enviro Division is one, which admittedly have taken a rented premises for storage of these bought out items and for this limited purpose an intimation has also been sent by the appellant in August'83. It Was subsequently found that the activities of receipt of Modvat inputs, their despatch to job workers and the return of fabricated products from job workers and clearance of such finished goods after completing whatever process is required, only in AMP. Such finished goods were despatched to the site. But before they were sent to the site, they were brought to the gate of Chinchwad factory for making entries inward and outward, when duty debits were made both in PLA and RG 23A maintained at Chinchwad factory.
8.2. In view of the above undisputed factual position, the objection raised insofar as eligibility to Modvat credit is concerned is more of a procedural violation rather than a substantive one. We would elaborate on this further. Had A.M.P. been included or covered by a separate licence, no objection could be possible for allowing Modvat credit. If manufacture has been done in unlicensed premises or Modvat inputs received there, it may attract penal provisions for contravention of the rules, which we will consider separately. But so long as it is not disputed that the goods cleared from A.M.P. have been removed to the Customers, site only after payment of duty at Chinchwad factory, there cannot be any overt attempt at evasion of duty. The Department, while accepting duty payment through PLA maintained at Chinchwad factory, cannot adopt a different standard, when it comes to the question of payment of duty through RG 23A. Shri Mondal, however, contends that this is a case of availment of credit, which is subject to observance of certain discipline and hence has to be treated differently. We have carefully considered this aspect. Modvat scheme is mainly intended to avert cascading effect of input taxation. In the scheme of value added tax even trading activities would be covered. But in Modvat scheme, activities at the manufacturing level are sought to be covered. Here, there is neither an allegation in the S.C.N nor in the findings of the Collector to the effect that the activities of Enviro division are only trading activity and they are not manufacturing the Pollution Control equipments. The Department have treated them as manufacturers and the appellants have also held themselves out to be manufacturers. They have filed a Modvat declaration and as per the declaration, they have received the declared duty-paid inputs and credit has been taken on the same. They are also stated to be maintaining a parallel RG 23-A records in A.M.P. for their own purposes. It is not the case of the Department that entries in the register kept in A.M.P. are divergent from the one maintained at Chinchwad factory. Hence, so long as a clear nexus of the receipt and utilisation of declared duty-paid inputs in the manufacture of declared final products is established and such inputs received are against valid duty payment documents, we are to hold that the appellants should be deemed to have complied with the requirement under Modvat scheme. Shri Mondal contends that filing a declaration is a prerequisite condition as held by this Bench and other benches. Here a declaration has been filed for the specified inputs for the manufacture of pollution control equipment, to be manufactured by Enviro Division. Only those declared inputs have been brought in and utilised in the manufacture of declared final products. The only allegation is that the activities were not done in the main licensed premises (Chinchwad factory) but in AMP reported to be 500 yards away. It is also reported by the Id. counsel that all these activities have now been shifted to their main premises and the department is now allowing Modvat benefit. Hence, in the peculiar circumstances, we are justified in holding that there is a substantive compliance and cannot deny the benefit on the ground of absence of declaration.
8.3. Modvat scheme is to be looked upon as a scheme with the sole object of averting cascading effect of input levy. If Modvat is denied merely because certain declared inputs have been received in a premises not included in the licence (but otherwise it is satisfied that these declared inputs have been used in the manufacture of declared final products), it would frustrate the very object of the Modvat scheme. Only in the view of the matter and having regard to peculiar circumstances in the case, we hold that there is a substantial compliance with the requirement of the Rules 57-G and 57-F(2).
8.4. Having held the issue of eligibility to Modvat credit in favour of appellants, there is no need for us to go into the time bar aspect of the demand and hence we do not propose to go in the same.
9.1. On the question of penal liability, we are to take note of the following position:
(i) The appellants' letter dated 22.8.83 does not reveal that their Enviro Division would be receiving Modvat inputs and completing manufacture of pollution control equipments in AMP. The letter merely states that the premise would be used strictly for godown purposes for storage of bought out items.
(ii) The appellants not only received Modvat inputs in the unlicensed premises (A.M.P.) but also completed manufacture of final product, stored there and cleared the finished goods from such an unlicensed premises.
(iii) They had committed the irregularity knowingly inasmuch as Modvat inputs were kept in unlicensed premises from where they were sent to job workers.
(iv) The appellants are a major assessee and are not a small unit, who can plead foolishness or lack of knowledge.
(v) There was an overt attempt to show that the goods which were manufactured in unlicensed premises, were done in the licensed premises by making gate entries in the Chinchwad factory.
9.2. In the context of the above position, we are to hold that there is a clear contravention of Rules 174, 9 & 49 of the Central Excise Rules. There is also a procedural violation of Modvat rules.
The only saving grace is that goods manufactured in unlicensed premises were cleared on payment of duty from the licensed factory. The plea of the Id. counsel that the appellants have acted foolishly or unwittingly does not carry conviction, because they are major assessee with specialised staff handling excise work. Even if it is so, such a foolish or unwitting act committed by a major assessee cannot be dismissed lightly. We would therefore deem it proper to sustain part of the penalty imposed more as a corrective measure leaving an indelible impression, than used as a punitive weapon. Under Rule 173 Q(1)(bb) penalty can be imposed on any person who contravenes, any of the provisions of Section AA of Chapter V of the Central Excise Rules, irrespective of whether such a contravention leads to evasion of duty or otherwise. Moreover there is a clear and knowingly committed contravention of manufacture, storage and removal of excisable goods from unlicensed premises. In view of these circumstances discussed, while sustaining the order of penalty imposed, we would deem it proper to reduce the penalty to Rs. 5 lakhs (Rupees five lakhs) only.
10. In the result, we set aside the demand for reversal of Modvat credit. We reduce the penalty from Rs. 10 lakhs to Rs. 5 (five) lakhs only on the appellants.