The issue involved in this case is whether manufacturing/packing of Mehandi/Henna Powder mixed with additives in pouches in the name of various brands (which not belonging to the applicant), is liable for registration and central excise duty?

CASE STUDY

M/S MOHAN PACKAGING( ORDER IN APPEAL NO. 1419(CRM)CE/JDR/2018 dated 27.12.2018
Prepared By: Meenal soni

Introduction: :-
M/s Mohan Packaging (hereinafter referred to as the appellant) is engaged in the packing/manufacture of Mehandi/Heena Powder mixed with additives in pouches in the name of various brands which are not belonging to them, the packing of mehandi powder amounts to manufacture in terms of Chapter Note No.5 of Chapter 33 of Central Excise Tariff Act, 1985.A show cause notice no. V(CEX) SCN/seizure/Mohan/PALI/49/2016/837 dated 05.08.2016 was issued to the appellant alleging that the appellant intended to clear the Mehandi/Henna Powder without registration and without any duty payment thereby contravening the provisions of section 6 of the Central Excise Act, 1944.
Relevant Legal Provisions:

Chapter 33 of the Central Excise Tariff Act, 1985
First Schedule of the Custom Tariff Act,1975
Section 6 of the Central Excise Act,1944
Rule 9,10,12 & 25 of the Central Excise Rules, 2002
Exemption Notification No. 12/2013-CE dated 01.03.2013

Issue Involved:The issue involved in this case is whether manufacturing/packing of Mehandi/Henna Powder mixed with additives in pouches in the name of various brands (which not belonging to the applicant), is liable for registration and central excise duty?

Brief Facts:

M/s Mohan Packaging, the appellant is engaged in packing/manufacturing finish goods viz. Mehandi/Henna Powder.
A show cause notice no. V(CEX) SCN/seizure/Mohan/PALI/49/2016/837 dated 05.08.2016 was issued to the appellant alleging that the appellant intended to clear the Mehandi/Henna Powder without registration and without any duty payment thereby contravening the provisions of section 6 of the Central Excise Act, 1944 and Rule 9, 10, 11 & 12 of the Central Excise Rules, 2002. The factory premises of the appellant was also visited by the Central Excise Officers on 09.02.2016 whereby on belief that the appellant was engaged in packing/manufacturing of mehandi powder/henna powder, bearing brand name or trade name of another person, without applying for Central Excise Registration .
Thereafter, the impugned order in original no. 02/2018-CE (DEMAND) dated 25.04.2018 was passed for confirming the allegations levelled in the impugned show cause notice. The central excise duty demand of Rs. 57,141/- was confirmed along with interest and penalty of Rs. 57,141/- under Rule 25 of the Central Excise Rules, 2002.

Assessee’s Contention:

The impugned order in original confirming the central excise duty demand along with interest and penalty is wholly and totally erroneous and is liable to be set aside.

The impugned order has placed reliance on the test report with respect to seized goods being mehandi/heena powder pertaining to Test Memo No. 27/2015-16, 28/2015-16, 30/2015-16, 31/2015-16, 32/2015-16 and 33/2015-16. The impugned order has placed reliance on the contents of the test report which reads as follows:

“On the basis of physico-chemical and chromatographic examinations, it is concluded that the sample u/r has the characteristics of heena and no other extraneous dye has been observed in the sample.”

On comparision of above test reports, it is clear that additives were mixed in mehandi/henna powder and packed in pouches’.

In this regard, the appellant submits that they are eligible for the benefit of exemption notification no. 12/2013-CE dated 01.03.2013 as they have not mixed any extraneous dye in the henna powder manufactured by them. The appellant wish to place reliance on the clarification issued by Board vide D.O.F. No. 334/15/2014-TRU Letter dated 10.07.2014. The clarification issued is reproduced as follows for the sake of convenient reference:-

‘It is clarified that the exemption is available to henna powder mixed with a liquid, so far that the liquid is a medium to change the form of henna powder into paste but excludes products like henna dye and such other products which are cosmetics.’
However, the impugned order has concluded that since the test report states that there are additives in the henna powder manufactured by them, the benefit of exemption is not admissible to them. In this regard, the appellant submits that as far as the test report clearly states that there was no extraneous dye, they are eligible for the benefit of exemption as the clarification also explains that products like dye and cosmetics are not to be contained in the henna powder or henna paste. The appellant submits that as no extraneous dye was present in the henna powder manufactured by them, they are entitled for the benefit of exemption notification. The appellant further submits that even otherwise, proper methodology has not been followed for testing the samples taken from their premises. They submit that although henna leaves of Sojat City have not been taken as the basis of comparision for arriving at the conclusion. They submit that henna leaves of Sojat City have inherent colour imparting properties and the said leaves should have been taken as the basis of comparision which has not been done. Consequently, the reliance placed on the test report is not at all proper and the impugned order in original should be set aside.

The impugned order has also discussed the amendments made in Chapter 14 of the Central Excise Tariff Act, 1985 and has concluded that the entries relating to henna under tariff heading no. 140410 were omitted with effect from 01.01.2007. As such, in view of these changes/omission, henna powder is no more classifiable under chapter 14 now and accordingly the Circular No. 256/90/96-CX dated 30.10.96 clarifying that henna powder is classifiable under chapter 14 has no relevancy. In this regard, the appellant wishes to narrate the history of the amendments made in chapter 14 of the Central Excise Tariff Act, 1944 from time to time.

The Chapter 14 of the Central Excise Tariff Act, 1985 upto 31.12.2006 is produced for the sake of convenient reference as follows:-

*Tariff Item*	*Description of goods*	*Unit*	*Rate of duty*
1404	Vegetable products not elsewhere specified or included
140410	-Raw vegetable materials of a kind used primarily in dyeing or tanning
	--- Heena:
1404 10 11	Heena Leaves	Kg	Nil
1404 10 19	Heena Powder	Kg	Nil

Thereafter, vide clause 67 of the Finance Bill 2006, certain changes in Central Excise Tariff Act, 1985 were introduced which are as under:-

Excise tariff
67. “In the Central Excise Tariff Act, 1985, the First Schedule shall,— (a) be amended in the manner specified in the Sixth Schedule; and (b) with effect from the 1st day of January, 2007, be also amended in the manner specified in the Seventh Schedule
The relevant portion of seventh schedule is reproduced below:-
(14) in Chapter 14,— (i) for Notes 3 and 4, the following Note shall be substituted, namely:— “3. Heading 1404 does not apply to wood wool (heading 4405) and prepared knots or tufts for broom or brush making (heading 9603).”;
(ii) tariff item 1402 00 00 and the entries relating thereto shall be omitted; (iii) heading 1403, sub-heading 1403 00, tariff items 1403 00 10 and 1403 00 90 and the entries relating thereto shall be omitted;
(iv) in heading 1404, sub-heading 1404 10, tariff items 1404 10 11 to 1404 10 90 and the entries relating thereto shall be omitted;
In view of the above changes, the entries relating to henna under tariff items 140410 were omitted with effect from 01.01.2007.
It is submitted that the Customs Tariff Act, 1975 and the Central Excise Tariff Act, 1975 are similarly designed and framed. However, from Budget 2006-07, the Customs Tariff Act, 1985 was being amended to make it at par with the Harmonized Commodity Description and Coding System. Consequently, with effect from 01.01.2007, the Central Excise Tariff Act, 1985 was also aligned with the Harmonized System of Nomenclature (HSN) and so certain amendments were made in the Central Excise Tariff. However, the basic purpose of the amendments was to make the Central Excise Tariff Act, 1985 at par with the HSN. Consequently, as the product heena leaves and heena powder are not popular worldwide, the entries relating to the same being 1404, 1404 10, 1404 10 11 and 1404 11 90 were omitted from the Central Excise Tariff Act, 1985. However, this omission was made only to align the Central Excise Tariff with the HSN code. As stated, the product heena powder and heena leaves not being used worldwide, and so do not find specific tariff heading in HSN. Consequently, the specific tariff entries mentioned in the Central Excise Tariff for heena powder and heena leaves were also omitted. However, it is pertinent to note here that after omission of the specific entries of heena powder and heena leaves from Chapter 14, the said product heena powder and heena leaves were not added under any other chapter heading. This means that the omission of entries pertaining to heena leaves and heena powder was not with intention to change its classification from chapter 14 to any other chapter and rather the omission was to make Central Excise Tariff at par with the HSN codes. As such, even after the omission, the product heena powder and heena leaves are more appropriately classifiable under chapter 14 of the Central Excise Tariff Act, 1985 rather than under chapter 33. It is submitted that if a particular product is specifically included under a chapter and after its omission, the said product is not specifically included under any other chapter, and if the reason for omission was alignment of the Central Excise Tariff with HSN codes, then, even after the omission, the said product is classifiable under the chapter in which it was specifically included. In order to substantiate the submission that the omission of entries relating to heena powder and heena leaves was only for alignment of Customs Tariff Act, 1975 and the Central Excise Tariff with the HSN codes, reliance is placed on the TRU letter DOF No. 334/3/2006-TRU dated 28.02.2006, the relevant extracts wherein reads as follows:-
“31. Other Amendments in Customs and Central Excise Act and Rules
5. First Schedule to the Customs Tariff Act, 1975, is being amended so as to incorporate the amendments approvedby the Customs Cooperation Council (World Customs Organization) in the legal text of the International Convention on the Harmonized Commodity Description and Coding System (Harmonized System). These changes would align the First Schedule of the Customs Tariff Act with the Harmonized System. This amendment will come into force with effect from 1.1.2007.
10. First Schedule to the Central Excise Tariff Act, 1985 is being amended so as to align it with the Customs Tariff Act, 1975 (CTA), in line with the amendments proposed in CTA with effect from 1.1.2007.
The above extracts from the TRU letter clearly substantiates the point that the only reason for amendment in the Customs Tariff and the Central Excise Tariff was to align it with the HSN coding followed internationally. It is reiterated that as the product heena powder and heena leaves is not popular worldwide so as to be governed by specific entry, the entries of chapter 14 pertaining to heena leaves and heena powder were being omitted. However, the fact that the said products were not specifically added under any other chapter heading proves that the classification of the said products even after the amendment is more appropriate under chapter 14 and not under chapter 33. Therefore, the impugned order in original classifying the product under chapter 33 is not at all tenable and is liable to be quashed. Hence, the appeal should be allowed by confirming classification of the product under chapter 14.

In continuation to the above, the appellant submits that the learned adjudicating authority is attempting to classify the product on the basis of exemption notification rather than the contents of the Tariff which is totally absurd and illegal. The appellant submits that the contents of the Tariff will definitely have precedence over the contents of the exemption notification. In order to better understand the submission, the history of the amendments made in the Tariff and the exemption notification is presented as follows:-

The entries provided in notification no. 8/96-Central Excise dated 23^rd July,1996 as amended vide notification no. 32/96-C.E. dated 26/11/1996 relating to Henna powder is as under:-

*Reference no.*	*Chapter Heading*	*Description of excisable goods*	*Rate*	*Condition No.*
33.3	33	Heena Powder, not mixed with any other ingredient.	Nil	-

Further he entries in Notification No. 4/1997 CE dated 02.06.1998 relating to Henna powder is as under:-

*Sl. No.*	*Chapter Heading*	*Description of excisable goods*	*Rate*	*Condition No.*
45	33	Heena Powder, not mixed with any other ingredient.	Nil	-

Further the entries provided in notification no. 5/1998 CE dated 02.06.1998 relating to henna powder is as under:-

*Sl. No.*	*Chapter Heading*	*Description of excisable goods*	*Rate*	*Condition No.*
52	33	Heena Powder not mixed with any other ingredient.	Nil	-

Further the entries provided in notification no. 5/1999 CE dated 28.02.1999 relating to henna powder is as under:-

*Sl. No.*	*Chapter Heading*	*Description of excisable goods*	*Rate under first schedule*	*Rate under the second schedule*	*Condition No.*
53	33	Heena Powder not mixed with any other ingredient.	Nil	Nil	-

Further the entries provided in notification no. 6/2000 CE dated 01.03.2000 relating to henna powder is as under:-

*Sl. No.*	*Chapter Heading*	*Description of excisable goods*	*Rate under the first schedule*	*Rate under the second schedule*	*Condition No.*
52	33	Heena Powder not mixed with any other ingredient.	Nil	Nil	-

Further the entries provided in notification no. 6/2001 CE dated 01.03.2001 relating to henna powder is as under:-

*Sl. No.*	*Chapter Heading*	*Description of excisable goods*	*Rate under the first schedule*	*Rate under the second schedule*	*Condition No.*
61	33	Heena Powder not mixed with any other ingredient.	Nil	Nil	-

Further the entries provided in notification no. 6/2002 CE dated 01.03.2002 relating to henna powder is as under:-

*Sl. No.*	*Chapter Heading*	*Description of excisable goods*	*Rate under the first schedule*	*Rate under the second schedule*	*Condition No.*
62	33	Heena Powder not mixed with any other ingredient.	Nil	Nil	-

The entries of S no. 66 of notification no. 4/2006-Central Excise is as under:-

*Sl. No.*	*Chapter Heading*	*Description of excisable goods*	*Rate*	*Condition No.*
66	33	Heena Powder not mixed with any other ingredient.	8%	-

Further the entries provided in Notification No. 12/2012 dated 17.03.2012 are as follows:-

*Sl. No.*	*Chapter Heading*	*Description of excisable goods*	*Rate*	*Condition No.*
134	33	Heena Powder or paste not mixed with any other ingredient.	6%	-

The entries of the Notification No. 12/2013 dated 01.03.2013 is as under:-

*Sl. No.*	*Chapter Heading*	*Description of excisable goods*	*Rate*	*Condition No.*
134	33	Heena Powder or paste not mixed with any other ingredient.	Nil	-

On careful perusal of the above exemption notifications, it is found that the notification mentions chapter heading of Heena Powder as 33 since its inception. However, it is worth pointing out that upto 31.12.2006, the product, Heena Powder and Heena Leaves were specifically mentioned under chapter subheading no. 1404 10 19 and 1404 10 11 respectively. It is only after alignment of the Central Excise Tariff and Customs Tariff with the HSN Code with effect from 01.01.2007 that the said entries were omitted from both the Tariffs. However, the above cited exemption notifications, right from their inception, i.e., 23.07.1996, mentioned heena powder under chapter 33, which is totally against the law. It is submitted that the above cited exemption notifications mentioned wrong chapter heading right from its implementation ignoring the fact that the product “heena powder” was specifically covered by chapter sub-heading no. 1404 10 19. It is submitted that for the period prior to 01.03.2006, there was no revenue impact of the classification of the product heena powder because whether the heena powder was classified under chapter 14 specifying nil rate of excise duty or under chapter 33 providing full exemption from excise duty, the manufacturers were not required to pay excise duty on clearance of heena powder. However, it is only after, alignment of the Central Excise Tariff and the Customs Tariff with the HSN Code with effect from 01.01.2007 that the dispute of classification started. This is for the reason that the exemption notification no. 04/2006-CE dated 01.03.2006 specified rate of excise duty for heena powder as 8% whereas the nil rate of duty was specified under chapter 1404 10 19 under the Central Excise Tariff Act, 1985. Moreover, the omission of the entry pertaining to heena powder and heena leaves, although for the purpose of alignment with HSN code, is being taken as the tool to fasten excise duty liability merely because the exemption notification mentions the chapter heading of heena powder as 33. The appellant submits that the exemption notification mentions wrong chapter heading since its introduction because upto 31.12.2006, the Central Excise Tariff Act, 1985 specifically classified heena powder under chapter 1404 10 19 and specified nil rate of excise duty. It is submitted that when the excise duty is mentioned as Nil for a particular product in the Tariff, then the question of granting exemption does not arise at all. This anomaly itself indicates that the product heena powder is classifiable under chapter 14 and not under chapter 33. Furthermore, if the Chapter 33 is pursued, there is no specific mention of heena powder in the entire chapter. On the contrary, the revenue department is attempting to classify the product heena powder under chapter 3304 99 90. In this regard, the appellant submits that the chapter sub-heading 3304 99 90 is residuary entry covering “Other products” for “Beauty or make up preparations and preparations for the care of skin (other than medicaments), including sunscreen or suntan preparations, manicure or pedicure preparations”. The appellant submits that, in view of the above analysis of history of legislations, it is crystal clear that the product heena powder is classifiable under chapter 14 and not under chapter 33. However, even if it is accepted for the sake of argument only, that the product heena powder is classifiable under the chapter sub-headings as contended by the revenue department, then, the appellant submits that the classification adopted would lead to absurd results. This is for the reason that the chapter sub-heading 3304 99 90 is residuary entry for beauty preparations like lip make up preparations, eye make up preparations, face powders face creams etc. which have cosmetic use whereas the product manufactured by the appellant is not a cosmetic product because it does not enhances beauty but is rather a product that is being used on account of social and religious values. The tariff entry 3304 includes the beauty and make-up preparations for the care of skin. Appellant’s product “henna” has social and religious values and it is applied on hands and feet due to these values. The importance of applying henna in culture is clear from the following:-

No social function is completed without the application of henna on the hands and feet – whether the function is of engagement, marriage, baby shower, etc.
When there is birth of any child at home, there is tradition of distributing the henna to all the neighborhood and relatives. This tradition is still alive in many parts of Rajasthan including Jodhpur.
It is considered as a symbol of “akhand saubhagya” in Hindu culture and it is to be essentially applied hands and feet on various fasts like “karva chauth”, “gangaur”, “teej”, etc. It is even required during the pooja in these fasts.
It is an essentially to be there in the items of “pooja” of goddesses like Laxmi, Parvati, etc. In all the temples of these goddesses, henna is an important item which is applied on the hands and legs of statues of these deities, particularly on the festivals.
No hawan/yagya is complete without applying henna.
It is applied by Indian girls and ladies on all the occasions and festivals. On the diwali pooja, it is considered customary to sit there with henna on the hands.
The application of henna is not merely limited to hindu culture, rather it is an essential part of muslim festivals like Eid-ul-Fitr and Eid-ul-Azha.

Thus, the above traditions as prevalent in Indian culture are evident of the fact that henna has strong social values and it is not an item of beautification as alleged in the order in original. It is worthwhile to mention here that the majority of sale of henna is due to its social values. All this makes it ample clear that the henna is not an item of beautification of skin as alleged in the impugned order and hence it cannot be classified under chapter heading 3304 which is particularly meant for products used for beautification and make up of skin. Henna is applied on hands and feet because of its social and customary values; rather than as a product for beautification of skin. It is worth mentioning here that the tariff heading 3304 includes the cosmetic items like lipsticks, face powders, manicure and pedicure items, nail paints, lotions, etc. These items are directly related to beautification of skin and are used for enhancing the beauty of skin. However, henna cannot be classified under this tariff entry as it cannot be related to these types of products in any manner. The items classifiable under tariff heading 3304 are solely used for enhancing the beauty of face, nails, lips, etc. However, henna cannot be said to be used solely as such. The prime purpose of henna is due to its social and religious values, not the beautification of hands or feet. Therefore, it cannot be classified under this tariff heading which is particularly meant for products used for beautification of skin. The impugned order attempting to classify product under the tariff heading 3304 is legally untenable and is liable to be set aside.

The appellant furthersubmits that the contents of the notification cannot be taken to decide the classification of any product. This is because the Notifications are always subsidiary to the contents of the Act. If there is any conflict between the notification and the Act, the Act will always have the precedence. This is known as “Gunpradhan principle” which has been laid down by the hon’ble Supreme Court in the case of ISPAT INDUSTRIES LTD. VERSUS COMMISSIONER OF CUSTOMS, MUMBAI [2006 (202) E.L.T. 561 (S.C.)]. In this case, it was held that the Act is primary and all the drafts issued under this Act are subsidiary to it. As such, in case of any conflict between the two, the Act will have precedence. The verdicts of hon’ble Supreme Court in this case are as follows:-

Interpretation of statute - Rule 9(2) of Customs (Valuation) Rules, 1988 - Gunpradhan principle is fully applicable - Rule 9(2) ibid is subservient to Section 14 of Customs Act, 1962, hence,to be interpreted in such a way as to make it in accordance with main object that is contained in Section 14 ibid - Object of Section 14 ibid is ‘primary’ whereas conditions in Rule 9(2) ibid are ‘accessories’. [para 36]

In the above case, there was conflict between the language of rule 9(2) of the Customs Valuation Rules, 1988 and section 14 of the Customs Act, 1962. It was decided that the Customs Act is the primary and the rules are accessories; therefore, the Act would prevail in case of conflict. In the instant case, the Central Excise Tariff Act, 1985 is primary while the notification no. 6/2002 and 4/2006 are accessories to the same. Thus, in the light of above decision, the Act would prevail and the classification of henna powder will be under tariff heading 1404 irrespective of the fact that the same is also included in any exemption notification with tariff entry 3303. As such, the contents of Act will always prevail and the henna will continue to be classified under tariff heading 1404 during the above period.

From the discussion done in above paras it is ample clear that the exemption notifications during the period prior to show cause notice, included the henna powder under tariff entry 3303 irrespective of the fact that the henna powder was specifically included in the Central Excise Tariff under tariff entry 1404. However, as clarified above, whatever is mentioned in the Act is final and part of notification, if contrary to the contents of the Act, is not sustainable. Therefore, the impugned order in original seeking to classify the product heena powder on the basis of contents of the exemption notification is totally vague and is liable to be set aside. Hence, the appeal should be allowed by classifying the product under chapter 14.

It was stated in the order in original that the entries of chapter 33 of Central Excise Tariff cover heena powder. It is stated in the order that on analyzing the entries made in chapter 33, it is found that:-

Heena powder is classifiable under chapter heading 3304 if it is used as preparation of beauty or make up or care of skin
Heena powder is classifiable under chapter heading 3305 if used for coloring of dye.

It has been further alleged that henna is a cosmetic product as per Drugs and Cosmetics Act, 1940. The term ‘cosmetic’ as per the said act means:-any article intended to be rubbed, poured, sprinkled or sprayed on, or introduced into, or otherwise applicated to, the human body or any part thereof for cleansing, beautifying, promoting attractiveness, or altering the appearance, and includes any article intended for use as a component of cosmetic. Further the schedule S of Drugs and Cosmetics Rule 150-A provides Standards for cosmetics in finished form. According to this, some of the cosmetics in finished form shall conform to the Indian Standards specifications laid down from time to time by the Bureau of Indian Standards (BIS). As, heena powder is mentioned at serial no 28, it is required to comply IS 11142 and consequently, heena powder is a cosmetic covered under Drugs and Cosmetics Act, 1940. Inthis regard, the appellant submits that merely because heena powder is mentioned as cosmetic under the Drugs and Cosmetics Act, 1940, it cannot lead to inevitable conclusion that the heena powder will be classifiable under chapter 3304 of the Central Excise Tariff Act, 1985. It is submitted that the classification under the Central Excise Laws will be governed by the contents of the Central Excise Tariff and not by the definations of other Acts. When, the legislative history of Chapter 14 clearly indicates that the product heena powder was specifically covered by chapter sub-heading 1404 10 19, which pertained to vegetable products not specified elsewhere, then, the said product cannot be classified in the residuary entry for cosmetics products. The provisions of the Central Excise Tariff Act are of utmost importance for the classification under the Central Excise Laws. The tariff entry 3304 includes the beauty and make-up preparations for the care of skin whereas the appellant’s product “henna powder” has social and religious values and it is used on account of traditions prevalent in India. This is also the main reason that the product heena powder does not finds place in the HSN code and consequently, as the Central Excise Tariff was aligned with the HSN code, the specific entry for heena powder as 1404 10 19 was omitted. However, even after the omission of the entry from the tariff, the product heena powder is classifiable under chapter 14 only because the said product has not been specifically included in any other chapter sub-heading after the amendment. Moreover, it is also submitted that merely because the product heena powder is required to comply with BIS cannot lead to conclusion that it is cosmetic and is classifiable under chapter 33 of the Central Excise Tariff Act, 1985. It is submitted that there is object and purpose of every Act and legislation and so is that of the Drugs and Cosmetics Act, 1940. The requirement of BIS Certification for heena powder is only incorporated in the Drugs and Cosmetics Act, 1940 so as to ensure that the quality is being maintained. It is very important that drugs and cosmetics that are being used by the consumers are of particular desired quality and it is for this reason that the product heena powder requires BIS certification. However, the fact that heena powder requires BIS certification cannot determine classification under the Central Excise Laws and the classification will be governed by the contents of the Tariff. As such, the impugned order in original resorting to other Acts for substantiating classification of the product under chapter 33 is totally void and is liable to be quashed.

The impugned order in original had also contended that since the product falls under chapter 33 of the Central Excise Tariff Act, 1944, the activity of making heena powder from heena leaves and heena paste from heena powder amounts to manufacture and is leviable to central excise duty. In this respect, the reliance has been placed on the meaning of preparation given by the Oxford Dictionary. In this regard, the appellant submits that firstly, their product does not fall under chapter 33 of the Central Excise Tariff Act, 1944 and consequently, the provisions of chapter note regarding ‘deemed manufacture’ are not applicable in their case. Moreover, the impugned order in original seeks to place reliance on the dictionary meaning of preparation to justify their stand that the process of crushing of dried heena leaves into powder amounts to manufacture of preparation covered under chapter 33 which is not legally acceptable. The impugned order in original has simply rejected the reliance placed by the appellant on a number of decisions rendered by Supreme Court and High Court clearly stating that change in physical form does not amount to manufacture. The appellant submits that the judicial pronouncements relied upon by them hold much significance than the general meaning given in Oxford Dictionary. Consequently, the impugned order in original simply rejecting the reliance placed on number of judicial pronouncements without even assigning any justifiable reasons is non-est and non-speaking order which is not tenable in the eyes of law.

The appellant reiterate that erroneous excise duty demand has been raised against them as for levy of excise duty, there should be manufacture but they have not undertaken any manufacturing process under excise. The appellant submit that the process of crushing dry heena leaves into powder form does not amounts to manufacture so as to levy excise duty. Hence, when there is no manufacture, the excise duty demands are not at all sustainable. In this context, reliance may be placed on following judicial pronouncements:-

SREE BISWA VIJAYA INDUSTRIES VERSUS COMMR. OF C. EX., BHUBANESWAR [1997 (96) E.L.T. 712 (Tribunal)] AFFIRMED BY SUPREME COURT REPORTED AS [COMMISSIONER V. SREE BISWA VIJAYA INDUSTRIES – 1998 (104) E.L.T. A136 (S.C)]:-

Manufacture - Tobacco powder obtained by crushing of tobacco leaves, stems, stalks and butts, classifiable under Tariff Heading 2401.00 of CET Act, 1985 - Process does not constitute `manufacture’ under Section 2(f) since it is merely a change from one form of unmanufactured tobacco to another form attracting nil rate of duty- Section 3 of Central Excise Act, 1944. [1990 (48) E.L.T. 115 (Tribunal) relied on]. [para 4]
The above cited decision lays down that mere process of crushing of tobacco leaves so as to obtain powder cannot be considered as manufacture under section 2(f) of the Central Excise Act, 1944. Similarly, in the present case, mere crushing of heena leaves to obtain heena powder cannot be considered as process amounting to manufacture and so no excise duty is leviable on the heena powder cleared by the appellant.

COMMISSIONER V. SHAMSUDDIN AKBAR KHAN & CO. [1999 (114) E.L.T. A231 (S.C)]:-

In this case, the Apex Court confirmed that the Tobacco powder obtained by crushing of tobacco leaves, stems, stalks and butts does not amount to ‘manufacture’.

COMMISSIONER V. PRAMILA GUDAKHU FACTORY [2003 (155) E.L.T. A235 (S.C.)]

The Apex Court held in this case affirmed that powdering tobacco leaves is not a process of manufacture and hence not dutiable.
Similar decisions were also rendered in the following cases:-

ISWAR GRINDING MILLS VERSUS COMMISSIONER OF C. EX., CALCUTTA-I [2000 (117) E.L.T. 743 (Tribunal)]:-

Tobacco powder - Manufacture - Crushing/Powdering of tobacco leaves first manually and then with power aided crushing/grinding machine to form tobacco flakes/powder does not amount to manufacture - Unmanufactured tobacco classifiable under Heading 24.01 of Central Excise Tariff Act, 1985 attracting nil rate of duty. [2000 (117) E.L.T. 345 (Tribunal) relied on]. [paras 5, 6]

SHRIKANT PRASAD VERSUS COMMISSIONER OF CENTRAL EXCISE, CALCUTTA-I [2000 (117) E.L.T. 345 (Tribunal)]:-

Tobacco powder obtained by crushing of tobacco leaves, stems and stalks fall under Heading 24.01 of Central Excise Tariff Act, 1985 as unmanufactured tobacco, attracting Nil rate of duty.

COLLECTOR V. MAHAVIR MINERALS STORE SUPPLY CO. [1999 (113) E.L.T. A117 (S.C)]:-

The Supreme Court held that crushing of dolomite into powder does not amount to manufacture.

SYNGENTA INDIA LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE, MUMBAI-VI [2001 (134) E.L.T. 415 (Tri. – Mumbai)]:-

Manufacture - Crushing, grinding and sieving of soap stone to obtain soap stone powder does not amount to manufacture - Section 2(f) of Central Excise Act, 1944. [para 3] Manufacture - Crushing, grinding and sieving of soap stone to obtain soap stone powder does not amount to manufacture - Section 2(f) of Central Excise Act, 1944. [para 3]

GUJARAT RECLAIM & RUBBER PRODUCTS LTD. VERSUS COMMR. OF C. EX., PUNER [2009 (243) E.L.T. 426 (Tri. – Mumbai)] AFFIRMED BY SUPREME COURT REPORTED AS [COLLECTOR V. GUJARAT RECLAIM AND RUBBER PRODUCTS LTD. - 1990 (45) E.L.T. A67 (S.C)]

Manufacture - Crumbed rubber in powder form - Crushing the rubber waste to powder form with no further addition of chemicals, not a process of manufacture - Crumbed rubber not classifiable under Heading 40.04 of Central Excise Tariff. [paras 3, 4]

CRANE BETEL NUT POWDER WORKS VERSUS COMMR. OF CUS. & C. EX., TIRUPATHI [2007 (210) E.L.T. 171 (S.C.)]:-

Manufacture - Crushing betel nuts into smaller pieces and sweetening the same with essential/non-essential oils, menthol, sweetening agents etc. did not result in manufacture of a new and distinct product having a different character and use as end product continues to retain its original character though in a modified form- Tribunal’s and High Court’s order set aside - Section 2(f) of Central Excise Act, 1944 - Note 4 to Chapter 21 of Central Excise Tariff. [paras 30, 31, 33]

A.R.S. & CO. VERSUS COMMISSIONER OF CENTRAL EXCISE, TRICHY [2015 (324) E.L.T. 30 (S.C.)]:-

Manufacture - Betel nuts - Scented betel nuts - Issue squarely covered under judgment of Apex Court in Crane Betal Nut Powder Works reported at 2007 (210) E.L.T. 171 (S.C.), wherein it was held that crushing betel nuts into smaller pieces and sweetening the same with essential/non-essential oils, menthol, sweetening agents, etc. did not result in manufacture of a new and distinct product - Tribunal’s order classifying said product under Heading 2106 of Central Excise Tariff, set aside - Assessee entitled for consequential refunds, if any - Section 2(f) of Central Excise Act, 1944. [paras 1, 2, 3]
The appellant submit that in light of the above cited numerous decisions rendered by the Apex Court, it is very much clear that mere process of crushing resulting in powder cannot be treated as manufacture and consequently, no excise duty can be paid on the clearance of heena powder which is nothing but crushed dried heena leaves. Therefore, the impugned order in original confirming huge excise duty demand is not at all tenable and is liable to be set aside.

The appellant further submits that the finished goods seized have been expired and so there is no point in getting them released on payment of redemption fine as they have no financial value. Similarly, the packing material which was seized is of no use and they do not intend to get the same released. The appellant submits that since the seized goods have become obsolete and are of no use as they do not have any value, they do not intend to get the said goods released on payment of redemption fine. Therefore, the impugned order in original confirming redemption fine for seized goods that have no financial value deserves to be set aside.

The appellant further submits that the impugned order in original has been passed without appreciating the facts of the case as it mentions that the appellant has contended that the computation of MRP on the basis of 4 times of transaction value is not legally correct. In this regard, the appellant submits that the computation of central excise duty demand considers actual MRP and the impugned order in original has wrongly mentioned the factual position. This shows that the impugned order in original has been passed in careless manner and the said order deserves to be set aside.

The appellant submits that the firm has been closed and the premises have been vacated. Furthermore, the facts of the case were not corroborated with other evidences such as the packing material was not verified and the parties sending the material for job-work were not summoned. The bank statements were submitted but the same were not correlated and considered in the investigation proceedings. The appellant submits that the central excise duty demand cannot be confirmed on the basis of confessional statements and rather it should be supported and substantiated by cogent and corroborative evidences. The appellant submit that it has been held in a number of judicial pronouncements that the charge of clandestine clearance cannot be made solely be placing reliance on the statements unless and until the same is also corroborated by sufficient and cogent evidences. The synopsis of decisions is produced as follows:-

COMMISSIONER VERSUS MOTABHAI IRON AND STEEL INDUSTRIES [2015 (316) E.L.T. 374 (Guj.)]:-

Demand - Clandestine removal - Demands based on statements of transporters or drivers of the truck which were not corroborated by any evidence - No investigation conducted at consignor’s place or at the place where the said goods are alleged to have been supplied - Tribunal was justified in holding that only on the basis of third party statements, such demand cannot be made - Section 11A of Central Excise Act, 1944. [para 13]
Demand - Clandestine removal - Demand based upon the fact that vehicles which were shown to have transported the goods were not capable of carrying such goods - Tribunal upon appreciation of evidence on record has found as a matter of fact that goods were duly found to have been recorded in assessee’s factory and were consumed in production - Payment was made through banking channels and no investigation had been made at consignor’s end - No error can be found in the findings recorded by Tribunal so as to warrant interference. [para 15]
Demand - Cenvat - Consignor only issued invoices to assessee, alleged - Payment to consignor made through banking channels - Tribunal found that all the purchases were duly recorded in statutory books of assessee goods were also found to be entered in its statutory records - Department had not made any investigation at the unit of assessee - None of the consignors of goods have denied clearance of goods to the assessee - Tribunal justified in holding that on the basis of statements of some transporters which were not corroborated by any material on record, a huge credit could not be disallowed - Demand and penalties on assessee and co-noticees rightly set aside. [para 19]

KISCO CASTINGS INDIA LTD. VERSUS COMMISSIONER OF C. EX. & S.T., CHANDIGARH [2015 (329) E.L.T. 556 (Tri. - Del.)]:-

Cenvat - Inputs - Invoice procurement without physical receipt of goods alleged - Appellant a manufacturer buyer purchased goods from a registered dealer - No investigations conducted at end of manufacturer supplier of goods against whole invoices Cenvat credit availed - No investigation conducted from transporters to ascertain the fact whether goods transported to appellants factory or not - Department cannot allege that registered dealer is non-existent unless and until registration is cancelled - Appellants produced invoices against which Cenvat credit availed and same has been entered in RG-23 register - Burden cost on Revenue to paper transaction without receipt of goods- Revenue failed to prove non-receipt of goods - Credit not deniable- Rule 3 of Cenvat Credit Rules, 2004. [paras 6, 8]

VICTORA TOOLS ENGINEERS (P) LTD. VERSUS COMMISSIONER OF C. EX., DELHI-IV [2015 (329) E.L.T. 864 (Tri. – Del.)]:-

Cenvat credit - Invoice of registered dealer, credit availed thereon - Reversal sought alleging inputs not received - No credible evidence brought on record to prove non-receipt of inputs - Statements of dealersof indulging in issuing invoices without supply of goods, not particularly naming appellant - Proper records maintained by appellant for receipt of impugned inputs against proper duty paying documents and their use in manufacture - Credit not deniable - Rule 3 of Cenvat Credit Rules, 2004. [paras 5, 6]

AKSHAY LPG VALVES VERSUS COMMISSIONER OF CUS. & C.EX., HYDERABAD-IV [2016 (337) E.L.T. 129 (Tri. - Hyd.)]:-

Cenvat credit - Disallowance of - Credit allegedly availed fraudulently without actual receipt of imported goods in factory - Burden of proof - HELD : Burden to prove allegations made in show cause notice on Revenue- No material evidence brought out by Revenue to establish imported goods diverted/disposed of in Delhi itself and not transported to assessee’s factory in Hyderabad - Revenue relying mainly on statements of transporter’s partner retracted before Magistrate and statement of father of proprietor recorded under duress retracted during cross-examination- On other hand all relevant documents like weighment slips, job work challans, production register showing manufacture and clearance of goods on payment of duty, produced by assessee evidencing that imported goods actually received - No shortage of raw material detected and no evidence of substitution of impugned raw material - Transactions entered in statutory records supported by proper banking channel - Documentary evidence produced by assessee to prevail over retracted confessional statements- In absence of cogent evidence produced by Revenue to support allegation of non-receipt of imported goods by assessee, disallowance of Cenvat credit not sustainable- Rule 14 of Cenvat Credit Rules, 2004. [paras 8, 9, 10]

DHAKAD METAL CORPORATION VERSUS COMMISSIONER OF C. EX. & S.T., DAMAN [2015 (330) E.L.T. 561 (Tri. - Ahmd.]:-

Demand - Cenvat credit - Inputs - Credit denied on ground that no manufacturing facility found with original manufacturer - Only invoices, not goods delivered - No evidence produced about non-receipt of inputs along with invoices by appellant from dealer supplier - Nothing on record to show appellant’s knowledge about non-manufacturing facility with manufacture - Beyond comprehension that a person will get invoices without inputs and in turn procure inputs clandestinely - Appellant’s indulgence in clandestine clearance of goods not established - In absence of corroborative evidences and cross-examination of concerned persons, their statements not reliable - No mala fide intention in taking credit - Credit allowed. [para 6]
Penalty - Cenvat/Modvat - Limitation - Extended period - Invocation of - Mala fide intention of appellants not proved, hence extended period of limitation not invocable - Section 11AC of Central Excise Act, 1944. [para 6]
Penalty - Imposition of penalty on dealer supplier - Non-receipt of goods along with invoices by dealers, not proved - Payment of duty by original manufacturer not denied by Revenue - Mere suspicion without corroboration by independent evidence - Penalty not imposable - Rule 15 of Cenvat Credit Rules, 2004. [para 7]

SM ENERGY TEKNIK & ELECTRONICS LTD. VERSUS C.C.E. & S.T., VADODARA-II [2015 (328) E.L.T. 443 (Tri. - Ahmd.)]:-

Cenvat/Modvat credit - Recovery of - Credit wrongfully availed during April 1996 to November 1998 against invoices without actually receiving raw materials - Evidence - Cross examination of witnesses - Disallowance of -HELD : Revenue’s case rests mainly on statement of transporters denying transportation of material to assessee’s premises - However, No opportunity given to assessee to cross examine transporters which is a valuable right of accused/notice in quasi-judicial proceedings - None of the transporters appealed when summons issued, proving their statements cannot be relied upon - Since statement of executive director denying receipt of raw material in factory subsequently retracted, it cannot be relied upon - RTO’s report that vehicle numbers mentioned in invoices incapable of transporting such huge quantities of material, related only to 11 consignments out of 66 consignments and it is doubtful if it can be applicable in respect of all 66 consignments credit cannot be denied merely on basis of RTO report - Not disputed that invoices genuine and goods cleared from suppliers’ end - As per statements of suppliers, goods transported through transport brokers - Assessee made payments to suppliers by cheque and entire transaction duly recorded in statutory records - Assessee eligible to Modvat credit - Impugned order set aside as not sustainable - Rules 14 and 15 of Cenvat Credit Rules 2004. [paras 9, 10, 11, 12, 13, 14, 15, 16]

STI INDUSTRIES VERSUS COMMISSIONER OF C. EX. & S.T., VAPI [2015 (325) E.L.T. 910 (Tri. - Ahmd.)]:-

Cenvat credit - Denial of - Wrongly availed without receipt of inputs -Duty paying invoices issued by non-existent supplier - Evidence - Statements of employee and broker of supplier company - HELD : Copy of letter produced by assessee containing information received under RTI Act showing details of duty payment documents and RG 23A Part II and ER-1 Returns of supplier company along with transport documents proving existence of said supplier during material period - Statements of broker and employee not corroborated by any evidence - Correlation of material purchased established by receipt of semi-processed goods along with delivery challans and bills of labour payments from job workers engaged by assessee after receiving inputs directly from supplier, and clearance of final processed goods on payment of duty - Cenvat credit not deniable in absence of any proof that alternative raw material received and used in final product - Impugned order set aside - Rule 14 of Cenvat Credit Rules, 2004. [paras 7, 8, 9, 10]

DYNATECH CONTROL PVT. LTD. Versus COMMISSIONER OF CENTRAL EXCISE, NEW DELHI-II [2015 (329) E.L.T. 538 (Tri. - Del.)]:-

Cenvat credit - Invoice of registered dealer, credit availed thereon - Reversal sought alleging inputs not received - Case based only on statement of dealer- No enquiries made from manufacturer-supplier even after dealeradmitting of non-receipt of goodsfrom manufacturer - No enquiries from transporter - VAT documents submitted by appellant in support of receipt of goods, not controverted by Revenue - Giving benefit of doubt to appellant, credit not to be denied - Rule 3 of Cenvat Credit Rules, 2004. [para 5]

G.S. ALLOY CASTINGS LTD. VERSUS COMMISSIONER OF C. EX., GUNTUR [2016 (331) E.L.T. 310 (Tri. – Bang.)]:-

Demand of Cenvat alleged to be availed on the basis of fake invoices without actually receiving the raw materials in question - Evidence collected by Revenue is only in the shape of statements of third party- Uncorroborated statements of third party cannot be adopted as an evidence, without corroboration from an independent source though such statement can be of some value but cannot be solely relied upon for the purpose of holding against the assessee - No investigation from the transporterseven though their names were available in the respective invoices - Revenue is silent on the issue that if the appellants has not received the materials in question, how have they manufactured the corresponding final product - It is not only impractical but impossible to manufacture the final product without raw materials in question - Appellants having reflected the raw material in their Cenvat credit account and having shown the utilization of the same, heavy duty cast on Revenue to establish that such raw material was not the one which was covered by invoice in question and stands procured by assessee from any other source - No evidence to reflect procurement of raw material from any outside source - Demand set aside. [paras 8, 9]
The ratio of the above cited decision is clearly applicable in the facts and circumstances of the case because in the present case also, no investigation has been made from the principal sending goods for job work, transporters etc. As such, when no investigation has been made regarding the manufacture of goods on job work basis by using brand name of other person, the allegation of manufacture and clearance of excisable goods without payment of central excise duty cannot be leveled against the appellant.

RAJAN ENGINEERING WORKS VERSUS COMMR. OF C. EX., DELHI-IV, FARIDABAD [2012 (279) E.L.T. 306 (Tri. – Del.)]:-

Cenvat - Availment of credit - Demand raised only on the statement of input supplier that he has neither manufactured the goods nor supplied to assessee -Department has not produced neither any statement of transporter that goods have been transported nor actual receipt of the same - There is no corroborative evidence - Impugned order set aside - Appeal allowed - Rule 3 of Cenvat Credit Rules, 2004. [para 6]

SHAKTI STEEL ROLLING MILLS VERSUS COMMISSIONER OF C. EX., CHANDIGARH [2014 (304) E.L.T. 108 (Tri. – Del.)]:-

Cenvat credit - Invoices issued by supplier without corresponding supply of goods, alleged - When a dealer is registered with the Department and is issued Cenvat credit invoices, duly incorporating the Excise Registration number, it has to be held that manufacturer has duly complied with requirement of verifying the identity and address of supplier - Subsequent investigationrevealed that godown address were subsequently changed by supplier, indicating that it was rightly registered at the address given at the time of registration - Payment of raw material is made by appellant through cheque - Appellant in their statements recorded during investigationhave taken a categorical stand that they have received the inputs along with invoice -Revenue has not made any investigationswith transporter so as to arrive at correct factual position as to whether inputs were supplied or not -Inputs stand reflected in RG-1 register and stand used by appellant in their final product, cleared on payment of duty - In absence of any evidence that such raw material was procured from other sources, Revenue’s case that no inputs were received, not sustainable. [paras 4, 5, 7]

A.K. MULTIMETALS VERSUS COMMR. OF C. EX. & S.T., CHANDIGARH-I [2015 (323) E.L.T. 591 (Tri. - Del.)]:-

Cenvat credit - Denial of - Invoices alleged to be paper transactions and goods not received physically - Evidence - First stage dealer non-existent as his premises found to be locked and having no godown - Allegation of non-receipt of goodson the basis of investigation conducted at another manufacturer’s factory selling goods through said first stage dealer - Burden of proof -HELD : No investigation conducted at the end of actual manufacturer/supplier against whose invoices Cenvat credit taken- No statement of transporters or actual manufacturer/supplier taken - Not disputed that during relevant period, first stage dealer was registered with Central Excise Registration department - Department cannot allege a registered dealer is non-existent unless and until registration is cancelled -Since assessee claiming goods actually received and produced invoices entered in RG-23 Register against which Cenvat credit takenand weighment slips produced in support, burden of proof on Revenue to establish that goods not received, which Revenue failed to do - Impugned order not sustainable- Rule 14 of Cenvat Credit Rules, 2004. [paras 6, 7, 8]

In light of the above cited decisions, it is very much clear that the demand for central excise duty cannot be confirmed against the appellant unless and until it is proved with corroborative evidences that there was manufacture and clearance of excisable goods liable to central excise duty. Hence, the impugned order in original is not tenable and deserves to be set aside.

The appellant further submits that the imposition of penalty under Rule 25 of the Central Excise Rules, 2002 is not at all tenable as they have already justified that there is no central excise duty liability on their part as they are eligible for small scale industries exemption. Consequently, when there is no central excise duty liability, the question of confiscation of goods and imposition of penalty thereof is not at all sustainable. In this regard, reliance is placed on the decision given in the case of KAMKHIYA ALLOYS (P) LTD. VERSUS COMMISSIONER OF C. EX., LUCKNOW[2011 (267) E.L.T. 97 (TRI. - DEL.]wherein it was held that when there was no intention to clear goods without payment of duty, confiscation is not sustainable and so penalty under Rule 25 of the Central Excise Rules, 2002 is also not imposable. The head note of the case is produced for the sake of convenient reference as follows:-

Confiscation - Non-accountal of goods - No statutory record available on date of visit of officers, which produced after 15 days - Submission that factory closed earlier and production started on 5-9-2006 only while preventive officers visited on 7-9-2006 - Records not produced on visit as concerned clerk not available then - Nothing made out that assessee had intention to clear goods without payment of duty - Confiscation not sustainable as non-production of records satisfactorily explained - Rule 25 of Central Excise Rules, 2002. [para 4]

Penalty - Non-accountal of goods - Non-production of records satisfactorily explained - No allegation that assessee played fraud, collusion, suppression of facts etc. with intention to evade duty - Penalty not imposable - Rule 25 of Central Excise Rules, 2002. [para 4]
The appellant submits that since in the present case also there was no intention to clear goods without payment of duty as they were covered by the exemption notification. As such, when there was no central excise duty liability, the question of evasion does not arise and the benefit of above cited decision should be extended to them. Therefore, the impugned order in original should be quashed and the appeal should be allowed.

Reasoning adopted by the adjudicating authority: -The appellant is engaged in packing/manufacturing of Mehandi/Henna Powder. The factory premises of the appellant was also visited by the Central Excise Officers on 09.02.2016 whereby on belief that the appellant was engaged in packing/manufacturing of mehandi/henna powder mixed with other ingredients and bearing brand name or trade name of another person, without applying for Central Excise Registration with intent to evade payment of duty by way of clandestine removal, the finished goods and packing material of the appellant was also seized. The adjudicating authority has concluded that since the test report states that there are additives in the henna powder manufactured by the applicant therefore the benefit of exemption is not admissible to appellant.

Decision: Appeal Allowed

Conclusion: -The Learned Commissioner (Appeals) declared that the test reports clearly stated that there was no extraneous dye, hence they are eligible for the benefit of exemption as per the clarification of Board that products like dye and cosmetics are not to be contained in the henna powder or henna paste. Therefore, the goods manufactured are exempted and hence the goods cannot be confiscated and the duty demand, interest and penalty stands withdrawn.

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PJ/Case Study/2018-19/148
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