Customs, Excise and Gold Tribunal - Delhi
Flex Industries Ltd. vs Commissioner Of C. Ex. on 17 January, 1997
Equivalent citations: 1997(91)ELT120(TRI-DEL)
ORDER
U.L. Bhat, J. (President)
1. Appeal E/1047/94-A, though not posted for hearing along with Appeals E/435/96-A and E/436/96-A, has been heard along with the other appeals on the representation of both the sides that they are connected and may be heard and disposed together.
2. The common appellant undertakes manufacture of Printed Polyester films to make packing pouches falling under sub-heading No. 3923.90 of the Schedule to the Central Excise Tariff Act, 1985. Printing of films is done through the medium of Gravure Printing cylinder. Cylinders are manufactured by fixing S.S. Shell of cylindrical shape over a pipe of stainless steel and the shell is subjected to copper electroplating. Designs of customers' choice are developed and computer transmitted on to the cylinders. The process involves a high degree of precision, expertise and artistry. Cylinders are manufactured to suit the needs of individual customers and thereafter P.P. films and pouches are manufactured and delivered to customers. Cylinder is covered by tariff sub-heading 5442.00. The prices of cylinders and films and pouches are fixed separately and a part of the price of cylinders (sets of four or five) is collected in advance by way of security as they are custom-made and price of end-product is collected finally as usual, by separate records. Appellant commenced manufacture in September 1977. Under Notification No. 64/86, dated 10-12-1986, printed cylinders, captively used or consumed in the factory for printing are wholly exempt from Central Excise duty. Appellant was clearing the finished products on payment of duty on their value without taking into consideration the value of printed cylinders. On an inspection by Central Excise Officers, it was found that appellant was recovering from customers Rs. 4500.00 as cost of cylinder on debit notes which included expenditure on art-work, design and development. Different sets of purchase orders were being prepared for laminate pouches and cylinders. Purchase orders for cylinders were not being filed along with price lists. The cylinders were being retained for manufacture of printed pouches for the respective customers on future occasions. Whenever future orders involve alteration of design or printing matter, necessary operation would be carried out on the cylinder at extra charge, sometimes the charges being Rs. 4500.00. Thus, it was found that there was suppression of material information regarding the correct value of finished products which would include the cost of the cylinders also. Purchase orders and sale documents were manipulated by splitting up the single transaction of manufacture of finished products into two, namely, manufacture of cylinders and manufacture of finished product with a view to evade payment of duty. Show cause notice dated 1-10-1992 was issued in respect of the period from September 1987 to March 1992 with the aforesaid allegations and proposing to add the price realized for cylinders to the assessable value of printed pouches as also notional interest on advance price received for the cylinders and invoking the larger period of limitation in the proviso to Section 11A of the Central Excises Act, 1944 and demanding differential duty of Rs. 27,68,594.00. The notice was resisted on merits as well as on the ground of limitation. However, the Collector of Central Excise, the adjudicating authority passed order dated 31-1-1994 confirming the demand except in regard to consignments in three price lists Nos. 462, 436 and 676. He also imposed penalty of Rs. 15,00,000.00 under Rule 173Q of Central Excise Rules, 1944. This order is being challenged in Appeal E/1047/94-A on merits and on the ground of bar of limitation.
3. Appeal E/435/96, arises from an order passed by the Assistant Collector in regard to the period from August 1993 to January 1995 in regard to price of cylinders. Three show cause notices were issued on 27-2-1994, 12-8-1994 and 23-2-1995. The demand was confirmed by the Assistant Collector and his order was upheld by the Collector (Appeals). These orders are challenged in Appeal E/435/96.
4. Appeal E/436/96 arises from an order passed by the Assistant Collector in regard to the period from February 1995 to June 1995. Show cause notice was issued on 4-9-1995. Assistant Collector confirmed the demand and his order was upheld by the Collector (Appeals). These orders are challenged in Appeal E/436/96.
5. The main and common contention raised in the three appeals is that a part of the price collected for cylinders cannot be included in the assessable value of the finished product. Manufacture of printed pouches for each customer requires four to five cylinders. The material to be printed differs from customer to customer which means that cylinders are custom-made and cylinders made for one customer cannot be used for another customer. The Collector has noted that each set of cylinders can be used to print ten lakh pouches. This means that cylinders made in a particular period or year can be used to print 10 lakh pouches and this work may be spread over several periods or years. This would mean that price of cylinders received during a period covered by one show cause notice may be used even beyond the period covered by the notice but according to the impugned orders, the entire cost of cylinder realized during the period covered by one notice has to be added to the assessable value of finished goods manufactured and cleared during the period which is not rational or reasonable. Learned Counsel for appellant has referred to an order passed by Appellate Collector in the case of another similar manufacturer holding that the value of cylinders must be spread over goods manufactured and to be manufactured in future using the cylinders. This principle is seen supported by M.F. (DR) Circular No. 17/4196-CX, dated 23-1-1996, in connection with value of patterns used in foundry industry to be added to the cost of castings for arriving at the assessable value of castings. There would be difficulty as the quantity of castings to be made out of a pattern cannot be anticipated and sometimes some rectifications or repairs may be made in the pattern after some period of use. The Board clarified as follows :-
"The matter has been clarified and it is hereby clarified that the proportionate cost of pattern has to be included in the assessable value of the casting even in cases where such patterns are being supplied by the buyers of the casting or are got prepared/manufactured by the job worker at the cost of the buyer. In cases where there is difficulty in apportioning the cost of pattern, apportionment can be made depending on the expected life and capability of the pattern and the quantity of castings that can be manufactured from it and thus working the cost to be apportioned per unit. For this purpose, a certificate from a Cost Accountant may be accepted."
(Emphasis supplied) See page T5 of 1996 (82) E.L.T.
6. The principle underlying the Board clarification would apply to apportionment of cost of cylinder used in the manufacture of printed pouches. It may be considered that cylinder is used and consumed in the manufacture of printed pouches; but it is not used in the sense in which raw material is used in manufacture of a product; in such case, the conversion or use of raw material is done quickly and it is easy to correlate a definite quantity of raw material and its value with a definite quantity of finished product and its value. In the present case, the use of cylinders is in such a manner that it is spread over a considerable period and over a very large quantity or number of finished products. To illustrate, we assume that a set of four cylinders of the value of Rs. X can be used in manufacture of ten lakh printed pouches. Hence it is reasonable to regard that Rs. X -10 lakhs is the proportionate value of cylinder which is used in the manufacture of a single printed pouch and this fractional value has to be added to the value of printed pouch. However, during a particular period, the use of the set of cylinder may not be exhausted as only 4 lakh printed pouches are manufactured during the period. If so, it has to be regarded that Rs. (x -s-10 Lakhs) x 4 Lakhs is the proportionate value of cylinder utilized in the manufacture of finished products during the period and only this value can be added to the value of printed pouches. This rational principle of proportional value addition has been approved by the Board and we are of the opinion that Board was right in doing so. This has to be arrived at after making a realistic estimate of the expected life and capability of the cylinders and determining the appropriate proportion of the value of cylinders to be added to the value of printed pouches. The conclusion arrived at by the lower authorities that entire value of the cylinders is to be added to the value of printed pouches manufactured during the relevant period without reference to the expected life and capability of the cylinders has to be set aside and the matter has to be considered afresh by the respective adjudicating authorities. This is subject to the plea of bar of limitation raised in one of the appeals.
7. The next contention relates to the addition of notional interest on advances received from the customers of price of cylinders in arriving at the assessable value of printed pouches. This aspect arises for consideration in Appeal E/1047/94. The cylinders are made to suit the designs and matter, appropriate to each customers and are custom made. If the customer does not accept or approve the cylinder made for this purpose, the appellant will be put to severe loss and hence appellant was collecting a part of the price of the cylinders in advance. According to appellant, the amount was being collected as security and this was a recognized trade practice. The law in this regard has been settled by the Supreme Court. See Metal Box India Ltd. v. Collector of Central Excise -1995 (75) E.L.T. 449 (S.C.). In that case the wholesaler was buying 90% of the total production and advancing huge amount free of interest and was obtaining 50% discount from the normal price. It was held that advance of huge amounts free of interest had necessarily entered into consideration between the parties leading to 50% discount being allowed. This was regarded as a special treatment to the wholesaler. It was further pointed out that in the absence of the advances, the manufacturer would have been required to borrow the amounts from Banks or the like on interest which materially would have got reflected in the price structure as it would be a part of cost of production to be passed on to the customers. The advances in that case were of the order of Rs. 75 Lakhs in 1980, Rs. 1 Crore in 1981 and Rs. 2 Crores in 1982 and were maintained at the same level on the first working day of each month and this was held to have a direct impact on the pegging down of purchase price. It was held that the price charged to this wholesaler could not be said to be normal price since a favoured treatment was given to the wholesaler who had advanced huge amounts free of interest. Loading of the price appropriately was upheld.
8. In the present case, there was no favoured buyer who advanced huge amounts free of interest. Advance of a part of the price was secured free of interest from all buyers of cylinder and cylinders were manufactured within a month of the placing of the order. Price of a set of 4 to 5 containers ranged between Rs. 20,000 to Rs. 25,000, a part of which was received as advance and retained for about a month. Though the total amount of advance collected during four years ranged from Rs. six and odd crores to Rs. ten and odd crores, they were received not from a single or a few buyers, but proportionately from all buyers. The Department did not marshal any evidence to show that a part of the price being received as an advance and being retained for a short period had been or would have been taken into consideration in fixing the uniform price for all buyers. In the circumstances, it does not appear probable that this factor had, to any extent, depressed or otherwise affected the price charged. That being so, there was no extra consideration received, over and above the declared price. The lower authorities failed to consider any one of these aspects while finding that the price has to be loaded to the extent of the notional interest. The finding is accordingly set aside.
9. The question of limitation arises for consideration only in Appeal E/1047/94-A. Show cause notice dated 1-10-1992 was issued in respect of period from September 1987 to March 1992. Larger period of limitation in the proviso to Section 11A of the Act was invoked on the ground that collection of price separately for cylinder had not been declared or otherwise disclosed. It was Cylinders captively consumed being exempt, no price lists were being filed for cylinders. Price lists filed for HDPE pouches did not disclose that cylinders were being manufactured and price was being collected. Purchase orders for HDPE pouches also did not make any disclosure regarding cylinders as they were covered by separate purchase orders. The excise records did not disclose this aspect. On the basis of these circumstances, suppression of material facts with intent to evade duty was alleged in the notice and accepted as proved in the impugned order.
10. Relying on a copy of a Classification List filed by appellant and seen at Page 130 of the paper book it is argued that there was full disclosure. The list bears the date 30-10-1992, long after the date of the show cause notice, namely, 1-10-1992. Reference is made to process chart at Page 126 of the paper book. This was filed before the Collector on 23-7-1993 as evidence in support of the reply to the show cause notice. There is nothing to show this was submitted to the proper officer at any time earlier or in connection with the price list or in connection with valuation of HDPE pouches. It is argued that copies of balance sheets were being submitted and these documents refer to "design and cylinder recoveries". The production of documents was stated to be in response to the request of the Central Excise Audit Official seen at Page 150 of the paper book. The list of documents appended to the letter includes balance sheet. The request was made on 27-10-1983 and it was complied with on 28-10-1993. This was long after the relevant show cause notice. It is finally argued that during the period covered by the notice, excise officers of audit and inspection wings had visited appellants' premises and seen all records. This bald assertion is not sufficient to show that besides excise records which do not disclose the collection of price of cylinder, excise officers were shown purchase orders, receipts or other records showing collection of price of cylinder. We therefore agree with the contention of the Departmental Representative that allegation of suppression of material facts has been established as rightly held by the Collector. We are unable to find any bona fides or good faith in the conduct of appellant. It is clear that the suppression of material facts was for evading duty.
11. The question of determination of the part of the value of cylinder to be amortised has to be decided by the adjudicating authority. While doing so, he will bear in mind the requirement of Section 4(4)(d)(ii) of the Act. Question of differential duty which may be found payable has a bearing on the quantum of penalty to be imposed and hence the penalty imposed also has to be set aside.
12. The confirmation of demand of differential duty and penalty imposed are set aside. The case is remanded to the jurisdictional authority for passing a fresh order after deciding the aspect covered by Paragraph 6 of this order and quantification of penalty amount. Appellant shall be given an opportunity of hearing before the order is passed. Appeal is allowed as indicated.