Whether duty demand can be waived on contention that assessee had bonafide belief that duty need not be paid on free samples?

Case:-THE COMMISSIONER OF CENTRAL EXCISE, CHENNAI-III V/S M/s NABULAE HEALTH CARE LTD

Citation:- 2013-TIOL-152-CESTAT-MAD

Brief Facts: - The Respondents are small scale manufacturers of Patent and Proprietary medicines. On 28-10-97, Officers of Revenue visited the factory of the manufacturers and verified their records. They found that they were issuing two sets of invoices, one set called 'central excise invoices' for paying excise duty and another set of invoices called challan-cum-invoices for other commercial purposes. On verifications of these invoices and also their RG-1 register it appeared to Revenue that the Respondents had not accounted the full production of goods manufactured by them in their RG-1 register and had not pay duty on all goods manufactured during the period 1993-94 to 1997-98. During investigation Revenue also found that the Respondents were manufacturing both exempted products and dutiable products and they had taken cenvat credit of inputs used in the manufacture of exempted products also but have not reversed appropriate amount as per Rule 57CC of the Central Excise Rules 1944. A show cause Notice issued based on such facts was adjudicated. On adjudication, duty demand of Rs.11,08,773/- has been confirmed against them. Out of this amount, Rs. 9 54,723/- was on account of goods clandestinely removed and Rs. 1,54,050/- was on account of Cenvat credit that was short reversed under provisions of Rule 57CC of the Central Excise Rules,1944. Aggrieved by the order of the Commissioner (Appeal) the Respondents filed an appeal with Commissioner (Appeal). The Commissioner (Appeal) came to the finding that allegation of clandestine removal is not maintainable because Revenue has not proved that the Respondent had received any money over and above the amounts billed as per Central Excise Invoices. He upheld the demand on account of physician samples cleared without payment of duty by the respondent but ruled that the value of such goods should be determined under Rule 6 (b) (ii) of Central Excise Valuation Rules. He also upheld the demand on account of credit short reversed under Rule 57CC. But he allowed utilization of an amount of Rs. 32,561/- which had expired in their credit account when they switched over from a duty paying unit to a an exempted unit at the beginning of a financial year when they re-started availing small scale exemption. Aggrieved by the order of the Commissioner (Appeal) Revenue has filed this appeal before the Tribunal.

Appellant’s Contention: - The appellant revenue contended that the Respondent have been replacing defective goods under challan-cum-invoices without corresponding excise invoices and were also clearing physician samples under challan-cum-invoices without corresponding central excise invoices and not paying excise duty. Since excise duty has to be paid on such clearances of goods whether or not the respondents have billed for and realized prices of such goods, the reasoning given by the Commissioner (Appeal) for coming to the conclusion that there was no clandestine removals is faulty and not legally maintainable. They point out that the proceeding before lower authorities have brought out clearance of goods without payment of excise duty. They argues that when goods are cleared on parallel invoices without payment of duty, there is a case of clandestine removal as decided by the Hon’ble Supreme Court in the case of CCE Vs. Kalvert Foods India Pvt Ltd. 2011 (270) ELT 6430 (SC) = (2011-TIOL-76-SC-CX). He submits that free replacements of defective goods cannot be made without payment of excise duty as decided by the Tribunal in CIMMCO Ltd. vs. CCE-1998 (98) ELT 409 (Tri). In the matter of the order passed by Commissioner (Appeal) to use expired credit for discharging duty liability determined by the adjudication order, Revenue submits that there is no provision in the Rules for such a proposition. It is argued that expired credit cannot be resurrected thorough the order of the Commissioner (Appeal). Revenue argues that at the end of each financial year the credit lying in the account of the assessee lapsed since the Respondent started availing full exemption from excise duty. Since such credit had lapsed the order of the Commissioner (Appeals) allowing set off of liability against such lapsed credit is not legally correct. They relied on the following decisions:-
(i) CCE VS. R.C. Biscuits and Cofectionary-2001 (130) ELT 914 (Tri)
(ii) Aggarwal and Company Vs. CCE-2005(182) ELT 267 (Tri) = (2005-TIOL-151-CESTAT-MUM)
In the matter of valuation of physician samples, they argue that the law in this matter is settled by the decision of the Larger Bench of the Tribunal in Cross land Research Lab- Ltd Vs. CCE-2006(205) ELT 653 (Tri-Mum) = (2006-TIOL-409-CESTAT-MUM) and in the case of Blue Cross Laboratories Ltd Vs.CCE-2006 (202) ELT 182 (tri-LB) = (2006-TIOL-1142-CESTAT-MUM-LB). This decision is followed in the latest decision of Mumbai Bench of the Tribunal in Allianz Bio Sciences Pvt. Ltd and Other Vs. CCE = (2012-TIOL-570-CE5TAT-MAD). So Revenue argues that goods have to be valued on the basis of value of identical goods cleared by the Respondent on payment of excise duty and the ruling of the Commissioner (Appeal) is incorrect.

Respondent’s Contention: - The respondent submits that they are small scale manufacturer and they were not well versed in excise law and they had no intention to evade payment of excise duty. Since they did not receive any payment on physician samples for goods given as replacement they thought that they did not have to pay excise duty. The Respondents claim that they were under the bonafide belief that they did not have to pay any excise duty on such goods. They further submitted that in the matter of replacing defective goods, there were decisions of the Tribunal to the effect that such goods can be considered as quantity discount and no excise duty would be payable. He relies on the following decisions:-

1. CCE, Chennai Vs. Hindustan Lever Ltd 2002 (142) ELT 513 (SC) = (2002-TIOL-798-SC-CX)
2. CCE, Bombay Vs. Spectrum Pharmaceuticals 2000 (119) ELT 737 (Tribunal)
3. Raptakos Brett & Co. Vs. CCE, Bombay 1998 (99) ELT 176 (Tribunal)
4. Ponds India Ltd. VS. CCE 2000(124) ELT 202 (Tri)
They submit that in view of the above decisions, they were under the bona fide belief that on goods cleared for replacing defective goods there was no requirement of paying any excise duty. They conceded that this issue has been decided against the Respondents in the judgment of the Apex Court in the case of ECE Industries Limited Vs. CCE-2004 (164) E.L.T. 236 (S.C) = (2003-TIOL-89-SC-CX)
They submit that they were under the bona fide belief that they need not pay duty either on physician samples cleared free and hence the demand is time barred. The only issue agitated was the valuation to be adopted for paying duty on physician's samples. The order of the Commissioner (Appeals) order may is not be specific that he did not give relief of duty payable on physicians' samples. Since he had decided on the method of valuation to be followed it is clear that the Commissioner (Appeal) did not give relief on that count. The Respondent also relies or the following decisions and argue that unless there is a positive act of suppression on the part of the assessee, the extended period of time cannot be invoked:-
1. Padmini Products Vs. CCE 1989 (43) ELT 195 (SC) = (2002-TIOL-289-SC-CX)
2. CCE, Vs. Chemphar Drugs Liniments 1989 (40) ELT A276 (SC) = (2002-TIOL-266-SC-CX)

Reasoning of Judgment: - The Hon’ble Tribunal held that they are not in agreement that the Respondent entertained a bonafide impression that he need not pay excise duty on manufactured goods if it was cleared free. This is because the legal position that liability to excise duty arises when any goods are cleared from a factory whether for consideration or for free is a long settled issue. Further the excise liability on physician samples cleared free was always known to the drug industry for decades. There were disputes only about method of valuation to be followed and not about the duty liability. The respondent is not a small manufacturer with no awareness of what happens in the industry. The respondent is a manufacturer who was crossing the full exemption limit in a financial year and paying duty thereafter. The fact that the respondent took care to clear the goods under his challan-cum-invoice rather than under excise invoice showing nil payment of duty shows his clear intent to evade excise liability on this count and for this reason the decisions in the case of Padmini Polymers and Chemphar Drugs Liniments (supra) are not applicable to the facts of the case. The case of Padmini Polymers related to a case where the appellant was acting on a clarification issued by CBEC. In the case of Chemphar Drugs there was an approved classification list and it was during a time when the officers were regularly visiting the assessees. The nature of excise levy and collection itself has changed to self assessment and voluntary compliance and hence these decisions are not applicable to the facts of the case and the decision of the Apex Court in the case of Kalvert Foods (supra) is more appropriately applicable. Further in this case, this pleading was not allowed by the Commissioner (Appeal) for Physicians samples and the respondent has not come in appeal. So there is no question of giving any relief in the matter of liability of duty on physicians’ samples. In the case of valuation of Physicians samples the question is settled by the decision of larger Bench of the Tribunal in the case of Blue Cross Laboratories Ltd (Supra) and therefore the decision of the Commissioner (Appeal) that the value should be determined based on cost construction method is not legal and correct and thus the value should be determined as decided by the Tribunal in the case of Blue Cross Laboratories Ltd Vs.CCE-2006 (202) ELT 182 (tri-LB). In the matter of free replacement of damaged goods and time expired medicines it is inclined to accept the pleading of the Respondent because there were a few decisions of the Tribunal supporting the belief of the Respondents to that effect during the relevant period. The case of Hindustan lever Ltd decided by Apex Court cited by the respondent is not on the same issue and is on quantity discounts which were known at the time of removals. However the decisions of the Tribunal cited are on the same issue and the belief of the Respondent was not a reckless belief. So on this issue they hold that extended period of time could not have been invoked for demanding duty short paid. In the matter of set off allowed for demand on account of improper reversal of credit under Rule 57 CC, they are of the view that the decisions relied upon by Revenue are applicable only in a case where an assessee tries to use the credit for a liability arising on clearances after the expiry of credit. In this case the liability is for the period before the lapsing of credit though determined after the date of lapsing. In such situation it is only proper that a set off on account of such lapsed credit is given because of such liability was determined correctly during the relevant time the credit would have been available for discharging such liability. So in this matter the appeal of revenue is not acceptable. They also give the option to pay duty short paid duty along with interest and penalty of 25% of duty short paid as penalty within 30 days of receipt of this order following the decision of the Gujarat High Court in the case of CCE Vs. Harish Silk Mills Pvt. Ltd = (2010-TIOL-510-HC-AHM-CX). The respondent is directed to work out the liability as per this order on their own and pay such amounts within thirty days of receipt of this order. If there is any differential amount due that shall be worked by the adjudicating authority and communicated which shall also be paid along with interest and 25% of the amount as penalty within 30 days of receipt of such order. If such payments are not made in time, liability equal to duty short levied will be payable.

Decision: - Revenue’s appeal disposed of.

Comment:- The analogy drawn from this case is that credit expired can be allowed to be utilised for payment of duty liability for the period before lapsing of credit, if duty liability determined subsequently.

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PJ/Case Laws/2012-13/1449

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