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J U D G M E N T KAPADIA, J.

Whether, in the facts and circumstances of the case, the tribunal was justified in holding that the 'additive mixture' processed by the three appellants herein was excisable and classifiable under chapter sub-heading 2404.49 of Central Excise Tariff Act, 1985 and that the department was right in invoking the extended period of limitation under the proviso to section 11A(1) of Central Excise Act, 1944 (hereinafter referred to as "the Act").

Briefly, the facts of the case are that M/s Hari Chand Shri Gopal, M/s Gopal Industries and M/s Gopal Zarda Udyog were the three assessees engaged in the manufacture of Chewing Tobacco (Final Product) falling under sub-heading 2404.40 of Tariff Act, 1985. In the manufacture of the final product, they were using an inter-mediate product known as "additive mixture". An intelligence was collected by the officers of the preventive wing of the Commissionerate to the effect that the appellants were manufacturing the said "additive mixture"

On dated 21.11.1997, replies were given to the three show-cause notices. The appellants submitted that they were engaged in the activity of manufacturing chewing tobacco, which was an excisable product on which they have been paying duty. In the reply, the appellants explained at length the process by which the additive mixture came to be produced in the three factories in Delhi. According to the appellants, the additive mixture was not a final product; that it was a transient product; it was not noticeable to the naked eye and that it was unsaleable and useless for any other purpose. According to the appellants, the composition of additive mixture was known only to the blender. According to the appellants, the entire process was shrouded in secrecy and was known only to the blender. In the said reply, the appellants alleged that the details of the process of manufacturing the final product as well as the formulation of the additive mixture at the intermediate stage was known to the department since 1992-93; that their records and registers stood verified by the department since 1992-93; that the said records indicated the receipt and utilization of the additive mixture in the manufacture of the branded chewing tobacco (final product) and that the said records were duly checked by the department from time to time. That, the partners of the appellants were also examined in 1992 by Superintendent of Central Excise, New Delhi, when the entire process of mixing and blending of the raw-material and the status of transfer of the additive mixture from their units in New Delhi to their factories in UP and HP was explained. In support of what is stated above, the appellants placed reliance on the panchnama dated 20.10.1992, under which their units were searched by the department and which indicated the stock position of the raw-material, additive mixture and the branded chewing tobacco. According to the department, in 1993, the Superintendent of Central Excise had personally visited their factories and had also studied in detail the process of manufacturing the branded chewing tobacco. The appellants further contended that there was no intent to evade as the said mixture was non-dutiable. In this connection, they relied on the notification no.121/94-CE dated 11.8.1994 under which additive mixture (input) falling under chapter sub-heading 2404.49 captively consumed in the manufacture of chewing tobacco (final product) stood exempted from payment of duty. That, the department had not denied their entitlement to exemption under the said notification in the show-cause notices. That, in fact, after seizure the said mixture was released/cleared under the above notification without levy of duty and, therefore, the department was not entitled to invoke the extended period of limitation.

By order dated 20.5.1998, the commissioner confirmed the demand. On the question of excisability, the commissioner found that the additive mixture was a kimam, which was manufactured by mixing sada kimam with spices, menthol, aromatic chemical and perfumes etc. Further, the commissioner found that the said kimam was marketable as a distinct identifiable product. In this connection, he relied upon the statements recorded under section 14 of M/s Globe Traders, M/s Laxmi Fragrances (P) Ltd., M/s Gulab Gandhi Tobacco Co. etc. That, after 1994, the said mixture (kimam) became classifiable under chapter sub-heading 2404.49/2404.40 and that despite the said changes, the appellants failed to get their units registered with the department. That, the evidence brought forth by the appellants regarding inspection of their factories pertained to the years 1992 and 1993, during which period the said mixture was not chargeable to duty. That, the appellants were in the business of manufacturing and marketing of chewing tobacco and, therefore, the fact that kimam was chargeable to duty must have been in their knowledge and that by bringing the above facts on record, the department had discharged its initial burden of proving the conditions mentioned in the proviso to section 11A(1) of the Act.

Applying the above test to the facts of the present case, we find that the substance of the show-cause notices issued in the present case was based on clandestine removal of the kimam from the units in Delhi with an intention to evade payment of excise duty or assessment. The show-cause notices also alleged contravention of the provisions of the Act and the Rules on the part of the appellants in failing to get their units registered under section 6 read with rule 174 of the 1944 Rules. However, we find from the facts that on 14.7.1992, stock verification was carried out by the department inside the premises of the appellants by anti-evasion department as also by the jurisdictional central excise officer. On 20.10.1992, the partner of the appellant was required to remain present before the Superintendent, Central Excise, New Delhi. His statement was recorded under section 14. In that statement, he has stated that in their units in New Delhi, there were three rooms in which raw-material was stored. In the said statement, he has further stated that the appellants were blending and mixing the additive mixture which was then transferred to their factories at UP and HP for manufacture of branded chewing tobacco. In the panchnama dated 20.10.1992, under which the premises of the appellants in Delhi were searched, the manufacturing process of additive mixture was specifically indicated. Even at that time, there was stock verification of the various raw-materials used in the manufacture of chewing tobacco. Under item 59 of that panchnama, the stock of additive mixture has been specifically indicated. Further, on 30.4.1993, the Superintendent of Central Excise had also visited the factory of the appellants and had actually studied the process of manufacture in Delhi. On 3.5.1993, a letter was addressed to the appellants in which the appellants were called upon to supply all information regarding the process of obtaining additive mixture which was used in the manufacture of chewing tobacco. On receipt of the said letter, the appellants clearly indicated the ingredients used by them in the manufacture of additive mixture. On 20.9.1993, the officers of the department again visited the various premises of the appellants. They conducted physical stock checking. They saw registers maintained by the appellant in respect of different types of additive mixtures. All the registers were checked and verified on that day. There is no finding in the present case that the appellants did not answer the queries made by the department. Moreover, the tribunal in the connected appeal has recorded a finding that the appellants were maintaining transfer challans under which the said kimam was transferred to other units. The tribunal has further recorded a finding in the connected civil appeals no.1878-1880 of 2004 that the appellants were maintaining form-IV register as well stock register regarding receipt of kimam in their factories in UP and HP from their factories in Delhi. That, after the change in the entries in 1994, no show-cause notice was ever issued. In the circumstances, although there was contravention of the provisions of section 6 read with rule 174 and although there was contravention in not obtaining registration of the units in Delhi, we are of the view that there was no intent to evade payment of duty.