Customs, Excise and Gold Tribunal - Mumbai
D.S. Screen Pvt. Ltd. vs Collector Of C. Ex. on 19 January, 1990
Equivalent citations: 1990(50)ELT475(TRI-MUMBAI)
ORDER P.K. Desai, Member (J)
1. This appeal is directed against the order of the Collector of Central Excise, Vadodara bearing No. 15/MP/89 dated 14-6-1989 ordering confiscation of S.S. wire mesh and P.B. wire mesh found from the fancy premises of the appellants with granting option to redeem the same on payment of fine of Rs. 3.00 lacs and also demanding duty to the tune of Rs. 3,16,055.40 and Rs. 1,20,606.96 on the alleged clandestine removal and evasion of duty and also imposing personal penalty of Rs. 2.00 lacs on the appellants as well as ordering confiscation of plant and machinery etc. with granting option to redeem the same on payment of fine of Rs. 1.00 lac.
2. The appellants herein are the manufacturers of wire mesh of different sixes and grades made out of stainless steel (S.S. Wire) and Phosphor Bronze (P.B. Wire mesh) and Filters and Spinnerette Filter Pack made out of the said wire mesh for man made fabric industry. Prior to 1986 the said factory was run in the name of M/s. Hindustan Boilers. On 10-12-1986, the officers of the Central Excise Department visited the appellants unit and found 14 rolls of wire mesh of different sizes admeasuring 2444.72 sq. ft. valued at Rs. 37,593.00 in the machine room which on verification were found to have been not accounted for in RG-1 Register. They also found one room in the factory premises containing the goods pledged with the Bank of Baroda. The said room was got opened by the Bank and on search the officers found 135 rolls admeasuring 24531.34 sq. ft. and 29 rolls admeasuring 689.14 sq. mtrs. of wire mesh totally valued at Rs. 13,81,949.06. These bundles were also not accounted for in the RG-1 register. The officers, thereafter scrutinised the pledge register and RG-1 register and found that the manufactured articles shown in the Bank pledge register, as compared to the entries in the RG-1 register, both of Hindustan Boilers as also of the present appellants, were much more. On further scrutiny, they found that the Hindustan Boilers Ltd. had manufactured 69,545.82 sq. ft. of wire mesh valued at Rs. 17,93,169.80 and the present appellants had manufactured 33,423.70 sq. ft. valued at Rs. 11,49,106.74 during the previous years of 1982-83 and 1985-86 upto 23-2-1986 and had removed the same without payment of duty and had accordingly evaded the duty to the tune of Rs. 3,16,055.40. They also found that the appellants had removed 24,342 sq. ft. and 7355.62 sq. ft. of manufactured product valued at Rs. 5,49,785.00 and Rs. 2,54,261.42 respectively in the financial year 1985-86 and 1986-87 and had evaded the duty amounting to Rs. 1,20,606.96. The show cause notice No. F.V(68) 15-23DA/86 dated 5-6-1987 was served on the appellants to show cause why the seized goods should not be confiscated and why the duty amount evaded should not be recovered and why personal penalty should not be imposed as also why the plant and machinery should not be attached. The appellants filed their reply dated 10-8-1988. In their reply, they pleaded that the main product is wire mesh and they are manufacturing these products right from 1983 and their major consumers are the Government of India and Government of India Undertakings like B.A.R.C. and other industrial houses like Reliance Gwalior Rayons, Calico and others. They submitted that the product is for industrial use, which is being manufactured by them as per the specification and that the same was not a consumer-product saleable in the open market. They submitted that the seized goods were not the goods manufactured as contemplated under Section 2(f) of the Central Excises and Salt Act, 1944 as they had yet to get the approval from their consumers as to the quality test. They submitted that only on approval by the consumers, the goods can be taken as manufactured and it was thereafter that they made entries in the RG-1 register. They submitted that this process of making entries in the RG-1 register only after receiving the approval from the consumers had been going on since last about 16 years without any objection from the Excise Department. They also denied any clandestine removal and submitted that what was hypothecated with the Bank was only the unfinished goods and which were not required to be entered in the RG-1 register. They also pleaded that there was no clandestine removal. The Collector has however rejected the contention and passed the impugned order.
3. Shri B.B. Gujral, the learned advocate for the appellants, pleaded that the goods found were not in fully manufactured condition and submitted that these goods have no general market and that only the Government and major industrial houses purchase the product. He submitted that as per the terms of contract and purchase order, the product is subject to the test by the consumers and that till the test was made and product was approved by the consumers, the same was not ready for delivery and as such cannot be considered as manufactured so as to fall within the purview of Section 2(f) of the Act. In support of his contention, the learned advocate also took us through some of the contracts and purchase orders to substantiate his contention that the goods cannot be taken to have been manufactured till approved by the purchaser and hence remain to be unfinished goods. The learned advocate cited before us, the decision of the CEGAT in Collector of Central Excise v. General Cement Product, reported in 1989 (21) ECR 222 and also cited the decision of the Supreme Court in Tata Iron and Steel Company Ltd. v. Union of India, reported in 1988 (35) ELT 605. The learned advocate also submitted that entry in the RG-1 register is required to be made only when the goods are completely manufactured as per the specification and in support thereof, he relied upon the decision of the CEGAT in J.K. Synthetic v. Collector of Central Excise, reported in 1987 (13) ECR 422 and Raza Textile Ltd. v. Collector of Central Excise, reported in 1989 (24) ECR 383. He also submitted that there has been a long standing practice to make entries accordingly in RG-1 register and that several audit parties have visited the factory premises and even otherwise officers also visited the factory premises for surprise check and none of them have raised any objection for the last 16 years. The learned advocate also submitted that the allegation of clandestine removal is also not duly established. He submitted that the department has based the allegation and the conclusion only on the ground of inconsistency between the RG-1 register and the Bank pledge register. He submitted that the goods were being hypothecated/pledged for the purpose of raising funds and that it is not uncommon in the trade that the goods once hypothecated are got released on payment of the advances taken and re-hypothecated for raising of funds. He submitted that merely from this it cannot be said that the entries in the Bank pledge register indicated newly manufactured goods. He submitted that there was no independent evidence of any clandestine removal and their being no open market even otherwise clandestine removal thereof was not possible. He also submitted that the appellants had been regularly filing RT-12 returns which were duly approved after scrutiny. He also submitted that the officers had paid several surprise visits during the period of 16 years and that at no stage they had ever suspected any clandestine removal. He also submitted that the demand for duty have even otherwise time-barred as there was no suppression on their part. In support of his contention, the learned advocate relied upon several decisions which in view of what we hold hereinafter, we do not consider it necessary to refer to them in detail.
4. Heard Shri C.P. Arya, the learned SDR. He supported the order of the Collector of Central Excise and submitted that the discrepancy in the RG-1 register and the bank pledge register did give rise to a strong presumption and reasonable conclusions as to the clandestine removal. He also submitted that the goods seized were fully manufactured goods as they were found in packed condition duly marked and were ready for despatch. In his submission, these goods were completely manufactured products. He submitted that non approval of the goods by the customer did not take them away from the purview of the definition of manufacture as given under Section 2(f) of the Act. The goods seized being fully manufactured were required to be entered in the RG-1 register and that admittedly they were not so entered in the RG-1 register. He also submitted that there was a wilful suppression on the part of the appellant and that the extended period was rightly invoked by the Collector. In support of his contention he cited the decisions reported in 1988 (36) ELT 497 and 1988 (35) ELT 388.
5. The questions that arise for our determination can be identified as':-
1. Whether the goods found from the premises, including those, found to have been hypothecated to the Bank, but lying in the same premises in a room under the control of the bank, are fully manufactured goods?
2. Whether the appellants have committed any default, by not making any entry thereof in the RG-1 Register?
3. Whether there was any manufacture and clandestine removal of the goods as alleged?
4. Whether the department was justified in raising the demand in relation to the alleged clandestine removal?
5. Whether the order of the adjudicating authority deserves to be sustained/set aside/modified?
6. It is an undisputed position that, on 10-12-1986, when the officers visited the premises of the appellants, they found 14 rolls of mesh of different sizes admeasuring 2444.72 sq. ft. valued at Rs. 37,593.00 lying in the machine room and that no corresponding entry therefor was made in RG-1 register. It is also an undisputed position that there was a room in the factory premises which was under the control of the Bank of Baroda where the goods hypothecated by the appellants, against the advances taken by them, were stored and that, on checking the goods stored in the said room on 18-11-1986,135 rolls of mesh admeasuring 24531.34 sq. ft. and 29 rolls of mesh admeasuring 689.14 sq. ft. totally valued at Rs. 13,81,849.06 were found, for which also no corresponding entries were made in RG-1 register.
7. As per the allegation of the department, all these rolls contained wire mesh in fully manufactured condition, duly wrapped, with label containing all the descriptions, and as such they were the goods duly manufactured as contemplated under Section 2(f) of the Central Excises and Salt Act, and that they were not duly entered in the RG-1 Register. The appellants, however, challenge the said allegation.
8. The main contention raised by the appellants is that, their principal customers are Government and Government undertakings, as also big industrial houses like Reliance Industries, Gwalior Rayon, Calico Mills, etc. and that they place the orders after approval, and submitted that, till the customers complete the test, and approve, the goods produced cannot be said to have been "manufactured" as contemplated under Section 2(f) of the Central Excises and Salt Act. To substantiate the submission the learned advocate for the appellants, referred to some specimen of purchase orders placed by the Department of Atomic Energy, Govt. of India. The Baroda Rayon Corporation Ltd., Ordinance Cable Factory, Century Enka Ltd., Reliance Industries Ltd., Nuclear Power Corporation of India Ltd. and others, and also referred to and relied upon the decision of the CEGAT Special Bench-BI in Collector of Central Excise v. Mis. General Cement Products Pvt. Ltd., reported in 1989 (21) ECR 222 and of the Supreme Court in Tata Iron and Steel Co. Ltd. v. Union of India and Ors., reported in 1988 (35) ELT 605 (SC).
9. The CEGAT Special Bench B-I, in its order in Collector of Central Excise v. General Cement (supra) had before it, the question whether the cement concrete poles meant for supply to UP State Electricity Board could be taken as "manufactured" and considered fit for delivery before they passed the prescribed quality control test, and it was held that they could be treated as manufactured only after they passed through the prescribed quality control test. There was however a specific requirement in the contract that before the goods could be considered as fit for delivery, they had to undergo various tests till they break in testing process, and for that purpose, one per cent of poles were being selected at random and sent for testing. It appears that the poles were tailor made for the said Electricity Board.
10. In Tata Iron and Steel Co. Ltd. v. Union of India (supra), the Supreme Court has held that if the goods to be supplied are as per specification, the product is said to have been manufactured after completion of processes incidental or ancillary thereto. The products in question were wheels, tyres and axles for the Indian Railway. This has generally no open market. Further the point at issue was whether manufacture was complete before incidental and ancillary process required were complete.
11. Here, in the instant case, the products in question are (1) wire mesh of different sizes and grades made out of stainless steel and phosphor bronze wires (2) filters and spinnerette filter packs made out of said wire mesh. Now considering the purchase orders, specimen of which are produced, it is found that the products manufactured are not tailor made for any particular Institution or Organisation, but the products are manufactured by them and put in the market, which according to the appellant, is a restricted, to some, and the orders are placed with certain conditions, namely, they would test the same, and accept the consignment only if particular qualitative test approve the same. A distinction has to be drawn here between two positions (1) where the goods are manufactured on a specific order and specific design supplied as indicated, and are made receivable by the ordering party, after undergoing certain specific test and (2) where the goods are manufactured by the manufacturers according to their own design, and the order is placed to purchase the said manufactured product, subject to certain qualitative tests to be undertaken. In our view, in the first position, the manufacture can be deemed to be complete after the qualitative and other specification tests are undergone, whereas in the other case, manufacture is complete as soon as the manufacturing process is complete and goods are offered for sale. The case before us, in our view falls within the second category and it has to be taken that the goods were completely manufactured, as soon as the manufacturing process was over irrespective of examination/testing etc by the purchaser. This category cannot attract the ratio of the decisions cited by the learned advocate.
12. The appellants have, amongst others, produced a copy of "salient features of commercial terms and conditions" signed by Joint Director, Purchase and Stores, Department of Energy, Govt. of India. Our pointed attention was drawn to Paras 5.2.4 of the said terms, which reads thus :
"5.2.4. In addition to the tests performed by the supplier, the purchaser shall have the right to ask for additional inspection or testing as he deems necessary and the additional cost for such tests will be borne by the purchaser."
Reading of the same does not impress upon us as indicating that the goods produced were subject to testing and approval before they can be branded as "manufactured", so as to fall within Section 2(f) of the Act. The process of "manufacture" was not subject to the said condition nor could the goods be deemed as manufactured to the specification. Reading of the other purchase orders, also does not show that the "manufacture of goods was subject to approval" or that the goods were "required to be manufactured as per the set specification".
13. It was also argued that the appellants had a restricted market, and they had to produce the goods, which were always subject to test by the purchaser. Besides our holding as above, that the conditions were of general nature, not attributed to the process of manufacture as subjected to the specification and approval thereof, there is also no evidence on record that the supplies were only to those institutions and none else.
14. Under the circumstances, the plea that the manufacturing process was complete only after the testing by the purchasers, and that the goods found from the factory premises as well as from the room under the control of Bank of Baroda, were not the goods "manufactured" as contemplated under Section 2(f) of the Act, cannot be accepted. The rolls found were otherwise complete duly wrapped with all the markings contained thereon, and as such, they have to be taken as manufactured.
15. It is undisputed that for the rolls found and seized, there were no corresponding entries made in RG-1 register.
16. For this the appellants have put forward the defence, one, that the product cannot be treated as manufactured, as the product was subject to testing by the purchasers, and be deemed to be marketable only thereafter, and become liable to be entered in RG-1 register only thereafter, and, second, that there is a long standing practice to make entry in RG-1 register only after qualitative test, and that the same has never been objected. In support of the first contention, the learned advocate for the appellants cited before us the decision of CEGAT in J.K. Synthetics Ltd. v. Collector of Central Excise, reported in 1987 (13) ECR 422 (CEGAT NRB). In view of our finding that the manufacturing process was complete and not dependent on any quality tests, the said ground as well as the ratio of the decision cited has no force. For the second point, the learned advocate however cited CEGAT decision in Raza Textiles Ltd. v. Collector of Central Excise, reported in 1989 (24) ECR 383 (CEGAT NRB) where it is held that practice followed for 19 years, without objection and when violation is mere technical, warning ought to have been given, before taking any action. The order cited however does not justify the action, nor does it legalise the procedure of non entry in RG-1 register at any other convenient date after the manufacture is complete. What it provides is for taking some liberal view in considering the question of imposition of penalty. This order therefore does not provide any shelter to the appellants in justifying their irregularity in not making entry in RG-1 Register.
17. Before concluding on this point, it may be noted that the plea of the appellants, in pleading that the goods found were not fully manufactured is based only on the ground that the same were not tested by the prospective buyers. No other ground for treating the same as not fully manufactured has been pleaded. Under the circumstances, vide our finding as above, we hold that the plea raised is not acceptable, and when the department has shown the said goods as duly manufactured, and for which there is no other objection, we hold that the appellants had with them the seized goods, duly manufactured, and not accounted for in RG-1 register.
18. The second set of allegations is that, there was a manufacture and clandestine removal of goods, without entry in RG-1 register and without payment of excise duty by M/s. Hindustan Boilers, the appellants as they were formerly known, as also by the present appellants.
19. The allegation is based principally on the ground that on verification of the bank pledge register and RG-1 register, there was a wide range of discrepancy in the manufactured product shown. Undisputedly, the department has not been able to procure any other cogent evidence either to prove any clandestine removal, or to show from other circumstantial evidence, that production higher than the one shown in RG-1 register can be inferred. The learned advocate for the appellants had argued the point at length, and has cited several judicial decisions to substantiate the defence that there could be no clandestine removal, and that the allegation made in that regard is not sustainable.
20. As the point at issue can be decided even otherwise than taking recourse to any case law, we deem it not necessary to deal with the decisions cited.
21. The main basis over which the whole allegation is based are the entries in bank pledge register. There is no challenge to the fact that pledge register, maintained both by the bank and the appellants tally. There is also no dispute that RT-12 returns were regularly filed, scrutinised and approved, and at no point of time prior to this, any objection had been raised.
22. It is a matter of common knowledge that the goods are pledged/hypothecated to the bank for the purpose of raising loans and taking advances on overdraft facilities, and the goods so pledged/hypothecated get released on payment of the due amount. There is no bar in pledging/hypothecating the same goods over and over again, to raise fresh loans. Under the circumstances, merely because the pledge register mentions, manufactured goods as pledged/hypothecated, it cannot be inferred that at each such time, newly manufactured goods were pledged. To prove the same, something more, either in the nature of direct evidence or at least in the nature of circumstantial evidence ought to be brought on record. Here no such corroborative evidence exists, and when the theory put forward in defence is very probable, the allegation regarding production and clandestine removal cannot be upheld.
23. Under the circumstances, though we confirm the finding of the authority below, as regards the manufactured goods lying unaccounted for in the factory premises, and bank's pledge room, we set aside the finding as regards the clandestine removal.
24. The goods duly manufactured but not duly accounted for in RG-1 register are liable to confiscation under Rule 173Q(1) of the Central Excise Rules, and as such, the order confiscating the same has to be maintained. The adjudicating authority has however ordered redemption thereof, on payment of fine of Rs. 3,00,000/-. Total value of the attached goods is about Rs. 9,92,245.80 ps. In our view, the same, in the present set of circumstances, appears to be on little higher side, as compared to the violation of the Rules, proved. The proved violation of Rules is reported to be on long standing practice and no clandestine removal is proved. We; therefore, feel that the redemption fine be reduced, and hence direct that the redemption fine be reduced from Rs. 3,00,0007-to Rs. 50,0007- (Rupees Fifty thousand only).
25. The appellants have also been imposed with personal penalty of Rs. 2,00,0007- (Two lakhs only). This penalty is imposed on account of the Collector holding both the charges, namely non-accounting in RG-1 Register and clandestine removal and resultant evasion of duty to the tune of more than Rs. 4.00 lacs. However, in view of our findings as above, evasion of duty and clandestine removal has not been established and as such the gravity of the action of the appellants gets considerably reduced. In our view the penalty of Rs. 25,0007- should be sufficient.
26. The Collector has also ordered confiscation of plant and machinery, with granting an option to redeem the same on payment of fine of Rs. 1.00 lac. In our view, the nature of the breach, held by us to have been proved, does not warrant any such confiscation. We, therefore, set aside the same.
27. In the result, the appeal is partly allowed. We confirm the order of confiscation of 2444.12 sq. ft., 24531.34 sq. ft. and 689.14 sq. mtrs. of S.S. Wire Mesh and P.B. Wire Mesh under Rule 173Q(I) of the Central Excise Rules, but reduce the redemption fine to Rs. 50,0007- (Rupees Fifty thousand only). We also reduce the personal penalty to Rs. 25,0007- (Rupees Twenty-five thousand only). Rest of the order of the Collector of Central Excise, is however set aside.