Customs, Excise and Gold Tribunal - Delhi
Standard Pencils Pvt. Ltd. vs Collector Of Central Excise on 12 April, 1996
Equivalent citations: 1996(86)ELT245(TRI-DEL)
ORDER Shiben K. Dhar, Member (T)
1. These appeals, directed against common Order-in-Original No. 42/1991 of Collector of Central Excise, were heard together and are being disposed of through this common order.
2. M/s. Standard Pencils Pvt. Ltd., the first appellant, hereinafter referred to as SPPL, are engaged in the manufacture of, among others, eyebrow pencils, bindi pencils, eye-shadows, eye-liners, black lead general pencils, copying pencils, etc. It was alleged that SPPL were evading excise duty on "Eyebrow Pencils" by removing such pencil as Kumkum Pencils (Bindi Pencils) taking advantage of exemption claimed on Kumkum pencils. SPPL had entered into an agreement on 1-12-1984 with Lakme for manufacture and supply of 'eyebrow pencil' in the name of Lakme and accordingly were supplying eyebrow pencil in two sizes, medium and large, up to June, 1988 and thereafter, Kumkum pencils in the same brand name and in the same sizes and claiming exemption under Notification No. 235/86, dated 3-4-1986.
2.1 M/s. SPPL were also manufacturing and supplying eyebrow pencils with brand name of 'Eyetex' for M/s. Aravind Laboratories up to June, 1987. Kumkum pencils with the brand name of eyetex were also being manufactured and supplied to M/s. Aravind Laboratories.
2.2 SPPL also alleged to have supplied eyebrow pencils in the name of black pencils to M/s. Colgate Palmolive (India) Ltd. without payment of duty.
2.3 It is alleged that in addition to common raw materials used in the manufacture of Kumkum pencils and eyebrow pencils, the following four raw materials are used in addition, only in eyebrow pencils. These 4 raw materials are not used in the manufacture of Kumkum pencils :
(1) Beeswax (2) Liquid Paraffin (3) Stearic Acid (4) Calcium Stearate These raw materials, as observed by Collector from scrutiny of "Raw Material Stock Register", have been regularly consumed by SPPL during the period relevant to the case, i.e., from 1-4-1986 to 3-12-1990. The production of eyebrow pencils reflected in the Daily Stock Account/RG 1 is, it is alleged, not in proportion to the quantities of the raw materials consumed as per raw material stock register, and therefore, it is alleged that production of actual quantity of eyebrow pencils has been suppressed by SPPL.
2.4 The samples of both kumkum and eyebrow pencils were sent for chemical test. Enquiries were conducted with dealers, main persons concerned in SPPL Lakme, Aravind Laboratories, etc. and statements were recorded. Based on the entries reflected in the raw material register with corresponding production in RG 1, scrutiny of documents, Chemical Test Report and statements of dealers and other persons concerned in the matter, the Collector held that "all the quantities of kumkum pencils cleared by M/s. SPPL to M/s. Lakme, Bombay and M/s. Aravind Laboratories, Madras, are actually eyebrow pencils, cleared in the guise of kumkum pencils, without payment of duty due thereon". He also held that pencils cleared as black pencils to M/s. Colgate Palmolive India Ltd. are also eyebrow pencils. Collector also, on the basis of allegation among others, that kumkum was shown as 'eye make-up' in the pamphlets of Lakme, pencils rejected for exports, were described as 'eyebrow pencils' in the correspondence even though the invoices for these issued by SPPL describe these as kumkum pencils and that their dealers were selling kumkum pencils as eyebrow pencils held, the last appellant, Lakme, liable to action under Rule 209(A).
2.5 Similarly, M/s. Aravind Laboratories, on the grounds among others that their representative used to supervise manufacture of eyebrow pencils at the premises of SPPL and the samples taken from the materials seized from the Aravind Laboratories and Venktesha Agency on test indicated that both types of goods were same, were also held liable for action under Rule 209(A).
2.6 In consequence, the Collector confirmed a demand of duty of Rs. 1,47,10,803/- (Rupees One Crore Forty Seven Lakh Ten Thousand Eight Hundred and Three only) being duty payable by SPPL, the first appellant. Orders of confiscation of the material, alleged to be eyebrow pencils, seized at various places were also issued. Penalties were also imposed on two Directors of SPPL. Penalties under Rule 209(A) were also imposed on Lakme, Aravind Laboratories and Venketesha Agency.
3. Arguing for the first four appellants, Sh. V. Lakshmi Kumaran, Ld. Advocate, made the following submissions :-
(i) M/s. SPPL during the relevant period manufactured both, kumkum pencils and eyebrow pencils. Both these pencils were prominently marked either as kumkum pencil or eyebrow pencil. The Chemical Test conducted on the basis of which it is alleged that both pencils are same in vague as it does not list out the specific composition. In any case, the subsequent test carried out by the Chemical Examiner himself clearly indicated that the two products, kumkum pencils and eyebrow pencils, were totally different. This test also indicates basis for presence of calcium compounds in kumkum pencils. Eyebrow pencils are harder, suitable for use with eyebrows, whereas kumkum pencils which are essentially bindi pencils are softer and used on the forehead to put the bindi mark. Exemption was being claimed on kumkum pencil. He, however, conceded that Tribunal has held against them on the subject of exemption to kumkum pencil and they have gone in appeal to Hon'ble Supreme Court. At this stage, however, he contested the claim that no kumkum pencils were manufactured during the relevant period and it was only eyebrow pencils which were removed. It is not conceivable that throughout this period not even a single kumkum pencil was produced and what was produced was only eyebrow pencil which was marked as kumkum pencil. Both pencils were prominently marked as eyebrow pencils or bindi pencils and it is inconceivable that consumers in general would have purchased kumkum pencil taking them as eyebrow pen-cils.There may have been isolated cases where stockists might have accounted these wrongly or attempted to sell one variety for the other. That by itself would not, however, constitute proof that whatever was manufactured by SPPL during the relevant period was only eyebrow pencils and not kumkum pencils.
(ii) The main basis in issue of Show Cause Notice is consumption of certain raw materials which admittedly are used for the manufacture only of eyebrow pencils. In fact, the entire Show Cause Notice proceeds on the assumption that because of consumption of raw materials relevant to the production only of eyebrow pencils, certain quantity of eyebrow pencil, not reflected in RG 1 Account, had been produced. This is no ground for concluding that whatever was sold as kumkum pencil . was, in fact, only the eyebrow pencil which was mis-declared as kumkum pencil.
(iii) Assuming that the quantities of the raw material from which quantity of eyebrow pencil that ought to have been produced is taken as correct, the duty liability would work out to be much less than what Collector has arrived at. Adopting the formula relied upon by the Collector himself, i.e., "MICAL Test Register" etc., it is possible to produce only 76,299 Gross of pencils. The presumption, therefore, that 113925 Gross quantity was produced, is itself an assumption contrary to the basic erroneous assumption, even admitting while denying, that such a basic assumption was correct. Taking such a quantity, that ought to have been produced, they have accounted in their records for a quantity of 72920 Gross. This quantity was accounted in the form of 31968 Gross of eyebrow pencils and 4Q952 Gross of leads. 40952 Gross of leads were supplied to M/s. Maharashtra Pencil Factory. These were not accounted in the statutory records for the simple reason that such leads are not liable to duty. If, however, quantity is to be worked out on an estimated basis on the basis of consumption of 4 raw materials used exclusively in the manufacture of eyebrow pencils, the quantity of forty thousand and odd leads which were supplied to M/s. Maharashtra Pencil Factory (MPF) have necessarily to be taken into account while working out any duty liability on the ground that a particular quantity of eyebrow pencils ought to have been produced from the given quantity of raw materials. Even according to calculations made in the impugned order, the quantity accounted for is justified as the most probable maximum quantity on identically formulae consumption.
(iv) Even if the assumed calculations are accepted, the total quantity that ought to have been produced would come to 76289 Gross, out of which 72920 Gross have been duly accounted for in the records of the Company. The duty liability, however, has been worked out on a much bigger figure of 113825 Gross. For producing this quantity they would need additional raw materials of the order of 4879 Kgs. There was no allegation that the appellants were selling goods without being accounted. In fact, the prder proceeds on the premise that the raw material used for eyebrow pencils were duly accounted up to July, 1991. The impugned Order suffers from a basic infirmity in that while the quantity of ingredients, i.e., 9778 Kgs. could produce only 76299 Gross, the demand is proposed on the assumption that an additional quantity, i.e., 78941 Gross of the Kumkum pencils was also produced out of the same quantity of the ingredients.
(v) The calculations for demanding duty in the impugned Order assumed the sales price itself as assessable value without giving abetment towards duty payable as required under Section 4(4)(d)(ii) of Central Excise Act. In this connection, he submitted copy of Tribunal's Final Order No. 172/87-B1 in case of KM. Industries, West Bengal v. C.C.E., Calcutta, where Tribunal held such deductions were permissible. He submitted that if duty liability is determined after re-determining the value by excluding the duty payable, the liability if any, if at all the allegations made in the Show Cause Notice are assumed to be correct, would only be Rs. 73,77,393. The duty payable would get further reduced to only Rs. 58,71,882/- if similarly in case of supplies to M/s. Aravind Laboratories duty is re-calculated after allowing abetment under Section 4(4)(d)(ii) and extending benefit of exemption available to Aravind Laboratories under Notification No. 140/83.
(vi) He submitted that these calculations are based on the premise which they strongly contest that eyebrow pencils were cleared as kum-kum pencils. Since exclusive ingredients such as were used were sufficient only to produce eyebrow pencils and leads as are accounted, the kumkum pencils manufactured and cleared could not be considered as eyebrow pencils. Consequently, the demand of duty on quantity of kumkum pencils cannot be sustained. Even otherwise, it would not be reasonable to assume that during this period every kumkum pencil cleared in fact was not kumkum pencil but eyebrow pencil. Collector has erred in arriving at a finding based on the sales invoices that whatever was cleared as kumkum pencil were in fact eyebrow pencils.
4. Arguing on behalf of M/s. Lakme, Ld. Advocate, Shri Shroff, made following submissions :-
(i) They have been purchasing eyebrow pencils from SPPL from 1985 onwards. From sometime in 1988, they decided to market kumkum pencil and actually started marketing black kumkum pencil sometimes in July, 1988 and red kumkum pencil in July, 1990. The packaging of the two products is totally different. Both eyebrow pencil and kumkum pencil are clearly indicated on the pencils themselves as also on the boxes. These pencils are always treated as being totally different and separate from eyebrow pencils. Eyebrow pencils were marketed for darkening eyebrows whereas kumkum pencils stand for making a spot on the forehead. The market for kumkum pencil in the South of India is basically for black kumkum pencil as that colour is favoured there. They were always under the impression and bona fide belief that eyebrow pencils and kumkum pencils are totally different products. They had no knowledge of the composition of the two products as this was never communicated to them by SPPL. The market for Lakme eyebrow pencil has been declining and, therefore, they started marketing kumkum pencil after December. 1988. It was alleged against them that the two pencils were one and the same reliance being placed on the Chemical Examiner's Report dated 7th Feb., 1991. Collector had erred in relying upon the Chemical Examiner's Report when subsequent Report dated 31-7-1991 by the same Examiner clearly indicated that though there were certain common ingredients the proportions differ and that in the case of kumkum pencils in addition to certain common ingredients other ingredients were also used. Chemical Examiner had stated that eyebrow pencil lead was hard as compared to kumkum pencil. And that presence of calcium in the kumkum that SPPL were using while rolling leads to avoid sticking. The appellants had always been under the impression and belief that two pencils were two separate and distinct products and that this was proved by the Second Report of the Chemical Examiner dated 31st July, 1991. They had never sold kumkum pencil as eyebrow pencil. They have always sold as kumkum pencil and the invoices clearly bear this out. Most of these stockists, in fact, had sold these pencils as kumkum pencil and not as eyebrow pencils, and the fact that some of the stockists have sold these as eyebrow pencil and the fact that some dealers have informed the consumers that these kumkum pencils may be used as eyebrow pencil were clearly irrelevant as such dealers and stockists were not under their control and they could not be held responsible for any such action.
(ii) In regard to allegation that 42000 eyebrow pencils originally rejected by the appellants were thereafter receive as kumkum pencils from SPPL and exported by the appellants as eyebrow pencils, he submitted that there was some error on the part of the staff of Lakme in recording the supplies made by the SPPL. Since the goods were exported in Dec., 1988, it was not possible to ascertain whether these pencils were kumkum pencils or eyebrow pencils. By admitting the discrepancy and paying the duty on these pencils, they only demonstrated their bonafide. This solitary instance that there was some bona fide mistake cannot be held against them as evidence that they knew that eyebrow pencils were being cleared under the guise of kumkum pencil and that, therefore, they knew that the goods were liable to confiscation. No stockist or dealer had in any statement stated that they had sold kumkum pencil and eyebrow pencil at their directions or instructions. How such stockists or dealers accounted for their pencils and how these were used could not alter the fact that two pencils were distinct and separate. They were never aware that the goods were liable for confiscation. They had pur- chased these goods on Principal-to-Principal basis under the bona fide belief that the two pencils were totally different. Even as it is cross-examination of various persons clearly brought out the fact that they had at no stage asked the stockists or dealers to account these as eyebrow pencil or to.sell these as eyebrow pencils.
(iii) Referring to cross-examination of Abai Mangali, Executive Manager at Page 90 of the Paper Book Part-II, the Ld. Advocate submitted that it has clearly came out from the cross-examination that kumkum pencil are used only as kumkum pencil and few instances of wrong description on the part of stockists which were reported to them were being corrected. It also indicates that they launched kumkum pencil around July, 1988 and the market response was very good and the demand has been going very rapidly. The cross-examination also reveals that Lakme transaction with SPPL was on Principal-to-principal basis. Referring to Cross-examination at Page 92 of the same Paper Book, he submitted that Sh. Sanjay Sharma categorically stated that he had never informed his retailers to sell kumkum pencil as eyebrow pencil and that he had not even a single invoice in which he has sold a kumkum pencil as an eyebrow pencil. He also during cross-examination stated that he may have by mistake stated that kumkum pencil may be used as eyebrow pencil. Referring again to cross-examination of Sh. Mohd. Dawood, dealer of Lakme and Aravind Laboratories, he submitted that in reply to specific question, Sh. Dawood categorically stated that nobody from Lakme or any other Company has instructed him to sell kumkum pencil as eyebrow pencil.
(iv) Drawing attention to the results of cross-examination as set out in the paper book, he submitted that these clearly indicate that statements were extracted from them. The cross-examination clearly indicates that in some cases where kumkum pencils were shown as eyebrow pencils had resulted from mistake and the persons who were got into the habit of eyebrow pencils right from 1981 to 1988 continued to do so. The two pencils are different products and hypothetical use of one for the other is not relevant and cannot form the foundation and the Test of Commercial Parlance made. Their Turnover of pencils were only 1.12% of the total turnover of Lakme.
(v) The Department has not produced any evidence of actual user whereas they have submitted large ntimber of affidavits from people in trade, of housewives, beauticians, etc. that kumkum pencils purchased by them were used for the purpose of making Bindi on the forehead. They had never sold any kumkum pencil which they had purchased from SSPL as eyebrow pencil and no evidence, in fact, to the contrary has been adduced by the Department. Similarly, appellants had never informed their dealers or their stockists to sell kumkum pencil as eyebrow pencil and, in fact, was no such allegation against them. Each eyebrow pencil is marked as eyebrow pencil not only on the pencil itself but also on the box in which it is sold. Similar is the case of kumkum pencil. No one, therefore, could confuse kumkum pencil with an eyebrow pencil. It may be possible to use kumkum pencil as an eyebrow pencil. That kind of use, however, is totally irrelevant; what is to be considered is pre-dominant use. If the two products are different merely because someone can use a kumkum pencil also as an eyebrow pencil would not make two totally different pencils one and the same. The sales pamphlets, numbering 2 or 3 only, were never used or circulated. In any case, it is not correct to rely on any publicity material for the purpose of identifying a product.
(vi) Summing up he submitted that they had always purchased pencils under the bona fide belief that the two pencils were different and, therefore, the seized pencils were not liable to confiscation and they were not liable to penalty under Rule 209(A).
5. Ld. D.R., arguing on behalf of Revenue, submitted that admittedly the 4 ingredients mentioned in Para 29 of the impugned order are used only in the eyebrow pencil in addition to materials which are common to both, kumkum pencil and eyebrow pencil. These 4 raw materials as pointed out by Collector in Para 31 of the impugned Order have been regularly consumed by SPPL during the period from 1-4-1986 to 3-12-1990. The production of eyebrow pencil reflected in the daily stock account was not in proportion to the quantum of raw materials consumed. Their plea that some of these raw materials were also used in glass-marking pencils has been correctly rejected by Collector in Para 32 of his Order since no glass pencil had been produced during the material period. During the year 1989-90 raw materials had been consumed to the extent of nearly 2400 Kgs. and yet there was nil production and clearance of eyebrow pencil during the year 1989-90 except small quantities of lead cleared to Maharashtra Pencil Co. In other years also, there was in similar way suppression of production of eyebrow pencils. Collector has worked out on the basis of raw material the quantity of eyebrow pencil which ought to have been accounted but were not accounted. Statements taken during investigations clearly indicated that the dealers/stockists were selling these pencils cleared as kumkum pencils as eyebrow pencils. Similarly internal correspondence in regard to 42000 rejected eyebrow pencils which were subsequently exported, described these pencils which were declared as kumkum pencil are eyebrow pencils. Collector, therefore, was correct in assuming that what, in fact, was cleared as kumkum pencil on which exemption was being claimed by the appellant were in fact eyebrow pencils on which duty ought to have been paid.
5.2 Opposing the plea for deducting duty payable from the price, he submitted that such a deduction is permissible only if the price represents cum-duty price. Since in their case admittedly no duty was paid, no such deduction from an ex-duty price can be allowed.
5.3 In regard to exemption claimed on kumkum pencil, he drew attention to the case reported in 1994 (70) E.L.T. 118.
5.4 The Chemical Examiners Report clearly indicated that both samples had same composition and therefore, Chemical Examiner had correctly concluded on the basis of analysis carried out that it is reasonable to presume that samples of eyebrow pencil and kumkum pencil have essentially identical chemical composition. Merely because Chemical Examiner had stated that it was not possible to establish the actual percentage of raw materials in the samples would not alter the fact that both the samples of kumkum pencil and eyebrow pencil are one and the same. Calcium stearate is not one of the raw materials for manufacture of kumkum pencil and yet presence of calcium was found. Subsequent Test Report cannot be accepted because of the fact that there may have been, in the meantime, a change in the chemical composition. The internal correspondence relating to Lakme clearly indicated that 42000 kumkum pencils were described in the documents as eyebrow pencils and were exported as eyebrow pencil. It is also on record that statements recorded indicate that some stockists were selling these as eyebrow pencils. In vies of this, the Collector has correctly concluded that all kumkum pencils were in fact eyebrow pencils, liable to duty, on which duty has been evaded, demand for duty, therefore, is justified. Appellants are also liable to penalties. M/s. Lakme and Aravind Laboratories are also liable to action under Rule 209(A) having dealt with in goods liable to confiscation.
6. We have heard both sides. The main charge in the Show Cause Notice is that 4 raw materials used exclusively in manufacturing eyebrow pencils have been consumed during the relevant period but the quantity of eyebrow pencils, which could be expected to have been manufactured from such raw materials, has not been entered in RG 1. From this an inference has been drawn that eyebrow pencils have been removed in the guise of kumkum pencils.and duty evaded to that extent since exemption was claimed on such kumkum pencils whereas eyebrow pencils had to pay duty as cosmetics. This inference is sought to be corroborated through certain statements which reveal that kumkum pencils were accounted by dealers as eyebrow pencil and internal correspondence in regard to certain export consignment of Lakme describe, pencils received as kumkum pencil, as eyebrow pencil. These eyebrow pencils were also supplied as Black pencils to M/s. Colgate Palmolive, who, however, during investigations immediately paid duty thereon. That the 4 raw materials are used exclusively in manufacturing eyebrow pencils had not been disputed before us. There is no do dispute also about the quantity indicated in raw material accounts. It was, however, contended that even assuming quantity is to be derived from the raw materials accounted in accordance with the formula adopted by the Collector himself, duty liability would be much less than what has been worked out. In other words, the formula adopted by Collector based on some MICAL Register was also accepted. What, however, was vehmently contested was that this would only indicate that such quantity as was not accounted as eyebrow pencil had been removed as eyebrow pencils without payment of duty. This would not lead to an inference that entire quantity during the relevant period that was removed was only kumkum pencil and not eyebrow pencil.
7. The question, therefore, that arises is whether demand of duty relating to eyebrow pencils is to be based on the quantity worked out from the raw material register or entire quantity of kumkum pencil as indicated in the sales invoices is to be taken as the basis, on the assumption that such quantity in fact was only eyebrow pencils. Collector in Para 31 of his Order has observed :-
"It is seen from the 'Raw Material Stock Register' maintained by SPPL that the said 4 raw materials required for manufacture of eyebrow pencils had been regularly consumed by SPPL during the period relevant to this case (i.e., from 1-4-1986 to 3-12-1990) Shri Ranganathan, the Storekeeper had stated that he had maintained the Raw-material stock register and had made receipt entries in the register, after verification as and when raw-materials are received and similarly as and when issues are made entered the same in issues column. One of the charges made in the Show Cause Notice is that even though the said four raw materials had been regularly consumed, the production of eyebrow pencils reflected in the daily stock account/RG 1 is not in proportion to the quantum of the raw-materials consumed as per the raw-material stock register."
7.1 In this Para, there is no allegation that raw material accounts are not correctly maintained. In fact, Collector has specifically observed that these raw materials had been regularly consumed by SPPL during the period relevant to this case, i.e., 1-4-1986 to 3-12-1990. There is nothing to cast doubt on the authenticity of raw materials register. In this context, therefore, it would not be fair to reject that part of evidence as reflected in raw material accounts, which evidence in fact is mainly relied upon to raise the charge against the appellant, and to use that evidence in arriving only at assumption that since some quantity as ought to have been produced, has not been entered in RG 1, all the kumkum pencils such as were accounted were in fact only eyebrow pencils, which had been removed as kumkum pencil. To the extent some quantities expected to have been produced from the raw material consumed were not accounted in RG 1 would not lead to the inference that entire RG 1 was falsified by indicating production only of kumkum pencils. Such an assumption would involve rejection of the evidence in the form of Raw Material Accounts, an evidence heavily relied upon by Collector himself. There is no allegation that raw material accounts were not maintained correctly nor any allegation also that raw materials reflected only partially correct position. We are, therefore, of the view that in absence of evidence indicating removal of each and every kumkum pencil as eyebrow pencil only, it would be reasonable to base the demand in regard to eyebrow pencils only on raw material accounts accepted by Collector himself as authentic.
8. In regard to deduction of duty payable from the price, this came up for decision before Tribunal in the case reported in 1995 (76) E.L.T. 325. The Tribunal held that since the price did not include element of duty, there could be no question of allowing deduction of duty. Such deduction can be allowed only in case of cum-duty price. Tribunal took the same view in case of Ramaraju Surgical Cotton Mills v. C.C.E., Madras, 1996 (82) E.L.T. 86. Since admittedly no duty was paid on the goods, no deduction towards duty payable could be claimed. Allowing such deduction in case of manufacturer who claims exemption to which he is not eligible would place another manufacturer who does not claim such exemption at a disadvantage. We, therefore, reject this plea.
9. The Ld. Advocate submitted that 40952 Gross of leads were supplied to Maharashtra Pencil Co. and, therefore, this quantity is to be added to the quantity of eyebrow pencils already accounted by them. The other words, 81968 Gross of eyebrow pencil are already accounted in RG 1 and to this must be added 40952 Gross of leads since these leads have come only from the raw material accounted in the raw material accounts. Collector has referred to leads supplied to Maharashtra Pencil Co. in some detail, when it had been contended before Collector that sale of leads to Maharashtra Pencil Co. was on sale basis. In Para 75-76 of his Order Collector has observed :-
"From the various statements of Shri C.K. Dhankani, Proprietor of MPF, it is observed that part of the leads received from SPPL had been used in the production of eyebrow pencils bearing MPF brand name as well as other parties. The remaining leads were used for manufacture of eyebrow pencils, for SPPL without brand name and without stamping and returned to them and that MPF had neither excise licence nor paid the duty. He had also stated that eyebrow leads were purchased and eyebrow pencils were despatched during 1985-86,1986-87,1987-88 and 1988-89 and that no eyebrow leads were received during 1989-90 and 1990-91 from SPPL. Rate of eyebrow leads supplied by SPPL was between Rs. 20 to 23 per gross. Eyebrow pencil leads were received with a certificate that they are meant 'for processing into pencils and not for sale' and that MPF had sent back only eyebrow pencils to SPPL.
Shri Ranganathan, the storekeeper of SPPL in his further statement dated 14-2-1991 had stated that the processed pencils received from MPF were cut into two sharpened, cleaned, labelled, capped and packed in packets and sent to Lakme under "Trading Invoices" and that the above had not been entered in RG 1 and duty was not paid on such eyebrow pencils; that the processed pencils received from MPF are received at the packing department, and all the processes viz., cutting, sharpening, cleaning, capping and packing were being done in the company by the employees for the last 8 years and that the details regarding receipt of processed pencils from MPF and its repacking are not intimated to the Department."
10. Collector has concluded that SPPL had been sending eyebrow leads in the name of eyebrow and leads for eyebrow pencils for reprocessing and return. The leads despatched to Maharashtra Pencil Co. had not been reflected in the Company's account, i.e., RG 1. Collector has correctly held that the SPPL as manufacturers of the lead pencils received from Maharashtra Pencil Co. In this view of the matter, if this quantity is added for the purpose of accounting the finished eyebrow pencils then, in determining duty liability, duty on these 40000 pencils would have to be demanded in addition to duty arrived at by excluding the raw materials required for these pencils in computing total duty liability from raw material accounts pencils. Since this would not make material difference itself in working out the total liability, we are of the view that quantity of 40000 leads supplied to Maharashtra Pencil Factory and claimed to be accounted in RG 1 for working out duty liability from the Raw Material Account cannot be taken into account.
11. In regard to exemption on kumkum pencil, the Ld. Advocate had fairly conceded that Tribunal has held against them and they are in appeal before Hon'ble Supreme Court. In view of this, following the ratio of the Tribunal's decision in case of C.C.E., Madras v. Standard Pencils (P) Ltd. -1994 (70) E.L.T. 118, we also hold kumkum pencils are not eligible to exemption.
12. We now come to the liability to penal action under Rule 209(A) on the appellants, M/s. Lakme Pvt. Ltd. and M/s. Aravind Laboratories, Madras. Reference to kumkum pencil as eyebrow pencil in a particular memo in the internal correspondence and one instance where these kumkum pencils are alleged to have been exported as eyebrow pencil and the statements of some dealers does create a suspicion. Rule 209(A) mandates that any person who acquires possession or is in any way concerned with removing, despatching, keeping, considering, selling or purchasing, or in any other manner deals with any excisable goods which he knows or has reason to believe are liable to confiscation under the Central Excise Act or the Rules shall be liable to penalty. The material ingredients are that the person must be held to know or that he has reason to believe that the goods he is dealing with are liable to confiscation under the Act. The Ld. Advocate forcefully submitted that there is not a single piece of evidence which will go to prove that Lakme knew that the goods which they were ordering for were actually eyebrow pencils. No dealer has given a statement that they were selling kumkum pencil as eyebrow pencil under the directions or instructions of Lakme. When certain instances came to their notice, they took steps to correct the situation. They did not know the composition of the pencils nor was any information in regard to composition supplied to them by SPPL. Even Chemical Examiner's Report does not categorically specify the various constituents of the sample and subsequently the Second Report submitted by him is in their favour. The onus of establishing essential ingredients of an offence is always on the Department. Particular emphasis in this connection was laid on the fact that the goods seized in the premises of Lakme were not subjected to a chemical test and that during cross-examination the testimony relied upon in the form of statements had been badly shaken. In fact, some persons cross-examined had categorically stated that they did not receive any instruction from Lakme to sell kumkum pencil as eyebrow pencils and that in some cases accounting of kumkum pencil as eyebrow pencil was a result only of past habit. The evidence such as has been led in this case would not appear to support the charge that the buyers entered into arrangement whereby they were knowingly receiving eyebrow pencils in the guise of kumkum pencil and they knew that such pencils are liable to confiscation. Similarly, in case of Aravind Laboratories, the only evidence is that some of their men were supervising manufacture. Certain circumstances as discussed in the impugned Order could create a suspicion. No verdict of "guilty" can be returned on suspicion, however grave. Considering in totality the circumstances, we are of the view that evidence such as has been led in this case is not sufficient to sustain penal action under Rule 209(A).
13. In regard to confiscation of the goods seized at various places, considering that we have held that only such quantity of pencils as could have been expected to be manufactured from the quantities indicated in the Raw Materials Accounts and were not so accounted, could be considered as eyebrow pencil removed without payment of duty, confiscation of the seized goods can be sustained only if such goods are related to such quantity of eyebrow pencils removed without payment of duty. Since this can be possible only after actual quantity is determined, this would have to be decided through de novo proceedings at the time of quantification. Since the Ld. Advocate submitted that there are some variations in the figures shown in Show Cause Notice and RG 1, this too would have to be looked into by Collector at the time of quantification of duty.
14. In the result, therefore, we pass the following order :-
(i) We hold that quantity of eybrow pencils removed without payment of duty be worked out on the basis of quantity of 4 essential raw materials used exclusively in the manufacture of eyebrow pencil as indicated in the Raw Materials Accounts, by adopting the formula relied upon by the Collector himself and duty on eyebrow pencils to the extent these are not accounted in RG 1 Register, be worked out accordingly.
Admissibility or otherwise if the benefit of Notification No. 140/83-C to M/s. Aravind Laboratories should also be decided while working out total liability.
(ii) the benefit of forty thousand and odd Gross leads supplied to Maharashtra Pencil Factory in working out such quantity cannot be given without charging such forty thousand and odd pencils separately to duty.
(iii) No exemption to kumkum pencil is available.
(iv) Duty payable cannot be allowed to be deducted from the price at which goods have been sold.
(v) Orders regarding penalty under Rule 209(A) on 4th, 5th and 6th appellants, i.e., M/s. Aravind Laboratories, Sh. Venketesa Agencies and M/s. Lakme Ltd., are set aside.
(vi) Depending upon quantum of duty payable in regard to eyebrow pencils such as may be arrived at by Collector, he shall pass fresh orders in regard to penalty under Rule 173Q in case of first appellant, M/s. Standard Pencils (P) Ltd. and second and third appellants, i.e., Sh. R.S. Falor and Sh. K.K. Falor.
(vii) Order regarding confiscation of goods seized shall also be in the light of directions regarding liability to confiscation given earlier by us.
We remand the matter to Collector, Central Excise, for passing suitable Orders through de novo proceedings in regard to quantification, confiscation and penalty under Rule 173Q in the light of directions given hereinabove and after observing Principle of Natural Justice.