Custom, Excise & Service Tax Tribunal
4. Whether Order Is To Be Circulated To ... vs Cce, Nagpur on 24 March, 2009
IN THE CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL West Block No. 2, R.K. Puram, New Delhi 110 066. Principal Bench, New Delhi COURT NO. I Excise Appeal Nos. 5511-5515 of 2004 [Arising out of the Order-in-Original No. 45-46/2004/C dated 30/06/2004 passed by The Commissioner of Customs & Central Excise, Nagpur.] For Approval and signature : Honble Ms. Jyoti Balasundaram, Vice President Honble Mr. Rakesh Kumar, Member (Technical) 1. Whether Press Reporters may be allowed to see : the Order for publication as per Rule 27 of the CESTAT (Procedure) Rules, 1982? 2. Whether it would be released under Rule 27 of : the CESTAT (Procedure) Rules, 1982 for publication in any authoritative report or not? 3. Whether their Lordships wish to see the fair : copy of the order? 4. Whether order is to be circulated to the : Department Authorities? 1. M/s Uniworth Textiles Ltd. ] 2. Shri B.K. Dalmia ] 3. Shri Samir Ghosh ] Appellant 4. Shri Narendra Kumar ] 5. Uniworth International Ltd. ] Versus CCE, Nagpur Respondent
Appearance S/Shri M. Chandarsekhran, Senioir Advocate and Rupesh Kumar, Advocate for the appellant.
S/Shri L.P. Asthana and Abhishek Jaju, Advocates for the Respondent.
CORAM:Honble Ms. Jyoti Balasundaram, Vice President Honble Sh. Rakesh Kumar, Member (Technical) DATE OF HEARING : 02/01/2009.
DATE OF DECISION : 24/03/2009.
Order No. ________________ Dated : ,,,,,,,,,,,_____________ Per. Rakesh Kumar :-
M/s Uniworth Textiles Ltd., B-129, MIDC Area, Buti Bori, Distt. Nagpur (hereinafter referred to as UTL) are a 100% EOU who started their operations sometime in the year 1994 on the basis of an LOP No. 23/94/EOU/573/93 dated 17/01/94 issued by the Ministry of Commerce. UTL had been promoted by M/s Uniworth International Ltd., Uniworth Centre, 70A, Shakespeare Sarani, Kolkata 700 017 (hereinafter referred to as UIL). While Shri Narendra Kumar is the Chairman of UTL, Shri B.K. Dalmia is President of UTL as well as Director of UIL and Shri S.K. Dalmia is the President of UIL as well as CEO of UTL. Shri Samir Ghosh is another Director of UTL.
1.1 UTL manufacture all wool fabrics, wool silk and poly wool fabrics of different varities for export. During the period of dispute, a 100% EOU, as per the then exim policy, was entitled to export 25% of the FOB value of its exports into DTA with the approval of the Development Commissioner and besides this, 5% of the FOB value of the exports could be cleared as rejects into DTA. As per the provisions of the proviso to Section 3 (1) of Central Excise Act, 1944, as amended with retrospective effect w.e.f. 11/05/82 by Section 92 of the Finance Act, 2000, the clearances of goods manufactured by a 100% EOU or a unit in Export Processing Zone (EPZ) into DTA attract central excise duty equal to the aggregate of the duties of Customs leviable under the Customs Act, 1962 or any other law for the time being in force, on like goods manufactured outside India if imported into India, and where the said duties are ad-voleram, the value of such excisable goods has to be determined in accordance with the provisions of the Customs Act, 1962 and the Customs Tariff Act, 1965. However, if the DTA clearances are as per the provisions of the EXIM policy, i.e. DTA clearances of prime quality goods within quota of 25% of the FOB value of exports and of rejects within 5% of the FOB value of exports have been made with the approval of the Development Commissioner, such DTA clearances attract the concessional rate of duty under Notification No. 2/95-CE, which is 50% of the rate prescribed under the proviso to Section 3 (1) of the Central Excise Act.
1.2 The provisions of the Exim policy also provide for advance DTA clearance and from the records, it is seen that after starting the manufacturing operations in 1994, UTL till July 1997, in addition to utilizing their normal DTA quota also made DTA sales against advance DTA quota with the approval of the Development Commissioner. However, during the period of dispute i.e. during the period from August 1997 to March 2002, all the DTA sales of UTL are of the goods which are claimed by them to be rejects within the quota of 5% of FOB value prescribed under the exim policy.
1.3 The Central Excise officers of Nagpur, Central Excise Commissionerate, on receipt of intelligence that UTL are clearing prime quality goods as rejects into DTA and that too by under declaring their value, started investigation into this matter and after completing the investigation, a show cause notice dated 13/08/02 was issued to UTL, UIL, Shri Narendra Kumar Chairman of UTL, Shri B.K. Dalmia President of UTL and Director of UIL and Shri Samir Ghosh Director of UTL, making allegations that prime quality fabrics have been cleared into DTA in the guise of rejects by grossly under declaring their value and on this basis, the show cause notice demanded allegedly short paid Central Excise Duty amounting to Rs. 24,30,39,796/- from UTL on clearance of 8,05,904.40 linear meters of poly wool, silk wool and all wool fabrics cleared into DTA in the guise of rejects during period from August 1997 to June 2001, alongwith interest on this duty as per the provisions of Section 11AB, seeking confiscation of these goods under Rule 209 (1) (a) (b) & (d) of Central Excise Rules, 1944 and also seeking imposition of penalty under Section 11AC of Central Excise Act. The show cause notice also sought imposition of penalty under Rule 209 of Central Excise Rules, 1944 on UIL and penalty under Rule 209A on Shri Narendra Kumar, Shri B.K. Dalmia and Shri Samir Ghosh. In this show cause notice, it was also alleged that all the DTA sales of the so called rejects are to only one customer UIL and that UTL and UIL are related persons within the meaning of this term, as defined under Rule 2 (2) of Customs Valuation Rules, 1988 and, therefore, the duty on the DTA sales is chargeable on the deductive value determined under Rule 7 of the Customs Valuation Rules, 1944 on the basis of the price charged by UIL in respect of sales of the same goods to independent buyers. Subsequently another show cause notice dated 22/07/03 containing the same allegations was issued to UTL, UIL, Shri Narendra Kumar, Shri B.K. Dalmia and Shri Samir Ghosh for demanding allegedly short paid duty in respect of clearances of all wool, poly wool and silk wool fabrics in the guise of rejects during the period from July 2001 to March 2002. The duty demanded under this show cause notice was 30,88,299/- in respect of clearances of 66,382 meter of poly wool, all wool and silk wool fabrics cleared during the period from August 1997 to March 2002. This show cause notice also, besides demand of duty alongwith interest, sought confiscation of the goods cleared into DTA during the period from July 2001 to March 2002 and sought imposition of penalty on UTL, UIL, Shri Narendra Kumar, Shri B.K. Dalmia and Shri Samir Ghosh. Both these show cause notices have been issued by invoking extended period under proviso to Section 11A (1) of the Central Excise Act, 1944. Both the show cause notices were adjudicated by the Commissioner, Central Excise, Nagpur by the impugned order-in-original No. 45-46/04 dated 05/07/04 by which the Commissioner upholding the allegations against the noticees has held that -
(a) the transaction value declared by UTL for all wool and blended fabrics cleared by them into DTA from August 1997 to March 2002 period are not acceptable in terms of Rule 4 (3) of Customs Valuation Rules and the values are to be rejected under Rule 10A ibid and are to be determined by taking recourse to Rule 7 ibid in the manner mentioned in the show cause notices, and
(b) the so called rejects 8,05,904.59 linear meters and 6,6382.90 linear meters of poly wool, all wool and silk wool fabrics cleared during period from August 1997 to March 2002 are to be charged full Central Excise Duty under proviso to Section 3 (1) of Central Excise Act by denying the benefit of Notification No. 2/95-CE dated 04/1/95, as amended ; and has confirmed the demand of Central Excise Duty amounting to Rs. 24,62,28,055/- against UTL, which is the short paid duty in respect of clearances of all wool/blended fabrics cleared into DTA during period from August 1997 to March 2002, under proviso to Section 11(1) of Central Excise Act, 1944 alongwith interest on this duty at the applicable rate, as per the provisions of Section 11AB of Central Excise Act ;
(c) imposed penalty of Rs. 24,61,28,055/- on UTL under Section 11AC of Central Excise Act, 1944 readwith Rule 209 (1) of Central Excise Rules, 2001 2002 ;
(d) imposed penalty of Rs. 1,00,00,000/- on UIL under Rule 209A of Central Excise Rules, 1944 readwith Rules 26 of Central Excise Rules, 2001-02 and
(e) imposed penalties of Rs. 20,00,000/- Rs. 5,00,000/-, Rs. 5,00,000/- on Shri B.K. Dalmia, Shri Samir Ghosh and Shri Narendra Kumar respectively under Rule 209A of Central Excise Rules, 1944 readwith Section 26 of Central Excise Rules, 2001-02.
1.4 It is against above order of Commissioner that these five appeals have been filed by UTL, UIL, Shri Narendra Kumar, Shri B.K. Dalmia and Shri Samir Ghosh.
2. Heard both the sides.
2.1 Shri M. Chander Shekharan, Advocate, the learned Senior Counsel for the Appellant and Shri Rupesh Kumar, Advocate also representing the appellants made the following submissions:-
(1) UTL has sold only rejects within the quota of 5% of the FOB value of exports prescribed in the exim policy. The Departments allegation that the goods cleared into DTA were not reject but prime quality goods is without any basis (2) The Commissioner has gone wrong in ignoring the Boards Circular No. 268/85-CX-6 dated 29/09/94 readwith the earlier Circular No. 23/84-CX-6 dated 29/05/84 and determining the assessable value by the deductive method prescribed under Rule 7 of the Customs Valuation Rules based on the price at which the goods sold by UTL were, in turn, sold by UIL to wholesale buyers. As per the Boards Circular dated 29/09/94, while determining the value of the goods cleared by 100% EOU to DTA, where the invoice price of the goods under assessment is in the nature of transaction value i.e. more or less corresponding to the FOB value of the export of goods of the identical nature and in conformity with the provision of Rule 3 of the Customs Rules, 1988, such invoice value can be accepted for the purpose of assessment and in such cases, there would be no necessity to ascertain the price of identical or similar goods imported through various customs houses or goods purchased by other EOU. This circular also clarifies that in the circumstances where the parameters given in Rule 3 of the Customs Valuation Rules are not satisfied (for example, in case of sales to sister concerns or inter-related concerns or where there are other reasons to believe that the invoice price does not represent the true transaction value) recourse may be taken to determine the assessable value, as indicated in the Boards Circular No. 23/84-CX-6. As per the Boards Circular No. 23/84-CX-6, the assessable value of excisable goods cleared into DTA by a 100% EOU, for the purpose of calculating the custom duty, may be determined under Rule 8 of the Customs Valuation Rules, as Section 14 (1) (a) of the Customs Act 1962 and other Valuation Rules may not apply to the goods produced in such 100% EOUs and allowed to be sold in India and that while determining the assessable value of the goods under Rule 8, the factors like sale (invoice) price of the goods under assessment, sale price of other consignments of identical/similar goods cleared from the EOU or other EOUs into DTA at some other time, export price of identical/similar goods exported by the EOU or other under EOUs etc. may be taken into consideration. Therefore, as per the Boards Circular dated 29/09/94 readwith the earlier Circular No. 23/84-CX-6 dated 29/05/84, the assessable value of the goods cleared by 100% EOU into DTA has to be determined necessarily by taking recourse to Rule 8 of Customs Valuation Rules by best judgment method. As held by the Honble Supreme Court in the cases of Collector of Central Excise, Vadodara vs. Dhiren Chemical Industries reported in 2002 (139) E.L.T. 3 (S.C.), the Board circulars are binding on the Departmental officers.
(3) Tribunal in the case of Tata Coffee Ltd. vs. CCE, Hyderabad reported in 2004 (168) E.L.T. 460 (Tri. Bang.) has held that when there is no dispute that the FOB value of the goods exported is fully commercial value, that value can be taken as the likely price of import also and accordingly can be adopted as the assessable value of the goods sold into DTA. Same view has been taken by the Tribunal in the case of Haryana Sheet Glass Ltd. vs. CCE, Surat I reported in 2005 (191) E.L.T. 682 (Tri. Bom.).
(4) Even if UTL and UIL are treated as related persons within the meaning of Rule 2 (2) of the Customs Valuation Rules, 1988, there is no evidence that the relationship has influenced the price. Therefore, the Commissioner has gone totally wrong in rejecting the price at which UTL sold the goods to UIL, even if all the DTA sales of UTL are to UIL during the period of dispute. When there was no basis to reject the sale price of UTL to UIL and it could not be said that the conditions for accepting the invoice price as the transaction value, as prescribed under sub-Rule (2) of Rule 4 of Customs Valuation Rules have not been satisfied, there was no justification for rejecting the UTLs sale price to UIL and then determining the assessable value by deductive value method under Rule 7 ibid. In any case at the most FOB value of the goods could have been adopted.
(5) Even in adopting the deductive value method under Rule 7 ibid, the Commissioner had been gone wrong as under Rule 7, the assessable value of the imported goods is determined on the basis of the sale price of the like goods in India in greatest aggregate quantity to unrelated buyers after allowing the following deductions :-
(a) commissions usually paid or a agreed to be paid or the additions usually made for profits and general expenses in connection with sale in India, at the imported goods of the same class or kind,
(b) the usual cost of transport and insurance and associated costs incurred within India, and
(c) the Customs duty and other taxes payable in India by the reasons of importation or sale of the goods.
In this case, neither the price for sale in greatest aggregate quantity had been adopted nor the deductions which are to be made as per the Rule 7 have been made from the sale price of the UIL.
(6) For the period prior to 16/09/99, the duty payable is 50% of only the aggregate of the duties of Customs chargeable under Section 12 of the Customs Act, 1962 and not the aggregate of the duties customs chargeable under Section 12 of the Customs Tariff Act and any other law for the time being in force. In other words, for the period prior to 16/9/99 duty chargeable would be only 50% of the basis Customs duty not the aggregate of the basic custom duty chargeable under Section 12 of the Customs Act, 1962 and the AED (GSI) chargeable under Additional duties of excise (goods of Special Importance) Act 1957 and AED (TTA) chargeable under Additional duties of Excise (Textile & Textile Article) Act. In this regard, reliance is placed on the judgment of the Tribunal in the case of Fabworth (India) Ltd. vs. CCE, Nagpur reported in 2002 (143) E.L.T. 663 (Tri. LB) reaffirmed by the Tribunal in the case of Modern Denim Ltd. vs. CCE, Ahmedabad reported in 2006 (202) E.L.T. 196 (Tri.-LB). Further Honble Supreme Courts judgment in the case of ITW Signode India Ltd. vs. Collector of Central Excise reported in 2003 (158) E.L.T. 403 (S.C.) relied upon by the Commissioner in the impugned order is not applicable to this case, as this judgment of Honble Supreme Court related to retrospective amendment to Section 11A of the Act and its effect on the action taken un-amended Rule 10 of the Erstwhile Central Excise Rules. Here there is no challenge to the retrospectivity of the amendment to the proviso to Section 3 (1) of the Central Excise Act. The Tribunals decision in the cases of Fabworth (India) Ltd. (supra) and Modern Denim Ltd. (supra) only hold that the amendment carried out to Notification No. 2/95-CE would be effective only w.e.f. 16/09/99 and amendment to the Notification No. 2/95-CE cannot be given retrospective effect.
(7) In this case the duty has been demanded under two show cause notices (SCN) dated 13/08/02 for the period from August 1997 to June 2001 and SCN dated 22/07/03 for the period from July 2001 to March 2002 and both the SCNs have been issued by invoking extended period under proviso to Section 11 (1) of Central Excise Act 1944 and making allegation of deliberate suppression of fact, mis-statement, fraud etc. on the basis of the same set of facts. When show cause notice dated 13/08/02 for demand of allegedly short paid duty for the period from August 1997 to June 2001 had been issued by invoking mis-statement, suppression of facts etc. on the basis of certain set of facts for subsequent period, the second show cause notice dated 22/07/03 could not be issued on the same ground invoking extended period. In this regard reliance is placed on Honble Supreme Court judgments in the cases of ECE Industries Limited vs. CCE, New Delhi reported in 2004 (164) E.L.T. 236 (S.C.), and P&B Pharmaceutical (P) Ltd. vs. Collector of Central Excise reported in 2003 (153) E.LT. 14 (S.C.). Thus the second show cause notice dated 22/07/03 is time barred. As regard, the first show cause notice dated 13/08/02, the allegation of suppression of fact is incorrect as the clearances of rejects were being made under intimation and with the permission of the Jurisdictional Assistant Commissioner. This is clear from -
(a) Letter dated 30/11/98 of the Superintendent to UTL and the UTLs reply dated 06/1/99 to the Jurisdictional Central Excise Superintendent,
(b) Letter dated 21/5/99 of the Superintendent Central Excise asking for figures regarding the clearances of rejects and the letter dated 25/5/99 of UTL giving the required figures and
(c) Letter dated 16/6/99 of Superintendent Central Excise to UTL with regard to under valuation in respect of goods rejects to UIL and the UTLs reply dated 13/6/99 to the Department denying this allegation. From this, it is clear that the clearances of rejects were with the permission of the Department and the questions raised by the Department with regard to value had been replied to by UTL in the year 1999. Therefore, the show cause notice dated 13/08/02 for the period from August 1997 to June 2001 is also time barred as the extended period under proviso to Section 11A (1) is not applicable.
2.2 Shri L.P. Asthana, Advocate, the learned Counsel for the Department made the following submissions :-
(1) UTLs were clearing prime quality fabrics into DTA in the guise of rejects. In this regard there is ample evidence as discussed by the Commissioner in his findings in para 25.1, 25.2, 25.3, 25.4 and 25.5 of the impugned order.
(2) As per para 9.22 of the hand book of Procedure of 1997 - 2002 exim policy, the term rejects shall cover the products which have some manufacturing defects and as per the Departmental instructions vide Circular No. 307/12/86-FTT dated 11/12/86, while a 100% EOU can sell rejects upto 5% of the FOB value of the exports as per the exim policy, the unit has to certify that the rejects were an un-avoidable feature on account of flaws of technology, techniques or material deployed by the units in the manufacture of its products and the goods cleared as rejects are stamped as rejects at the time of clearance into DTA. This circular also provides that the rejects shall be established as such to the satisfaction of the Assistant Commissioner of Customs/Central Excise having jurisdiction over such units. While UTL had applied to the Jurisdictional Assistant Commissioner from time to time for clearance of the rejects within 5% of the FOB value of exports into DTA, the Assistant Commissioner had granted permission for such rejects sales into DTA subject to UTL following the guideline for removal of rejects into DTA, as prescribed in the Boards letter No. 305/90/85-FIT dated 30/1/86 and the Ministry of Commerce Circular No. 33/85-98 dated 16/01/86 and also subject to fulfillment of the conditions specified under Notification No. 2/95-CE/NT dated 24/5/95. However, none of the clearance of so called rejects by UTL were stamped as rejects, which is evident from the statements of various persons including customers recorded in course of enquiry. Besides this, the enquiry with the wholesale dealers, who are buying the so called rejects from UIL, indicated that the goods being sold by UIL, which had been purchased by them from UTL, were prime quality goods and not rejects. Besides this, there is also evidence indicating that certain varieties of fabrics were being exclusively produced for some wholesale dealers, which is not possible if the goods being sold by UTL were genuine rejects. Similarly, it was also found during the enquiry that when the customers placed orders to UIL for certain quality of fabrics and that quality was not in stock, UIL placed orders on UTL for production of that quality and its supply, which also is a clear indication that prime quality goods were being sold into DTA.
(3) Since, the goods being sold by UTL to UIL were prime quality goods and not rejects, these clearances were in contravention of the provisions of the exim policy and hence not only these goods were liable to confiscation, but the same would not be eligible for concessional rate of duty under Notification No.2/95-CE. For the same reason, the price being charged by UTL for sale of goods to UIL would also be suspect and cannot be accepted as, true transaction value. Besides this, since UTL and UIL are related persons within the meaning of this term, as defined in Rule 2 (2) of Customs Valuation Rules, 1988 in as much as during 1998-1999 and 2000, M/s Aviante International Limited are Overseas Corporate Entity, was holding 16% equity shares of UTL and 11.66% of the equity shares of UIL and since through out the period of dispute UTL and UIL were so associated in the business of one another that UIL was sole sale distributor of UTL and UIL were also controlling the operations of UTL, the transaction value price of UTL in respect of sales to UIL cannot be accepted as true transaction value under Rule 3 readwith 4 (1) of the Customs Valuation Rules and, therefore, the same has to be determined by sequential application of Rule 5,6,6A,7 & 8 ibid. The fact that this relationship between UTL and UIL has influenced the price, is clear from the fact that UIL were selling the goods purchased from UTL to be independent buyers at prices which are 62% to 152% higher that the declared transaction value.
(4) Since Rule 5 & 6 are not applicable, as there is no question of import price of identical or similar goods within the meaning of identical goods and similar goods as defined in the Customs Valuation Rules being available, recourse has been taken to Rule 7 i.e. deductive value method and since UTL and UIL are related persons, for determining the assessable value, the price charged by UIL from the independent buyers has to be taken into account. The Boards Circular No. 268/85-CX dated 29/9/94 readwith the earlier Circular No. 23/84-CX-8 dated 29/5/84, according to which in respect of DTA sales of a 100% EOU, the FOB value of export of identical or similar goods can be adopted as assessable value, are contrary to the provisions of Rule 8 of the Customs Valuation Rules, as sub-Rule (2) of Rule 8 of the Customs Valuation Rules, clearly states that no value shall be determined under this rule on the basis of price of goods for export to country other than India. In view of this clear prohibition in Rule 8 (2) ibid for determining the assessable value of the goods cleared by 100% EOU to DTA, the FOB price of the identical or similar goods exported to other countries cannot be adopted As per the Honble Supreme Courts judgment in the case of CCE, Bolpur vs. Ratan Melting and Wire Industries reported in 2008 (231) E.L.T. 22 (S.C.), a Circular of the Board which is contrary to law has no existence in law. The judgment of the Honble Supreme Court in the case of CCE, Bolpur (supra) is the judgment of the Constitutional Bench.
(5) Since, the goods are not rejects but are prime quality goods, the benefit of concessional rate of duty under Notification No. 2/95-CE is not applicable and, therefore, through out the period of dispute, the duty chargeable in respect of the clearances of the so called rejects would be as per the provisions of the proviso to Section 3 (1) of Central Excise Act, 1944, as amended retrospectively w.e.f. 11/5/82 by Section 92 of the Finance Act 2000 and thus the duty chargeable would be an amount equal to the aggregate of duties of Customs chargeable under Section 12 of the Custom Act, or any other law, for the time being, in force on the like goods produced or manufactured outside India and imported into India. Thus, the Tribunals judgments in the cases of Fabworth India Limited (supra) and Modern Denim Ltd. vs. CCE (supra) are of no relevance.
(6) Since in this case UTL & UIL and other noticees have committed a fraud by evading huge amount of Central Excise Duty by clearing prime quality fabrics as rejects, extended period has been rightly invoked in both the show cause notices and for the same reason, while UTL have been rightly under Section 11AC of Central Excise Act, 1944, other noticees have been rightly penalized under Ruled 209A of the Erstwhile Central Excise Rules 1944 of Rules 26 of Central Excise Rules 2001-02.
(7) On issue of suppression of facts, Shri Asthana also emphasized on an opinion dated 10/11/98 from tax consultant placed in file No. 45 seized from the office premises of UTL and referred to at page 15 of the impugned order-in-original which shows that a tax consultant had advised UTL that the price being charged by UTL from UIL in respect of sale of the goods cannot be adopted as transaction value as the two are related.
3. We have carefully considered the submissions from both the sides and perused the records. The period of dispute in this case is from August 1997 to March 2002 and there is no dispute about the fact that during this period the DTA clearances had been made under the provisions of the exim policy relating to the clearances of rejects of value upto 5% of the FOB value of exports. The main point of dispute in this case is as to whether these clearances were of genuinely rejected goods or were of prime quality goods.
3.1 During the period of dispute, 100% EOUs, in addition to the DTA quota of prime quality goods upto 25% of the FOB value of exports, could also sell rejects upto 5% of the FOB value of exports. As per Import Trade Control Order No. 33/85-88 dated 16/01/86 issued by Chief Controller of Import and Exports, New Delhi in respect of clearances of rejects into DTA by 100% EOUs, circulated by the Central Board of Excise and Customs vide Circular No. 307/12/86-FTT dated 11/12/86, a 100% EOU could clear rejects into DTA as permitted in the letter of approval issued to such units by the Central Government and subject to the conditions that -
(a) the goods cleared as rejects must have definite manufacturing defect and as such not exportable, as per the declaration of the 100% EOU concerned and shall include sub-standard products but shall not include spares, tool wastes or by-products ;
(b) the unit must certify that the rejects were unavoidable feature on account of technology, technique or material deployed in the manufacture of its products ;
(c) the rejects are also invoiced as reject and stamped by the manufacturer as rejects at the time of clearance into DTA and
(d) the goods cleared as rejects must be established as such to the satisfaction of the Jurisdictional Assistant Commissioner of Customs/Central Excise and it is the Assistant Commissioner who shall decide that an item is indeed, reject with reference to quality control yard stick of the unit, and report of the internal quality control department of the unit.
UTL had been allowed DTA sale of rejects upto 5% of the FOB value of exports and subject to the fulfillment of conditions prescribed in this regard in the above-mentioned circulars of the CCI&E and CBEC. However, from the records it is seen the goods sold by UTL to UIL and by UIL to independent buyers were never stamped as rejects at any point of time. This is clear from the statement dated 27/03/01 of Shri Avinash Gothmare, Sales Coordinator of UIL, statement dated 27/03/01 of Shri Raj Chaturvedi, G.M. (Commercial) of M/s UTL, statement dated 23rd and 26th November 2001 of Shri S.K. Dalmia, President of UIL and CEO of UTL. We also find that Shri A.B. Banerjee, Sales Assistant of UIL in his statement dated 27/11/02 has stated that on receipt of orders, as per the directions of the Supervisors he used to fill up the order forms and issue the same to Shri B.S. Chauhan, Deputy Manager (Folding) of UTL to arrange the packing of ordered goods from the factory stock, that he used to follow up progress of packing whether the matching shade has been found or complete length is available or not, that in case if the order is received is for bulk quantity and the same is not in stock either at the mill of UTL or in the godown of UIL, then he used to enquire from the Gray department of UTL about the availability of grey fabric of the same quality and its processing and that the goods being sold by UIL were of prime grade which were of excellent quality and that fabrics of certain qualities (about 25 to 40 qualities-like quality No. 500020, 500015 etc.) were monopoly item specially manufactured by UTL for certain dealers is DTA and these qualities are not exported. While on one hand, UTL while clearing the fabrics to UIL were not stamping the same as rejects, though this was the requirement of EXIM policy, as per the statements dated 23/11/01 and 26/11/01 of Shri S.K. Dalmia, on receipt of the fabrics by UIL, the same were being graded as Prime A-class & B-class. We also find that the UIL sold the fabrics purchased from UTL to a number of wholesale dealers and the Department conducted extensive enquiries with the wholesale buyers who were buying the fabrics from UIL and enquiry with the buyers Shri Prajay Sharma Partner, Kala Mandir, Raipur; Shri Madan Lal Agarwal, Proprietor, M/s Fashion House Raipur; Shri Sarvinder Sahni, Partner M/s Japji Traders, Chandani Chowk, Delhi; Shri Adesh Gupta of M/s Adesh Enterprises, Chandni Chowk, Delhi; Shri K.S. Chugh of M/s Guru Mehar Agencies, Chandni Chowk, Delhi and Shri Rajender Prasad Gupta of M/s Shiv Lal Devi Sahay and Co., Delhi revealed that it is only the prime quality fabrics which were being sold by UIL, as all of them stated that they were buying only the prime quality goods not rejects. Besides this, as mentioned above, it is also seen that a number of qualities called monopoly qualities were being manufactured only for sale to certain wholesale dealers in DTA and these qualities were not being exported at all. Moreover it is also seen that while UIL were buying the so called rejects from UTL at the price ranging from Rs. 160/- to Rs. 175/- per linear meter, the same fabrics as such and mostly on the same day were being sold by UIL to buyers in DTA at much higher prices ranging from Rs. 300/- to Rs. 2700/- per linear meter which is not possible if the goods were really rejects. Moreover the statement of Shri A.B. Banerjee, that if some quality ordered was not available in stock, that quality was being specifically processed for DTA sale by UTL also indicates that it is the prime quality fabrics which were being sold. The defective goods as per the definition in the exim policy and the circular of CCI&E are the goods which have some definite manufacturing defect because of which the same cannot be exported. The arising of defective goods is a random phenomena and it would be impossible for a 100% EOU to supply a specified quantity of a particular variety of fabric against an advance order as reject. Another very important fact noticed is that there is huge difference between the figures of rejects mentioned in the statutory records and the actual quantity of rejects based on the internal records of UTL, which shows that the figures of rejects have been inflated. For example during January 2000 and February 2000, while as per statutory records the rejects were declared as 15852M and 22070M, as per the Folding Departments record, the actual rejects were 209.40M and 204M respectively. This is a clear evidence of inflating the figure of rejects for which the Appellants have not given any explanation.
3.2 As against the above evidence produced by the Department, the appellants have not produced any evidence in support of their claim that the goods being cleared by them into DTA were actually rejects, that is the goods which were having some manufacturing defects because of which the same could not be exported. In view of these circumstances, we uphold the Commissioners finding that the goods being sold by UTL into DTA to UIL were not rejects. Since these goods were not rejects, the same would not be eligible for concessional rate of duty under Notification No. 2/95-CE and would be chargeable to duty at the rate prescribed under proviso to Section 3 (1) of Central Excise Act, 1944 as amended with retrospective effect w.e.f. 11/05/82 by Section 92 of Finance Act, 2000. In other words, the impugned goods through out the period of dispute would be liable to duty equal to aggregate of the duty chargeable under Customs Act, 1962 or under any other law for the time being in force. In view of this, there is no necessity to go into the question as to whether during period prior to 16/09/99 the goods would be liable to 50% of Additional Customs duty, AED (GSI) and AED (TTA) in addition to 50% of the basic customs duty.
4. The next question to be determined is as to what should be the assessable value of the goods cleared into DTA and whether the price at which UTL sold the so called rejects into DTA to UIL Rs. 160 to Rs. 175 per meter can be accepted as true transaction value of the goods.
4.1 As per the provisions of the 1st Proviso to Section 3 (1) of Central Excise Act, the goods manufactured by 100% EOU or a unit in free Trade Zone and cleared into DTA would attract Central Excise Duty in an amount equal to the aggregate of the duties of Customs leviable under the Customs Act, 1962 or any other law, for the time being, in force on the like goods produced or manufactured outside India, if imported into India and where the said duties of Customs are ad-voleram, the value of such excisable goods shall be determined in accordance with the provisions of Customs Act, 1962 and the Customs Tariff Act, 1975. Section 14 of the Customs Act readwith the Customs Valuation Rules, 1988 provide for determination of value of the imported goods for the purpose of calculating the basic Customs Duty and Section 3 (2) of the Customs Tariff Act, 1985 prescribes the method for calculating additional Customs Duty chargeable under Section 3 (1) of the Act. Under Section 14 (1) of Customs Act when goods imported into India are chargeable duty at an ad-veloram rate, the value of such goods shall be deemed to be the price at which such goods or like goods are ordinarily sold or offered for sale at the time and place of importation or exportation, as the case may be, in course of International Trade, where the seller and buyer have no interest in the business of each other and the price is the sole consideration for sale or offer for sale. However, sub-Section (1A) of Section 14 provides that subject to the provisions of sub-Section (1), the price referred to in that sub-Section in respect of imported goods shall be determined in accordance with the Rules made in this behalf. The Customs Valuation Rules, 1988 prescribe the method for determining the assessable value of imported goods and Rule 3 of the Valuation Rules provides that for the purpose of these Rules, subject to the provisions of Rule 9 & 10A, the Value of the imported goods shall be the transaction value and if such transaction value cannot be determined the value shall be determined by sequentially applying Rule 5 to 8 of these rules. Sub-rule (1) of Rule 4 of these Valuation Rules defines transaction value of imported goods as the price actually paid or payable for the goods when sold for export to India and adjusted in accordance with the provisions of Rule 9, and sub-Rule (2) of Rule 4 enumerates the conditions subject to which the transaction value of the imported goods shall be acceptable, one of the condition being that the buyer and seller are not related persons, as defined in Rule 2 (2) of the Valuation Rules and if they are related, the relationship has not influenced the price, for which the tests have been prescribed in sub-Rule (3) of Rule 4. Rule 5,6,7 & 7A provide for determination of the value on the basis of the contemporaneous import of the price of identical goods, similar goods, deductive value and computed value respectively. Rule 8 is the residual method based on the best judgment. Sub-Rule (2) of Rule 8, however, prescribes certain methods of valuation which are prohibited while applying best judgment and one of prohibited method is the valuation on the basis of the price of the goods for export to a country other than India. As per Explanatory notes to Rule 8, subject to the prohibitions of Sub-rule (2), for determining value by best judgment method, other Rules i.e. 5,6,7 & 7A can be flexibly applied. Rule 9 provides for addition of certain costs and services to the price actually paid or payable for the imported goods. Rule 10A provides for rejection of the declared transaction value if there are reasons to doubt its truth or accuracy and this Rule in a way supplements sub-rule (2) of Rule 4.
4.2 From the scheme of determining Central Excise Duty on the goods sold by a 100% EOU into DTA, as laid down in the proviso to Section 3 (1) of Central Excise Act, 1944, it is clear that the goods manufactured by a 100% EOU have been placed on par with the imported goods and the sale of the goods by a 100% EOU into DTA is on par with import of goods into India. Therefore, if the such sale satisfies the conditions for accepting the transaction value as prescribed under sub-rule (2) of Rule 4 and the circumstances referred to in Rule 10A are not present, the transaction value of such DTA sales can be adopted as assessable value under Section 14 (1) of Customs Act readwith Rule 3 of the Valuation Rules. The question arises as to how the transaction value is to be determined if the conditions for accepting the transaction value under sub-Rule (2) of Rule 4 are not satisfied for example the sales are to the related persons or when there are situations referred to in Rule 10A creating doubts about the declared transaction value.
4.3 In this case there is no dispute that all the DTA sales of UTL, of the goods declared as rejects are to UIL and it is UIL who, thereafter, sold these goods to various other wholesale dealers. The departments allegation is that the price at which UTL sold the goods declared as rejects to UIL is not true transaction value as UTL and UIL are related persons and prime quality goods are being sold in the guise of rejects and on this basis invoking Rule 4 (2) and Rule 10A, the Department has rejected the transaction price of UTL and has proceeded determine the assessable value of the goods by applying Rule 7 by detective method on the basis of price at which UIL were selling the same goods to various wholesale buyers. The appellants contention is that even if UTL and UIL are treated as related persons, application of Rule 7 is incorrect and that in such a situation in accordance with the Boards Circular No. 268-85-CX-8 dated 29/9/94 readwith Circular No. 23/84 dated 29/05/84, the assessable value must be determined on the basis of the FOB price of export of the identical goods. After carefully considering the rival submissions on this point, we are of the view that without going into the question as to whether UTL and UIL are related persons within the meaning of this term, as defined in Rule 2 (2) of the Valuation Rules, the transaction value of UTL in respect of sales to UIL is to be rejected under Rule 10A, as the value is based on the assumption that the goods are bonafide rejects, while as discussed above, the evidence on record indicates that it is prime quality goods which were being sold as rejects and thus the price at which UTL were selling the goods UIL becomes suspect and cannot be accepted as true transaction value. Honble Supreme Court in case of Varsha Plastics Ltd. vs. UOI reported in 2009 TIOL 16 S.C., has held that once the nature of the imported goods has been misdeclared, their declared value becomes unacceptable. The question now arises as to whether for determining the transaction value Rule 7 is to be applied or Rule 8. Since as per Rule 3 of the Valuation Rules if the transaction value is not available, the same has to be determined by sequentially applying Rule 5,6,7, 7A & 8 and since because of the nature of these goods Rule 5 & 6 are ruled out, it is Rule 7 which has to be tried first instead of jumping straightway to Rule 8 and recourse can be taken to Rule 8 only when the value cannot be determined under Rule 7 or Rule 7A. We are also of the view that the Boards Circular providing for determination of the assessable value in such cases by taking recourse to Rule 8 on the basis of the FOB price of the identical or similar goods is not in accordance with the provisions of sub-Rule (2) of Rule 8 enumerating the prohibited methods while taking recourse to Rule 8, as one of the prohibited methods prescribed in this sub-rule is determining the assessable value on the basis of the price of the goods for export to a country other than India. In fact sub-Rule (2) of Rule 8 is based on Article 7 (2) of the WTO Valuation Code and the rationale for this prohibition is that the GATT recognized that two exported markets are to be treated as separate. An exporter in a country X - exporting his products to buyers in Country A & B may export his goods at a lower price to the buyers in country A where his brand is yet to be established and there is a lot of competition, while he may export the same product to buyers in country B at a much higher price where his brand is well established and there is not much competition. Therefore, the prices for export to two different countries are not comparable. For this reason only, the very definition of the transaction value given in Rule 4 (1) of the Valuation Rules defines the transaction value as the price actually paid or payable for the imported goods when sold for export into India. When a 100% EOU is treated on the par with the foreign supplier, the sales to the domestic tariff area cannot be treated as on par with export sales to other countries. We, therefore, hold that the Boards Circular prescribing the determination of DTA sales on the basis of the FOB prices of the export of the similar or identical goods are not in accordance with the provisions of sub-Rule 2 of Rule 8 and hence as held by Honble Supreme Court in the case of CCE, Bolpur vs. Ratan Melting Wire (supra) such instruction is not binding on the Departmental Officers. The Appellants have cited Tribunals judgment in case of Tata Coffee Ltd. vs. CCE, Hyderabad reported in 2004 (168) E.L.T. 460 wherein, in respect of dispute as to whether the assessable value of the goods cleared by M/s Tata Coffee Ltd., a 100% EOU, into DTA should be the DTA sale price or the FOB price for export, the Tribunal held that the FOB price for export would be the correct assessable value. But this judgment is based on the Boards Circular No. 268/85-CX-8 dated 29/9/94 mentioned above and the assumption that the FOB value of the goods for export out of India can be taken as the likely import price also, both of which are not correct.
4.4 Coming to Application of Rule 7 for determining the assessable value, this Rule provides for determination of the value of imported goods on the basis of unit price at which the imported goods or identical or similar goods are sold in greatest aggregate quantity to persons who are not related to the sellers in India, subject to deductions as mentioned in this Rule. Since, as discussed above, the price at which UTL have sold the impugned goods to UIL is suspect, it would be fair and reasonable to determine the deductive value from the unit price at which UIL sold the goods to independent buyers in greatest aggregate quantity. However, we find that the Commissioner while determining assessable value by deductive method under Rule 7 has not adopted the unit price for greatest aggregate quantity and has not allowed deduction of -
(a) general expenses in connection with sale including commission
(b) profit element of UIL
(c) cost of transportation and insurance and
(d) the taxes including sales tax.
The deductive value under Rule 7 is not simply the sale price of the identical or similar imported goods but is the value determined from the unit sale price for greatest aggregate quantity after allowing the deductions mentioned in this Rule. Therefore for correct determination of the assessable value by the detective method as prescribed under Rule 7 of the Valuation Rules, this matter has to be remanded to the Commissioner.
5. Next question to be decided is as to whether the extended period under proviso to Section 11A (1) of the Central Excise Act, 1944 is available to the Department for recovery of the short paid duty and also linked with this, the question of imposition of penalty on UTL under Section 11AC of the Central Excise Act and other noticees under Rule 209A of Central Excise Rules, 1944/Rule 26 of the Central Excise Rules 2002. Both the show cause notices show cause notice dated 13/08/02 for the period from August 1997 to June 2001 and the second show cause notice dated 22/07/03 for the period from July 2001 to March 2002 have been issued by invoking extended period and both the show cause notices contain identical allegations of fraud, suppression of fact, etc. against the appellants. From the records of this case, it is seen that investigation into this matter had been initiated sometime in September, October 2001 and on completion of investigation in August 2002, the show cause notice dated 13/08/02 was issued. Since w.e.f. April 2001, UTL had stopped the sales of fabrics to UIL, the show cause notice was to be issued for the period from August 1997 to March 2002 but since at the time of issue of the first show cause notice, the figures of clearance only upto June 2001 were available and UTL in spite of being asked repeatedly since April 2002 for furnishing the data of their sales to UIL for July 2001 to March 2002 period, did not furnish the same, the show cause notice dated 13/08/02 was issued only for period from August 1997 to June 2001. Subsequently when UTL submitted the required information regarding the sales of fabrics to UIL for July 2001 to March 2002 period, the second show cause notice dated 21/07/03 was issued for the remaining period from July 2001 to March 2002.
5.1 So far as the first show cause notice dated 13/08/02 is concerned, since, as discussed in para 3.2 above, UTL in connivance with the UIL and other appellants have sold prime quality fabrics in the guise of rejects, and while the permission to sell the rejects had been given by the Assistant Commissioner to UTL subject to following the condition/guidelines prescribed in this regard in the Boards Circular No. 307/12/86-FTT dated 11/12/86, UTL never followed the conditions of this circular, and hoodwinked the Department into believing that they are clearing rejects, while actually they were clearing prime quality fabrics to UIL; they are guilty of fraud, suppression of facts and wilful misstatement with intent to evade the payment of duty and, therefore, for this show cause notice, the extended period under proviso to Section 11A (1) is available and this show cause notice is within time.
5.2 However, in respect of second show cause notice dated 21/07/03, the contention of the appellants is that in view of Honble Supreme Court judgment in the case of Nizam Sugar Factory vs. CCE, Andhra Pradesh reported in 2006 (197) E.L.T. 465 (S.C.) and also Honble Supreme Court judgments in the cases of P&B Pharmaceuticals (P) Ltd. vs. CCE reported in 2003 (153) E.L.T. 14 (S.C.) and ECE Industries Limited vs. CCE, New Delhi reported in 2004 (164) E.L.T. 236 (S.C.), the same is time barred as the same has been issued subsequent to the issue of first show cause notice dated 13/08/02 on the basis of same set of facts. The contention of the Department is that the above-mentioned judgments of the Honble Supreme Court are not applicable as the duty for the period from July 2001 to March 2002 would have been demanded alongwith the first show cause notice dated 13/08/02 if UTL had promptly furnished the information regarding there sales to UIL for this period also for the Department was after them since April 2002 and it is only because of the delay on the part of the UTL in furnishing this information that the show cause notice for July 2001 to March 2002 had to be issued separately on 22/07/03.
5.3 On carefully considering the rival submissions on this point, we are of the view that the ratio of the Honble Supreme Court judgments in the cases of P&B Pharmaceutical Pvt. Ltd. vs. CCE (supra) and Nizam Sugar Factory (supra) is that once a show cause notice for demand of short levied/short paid duty for a particular period is issued on the basis of certain set of facts, show cause notice for recovery of short levied/short paid duty for the subsequent period cannot be issued by alleging wilful statement, fraud, suppression of facts etc. on the basis of the same set of facts. In the case of Nizam Sugar Factory, first show cause notice for recovery of short paid duty for the period from February 1978 to September 1982 had been issued on 28/02/84 invoking extended period by making allegation of wilful misstatement, suppression of facts etc. and subsequently a second show cause notice dated 16/07/87 was issued for the subsequent period from October 1982 to March 1987 on the basis of same set of facts making allegation of wilful statement, suppression of facts, and it is in this background that Honble Supreme Court held that the second show cause notice could not be issued by invoking extended period on the basis of same set of facts. The facts of this case are different. There is no dispute about the fact that during the period from August 1997 to March 2002, the appellants have committed a fraud for evasion of duty by clearing prime quality fabrics as rejects and the show cause notice for the entire period would have been issued on 13/08/02, had UTL furnished the figures of their sales to UIL for July 2001 to March 2002 period in time. A separate show cause notice for the period from July 2001 to March 2002 had to be issued after issue of the first show cause notice dated 13/08/02 only because the information for the period from July 2001 to March 2002 was received subsequently that is after issue of the first show cause notice. In view of these circumstances, we are of the view that extended period is applicable even for the second show cause notice.
5.4 Since this is a case where the appellant have committed a fraud, UTL would be liable for penalty under Section 11AC of Central Excise Act and other noticees would be liable for penalty under Rule 209A of the Erstwhile Central Excise Rules, 1944/Rules 26 of the Central Excise Rules 2001-02.
6. In view of the above discussion, while holding that -
(1) UTL during the entire period of dispute were clearing the prime quality fabrics in the guise of rejects and hence they are not eligible for the benefit of Notification No. 2/95-CE and duty in respect of DTA clearances for the period from August 1997 to March 2002 would be chargeable at the rate prescribed under proviso Section 3 (1) of Central Excise Act, 1944, as amended with retrospective effect w.e.f. 11/05/82 by Section 92 of the Finance Act, 2000; i.e. the aggregate of the basic customs duty and the Additional Customs duty including AED (GSI) and AED (TTA) and SACD, wherever applicable ;
(2) The price at which UTL sold the fabrics to UIL does not represent the true transaction value of the goods and the same has to be determined by taking recourse to Rule 7 of the Customs Valuation Rules, 1988 ;
(3) Extended period under proviso to Section 11A of Central Excise Act is available to the Department in respect of both the show cause notices for the recovery of the short paid duty ; and (4) While UTL are liable for penalty under Section 11AC of Central Excise Act, other noticees are liable for penalty under Rule 209A of the Erstwhile Central Excise Rules, 1944/Rules 26 of the Central Excise Rules 2001-02 ;
We remand this matter to the Commissioner for denovo adjudication for -
(a) Re-quantifying the duty demand by determining the assessable value under Rule 7 of the Customs Valuation Rules, 1944 in accordance with our directions in para 4.4 of this order and
(b) Re-determining the quantum of penalty on the Appellants which should be in accordance with the requantified duty demand.
(Pronounced in open court on 24/03/2009.) (Ms. Jyoti Balasundaram) Vice President (Rakesh Kumar) Member (Technical) PK