Customs, Excise and Gold Tribunal - Bangalore
Commissioner Of Central Excise vs Itc Limited on 27 September, 2002
Equivalent citations: 2003(153)ELT650(TRI-BANG)
ORDER S.S. Sekhon, Member (T)
1. This is an appeal filed by Revenue.
2. M/s. ITC Ltd., the respondents are manufactures of Cigarettes assessable to duty under Chapter 24 of the Schedule to the Central Excise Tariff Act 1985. They also manufacture Cut Tobacco in different blends, for use in Cigarettes manufactured by them, Cut tobacco was chargeable to duty @ 225% adv. However, if the same was for use in the manufacture of cigarettes then, it was to be charged duty @ Rs. 0.10 per kg. in terms of Notification No. 356/86 exempted as amended.
3. It was noticed by the officers of the Directorate General of Anti-Evasion, Bangalore Regional Unit, that while accounting for the cut tobacco, as contained in the waste cigarettes. M/s. ITC were taking the weight of the cigarettes without slitting them, that is the weight of the paper was also included in that of the cigarette. It was thus found that the assessee were wrongly adjusting the weight of the paper contained in waste cigarettes, towards accountal of cut tobacco. Secondly, M/s. ITC had declared to the Deptt. the quantity of cut tobacco, used in the manufacture of 1000 cigarettes in Appendix I, for each brand of cigarette. As and when this input-output ratio changed, a fresh declaration was filed by them.
4. Therefore, it appeared that M/s. ITC Ltd. had not satisfactorily accounted for the cut tobacco manufactured by them, and were not able to show that the entire cut tobacco manufactured by them and cleared at nil rate of duty, was captively consumed. Since the benefit of Notification 356/86, dated 24-6-86 was not available to cut tobacco not used for captive consumption, it appeared that duty was payable at tariff rate of 225% adv. on the quantity of cut tobacco found unaccounted. Accordingly, a show case notice dated 4-10-91 was issued to M/s. ITC, demanding duty of Rs. 1,49,17/120.28 for the period from April, 91 to September, 91 and seeking to impose penalty under Rule 209.
5. This show cause notice was adjudicated by then Commissioner of Central Excise, vide OIO No. 26/92, dated 30-3-92, wherein the entire demand was confirmed, and a penalty of Rs. 10 lakhs was imposed on M/s.
ITC. The assessees filed an appeal against this order before the Tribunal. The Tribunal vide Order No. 207/93, dated 15-3-93, directed the assessee to pre-
deposit the entire amount of duty, subject to which pre-deposit of penalty would be dispensed with. Against this order for pre-deposit by the Tribunal, the assessees approached the High Court of Madras, in WP No. 9757/93, seeking to quash the order of deposit, and direct the Tribunal to dispose off the case on merits.
6. This bench vide its order dated 15-3-93 has decided the appellants appeal in OIO No. 26/92, dated 30-3-92. Subsequent demands made by these 17 show cause notices, commencing from the period from 1-10-91 to 31-10-98 were issued on grounds involving a revenue of Rs. 33.20 crores, which the Commissioner had adjudicated vide his Order-in-Original No. 8/99, dated 13-8-99 and by which he did not confirm the demands as made out on the following grounds :-
(a) The case of the Deptt, is not one of seizure or clandestine removal, but only one based on hypothesis.
(b) The Board, vide Circular 43/90-CX8 (F. No. 261/24/4/90 CX 8), dated 6-7-90 has clarified that set-off of duty can be permitted on that quantity of cut tobacco, contained in waste also. The same ratio should be applied to the present case also, where the dispute is regarding the eligibility to exemption notification, on the quantity of cut tobacco found to vary as per the declared input/output ratio and the quantity contained in waste cigarettes.
(c) The percentage of variation ranges from 1-3%, whereas the maximum permissible error in respect of cigarettes is 9% as per the provisions of the Standards of Weights and Measures (Packaged Commodities) Rules, 1977, and accordingly, there is no non-accountal of cut tobacco.
(d) As regards the weight the paper and filter tips contained in the waste cigarettes, which are adjusted towards the accountal of the issued cut tobacco, the assessees were able to show that the allegation was purely hypothetical, and that the cut tobacco used in manufacture (+) cut tobacco as waste (+) weight of cut tobacco to the extent of paper and filter in waste cigarettes, exceeded the total quantum of cut tobacco, which was an impossibility.
(e) The Collector, in earlier order bearing No. 26/92, dated 30-3-92 had confirmed the duty demand primarily because the assessee was unable to reconcile the difference in support of their claim.
Now that such an exercise has been carried out, there was no non-accountal of cut tobacco.
(f) Even if it is assumed that there was non-accountal of cut tobacco, there is nothing on record to substantiate that the assessees had clandestinely removed the cut tobacco without payment of duty, causing loss to the exchequer. Such an allegation could, more so, not be made, when the unit was under physical control.
This Order-in-Original No. 8/99, dated 13-8-99 passed by the Commissioner of Central Excise, Bangalore-II Commissionerate, Bangalore not acceptable to the Department on the following grounds :-
(i) The appeal filed by the assessees has not been disposed off by the Tribunal, consequent to the order of the High Court. The petition before the High Court is filed seeking to get the order of pre-deposit quashed, and not for a decision on merits. Therefore, on merits of the case, there is no decision of the Tribunal against the Collectors Order-in-original No. 26/92.
(ii) The Tribunal had albeit superficially, gone through the merits of the case, and then ordered pre-deposit of the entire duty confirmed. The Commissioner ought to have waited for the Tribunal to decide the case, or having taken the decision to adjudicate the case, followed the order of his predecessor.
(iii) Notwithstanding what has been stated at (i) and (ii) above, the Commissioner's finding that the case of the Department is one of mere hypothesis, is not acceptable. The Commissioner has observed that the case of the department, is not one of seizure or clandestine removal. Since, the allegation against the assessee is that they have failed to satisfactorily account for the raw material, the question of seizure cannot arise. As regards clandestine removal such a specific allegation has not been made against the assessee. Apparently, the Commissioner, has made, such an observation, as the demand have been made under Rule 9(2), read with Section 11A. However, the department has all along been alleging that the assessees have not accounted for the cut tobacco purportedly used by them. The onus, is therefore, on the assessee to prove that they have, indeed utilised the entire cut tobacco manufactured by them, in the cigarettes, or that, it is contained in waste, etc., having failed to do so, the case of the department cannot be dismissed as a mere hypothesis.
(iv) Circular 43/90-CX. 8, dated 6-7-90 was issued, wherein the Board had directed that set-off of duty paid on cut tobacco should not be restricted to the quantity contained in cigarettes, but should also be allowed in cut tobacco contained in waste. The Commissioner has held that this should be extended to the quantity of cut tobacco found to vary as per declared input ratio and the quantity contained in waste cigarettes, and consequently, there would be no duty demand.
(v) The wordings of the circular are very clear. The effect is that the assessees are eligible for set-off duty paid on cut tobacco not only to the extent contained in the cigarettes, but also on that cut-tobacco, which is contained in waste. From the show cause notices issued that the benefit of exemption Notification 356/86 or 121/94 or 21/96, as the case may be, has been denied in respect of cut tobacco which is found neither in cigarettes, nor in waste. It is the case of the Department that the benefit of exemption notification is available only in respect of cut tobacco used for captive consumption in the manufacture of cigarettes, and where this condition is not fulfilled, duty is chargeable at tariff rate.
(vi) A parallel can drawn between 57D(1) and the contents of the Board's circular referred to the above, in that, both lay down that credit, whether in the form of Modvat credit or set-off, should not be denied on the grounds that part of the input is contained in waste. However, credit under the Modvat scheme or any other input duty relief scheme can be allowed only in respect of inputs received into the factory and used in the manufacture of the final product. The same cannot, under any circumstances, be allowed on inputs nor received or not used in manufacture or not accounted for satisfactorily. A provision to this effect is contained in erstwhile Rule 57-1(2), wherein credit of duty availed on inputs not satisfactorily accounted is reversible. Though this rule is not applicable to the case on hand, the spirit behind any input duty relief scheme is the same. The Commissioner's action in stretching the provisions so as to allow the benefit of the exemption notification to inputs not satisfactorily accounted for is similar to allowing credit of duty on inputs not received, or not used in manufacture and defeats the purpose for which such schemes are formulated. The Commissioner, thus erred in advancing the said reasoning.
(vii) Another reasoning advanced by the Commissioner, for dropping the demand is that the percentage of variation ranges from 1-3% whereas the maximum permissible error is 9% in respect of cigarettes under the Standards of Weights and Measures (Packaged Commodities) Rules, 1977. This finding appears to be misplaced. The Commissioner of Central Excise is not the proper officer under the Standards of Weights and Measures Act. Secondly, neither the Central Excise Act/Rules or the Central Excise Tariff Act, contains a provision to the effect that the provisions contained therein are subject to the provisions of the Standards of Weights and Measures Act. Thirdly, assuming, but not admitting the finding of the Commissioner, it is seen that the Second Schedule to the said Act, provides that the maximum permissible error on net quantities declared by weight of up to 50 Gms, is 9% of declared quantity. That is, the Standards of Weights and Measures (Packaged Commodities) Rules, 1977, provides that the content of tobacco in a cigarette may have a variance of +/- 9% of the declared quantity. A careful scrutiny of the provisions of the rules referred to above, will reveal that Rule 6C provides for declaration of "net quantity, in terms of standard unit of weight or measure contained in the package". It is against this declared quantity that the maximum permissible error is allowed, and has nothing to do with the input-output ratio, which is the basis for the department's case. The Commissioner has failed to appreciate this point. The Commissioner, has also failed to apply the provisions of the Standards of Weights and Measures Act, correctly and erroneously concluded that the allowance of 9% as discussed above is available during the course of manufacture, as against the content of tobacco contained in manufactured-cigarettes. More so, when the assessee has produced no shred of evidence to show that the tobacco contained in the cigarettes manufactured by them during the relevant period was fair in excess of that declared by them.
(viii) The Commissioner, at Para 19 of the order, has observed that the quantum of cut tobacco accounted is in excess of the cut tobacco issued for manufacture, which is an impossibility. He has chosen to rely upon a reconciliation between the quantities issued and accounted, by the assessee. A sample SCN dated 26-6-96 has been chosen for this purpose. From the reconciliation, as it is claimed to be, two important points are to be noted. Firstly, the assessee has proceeded from the "tobacco to be ideally used as per input-output ratio declared" - which, in the first place is only an assumption, as such quantity has never been utilised by the assessee. The basis of reconciliation, itself, is faulty. Secondly, the purported reconciliation only attempts to show an error of calculation on the part of the department, and does not, in any manner, explain for the unaccounted cut tobacco. This purported reconciliation statement, therefore, cannot be imparted with any credibility.
(ix) Further, it is significant to note that, the assessee have, all along, been arguing that tobacco being hygroscopic, it is not possible to offer an exact reconciliation/account of cut tobacco. This argument has been put forth by the assessee before the Commissioner as well as his predecessor. Therefore, any attempt at reconciliation, at this stage, can be nothing but an after thought, and needs to be dismissed as such.
(x) The Commissioner has finally decided the case in favour of the assessee, on the grounds that they have satisfactorily accounted for the cut tobacco by way of the reconciliation statement, and has also observed that, had this reconciliation been done earlier, the then Collector also would have taken a similar view. Such observations are uncalled for, as the Commissioner is not an appellate authority for the earlier order.
7. This mater was disposed by this Bench vide Final Order Nos. 833 and 834/2001, dated 25-4-2001. The Supreme Court in Civil Appeal No. 8514 of 2002 [2002 (140) E.L.T. 4 (S.C.)] [Arising out of S.L.P. (C) No. 13587 of 2002] allowed the Civil Appeal and set aside that Order with directions that the appeals before the Tribunal (E/451/92-MAS and E/1304/2000-MAS) be remanded to the Tribunal to be heard and disposed of afresh after considering the relevant material before the Tribunal and asking for more material if required. Therefore, the appellants were asked to produce calculation sheets and charts.
8. We have re-heard both sides, considered the submissions, the calculation charts, the record and find :-
(a) As regards the earlier order of the Commissioner, i.e., in Appeal No. E/451/92 MAS, this Bench has after rehearing, passed a Final Order No. 1215/2002, dated 20-9-2002 [2002 (149) E.L.T. 1116 (Tribunal)] against the appeal filed by M/s. ITC Ltd., after setting aside the order-in-Original confirming the demand and imposition of penalty. The background material being the same, is therefore not repeated. The ground taken in the present appeal of the Revenue of the Commissioner having relied on an interim order of the High Court, is no longer relevant; since that matter has now been finally settled by this Bench on merits in favour of the assessee.
(b) Relying the Final Order No. 1215/2002, dated 20-9-2002 and perusal of notices in this appeal, convince us that there is merit in the Commissioner's finding in this case that the Department case is one of mere hypothesis. There is no allegation of clandestine removal in the present cases. As regards accounting not being correct, the onus is not on the assessee but it is on the Department to prove that the tobacco contained in waste cigarettes, etc., have been utilised in any other manner than in rolling of cigarettes. The Department has failed to do so. Relying on our finding in Order No. 1215/2002, dated 20-9-2002, we find no reasons in ground No (1), (ii) and (iii) of the present appeal. As regards ground No (iv), we find no merits in the same since we have found and held that the interpretation of the expression "for use in manufacture" would be satisfied, in the facts of these cases, in view of the law as laid down by the Apex Court in cases Dalmia Dadri (AIR 1988 S.C. 342), Steel Authority of India [1996 (88) E.L.T. 314 (S.C.)] and Multi Metals [1992 (57) E.L.T. 209] to be followed. The Department is, as well, bound by this interpretation of the term in the Notification to mean "intended for use" and "not actually used". Allegedly unaccounted 'cut tobacco' should have been found in the premises allegedly ready for other clardestine use, however that is not the case before us. Therefore, we find no merits in the grounds (iv), (v) and (vi). As regards Variation', by our Final Order No. 1215/2002, dated 20-9-2002, we have considered that the 'variation' is to be determined as per Paras 64 and 65 of the Cigarettes Manual and have to be recorded in Appendix 'F' by the officer. Only thereafter, action to recover any duty on alleged non-use could be initiated. That has not been done in these case. 'Variance' in cut tobacco consumption, in a Cigarette Factory is an accepted phenomenon. We have found nothing amiss in that, in our Final Order No. 1215/2002, dated 20-9-2002. We, therefore, find no merits in the grounds No. (vii), (viii) and (ix). We, however, find that the Commissioner was not very accurate and correct in applying 'Variance' as per the Standards of Weights and Measures (Packaged Commodities) Rules, 1977. That part of the finding is required to be set aside.
(c) As regards ground No. (x) in this appeal, i.e. regarding unsatisfactory accountal for the cut tobacco by reconciliation statement, the Revenue has made the following plea :-
"The Commissioner II has dropped demands in 17 show cause notices which were issued on the same grounds as discussed above. He has (i) accepted an overall reconciliation in terms of the formula, finding that the overall variance is within permissible limits as laid down in the Standards of Weights and Measures Act, (ii) given a finding that the total quantity of cut tobacco alleged to be not used in the manufacture of cigarettes exceeds the quantity of cut tobacco issued for manufacture, and hence the charges are not sustainable, (iii) given a finding that a respectable assessee is not likely to resort to non-accountal. (iv) given a find based on a report from the jurisdictional DC, holding that there was no error in accountal.
(i) Overall reconciliation in terms of the formula is not acceptable, as there are different blends, which are never mixed up. They should therefore be considered separately. Further, the Standards of Weights and Measures Act is not relevant.
(ii) The finding regarding arithmetical impossibility of the charges is given regarding one show cause notice only (sen dt. 26-6-96) and has been extended to the entire demand. Each show cause notice should have been examined, when he was adjudicating on 17 show cause notices.
(iii) The remarks about the assessee and the unlikelihood of his indulging in non-accountal are speculative ones that have no place in weighing of evidence.
(iv) The inference drawn from the report of the DC (Paras 14 and 15 of the order) is meaningless. The DC has reproduced the manner of maintenance of the Appendices and drawn inferences that do not logically follow. The Commissioner was required to apply his own mind to the issues and not that of the DC.
The Commissioner has not addressed the issue of faulty accountal in Appendix 'C'. His reasoning is indirect, that as the overall ratio is within permissible limits there could not have been non-accountal. The calculation of non-accountal shown in the show cause notices has not been directly addressed by him. He has only reproduced without comment the DC's erroneous observations (Para 14) that "since the weight of paper and filter had not been taken into consideration at all while issuing cut tobacco for manufacture of cigarettes at Appendix 'C' stage i.e. at the starting point, there was no meaning in weighing paper and filter at any point, sat Appendix E stage and alleging that cut tobacco to the extent of weight of paper and filter was unaccounted. That in other words if an additional factor (i.e. weight of paper and filter) was to be considered at any subsequent stage, in a chain of operations, the same would have to be included at the starting point itself, which has not been done.
The above observations are illogical and fallacious. It is because an additional factor, i.e. paper, was introduced into the accountal process at a later stage that the problem arose. To simplify the issue we can say that the assessee showed 50 kilograms of waste cigarettes as accountal of 50 kilograms of cut tobacco. In fact 50 kilograms of waste cigarettes contained 20 kilograms of paper and 30 kilograms of cut tobacco. So, this would constitute accountal of only 30 kilograms of cut tobacco, and 20 remain unaccounted."
The assessee have made the following plea :-
"So far as the first allegation is concerned, the Department has failed to appreciate that the accountal of tobacco in the cigarette manufacturing process takes place in Appendices C, D and E (as prescribed in the Cigarette Manual) which trace the issue, returns and rejections of Cut tobacco, the making and packing of cigarettes, the slitting of waste cigarettes for retrieval of cut tobacco and treatment of the retrieved tobacco and rejections arising there from. The above allegation has resulted from the review of the Appendix C alone, to the exclusion of Appendices D and E. The above allegation lends itself to easy verification since the arithmetic sum of accounted cut tobacco and allegedly unaccounted cut tobacco must be equivalent to the total cut tobacco issued for the manufacture of cigarettes. This truism has been tested with reference to the details contained in Annexures I to VI of the show cause notice, and the allegation made in Para 3.1 thereof. From the attached enclosures I to IV, it is evident that such an arithmetic sum in each of the periods under review is in excess of the total cut tobacco issued in the corresponding period and by precisely that quantity alleged to be the weight of paper contained in waste cigarette and wrongly adjusted towards the accountal of issued cut tobacco.
This may be illustrated by considering the details relating to any cigarette brand in any period covered by the show cause notice. It, therefore, stands to reason that there is no force in the above allegation. Appendix C records the weight of waste cigarettes at the time of rejection, when the individual weights of tobacco and paper can not be determined. Appendix E then records the constituent weights of retrieved tobacco, sand and paper upon the waste cigarettes being slit. The accountal of cut tobacco has, therefore, to be seen from all the Appendices maintained.
Both month-wise and for the entire period of April, 1991 to September, 1991, which tracks and accounts for cut tobacco from the point of issue till the time cigarettes are packed. All these figures have been taken from Appendices C, D and E maintained by CTC in terms of the Cigarettes Manual which have been verified by the Department Officials posted at the factory. These statements have been prepared on the same lines as directed by CCE, Bangalore, on 19-8-1997, and prepared by the jurisdictional Deputy Commissioner of Central Excise, in relation to the show cause notices issued for the period 1-10-1992 to 31-10-1998 (subject-matter of Revenue Appeal No. E/1304/2000). The tobacco actually used in manufacture has been derived having regard to the rejections as well as tobacco content in waste cigarettes and in cigarettes remaining unpacked. The quantity so derived for each brand of cigarettes for each of the months covered by the show cause notices has been compared with the corresponding quantity of theoretical consumption. It can be seen that there are situations where actual consumption is less that the theoretical consumption, and that such cases have been ignored by the Department. The overall excess tobacco consumed is to the tune of 72,098 kgs. The results of the comparison are summarised below :
PERIOD(1991) ACTUALCONSUMP-TION(Kgs) IDEALCONSUMP-TION (Kgs) EXCESSCONSUMP- TION(Kgs)TO IDEAL %OF EXCESS April 782819 762472 20347 2.67 May 732466 714786 17680 2.47 June 793050 787717 5333 0.68 July 791097 779283 11814 1.52 August 812956 803361 9596 1.19 September 745238 737911 7327 0.99 TOTAL 4657626 4585528 72098 1.57 From the above tabulation read with the reconciliation statements, it can be seen that no quantity of cut tobacco is unaccounted at any stage in the process of manufacture of cigarettes and so long as the cut tobacco is for use in the manufacture of machine rolled cigarettes, such tobacco is eligible to the benefits of Notification Nos. 356/86 and 121/64."
and they have submitted and demonstrated that the data of the figures, both month-wise and entire period of April, 1991 to September, 1991, which tracks and accounts for cut tobacco does not indicate any misuse of the 'cut tobacco'. Appeal filed by M/s. ITC Ltd. was disposed of by this Bench vide Final Order No. 1215/2002, dated 20-9-2002 on this very same argument and demonstration. The Commissioner has relied upon, the verification ordered by his predecessor and has recorded and relied on the report of the verification conducted by the Jurisdictional Deputy Commissioner of the records and has found -
"Consequently, the Deputy Commissioner after a detailed study, submitted her report on 6-8-99, wherein it was reported with regard to the first allegation, that Appendix C showed the details of the weight of cut tobacco actually used in the Manufacture of cigarettes after deducting from the cut tobacco received for making cigarettes, the quantity of tobacco such floor as sweepings, winnowings, sand and waste cigarettes; that the details of waste cigarettes received in the slitting room was again accounted in Appendix '£', which contained details of smalls (cut tobacco) waste paper and filter retrieved after slitting, and that the retrieved cut tobacco was sent back for manufacture and was accounted properly in Annexure 'A'; that since the weight of paper and filter had not been taken into consideration at all, while issuing cut tobacco for manufacture of cigarettes at Appendix 'C' stage i.e. at the starting point, there was no meaning in weighing paper and filter at any point, say Appendix 'E' stage and alleging that cut tobacco to the extent of weight of papers and filter was unaccounted; that in other words if an additional factor (i.e. weight of paper and filter) was to be considered at any subsequent stage, in a chain of operations, the same would have to be included at the starting point itself, which has not been done in the instant case."
This does not support the plea of SDR, being made before us, as recorded supra. The report of the Deputy Commissioner relied by the Commissioner does not confirm the plea of Revenue, "assessee showed 50 Kilograms of waste cigarettes as accountal of 50 Kilograms of cut tobacco. In fact 50 Kilograms cigarettes contained 20 Kilograms of paper and 30 Kilograms of cut tobacco and would constitute accountal of 30 Kilograms of cut tobacco and 20 Kilograms remaining unaccounted". That plea is only on reading the Appendix 'C data in isolation, has correctly not considered conducted by the Deputy Commissioner and Commissioner and is found to be not correct reading of Accounts by us. The rolling of cigarettes in a machine rolling factory is a continuous process, where the objective is to reduced waste to minimum. That fact has been recognised in the accounts prescribed. Appendices D and E show the re-addition of cut tobacco recovered from slitting of waste cigarettes and sweepings, etc., which is recycled. Accounts of these accounts have to be examined, therefore, in totality. When we see the figures reconciled by the assessee and demonstrated by the learned Advocate, we find nothing amiss in the accountal or and the satisfactory use of the cut tobacco issued for use in manufacture of cigarettes. We find no reason to accept the ground No. (x) made out in Revenue's Appeal and the plea of unsatisfactory accounting of cut tobacco and consequent liability of demand of duty.
9. In view of our findings, we find no merits in the Revenue's appeal, the same is rejected.