Customs, Excise and Gold Tribunal - Delhi
Godfrey Philips India Ltd. vs Collector Of Central Excise on 24 September, 1992
Equivalent citations: 1993ECR140(TRI.-DELHI), 1993(63)ELT186(TRI-DEL)
ORDER K.S. Venkataramani, Member (T)
1. These three appeals have been filed by the same appellants, who are manufacturers of cigarettes falling under T.I. 4 II. In all these cases, various demands of duty have been made and penalty imposed on the ground that the appellants, herein, had cleared loose cigarettes for testing purposes within the factory without accounting for the quantity in the statutory account and without payment of Central Excise Duty leviable on the cigarettes. The Department issued various show cause notices. In Appeal No. 2013/ 85-D, the show cause notice was issued on 11-6-1984 for an amount of Rs. 1,73,359.11 for the period 20-10-1982 to 10-10-1983. On adjudication, demand was confirmed and a penalty of Rs. one lakh was imposed by the Additional Collector of Central Excise, Bombay-I in his order No. 1/85 dt. 6-6-1985. In Appeal No. 2014/85-D, by a show cause notice issued on 11-4-1984 an amount of duty Rs. 95,906.29 was demanded for the period 11-10-1983 to 10-4-1984. A penalty of Rs. 50,000/- was imposed on the appellants by the Additional Collector in his adjudication Order No. 3/85 dt. 6-6-1985 while confirming the demand. In Appeal No. 2607/85-D, a show cause notice was issued on 6-4-1985 demanding duty of Rs. 82,636.14 for the period Nov. 84 to 31-3-1985. The Additional Collector, by his adjudication order No. 6/85 dt. 13-8-1985, confirmed the demand, also imposed a penalty of Rs. 40,000/-. Briefly, the facts relating to these appeals, which are common, except for the periods of demand are that during the course of a survey conducted by the Department, the Central Excise Officers noticed that loose cigarettes were found utilised for personal consumption within the factory on which no duty was paid. On 18-10-1982, the Superintendent of Central Excise, wrote to the appellants to clarify the matter to which they said that loose cigarettes are used for quality test purposes and not for personal consumption. They also said therein that no record of the number of cigarettes consumed in the process of testing has been maintained and that they have had already intimated the approximate quantity of such cigarettes in their earlier letter dated 11-7-1977. The Superintendent, thereupon, required the appellants to furnish a copy of their letter of 11-7-1977 and also to intimate the names and designations of the persons, who are on the panel for testing the cigarettes and the details of cigarettes issued for test purposes. By their letter of 6-3-1984, the appellants said that they use 2500 cigarettes, non-duty paid per day for consumption within the factory. Proceedings were initiated by the issue of various show cause notices, as mentioned above, asking the appellants why the duty on the cigarettes, so removed, be not demanded under Rule 9(2) and under the First Proviso to Rule 49(1) of Central Excise Rules and as to why penalty should not be imposed on them under Rule 9(2). The Additional Collector, on considering their reply and hearing them in the matter, passed the various adjudication orders, referred to above, confirming the demand and imposing penalty.
2. Ms. Amrita Mitra, ld. Counsel, appearing for the appellants, contended that the test of cigarettes takes place at a stage after they are rolled and this test is for the purpose of ascertaining moisture content, tar and nicotine level of drag i.e. the amount of tobacco taken in while smoking. The first two tests can be done in a laboratory but the drag test can only be done by empirical testing by taking sample of loose cigarettes and testing them by actual smoking by panel of employees chosen for the purpose. The ld. Counsel referred to Rule 93 of the Central Excise Rules which provides that no excisable tobacco product shall be delivered from any factory unless they are packed in the manner prescribed therein which shows that in the case of cigarette, the manufacture is complete only when the provisions of Rule 93 are complied with. Therefore, the loose cigarettes, which are removed by the appellants for the purpose of testing, have not reached the stage of payment of duty at all. The same conclusion will follow by a reference to Rule 2(f) of Central Excises & Salt Act, 1944 especially Section 2(f)(ia) which says that manufacture in relation to tobacco includes relabelling of containers and re-packing from bulk to retail packs or the adoption of any other treatment to render the product marketable to the consumer. In this case, the goods cannot be said to be marketable at the loose stage of cigarettes sticks. The Ld. Counsel cited the Supreme Court decision in the case of Bhor Industries Ltd. v. Collector of Central Excise -1989 (40) E.L.T. 280 to say that the criterion for marketability is to be established for determining dutiability and cigarettes are capable of being sold only when packed in packets in the prescribed manner under Rule 93 of Central Excise Rules. The Ld. Counsel also relied upon the Hyderabad Collectorate Trade Notice No. 138/83 dt. 26-11-1983 which laid down that the RG-l stage in respect of cigarettes is that they are packed in outers. The Ld. Counsel also referred to the Departmental Instruction Manual on Cigarettes in this regard. She also relied upon the Delhi High Court decision in the case of Delhi Cloth & Genl. Mills v. Union of India -1978 (2) E.L.T. 122 where the Court took note of the fact that in respect of calcium carbide, there is a statutory prohibition in selling it in loose form, for determining the marketability. Likewise in the present case, Central Excise Rules require cigarettes to be packed in outers before removal and they are not marketed in loose form. Reliance was also placed on the Calcutta High Court decision reported in 1971 TLR 1073 wherein the High Court held that labelling of medicines is manufacture within the definition of that term for the purpose of Item 14E relating to patent and proprietary medicines under Central Excise Tariff and in the light of definition of manufacture under Rule 2(f) of the Central Excises & Salt Act, 1944. The Ld. Counsel also cited the decision of the Tribunal in the case of Collector of Central Excise v. Chemopulp Tissues Ltd. -1989 (41) E.L.T. 71 (Tribunal). Normal minimum packing without which a manufactured product cannot be delivered should be treated as a process incidental or ancillary to the completion of that product. The Ld. Counsel also pointed out that the adjudicating authority has taken objection only to that quantity of cigarettes subject to empirical test and not to the quantity tested for determining Nicotine content in drag test. It was also argued that it was wrong for the department to have calculated the demand at tariff rate of duty without exemption whereas Notification 36/83 grants exemption to cigarettes where also Notification lays down that cigarettes packed in packets means cigarettes which are packed for retail sale. The Ld. Counsel also referred to the decision of the Tribunal in the case of Jyoti Home Industries v. Collector of Central Excise, Bangalore in its Order Nos. 981 to 993/1987-D dated 21-12-1987 where the Tribunal had held that in respect of bidi, the goods can be said to have been fully manufactured when the raw-materials is rolled into bidis. In that case also, the Tribunal was considering the question whether bidi is used for testing by actual smoking will be liable to duty. The Tribunal also considered in this connection the definition of manufacture under Section 2(f)(ia) as well as the implications of Rule 93. The Tribunal considered the Madhya Pradesh High Court judgment in the case of Chhotabhai Jethabhai Patel & Co. v. Joint Secretary to the Govt. of India - 1982 ECR 514 as well as the A.P. High Court judgment in the case of Y. Thirupathi Rao and Anr. v. Collector of Central Excise, Hyderabad and Ors. -1983 (14) E.L.T. 2346 (A.P.) and chose to follow the later judgment of the Andhra Pradesh High Court to say that such bidies used for test are liable to duty. It was contended by the Ld. Counsel that the Tribunal erred in relying upon the Andhra Pradesh High Court judgment because that judgment was based on the reasoning that bidies are excisable goods because they are included specifically in the Central Excise Tariff. But the ld. Counsel urged this criterion has not been accepted for deciding whether the goods are excisable goods by the Supreme Court in its decision in the case of Bhor Industries (supra) which, on the other hand, emphasised the criterion of marketability. Therefore, the Tribunal's conclusion is based on case law which is no more good law. The ld. Counsel, further, contended that in any event, the Department had no ground to invoke the longer period for demanding the duty under Section 11A because in the first place the factory was under physical control with clearances taking place with the counter signatures of the officers. The fact that testing of the cigarettes within the factory is also known to the department since 1954 onwards. The ld. Counsel, in this connection, drew attention to their letter of 12th Oct., 1954 to the Assistant Collector intimating them regarding the necessity of quality test of the cigarettes. The Department had also responded in letter dated 25-11-1954 stating that they had no objection to continue the existing procedure for drawal of samples for testing. Further, the ld. Counsel referred to the letter they had written to the Department on 6-3-1984 again on the same subject urging that the cigarettes consumed in testing should not be subjected to duty. Therefore, the Department cannot allege suppression of facts by the appellants herein and the demand for the period beyond six months was hit by limitation.
3. Shri J.N. Nair, Ld. D.R. contended that the definition of manufacture under Section 2(f) of the Central Excises & Salt Act is an inclusive definition. The cigarette as a commodity excisable under the Tariff, comes into existence the moment it is rolled so as to answer the description of the item in the tariff. The empirical test conducted is on this fully finished cigarette and the test is by actual smoking of the cigarettes. Ld. DR contended that unless manufacture is completed, goods cannot be tested as to their quality for which proposition, he relied upon the Tribunal's decision in the case of D.S. Screen Pvt. Ltd. v. Collector of Central Excise - 1990 (50) E.L.T. 475 (Tribunal). Rule 93 only provides the procedure for the removal of the excisable goods fully manufactured although the manufacture is complete when the cigarette is rolled and the taxable event is such manufacture of cigarette, and not its removal. Rule 93 cannot be a substitute for statutory definition of the term 'manufacture'. The Ld. DR in this context relied upon the decision of the Supreme Court in the case of J.K. Spg. Mills v. Union of India -1987 (32) E.L.T. 234 and in the case of Wallace Flour Mills v. Collector of Central Excise - 1989 (44) E.L.T. 598. The Ld. D.R., further argued that the ratio of the Supreme Court decision in the case of Bhor Industries (supra) also lays down that it is not the actual sale in the market but capability of being marketed which is the criterion for dutiability. In the present case, the cigarettes manufactured are in fact, smoked and tested as a cigarettes which shows the capability of the product to be marketed. The Supreme Court had an occasion to consider this aspect in its decision in the case of Bhor Industries (supra) & Plasmac Machine Mfg. Co. Pvt. Ltd. v. Collector of Central Excise - 1991 (51) E.L.T. 161 (S.C.) wherein the Supreme Court held that captive consumption of the product within the factory is not determinative nor their actual sale in the market for dutiability. The ld. D.R., further urged that the Tribunal in Jyoti Home Industries case had clearly held that bidies smoked for test purposes are chargeable to duty. As regards, the question of limitation, the ld. D.R. urged that the 1954 letter of the appellants did not disclose the fact of the empirical test being carried out. Therefore, there was suppression which justified invoking the longer period for demanding the duty as also imposing penalty on the appellants.
4. The submissions made by both the parties, herein, have been carefully considered. On the question whether cigarettes, which are in loose sticks, are excisable goods at all and whether such cigarettes consumed by actual smoking as an empirical test to test the quality of the cigarettes, the Tribunal had considered a similar situation in respect of bidies in its Jyoti Home Industries decision (supra). The Tribunal, therein, also considered a similar contention raised before it with reference to Rule 93 of Central Excise Rules that bidi issued for testing purposes not being in accordance with that rule cannot be said to have reached the excisable stage. However, the Tribunal had followed the A.P. High Court decision in the case of Y. Thirupathi Rao and Anr. v. Collector of Central Excise, Hyderabad and Ors. (supra) after considering also the Madhya Pradesh High Court decision in the case of Chhotabhai Jethahhai Patel & Co. (supra). The decision of the A.P. High Court (supra) had laid down that the process of rolling the tobacco into bidi would be a process incidental to the completion of the manufactured product and, therefore, would amount to manufacture within the scope of Section 2(f). Para 6 of the Tribunal's Order is reproduced below :
"Sh. Haksar had relied on Section 2(f)(ia) to contend that it is only the labelling and packing that the process of manufacture of biris would be complete. We find that the provision cited is only by way of an inclusive definition to the effect that labelling and repacking would also be processes of manufacture and not that it was only on such processes being carried out that manufacture would be complete. The decision of the Andhra Pradesh High Court cited supra has laid down that the process of rolling the tobacco into biris would be a process incidental to the completion of the manufactured product and, therefore, would amount to manufacture within the scope of Section 2(f). Respectfully following the said decision, we hold that the appellants are proved to have manufactured the biris in issue i.e. biris which had been lost in test smoking."
Therefore, it is not possible to accept the contention that the Tribunal was in error to follow the ratio of the A.P. High Court judgment (supra) because the Tribunal had not referred to the reasoning of the High Court relating to the excisability being established only by the description of the item in the Central Excise Tariff The issue had been, further, settled by the decision of the Supreme Court in the case of Plasmac Machine Mfg. Co. Pvt. Ltd. (supra) where the decision of the Supreme Court in the case of Bhor Industries (supra) had also been considered. Para 7 of the Plasmac Machine Mfg. Co. Pvt. Ltd. decision of the Supreme Court (supra) may be usefully referred, which is as follows :
"The submissions that the Tie Bar Nuts manufactured by the appellants to specifications of Injection Moulding Machines for captive use and not for sale is also, in our view, untenable, as such use is not determinative of the question. If the goods are capable of being sold that would be enough. In Bhor Industries Ltd., Bombay v. Collector of Central Excise, Bombay - 1989 1 SCC 602, the crude PVC films as produced by the appellants were not known in the market, nor could they be sold in the market. Sabyasachi Mukharji, J., as he then was, while considering the submission that it was only the goods as specified in the Schedule to the Act that could be subjected to the duty in para 6 observed :
"For articles to be goods these must be known in the market as such or these must be capable of being sold in the market as goods. Actual sale in the market is not necessary, user in the captive consumption is not determinative but the articles must be capable of being sold in the market or known in the market as goods. That was necessary."
The appellants themselves have called the goods 'Tie Bar Nuts' and those are admittedly used for fixing platens at appropriate distances. It cannot be said that the Tic Bar Nuts after their manufacture did not constitute goods; their actual sale in the market was not necessary."
5. It may also be relevant to bear in mind that loose sticks of cigarettes are also bought and smoked by consumers. The panel of employees had, in fact, lighted the cigarettes and smoked them as a fully finished cigarettes. As regards the argument that in view of the stipulation in Rule 93 that cigarettes can be delivered from the factory only in packets and that, therefore, loose cigarettes are not to be considered as excisable goods, it may be observed that argument on similar lines had not found favour with the Tribunal in its decision in the case of Jyoti Home Industries. Further, the Rule 93 spells out a requirement at the point of delivery which has relation to the collection of duty. Tariff Item 4 II(2) of Central Excise Tariff prescribing the rate of duty on "cigarettes" does not contain any indication that the cigarettes should be in prescribed packing; the rate of duty is per thousand cigarettes or on ad valorem rate whichever is higher. In this context, it has to be borne in mind that in the Wallace Flour Mills case (supra), the Supreme Court dealt with the two stages, namely, the taxable event and the collection of duty by saying, "It is well settled by the scheme of the Act as clarified by several decisions that even though the taxable event is the manufacture or production of an excisable article, the duty can be levied and collected at a later stage for administrative convenience... the taxable event is the fact of manufacture or production of an excisable article, the payment of duty is related to the date of removal of such article from the factory". This view is in line with the Supreme Court's earlier decision in the case of Union of India v. Bombay Tyre International -1983 (14) E.L.T. 1896 (SC) wherein it was observed by the Supreme Court"...the said tax can be levied at a convenient stage so long as the character of the impost, that is, it is a duty on manufacture or production is not lost. The method of Collection does not affect the essence of the duty, but only relates to the machinery of collection for administrative convenience." The Supreme Court, further, observed therein, "Where the levy in our country has the status of a constitutional concept the point of collection is located where the statute declares it will be." In such a situation, arguments that in the light of Rule 93, the individual cigarette sticks are not excisable goods, cannot be accepted which conclusion will also follow from the decision of the Tribunal in similar circumstances with reference to the empirical test of bidies in its Jyoti Home Industries decision (supra). Therefore, the demand for duty in respect of cigarettes consumed captively, which is also made in terms of Rule 49 of the Central Excise Rules in the show cause notices, is sustainable and concessional rate can be availed of only if it is shown that the conditions, therefor, in the Exemption Notification are satisfied and not otherwise. As regards limitation, there is substance in the appellants' plea that the demand beyond six months is barred by limitation as they cannot be said to have suppressed any facts. This is because of the admitted position that ever since 1-5-1979, the appellant unit was under physical control. The detailed system of supervision over manufacture and accounting of cigarettes prescribed in the Departmental Manual on Cigarettes also go to support the appellants' claim that the Department could not have been kept in the dark regarding the testing carried out. The various correspondences to which the appellants have referred, namely, letter of 12-10-1954 and the approval dated 25-11-1954 by the Department and the further correspondence in the matter carried on by the appellants as in the letter dated 6-3-1984 from them addressed to the Collector with a copy to the Assistant Collector and Range Superintendent would go to show that there was scope for the department to have come to know about the testing of the cigarettes as undertaken by the appellants. The fact that the details of empirical test were not disclosed by itself does not mean that it was deliberately held back in the context of the correspondence and also in the context of the physical control over the factory and in such a situation, the ratio of the Supreme Court decision in the case of Collector of Central Excise, Hyderabad v. Chemphar Drugs & Liniments - 1989 (40) E.L.T. 276 becomes applicable wherein the Supreme Court held that the longer period under Section 11A can be invoked only where a manufacturer had deliberately withheld relevant information from the Department. In this view of the matter, the demand for duty beyond six months will be hit by limitation. This will apply to the show cause notice dated 11-6-1984 for the period 21-10-1982 to 10-10-1983. In the other two cases, the Department has issued the show cause notice only for the period within six months. Therefore, they are not hit by limitation. As for the personal penalty on the appellants, herein, in view of the finding above on the question of suppression of facts and as the records and evidence do not disclose any mala fides on the part of the appellants in this respect, the order imposing penalty on them does appear harsh and it is, accordingly, set aside in all the three appeals. The appeals are disposed of in the above terms.