Grant of Stay - Charge of clandestine removal for installed but unused packing machine

PJ/Case Study/2012-13/09

CASE STUDY

Prepared By:
CA Pradeep Jain
Sukhvinder Kaur LLB [FYIC]

Introduction:-

In the case under study, the main issue is regarding the levy of excise duty on three packing machines for manufacture of tobacco products. There was compounded levy on such product. Though the machines were installed but they started production in mid of the month. Even the machines were stopped by the department on first day of the month. Though there were three machines were installed but only two machines were working. The assessee had not registered themselves with the Department and therefore, clandestine removal was alleged. Duty demand was confirmed and the matter is before the First Appellate Authority in appeal. The assessee had already deposited substantial amount of duty confirmed against them and have additionally given FDR of Rs. 10 lakhs. Whether this is sufficient to safeguard the interest of the Revenue and will not cause undue hardship to the assessee was the issue raised before the learned Commissioner (Appeals) during hearing of Stay application.

M/s Marmick Tobacco Pvt Ltd v/s Additional Commissioner, Central Excise Commissionerate, Jaipur-II
[Stay Order No. 61-62(AKJ)/CE/JPR-II/2012, Dated: 16.05.2012]

Brief Facts:-

- Appellant was engaged in the manufacture if ‘Marmic’ brand chewing tobacco falling under Chapter Sub-heading No. 24039910 of the First Schedule to the Central Excise Tariff Act, 1985 without obtaining Central Excise Registration.

- The Central Excise Team visited the premises of appellant on 01.05.2010 and found that out of three pouch packing machines two packing machines were in working condition.

- The Additional Commissioner confirmed the demand of Rs. 4275000/- under Rule 18 (2) of the Chewing Tobacco and Unmanufactured Tobacco Packing Machines Rules, 2010 and also imposed a penalty of Rs. 4275000/- on Shri Naresh Dayalal Barot, Director of Appellant-company under Rule 26 of the Central Excise Rules, 2002.

- Against the impugned order, appellant has filed appeal before the learned Commissioner (Appeal) and Stay application is also filed for grant of stay and waiver of pre-deposit.

Appellant’s Contentions:-

The appellant raised the following contentions during hearing of Stay application: -

- No manufacturing Activity on third machine: Appellant submit that only two machines were operative and the third machine was not in a working condition and therefore, no duty can be demanded on the third machine by referring to provisions of Rule 18(2) of the Chewing Tobacco and Unmanufactured Tobacco Packing Machines Rules, 2010. The third machine was merely installed in the factory but was not in a working condition. This fact was recorded in the Panchnama dated 01.05.2010, thatthe machines were checked in the presence of two independent witnesses wherein it was found that one pouch packing machine was not in the working condition. This fact is mentioned at page no. 3 of the Panchnama dated 1.5.2010 which is reproduced at para no. 2 of the impugned show cause notice. Thus, since the machine was not operating, duty demand cannot be confirmed on the same.

- In continuation to above it is submitted that when the machine was not working, no manufacturing activity took place. When no manufacturing activity took place no excise duty can be imposed. The same decision has been given in the case of COLLECTOR OF CENTRAL EXCISE, JAIPUR-IIVersus JUPITER INDUSTRIES [2006 (206) E.L.T. 1195 (Raj.)] wherein it is said that manufacture of activity is a necessary condition for the levy of excise duty. The citations of the decision given by the High Court is given below-

Production capacity based duty - Stainless steel pattas - No duty is leviable for period when machine is not installed/operated - It is especially so as levy of excise duty cannot go beyond charging provision and manufacture of goods is a condition precedent –

In the light of above decision, Appellant are not supposed to pay the excise duty on one machine as it was not operating during the period in appeal.

- No production till 13.04.2010: The duty demand has been confirmed for the entire month of the April, 2010 and whereas there was no production till 13.04.2010. Appellant submit that there was no electricity available and they had arranged for generator on rent as from 14.4.2010 merely to run the trial production. If they had mala fide intention then Appellantwould not have applied for the electric connection. The generator was hired merely to carry out the trail production. No prudent man will hire the generator for carrying out entire production in the case where he has already applied for the electricity connection. The production had commenced only from 13.04.2010 onwards only as the raw material i.e. paraffin was received by appellant on 30/31 march and tobacco which also one of the essential raw material was received by the by 11^th April. Thus, without receipt of both the raw materials, the production of the finished product that is MARMIK Brand chewing tobacco could not have commenced. The bilty of transportation which carried tobacco is dated 9.4.2010. This bilty also showed that the goods were transported on 9.4.2010 and it has to reach the destination Dhola which could only be possible by 11^th. It is further submitted that there was no electricity connection till 14.04.2010, and therefore, before that period, there was no production. It is submitted that the invoice of the hiring of generator was also submitted which was from 14.04.2010. Therefore, before 14.04.2010 it cannot be held that there was production. Thus, it is submitted that from the above facts it is clear that there was no production from the third machine which was found to be inoperative and also that before 14.04.2010 there was no production as there was no electricity. Therefore, there is evidence to rebut the presumption under Rule 18 (2) that the third packing machine installed by the Appellantin their premises was operating packing machine.

- Non-awareness of New Scheme: Appellantsubmit that they were not aware of the new scheme of Compounded levy. Although Appellantwere manufacturing the same products at Vasi also, but there was ambiguity regarding the classification of this product. Previously, that product was classified under tariff heading24039990, but later on, same divisional office classified it under tariff heading 24039910. So, there was utter confusion under which tariff heading their product is classified and whether the compound levy scheme was applicable on it or not. It has been held in the case of Siddharth Tubes Ltd. Vs Commissioner of C. Ex., Indore [2008 (228) ELT 193 (Tri.-Del.)] that where there is any confusion amongst the department and assessee; the benefit of doubt should be extended to the assessees. Further, when the compounded levy scheme was being implemented, their unit at Dhola was under transitional phase. Due to this reason also, there was unawareness regarding the new law.

- No Corroborative Evidence:- Appellant submit that the finding of mala fide intention to move to a remote area for evading tax liability in the impugned order is not sustainable as the above finding is only as assumption and there is no corroborative evidence to prove that the intention of the appellant was to evade payment of duty when they have established the unit in a remote area. Such a finding given without any corroborative evidence is not sustainable and is liable to be set aside.

In COMMISSIONER OF CENTRAL EXCISE Versus BRIMS PRODUCTS [2011 (271) E.L.T. 184 (Pat.)] it was held that

“…since the charge was for clandestine manufacture and surreptitious removal of finished final product, the same is required to be proved beyond doubt by the Revenue. One has to keep in mind that, though being the main ingredient, betel-nut is not the only raw material which is used in manufacture of Pan Masala. That apart, since the investigation has been carried only at the transporters end, no presumption could be drawn with regard to manufacture and removal of the final product. Presumptions and assumptions cannot take place of positive legal evidence, which are required for proving the charge. Even if, it is assumed that some raw materials were received at the factory of the respondent during the said period, the same cannot become conclusive proof of production and clandestine sale to different parties. Due to lack of positive evidence, benefit of doubt will always go in favour of the assessee.”

Thus, the impugned finding is merely an allegatory one and is not sustainable in lack of corroborative evidence.

- Bonafides of the case: In continuation it is submitted that the nature of the machine installed by Appellant also points towards our bona fide intention. It is submitted that Appellant have installed machine in the premises which was manufacturing only 20 pouches per minute. It is submitted that anyone who is aware of the rules that duty payable per machine will be high, then he would not bring a slow machine. If a slow machine is installed, the no. of pouches manufactured by the machine will not be able to cover even the duty payable; then from where will they make the profit? Obviously, no prudent man will install a machine which puts him to loss rather than generating profit. The manufacturers operating under this scheme will install a high speed pouch packing machine so that no. of pouches manufactured comes high and so as the profits. But since Appellant were unaware of new scheme, they had not installed such machine and had continued with the slow-one. This makes it clear that there was no inkling that the compounded levy was being introduced and therefore, they were acting bonafidely.

- No intent to evade duty:Appellant submit that it is not proved that they have manufactured excisable goods with intent to evade payment of duty. Appellant submit that they are being held defaulter without sufficient proof to establish the charge of clandestine removal.

It is submitted that the learned adjudicating officer has denied his responsibility to prove the allegations by cogent evidence corroborating the charge of clandestine removal. Appellant have relied upon the judgment of the Hon’ble High Court that the department is required to discharge its burden of proof to establish the charge of clandestine removal.

In support of their contention Appellant have placed reliance on the judgment given in following cases:

·                      CCE Vs M/s Air Carrying Corporation India Pvt Ltd [2009-TIOL-466-HC-MUM-CX]

·                      CCE, Hyderabad Vs M/s Dhariwal Industries Ltd [2010-TIOL-1498-CESTAT-BANG]

- No Penalty on Director under Rule 26:- With regard to imposition of penalty under Rule 26 of the Central Excise Rules, 2002 on the director, it is submitted that the learned Adjudicating Authority has relied on the statement of Shri Naresh Dayal Barot, Director of the appellant-unit to hold that the director has masterminded the game plan to manufacture and remove excisable goods clandestinely with intent to evade payment of excise duty and therefore penalty under Rule 26 is applicable. In this regard, the appellant submit that only on the basis of statement of the Director, the charge of clandestine removal cannot be held to be proved. However, the statement cannot be said to be sufficient to prove clandestine removal, documentary evidence is also required. It is submitted that it was held in the case of Commissioner of Central Excise, Rajkot v/s M/s Jaidev Alloys Pvt Limited [2011-TIOL-1126-CESTAT-AHM].Reliance is also placed on the following cases:-

·                      COLLECTOR OF C. EX., NEW DELHI versus NEW TOBACCO COMPANY LTD. 2001 (134) E.L.T. 176 (Tri. - Kolkata)
·                      BIJENDRA KEDIA Versus COMMISSIONER OF CUSTOMS (P), CALCUTTA 2001 (133) E.L.T. 791 (Tri. - Kolkata)

In continuation, Appellant submit that the statement of the generator provider Shri Jugraj Bheraji Solanki who is the owner of the premises does not bring out the mala fide intention of Shri Naresh Dayal Barot nor does it establish that there was any clandestine removal. The said statement only shows that the place was taken on hire by the Director of the appellant unit on rent and the construction had taken place. Even otherwise also, no omission or commission has been proved on part of the director as such personal penalty is not justified.

- It is further submitted that the impugned order has already imposed the penalty on the company. If penalty is alleged to be imposed on the firm, it should not be imposed on the authorized signatory separately. This view has been taken by the hon’ble Tribunal in the case laws cited below:-

·                      Silkon Silk Mills (Exports) Ltd. v/s Commissioner of Customs-II, Bombay [1997 (89) ELT 151 (Tribunal)]

·                      Globe Rexine Pvt. Ltd. v/s CCE, Chennai [2006 (4) STR 340 (Tri.-Chennai)]

In the aforesaid cases, hon’ble Tribunals have set aside the penalty on the Director saying that penalty cannot be imposed on two persons separately for the same act as alleged in the show cause notice. Since, these cases are equally applicable in instant case, thus considering the ratio of above, the show cause notice should be withdrawn and no penalty should be imposed on the director.

- Financial Hardship:- It is further submitted that after this seizure, flood came and raw material including the packing material was destroyed. The machines installed therein were also demolished. The construction carried on by the Appellantwas also destroyed. Thus, huge loss was incurred due to flood. The impugned show cause notice issued in such a situation is harassing the Appellant. Appellantsubmit that they have given FDR of Rs. 10 lacs to the department. Besides this, duty of Rs.14 lacs has also been deposited. If the contention of the department is accepted then also the duty on two machines has commenced from the date of arrival of raw material. Then the duty comes to Rs. 16 lacs whereas duty deposited by us is Rs. 14 lacs alongwith a FDR of Rs. 10 lacs. Therefore, the interest of the Revenue is clearly protected and therefore, the pre-deposit should not be insisted upon. If the pre-deposit is waived and stay is granted there will be no threat to Revenue’s interest as the appeal is filed challenging the imposition of penalty on them. Therefore, the appeal should be admitted and the condition for pre-deposit should be waived.

- It is submitted that Appellant are not in a financially sound position to pre-deposit the penalty amount. Appellant’s unit is already in knock down condition and the provisional Balance Sheet and Profit and Loss Account of our firm shows heavy losses. We already have accumulated losses of Rs. 636001.97 and in the financial year 2011-12 also, we have incurred a loss of Rs. 834943/- as per provisional financial statements. A copy of the same was enclosed with the written submissions during personal hearing to substantiate their claim. Therefore, pre-deposit should be waived otherwise Appellant will not be able to exercise their substantial right to appeal as Appellant are aggrieved by the impugned order-in-original. Appellant have a strong case on merits. Therefore, the appeal should be admitted and unconditional stay should be granted to them.

In this regard, Appellant submit that the factors to be considered while granting stay were laid down in the following judgments: -

- Two significant expressions, used in Section 35-F of the Act, are “undue hardship to such person” and “safeguard the interests of revenue”. While dealing with an application filed under Section 35-F these twin considerations must be kept in view. The word “undue” adds something more to “hardship”. It means an excessive hardship or a hardship greater than the circumstances warrant. “Undue hardship” is normally related to economic hardship. “Undue” means something which is not merited by the conduct of the claimant, or is very much disproportionate to it. Undue hardship is caused when the hardship is not warranted by the circumstances. For a hardship to be “undue” it must be shown that the particular burden to observe, or perform the requirement, is out of proportion to the nature of the requirement itself, and the benefit which the Applicant would derive in complying with it. “Undue hardship” is a matter within the special knowledge of the Applicant for waiver, and has to be established by him. A mere assertion of undue hardship would not suffice. Imposition of conditions, to safeguard the interest of revenue, is an aspect which the Tribunal has to bring into focus. It is for the Tribunal to impose such conditions as are deemed proper to safeguard the interest of revenue. The Tribunal, while dealing with the application, has to consider the material placed by the Assessee relating to undue hardship, and should stipulate conditions required to safeguard the interest of revenue. (Benara Valves Ltd. (2006) 13 SCC 347; S. Vasudeva v. State of Karnataka AIR 1994 SC 923; Monotosh Saha v. Special Director, Enforcement Directorate (2008) 12 SCC 359).

- The following principles should be kept in mind while considering the applications for stay or for dispensing with the requirement of pre-deposit under Section 35F of the Act: -

(i) Three aspects to be focused while dealing with the applications for dispensing of Pre- deposit are (a) prima facie case, (b) balance of convenience and (c) irreparable loss (ii) Interim order ought not to be granted merely because a prima-facie case has been shown.
(iii) The balance of convenience should clearly in favour of making of an interim order and there should not be the slightest indication of a likelihood of prejudice to the interest of public revenue
(iv) While dealing with the application, the twin requirement of consideration i.e. consideration of undue hardship, and imposition of conditions to safeguards the interests of revenue must be kept in view.
(v) When the Tribunal decides to grant full or partial stay, it has to impose such condition as may be necessary to safeguard the interests of the revenue. This is an imperative requirement
(vi) An Appellate Authority, being a creature of the statute, cannot ignore the statutory guidance while exercising general power or expressly conferred incidental powers [Commissioner of Central Excise, Guntur VS Sri Chaitanya Educational Committee, 2011 (22) S.T.R. 135 (A.P.)].

- Even the hon’ble Supreme Court has held that the financial condition of the assessee and the merits of the case are the determinant factor while granting the waiver of pre deposit. This has been held in the following cases:-

·                      PAMWI TISSUES LTD. Versus COLLECTOR OF CENTRAL EXCISE [1995 (80) E.L.T. 12 (S.C.)]

Stay/Dispensation of pre-deposit - CEGAT ordering for pre-deposit of Rupees one crore within eight weeks - Interim stay granted by High Court but subsequently vacated with the observation that order passed by the CEGAT is not in any way harsh - On appeal to Supreme Court, Order of CEGAT set aside and Tribunal directed to decide the appeal on merits as the assessee is a sick unit and department has no objection to hearing of appeal without pre-deposit - Section 35F of the Central Excises and Salt Act, 1944 read with Rule 28 of the CEGAT (Procedure) Rules, 1982.

·                      MEHSANA DIST. CO-OP. MILK P.U. LTD. Versus UNION OF INDIA [2003 (154) E.L.T. 347 (S.C.)]

Stay/Dispensation of pre-deposit - Prima facie case - Tribunal directed the appellant to deposit Rs. 30 lakhs by way of pre-deposit without considering the prima facie merits at all and has concentrated upon the prima facie balance of convenience in the case - Appellate Authority should have addressed its mind to the prima facie merits of the appellant’s case and upon being satisfied of the same determined the quantum of deposit taking into consideration the financial hardship and other such relevant factors - Section 35F of Central Excise Act, 1944. [para 2]

It is submitted that revenue interest is safeguarded as the excise duty with interest is already paid. And insistence on pre-deposit will cause undue hardship to us.

- Non consideration of submissions of Appellant-assessee: It is submitted that various contentions raised by us have not been considered properly and no reasons have been given to reject the same. Therefore, it is clear that a non-speaking order has been passed. In this regard, we are relying on the judgment in CCE Vs M/s Cable Corporation Of India Ltd [2010-TIOL-607-HC-MUM-CX] -

CESTAT - Tribunal is expected to pass a reasoned order following principles of natural justice dealing with all contentions - matter remanded: while deciding the case, Court is under an obligation to record reasons, however, brief, the same may be as it is a requirement of principles of natural justice. Non observance of the said principle would vitiate the judicial order: BOMBAY HIGH COURT;

·                      State of Himachal Pradesh Vs Sardara Singh [2008-TIOL-160-SC-NDPS]:-

Even High Courts are required to pass speaking reasoned orders - The "inscrutable face of a sphinx" is ordinarily incongruous with a judicial or quasi-judicial performance. The manner in which appeal against acquittal has been dealt with by the High Court leaves much to be desired. Reasons introduce clarity in an order. On plainest consideration of justice, the High Court ought to have set forth its reasons, howsoever brief, in its order indicative of an application of its mind, all the more when its order is amenable to further avenue of challenge. The absence of reasons has rendered the High Court order not sustainable. The requirement of indicating reasons in such cases has been judicially recognized as imperative. Judicial discipline to abide by declaration of law by this Court, cannot be forsaken, under any pretext by any authority or Court, be it even the Highest Court in a State, oblivious to Article 141 of the Constitution of India. Reasons are live links between the mind of the decision taker to the controversy in question and the decision or conclusion arrived at. Reasons substitute subjectivity by objectivity. The emphasis on recording reasons is that if the decision reveals the "inscrutable face of the sphinx", it can, by its silence, render it virtually impossible for the Courts to perform their appellate function or exercise the power of judicial review in adjudging the validity of the decision. Right to reason is an indispensable part of a sound judicial system, reasons at least sufficient to indicate an application of mind to the matter before Court. Another rationale is that the affected party can know why the decision has gone against him. One of the salutary requirements of natural justice is spelling out reasons for the order made, in other words, a speaking out. The "inscrutable face of a sphinx" is ordinarily incongruous with a judicial or quasi-judicial performance: SUPREME COURT;

·                      Commissioner of Central Excise, Bangalore versus Srikumar Agencies [2008 (232) E.L.T. 577 (S.C.)]:-

“Appellate Tribunal’s order - Non-speaking order -Facts not analysed in detail in impugned order by Tribunal - Disposal of appeals by mere reference to decisions not proper way to deal with appeals - Applicability of decision cited by Revenue not considered - Appeals involving different goods - CESTAT ought to have examined cases individually and articles involved - Manner of disposal not proper - Impugned order set aside - Question referred to Larger Bench of Supreme Court not answered as matter remitted to CESTAT for fresh decision by appropriate Bench - Section 35C of Central Excise Act, 1944. - By clubbing all the cases together and without analyzing the special features of each case disposing of the appeals in the manner done was not proper. [para 6]”

It is submitted that Appellant have clearly contended in their submissions in the memorandum of appeal that many of their submissions as well as the case laws cited by them were not considered by the learned Adjudicating Authority. Therefore, the matter is required to be looked again so that all contentions are dealt with judiciously. Therefore, the non reasoned order is not sustainable and hence liable to be quashed.

Reasoning of the Commissioner (Appeal):-

- After noting the facts as well as the arguments of the appellant, the Commissioner (Appeal) observed that the Adjudicating Authority had confirmed the demand of Central Excise duty of three pouch packing machines whereas it was on record that only two machines were in working condition.

- The Commissioner (Appeals) further found that Central Excise duty amounting to Rs. 14.00 lacs has been deposited by the appellant.

- The Commissioner (Appeals) found force in the arguments of the appellant that no duty is leviable for period when machine was not installed/operated.

- Therefore, the Commissioner (Appeals) ordered stay of recovery of remaining part of the Central Excise duty alongwith interest and penalty imposed on company as well as Director till disposal of the appeal.

Decision of the Commissioner (Appeal):-

Stay application allowed.

Conclusion:-

The First Appellate Authority rightly held that no undue hardship will be caused to Revenue when substantial amount of duty is already deposited with Government Exchequer. This decision was reached after taking into consideration the merits of the case, undue hardship being caused to the assessee as well the safeguarding Revenue interest.

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PJ/CASE STUDY/2012-13/09
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