Whether DTA sale by EOU in pursuant to sale agreement without informing department amounts to clandestine removal?

Case:- BAYIR EXTRACTS PVT. LTD VERSUS COMMISSIONER OF CUSTOMS, BANGLORE

Citation: - 2012(285) E.L.T. 97 (Tri-Bang).

Brief fact: - The Brief facts of the case is M/s. Gani Natural Colors and Oleoresins Pvt. Ltd. (GNCOPL for short), presently called M/s. Bayir Extracts Pvt. Ltd. (BEPL for short), was licensed in the year 1997 as a 100% EOU (export-oriented unit) to manufacture oleoresins, herbal extracts etc. Under the EOU scheme, they procured raw materials and capital goods duty-free under relevant Exemption Notifications. They carried out commercial production during February to August 1999 and exported a few consignments of oleoresins worth Rs. 2.62 lakhs in 1999 and became defunct thereafter due to various reasons. They entered into a Memorandum of Understanding (MoU) with one Shri Ganapathy Bairy, proprietor of M/s. Bayir Chemicals on 29-11-2001 and subsequently entered into a sale agreement with him on 28-2-2002. Accordingly, the possession of the factory came to be shared by Shri Ganapathy Bairy in the month of November 2001 itself. He added more machinery to the plant and started manufacturing herbal extracts on behalf of M/s. Bayir Chemicals and also on behalf of M/s. Sneha Chemicals owned by his wife. The entire activity was carried out without intimation to the Customs authorities, without de-bonding the capital goods and without obtaining permission of the Development Commissioner to remove the finished goods into the DTA (domestic tariff area). On 26-6-2003 Officers of Customs visited the factory and found that the unit was unauthorizedly engaged in the production of oleoresins on behalf of M/s. Bayir Chemicals and M/s. Sneha Chemicals. They seized the raw materials found in stock valued at Rs. 25,87,269/-, bonded capital goods of GNCOPL/BEPL valued at Rs. 62,52,629/-, additional machinery of M/s. Bayir Chemicals worth Rs. 88,50,000/- and semi-finished goods valued at Rs. 3/- lakhs along with books of accounts. Simultaneously, searches were conducted at the residence of the Managing Director of GNCOPL and the premises of M/s. Bayir Chemicals and M/s. Sneha Chemicals and some records were seized. Statements of Shri K.M. Harish, Managing Director of GNCOPL, Shri Ganapathy Bairy, Proprietor of M/s. Bayir Chemicals, Shri Nagaraj Nawada, Manager of M/s. Bayir Chemicals and Smt. Veena Bairy, Proprietress of M/s. Sneha Chemicals were recorded during June-July 2003. On completion of the investigations, the department issued show-cause notice dated 22-12-2003 to the appellants. It was in adjudication of this show-cause notice that the original authority confirmed the demands of duty against GNCO/BEPL and imposed penalties on them and others. The order-in-original was upheld by the Commissioner (Appeals) with a minor modification as to the quantum of penalty imposed on GNCO/BEPL. The order of the appellate authority is presently under challenge in these appeals.

Appellant Contention: - The learned counsel for the Appellants submitted that M/s. BEPL were only undertaking job work for M/s. Bayir Chemicals who supplied the raw materials and in semi-finished form goods were sent back to the Peenya unit of M/s. Bayir Chemicals who manufactured the final product (herbal extracts) and exported the same. Therefore the demand of duty was not sustainable on these facts. According to him, job work was not banned for EOU. Without prejudice to these submissions, the counsel claimed that the processes such as milling, soaking with solvents, etc., undertaken in the premises of M/s. BEPL did not result in any marketable and excisable product and therefore the demand of duty of Rs. 10,30,360/- was not sustainable.
The Appellant further submitted that the semi-finished herbal extracts were not shown by the Revenue to be marketable and hence not excisable. He also pleaded time-bar against the above demand of duty by submitting that the nature of job work undertaken by M/s. BEPL for M/s. Bayir Chemicals was known to the department through the latter's letter dated 18-11-2002 addressed to the Superintendent of Central Excise and therefore the demand of duty raised in show-cause notice dated 22-12-2003 was hit by limitation in the absence of suppression, willful misstatement, etc.

Respondent Contention:- The learned Additional Commissioner (AR) reiterated the relevant findings of the original authority and particularly referred to the statement of Shri Ganapathy Bairy who had admitted manufacture of semi-finished herbal extracts weighing 97,307.35 Kgs. in the premises of the 100% EOU and had also admitted the excisability of the product and its classification under Chapter Heading 13.01 of the CETA Schedule. He further pointed out that no evidence of further processing of the herbal extracts at the Peenya Unit of M/s. Bayir Chemicals was available. He also questioned the EOU's claim of exemption based on job work. According to the Additional Commissioner (AR), the plea of limitation was also not substantiated. Neither the MOU nor the sale agreement between M/s. GNCOPL and M/s. Bayir Chemicals was disclosed to the department. The receipt of raw materials by the EOU from M/s. Bayir Chemicals, manufacture of herbal extracts from such raw materials and the dispatch of the products from the EOU premises were not disclosed to the department. Neither M/s. GNCOPL nor M/s. Bayir Chemicals maintained any records regarding the receipt, processing or dispatch of goods. Suppression of facts with intent to evade payment of duty was evident from these circumstances and therefore the proviso to Section 11A (1) was correctly invoked in this case.

Reasoning of Judgment:- The Tribunal held that the above submissions of the Additional Commissioner (AR). Shri Ganapathy Bairy, Proprietor of M/s. Bayir Chemicals clearly admitted in his statement that the 100% EOU had manufactured semi-finished herbal extracts by undertaking processes like milling, loading, soaking, distillation, filtration, etc. and that the products were excisable and classifiable under Heading 13.01. Raw materials for this activity were, admittedly, supplied by M/s. Bayir Chemicals. The products received from the EOU by M/s. Bayir Chemicals were manufactured goods which were admittedly excisable and also classifiable as above. The evidence given by the raw material supplier (who was also in possession of the EOU premises since November 2001 as per the MOU and hence had direct knowledge of the activities which took place during the material period) could not be dislodged by the job worker EOU. The learned advocate, who represented the EOU and M/s. Bayir Chemicals, did not attempt to establish any conflict or inconsistency between the oral evidence of M/s. Bayir Chemicals and the stand taken by the EOU. Thus their challenge to the demand of duty on the semi-finished herbal extracts on the ground of non-excisability must fail. There is, also, no merit in their alternative claim that the job-worked herbal extracts were further processed by Bayir chemicals' Peenya Unit and exported or cleared on payment of duty. There is no evidence to substantiate this claim. This apart, job work itself is outside the scope of a 100% EOU's activities (as rightly held by the lower authorities) in as much as the EOU's entire production is meant for export. There is no valid plea of limitation either. It is not in dispute that the MoU and sale agreement between the EOU and M/s. Bayir Chemicals were not disclosed to the department, that the receipt of raw materials by the EOU from M/s. Bayir Chemicals or the manufacture of semi-finished herbal extracts from these materials or the dispatch of these extracts from the EOU premises was not disclosed to the department, that the Development Commissioner's permission was not taken by the EOU for clearance of the goods to the DTA unit, and that neither the EOU nor M/s. Bayir Chemicals maintained any records in the EOU premises regarding the processing or dispatch of the goods. In these circumstances, suppression of facts with intent to evade payment of duty on the goods is evident and therefore the extended period of limitation was rightly invoked in the show-cause notice dated 22-12-2003 for recovery of duty on the semi-finished herbal extracts for the period June 2002 to June 2003. A perusal of the letter dated 18-11-2002 of M/s. Bayir Chemicals to the Superintendent of Central Excise reveals that the letter was issued only to inform the department that M/s. Bayir Chemicals intended to get job work done by GNCO. The letter did not disclose the nature of the intended job work, nor did it disclose the identity of raw materials or final product. Hence this letter referred to by the learned counsel cannot be seen as disclosure of relevant information to the department. Therefore Tribunal upholds the demand of duty on semi-finished herbal extracts and it is ordered accordingly.

Further with regard the demand of duty of Rs. 21,66,126/- on 31,370 kgs. of oleoresins which were found to have been clandestinely manufactured and cleared from the EOU from April 1999 to October 2001, the challenge to the demand of duty on oleoresins cannot be sustained inasmuch as the evidence on record is in favour of the Revenue. The Managing Director of GNCO/BEPL clearly admitted in his statement dated 15-7-2003 that 8,67,600 litres of rectified spirit procured from April 1999 to October 2001 had been used as solvent for manufacture of chilli oleoresins weighing 32,020 Kgs. and that, out of this quantity, 31,370 Kgs. of oleoresins was sold in the local market in retail. He also admitted that no records or books of accounts were issued/maintained in relation to this activity. He also admitted purchase of 1,62,400 Kgs. of chilli without bills. There was no valid retraction of these statements of Shri K.M. Harish. His affidavit dated 12-3-2005 which contained averments such as that there was no power in the unit during the material period is not acceptable as a valid retraction on account of the long gap between the dates of confessional statement and affidavit and also on account of the fact that it was not affirmed to before the authority which recorded the confessional statement. The clandestine activities having been admitted, the case law cited by counsel is not relevant. The learned counsel has referred to the affidavit as clarificatory. Any clarificatory statement should have been given, without delay, to the authority which recorded the original statement. Moreover, there should not be any inconsistency between the original and 'clarificatory' statements. In the present case, Tribunal has found inconsistencies also. Therefore the view taken by us with regard to the evidentiary value of the Managing Director's original statement remains intact.

The Tribunal further held that as rightly pointed out, the expression "brought to any other place in India" was substituted for the expression "allowed to be sold in India" in the proviso to Section 3(1) of the Central Excise Act with effect from 11-5-2001 and that, prior to the amendment, the clearances, from EOU to the DTA, of goods not allowed to be sold in India (i.e., DTA clearances by EOU without the Development Commissioner's permission) were chargeable to duty under the main part of Section 3(1) and not under the proviso thereto. It was held to this effect by the Hon'ble Supreme Court in the case of M/s. NCC Blue Water Products Ltd. (supra). The impugned demand of duty was quantified under the proviso even for the period prior to 11-5-2001, which cannot be sustained. As per the provisions interpreted by the Hon'ble Supreme Court, the demand of duty on oleoresins cleared from EOU premises from April 1999 to 10-5-2001 requires to be requantified in terms of the main part of Section 3(1) of the Central Excise Act and therefore direct the adjudicating authority to do so.

Further Duty of Rs. 38,054/- was demanded from the EOU in respect of black phenyl which was held to have been manufactured by the EOU as a job work for M/s. Sneha Chemicals who supplied the necessary raw materials. Tribunal has found this dispute to be similar to the one pertaining to semi-finished herbal extracts and, therefore, there is no reason for a different view. Consequently, the above demand has only to be sustained. The Tribunal further held that plea of limitation is not sustainable against any of the demands of duty, for which reasons has already recorded. The entire demand is liable to be honored by the EOU which never sought debonding but only chose to plead with the Development Commissioner, even around the end of 2003, for an opportunity to work as EOU with the help of Shri Ganapathy Bairy. The Development Commissioner granted this relief to GNCO/BEPL vide his Order-in-Original dated 18-2-2004 (page 69 of Paper Book). There is no reason why they should not pay duty on their DTA clearances. The learned counsel, who represented all the three appellants, did not argue for shifting this duty liability to Bayir Chemicals or Sneha Chemicals, either.

Tribunal further held that they have sustained the demands of duty to the extent stated aforesaid, it goes without saying that provisions of Section 11AA can be invoked to levy interest on the correct amount of duty. Significantly, there is no specific grievance against Section 11AB having been invoke for levy of interest on duty. In the result, the assessee is liable to pay interest on duty under the aforesaid provisions for the relevant periods.

Tribunal further held that raw materials valued at Rs. 25,87,269/-, semi-finished goods valued at Rs. 3 lakhs and capital goods valued at Rs. 8.5 lakhs were seized from the premises of GNCO/BEPL and eventually confiscated under Rule 25 of the Central Excise Rules, 2002. The capital goods were admittedly procured by GNCO under CT-3 procedure without payment of Central Excise duty by availing the benefit of Notification No. 1/95-C.E. These goods were admittedly not used for the declared purpose and hence liable to confiscation under Rule 25. These capital goods were used for job work on raw materials supplied by a third party, which was not permissible under the EOU scheme and amounted to contravention of Notification No. 1/95-C.E. For this reason, the resultant product viz, semi-finished herbal extracts, which were cleared without payment of duty and without following the prescribed procedure, also became liable to confiscation. The raw materials were also liable to confiscation on account of the fact that they were not used for the purpose for which they were procured duty-free. Having regard to the total value of all the goods seized and confiscated, Tribunal are of the view that the redemption fine of Rs. 50,000/- imposed by the original authority in lieu of confiscation is quite reasonable.

Tribunal further held that insofar as the penalty imposed on BEPL under Section 11AC is concerned, it goes without saying that this penalty is sustainable on the facts of this case inasmuch as the proviso to Section 11A (1) of the Act was rightly invoked on the ground of willful suppression of facts by GNCO/BEPL, for recovery of duty and, for that matter, the requirements of Section 11AC were satisfied. However, the quantum of this penalty needs to be redetermined by the adjudicating authority after requantifying the demand of duty. Further penalties of Rs. 1/- lath on M/s. Bayir Chemicals and Rs. 5,000/- on M/s. Sneha Chemicals under Rule 26. As regard the penalty of Rs 1 lakh, appear to be disproportionate and reduced to Rs 50,000/-. The Other penalty on Smt. Veena Bairy owner of Sneha Chemicals (wife of Shri Ganapathy Bairy, owner of Bayir Chemicals), there is no evidence as to actively involved in the transaction with GNCO/BEPL. Thus the penalty imposed on her is liable to be set aside.

In the result, it is ordered as follows -
(a) The demands of duty on herbal extracts and black phenyl are upheld and these duties are held to be recoverable with interest thereon from BEPL
(b) The demand of duty on oleoresins is set aside for the purpose of re-quantification in terms of the main part of Section 3(1) of the Central Excise Act by the original authority for the period from April 1999 to 10-5-2001 and in terms of the proviso to Section 3(1) for the subsequent period. The duty so requantified in respect of oleoresins is also recoverable with interest thereon from BEPL.
(c) Of course, upon requantification of duty as above, BEPL has to pay the balance amount of duty after appropriation of Rs. 30/- lakhs already paid. This balance shall be paid with interest thereon under Section 11AA/11AB for the relevant periods.
(d) The redemption fine is sustained.
(e) The quantum of penalty to be imposed on GNCO/BEPL under Section 11AC of the Act is directed to be redetermined by the original authority, who should take care to ensure that it does not exceed the amount of penalty determined by the Commissioner (Appeals).
(f) The penalty on Bayir Chemicals (Shri Ganapathy Bairy) is reduced to Rs. 50,000/- and that on Sneha Chemicals is set aside.
(g) The appeal of Sneha Chemicals is allowed and the other appeals are disposed of in the above terms.

Decision:- Appeal disposed off.

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PJ/Case Laws/2012-13/1333

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