Customs, Excise and Gold Tribunal - Delhi
Oswal Industries (P) Ltd. vs Collector Of Central Excise on 12 April, 1990
Equivalent citations: 1990(27)ECC281, 1990(30)ECR401(TRI.-DELHI), 1990(49)ELT305(TRI-DEL)
ORDER K. Sankararaman, Member (T)
1. This is an appeal filed by M/s. Oswal Industries Pvt. Ltd., Ludhiana against the Order No. 42-CE/88 dated 4-8-1988 passed by the Collector of Central Excise, Chandigarh, demanding Rs. 4,13,630/- as duty on Knitted Acrylic Pile fabrics and imposing a penalty of Rs. 2 lakhs on them under Rule 173Q of the Central Excise Rules. The charge against them is that they manufactured and removed the goods in question without payment of Central Excise duty leviable thereon. In addition 213.10 metres/298.34 square metres of processed knitted Pile fabrics physically seized were confiscated and an option to redeem them was given on payment of Rs. 5,000/- in addition to the duty leviable.
2. When the appeal came up for hearing, Shri G.S. Bhangoo, learned Counsel for the appellants started his arguments with the observation that Grey Fabrics viz. unprocessed were exempt in terms of Notification No. 109/86 dated 27-2-1986 which is given under Chapter 58. Knitted acrylic fabrics falling under Heading 6001 would be exempt from basic excise duty and additional duty of excise leviable under the Additional Duties of Excise (Goods of Special Importance) Act, 1957 if the woven fabric is exempt from the said duties. They have only knitting machines. They do not have any processing machine. They send the fabrics manufactured by them for shearing to an outside place namely M/s. Sambhav Processors. Their contention that they did not have the processing facility in their premises and did not carry out the shearing or cropping process in their factory would derive support from the fact that the Department did not ask them to take a licence for the processing work, even after the registration of the impugned proceedings. He strongly pleaded that the seizure was made not from their premises but from the premises of M/s. Sambhav Processors. If the goods were actually seized from their own premises, there was no need for the department to leave the goods for custody in the premises of M/s. Sambhav Processors, which was not adjacent to their premises but situated at a distance of nearly two kilometres. In the Industrial Estate, there are so many factories adjacent to their factory, and the goods could have been left in the custody of any of them in their own factory instead of transporting them to a place nearly two kilometres away. Shri Bhangoo pleaded that this itself will also go to show that the seizure was made not in their factory but in the premises of M/s. Sambhav Processors where their goods had been sent for processing. He controverted the observation in the Collector's order that only in March, 1988 (wrongly mentioned as March 1987 in the order) after a lapse of 8 months after the seizure on 25th July, 1987 had they raised the argument that the goods were not seized from their premises. The learned Counsel submitted that he had seen the Collector on 11-8-1987 soon after the seizure and gave a written representation setting out the correct position, including the place of seizure. Shri Bhangoo then proceeded to raise the contention that irrespective of the place of seizure and the factory where the process of shearing was carried out, the said process did not constitute manufacture, attracting duty. In Chapter 60 or in the other Chapters like 51, 52, 54 and 55, there are no Chapter Notes specifying shearing as a process of manufacture. He referred to the judgment of the Supreme Court in the case of Mafatlal Fine Spinning and Mfg. Co. Ltd. reported in 1989 (40) ELT 218 (SC) on the question concerning "Shearing". He also referred to the decision of the Tribunal in the case of Siddeshwar Cotton Mills reported vide 1989 (44) ELT 157. He referred to the definition of "Shearing" and "Cropping" which are synonymous terms appearing in Standard Reference Books which had been reproduced in the judgment/order cited. 'He contended that a combined reading of the exemption Notification 109/86 dated 27-2-1986 and 297/79 dated 24-11-1979 would support their stand that the process of shearing or cropping does not make the subject goods dutiable and not the Collector's narrow interpretation put on the term "Cropping" on the basis of its definition in Notification 297/79 that it means cutting away mechanically of loose ends from the fabrics. He pleaded that the question of dutiability apart, there was no case for imposition of penalty. The departmental officers were aware of the manufacture of the subject goods. There has been abona fide difference of interpretation. Earlier, the officers were themselves taking the view that cropping of knitted fabrics did not constitute manufacture. Later they changed this stand. This would not justify any finding against them leading to the imposition of penalty. He summed up his arguments with the postulations that the process in question is not a dutiable process, that even if it is dutiable, it is covered by the exemption and even if not exempt, the liability is not on them but the actual manufacturers who carry out the subject process.
3. Replying to the arguments of the learned Counsel, Shri L.C. Chakraborty, learned J.D.R. referred to the judgment of the Supreme Court in the Mafatlal Fine Spinning & Mfg. Co. Ltd. matter [1989 (40) ELT 218 (SC)] cited by the Counsel. He stated that this decision was rendered in the context of Rule 49A of the Central Excises Rules, to decide whether cropping would make the cotton fabrics liable to interest at 3% of the yarn duty as against interest at l 1/2% applicable for grey (unprocessed) fabrics. He also referred to the decision of the Tribunal in Madura Coats Ltd. v. Collector of Central Excise, Madurai reported in 1987 (22) ELT 450 where it was held that fabrics subjected for finishing process of cropping in same factory is liable to 3% interest applicable for processed fabrics.
4. The learned JDR contended that though the process cropping (shearing) had been the subject matter of decision by the Supreme Court in the Mafatlal case wherein it had been held that this process does not convert the grey cloth into a processed cloth attracting higher rate of interest of 3%, the technical definition of the term, is not relevant in the present context because, as observed by the Collector in his order, the specific definition of the term "cropping" in the Notification No. 297/79 has to be kept in mind. This specific definition will be decisive in applying the said exemption. This definition stipulates that cropping consists of cutting away mechanically loose ends from the fabrics. The Collector has also held that the Notification in question does not exempt shearing and cropping per se. What has been carried out in the present case is not cropping within the meaning provided by the Notification itself because the cutting was of not only loose ends but trimming of the material from the surface of the fabric itself.
5. Shri Chakraborty supported the Collector's order and argued that the special definition of the term cropping would mean that the exemption was available only for the process of cutting the loose ends of the material at the ends and not from the surface. He also controverted the point raised by the learned Counsel regarding the place of seizure and the carrying out of the cropping work in the premises of M/s. Sambhav Processors and not from the factory of the appellants. He pointed out that the Manager of the appellant firm had given his statement in this regard which has been relied upon by the department. He has not retracted his statement till date. No affidavit had been filed by M/s. Sambhav Processors that they had carried out the cropping work in their premises. This inaction on their part is not the reaction of the normal or average prudent person. The defence plea raised is an afterthought. Accordingly, he pleaded that the appeal may be dismissed.
6. We have carefully examined the submissions made by both the sides. We find that the main point for decision is whether the process of cropping would constitute a manufacturing activity bringing into existence a new product different from the starting material. The Supreme Court judgment in the Mafatlal matter (supra) is to the effect that cropping does not constitute a process of taking grey cotton fabric to the category of processed cotton fabrics for the purpose of levy of 3% interest on the amount of yarn duty. In other words, cotton fabrics remain grey or unprocessed even after the process of shearing. This decision is dated 17-1-1989 and was not available to the Collector when he adjudicated the case on 4-8-1988. However, the technical definition for the process of shearing referred to in the said judgment taken from Standard Reference books were taken note of by him. He, however, held the view that the said definitions for the process of shearing did not come into the picture while examining the applicability of the exemption notification wherein the term "cropping" had been specifically defined. It is his contention that the definition in the Notification is narrower in its scope than the defamation given in the Reference books. On examining this contention we find that the term cropping which, as admitted by both the sides, is synonymous with "shearing" is described in exemption Notification No. 297/79 dated 24-11-1979 as amended, as cutting away mechanically of loose ends from the fabrics. The definitions of the term in Standard Reference Books extracted in the Supreme Court judgment in the Mafatlal case are as below :-
"In regard to the process of "Shearing" Shri Sorabjee relied upon Fairchild's Dictionary of Textiles which says:
"SHEARING : 1. A process of cutting fleece from sheep generally by power-driven clippers or sometimes by hand shears. Properly sheared fleece will be removed in one solid sheet, which is rolled into a compact bundle with the wool on the inside. 2. A finishing operation in which uneven threads are mechanically cut or trimmed from the face of the fabric. Almost always employed for woollen and worsted and extensively employed on other fabrics. The amount of shearing on napped and pile fabrics varies according to the desired height of the nap or pile; on clear-finish fabrics like gabardine, a very close shearing is given. 3. A finishing operation in which floating portions of yarn are cut, e.g., in extra warp or extra filling figured fabrics. The method is similar to that employed in #2, above."
In "Textile Terms and Definitions" 8th Edition by the Textile Institute:
"SHEAR:
(1) To cut the fleece from a sheep.
(2)....
(3) To cut loose fibres or yarn from the surface of a fabric after weaving (also called crop)."
In Handbook of Glossary of Textile Terms (Bureau of Indian Standards) :
"SHEARING - Shearing indicates:
(a) Cutting fleece from live sheep,
(b) Trimming nap or pile to the required uniform height, and
(c) Removing all protruding fibres from the surface of the fabric i.e. cropping."
The definition of the terms in "Fairchild's Dictionary of Textiles" has been extracted in the order of the Tribunal reported in 1987 (32) ELT 450 (Tribunal) :-
"Cropping - A finishing process of shearing surface fuzz or nap of fabrics, See shearing 2."
"Shearing 2 - A finishing operation in which uneven threads are mechanically cut or trimmed from the face of the fabric. Almost always employed for woollen or worsted and extensively employed on other fabrics. The amount of shearing on napped and pile fabrics varies according to the desired height of the nap or pile; on clear/finish fabrics like gabardine, a very close shearing is given."
7. It was contended by Shri Chakraborty during his arguments supporting the Collector's order that the term "cropping" in the exemption Notification would cover only cutting away the loose ends from the fabrics. Thus, only fabrics from which loose ends were cut away mechanically would be eligible for the exemption. The loose ends would be only the ends of the threads at the edges and not all over the surface of the fabrics. Since in the present case, the process carried out covered the cutting or trimming of the pile on the surface of the fabrics, it went beyond the scope of the notification and hence duty has been correctly determined. This argument does not appeal to us. The definition of the term cropping in the exemption Notification in question is, no doubt shorter than the one given in the Reference books referred to in the decisions cited by both the parties. But that, to our mind, does not advance the case of the department. Cutting away mechanically of loose ends from the fabrics cannot mean that the cutting should be confined only to the loose ends of yarn at the edges. The loose ends in the fabrics in the knitted fabrics are there not only at the edges but also on the surface. ' Since the definition of the term "Cropping" in the Notification does not itself say that the cutting the loose ends is to be limited only to the loose ends present in the fabric at the edges and not on the surface, this criterion cannot be imported into the matter for deciding the applicability of the exemption Notification as has been done by the Collector. The shorter definition of the term in the exemption Notification does not have the effect of curtailing the normal meaning of the terms given in the Standard Technical Books referred to in the Mafatlal decision of the Supreme Court. Accordingly, we accept the plea of the appellants that the process in question does not attract duty as held by the department.
8. In the view we are taking, the other questions raised in the appeal become less important. Still we would like to deal with them as the points raised tend to support the stand of the appellants and correspondingly detract from the conclusions of the Collector. These concern the contentions raised regarding the place of seizure. It has been strenuously argued by Shri Bhangoo, learned Counsel for the appellants that the seizure took place not from their premises but from the factory of M/s. Sambhav Processors. The Collector has made an interesting and intriguing observation with regard to the fact that one of the witnesses to the search memo happened to be the Director of M/s. Sambhav Processors that "it stretches one's imagination to the extreme to believe that a person would attest his signature to a document showing seizure of goods at a place other than his own premises." He proceeds to state that the other person (viz. the other witness) is a totally independent person. There is nothing unusual about a person attesting his signature to a seizure memo relating to a seizure of goods at a place other than his own premises. That is the common practice also. That in this very case, the second witness is an independent person, as observed by the Collector himself. As the department's stand is that the seizure was made not at the premises of M/s. Sambhav Processors as contended by the appellants, but in the factory of the appellants, the intention was to say that as Shri Yash Pal Jain, Director of M/s. Sambhav Processors had signed as a witness to the seizure memo the seizure could not have been effected from his factory, as only independent persons attest the seizure memo as witnesses. But this has not come out properly in the order. Notwithstanding this, two points raised by the learned Counsel for the appellants tend to support his contention about the place of seizure not being their factory. One is that if the processing had, in fact, been carried out in their factory as alleged by the department, their not being asked to take out a Central Excise licence after the seizure would not be the normal reaction of the department. They would have insisted on a licence being applied for to regulate future clearances and payment of duty. Such a course was not followed. There is no evidence or finding that any machine for cropping was found with them and that it was dismantled and removed after the seizure which would justify the department's non-insistence on their taking a licence. The other point is that the seized goods were left with the Director of Sambhav Processors for safe custody. We find that the seizure memo mentions that the goods after seizure have been kept in one corner of the finishing room of the factory and handed over to Shri Yash Pal Jain, Director of Sambhav Processors (Pvt.) Ltd., Industrial Area 'A', Ludhiana, holding Central Excise licence for safe custody under proper supratnama. It is not clear how the goods alleged to be seized from the factory premises of the appellants were, after seizure, kept in one corner of the furnishing room of the factory but handed over to the Director of another factory. Normally seized goods are handed over by the department for safe custody under a Supratnama to the owner of the goods and not to any other person. It is hard to follow why in this case, the seized goods were handed over to the Director of M/s. Sambhav Processors for safe custody unless the seizure itself took place in his premises, as contended by the appellants. Further, M/s. Sambhav Processors are reported to be situated at a distance of nearly 2 K.Ms away from the factory of the appellants and in the Industrial area where it is situated, there are a number of other factories in close proximity to the appellant's factory. Instead of leaving the goods in proper custody of any one such factory, in close proximity to the factory of the appellants, if for any reason, they did not want to give to them, the seizing officers had given the custody of the goods to a factory situated 2 Kilometres away, unless, as contended by them, the goods were seized there only (Sambhav Processors) and hence naturally the custody was given to them. These facts, as stated above, tend to support the contentions of the appellant about the place of seizure.
9. There are certain observations by t he Collector, in his order, pointing out discrepancies in the transport challans covering the movement of the goods with regard to their serial numbers, overwritings and dates. His conclusions have been questioned by the appellants. We, however, do not propose to deal with them, as we feel that the same, as also the rival contentions regarding the place of seizure of the goods in question tend to recede into the background in view of our decision on the basic question that the process carried out namely cropping or shearing is covered by the exemption Notification.
10. For the reasons discussed by us, we hold that the process of shearing or cropping carried out on the knitted acrylic fabrics does not attract duty being covered by exemption Notification No. 109/86-C.E., dated 27-2-1986, as amended, read with Notification No. 297/79, dated 24-11-1979, as subsequently amended. Accordingly, we set aside the order of the Collector and allow the appeal. The appellants would be entitled to the consequential benefits.