Customs, Excise and Gold Tribunal - Mumbai
M/S. Terene Fibres India Pvt. Ltd. vs Commr. Of Central Excise, Mumbai-Vi on 25 May, 2001
Equivalent citations: 2001(138)ELT889(TRI-MUMBAI)
ORDER
G.N. Srinivasan, M (J)
1. This an appeal filed by the appellants against the decision of the Commissioner of Central Excise, Mumbai made in Order No. 1/99-Commor. VI dated 11/11.1999 confirming demand of duties of Rs. 4,21,92,165/- and imposing a penalty of equivalent amount under rule 57U (6) of the Central Excise Rules.
2. The appellants manufactured polyester staple fibre (PSF) which falls under heading 5503.20 of the Central Excise Tariff Act, 1985.
3. The appellants, ICI Ltd, and Reliance Industries Ltd. had agreed among themselves that in the plant owned by ICI Ltd., which was transferred to the appellants. The appellants would thus convert the necessary raw materials supplied by Reliance Industries into PSF to the extent of the rated capacity of the appellants plant. The arrangements/agreements between the three parties mentioned above were made in the year 1993. In the year 1995 the Audit Wing of the department exchanged correspondence with the appellants. The letters were dated 1.2.1995, 27.6.1995, 24.8.1995, 27.10.1995, 30.11.1995, 30.10.1996, 20.11.1996 and 11.8.1997. The appellant s in respect of the items of the capital goods purchased by the Reliance Industries which were delivered to the appellants for toning the inputs (PTA & MEG) supplied by Reliance Industries took Modvat credit under rule 57Q. This was objected to by the department by issuing a show cause notice dated 30.4.1998. The appellants objected to the show cause notice proposing to deny the credit that the appellants were not the owners of the inputs by filing a reply dated 5.8.1998. In the said reply the appellants contended inter alia the during the relevant period of the proceedings there was no requirement that the manufacturer who availed Modvat credit should be the owner of the goods and that the manufacturer should have borne the expenditure of duty. It was also contended further that the longer period of limitation could not apply as the relevant facts had been in the knowledge of the department since June, 1995. The Commissioner after hearing the parties passed the impugned order confirming the said demand. Hence the present appeal.
4. Shri J. J. Bhatt, learned senior counsel appeared along with Shri Rohan Shah, advocate. It was argued by Shri Bhatt that the approach of the Commissioner in confirming the demand by the impugned order has reflected in paragraphs 31 and 32 was wrong in law. He further stated that the term purchase or the concept of ownership of the inputs used i the manufacture for final product was never in the contemplation of the rule making authority. He stated that even after amendment made to rule 57R the concept of ownership is not contemplated. He further stated that the beneficial legislation should not be interpreted i such a manner by the Commissioner so as to deprive the assessee of its rightful claim. He also refereed to the agreement dated 22.9.1993 entered into between the appellants and Reliance Industries Ltd. where-under the inputs were given free of cost to the appellants and the ownership was still with RIL in terms of clause 7 of agreement. He took us through the various amendments made to rule 56R to say that provisions of the Modvat Rules enabled the appellants to take Modvat Rules enabled the appellants to take Modvat Rules enabled the appellants to take Modvat credit. He further refereed to the amended rule 57R3 to say that it did not preclude a manufacturer from getting the capital goods in any other manner than the specified rules. He further states that rule 57R3 prescribes conditions for allowing credit of duty paid on capital goods acquired by the manufacturer or lessee higher purchaser or like agreement. It does not prohibit acquisition of capital goods for any other mode of transaction nor did it prescribe only direct purchase of capital goods in all other cases with only direct purchase of capital goods in all other cases with only exception of higher purchase agreement. Here even if there are any procedural lapses as provided in the judgment of the Tribunal in the case of Maschneijer Aromatics India Ltd. vs. CCE 1990 (46) ELT 395(1), procedural lapses cannot deny substantive right to Modvat credit. He also stated that the reliance on the so called proforma as provided under rule 57T mentioned trade notice 73/99 dated 21.6.1999 cannot control the provisions of the Modvat Rules. For that purpose he relies on the judgment of the Madras High Court in the case of Pandiri Saresware Rao vs. Matri Umamahesware Rao and Ors. AIR 1941 Madras 152 at page 153. (We are not dealing with this argument as this order will reveal.
5. Shri Deepak Kumar, learned DR, adopts the reasoning of the adjudicating authority.
6. We have considered the rival submissions. The facts of the case are that under an agreement between ICI Ltd.and the appellants in year 1993 the manufacturing facility of ICI Ltd. was transferred to the appellants and the appellants and the appellants are the owners of the plant. An agreement dated 2.9.1993 was entered into between Reliance Industries Ltd. and the appellants. In the said agreement it is stated inter alia as under:
"TFI undertakes to convert the necessary raw materials and other inputs including DMT and MFG (hereinafter referred to as inputs) to be supplied by RIL into PSF to the extent of the rated capacity of the plant.
Clause 8 - TFI will keep an account of the raw material as well as packing material supplied by RIL and will provide a regular statement as laid down by RIL.
Clause 10 - TFI shall at the request and cost and expense of RIL make necessary improvements to the plants through appropriate arrangements in order to improve the quality and quantity of production of the plants. Provided, however, that RIL shall not have nay claim for ownership of such improvements.
Clause 12 - It is understood that RIL shall not be responsible or be liable for any damage to the Batch Plant and TFI shall be solely responsible to provide adequate insurance for the Batch Plant. TFI will also indemnify RIL against any third party claims which may arise our of the operation.
Clause 15 - RIL shall be the full and absolute owner of the inputs, packaging materials and labels supplied by RIL under this arrangement and TFI and/or TFI's Bankers shall have no right or interest, claim or lien or charge on the same and converted PSF lying with TFI shall at all times belong to and the property of RIL and RIL shall be entitled to remove the same although they are located within the premises of TFI."
The argument of Shri Bhatt has to be looked into in the light of the show cause notice. In the show cause notice dated 30.4.1998 at page 125 of the proper book it has been mentioned inter alia as follows:
" (a) Under the agreement dated 2nd September 1993 between M/s. ICI and M/s. RIL, M/s. ICI and M/s. RIL, M/s. ICI agreed to convert the inputs to be supplied by M/s. RIL into PSF in the CP plant for consideration of conversation charges. This agreement contained a provision for the delegation of its obligations under the said agreement to its subsidiary M/s. TFIL by M/s. ICI Ltd.
(b) Under another agreement, also dated September 1993, M/s. IcI agreed to sell and transfer the assets and property owned and held by it in its fibre business (Other than CP plant) i.e. batch plant to its subsidiary M/s. TIFL. Vide this agreement, M/s. ICI also delegated its obligation arising out of the agreement mentioned in the in the proceeding sub para to M/s. TFIL, and for the fulfilment of the said obligation, M/s. ICI handed over the control, management and possession in CP plant to M/s. TFIL.
(c) In respect of batch plant purchased from M/s. ICI under agreement dt. 2nd Sept. 93 TFIL entered into an agreement with M/s. RIL where under M/s. TFIL agreed to manufacture PDF for M/s RIL from the inputs supplied by them on job charge basis.
(d) Under all the agreements, the spare, components and accessories for the above said two plants were to be supplied by M/s. RIL free of cost.
4. As stated in para 1 above M/s. TFIL avail modvat credit of duty paid on the input supplied by M/s. RIL as well as on the spares, components and accessories, also supplied by M/s. RIL under the provisions of rule 57A and rule 57Q of Ce.Ex. Rules 1944 respectively. For this purpose spares, components and accessories are received by M/s. TFIL under the cover of duty paying documents wherein M/s. TFIL are either shown as buyer as well as consignee or the consignee of the said goods on account of M/s. RIL and after filing the declaration under rule 57T of C.Ex. Rules 1944, the credit is availed.
5. Statement of Shri B.V. Parikh, the Assistant Manager Excise of M/s. TFI was recorded on 6.10.97 under the provisions of Section 14 of C.Ex. Act, 1944 wherein he stated that in view of the agreement dt. 2nd Sept., 1993 M/s. TFIL are in control/possession of both the plants i.e. batch plant and CP plant in the above said manufacturing and that CP plant is owned upto May/June 97 by M/s. ICI and batch plant is owned by M/s. TFIL; that spares, components and accessories are supplied free of cost of by M/s. RIL in terms of to conversion agreement dt. 2.9.93 and that neither M/s. RIL nor M/s. TFIL claims depreciation on duty part of capital goods i.e. spares, components and accessories. In his further statement recorded on 16.10.97 Shri Parikh stated that in all the cases of supply of spares, components and accessories, the payment is made by the M/s. RIL to the suppliers, and that M/s. TFIL is not claiming depreciation on the spares, components an accessories supplied free of const of claiming them as revenue expenditure; that TFIL is not reimbursing even the duty part of the value of the spares components and accessories so supplied by RIL and that their transactions are not covered under lease, hire purchase or and loan agreements.
6. On 20th Oct. 97 Range Office received a letter No. Nil dt. 20th Oct. 97 addressed to Supdt., C.Ex., Range IX Belapur - I Dn. on the letter head of M/s. TFIL, without indicating the name of the author/sender. However from the contents of the letter it appeared to have been written by shri B.V. Parikh. Through this letter, reply to some of the questions given in the statement dt. 16.10.97 were requested to be substituted. The letter alleges that the statement was recorded under force or threat and was not voluntary. However, the replies requested to be substituted did not materially differ form the replies recorded in the statement dt. 16.10.97.
7. In response to Summon to M/s. RIL, Shri Arvind Bhansali, Manager, Indirect Taxation appeared on 27.10.97 under the authorisation letter dt. 25th Oct, 97 from Vice President, Indirect Taxation of M/s. RIL & his statement was recorded under Section 14 of the C.Ex. Act, 1944. In his said statement Shri Arvind Bhansali confirmed that under the toll agreement, M/s TFIL are manufacturing PSF for M/s. RIL from the inputs supplied by them and that the spares, components and accessories are supplied free of cost. He further stated that the free cost of spares, components and accessories net of modvat are charged to profit and loss account of M/s. RIL. He produced a C.A. certificate to the effect that, a cost net of modvat are capitalised or charged to revenue expenditure under the Income Tax Act by M/s. RIL."
7. From the above it will be clear that RIL was supplying free of cost of TIFL the inputs as well as spares, components and accessories. The appellants did not spend any money on the acquisition of these capital goods. In terms of clause 15 of the agreement it remains a property of the RIL. Now the question would be whether under the circumstances the appellants should be entitled to Modvat credit.
8. For purpose of understanding this, it is useful to refer to the provisions of rule 57R3 and 57Q:
Rule 57R (3) as inserted by Notification No. 4/94 dated 01.03.1994:
" (3) No credit of the specified duty paid on the capital goods shall be allowed if such capital goods are acquired by a manufacturer on lease, hire-purchase, loan or by any other transaction other than direct purchase, whereby the property in the said capital goods is not transferred to such manufacturer".
Rule 57Q as continued form 17.06.1994:
(1) The provisions of this section shall apply to finished excisable goods of the descriptio specified in the Annexuer below (hereinafter referred to as the "final products") for the purpose of allowing credit of specified duty paid on the capital goods used by the manufacturer in his factory and for utilising the credit so allowed towards payment of duty of excise leviable on the final products, or as the case may be, on such capital goods, if such capital goods have been permitted to be cleared under rule 57S, subject to the provisions of this section and the conditions and restrictions as the Central Government may specify in this behalf."
The reading of the provisions of rule 57Q as well as rule 57R one comes to the conclusion that the acquisition of the capital goods by the manufacturer is envisaged. The term other than direct purchase mentioned in notification R3 is very significant. If we imagine a utilisation of the inputs without the acquisition thereof will it not amount to benefiting oneself without paying the price thereof? To put it in other words, using the inputs in the manufacture of final product without having the ownership thereof may amount to converting such inputs to one's benefit without paying the money thereof. It will amount to unjust enrichment in our view. If a person does not acquire the same without purchasing it he could not be entitled to it in terms of the provisions of rule 57R3 inserted by notification 4/94 dated 1.3.1994. It was somewhat slightly changed after 17.6.1994 when it stated that the credit of the specified duty paid on the capital goods will be allowed if such goods are acquired by manufacture on leasing height purchase or loan agreement subject to such conditions or restrictions that may be specified in the notification. It was somewhat liberal. But after 1.3.1997 the manufacturer in respect of the financing agreement etc. to perform certain conditions as mentioned in sub-clause 2(i) and they should not claim depreciation under the Income Tax Act. From the reading of the above we are of the view that the ownership of the goods is implied in these partial restrictions in respect of ownership namely lease or higher purchase have been mentioned i lease higher purchase or loan in notification 4/94. Subsequently it was changed in notification 26/94. Term acquisition may be a genus purchase lease or higher purchase loan etc. may be species. The words other than direct purchase mentioned in notification 4/94 is very significant. The intention seems to be that the person who takes the beneficial portion has to acquire the ownership of the goods by direct purchase only. Nobody can compel person to take Modvat credit. Even in respect of an exemption notification nobody can compel a person to take benefit of it. Where the duty is to be levied the burden is one the department to show that the duty is liviable.
It is on the assessee to prove that he is entitled to the exemption. It is not the bounded duty on the department to go out of the way to thrust the exemption. It is not the bounded duty on the department to go out of the way to thrust the exemption. No doubt it is true that Modvat is not an exemption clause as notification is not issued under section 5A of the Act. We are aware of the fact that article 265 of the Constitution which says that no tax can be levied without party of law where a person is entitle to exemption of not it is such person to claim such exemption. By reading rule 57R3 as contained in notification. By reading rule 57R3 as contained in notification is not issued under section 5A of the Act. We are aware of the fact that article 265 of the Constitution which says that no tax can be levied without party of law where a person is entitle to exemption or not it is such person to claim to exemption or not it is such person to claim such exemption. By reading rule 57R3 as contained in notification 4/94 we are clearly of the view that the rule making authority has mentioned the words other than purchase. It means the ownership is implied when the words are read with the term acquisition. For sake of repetition it is stated that a person may acquire the property in the goods either absolutely or to a limited extent and the person who gets absolutely certain benefit are derived by him under rule 57R3. A person who gets limited title or put it in leasehold acquisition of the goods in a limited way is not entitled to the benefit of Modvat.
9. In this case another peculiar feature emerges. The duty amount involved is merely Rs. 4,21,92,165/-. The value of the goods wold be running into several crores. To the businessman in the form of Reliance Industries Limited and the appellants do nt make any mention of any schedule of the goods to be transferred in the agreement. This very unique. It is normally accepted that whenever any agreement is entitled into for several crores of rupees the inputs are mentioned as a form of schedule but that is not the system followed but that is not the system followed by the businessman here. This is very strange. This goes to show the motive of the parties to hide something from the department. That section is always good as long as it does not have any sinister move behind it. It is directly a financial flow back namely the advantage is there. RIL here places the inputs under the custody of TFI but expects TFL to manufacture the goods and states the ownership still lies with them. If there is any damage e to inputs we asked Shri Bhatt who will be entitled to the insurable interest, he replied that only RIL will be entitled to insurable interest. If that were to be so, can we say that TFI can become a godown keeper for the RIL's goods?
10. The provisions of rule 57R to say very clearly shows that ownership is implied.
11. Implied conditions are very important in Modvat Rules. This is what the Allahabad High Court in the case of Super Cassettes Industries Ltd. vs. UOI 1997 (94) ELT 302. The reversal of credit contemplated in the said judgment has been used as an implied one though not in specific words in the sense that the revocation of the Modvat credit was not envisaged even though it was inadmissible would have to be reversed on the basis of unjust enrichment.
12. If we look into rule 57Q of the Rules it states that the provisions of section shall apply to finished excisable goods of the description specified in the annexure for the purpose of allowing credit on specific duty paid on the capital goods used by the manufacturer in its factory and for utilising the credit so allowed towards payment of duty on excise leviable on the final product which means that the duty which has been paid on the capital goods which was used by the manufacturer in its factory, how such goods could be utilised in its factory unless we take the provisions of rule 57R we cannot understand. If we see Sub-rule (3) of rule 57R it becomes very clear. Unless the payment of duty is made by the manufacturer he cannot claim the credit. The credit of duty if it is not born by the manufacturer would be taken by such manufacturer without payment of duty on the capital goods. The words credit of duty paid on the capital goods in rule 57Q is very crucial namely without payment of duty by the manufacturer it cannot be given credit to that manufacturer. Supposing the manufacturer does not pay duty as in this case and somebody else pays the duty and how could credit come? The debit and credit should go together. Unless a person increased the expenditure the whole system of accounting in the company accounts would crumble without double entry book keeping which is being followed in company accounts to our knowledge. The concept of allowing others to take credit on one's behalf to our mind is not contemplated in rule 57Q. Reading rules 57Q and 57R3 we are of the view that the contentions made by the appellants cannot be accepted.
13. One more point need to be mentioned. The goods come to the factory of the appellants on account RIL. Supposing the inputs are not fit for use or the inputs get damaged the plant what happens? Can the appellants file a claim against RIL? In terms of clause 15 of the agreement RIL cannot be sued. Then can the appellants file a suit against the supplier of the inputs for giving wrong material quality-wise? In our view the appellants cannot file a suit inasmuch as RIL would be the absolute owner of the inputs in terms of clause 15 only they could file a claim against the seller of the inputs. The seller might say that the appellants did not pay the price and in terms of clause 15 of clause 15 the appellants have never been the owner of the goods and therefore they were not entitled to claim any damages against them. So the entire chain of circumstances mentioned above would go only to show that ownership of the goods is very much in the contemplation of the legislation and without payment of duty they cannot claim any Modvat.
14. This takes us to other aspect namely limitation. The observations of adjudicating authority as mentioned in paragraphs 37 and 38 appear to be correct. The statement of Shri B.V. Parikh states that the appellants were receiving the conservation charges net of duties. Without bearing the duty incident how a person can get the benefit of the same as mentioned by the earlier portion of the order without a debit if a person claims to earn credit it will amount to unjust enrichment.
15. This takes us to another point namely limitation. The thrust of the argument of Shri Bhatt that right from 1995 onwards the department was in the know of things. It has been held that by the recent judgment of the Tribunal in the larger bench decision of the Tribunal in Nizam Sugar Factory case that knowledge is not what is envisaged under proviso to section 11A. The same thing will be equally applicable to the provisions of rule 57U. As observed by us earlier, not mentioning the schedule to the inputs supplied by RIL would show that person has certain intention to evade duty and we are of the view that the claim of the appellants that they are barred by limitation cannot be accepted. Hence the larger period of limitation can be invoked in the facts and circumstances of the case. Moreover if the RIL is allowed to take depreciation then it will go against the provisions of what is contained in rule 57R3 especially after 1.3.1997. We are of the view that the whole scheme is adopted by the appellants is to defeat the very purpose of Modvat Scheme. We are, therefore, of the view that the penalty levied is perfectly valid in the facts and circumstances of the case as this is a case of an assessee trying to get the benefit in an unjust way and with all intention to make gain in an unlawful way. Appeal stands dismissed.
J.H. Joglekar, Member (Technical) I have read the order drafted by my learned brother and my findings are as under:
1. The single issue for consideration is whether during the relevant period, the interpretation of Rule 57R permitted the appellants to avail of the modvat credit facility on the capital goods supplied by RIL.
2. During the arguments, The Bhatt, placed on record a photo-copy of the agreement for toll conversion dated 2.9.1993 between RIL and M/s. Terene Fabrics India Pvt. Ltd., the present appellants. Some of the clauses have been extracted in my brother's order. Two clauses which are most relevant read as Clause 2 and Clause 10 which are as follows:
Clause-2 RIL shall make available the said inputs, packing materials, labels and also additional capital goods including any machinery, tools and any/or spares to TFI in advance at the factory gate. The Converted PSF shall be despatched by TFI in accordance with the written instructions from RIL.
Clause-10 TFI shall at the request and at the cost and expense of RIL make necessary improvements to the Plants through appropriate arrangements in order to improve the quality and quantity of production of the Plants. Provided, however, that RIL shall not have been any claim for ownership of such improvements.
3. In terms of this agreement, TIFL were converting the raw materials supplied by RIL into yarn on job work basis. RIL were also making available packing available packing materials, labels as also machinery, tools and spares (clause-2). The ownership of all the supplied continued to vest in RIL and RIL were immune from any claims on TIFL by a third party (clause-15). RIL were protected from any damage to eth plant during the job phase (clause-12). Clause 10 was peculiarly worded. It spoke of "improvements" as distinct from physical plant. The clause obviously speaks of technological innovation and is more in the arena of intellectual property as against physical property.
4. Put in plain language, the machinery was purchased by RIL and was supplied to TIFL. In spite of its possession by TIFL, the ownership continued to vest in RIL The waiver of claim of ownership of improvements by RIL in clause-10 as extracted above had no bearing or relevance to the continued ownership of capital goods by M/s. RIL. The question is whether the Rules permitted TIFL to avail of the benefit of duty so paid by RIL. The Bhatt took us through the 3 Avatars of Rules 57Q and Rule 57R. For the purpose of this case, Rule 5R(3) is relevant inasmuch as it qualified the benefit available under Rule 57Q. During the period 1.3.94 to 16.6.94, the sub-Rule read as under:
"No credit of the specified duty paid on the capital goods shall be allowed if such capital goods are acquired by a manufacturer on lease, hire-purchase, loan or by any other transaction other than direct purchase whereby the property in the said capital goods is not transferred to such manufacturer."
5. The toll agreement did not indicate that the equipment was leased to or hired to or loaned to TIFL by RIL. The last phase could be rephrased in simpler language as below:-
"No credit of the specified duty paid on the capital goods shall be allowed, where such capital goods are acquired by a manufacturer (by a transaction) whereby the property in the said capital goods is not transferred to such manufacturer".
6. The toll conversion agreement very clearly showed that the property in the capital goods continued to vest in RIL. Even if the RIL had claimed no ownership of "improvements" to the plant, since the property did not transfer to TIFL during this period, they had no claim for the modvat credit.
7. The 2nd phase was from 17.6.94 to 28.2.97. Rule 57F(3) read as follows:-
"The credit of the specified duty paid on the capital goods shall be allowed if such capital goods are acquired by a manufacturer on lease, hire-purchase or loan agreement, subject to such conditions and restrictions that may be specified in eth Notification issued by eth Central Government."
This made for a departure from the earlier stand, specifically permitting availment by a lessee or a person who had hired the machinery for ultimate purchase or had some machinery loaned to him. The Bhatt taking advantage of the insistence of the Commissioner to the effect that ownership was the prime requirement for availment of credit submitted that in the light of this provision, the owner himself would be ineligible for such availment. In my opinion, an unwarranted focus has been put on the aspect of ownership. It is trite law that a statute has to be interpreted strictly on eth basis of the wording occurring therein. During this period, since TIFL and permitted in this sub-Rule, they had no claim for such credit during this period.
8. In eth 3rd phase commencing from 1.3.97, the provisions remained as they were in the 2nd phase, but were further qualified by the statement that such lease etc. was to be from a financing Company following the specified procedure. It is not the case of the appellants that RIL was a Financing Company. Therefore, for this phase also TIFL could not claim the credit.
9. It is not material whether the capital goods qualified in terms of Rule 57Q nor it is material whether they were used for the manufacture of final goods. It is sufficient that Rule 57R which qualified Rule 57Q did not permit availemnt of credit in eth circumstances in which the goods were received by M/s. TIFL.
10. The cited sub-rule underwent drastic revision during these three phases. Where the first phase was worded so as to confer benefit of an owner of the capital goods, it would appear that the wording of the rule in the subsequent two phases was such as to deny the credit to a manufacturer who had purchased the capital goods. But then this is not relevant for the purpose of the appeal before us. Nor are we, being a Tribunal which is a creature of statute, empowered to examine the vires of any rules.
11. I therefore uphold the belief of the learned Commissioner that modvat credit amounting to Rs. 4,21,92,155/- was in-admissible.
12. I now come to the argument of the demand being hit by limitation.
13. It is the claim of the appellants that the issue of availment was contested and debated for a very long time, that the earliest correspondence exchanged was on 1.2.95 and that in holding the belief that the applicants were eligible for modvat credit, no mis-representation or suppression had been made by them. It is therefore claimed that the demand made by Show-cause-Notice dated 30.4.98 is barred by limitation.
14. The Learned brother M(J) relied upon the Tribunal Judgment in eth case of Nizam Sugar Factory to uphold the Commissioner's orders. The events which occurred during the period of dispute would have to be examined.
15. The supply of capital goods made in terms of the toll agreement was first noticed in the Audit Report No. 134/95 dated 1.2.95 (D). In the report, it was voiced that in terms of Rule 57R( 3) as it then stood, modvat credit could not be claimed by TIFL. This finding was conveyed to the appellants on 27.6.95. In reply, the appellants made the following claim:
"You have also quoted all the relevant paragraphs of the agreement between RIL and us for job work undertaken by us. As per Clause (2) of the agreement, capital goods were required to be made available by RIL to us for the manufacture of the goods. By this clause it was intended that the property of the capital goods have been passed on/transferred to us. The ownership rest with us as is evident with clause 10 of the agreement which is also referred in your letter.
Prior to issue of Notification No. 26/94-CE(NT) dated 17.6.94, Rule 57R(3) did not permit credit of duty on the capital goods if the same were acquired on lease, hire purchase, loaned or by any transaction other than direct purchase whereby property of the said capital goods is not transferred to such manufacturer. This provision is not applicable to us as per agreement between RIL and ourselves. This is by way of express provision in the agreement for job work.
16. I have earlier commenced on eth interpretation of Clause-10 of the agreement which does not support the assertion of ownership by TIFL.
17. The question that arises is whether this wrong representation could invoke the mischief of extended period.
18. The Superintendent vide his letter dated 17.10.95 spoke of further audits done in July 95 and September 95 and pointed out that in the situation of purchase of goods by RIL, the TIFL could not claim the credit. The Superintendent therefore "requested to reverse the said credit". Thus where the Superintendent should have issued a Notice under Section 11A calling upon the assessee to reverse the credit wrongly taken, he was content with making a simple request. In the reply dated 30.11.95, the appellants continued to make the same arguments and continued to make the claim that the ownership of the capital goods vested with them.
19. The successive Audit Reports show that the wordings and the text of the agreement were before the Department and the Department could have examined the claim of ownership made by eth appellants, if necessary by way of reference being made to the legal branch, or to a panel lawyer, or to eth Branch Secretariat of the Law Ministry.
20. There is a letter from the appellants dated 11.8.97 addressed to the Jurisdictional Commissioner referring to the discussions with the Jurisdictional Superintendent. It appears that the Supdt. had insisted that for availment of credit ownership must vest in the claimant. In this letter, the appellants claimed that ownership was not a criteria. The reply in general terms makes no claim as to ownership of the capital goods. In this letter the appellants had referred to the earlier correspondence also. As far as the correspondence placed on record shows, the next step was only issue of the show-cause-notices in February 98 which culminated in the present proceedings.
21. I have perused the show-cause Notice. The demand has been made in terms of Rule 57U, sub-Rule (1) thereof limits demand to a period of 6 months. The proviso thereof permits demand to be made for extended period where the wrong credit has been taken on account of willful-mis-statement, collusion or suppression of facts. Annexure 'A' to the Notice shows, the period of demand as April 94 to June 97. The show-cause-Notice is dated 30.4.98. Therefore, it would appear that the demand is in terms of the proviso to sub-rule (1) of Rule 57U. The Show-cause-Notice details the statement of Shri Parekh, an employee of TIFL and of Shri Bhansali, an employee of RIL. The gist of the statement as detailed in the body of the show-cause-Notice does not indicate any willful mis-statement or suppression of facts. In para 7 of the show-cause-notice, the statement is made that during the relevant period, the ownership was a criterian for availment of modvat credit. The further statement is made that by the virtue of Notification Nos.26/94 CE(NT) and 27/94 CE (NT) exceptions have been made to this criterian. As I have observed earlier, only in the first phase of the transition of Rule 57R, ownership is suggested whereas in the next two phases, it might be a disqualification. A Notification cannot make for an exception to the Rule. These 2 Notifications merely provide the operational procedure to carry out the mandate of the Rule. Therefore, the claim made in the para 7 of the Show-cause-Notice that because the ownership continued to vest in RIL, M/s. TIFL were not eligible to claim the credit was only partly true.
22. The conclusion of para 7 of the show cause notice reads as follows:
"The above facts were also not indicated in any of the declarations filed under Rule 57T ibid for availing modvat credit, hence extended period under Rule 57U (2) of the Central Excise Rules 1944 read with proviso to Sec. 11A (1) of the Table".
23. The correspondence pursuant to the Audit Report had also established ownership with RIL. Therefore, for over 3 years, this fact was in the knowledge of the Department. First Audit Report was dated 1.2.95. In follow-up reports, instead of issuing demands, the Department merely requested the assessee to reverse the credit. The fact of the appellants having taken credit subsequently totalling nearly Rs.3 crores, thereafter was intimated to the Department every month. Even then the Department continued to tolerate the continued wrong availment without issuing show-cause-Notices for the normal period. In the light of the knowledge of the Department, the allegation that the facts were suppressed by the assessee lacks force.
24. For invocation of the extended period, suppression of the facts has to be "wilful". The Supreme Court's judgment in the case of Cosmic Dye Chemicals 1995 (75) ELT 271 has held that the mis-statement or suppression of facts has to be with intent to evade duty, to qualify for the word "wilful". It has come out in the statements that neither RIL nor TIFL had claimed depreciation on the duty portion of the capital goods. On the face of these statements "intent" is not visible.
25. In the judgment in the case of Pushpam Pharmaceuticals Ltd. 1995(78) ELT 401, the Supreme Court has held as follows:
"4. Section 11A empowers the Department to re-open proceedings if the levy has been short-levied or not levied within six months from the relevant date. But the proviso carves out an exception and permits the authority to exercise this power within five years from the relevant date in the circumstances mentioned in the proviso, one of it being supression of facts. The meaning of the word both in law and even otherwise is well known. In normal understanding it is not different that what is explained in various dictionaries unless the course the context in which it has been used indicates otherwise. A perusal of the proviso indicates that it has been used in company of such strong words as fraud, collusion or wilful default. In fact it is the mildest expression used in the proviso. Yet the surroundings in which it has been used it has to be construed strictly. It does not mean any omission. The act must be deliberate. In taxation, it can have only one meaning that the correct information was not disclosed deliberately to escape from payment of duty. Where facts are known to both the parties the omission by one to do what he might have done and not that he must have done, does not render it suppression."
The belief that where the facts are known to the Department, the extended period cannot be applied has been established in the following judgments:
i) H. Guru Instruments (North India) Pvt. Ltd. - 1995 (80) ELT 846 (Tribunal).
ii) Udaipur Cement Works - 1995 (80) ELT 465.
iii) Polychem Ltd. - 1997 (90) ELT 156.
iv) Shroff Textile Ltd - 1997 (89) ELT 516 (T)
26. Learned brother (J) in his judgment referred to the Tribunal's judgment in the case. Nizam Sugar Mills 1999 (114) ELT 426 (TRIB). This is an order per majority where three of the five Members held that the delay in issue of the show-cause Notice after the Department had gained knowledge did not act as limitation to the raising of the demand. As the concluding portion of the order drafted by Shri V K Agrawal (M-T) which formed the basis of majority judgement would show the basic requirement continued to be wilful suppression etc. This judgement has limited applicability and cannot come to the rescue of Revenue where the fundamental obligation to establish wilful suppression etc. has not been met. In the present case, this judgement can have no application.
27 I therefore, hold that the demand confirmed by the Commissioner in the impugned order is barred by limitation. The orders of confirmation thereof do not survive. In terms of the judgment of the Tribunal in the case of Uttam Steels Ltd. 1999(111) ELT 277 and also in terms of the judgement in the case of Gujarat Rolling Mills - 1999(113) ELT 936 where the demand is hit by limitation, orders of penalty would also not survive. On the same logic, the orders of confiscation of Plant, machinery, building, etc. would also be adversely hit.
28. In the light of my discussions, I hold that M/s. TIFL were not eligible to claim modvat credit of duty paid on the capital goods, but that the demand being hit by limitation, the orders of confirmation of duty, imposition of penalty and confiscation of plant, machinery, etc. do not survive. The appeal is thus allowed.
In view of the difference of opinion between the two members constituting the bench, the matter is submitted to the Hon'ble President, CEGAT for nomination of and reference to a third Member on the following points.
"Whether the demand for the extended period would sustain as held by the Member (J) or whether the demand is hit by limitation as held by the Member (T)."
Gowri Shankar, Member (Technical)
1. I have heard both parties on the question posed before me.
2. The facts, both with regard to the merits and on the limitation are set out in detail in paragraph 3 of the lead order of the Member (Judicial). It is only necessary to add that the show cause notice dated 30.4.1998 proposed recovery of credit taken on goods received between 1.4.1994 and 30.6.1997 and invoked the extended period contained in the proviso under sub section (1) of Section 11A by alleging that the assessee "did not disclose the facts to the department." This fact evidently relates to the ownership of the capital goods did not vest with the assessee but with Reliance Industries Ltd (Reliance for short) for which it supplied the goods.
3. On these facts the Member (Judicial) has held that the extended period of limitation would not apply. He ways (in paragraph 14) "Without bearing the duty incident how a person can get the benefit of the same as mentioned by the earlier portion of the order without a debit if person claims to earn credit it would amount to unjust enrichment. In paragraph 15 he says "As observed by us earlier, not mentioning the schedule to the inputs supplied by RIL would show that person has certain intention to evade duty and we are of the view that the claim of the appellants that they are barred by limitation cannot be accepted hence the larger period of limitation cannot be invoked in the facts and circumstances of the case."
4. Member Technical has held that the fact of the goods not being in the ownership of the assessee was known to the department by way of reports of audit of the accounts of the factory undertaken by the departmental officers. He has referred to audit done in July an September, 1995. He has noted in paragraph 15 that the audit report dated 1.2.1995 of the department had said that credit could not be claimed by the assessee. This report has specifically suggested that the credit would not be available for the reason that the owner of the goods was Reliance and not the assessee. He has gone to further consider the audits done subsequently and correspondence between the department and the assessee on this issue. He further finds in paragraph 21 that the statement of the appellant and Reliance do not indicate any willful misstatement or suppression of facts. He concludes that from these facts that over three years the fact that the assessee having taken the credit which was known to the department, which instead of issuing a demand, merely requested the assessee to reverse the credit. In the light of the knowledge of the department, he says the allegation that the fact was suppressed was exposed.
5. He further finds that on the facts before him, there was no intend apparent in the conduct of the assessee to evade duty, relying on the scope of the proviso under Section 11A(1). HE has also held that the judgment of the larger bench of the Tribunal in Nisam Sugar Mills vs CCE 1999 (114) ELT 426, which the member judicial cited in support of his reasoning would have no application to the facts before him.
6. The first contention of the representative of the department is that even accepting the finding of the Member (Technical), the entire demand of duty is not barred by limitation. The first audit report from which the department came to know of the ownership was not with the assessee in 1995. Subsequently, however, on verification from the Deputy Commissioner stated that although the report was of early 1995, the audit itself was in October-November 1994. Therefore, for the period prior to the acquisition of knowledge by the officers during this order, the extended period would apply. The other argument that he advances is that there has been considerable contravention by the assessee of the rules, justifying the application of the extended period. Three letters were written to the assessee starting from the first one dated 27.6.1995, asking that credit could not be taken on the equipments which it received since it was not their owner. These letters went unheeded and it continued to take credit. Therefore, there has been contravention of the rules justifying invoking the extended period. He cited the decision of the Tribunal in Jalani Tool (I) ltd vs CCE 1994 (70) ELT 788.
7. The answer from the counsel for the appellant is as follows. On the basis of the toll agreement with Reliance, the assessee believed that it was the owner of the goods. Clause 10 of this agreement provides that "The assessee shall at the request and cost and expense of RIL make necessary improvements to the plants through appropriate arrangement in order to improve the quality and quantity of production of the plants. Provided, however, that RIL shall not have any claim for ownership of such improvements". On this basis it believed that it was the owner. He contends that the decision of Jalani Tools (I) ltd vs CCE does not give a reasoned finding that the extended period of limitation would be available to t he department in a case where the manufacturer pursues a course of action for non payment or short payment of duty or taking credit despite contrary advice by the departmental officers.
8. In Jalani Tools (I) ltd vs CCE, the lead order was written by Member (Judicial). She found that modvat credit was available on grinding wheels and grinding belts which were in dispute and therefore said "we are not called upon to record any finding on the limitation". The Vice President held that credit was not available on these items. He thereafter said that the extended period of time was available to the department, because the assessee should have paid heed to the direction of the Superintendent to adjust the credit wrongly taken. Therefore, the appellant could hardly claim that their action was a deliberate act of misdeclaration or wrongful availment." The question that was referred to the third member was this "Whether the item in question were inputs in the nature of raw material and therefore, eligible for modvat benefit or they were merely items required for operation of the machines and could not be considered as inputs in the nature of raw material or otherwise and were not eligible for modvat." The third member agreed with the Vice President's view that the credit was not admissible to the goods. He also said that the longer period has rightly been invoked. The final order of the bench said that "modvat credit was not admissible and the longer period has been rightly invoked."
9. The question that referred to the third member did not relate to limitation. It only related to the eligibility to credit of these two items. This is in fact what he says in the first paragraph of his order. Nor does he give the findings that argument is advanced on limitation. His order on limitation is without advancing any reasoning or basis.
10. The position therefore is that expressly Member Judicial has declined to give a finding on limitation. There was therefore no dispute on this which could be referred to the third member. This aspect, in any case, was not referred to. The third member's finding on limitation therefore is extraneous to the proceedings to which it was dealing. It is also not supported by any reasoning. The only reason that remains is that of the Vice President. Therefore, I do not find it possible to say this decision proposes a ratio that where a manufacturer, despite the request of the jurisdictional officers continue to take credit, the extended period would be available. The question that is required to be dealt with is, whether the direction of the jurisdictional officer can be equated with the provisions of the Central Excises and Salt Act, 1944 or the Rules made thereunder. It does not appear to be that a direction of an officer can be equated with the provisions of the Act and the Rules. However, these are merely incidental observations.
11. The notice to show cause issued to the assessee alleged suppression of fact of ownership. It did not allege contravention of the rules. Even if it is accepted that Jalani Tools (I) Ltd. vs CCE has held that in a situation before it, the extended period would be applicable, applying that ratio to the facts before me woluld in effect amount to giving a finding on limitation on considerations that were not even made known to the assessee in the show cause notice. This is another reason for not accepting the departmental representative's argument.
12. As to the ground on which the notice did invoke the extended period, Mr Mondal's contention is that the Supreme Court's judgement in Cosmic Dye Chemical vs CCE 1995 (75) ELT 721 and Pushpam Pharmaceuticals Company vs CCE 1995 (78) ELT 401 which the Member (Technical) has relied upon would not apply to demand made under proviso of Rule 57U (1). He points out that the words that proviso under Section 11A(1) refers to "wilful suppression" whereas the proviso under Rule 57U(1) refers to "suppression." The Supreme Court in its judgement was concerned with wilful suppression. In paragraph 4 of its judgement in Pushpam Pharmaceuticals Company vs CCE the Supreme Court explained the scope of the term "suppression of facts" contained in the proviso under Section 11A (1). Nothing that it was the mildest expression used in the proviso, it said "Yet the surroundings in which it has been used it has to be construed strictly. It does not mean any omission. The act must be deliberate. In taxation, it can have only one meaning that the correct information was not disclosed deliberately to escape from payment of duty." From this explanation, it appears to me, that the absence of the word 'wilful' qualify the word suppression in the proviso under Rule 57U(1) does not lead to the conclusion that any failure to provide information itself amounts to suppression. It would then follow that even a bona fide failure to provide information or failure to provide information which was not in the possession of the appellant would invite invocation of the extended period.
Surely, that is not what the legislature intended. The meaning of the term in the Oxford short dictionary "keeping, concealing secret; refusal to disclose information etc" indicates that suppression is a result of conscious thought or action. Therefore, not all failure to suppress information can amount to suppression.
13. In the light of this discussion, the answer to the question would be that the demand is hit by limitation as the Member (Technical held.
14. The matter is referred to the bench for passing appropriate orders.