Customs, Excise and Gold Tribunal - Mumbai
Orkay Polyester vs Director, Anti-Evasion, C. Ex. on 22 September, 1997
Equivalent citations: 2003(161)ELT227(TRI-MUMBAI)
ORDER Gowri Shankar, Member (T)
1. First appellant was at the relevant time engaged in a manufacture of pre-oriented yarn (POY for short) and was also engaged in texturising such yarn. The other five appellants manufactured texturised yarn from POY and were job workers for the first appellant. In the order impugned in the appeal, the Director (Anti-Evasion), adjudicating upon notice issued to the appellants has found against the first appellant on the following counts.
2. The first is that the POY cleared by the first appellant as being 755 denier was actually below 640 denier and liable to a higher rate of duty, the difference being Rs. 46.50 per kg. He has consequently demanded duty of approximately Rs. 2.68 crores. He has found that appellants could not account for 124 M.Ts. of polyester chips, principal raw material for POY and concluded that 119.6 M.Ts. of yarn has been manufactured out of this quantity of raw material and cleared by the appellant without paying duty of approximately Rs. 1.00 crore. He has found that during stocktaking of the finished goods in the appellant's factory, there was an excess of 4.347 M.Ts. of POY of certain denier over the balance in the R.G.I Register and a shortage of 1.946 M.T. of certain other deniers. He has confiscated the goods in excess with an option to redeem on payment of fine of Rs. 1.00 lakh and demanded duty of approximately Rs. 1.63 lakhs. He has imposed the following penalties.
Rs. 50 lakhs under Sub-rule (1) of Rule 173Q; Rs. 1,000/- under Rule 226;
Rs. 500/- each under Rule 52 and Sub-rule (2) of Rule 9;
He has confiscated the plant and machinery, with an option to redeem payment of Rs. 50 lakhs.
3. Notice and a Corrigendum was issued in August, 1984, and first adjudicated by the Director (Anti-Evasion) in June, 1985. This order was set aside by the Bombay High Court on a writ petition filed by Orkay with directions to adjudicate the case afresh. Thereafter the order impugned in the appeal was passed.
4. During the course of hearing, advocate for the appellants relied only on arguments that had been raised before the Director, explaining and elaborating on these. The Departmental representative also adopted the reasoning in the order impugned in the appeal except with regard to one aspect, which we have separately specified. Summaries of arguments were also handed over by each side. We have, therefore, not considered it necessary to record the arguments of each side separately since that would amount to needless petition.
5. The first issue for consideration is whether the appellant manufactured and cleared without payment of duty 119.6 M.Ts. of POY out of 124 M.Ts. of Polyester chips. The notice alleged that the appellant had received from 1st March, 1982 to 25th March, 1984, 9776.55 M.Ts. of polyester chips, these being the figures shown in the raw material account in Form IV and periodical returns of raw material filed by it out of this it produced a total (including waste yarn) of 9251.813 M.Ts. Hence, it proceeded, the appellants did not pay duty on 223.73 M.Ts. of yarn, this being the difference between the quantity shown as manufactured and the quantity which the department felt ought to have been manufactured out of the quantity of raw material. The Director has found that the appellant was not able to explain how it had used 124 M.Ts. of this raw material and concluded that this quantity was used in the manufacture of 119.6 M.Ts. of yarn of which he demanded duty.
6. In the two proceedings before the Director Orkay had volunteered the information that after the yarn came into existence, it was coated with spin finish oil, and that the quantity of such oil used during the relevant period was about 37.902 M.T. The quantity to be accounted including this is 9329.53 M.Ts. Its claim before the Director that 8 M.Ts. of polyester chips was lost in a fire was accepted by him. There is also no dispute that 211.247 M.Ts. was in stock on 26th March, 1984, and that 9251 M.Ts. of POY including waste yarn was produced during the relevant period. The quantity that the appellant was required to account for 97.025 M.Ts.
7. It has been the appellant's contention throughout the proceedings that allowance has to be given for shortages on account of pilferage (16.957 MTs), presence of dust removed by cleaning the chips before they are processed (23.698 MTs); moisture contained in the chips lost by driage (46.904 MTs), invisible losses in the form of spillage, etc. (9.475 MTs).
8. The appellant had claimed insurance in 98 claims from the insurers on the grounds of pilferage, i.e. on the grounds that chips were pilfered during transit from the ships from which the chips were unloaded on the Bombay Port Trust docks to its factory. The appellant had not taken this pilferage into account while entering the entries of raw material received in the form of register. An affidavit of G. H. Padlya, an employee, was filed before the Director in support of its contention. In this affidavit Padlya had said that claims were filed for 16,957.200 kgs of chips pilfered and that "as a result, the insurance company passed our claim for Rs. 21,77,543.04". He added "This amount includes not only payment of pilferage of 16,957.200 kgs. but also certain quantity of chips which were contaminated". He had attached a tabulated statement showing the present status of insurance claim and said that column 5 of the statement excluded contaminated chips. Relying upon this last statement the Director has said that the total claim was for 16,957.200 kgs. and that there was no question of excluding contaminated chips. On the basis of these apparent contradictions and drawing support from the fact that the quantities entered as received in the Form IV register did not exclude the quantity stated to have been pilfered, he rejected this claim.
9. The statement showing status of the claims which was part of the affidavit is headed "Quantity of chips certified as received". Out of the total of 98 claims in this statement 24 claims are shown in its remarks column as including claim for contamination. The remaining claims, therefore, are stated to be only on account of pilferage. This, and the heading of Column 5, support the appellant's claim that while the quantity mentioned in column 5 was short received, the claim amount in these 24 cases includes figures over and above the value of its quantity pilfered for the reason that there was some loss due to contamination. The fact that these quantities were not taken into account while entering the raw material received in the RGI Register does go against the appellant; the contention that the appellant entered in its Form IV Register quantities shown as having been imparted in the bills of entry and not quantity actually verified to have been received in its factory, is seen to be correct while comparing the quantities with the bills of entry with those entered into Form IV register. Moreover, each of the claims has been passed by the insurance company after a survey. The tota'l quantity received short accounts for less than 0.18% of the total quantity received during this period and is thus within imminently reasonable limits. It would be difficult to believe that this quantity was exagerated. The conclusion therefore, follows that this quantity was received short, and the failure to deduct this quantity and the incorrectness to that extent of Form IV Register cannot detract from this fact.
10. The appellant had claimed that in the course of manufacturing process the chips were put through a cyclone separator a machine in which they were subjected to air moving at high speeds in order to remove moisture and dust. It had relied upon a letter dated 10th May, 1985 from M/s. Didier Engineering who had helped to set up its plant. In the letter, there is a statement that in the process of drying chips in cyclone apparatus, dust is extracted from the chips and into dust bins. The letter explains that the percentage of loss on this account will vary according to the quality and uniformity or lack of it of the shape and sizes of the chips, but suggested a possible maximum of 0.5%, with a range of 0.2% to 0.3% in case of reasonably good quality of chips. The appellant had relied on an affidavit dated 25th June, 1987, of J.H.W. Rink of Didier Engineering in support of the contention that there would be a loss due to moisture contents of approximately 0.5%; that polyester chips during production handling and transportation absorb moisture to the extent of approximately 0.5% and that during the process of drying the moisture is removed in order to ensure a maximum content of 0.005% (normally lower) before spring is commenced. The Director has not accepted this contention on the ground that no literature about the plant was produced; that the loss of weight during driage would be made good when the yarn produced cools and reabsorbs moisture to the same extent He has also said that the claim is an afterthought. The fact that no literature of the plant was produced is not of any significance in declining to accept the claim. The Director himself accepts, in the very next sentence that polyester absorbs or loses moisture, when he says that the yarn would absorb moisture. Didier Engineering had supplied the plant to Orkay. From Rink's affidavit it is clear that Didier Engineering had supplied such plants to 25 customers all over the world and he had been closely associated with erectioning and commissioning of these plants. At that time Rink was a Project Manager of the Polymer Division of Didier Engineering. When he affirmed the affidavit, the plant had already been set up and Didier Engineering would have nothing to gain by affirming an affidavit in order to please Orkay. Rink was also available for cross-examination before the Director on 24th June, 1987, when the matter was to be heard by the Director. In view of his experience and qualifications, Rink has to be treated as an expert in his field. It was open to the Director to reject his averments after cross-examining him by advancing appropriate evidence. It is not clear what he means by saying that Rink's affidavit was an after-thought. The appellant may not earlier have brought the fact of driage to the notice of the department because there was no reason to do so. It advanced its claim when it was compelled to do so by the notice. That the Director could not dismiss Rink's claim, particularly when he has accepted that polyester absorbs moisture. We are, therefore, of the view that the contents that moisture was extracted from the chips to the point of 0.5% is reasonable and requires acceptance. Now, the process of absorption of moisture is spread over a period of time, although it will also depehd on factors such as ambient humidity, etc. We find it difficult to accept the Director's contention that the yarn would absorb moisture to the extent of its loss of it from the.......... as soon as it is cooled after spinning. On the face of it this is untenable particularly when the yarn is coated with spin finish oil, which would inhibit absorption of moisture, at least for some times till it wore off. It is only an assumption to say that the yarn would lie in the premises of the spinner for the same length of time as the time that elapsed between manufacture of polyester chips and their drying in the spinners plant. This finding of the Director falls for want of substantiation.
11. It is interesting to note that the Director does not advance the same argument to the appellant's claim to the extent of 0.25% on account of loss of, dust from the polyester chips from the cyclone separator. This contention too was based only on the letters of Didier Engineering, written in May, 1985. The Didier accepts this claim straightaway. Hence we do not see why the other claim on account of moisture should be differently treated in the absence of any specific material to substantiate such rejection.
12. During the proceedings before the Director, the appellant had stated that it used 37.902 MTs. of spin finished oil which was coated on the yarn after it was spun. This quantity was added to the quantity of polyester chips in arriving at the total quantity of raw materials found unaccounted for. Therefore, when the Director says that the shortage on account of dust removal is of set by the addition of spin finished oil, and in real terms, there is no loss, he ignores the fact that spin finish oil has already been separately considered as an input and its weight added to the quantity of raw material to be accounted for. His finding in this regard, therefore, cannot be maintained.
13. A quantity of 9.475 MTs was claimed as invisible loss in the form of dust, sweepings, left over chips in the bins, etc. This has been denied on the ground that it has not been substantiated. Surely it is not unreasonable that 1/10th of 1% of the total quantity of raw material would be lost in this manner. It is a well known fact, that in every industry, in every aspect of material handling, there is some loss of material, considering that the raw material was in the form of chips and packed in bags, the percentage of losses is not unreasonable.
14. It is settled law that clandestine manufacture and removal have to be established beyond reasonable doubt and cannot be based on presumption. An unexplained shortage of raw material cannot by itself justify the conclusion arrived at by the Director that this quantity has necessarily been used in the manufacture of POY which is cleared without payment of duty. The quantity of raw material found short is of the order of 0.73% of the quantity that was received. The loss of this quantity does not appear excessive or unreasonable. In fact the explanation tendered by the appellant accounts for 97.025 M.Ts. The Director has not dealt with the contention of the appellant that 26.975 M.Ts. had been issued for production, although it was not entered in the Form IV register. His stand (in para 25 of the order) that this quantity was admitted as not accounted for, is contrary to the facts. The appellant had stated that this quantity has been issued and relied upon issue slips. It had in fact added this quantity (in para 4.4 of its reply to the notice) in arriving at the total quantity to be accounted for.
15. It is relevant to note that in identical issue the Collector of Central Excise, Bombay-III, in his order No. 13/92/Collr., dated 22nd April, 1992 had held that clandestine removal was not established merely because of shortage in raw material. In that case too the appellant had sought to account for the losses of chips on the same ground as at present, and the Collector has not declined to accept its explanations. It is not contented that the Department has questioned the legality or propriety of this order by filing an appeal against it. Thus the Department has itself accepted that losses in raw material have taken place at other times in the appellant's factory on account of the reasons claimed by it,
16. The next ground for demand of duty is that the appellant cleared yarn of denier below 640 as yarn of 755 denier on which the duty was less by Rs. 46.25 per kg. Denierage is the standard of the fineness of synthetic or silk yarn and a denier is defined as its weight in grams of 9000 metres of yarn; hence the lower the denier, the finer the yarn. Polyester yarn was liable for duty at the relevant time at various rates as specified by notification. At the relevant time rates of duty notified were as follows :
Below 350 deniers ... Rs. 90/- per kg.
350 - 750 deniers ... Rs. 65/- per kg.
Above 750 deniers ... Rs. 18.75 per kg.
The allegations is that the appellant misdeclared the yarn of lower denierage as that of 755 denier, of which the rate of duty was much lower. The allegation relates to the POY manufactured and cleared. Texturised yarn at the relevant time was exampted from duty. The notice alleges the misdeclaration on three counts each of which we will proceed to consider.
17. It is first alleged that the appellant had described the texturised yarn in its invoices of sale as 160/2 denier and that this refers to yarn of two plies obtained by doubling a single ply yarn of 160 denier. In other words the numerals 160/2 refers to two yarns twisted together each of 160 denier. The allegation proceeds that in the process of texturising of the yarn the maximum draw ratio, the ratio between the POY and the texturised yarn drawn from it, is 1:4 and therefore, texturised yarn of 160 deniers could not be obtained from POY of 755 deniers. The POY from which such yarn could be drawn would not exceed 640 deniers. It was the assessee's claim before the Director that the texturised yarn was actually of 320 deniers of single ply, but since there was resistance in the market to buying this yarn, it resorted to describing such yarn as 160/2. In other words the assessee resorted to the device of informing the customers that it was selling them finer yarn 160 deniers then what it actually was. The appellant relied upon the affidavit of V.K. Tapadia, Director, Marketing and Production, dated 14th August, 1997, an extract of which is reproduced below:-
"Up to about middle of 1983, customers wanting thick texturised yarn for suiting were being given for two ply texturised yarn each ply being 160 den-iers. Each individual ply of 160 deniers used to be manufactured from POY ranging between 230 to about 355 deniers. In the second half of 1983, I learnt that Reliance Textiles Industries had started manufacturing and marketing thick texturised yarn which was a single ply 320 denier yarn instead of being a two ply textured yarn of 160 deniers each. I further learnt that this was manufactured by Reliance from POY of 555 deniers. I also learnt that Reliance described this textured yarn as 160/2 (320) deniers. Getting a clue from the marketing practice of Reliance, Orkay Silk Mills also started making single ply 320 denier textured yarn from POY of 755 denier. In the initial stages Orkay marketed this textured yarn under the descrin 300 denier textured yarn. However, since this was a new terminology in the market, there are some resistence from the market and it was decided that Orkay should redes-ignate this textured yarn as 160/2. I say that the resultant denier of the two-ply yarn of 160 deniers each ply is 320 and as such though technically there is no much difference between a 160/2 two-ply textured yarn and a 320 denier single ply textured yarn, the market nevertheless was more at ease with the terminology 160/2. Accordingly, to overcome market resistence, Orkay started calling its singly ply 320 denier textured yarn made from 755 denier POY as textured yarn of denier 160/2.
I say that when texturising units of Orkay Group of Industries started making single ply 320 denier textured yarn from POY of 755 denier they did not discontinue the manufacture of two ply yarn. However, most of the two ply yarn was consumed by Orkay Silk Mills Limited themselves in their weaving unit at Sakinaka and in Job workers' whereas single ply 320 denier textured yarn described as 160/2 was mostly sold in the market. Negligible quantity of two ply yarn was also sold in the market. This is because two ply yarn gage a slightly better feel and finish and Orkay was, manufacturer of high quality fabrics thereon market was having single singly ply 320 denier because of price differential. I say that there was a price differential of about Rs. 30/- per kg. between a two ply textured yarn of 160 denier each ply and a single ply 320 denier textured yarn because of the substantial difference in the excise duty on POY of the different denier groups from which these two types of textured yarn are made. I say that sales invoice of Orkay Silk Mills Ltd. will bear this out."
The department had also relied upon the statements of a number of persons consisting of buyers or representative of buyers of yarn. In support of charge, what was sold was yarn of 160 deniers in two plies. All of these were cross-examined in the proceedings before the Director. Most of them charged then show, the cross-examination. The Director has not accepted their later stand, which supported the assessee because he was of the view that they did not satisfactorily answer his question as to whether Orkay was not making a wrong declaration in regard to the yarn. He advanced another reason that wrong statement for the appellant regarding the yarn could not have had the effect of overcoming market resistance, because the buyers were users of the yarn and would not be fooled into accepting single ply yarn as double ply yarn of a higher value and greater fineness. It has been contended that denierage of yarn which was manufactured and sold in the market depended substantially on the rate of duty which prevailed. Thus, to take an example Notification 73/82 provided, among others two slabs - 100 to 750 deniers at a duty of Rs. 61.25 per kg. and above 750 deniers at Rs. 18.75 per kg. To make two ply yarn of 160 denier POY of denier of 640 or lower would be required. To make yarn of 320 denier POY required would be above 750 deniers having a higher duty rate. Thus, when the cut off point for the slab was moved to 550 deniers it is claimed that M/s. Reliance Textiles Industries made 320 deniers texturised yarn from POY of 550 deniers and sold it as a substitute for doubled yarn of 160 deniers. This was described by it as 160/2 deniers. It paid duty at 18.75 per kg. In order not to be overtaken by a competitor in the market, the appellant it is contended resorted to the same practise.
18. It is difficult to accept that customers in the market would accept single ply texturised yarn of 320 as doubled ply yarn of 160 deniers. This is what the Director says in the order. However, the fact remains that the appellant cross-examined all the witnesses most of whom had in effect said that there was no material difference for practical purposes to a weaver between double ply 160 denier yarn and single ply 320 denier yarn. The department had recorded the statements of various persons in their enquiries into this aspect, H.B. Vyas, the Managing Director of the Bombay Silk Mills; S.K. Mahajan, partner of M/s. Mahajan Silk Mills; B. Mehra, Partner Subodh Textiles; M.D. Mutreja, Trustee of Paramount Silk Mills; Z. Cherian, Weaving Master, Champak Textiles; V.C. Jain, Karta of Bharat Silk Mills; S.M. Kejadwal, Proprietor, S.K. Textile Mills; Ashok Arora, Proprietor of Gauri Silk Mills. The relevant portion of the statements are summarised below:
Vyas - I received two lots of polyester yarn described as 160/2 deniers. I understand 160/2 denier - as being 160 denier of 2 ply or 320 resulting denier.
S.K. Mahajan - We manufacture suiting and shirting of synthetic blended fabrics in our unit. Since 1982 we have received two consignment of 160/2 texturised/polyester yarn from Orkay, order was placed for 160/2 denier double ply yarn. Samples of the yarn showed 160/2 deniers.
B.P. Mehra - In order to make suiting in our unit we buy yarn of den-ierage 150, 150/2 etc. We buy from Reliance Textiles and Orkay, etc., through our progress. We had purchased from Orkay in 1982 Polyester yarn of den-ierage 160/2 and 300/1 i.e. 160/2 double ply and 300 single ply. We have received yarn 160/2 ply and 300/1 single ply. We understand that 160/2 Ply totally should make approximately 300 deniers.
M.D. Mutreja - We have bought from Orkay Yarn 160/2, 160/1/120, 300/1, 160/2, we have ordered for 160/2 and received two ply yarn of deniers 160 each. According to me 160/2 is two ply yarn of 160 denier each.
Z. Cherian - At our unit we used yarn of denierage 150/1, 160/2,200, 210, 320/1. I understand that 160/2 denierage means technically yarn of double ply of 160 deniers; whether this is used or single ply yarn of 320 deniers does not make any difference.
V.C. Jain - We have received goods of denierage 160/2 against our order 320/1. I do not understand the difference between 160/2 and 320/1 yarn. In short we have received three consignments as above - 160/2 deniers ply yarn from Orkay against our order of 320 deniers. I do not know what difference it makes in weaving, but I am told that final denier being same there will be no much difference in the final product i.e. fabrics.
S.M. Kejriwal - Mostly I have ordered for polyester texturised yarn 160/2 (double twisted) and it has been made certain that against these orders I have received no other yarn, but have only received 160/2 double twisted. As per my knowledge and market practice and technical terms 160/2 means Yarn of two ply each of 160 deniers and 300 means yarn of 300 denier twist one ply.
Ashok Arora - To the best of my memory we received 75/1, 85/1, 150/1, 150, 160/1. 160/1 means yarn of single ply (not double). Similarly when we received 160/2/80 means yarn of 160 deniers double i.e. each thread consist of 160 deniers with filaments.
In cross-examination by the appellant, before the Director each of these persons have stated as follows:
Vyas - If double yarn is made from two single plys of 160 deniers resultant denier of the double yarn will be 320. Resultant denierage is the same whether you take 320 deniers single ply yarn or 160 deniers double twist yarn. The fabric produced out of 160/2 yarn is slightly superior to fabric produced from 320 denierage single ply, but both can be used for manufacture of suiting. The price of 160/2 yarn should be higher than the price of 320 denier single ply yarn because of extra labour involved in using two plies and it was higher in 1983-84 also on account of duty difference on POY. I am aware that both Orkay and Reliance Textiles have marketed single ply 320 yarn as 160/2 denierage. We have purchased from Orkays and from Reliance through their Agents 320 deniers single ply texturised yarn described as 160/2.
S.K. Mahajan - It is correct that, texturised yarn described as 160/2 in Invoice 928 could not have been double yarn made by doubling two plys of 160 deniers each. Although I had said in my statement before the Central Excise Officers that yarn purchased by me is described as 160/2 does not appear to be two fold yarn. The statement was made on the basis of records available. Afterwards a sample was drawn and I saw that it was not two fold yarn.
B.P. Mehra - Resultant denierage of 160/2 single ply is the same as 320 denier single ply texturised yarn and for all practical purpose there is hardly any difference between these two. I agree the yarn sold to me by Orkay though described as 160/2 deniers was not 160/2 deniers double ply yarn, but was in fact 320 deniers single ply texturised yarn. Orkay were fooling us by describing 320/1 as 160/2 deniers textursied yarn. For the price that I paid of Rs. 101/109 per kg., I could never have bought yarn of 160/2 deniers and I have got my money's worth. In my statement I did not write double ply because I overlooked it. The statement was recorded by the officer.
N.D. Mutreja - I gave my statement as I was told to do I do not know the technical distinction between the two ply and one ply yarn. (The Director has qualified that in his language 160/2 deniers also means 320 deniers of single ply yarn).
Z. Cherian - I have Diploma in Textile Technology. In case of two ply texturised yarn where each ply is 160 deniers resulted would be 320 deniers.
Usually two ply 160 deniers and single ply 320 deniers yarn would look alike. To distinguish between these two physical tests would be necessary. If 160 deniers is a single ply yarn, the figure 1 would not be written after 160. As a weaver it makes no difference to me whether the yarn is 160/2 double or 320 deniers-single. What I had stated to Vinod Jain referred to in my earlier statement that yarn given to me for weaving was 160/2 deniers with resultant deniers 320 was my impression and not based on any tests.
V.C. Jain - I do not know the difference between 160/2 and 320/1 texturised yarn.
S.M. Kejriwal - Resultant deniers of 160/2 ply yarn is same as 320 deniers single ply yarn. According to my knowledge whatever was supplied by Orkay in its invoices was 160/2 twisted yarn, but this is not based on any tests. I cannot explain the difference in price between the invoices nos. 610 and 619 and others. My conclusion that the yarn supplied under eight invoices of Orkay was two ply yarn, was because of the figure "2" appearing after 160 in the invoice. I have not carried out any test to see whether it was single ply or two ply.
Ashok Arora - Between June, 1982 to October, 1983, I did not so far as my recollection goes have any occasion to buy texturised yarn on my own account from any manufacturer described as 160/2 deniers. I cannot rule out the possibility that one minor part of the supply received by me might have been 320 deniers single ply yarn instead of being 160/2 deniers ply yarn. I may have received 320 deniers single ply yarn at times.
19. It would be seen from these extracts that, it was only Arora and Kejriwal who have more or less stuck to their original statements that there is a distinction between 320 deniers single ply and 160 deniers two ply. Arora was a job worker for Orkay and so did not pay for the yarn that he received. Others have in effect said that there is no such difference; that yarn of 160 deniers could not have been sold for its price at which they bought the yarn described as 160/2 denier; that physical examination would be required before determining the denierage and number of plies and it made no difference to the users whether the yarn is 160/2 deniers or 320 deniers single ply. The Director has either not referred to the depositions in cross-examination of those witnesses which were in favour of the appellant or dismissed them by saying that no person in the market would accept the yarn described as 160/2 when it was actually 320 deniers and by saying that they have not given satisfactory answers. That the last statement is incorrect is evident on reading the record of cross-examination. It is also evident from the deposition of some of the witnesses that the same practice was being followed by M/s. Reliance Textiles Industries. All but two more witnesses on whose statement the Department relied have not stood the test of cross-examination. On the contrary they have come out in the appellants favour.
20. The Director had also stated in his order that the texturising machine installed in this appellants factory could not have a draw ratio higher than 4:1. In other words the difference between denierage of texturised yarn, and the POY form could not be more than four times. It was attempted to be contended that there was evidence in the form of a letter from M/s. Himson Textiles, the supplier of the machines, that by adjusting the gears, the draw ratio could be increased to 5:1 on the STS 600 Machine used by the appellant. However, there was nothing to show that the draw ratio was so increased. The Director is no doubt right in saying that there is a limit to the extent that the draw ratio can be increased. There is however no evidence to say that it could not be more than 4:1. In these circumstances, it is not legitimate that the draw ratio had to be 4:1 all over.
21. The appellant had cross-examined C.L. Gokani, the Manager of Ramgopal and J.M. Textiles whose statement was relied upon in the notice. Gokani had stated that what the two units texturise as job workers for the appellant was a single ply yarn of 320 but in view of the suggestion made by Parekh, Texturising Manager of the appellant-company they agreed to describe the goods in their invoices as 160/2. That the suggestion was made is confirmed by Parekh. Although the Director attempts to dismiss their statements made in the cross-examination, the fact remains that he had indicated that the yarn drawn was in fact 320.
22. Some samples of the yarn were drawn and tested by the Department. The tests report are relied upon in the notice. The Director has not accepted these test reports for the reasons recorded in page 41 of his order, as reproduced below:
"It may be relevant to record here that irrespective of the machine capacity to draw, no yarn can be stretched beyond the residuary draw ratio which is always pre-determined. This draw ratio is contingent on the machines were the POY is made. The assessee had been summoned to produce the machine records which they did not answer. They have not even on their own produced the pre-determined draw ratio of 755 denier POY claimed to have been manufactured by them. In view of the findings herein I am not relying upon the results of the samples tested as they have not been properly drawn.
The fact that 755 POY was a yarn at lower rate of duty compared to POY of 640 denier as it is only POY of 640 denier which could be drawn into texturised yarn of 160 denier. Therefore, I find that they have misdeclared the denierage of 640 denier yarn as 755 denier and have thus evaded duty.
In view of findings herein above I do not rely on the test reports and the evidence in cross-examination of the Deputy Chief Chemist before me. Further, the search of assessees' premises was conduced on 26-3-84, and in view of the fact that I am not relying on the results of any test report, it is not relevant from where and when the samples were drawn. The assessees conduct in not maintaining and keeping the sanctity of records leads me to believe that the officers have also not relied upon drawing the samples from the assessees' captive texturising units in and near its premises. In any case, the non-drawal of sample from the assessees' premises does not alter the situation as nothing important turns on it in view of the other material collected and relied upon in the show cause notice."
23. The Departmental representative contended before us that even if the Director had relied upon the test report, the conclusion that could be inevitably drawn would be against the appellants.
24. The Department had drawn sixteen samples of yarn. Of these eight samples were drawn from the Orkay's Plant at Patalganga; two from M/s. Orkay Silk Mills; three from Ramgopal Textiles; two from Bombay Silk Mills and one from Mahajan Silk Mills. Seven samples were of texturised yarn and balance of POY. The notice relied specifically on the report of the test of the samples described in numbers 14, 15 and 16 of the letter of Deputy Chief Chemist showing the result of the test. The sample at Sr. No. 14 was drawn from texturised yarn sold to M/s. Bombay Silk Mills under the appellants Invoice No. 984, Sr. No. 15 was from goods sold to the same customer under the Invoice No. 985, Sr. No. 16 from texturised yarn sold to Mahajan Silk Mills under Invoice No. 928. In these three cases the yarn was described in the relevant document of the appellants as 160/2. The test report indicated the yarn to be two ply and the denierage to be more or less what was declared. .
25. It was the appellants contention that the yarn covered by Invoice Nos. 928 and 984 were in fact two ply of 160 deniers. It contended that even during the period that it manufactured single ply 320 denier yarn and sold it described it as 160/2, it continued to make two ply yarn of 160 deniers each, and that the goods sold under Invoice No. 984, were such two ply yarn. It contended that the sample in Sr. No. 16 was out of yarn which was made before it commenced manufacture of POY of 750 deniers, otherwise in both these cases yarn correctly been described as 160/2 deniers and was made out of POY on which appropriate duty had been paid.
26. This brings us to the third sample Sr. No. 15. The appellants contention was, and is that this was single ply yarn of 320 deniers and not 160/2, as indicated by the laboratory. The appellant cross-examined B. Tekchandani and L. B. Khandekar who were respectively the Chemical Examiner Grade I, and Assistant Chemical Examiner who tested the sample. Such cross-examination was done in both the proceedings before its Directors Tekchandani admitted in a reply to questions in cross-examination that each ply in a two ply yarn must have the same number of filaments; one can separate two ply yarn into its two component plies and in doing so no violence would be done to the filaments in the yarn. He accepted that there was no equipment in the laboratory where it was tested to count number of filaments in the yarn. He further said that the yarn was actually tested by Khandekar, He was given by the advocate for the assessee, two samples. The record shows that he separated one of the two samples into two plies easily and instantaneously. He was unable to separate a sample marked DV into two such separate plies. Khandekar too was unable to separate the two plies, in sample DV, was able to separate the plies in the other sample (D-1). Khandekar too performed in the same manner with regard to the two samples, placed before it. These two samples also corresponded to the samples DV & D1. Record indicates that the sample DV was from the sample of the yarn covered by 985 sold to Bombay Silk Mills. This is the sample that was in dispute. We have to recall at this stage that Hemanir Vyas in his cross-examination had specifically stated that the yarn covered by Invoice No. 985 was single ply yarn.
27. It would be seen that this is the reason for which the Director has chosen not to rely upon the test reports. Out of the three samples relied upon in the test-report, the Department was not able to rebut the assessees contentions that two of the samples, which it did not dispute were 160/2, were drawn from POY on which appropriate duty has been paid. With regard to the third sample, the person who decided it and furnished the test report could not show it to be two ply yarn before the Director.
28. The appellants contended that the test reports were in fact in favour of the appellants and that the Director was wrong and arbitrary, rejecting it. The sample at Sr. Nos. 3, 5, 6, 7 and 8 were said to be POY of 755 den-iers. The result of the test confirmed the denierage to be of either 755 of a denierage very slightly different. The test report indicated the merge number of the samples to be 1527, 1536 and 3004. The merge number it was explained, represented a batch, i.e. yarn manufactured out of one charge of raw material. Thus a sample of yarn of one merge number would represent all the yarn in that number. The appellants contention was that Merge Nos. 1527 and 3004 amounted to 114 M.Ts. and 359 MTs of POY, this total 573 M.Ts., over 93% of the total quantity of 616 M.Ts of POY of 755 deniers. It is contended that this is a strong piece of evidence in the appellants favour, in that it shows that it had correctly declared denierage of all, but a small quantity of POY totally manufactured by it.
29. When once the Director has said that he does not rely on the test report that should end the matter. The Departmental representative attempt to rebit the appellants contention, the test report was in his favour, is not successful. The only portion of the test report that the department relied upon was demonstrated by the appellant not to be against it, in the proceedings before the Director. The contention raised on its behalf that the test of the sample showed that 93% of the total production of POY have been correctly declared by it has some merit. The quantity of POY, which notice, alleges, have been cleared at a lower rate of duty is accounted for except to the extent of 7% as covered by merge Nos. 1527 and 3004. The samples from which, on test, establish absence of misdeclaration. The test report thus adds some support to the appellants case.
30. It has therefore, to be concluded that the Department has not made out its case in regard to misdeclaration with regard to the denierage of the yarn.
31. The remaining question with regard to this appellant relates to the excesses and deficiencies which are alleged to have been- found in the stock of excisable goods during the stock taking which was conducted. The Director has found that the stock taking showed excess of 27 M.Ts of POY of same denierages and a shortage of 9.946 M.Ts of other denierage when complied with the production in the RG-1 register. It is the appellants contention that eleven different teams of officers were simultaneously taking stocks of the yarn lying in different places of the factory, that each team made summary of the quantity of stock verified by it, grouping it into denierage and that because of the fact that there were so many officers conducting stock taking at one time, and an absence of effective co-ordination of each team, the shortages and excesses state to have been noticed are in fact non-existent. The appellant cross-examined S.C. Bhide, Senior Intelligence Officer who was in charge of stock taking. It was put to him that the weight of yarn in each carton was shouted out by a labourer of the appellants and written down by an officer and that as a number of such teams were doing this at the same time, there were errors in recording the entries, Bhide did not agree to such a suggestion. He however, agreed that Annexure 'B' of the panchanama showed the physical stock of the POY 1/355 denierage to be 28,978 kgs. Annexure 'C summarised the discrepancy between the physical stock and the recorded balance showed it to be a different quantity of 31,559 kgs, Bhide was unable to explain this discrepancy. The record indicates that at this stage the Director informed the appellants Advocate that the question of reconciliation of the figures could be raised before him and he was not permitted to put any further questions on this issue. Accordingly the appellants made submissions. These are to the effect that staff of the appellants which was deployed for stock taking was insufficient to effectively carry out stock taking, there having been eleven teams of officers who were taking stock of very large quantity of a yarn scattered all over the factory and that all this was going on when new material produce was coming in and finished goods were being despatched. It was contended that production of POY of denierage 230, 235, 260, 295/300 had been discontinued on or before 22nd February, 1983, nearly four month prior to stock taking and the appellant would not have been foolish enough to keep such stock unaccounted. The emphasis was placed on the discrepancy in the stock of yarn of 350 deniers and it was argued that if this were reconciled, the resulting total would more or less tally with the recorded stock. It was contended that the appellants could not have any motive to evade duty to the order of Rs. 2,00,000/-, when it paid duty exceeding Rs. 40 crores per year. The Director has disposed of this point by saying that stock taking had been done correctly by experienced officers and that the shortage was a deliberate misfeasance.
32. The appellants contention that it is probable that errors could be possible in stock taking when there were large number of persons involved and the quantity to be verified was large, with goods coming in and going out when this was going on, is not without merit. However it had been able to establish, only one specific case of error in the figures in the Panchanama. The appellant's officers were present throughout the stock taking and had accepted the correctness of the stock taking by signing the panchanama. The appellant did not immediately, or shortly after the stock taking call for re-verification on the grounds that were subsequently urged. On balance, therefore, we have to confirm the Directors finding we have to verify the correctness except for the errors pointed above. There is however no material to support the contention that the shortage and excess were deliberate in order to evade payment of duty.
33. The other appeals are by Orlando Synthetic Industries Ltd., K.D.B. Crimping Dyg. & Bleaching, Paramount Synthetics P. Ltd., Orkay Polyester, Orkay Textile Corporation and Orkay International. These 6 Appellants were texturising units i.e. to say, they received POY and texturised yarn. At the relevant time texturised yarn was exempted from payment of duty, provided that it had been manufactured out of POY on which duty had been paid. The notification 178/83, which contained this exemption, also contained a presumption that all stocks of filament yarn, other than texture, except such stocks as are clearly recognisable as being non-duty paid, shall be deemed to be filament yarn, on which appropriate duty has been paid. The charges against these appellants are that they manufactured texturised yarn out of POY on which duty was not paid. The allegations more specifically for each unit is that it received quantities of POY on which duty was not paid, from the first appellant, for manufacture of texturised yarn.
(A) Paramount Synthetics ...... 69,366.030 Kgs.
Pvt. Ltd.
(B) Orlando Synthetics ...... 45,464.200 Kgs.
(P) Ltd.
(C) Orkay International ...... 35,241.520 Kgs.
(D) Orkay Textiles Corpn. ...... 61,734.110 Kgs.
(E) K.D.B. Crimping ...... 16,192.760 Kgs.
Dyeing and Bleaching
34. As summarised in the order of the Director, the notice alleged that the first appellant had been habitually removing clandestinely large quantities of unaccounted and suppressed production of POY to its sister concerns processing texturised yarn and situated within the same premises as of the first appellant. The basis for the charges against these appellants ceases to exist on our finding that the charge of clandestine removal without the payment of duty has not been established against the first appellant. However even on the assumption that this is not the case, findings against this appellant have not been substantiated,
35. The charge against Paramount Synthetics (P) Ltd. was that in November and December, 1983, it had manufactured texturised yarn amounting to 75,016.950 kg. whereas its first consignment of POY was received from the first appellant on 30th December, 1983. It was the appellant's contention that it had received quantity of POY prior to 30th December, 1983, not from the first appellant, but from M/s. Orkay Investment, another texturising unit contiguously. This contention has not been accepted on the ground that no evidence by way of duty paying documents was produced to support it. It was also found by the Director that proper accounts were not kept by it. We, therefore, demanded duty on the quantity of texturised yarn that would have been manufactured out of POY, whose receipt was unaccounted for.
36. The appellants contention is that since it manufactured a commodity which was exempted from duty, it was not required to maintain any central excise record. The Directors view that merely because there was production prior to first receipt of POY from the first appellant, it must have received non-duty paid POY, not supported by any evidence. The contention that it received a stock of POY from Orkay Investment has not been dealt with by him. Therefore, independently of finding with regard to the first appellant, the benefit of doubt has to go to this appellant. Except for Orlando Synthetics Industries Ltd. and K.D.B. Crimping Dyeing and Bleaching, the findings against the other units are identical quantity of pressurised yarn manufactured by them is greater than the quantity that could have been made out of the POY established to have been received by them on payment of duty and the excess had been manufctured out of non-duty paid POY. In the case of Orlando Synthetics Industries Limited and K.D.B. Crimping Dyeing and Bleaching, the Director agrees that the production of texturised yarn is less than the total quantity of POY received and drop charges against it. It would, therefore, follow that no action can be taken against these two. However the Director has ordered confiscation of POY lying in the premises of both these units. No reason is forthcoming for such confiscation, and following on his finding with regard to these units, the confiscation has to be set aside.
37. As for the other three, the Director has nowhere considered the contention that the quantity of POY that was not recorded had come from Orkay Investments. This was a point that was specifically put forth in reply to the show cause notice. It has also to be borne in mind that notification contained the presumption that all stocks of POY was deemed to be duty paid. Therefore, the burden to establish that what they received was not non-duty paid POY, was not on these appellants. In any event, they had offered a plausible defence by contending that the yarn had been received from Orkay Investment. It would have been a different matter, if it could have been shown that this defence would not stand. The Director has however not considered this defence and the contention that if quantities of POY received, texturised yarn manufactured by Orkay Investment was also taken into account there would be no unaccounted receipt of POY in any of the units. It cannot, therefore, be said that the case against these appellants has been established by a preponderance of probability. We may repeat here our observation that going strictly by the Notice, the charges against these units fail, once we have found in favour of the first appellant with regard to removal of POY on payment of duty.
38. In the result, we order as follows :
Demand for duty on 119.60 M.Ts. of POY set aside. Demand for duty on 5,58,882.40 Kgs. of POY set aside.
Demand for duty on the quantity of yarn found short during the stock taking is confirmed.
Confiscation of 4,374.73 kgs. of POY found in excess during the stock taking and redemption fine is confirmed.
Confiscation of other quantities of POY is set aside.
Penalties imposed are set aside.
39. Appeal E-3598 allowed in part. Other appeals allowed.