Customs, Excise and Gold Tribunal - Bangalore
M/S. I.T.C. Ltd. vs Cce, Bangalore on 25 April, 2001
ORDER
Lajja Ram
1. These are two appeals - one filed by M/s. I.T.C. Ltd. being aggrieved with the Order-in-Original No.26/92 dated 30.03.92, and the other filed by the Revenue being aggrieved with the order-in-original No.8/99 dated 13.08.99, both passed by the Collector/Commissioner of Central Excise, Bangalore. In both appeals, the matter relates to the accountal of cut tobacco. In the show cause notices, issued to M/s. ITC, it had been alleged that certain quantities of cut tobacco had not been used in the manufacture of cigarettes; the weight of paper contained in the waste cigarettes had been wrongly adjusted towards the accountal of issued cut tobacco; such cut tobacco remaining un-accounted for. Accordingly, it was concluded that such quantities of cut tobacco not accounted for was not eligible for the exemption under Notification No.356/86 CE dated 24.6.86 and was liable to pay the central excise duty at the tariff rate of 225% Adv. In the order-in-original No.26/92 dated 30.3.92, the Collector of Central Excise, Bangalore, while adjudicating the show cause notice dated 4.10.91, read with corrigendum dated 22.11.91, observed that there had been no satisfactory explanation of the un-accounted removal of cut tobacco. He held that the weight of paper contained in the waste cigarettes had been wrongly adjusted towards accountal of cut tobacco issued and that the cut tobacco equivalent to this weight had remained un-accounted for during the period from 1.4.91 to 30.9.91. The central excise duty was liable to be paid on this un-accounted quantity of cut tobacco at higher rate of 225% Adv. as for such quantity exemption under Notification No.356/86 CE was not available. Further, on the basis of their own input output norms, the cut tobacco had not been fully accounted for. He confirmed the demand of central excise duty amounting to Rs.1,45,18,413.10. A penalty of Rs.10,00,000/- was imposed.
2. In the appeal filed by the Revenue, the Commissioner of Central Excise, Bangalore-II, in his order-in-original No.8/99 dated 13.08.99 took a view that the case of the Department was not of any seizure or clandestine removal and the case entirely relied upon the hypothesis alone. The assessee had not disputed the quantum of variation in the use of cut tobacco vis a vis the input output ratio declared by them. For the reasons mentioned in para-16 of his order-in-original, the adjudicating authority took a view that no duty could be charged on the cut tobacco in spite of the non-accountal of the quantum of cut tobacco, which was at variance from the input output ratio declared by the assessee and the cut tobacco actually contained in the cigarettes/wastes. After making a reference to the provisions of the Standards of Weight and Measures (packaged commodity) Rules 1977, he took a view that while un-disputedly there was a variation in the cut tobacco quantity as per declaration and the actuals, this variation was within the permissible limits. He also held that there was no non-accountal of cut tobacco equivalent to the weight of the paper and filter tips as alleged in the show cause notices. Relying upon the Reconciliation Statement furnished by the assessee, he dropped the proceedings for the period 1.10.91 to 31.10.98.
3. Both the appeals were heard together on 26.3.2001 at Bangalore and are being disposed of by this common order.
4. Shri Habibullah Badshah, Senior Advocate appearing for M/s. I.T.C. Ltd. submitted that cigarettes were under physical control system and the manufacturers were required to maintain detailed accounts with regard to both the cut tobacco and the cigarettes manufactured. There was also an obligation cast on the central excise officers to maintain Reconciliation Statement in the form Appendix F of the Manual of Departmental instructions on excisable manufactured products - cigarettes. The charge of clandestine removal of cut tobacco had been dropped by the adjudicating authority. The variation in the quantity of cut tobacco actually accounted for and the quantity taken-up for consumption, was within the permissible limits. He referred to the various Appendix maintained by the assessee in terms of the departmental instructions and submitted that they had been maintained properly and were being checked by the jurisdictional central excise officers from time to time. He relied upon the findings of the Commissioner of Cental Excise in the adjudication order for the subsequent period, wherein similar charges had been droped by the adjudicating authority. In the case where demand had been confirmed by the adjudicating authority, it was his submission that the adjudicating authority had not gone into the question as what possibilities could be there for the difference in the cut tobacco issued and utilised. This order confirming the demand and imposing penalty was far from clear. Only a primafacie view and been taken and on that basis, huge liability has been fastened. There were no clear findings. Various issues had been mixed-up. The adjudicating authority had not gone into the question of variation. The various issues had not been examined fully, and the case had been made out on no evidence. The valuation adopted for applying the advalorem rate of duty was also not correct in as much as company's gross profit margin had been added to the standard costs. He referred to the Tribunal's decision in the case of Asia Tobacco Co. Ltd. Vs. Commissioner of Central Excise, Coimbatore in Appeal No.E/107/91 MAS, wherein vide order No.370-1991 dated 5.6.91, the Tribunal had dealt with the case of non-accountal of cut tobacco, and on the ground that the impugned order had been passed in violation of principles of natural justice, had remanded the matter to the jurisdictional adjudicating authority. The ld. Sr. Advocate also referred to the case law in support of his contention that no firm basis had been made out to confirm the demand.
In reply, Smt. Radha Arun, SDR explained the charges levelled against M/s. I.T.C. Ltd. and submitted that the quantity of cut tobacco issued had to be accounted for by the assessee with reference to the actual production of cigarettes. In the present case, the quantity of cut tobacco not accounted for had been sought to be explained by adding the weight of paper to the tobacco contained in waste cigarettes. It was not permissible under the Rules. The charges were specific but the denials were vague. The assessee had explained their difficulties but had not been able to account for the fully quantity of cut tobacco issued. As cut tobacco was separately excisable and dutiable, the expression 'for use' in the relevant notification was with regard to the actual cut tobacco used, and no other meaning could be ascribed to this expression used in the exemption notification. In this regard, ld. SDR referred to the definition of cut tobacco in the Tariff.
As regards the appeal filed by the Revenue, the ld. SDR referred to para-24 of the order and submitted that the arguments for dropping the demands were speculative. The calculations in the show cause notices had not been rebutted. This ld. Commissioner of Central Excise had not examined the calculations referred to in the show cause notices. The ld. SDR also submitted that the case law referred to by the ld. Sr. Advocate was distinguishable.
5. We have carefully considered the matter. First, we will take up the order-in-original No.8/99 dated 13.8.99 passed by the Commissioner of Central Excise, Bangalore-II, which is the subject matter of the appeal filed by the Revenue, being Appeal No.E/1304/2000. The cut tobacco was classifiable under Heading No.24.04 of the Central Excise Tariff, and when it was manufactured by the manufacturer, who was utilising such cut tobacco in the manufacture of cigarettes, it was required to be accounted for with reference to the quantity used in the cigarettes, and the quantity contained in the waste cigarettes, machine sand, winnowings and floor sweepings. In so far as the quantity of cut tobacco contained in waste cigarettes was concerned, it was to be the quantity of cut tobacco contained in such cigarettes and not the total weight of the waste cigarettes as such which would include also the weight of paper, filter etc. It was alleged in the various show cause notices issued that while explaining the accountal of cut tobacco issued, the weight of waste cigarettes including the weight of paper in which the tobacco was rolled, was also taken into account. With regard to the cigarettes as such it was found that the quantity of cut tobacco as contained in the cigarettes was at variance with the weight of cut tobacco declared to be contained in such cigarettes. Thus, it was alleged that a sizable quantity of cut tobacco remained un-accounted for, both with regard to the good cigarettes as well as the waste cigarettes. In the case of good cigarettes, there was short accountal of cut tobacco when compared with the weight of cut tobacco declared to be contained in different brands of cigarettes. In so far as the waste cigarettes wee concerned, there was short accountal of cut tobacco to the extent of weight of paper and filter, which had been wrongly taken into account for accounting the cut tobacco contained in those waste cigarettes.
6. We find that the ld. Commissioner of Central Excise had taken a view that no cut tobacco was seized nor any clandestine removal had been established. He has not analysed the allegations with reference to the actual quantity of cut tobacco used or not used. The input output ratio declared by the assessee had not been discussed with reference to the cut tobacco actually used and contained in good cigarettes as well as in the waste cigarettes.
7. The ld. Commissioner of Central Excise, who had adjudicated the matter in the appeal filed by the Revenue had taken a view that the difference between the cut tobacco issued and the cut tobacco used was within the permissible limits under the provisions of the Standard of Weight & Measures (Packaged Commodity) Rules, 1977. We consider that the condonation of error under the provisions of the above Rules of 1977 could not be automatically applied to the variation in the use of cut tobacco for cigarettes as in the present case and the matter has to be independently examined and clear findings recorded.
8. The cut tobacco was eligible for the concessional exempted rate when it was for use in the manufacture of machine rolled cigarettes. The expression 'for use' is for assessment, at the stage of assessment of cut tobacco. If, however, the cut tobacco is not actually used for the manufacture of cigarettes, then the benefit availed of at the stage of assessment of cut tobacco could not be allowed to be extended. If the exemption is continued even when the cut tobacco is not used in the manufacture of machine rolled cigarettes, then it would be against the express language of the exemption notification.
9. The ld. Commissioner of Central Excise had based his findings inter alia on the basis of the re-conciliation by the assessee of the quantities of cut tobacco issued and the quantities accounted for. In the grounds of appeal, the Revenue had pleaded that the assessee had proceeded on assumption and that the basis of reconciliation was faulty.
10. There is nothing on record to show that this Reconciliation Statement had been placed before the Department. Taking congnizance of such a statement without confronting the Department with the same, does not appear to be appropriate and does not appear in the interest of justice.
11. Control over the utilisation of the cut tobacco is an important factor for exercising control over cigarettes' factories. Even when the cigarette factories are under physical control and Excise Officers are posted in cigarette factories for day to day control and checks, the importance of proper accountal of cut tobacco could not be over-emphasised. The specific allegations made in the various show cause notices could bot be brushed aside on the ground that no prudent manufacturer would resort to non-accountal of the raw materials. In paras-23 and 24, the adjudicating authority had argued as under :-
23. Notwithstanding the above findings, even if it is held for the sake of arguments that there was non-accountal of cut tobacco as alleged in the aforesaid 17 show cause notices, the following are the only ways open to the assessee for the disposal of such unaccounted volume of cut tobacco.
(a) clearing the same, as such on payment of appropriate duty.
(b) clearing the same as such clandestinely without payment of duty.
(c) converting the same into cigarettes and clearing the latter on payment of appropriate duty.
(d) converting the same into cigarettes and clearing the latter clandestinely without payment of duty.
(e) Destruction of the same with the permission of the department.
(f) Destruction of the same clandestinely without the knowledge of the department.
"24. If the assessee had disposed off the cut tobacco in the manner described at S1.ons.(a), (c) and (e) there is no loss of revenue to the department. Similary, they do not derive any gain, by resorting to destruction of the cut tobacco without the permission/knowledge of the department as indicated at (f) above. Therefore, I am of the view that no prudent manufacturer, that too business giants like this assessee would resort to non-accountal of the raw materials and clear the same or the finished products on payment of duty, by risking their reputation and also when they are not being benefitted in any manner by such an act. The department stands to lose revenue only if the assessee chooses to clear such unaccounted cut tobacco as such or after its conversion into cigarettes clandestinely without payment of duty. The allegation against the assessee in the aforesaid 17 show cause notices is that there was non-accountal of cut tobacco (issued for the manufacture of cigarettes) regularly as shown in Annexure I and II of each of the show cause notices right from 1.10.92 to 31.10.98. There is however no allegation nor anything on record to show that there was any clandestine removal of unaccounted cut tobacco as such or in the form of cigarettes. Further, when the assessee is working under physical control procedure it is not possible to resort to non-accountal of cut tobacco and clear the same clandestinely as such or in the form of cigarettes regularly over a period covering a number of years."
We consider that the allegations as levelled in the show cause notices could not be brushed aside on the basis of such arguments. In para-8 of the Appeal Memo, the Revenue has claimed as under:-
"(viii) The Commissioner, at para-19 of the order, has observed that the quantum of cut tobacco accounted is in excess of the cut tobacco issued for manufacture, which is an impossibility. He has chosen to rely upon a reconciliation between the quantitites issued and accounted, by the assessee. A sample SCN dated 26.06.96 has been chosen for this purpose. From the reconciliation, as it is claimed to be, two important points are to be noted. Firstly, the assessee has proceeded from the "tobacco" to be ideally used as per input-output ratio declared" - which, in the first place is only an assumption, as such quantity has never been utilised by the assessee. The basis of reconciliation, itself, is faulty. Secondly, the purported reconciliation only attempts to show an error of calculation on the part of the department, and does not, in any manner, explain for the unaccounted cut-tobacco. This purported reconciliation statement, therefore, cannot be imparted with any credibility."
The ld. SDR had pleaded before us that the provisions of the Weight and Measures Act were not relevant and that each blend has to be taken-up separately and each show cause notice was required to be examined independently. It was also emphasised that the allegations could not be disposed of on a speculative consideration.
12. In facts and circumstances of the case, we agree with the plea of the Revenue for remand of the matter to the jurisdictional Commissioner of Central Excise for re-adjudication in the light of our above observations.
13. As regards the appeal filed by M/s. I.T.C Ltd., the ld. Sr. SDR had referred to the various accounts maintained by the assessee and has submitted that they were subjects to verification by the central excise officers posted in the factory and that no discrepancy had been recorded by them in the accounts maintained by the factory. From the records referred to by the ld. Sr. Advocate, we find that the weight of paper and tobacco had been shown separately. We could not however examine the input output declaration said to have been sent by the assessee. It could not be ascertained whether the weight of paper had been correctly shown vis a vis the declaration said to have been filed and whether the weight of paper have been separately shown in such a declaration. It has also been argued on behalf of M/s. I.T.C Ltd. that the adjudicating authority had not gone into the question of variation and had not studied the possible and plausible reasons for such variations. In para-14 of the order, it had been mentioned that the assessee had not made any attempt to reconcile the difference in support of their claim that they have satisfactorily accounted for the input as well as the output. The appellant's plea in this regard is that such a huge demand could not be fastened on them on a primafacie view of the adjudicating authority and on the basis of the alleged non-reconciliation when no opportunity for any reconciliation had been given to them.
14. We find that there is no allegation in the show cause notice that the cut tobacco not accounted for had been used in the manufacture of cigarettes and such cigarettes had been removed without payment of central excise duty. The adjudicating authority had not proceeded further with regard to the allegation of non-accountal of cut tobacco after holding that M/s. I.T.C. had not accounted for cut tobacco and were not eligible for the exemption under Notification No.356/86 CE, and were liable to pay central excise duty at the Tariff rate.
15. The ld. SDR had pleaded before us that a quantity equal to the weight of paper contained in the waste cigarettes in Appendix C was not so used in terms of the assessee's own accounts and was not eligible for the benefit of concessional rate of duty under Notification No.356/86 CE. With regard to the declared formula for use of cut tobacco in the manufacture of cigarettes, it was submitted that the cut tobacco for which concessional rate of duty under Notification No.356/86 CE had been availed, differed in quantity from the amount of cut tobacco used in the manufacture of cigarettes as per the declarations filed by M/s. ITC.
16. We consider that in the facts and circumstances of the case, the matter could not be disposed of in this manner. A more detailed study of the disposal of the cut tobacco which is potential cigarettes (refer para-21) (a) of the supplement to the Manual), is required. While reference has been made to the Manual, the main ground taken is that the assessee had not chosen to cor-relate the various accounts to the satisfaction of the investigating officers vis-a-vis. the formula given by the assessees themselves etc. Their explanation had been disposed of with the remarks in para-14 of the order.
17. We consider that a careful analysis of the discrepancies vis-a-vis assessee's explanation is required to meet the ends, of justice.
18. We therefore, consider that this appeal field by M/s. ITC Ltd. also needs to be allowed by way of remand for re-adjudication by the jurisdictional Commissioner of Central Excise in the light of our above observations.
19. We, therefore, set aside both the orders impugned before us and remand the matter to the jurisdictional Commissioner of Central Excise for de novo adjudication after following the principles of natural justice. Both the sides will be at liberty to place the relevant facts and the case law before the adjudicating authority. The Revenue will also be free to place the various pleas taken-up in the appeal filed before us, before the adjudicating authority.
20. With these observations, both the appeals one filed by the Revenue and the other filed by M/s. ITC Ltd. are allowed by way of remand. Ordered accordingly.