Customs, Excise and Gold Tribunal - Delhi
Sangam Processors (Bhilwara) Ltd., ... vs Cce on 10 February, 2004
Equivalent citations: 2004(93)ECC587, 2004(168)ELT357(TRI-DEL)
ORDER C.N.B. Nair, Member (T)
1. The first appellant M/s. Sangam Processors (Bhilwara) Ltd. is a processor of textile fabrics. The second and third appellants M/s. Sangam India Ltd. and M/s. Sangam Suitings are textile fabric manufacturers who got their fabrics proposed by the first appellant. The remaining appellants are officers of these manufacturing units.
2. Processing of fabrics was liable to central excise duty at ad-valorem rates. Therefore, M/s. Sangam processors were discharging central excise duty on the processed fabrics based on their value. However, dispute arose about the correctness of the amount of duty paid by them. This led to the issuance of 2 Show-Cause-Notices dated 2.7.99 and 5.7.99 by the jurisdictional Central Excise Commissioner. The notices proposed recovery of the duty short levied as well as imposition of penalties on the processor, the aforesaid 2 supplier of fabrics and the officers of the companies. The Show-Cause-Notice also charged that the short levy was the result of suppression of facts by the appellants, thereby attracting the Proviso to Section 11A of the Central Excise Act for recovery of duty during the extended period. Under the adjudication order dated 4.4.2000 the Commissioner of Central Excise, Jaipur upheld the allegations. Consequentially duty demand of over Rs. 83 Lakhs was confirmed and penalties were imposed on the present appellants. The appellants moved this Tribunal in appeal. Vide its final order numbers 800-805/2000-A dated 6.9.2000 this Tribunal allowed the appeals after setting aside the adjudication order. Aggrieved by that order, Revenue moved the Hon'ble Supreme Court. Vide its order dated 13th November, 2002 the Apex Court was pleased to dispose of the appeals by way of remand and passed the following order:
"It appears to us that the Tribunal has not considered all aspects in the proper perspective. We, therefore, set aside the impugned order and remand the matter back to the Tribunal for disposal in accordance with law. It is clarified that all questions raised by the parties are left open. The appeals are allowed accordingly."
3. We have perused the records and have heard both sides during the hearing on 1st January, 2004, and all the appeals are disposed of under this common order.
4. Briefly stated the facts leading to the dispute are as under:
4.1 The manufacturing (processing of fabric) was carried out as a job work by M/s. Sangam Processors. They do not buy the main raw material (fabric). Nor do they sell the processed fabric. They only receive a payment towards processing charges. However, since the processed fabrics were liable to central excise duty on ad-valorem basis, the full value of the processed fabric (i.e. including cost of fabric) was required to be determined. The correct method of such determination remains settled by the decision of the Apex Court in the case of Ujagar Prints Etc. Etc. v. Union of India and Ors., 1989 (21) ECC11 (SC) : 1989 (39) ELT 493 (SC).
4.2 The appellant processor received fabrics from several parties for processing. During the disputed period, consignments were received from 22 suppliers including the 2 parties in the present appeal, namely, M/s. Sangam India Ltd. and M/s. Sangam Suitings who form part of the Sangam group of companies. From time to time the appellant filed price declarations in respect of the various consignments processed before the Central Excise authorities, showing the price being adopted for the purpose of assessment of the processed fabrics. The cost declaration included, mainly, the cost of yarn used in the weaving of the fabric being processed, processing charges etc. The cost declarations also indicated the selling price of the processed fabrics, (even though the sales were subsequent to return of the processed fabric) by the parties who had entrusted the processing work with M/s. Sangam Processors. The appellants filed also cost sheets filed by the suppliers of the fabrics. Thus, the cost of the processed fabrics in question was declared both as cost of unprocessed fabric plus cost of processings, as well as sale price of processed fabric minus cost of sale and sale profit. The cost declarations also indicated that weight of yarn per metre of fabrics both on the warp and weft side. No objections were raised by the Central Excise authorities to the method of computation of value of the fabric or the weight of yarn taken into account for such computation and the duty payments made were accepted without any demur.
4.3. On 3.8,98 Central Excise Officers visited M/s. Sangam Processors factory and carried out certain checks. The fabrics under processing were of very different qualities, depending upon the mix of yarns in question. When weight of 50 lots were checked, it was observed that the actual weight in respect of 30 lots of fabric was equal to or less than the weight declared in the price declarations. In respect of the remaining 20 lots, actual weight was found to be more than the weight declared in the price declarations. The present proceedings have emanated from the higher weight found in respect of those 20 lots. It is the Revenue's contention that since the weight was found to be higher than the declared weight and since price of fabrics was worked out from the weight per metre of fabric, the price worked out is lower than the correct price and this has led to undervaluation and loss of revenue. In the proceedings the authorities held that the weight adopted by the processor was required to be rejected for the valuation of the fabrics and the valuation was required to be freshly made depending upon the weight of yarn consumed by the original fabric weavers who supplied the fabric after weaving to M/s. Sangam Processors for processing. In the ensuring proceedings weight of processed fabrics was taken as weight of yarn consumed by the weavers. The data about yarn consumption was taken from the balance-sheets of the weavers. The duty demand has been computed and confirmed also on this basis in the adjudication order.
5. Appellants have contested the method adopted by the Revenue as incorrect, unreliable and purely presumptions. It is their contention that the unreliability of the course adopted by the Revenue would be clear from the very fact that, on verification of weight by the Revenue Officers on 3.8.98, in majority of the cases (30 out of 50) the actual weight was found to be equal to or less than the weight declared in the price declaration. It is the appellants' submission that this fact alone should have convinced the adjudicating authority that variation in weight is normal and that since the variation is found both ways (higher and lower), the adjudicating authority should have held that the variation with declared weight in the price declarations cannot be the result of any deliberate plan by the appellant to understate the weight of the yarn in the fabric under processing so as to evade Central Excise duty. The appellant has also explained the variation as the result of many factors, the main factors being absorption or loss of moisture during storage and processing and the tolerance element in the count of the yarns used. The appellants also have been contending that in, any event, adopting the yarn consumption by the fabric weaver cannot be a reliable method of determining the quantity of yarn content in the fabric processed by the processor. It is their submission that variation occurs between the two on account of several factors like wastage of yarn during weaving, yarn consumed in designing and development of fabric, yarn consumed in the making of fabrics which are distributed as samples, yarn left unutilized in the cones, yarn used in the fabrics which have come out during manufacture as damaged, woven fabrics sold as stock lot without processing etc. During the adjudication proceedings the appellants submitted before the Commissioner that a variation of 9.12% was to be allowed on account of these factors. The Commissioner accepted variation on account of wastage, shortage and others to the accounting for 3.5% of yarn consumed in weaving and held that no allowance is required to be made towards yarn consumed in design and development, in the manufacture of samples and damaged fabrics as well as yarn left behind in cones. It is the appellant's contention that the decision of the Commissioner is entirely arbitrary and without factual basis. During the hearing of the case, the appellants have pointed out that weaving units carry out design and development exclusively on certain looms and since the fabrics so produced do not come to be sold, the claim for reduction made by the appellant was fully justified by the position obtaining in the industry. The appellants submit that the same is the position in respect of other items like samples, damaged fabrics and yarn left unutilized (bottom yarn).
6. During the hearing of the case, learned Counsel for the appellants has pointed out that the method adopted by the appellants and their fabric suppliers for the determination of quantity of yarn per metre of fabric was entirely in conformity with the general practice prevailing in the textile industry and the Commissioner has acted completely unreasonably in discarding this formula and adopted a different method for determination of yarn consumption. The learned Counsel has submitted that, across the textile industry, weight of yarn in fabric is determined according to a formula which is reproduced below:
Weight per metre = Warp Weight + Weft Weight
Warp Weight = Reed x Reedspace x 0.64
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Average yarn count
Weft Weight = Pick x Reedspace x 0.60
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Average yarn count
7. In support of this contention, the learned Counsel for the appellant has produced before us a publication of Institute of Cost and Works Accounts of India, 12 Sudder Street, Calcutta-700 016 entitled Cost Audit in Textile Industry. The publication states as under: "Sort-wise Cost Computation:
The cost system narrated above is employed to arrive at the cost in respect of different processes operated in a mill and the cost to be charged to different counts of yarn and various types of fabrics manufactured. Now the next stage would be to ascertain the cost of each particular sort of fabric manufactured in the mill. On the basis of the basic parameters of the sort, viz. counts of warp and weft yarn, number of reeds and pickis, the reed space required for getting the cloth of particular width, the total quantities of warp and weft yarn required for the manufactured of the particular sort per piece or any other appropriate unit are calculated.
The calculation of warp yarn and weft yarn required for a particular length of fabric woven is done as per the following formulae:
YardsWarp yarn per Piece in kg = Total No of warp end x tape lenght in yards x0.453 840 x count Weft yarn per Piece in kg. = Reed Space x pick per inch x piece length in yds x 0.4536 840 x count The above formulae will give the oretical requirements of warp yarn and weft yarn. In the case of folded yarn used for weaving, the count number is divided by the number of folds. For example when 2/80 yarn is used count is taken as 40 (80/2). Since yarn waste occurs during conversion of yarn into fabric the gross quantity of yarn required should be arrived at by providing for the process waste of yarn."
8. The learned Counsel has also pointed out that the Textile Processors Association had confirmed to the Chief Commissioner of Central Excise, Jaipur that the above method of computation of weight of yarn was being adopted by the Textile Processing Industry as a rule. The learned Counsel for the appellants have submitted that it is well settled that the Tax authorities should go by the norm adopted in the industry while determining issues rather than going against the norms.
9. Another point emphasized during the hearing was that full facts about the method of determination of cost had been declared through cost sheets and price declarations to the Central Excise authorities, contemporaneously with the assessment of the goods. Therefore, the allegation that the relevant facts had been suppressed with intent to evade payment of duty is completely unjustified in the facts of the present case. The appellant has, therefore, contended that proviso to Section 11A justifying extended period for demand of duty was not attracted at all in the facts of the present case.
10. We have heard the learned SDR also. It is his submission that the Commissioner had considered the appellant's submissions in detail in the adjudication order and had recorded the reasons for rejection of those contentions. He has emphasized that once appellants' explanation for the difference in weight (absorption of moisture by the yarn) was found to be incorrect in view of the climatic condition of Bhilwara, the Commissioner was justified in adopting a different method and holding that the difference noticed was not the result of normal factors and that lower weight was being adopted deliberately to evade payment of duty. He also pointed out that the destruction of documents containing the full details of the processed fabrics by the processor gives credence to the allegation that relevant documents were suppressed and destroyed to facilitate evasion of duty.
11. The differential duty demand stems from the valuation of fabrics processed by M/s. Sangam Processors. From a perusal of the records, it is clear that the appellant had made, through relevant price declarations, detailed disclosure of the method adopted by them for computation of value of the processed fabric. Prices were arrived at through both forward and backward computation methods. On the one side it was the cumulation of the costs of all elements like cost of yarn, cost of weaving, losses during weaving, shrinkage and the cost of processing and on the other side, it was the cost obtained by reducing marketing cost and marketing profit from the sale price. It was also clear that the weight of yarn was being worked out according to a particular formula. No objection was raised by the central excise authorities either to the formula adopted or the cost attributed to each of the elements in response to the price declarations which were accompanied by the cost sheets or when the appellants filed returns showing the assessment of the fabrics. The formula adopted for determining the weight of yarn in a meter of fabric was not also anything individual to the appellant. It is the formula adopted by the entire processing industry of Bhilwara. This had been confirmed to the central excise authorities by the Association of Processors. The publication of Cost and Works Accountants of India also confirms that the formula adopted by the appellant processor is the all industry formula. The adoption of formula which is used across an industry could hardly be called an effort to evade central excise duty. If the fortunes of an entire industry is to be assessed based on this formula, it is as well that excise matters are also judged by the same formula. The Commissioner was clearly in error in rejecting the formula in the appellant's case along and in imposing duty demand on them. This is clearly discriminatory, unjust and unwarranted.
12. The Commissioner was not on terra firma in treating the total yarn consumption of fabric weavers, (who supplied the fabrics to the appellants) as revealed from their Balance sheets, as the yarn content to the fabrics processed by the appellants. Their Balance sheet quantities would be far removed from the yarn content in the fabrics supplied to the appellant processor. The need for adjustment has been recognized by the Commissioner himself and he has allowed 3.5% on account of wastage, shortage and other losses. However, he has refused adjustment towards other uses like design and development and supply of samples, damage etc. Such refusal again can only be treated as arbitrary, because it was clear from the records that a certain amount of yarn is used for such purposes and all the fabrics woven during such activities do not find their way to processing. No producer can hope to manufacture and sell commercial quantities without the prior activities of design, development, distribution of samples etc. Howsoever, efficient the operation, certain quantities are bound to be damaged also. Sale of damaged goods as 'seconds' in the textile industry is also too well known. There was no justification for not allowing these elements. Thus, it is clear that the qualification made by the Commissioner is not reliable.
13. While we have already held that the findings in the impugned order are not just, reasonable or reliable, we are also of the view that the entire proceedings were misdirected and was an avoidable waste of effort. The entire dispute emanated from the difference noticed between the declared weight of yarn per square metre of fabric and the so-called actual weight found on verification. The very fact that in 30 out of 50 samples, the ascertained weight was same or less than the weight declared and the higher weight was found only on 20 of the samples should have been indication (sic) to the Revenue that weights determined based on a formula can slightly vary from the actual weight. Further, variationboth ways made it clear that variation is not the result of assessee declaring false weights to evade central excise, duty but factors beyond anyone's control and on account of recognized error factors. There was also no gain to the processor from showing lower weights per square metre of fabric than the actual weight. Because, sale of the goods was by metre and not by weight. The processing charges were also per Sqr. Mtr. and not by weight of the fabric. There could be no loss to the Revenue also because the duty was based on the Sqr. Mtr. value of the fabric and not based on the weight of the fabric. To attribute ill motive to weight variations in such a case is to look for malice where there was none. We are therefore, clear that the entire proceedings were misplaced, vexatious and unwarranted.
14. In the view we have taken above, the appeals succeed and are allowed with consequential relief, if any, to the appellants.