The Issue involved in this case is that whether the amount of Freight paid by the Supplier in order to supply the goods at the recipient’s place will be liable to duty of excise.

CASE STUDY

Prepared By: Adit Gupta

M/S Sharda Ceramics Order In Appeal No. 1173(CRM)CE/JDR/2018 dated 25.10.2018

Introduction: :-
M/s Sharda Ceramics Pvt. Ltd. (hereinafter referred as appellant) isholder of Excise registration no. AACCS9517PXM002and is engaged in manufacture of Porcelain Insulator falling under Chapter heading no. 8546 & 8547 of the First Schedule to the Central Excise Tariff Act, 1985.
Show cause notice no. 1140/IAR/JDR/Gr-M-1/2016-17/259 DATED 9.2.2017 alleging that they have not paid the Central Excise duty amounting to Rs. 8,68,270/- during the period from March, 2015 to September, 2016 by not assessing the correct assessable value in contravention to provisions of rule 5 of Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 read with section 4 of Central Excise Act, 1944 and rule 4,6 & 8 of Central Excise Rules, 2002. It was asked to show cause as to why this excise duty, interest and penalty should not be recovered from the appellant. Personal hearing could not be attended by the appellant and the case was decided by passing the impugned order in original no. 06/CE-Dem/2017-Asst. Commr. dated 15.11.17 wherein the demand of duty, interest and penalty was confirmed.
Aggrieved by the impugned order in original (hereinafter referred as order), the appellant prefer to file this appeal to the Commissioner Appeals. However, it was finally concluded that the assessee had correctly measured the assessable value.

Relevant Legal Provisions:

Section 35 of the Central Excise Act, 1944.
Chapter heading 8546 of the First Schedule to the Central Excise Act, 1985.
Rule 5 of Central Excise Valuation Rules, 2000
Section 4 of Central Excise Act, 1944.
Section 11A(1) of Central Excise Act, 1944.
Interest Section 11AA
Penalty under Section 11AC(1)(a) of Central Excise Act, 1944.

Issue Involved: The Issue involved in this case is that whether the amount of Freight paid by the Supplier in order to supply the goods at the recipient’s place will be liable to duty of excise.

Brief Facts:M/s Sharda Ceramics Pvt. Ltd. (hereinafter referred as appellant) isholder of Excise registration no. AACCS9517PXM002and is engaged in manufacture of Porcelain Insulator falling under Chapter heading no. 8546 & 8547 of the First Schedule to the Central Excise Tariff Act, 1985.
Show cause notice no. 1140/IAR/JDR/Gr-M-1/2016-17/259 DATED 9.2.2017 alleging that they have not paid the Central Excise duty amounting to Rs. 8,68,270/- during the period from March, 2015 to September, 2016 by not assessing the correct assessable value in contravention to provisions of rule 5 of Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 read with section 4 of Central Excise Act, 1944 and rule 4,6 & 8 of Central Excise Rules, 2002. It was asked to show cause as to why this excise duty, interest and penalty should not be recovered from the appellant. Personal hearing could not be attended by the appellant and the case was decided by passing the impugned order in original no. 06/CE-Dem/2017-Asst. Commr. dated 15.11.17 wherein the demand of duty, interest and penalty was confirmed.
Aggrieved by the impugned order in original (hereinafter referred as order), the appellant prefer to file this appeal to the Commissioner Appeals.

Assessee’s Contention:

The appellant submit that the Order-In-Original passed by the learned Assistant Commissioner is wholly and totally erroneous and is liable to be set aside.

The appellant submit that the impugned order is alleging that the freight and insurance are includible in the assessable value as in the given case the property in goods was passed onto buyer at his place; rather than factory gate of appellant. To support this allegation, section 4 of Central Excise Act, 1944 has been discussed and it has been contended that the place of removal is determinative factor for the purpose of valuation. In this regard, reliance is placed on the definition of ‘place of removal’ as stated in clause II(c) of Explanation VI to section 4 of the Central Excise Act, 1944 which reads as follows:-

‘place of removal’ means-

A factory or any other place or premises of production or manufacture of the excisable goods;
A warehouse or any other place or premises wherein the excisable goods have been permitted to be deposited without payment of duty;
A depot, premises of a consignment agent or any other place or premises from where the excisable goods are to be sold after their clearance from the factory;"

If the above definition is analyzed, it is found that only factory, warehouse, depot, premises of consignment agent or any other place or premises from where excisable goods are to be sold after their clearance from the factory are to be treated as place of removal. This means that only premises of manufacturer can be considered as place of removal because the factory, warehouse, depot etc are nothing but extension of the premises of manufacturer. However, the phrase ‘any other place or premises from where the excisable goods are to be sold’ cannot be interpreted to be premises of buyer by any stretch of imagination. This is supported by the well known judicial principle of ‘Ejusdem generis’ or “Noscitur A Sociis”. In layman language, the principle of “Noscitur A Sociis” means that a word or phrase used in a sentence is to be comprehended and understood from the accompanied words and the accompanied words indicate the colour of the word or the phrase used in that sentence. Similarly, “Ejusdem generis” is a latin word for “of the same kind” and is legal principle to interpret loosely written statues. In other words, where a law lists specific classes of persons or things and then refers to them in general, the general statements only apply to the same kind of persons or things specifically listed. Example: if a law refers to automobiles, trucks, tractors, motorcycles and other motor-powered vehicles, "vehicles" would not include airplanes, since the list was of land-based transportation. On understanding the above mentioned legal principles used for interpretation of statutory provisions, it is clear that the words used in a sentence are to take colour from their adjoining or accompanying words and if they are interpreted literally, it would be against the legislative intention. In the present case, the phrase, or any other place or premises, is preceded by the words, depot, premises of consignment agent which are extension of the premises of manufacturer thereby meaning that the phrase ‘any other place or premises’ refers to premises of manufacturer and cannot by any stretch of imagination be extended to buyer’s premises. Therefore, the legal principle of “Noscitur A Sociis” is clearly and rightly applicable in the present case and the same should be applied while interpreting the above statutory definition of place of removal given under section 4 of the Central Excise Act, 1944. Therefore, the impugned show cause notice considering the buyer’s premises as the place of removal in order to include freight charges incurred from factory to the buyer’s premises in the assessable value of goods for the purpose of levy of central excise duty is not at all tenable and deserves to be quashed.

Aligning with the above, reliance is also placed on the decision given by the Larger Bench of the Delhi CESTAT in the case of M/s BHAYANA BUILDERS (P) LTD. [2013-TIOL-1331-CESTAT-DEL-LB] wherein it has been held by applying the above legal principle that the value of the goods and materials supplied free of cost by a service recipient to the provider of taxable construction service would be outside the taxable value or the gross amount charged. The relevant extracts from the decision are produced for the sake of convenient reference as follows:-

Interpretation of Explanation inserted in Notification No 15/2004 ST vide Notification No 4/2005 ST – Interpretation of the word “used” – Noscitur principle - The noscitur principle posits that a statutory term is recognised by its associated words i.e. in an associational context, whereby the word or phrase is not construed as if stood alone but in the light of its surroundings - The word used is structurally associated in the Explanation with the earlier two words (supplied or provided) and the three words are employed to define the meaning of the expression gross amount charged, an expression that occurs in the preamble to Notification No. 15/2004-ST - The noscitur principle could be gainfully employed to identify the legal meaning of the word used from several grammatical/ literal meanings of the said word, by employing the associational context.

In this case, the issue was whether value of materials supplied free of cost by the service recipient to the service provider were includible in the gross value of the taxable service and as the assessee had not included the value of the materials supplied free of cost by the service recipient, the abatement benefit claimed under notification no. 15/2004 was deniable. In this case, the question was of analysing the explanation inserted which read as follows:-

"Explanation. - For the purposes of this notification, the "gross amount charged" shall include the value of goods and materials supplied or provided or used by the provider of the construction service for providing such service.".

The issue in the case was interpretation of the word “used” and the revenue was literally interpreting the word so as to include the value of all the materials used in the provision of the construction service irrespective of the fact that the materials belong to or are procured by the service provider at his own cost or are issued by the service recipient free of cost.It was concluded by the larger bench that goods and materials, supplied/ provided/ used by the service provider for incorporation in the construction, which belong to the provider and for which the service recipient is charged towards the value of such supply/ provision / use and the corresponding value whereof was received by the service provider, to accrue to his benefit, would alone constitute the gross amount charged.

Similarly, in the present case, the phrase ‘any other place or premises’ is to be read according to its surrounding words which indicate that the other premises refer to premises of manufacturer and cannot be considered as the premises of buyer. The interpretation by application of the principle of “Noscitur A Sociis” , also confirmed vide the above cited decision of the larger bench is to be adopted in the present case and the impugned order deriving an interpretation that is totally erroneous is liable to be set aside.

In continuation to the above, the appellant also submit that if the interpretation of the impugned order is accepted for the sake of argument, then too, it leads to absurd results. This is for the reason that the phrase reads as ‘any other place or premises from where the excisable goods are to be sold after their clearance from the factory’ which means that place of removal is any place or premises from where excisable goods ARE TO BE SOLD. The place or premises from where excisable goods ARE TO BE SOLD can only be the manufacturer’s premises or premises referable to the manufacturer. If the contention of the revenue is accepted for the sake of argument also, then these words will have to be substituted by the words “have been sold” which would then possibly have reference to the buyer’s premises. Therefore, by accepting the interpretation taken by the impugned order; one will end up re-writing the said provision, which is not permissible in law. Therefore, the impugned order is not tenable and is liable to be quashed.

Parallel to above, it is submitted that rewriting the statute is not permissible and an interpretation leading to rewriting the statute has been held unsustainable by various courts of law including the Supreme Court. In this regard, reliance is placed on the following decisions:-
TATA CONSULTANCY SERVICES Versus STATE OF ANDHRA PRADESH [2004 (178) E.L.T. 22 (S.C.)]

Interpretation of statutes - Role of the Court - Rewriting of statute is the function of legislature and Court cannot do so while interpreting statutes. [para 76]

COMMISSIONER OF C. EX. & CUSTOMS Versus PORT OFFICER [2010 (257) E.L.T. 37 (Guj.)]

Penalty - Quantum of - Penalty under Section 76 of Finance Act, 1994 whether reducible below limit prescribed - Discretion provided by prescribing minimum and maximum penalty - Discretion vested in authority to impose prescribed minimum penalty extendable upto prescribed maximum - No further discretion provided under Section 76 ibid to levy penalty below stipulated limit and reading such further discretion amounts to rewriting provisions and the same not permissible - Section 76 ibid not gives any discretion to reduce penalty below minimum prescribed - Section 76 ibid. [paras 1, 10]

COMMISSIONER OF C. EX., SURAT-I Versus NEMINATH FABRICS PVT. LTD. [2010 (256) E.L.T. 369 (Guj.)]

Demand - Limitation - Shortage and clandestine removal admitted by Director - Same stands proved by statements of merchant manufacturers from whom raw materials received and to whom resultant product cleared - Suppression of facts stands admitted and established by evidence on record - Tribunal allowed assessee’s appeal holding limitation of six months from date of knowledge applicable - HELD : Termini from which period of “one year” or “five years” is computed is relevant date as defined in sub-section (3)(ii) of Section 11A of Central Excise Act, 1944 - Concept of knowledge of departmental authority entirely absent - Importing of said concept in Section 11A(i) ibid or the proviso ibid would tantamount to rewriting statutory provision and rendering defined term “relevant date” nugatory - Reasoning, that once knowledge acquired by Department there is no suppression, fallacious as once suppression admitted, merely because Department acquires knowledge of irregularities, suppression not obliterated - Impugned Tribunal order introducing novel concept of date of knowledge contrary to provisions of Section 11A ibid, hence quashed and set aside.
In view of above decisions, the impugned order is not tenable as it has made an attempt to rewrite the statute which is not permissible. Therefore, the impugned order should be set aside and the appeal should be allowed.

The impugned order has placed reliance on the decision of Supreme Court given in the case of Roofit Industries Ltd. wherein it was held that where goods have been delivered at the place of buyer, the freight charges are required to be included in the assessable value of goods for the purpose of levy of central excise duty. The impugned order has erroneously placed reliance on this decision as it has been given under different facts and circumstances and has also been distinguished by hon'ble Supreme Court in a subsequent decision given in the case of COMMISSIONER OF CUS. & C. EX., NAGPUR VERSUS ISPAT INDUSTRIES LTD. [2015 (324) E.L.T. 670 (S.C.)]. The synopsis of the decision is produced for the sake of convenient reference as follows:-

Valuation (Central Excise) - Freight charges - “Ex-works” prices - Goods cleared from factory on payment of Sales tax, indicating that they were sold at factory gate - Sales were against Letters of Credit and bank discounting facilities, sometimes in advance - Invoices were prepared only at factory directly in name of customer in which name of Insurance Company as well as number of transit Insurance Policy were mentioned - Excise invoices were prepared at time of goods leaving factory in name and address of customers - When goods were handed over to transporter, assessee had neither right to disposal of goods nor did it reserve such rights inasmuch as title had already passed to its customer - HELD : Insurance of goods during transit cannot possibly be sole consideration to decide ownership or point of sale of goods - Hence, on facts, cost of insurance policy to cover risk to loss or damage of goods while in transit, was not includible in assessable value - Section 4 of Central Excise Act, 1944. [paras 24, 27, 33]
Valuation (Central Excise) - Freight charges - For period from 28-9-1996 up to 1-7-2000, could not be included in assessable value on ground that sale took place at buyer’s premises- For period 1-7-2000 to 31-3-2003, there was no extended place of removal, factory premises or warehouse, alone being places of removal - For these periods, under no circumstances buyer’s premises could be place of removal for purpose of Section 4 of Central Excise Act, 1944 - Hence, on facts, cost of insurance Policy to cover risk to loss or damage of goods while in transit, was not includible in assessable value. [para 24]
Valuation (Central Excise) - Place of removal - After insertion of Section 4(4)(b)(iii) of Central Excise Act, 1944 w.e.f. 28-9-1996 - Upto 1-7-2000 when it was further amended - It has reference only to places from which manufacturer is to sell goods manufactured by him - Depot, or premises of consignment agent of manufacturer are obviously places which are referable only to manufacturer - Even expression “any other place or premises” refers only to manufacturer’s place or premises because such place or premises is stated to be where excisable goods “are to be sold” - It does not refer to place of delivery which could be buyer’s premises or such other premises as buyer may direct manufacturer to send his goods - That would mean substitution of these words by words “have been sold”. [paras 16, 17, 24]
Valuation (Central Excise) - Place of removal - After substitution of Section 4 of Central Excise Act, 1944 w.e.f. 1-7-2000 - Section 4(3)(c) ibid defined place of removal as was substituted by 1973 Amendment, before its further amendment in 1996 - It eliminated Section 4(2) and clause (b)(iii) introduced by 1996 amendment - Hence, for period after 1-7-2000 to 14-5-2003 depot, premises of consignment agent or any other place from which excisable goods are to be sold after their clearance from factory are no longer places of removal - Also, definition of “transaction value” makes it clear that freight or transportation expenses are not included in calculating Excise duty payable. [para 17]
Valuation (Central Excise) - Place of removal - Amendment of Section 4 of Central Excise Act, 1944 w.e.f. 14-5-2003 - It re-included sub-clause (iii) of old Section 4(3)(b) (pre-2000) as Section 4(3)(c)(iii) ibid - Hence, after 14-5-2003, position as it obtained from 28-9-1996 to 1-7-2000 has now been reinstated- Rule 5 of Central Excise Rules, 2002 was substituted, with effect from 1-3-2003, also confirms position that cost of transportation from place of removal to place of delivery is to be excluded, save and except in case where factory is not place of removal. [paras 22, 23]
In light of the above cited decision, they submit that even the Supreme Court has confirmed that the buyer’s premises cannot be considered as place of removal and the phrase ‘any other place or premises’ can only refer to the premises of manufacturer.

In continuation to above it is submitted that the relied upon decision pertains to period 28.09.1996 to 31.03.2003 wherein there were different provisions prevalent. Consequently, the decision is also given for two periods separately. The first period of the relied upon decision is from 28.09.1996 to 30.06.2000 and the remaining period is from 01.07.2000 to 31.03.2003. We submit that the conclusion arrived at by the Supreme Court for both the periods is summarized as follows:-

28.09.1996 to 30.06.2000:-
During this period, one more category in place of removal was added in section 4(4)(b)(iii) which read as follows:-
“(4)(b)(iii) a depot, premises of a consignment agent or any other place or premises from where the excisable goods are to be sold after their clearance from the factory
The hon’ble Supreme Court held that the phrase any other place or premises from where excisable goods are to be sold refers to premises of manufacturer and cannot mean premises of buyer. It was held that the place of removal cannot be extended upto buyer’s premises.
01.07.2000 to 31.03.2003:-
During this period, the above category added in the place of removal was deleted and the meaning of place of removal was given as follows:-
“place of removal” means -
(i) a factory or any other place or premises of production or manufacture of the excisable goods;
(ii) a warehouse or any other place or premises wherein the excisable goods have been permitted to be deposited without payment of duty,
from where such goods are removed;
The hon’ble Supreme Court had concluded that since the clause (iii) pertaining to depot, premises of a consignment agent or any other place or premises from where the excisable goods are to be sold after their clearance from the factory was deleted, the place of removal was only factory or warehouse and no other place. Hence, for the period from 01.07.2000 to 31.03.2003, there was no question of treating the buyer’s premises as the place of removal.
It is pertinent to note that the Hon’ble Supreme Court also held that the position of law for the period 28.09.1996 to 30.06.2000 has been re-introduced vide Amendment Act applicable with effect from 14.05.2003 wherein a depot, premises of a consignment agent or any other place or premises from where the excisable goods are to be sold after their clearance from the factory has been again included in the definition of place of removal. Therefore, the conclusion pertaining to period 28.09.1996 to 30.06.2000 is applicable for the period after 14.05.2003 also. Moreover, it is worth mentioning that at present, the definition of place of removal is exactly same. Hence, the decision of the Apex Court rendered in the context of provisions from 28.09.1996 to 30.06.2000 is aptly applicable in the present case. Therefore, the impugned order is not at all tenable and is liable to be set aside.

The appellant further submits that the impugned order has been issued by invoking the extended period of limitation by alleging that they have suppressed the facts of non-inclusion of freight charges collected separately in their invoices. In this regard, it is submitted that the term suppression means something that was supposed to be disclosed but not disclosed. In the given case, the freight charges were clearly indicated on the face of invoice. Further, there is no requirement under any section or rule for disclosing this information either in the return or through some other means. In other words, there is no provision in the Central Excise law which states that each and every act and procedure followed by the assessee should be intimated to department and that too suo motu. It has been held by hon’ble Gujarat High Court in the case of APEX ELECTRICALS PVT. LTD. VERSUS UNION OF INDIA [1992 (61) E.L.T. 413 (Guj.)] that non-furnishing of the information not required under law does not amount to suppression. The verdicts of hon’ble High Court are given as follows:-

“Demand - Limitation - Suppression - Information not required to be supplied under law if not supplied does not amount to suppression - Proviso to Section 11A(1) of Central Excises and Salt Act, 1944.”
Similar decision was given in the following cases:-

GUFIC PHARMA VS. CCE - 1996 (85) ELT 67 (T) [AFFIRMED BY SUPREME COURT AT 1997 (93) ELT A186]
PROLITE ENGINEERING CO. VS UNION OF INDIA [1995 (75) ELT 257 (GUJ.)]
UNIQUE RESIN INDUSTRIES VS. CCE - 1995 (75) ELT 861 (T)

In all the above cases, it was held that the information not required to be submitted under law, if not submitted, will not amount to suppression of facts. Thus the impugned order invoking the extended period of limitation on the grounds of non-furnishing of information (that was not required to be submitted under law), is not sustainable and is liable to be set aside.

It is further submitted that the extended period of limitation is invokable only if there is suppression of facts. However, the submissions made in the forgoing paras make it ample clear that there was no misstatement or willful suppression of facts on their part, thus, the impugned order is barred by the clause of limitation. It was held in the case of Rainbow Industries v/s. CCE [1994 (74) ELT 3 (SC)] that for invoking the extended period, two ingredients are essential – (i) Willful suppression, mis-declaration, etc. and (ii) Intention to evade payment of duty. In absence of both of these extended period cannot be invoked. This has also been held in the case of Chemphar Drug & Limits reported in (2002-TIOL-266-SC-CX) wherein hon’ble Supreme Court held as under:-

“Demand – Central Excise – Limitation –Invoking extended period of five years – something positive other than mere inaction or failure on part of the manufacturer or producer or conscious or deliberate withholding of information when the manufacturer knew otherwise, is required before it is saddled with any liability, before the period of six months.”

Thus, in the light of above decision, extended period cannot be invoked blindly in every case. Where the assessees have been acting in the boundaries of law, the extended period cannot be invoked. Similar decision is given in the following cases:-

Pushpam Pharmaceuticals Company Vs. CCE, Mumbai reported in ( 2002-TIOL-235-SC- CX )

“Central Excise – Demand – Suppression of facts – Words and phrases – Where facts are known to both the parties the omission by one to do what he might have done and not he must have done, does not render it suppression – Suppression of facts must be deliberate to escape from payment of duty.”

NESTLE INDIA LTD. Versus COMMISSIONER OF CENTRAL EXCISE, CHANDIGARH [2009 (235) E.L.T. 577 (S.C.)]

Demand - Limitation - Intermixture of vitamins cleared by assessee for more than 20 years prior to issue of show cause notice - Assessee offered to demonstrate but Department not availed opportunity to find out whether manufacture was involved - Extended period invocable only when there is positive act other than mere inaction or failure on the part of manufacturer and there must be conscious or deliberate witholding of information by manufacturer as held in 1989 (43)E.L.T.195 (S.C.) and 1989 (40)E.L.T.276 (S.C.) - Tribunal order on non-sustainability of invocation of extended period, upheld - Proviso to Section 11A of Central Excise Act, 1944. [para 17]

COMMISSIONER OF C. EX., BANGALORE Versus KARNATAKA AGRO CHEMICALS [2008 (227) E.L.T. 12 (S.C.)]

Demand - Limitation - Controversy regarding classification of micronutrient fertilizers not settled though these circulars were issued by Department - Conflict of views between Ministry of Finance and Ministry of Agriculture - Extended period of limitation not invocable - Section 11A of Central Excise Act, 1944. [para 27]
Castings — Machine parts — Milling, drilling and boring carried out on rough castings — Exemption under Notification No. 223/88-C.E., dated 23-6-1988 not available (2) Demand — Limitation — Department when aware of assessee’s activities at all times — Extended period of limitation not Appeal — Additional evidence — Documents not placed before invokable (3) adjudicating authority nor necessary for passing order in the case, not admissible

Collector v. Super Electricals – 1997 (95) E.L.T. A155 (S.C)

Demand — Limitation — Extended period of five years not applicable in the absence of suppression or mis-statement of facts or fraud (2)Penalty — Retrospective amendment to Rule 9(2) not invokable for past period

ILAVIA ENTERPRISES Versus COLLECTOR OF C. EX., JAIPUR [1997 (91) E.L.T. 26 (S.C.)]

Demand - Limitation - Manufacture of goods commenced on 1st August, 1991 but requisite declaration filed in April, 1992 - Show Cause Notice issued on 10-5-1993 for the period 1-8-1991 to 30-12-1992 - HELD : No suppression of facts on the part of the assessee, nor they have acted with any mala fide intention - Demand to be restricted to six months period preceding to the date of Show Cause Notice - Extended period of limitation not invokable - `Shikakai’ bath powder whether an Ayurvedic medicine or cosmetic - Section 11A of the Central Excise Act, 1944.

COLLECTOR OF CENTRAL EXCISE Versus H.M.M. LIMITED [1995 (76) E.L.T. 497 (S.C.)]

Demand - Limitation for extended period not invokable unless show cause notice puts assessee to notice specifically as to which of the various commissions or omissions stated in the proviso to Section 11A(1) of Central Excises & Salt Act, 1944 had been committed. [para 2]
Demand - Limitation for extended period - Non-declaration of waste/ by-product in classification list - Inference of intention to evade payment of duty not drawable automatically - Show cause notice must contain an averment to that effect pointing out specifically as to which of the various commissions or omissions stated in the proviso to Section 11A(1) of Central Excises & Salt Act, 1944 had been committed by assessee and adjudicating authority must specifically deal with assessee’s contention in rebuttal thereof. [para 2]
Penalty not imposable unless Department is able to sustain its demand show cause notice which was under challenge on the ground of limitation - Rules 9(2) and 173Q of Central Excise Rules, 1944.

COSMIC DYE CHEMICAL Versus COLLECTOR OF CENTRAL EXCISE, BOMBAY [1995 (75) E.L.T. 721 (S.C.)]

Demand - Limitation - Intent to evade duty must be proved for invoking proviso to Section 11A(1) of Central Excises & Salt Act, 1944 for extended period of limitation - Intent to evade duty built into the expressions “fraud” and “collusion” but “mis-statement” and “suppression” being qualifiedby immediately preceding words “wilful” and “contravention of any of the provisions of this Act or rules” being qualified by the immediately following words “with intent to evade payment of duty”,.
- It is, therefore, not correct to say that there can be a suppression or mis-statement of fact, which is not wilful and yet constitutes a permissible ground for the purpose of the proviso to Section 11A. Mis-statement or suppression of fact must be wilful. [para 6]
Demand - Limitation - SSI manufacturer not including value of clearances of fully exempted goods in his declaration for previous financial year due to bona fide impression gained from two High Court judgments which held that fully exempted goods were not includible in the definition of “excisable goods” as defined in clause (d) of Section 2 of Central Excises & Salt Act, 1944 - Mis-statement or suppression of fact in the SSI declaration cannot be called wilful - Extended period of limitation not invokable - Proviso to Section 11A(1) ibid. [para 8]
Words and phrases - “Wilful” means intent to evade duty - Proviso to Section 11A(1) of Central Excises & Salt Act, 1944. [para 6]
Words and phrases - “Fraud” and “collusion” - Intent to evade duty is built into these very words - Proviso to Section 11A(1) of Central Excises &Salt Act, 1944. [para 6]

COMMISSIONER OF C. EX., MUMBAI Versus S. NARENDER KUMAR & CO. [2011 (267) E.L.T. 577 (S.C.)]

Demand - Limitation - Extended period, invocation of - Assessee regularly filing classification list with Department and same approved over the years - SCN issued invoking extended period after issuance of Circular subsequently regarding classification of Jaljira masala - Case identical to Apex Court decision in 2005 (188)E.L.T.149 (S.C.) and 2005 (180)E.L.T.300 (S.C.) where also classifications approved by Department from time to time and where it was also held that Department could have called upon assessee to produce catalogues in case of some confusion/doubt - No infirmity in Tribunal’s order holding absence of wilful suppression - Extended period not invocable - Proviso to Section 11A(1) of Central Excise Act, 1944. [paras 6, 8]

Padmini Products v/s Collector of Central Excise– reported in 1989 (43) ELT 195 (SC)

“Demand- Limitation- Extended period of 5 years inapplicable for mare failure or negligence of the manufacturer to take out license pr pa duty when there was scope for doubt that goods were not dutiable – Dutiability of goods in doubt because to Trade notice Scope of fraud, collusion, willful mis-statement or suppression of facts or contravention of rule with intent evade duty- Rule 9(2) of the Central Excise Rules, 1994 and Section 11 S of Central Excise and Salt Act, 1994.when in view of the trade notice there is scope for believing that the goods were entitled to exemption and consequently no licence is required to be taken out, then the extended period of limitation for demand under Section 11 A is inapplicable. Mere failure or negligence on the part of the manufacturer either not to take out a licence or not pay duty in case where there was scope for doubt, does not attract the extended limitation. Unless there is evidence that the manufacturer knew that goods were liable to duty or he was required to take out of licence. For invoking extended period of five limitation duty should not had been said, short levied or short paid erroneously refunded because of either any fraud, collusion or willful mis-statement or suppression of facts of facts or contravention of any provision of the Act or Rules made there under. These ingredients postulate a positive act, therefore, failure to pay duty or take out a licence is not necessary due to fraud or collusion or willful mis-statement or suppression of facts contravention of any provisions of the Act. Likewise suppression of facts is not failure to disclose to the legal consequences of a certain provision.”

Tamil Nadu Housing Board v/s Collector of Central Excise, Madras[1994 (74) ELT 9 (SC)]

Demand – Limitation for extended period invokable only if existence of both situations (1) suppression, fraud, collusion etc. and (2) intent to evade payment of duty proved- initial burden on Department- once department discharges such burden, it shifts and then applicability of provision to Section 11A(1) of Central Excise and Salt Act, 1944 is to be construed liberally.
In the above cases, it was held that mere inaction would not be a valid ground for invoking the extended period of limitation. There should be deliberate withholding of information with an intent to evade payment of duty without which extended period is not invokable.

The appellant submit that the impugned order has imposed the penalty under section 11AC(1)(c) of the Central Excise Act, 1944. In this regard, it is submitted that the impugned order has not been able to prove the suppression of facts in the instant case which is the essential for imposing the penalty under section 11AC. It has been held in the case of Hindustan Steel v. State of Orissa [1978 2 ELT J 159 (Supreme Court)] that an order imposing penalty for failure to meet statutory obligation is a result of proceedings which are quasi judicial in nature and penalty should not ordinarily be imposed unless the person acted deliberately in defiance of law or was guilty of misconduct or dishonest or acted in conscious disregard of his obligation. Thus, mens rea is an essence of invoking the penal provisions. Reliance is also placed on the following judgments:-
Commissioner of Sales Tax, UP Vs. Sanjiv Fabrics[ 2010 (258) E.L.T. 465 (S.C.)]

Penalty - Mensrea whether an essential ingredient for imposing penalty under Section 10(b) read with Section 10A of U.P. Trade Tax Act, 1948 - Object of statute, language of relevant section and nature of penalty are relevant factors to be considered - Prevention of misuse of registration certificate is object of Section 10(b) of U.P. Trade Tax Act, 1948 but words “falsely represents” used as against “wrongly represents” - Use of words “falsely represents” indicating that offence under Section 10(b) ibid comes into existence only when dealer acts deliberately in defiance of law or is guilty of contumacious or dishonest conduct - Burden on Revenue to prove existence of circumstances leading to offence for imposing penalty under Section 10A ibid - Prosecution provided for breach of any provision as per heading in Section 10A ibid - Mensrea is an essential ingredient for penalty under Section 10(b) read with Section 10A ibid in view of language used in section and nature of penalty provided - Sections 10(b) and 10A ibid. [paras 8, 17, 18, 22]
Penalty - Imposition of - Factors to be considered while imposing penalty - Object of statute, language of relevant section and nature of penalty are relevant factors to be considered for imposition of penalty. [para 17].

Commissioner of Central Excise, Chandigarh Vs. Pepsi Foods Ltd. [2010 (260) E.L.T. 481 (S.C.)]:-

Penalty - Mandatory equal penalty - Valuation (Central Excise) - Non- inclusion of freight from factory gate to depots of related person - Assessee’s submission that no mala fide intention to evade and goods cleared on payment of duty, not found incorrect in O-I-O - Statute when creates an offence and ingredient of offence is a deliberate attempt to evade duty either by fraud or misrepresentation, statute requires mensrea as a necessary constituent of such offence - Imposition of penalty under Section 11AC of Central Excise Act, 1944 wholly impermissible when no fraud, suppression or mis-statement alleged in SCN - Part of O-I-O imposing penalty without finding of fraud or mis-statement quashed. - In order to attract the penalty provision under Section 11AC, criminal intent or ‘mensrea’ is a necessary constituent.[paras 19, 20, 24]
Penalty - Mensrea - Section 11AC of Central Excise Act, 1944 - In order to attract penalty provision under Section 11AC ibid, criminal intent or mensrea is a necessary constituent. [para 19].

Commissioner of Central Excise Vs. Dashion Ltd. [2016 (41) S.T.R. 884 (Guj.)]

Penalty - Cenvat credit - Mensrea - Utilisation at main office, without distribution to various units, and omission to registration as Input Service Distributor - No evidence to support allegation of willful misstatement, suppression, fraud or collusion - Mere charge of wrongful availment of credit in show cause without showing mensrea for evading duty, not sufficient to impose penalty - Penalty imposed mechanically by adjudicating authority, not sustainable - Section 11AC of Central Excise Act, 1944. [para 8].

Commissioner of Cus., CE & Service Tax Vs. NRB Bearing Ltd. [2016 (332) E.L.T. 707 (Bom.)]

Penalty - Cenvat credit - Intentional vis-a-vis wrong availment - Mensrea, absence of - Ineligible credit reversed by assessee within 3-4 months of availing and interest also paid subsequently - Commissioner (Appeals) by a threadbare order setting aside adjudication order in absence of mensrea on part of assessee in intentionally availing said credit - Tribunal upholding said appellate order on reasoning that ‘wrong’ and ‘intentional’ used in show cause notice are contrary - Though said reasoning of Tribunal not acceptable, in view of finding of absence of mensrea by first appellate authority, penalty not imposable - Rule 15 of Cenvat Credit Rules, 2004 - Section 11C of Central Excise Act, 1944. [paras 3, 4].

Central Excise, Delhi-III Vs. Vee Gee Faucets Pvt. Ltd. [2015 (329) E.L.T. 76 (P & H)]:-

Penalty - Bona fide belief - Rules 25 and 26 of Central Excise Rules, 2002 - Scope of - Mensrea is a necessary ingredient before imposition of penalty under Rules 25 and 26 ibid - Tribunal set aside the order of imposing penalty finding that it is a bona fide belief of the assessee in using the brand name of its sister concern - Such user is not with intent to evade payment of duty thus levy of penalty rightly set aside - Revenue has not been able to prove the intention to evade payment of duty or the fact that assessee knew or has reason to belief that goods used are liable to be confiscated under the Act - Tribunal justified in setting aside the penalty. [paras 25, 26, 27, 28]

Commissioner of Customs & Central Excise, Bhopal Vs. Bhilai Jaypee Cement Plant[2015 (320) E.L.T. 730 (M.P.)]:-

Penalty - Mensrea, absence of - Availment of credit facility in respect of capital goods due to misunderstanding of law and its applicability- As per two Appellate Authorities namely Commissioner and Appellate Tribunal imposition of penalty in instant case not called for on account of absence of sufficient evidence proving mensrea or guilt - No reason to interfere with reasonable approach adopted by Appellate Authorities concurrent in nature - Penal consequence to be enforced only when assessee’s conduct shows certain positive action indicating fraud, misstatement, collution, etc. - Assessee’s action may be in contravention to statutory provision but with bona fide reason or belief by interpretation of High Court judgment, therefore, imposition of penalty not warranted - No substantial question of law involved - Therefore, no case for interfering with concurrent findings recorded by authorities - Rule 15(2) of the Cenvat Credit Rules, 2004. [paras 6, 7].

In view of these judgments, no penalty can be imposed unless mens rea or intention to evade payment of duty is proved. The mens rea is not proved by the impugned order, thus, penalty under section 11AC is not imposable and the impugned order is liable to be quashed.

In continuation to the above, it is submitted that the issue involved herein is that of interpretation of legal provisions and where interpretation of legal provisions is involved penalty cannot be imposed on the assessee. This contention has been upheld in the case of UNIFLEX CABLES LTD V/S COMMISSIONER OF CENTRAL EXCISE, SURAT-II [2011-TIOL-85-SC-CX]= [2011 (271) E.L.T. 161 (S.C.)] wherein it was held as under:

Central Excise – No penalty in a case of interpretational nature: The Commissioner, himself in his order-in-original has stated that the issue involved in the case is of interpretational nature, Keeping in mind the said factor, the Commissioner thought it fit not to impose harsh penalty and a penalty of an amount of Rs. 5 lakhs was imposed on the appellant while confirming the demand of the duty. Therefore, in the facts and circumstances of the present case, penalty should not have been imposed upon the appellant.
Thus, hon’ble Supreme Court has held that penalty is not imposable in the issues involving the interpretation of legal provisions.

Without prejudice to the grounds mentioned in the forgoing paras, it is submitted that the demand in the impugned order has been erroneously quantified. While calculating the demand, the impugned order has considered the total of outward freight ledger which is not justified. In this regard, it is worthwhile to mention here that the outward freight ledger has all types of freight payments made by the appellant irrespective of the fact whether the same is payable on the goods liable to excise duty or not. In this respect, it is submitted that the impugned order has even considered the freight paid on goods traded by us. It is worthwhile to mention here that the provisions of Central Excise Act, 1944 does not apply on the trading activities as no "manufacture" is involved. Accordingly, when a transaction is not leviable to excise duty, the question of assessing its transaction value under the provisions of Central Excise Act, 1944 does not arise at all. The total freight value pertaining to trading activity amounted to Rs. 21,49,391/-. Therefore, the demand of excise duty @ 12.5% on this amount which comes 268674/- should be reduced from total demand confirmed by the impugned order. Therefore, the impugned order passed by including even the freight amount in the transaction value should be set aside and the appeal should be allowed.

In continuation to above, it is further submitted that the impugned order has been passed for confirming the duty demand on the freight amount pertaining to sales return. In this regard, it is submitted that during the period in appeal, the freight amounting to returned goods is also included for the purpose of calculation of duty demand. In this regard, it is submitted that when the goods are returned back, the excise duty already paid at the time of initial clearance is available as credit. Therefore, demanding the duty on the amount which is again admissible as credit is simply a revenue neutral situation. The demand of excise duty on a revenue neutral transaction is not justified in view of following recent decisions:-
K-AIR SPECIALITY GASES PVT. LTD. Versus COMMISSIONER OF C. EX., PUNE [2017 (4) G.S.T.L. 379 (Tri. - Mumbai)]

Supply of Tangible Goods for use Service - Import of helium - Payment of rent for empty container received from foreign suppliers - Revenue alleging packing/repacking, labelling and relabelling of helium gas received from foreign suppliers, amounts to manufacture and rental paid for specialized container taxable under impugned head on reverse charge mechanism - HELD : Impugned order confirming demand, unsustainable for more than one reason - Firstly, containers transporting helium gas from supplier situated abroad in assessee’s effective control and possession till gas unloaded in equally specialized containers and empty containers re-exported to foreign supplier - Secondly, it is unacceptable proposal that once assessee discharged Central Excise duty on gas transferred into smaller packs and considering same as activity of manufacturing, question of rendering of service by supplier under supply of tangible goods for use rentals, going into cost of manufacturing, on which duty already discharged - Thirdly, question of revenue neutrality to arise - Tax paid under service tax to be available as credit to assessee as services consumed for supply of raw materials/inputs for manufacture of repacked gas and impugned gas cleared by discharging Central Excise duty hence, no necessity arises for any tax avoidance - Impugned order unsustainable and liable to be set aside - Section 65(105)(zzzzj) of Finance Act, 1994. [paras 7, 7.1, 7.2, 7.3, 7.4, 7.5]

FELIS LEO ENGG. PVT. LTD. Versus COMMISSIONER OF CENTRAL EXCISE, PUNE [2017 (348) E.L.T. 681 (Tri. - Mumbai)]

SSI Exemption with Cenvat benefit - Rate of duty on export goods - Concessional rate vis-à-vis full rate - Concessional rate of 60% of normal duty under Notification No. 9/2003-C.E. available up to value limit of ` one crore - Unless it is shown that disputed clearance is not within total permissible value limit, concessional rate of duty on export goods cannot be denied - Impugned order set aside. [para 5]
Demand and penalty - Revenue neutral situation - Export of goods under rebate - Duty payable by assessee eligible to be refunded as rebate - Entire situation being revenue neutral, demand and penalty not sustainable - Sections 11A and 11AC of Central Excise Act, 1944. [para 5]
An analysis of above decisions makes is clear that the demand of excise duty on revenue neutral situation is not justified. In the given case, the freight value of Rs. 2,74,002/- pertains to returned goods. Therefore, the demand of excise duty @ 12.5% on this amount which comes Rs. 34,250/- is not sustainable and is liable to be quashed. The appeal should therefore be allowed.
Notwithstanding the grounds mentioned in the forgoing paras and without accepting the allegations contained in the impugned order, it is submitted that the impugned order has raised the demand of excise duty on the same amount on which the service tax has already been paid by the appellant. Therefore, even if the demand is anyhow confirmed, the adjustment of service tax paid by the appellant on freight amount should be allowed to the appellant. In this regard, it is submitted that demand in the given case is Rs. 8,68,270/- on which service tax amount of Rs. 3,77,647/- has already been paid. Therefore, even if the allegations leveled in the impugned order are confirmed, this amount of service tax so paid should be allowed to be adjusted in the total demand of Rs. 8,68,270/-. In view of this, the impugned order is not tenable and thus must be set aside.

Reasoning adopted by the adjudicating authority: -
As per the authority the main issue involved in the case is whether the place of delivery can be treated as the place of removal for the purpose of arriving at the assessable value when contract for supply of the goods are on FOR basis and whether amount of freight is includible for arriving at the assessable value. Furthermore, there has been no dispute about the fact that though the contract is on FOR terms but the amount of freight or rate of fixed freight is separately mentioned in the contract and invoice is issued when the goods were leaving the factory premises. It is known that as per Rule 5 of the Valuation Rules 2000, the cost of transportation from the place of removal up to the place of delivery of excisable goods is allowed to be excluded when the excisable goods are sold for delivery at a place other than the place of removal. Henceforth, as per the conditions of contracts wherein the provisions on account of freight has separately and specifically been mentioned and in view of the contents declared in the invoice about the date and time of removal of goods, payment of sales tax at the time of removal of the goods from the factory premise, mentioning of freight and insurance separately in the invoice and findings of the Supreme court in the case of Ispat Industries lead to the conclusion that the place of removal in this matter was the factory gate and the place of deliver is the buyers premises who mainly are Electricity Boards/ Vidhyut Nigam, hence the cost the cost was rightly not included in the value for arriving at the assessable value for the purpose of levy of Central Excise duty. Moreover, the Cenvat Credit of service tax paid on outward GTA service upto place of delivery of the goods is not available to the appellant. Therefore, Confirmation of Demand of duty along with interest vide impugned order is set aside subject to the condition that the Cenvat Credit of service tax paid on Outward GTA service upto the place of delivery of the goods is not availed by the appellant.
Decision:- Appeal Allowed.

Conclusion:- It has been concluded that no duty of excise shall be payable on the Freight amount paid on Outward GTA service to deliver the goods to the place of delivery.

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PJ/Case Study/2018-19/139
15 December 2018

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PJ/Case Study/2018-19/139
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