Whether the stentering of cotton fabrics amounts to manufacture so as to levy excise duty on such fabrics?

PJ/Case Study/2013-14/

CASE STUDY

Prepared By:CA Neetu Sukhwani &
Kavita Thanvi

Introduction:- The assessee filed this appeal against Order-in-appeal issued by the Commissioner (Appeals). The assessee appears to have evaded Central Excise Duty amounting to Rs. 18,639/- leviable on the Cotton fabrics processed with the aid of power by clearing 102 Thans of Dyed Cotton Fabrics subjected to the process of stentering to M/s Arihant Finishing by way of not raising any invoice in contravention of provisions of Rule 4(1), 6, 10 & 11 of the Central Excise Rules, 2002.

The Commissioner (Appeal) passed the stay order and asked to deposit 50% of penalty imposed on the assessee and they were also directed to deposit the dues before 12.07.2004 and report compliance thereof failing which the appeal will be dismissed for non compliance of provisions of Section 35 F of the Act. Thereafter, the appellant have deposited the 50% penalty and informed to the Commissioner (Appeal) for compliance report. The Commissioner (Appeal) granted the final hearing wherein the appellant appeared before the learned Commissioner but they did not consider the submissions of the appellant. Feeling aggrieved by the impugned order-in-appeal, the appellant filed the present appeal before the Hon’ble CESTAT.

M/S JOVE (TAX) LINK [FINAL ORDER NO. A/55649/2013-EX[DB] DATED 15/02/2013]

Relevant Legal Provisions:-

Section 11AC of Central Excise Act, 1944:-

Penalty for short-levy or non-levy of duty in certain cases:-

(1) The amount of penalty for non-levy or short-levy or non-payment or short payment or erroneous refund shall be as follows:—

(a) where any duty of excise has not been levied or paid or short-levied or short paid or erroneously refunded, by reason of fraud or collusion or any wilful mis-statement or suppression of facts, or contravention of any of the provisions of this Act or of the rules made there under with intent to evade payment of duty, the person who is liable to pay duty as determined under sub-section (10) of section 11A shall also be liable to pay a penalty equal to the duty so determined;

(b) where details of any transaction available in the specified records, reveal that any duty of excise has not been levied or paid or short-levied or short-paid or erroneously refunded as referred to in sub-section (5) of section 11A, the person who is liable to pay duty as determined under sub-section (10) of section 11A shall also be liable to pay a penalty equal to fifty per cent of the duty so determined;

(c) where any duty as determined under sub-section (10) of section 11A and the interest payable thereon under section 11AA in respect of transactions referred to in clause (b) is paid within thirty days of the date of communication of order of the Central Excise Officer who has determined such duty, the amount of penalty liable to be paid by such person shall be twenty-five per cent of the duty so determined;

(d) where the appellate authority modifies the amount of duty of excise determined by the Central Excise Officer under sub-section (10) of section 11A, then, the amount of penalties and interest payable shall stand modified accordingly and after taking into account the amount of duty of excise so modified, the person who is liable to pay duty as determined under subsection (10) of section 11A shall also be liable to pay such amount of penalty or interest so modified.

Explanation.—For the removal of doubts, it is hereby declared that in a case where a notice has been served under sub-section (4) of section 11A and subsequent to issue of such notice, the Central Excise Officer is of the opinion that the transactions in respect of which notice was issued have been recorded in specified records and the case falls under sub-section (5), penalty equal to fifty per cent of the duty shall be leviable.

(2) Where the amount as modified by the appellate authority is more than the amount determined under sub-section (10) of section 11A by the Central Excise Officer, the time within which the interest or penalty is payable under this Act shall be counted from the date of the order of the appellate authority in respect of such increased amount.”.

Issue: - Following issue was made before the CESTAT:-

Whether the stentering of cotton fabrics amounts to manufacture so as to levy excise duty on such fabrics?

Brief Facts:-

The appellant, M/s Jove (Tax) Link are engaged in the processing of Cotton Fabrics falling under chapter-52 and Man Made Fabrics falling under chapter 55 of the schedule to the Central Excise Tariff Act, 1985. The assessee appears to have evaded Central Excise Duty amounting to Rs. 18,639/- leviable on the Cotton fabrics processed with the aid of power by clearing 102 Thans of Dyed Cotton Fabrics subjected to the process of stentering to M/s Arihant Finishing, Pali by way of not raising any invoice in contravention of provisions of Rule 4(1), 6, 10 & 11 of the Central Excise Rules, 2002.

The officer of the Central Excise department visited in the factory premises of the appellant The departmental officer have seized 102 Than (11016 Mtrs.) of Dyed Cotton fabrics subjected to the process of stentering sent to M/s Arihant Finishing without raising any invoice. Thereafter, they conducted physical verification of the stock. A SCN dated 05.01.2013 was issued to the appellants and they were directed to answer their reply to Joint Commissioner, Central Excise Commissionerate (JP-II), Jaipur. The appellant filed the reply to the impugned show cause notice vide their letter dated 03.03.2003. But the adjudication authority did not adhere to the submission of the appellant and passed the order against the appellant and confirmed the demand & imposed the penalty as well as interest. Feeling aggrieved by the impugned order, the appellant preferred an appeal before the Commissioner (Appeal). Thereafter, the Commissioner (Appeal) granted the stay hearing wherein the appellant appeared before appellate authority and filed the written submissions. The Commissioner (Appeal) passed the stay order dated 21.06.2004 and asked to deposit 50% of penalty imposed on them and they were directed to deposit the dues before 12.07.2004 and report compliance thereof falling which the appeal would have been dismissed for non compliance of provisions of Section 35-F of the Act. Thereafter, the appellant have deposited the 50% penalty and informed to the Commissioner (Appeal) for compliance report. The Commissioner (Appeal) granted the final hearing wherein the appellant appeared before the learned Commissioner but they did not consider the submissions of the appellant. Feeling aggrieved by the impugned order-in-appeal, the appellant prefers to file the present appeal before the Hon’ble CESTAT.

Appellant’s Contentions:-

The appellant submit that the impugned order-in-appeal passed by the Commissioner (Appeals-II), Central Excise Commissionerate (JP-II) is totally erroneous in law and is liable to be set aside. Further they submit that the appellate authority as well as adjudicating authority has passed a non speaking order that he has not discussed & distinguished the fact brought to their notice by them. Such an order is totally erroneous and void ab initio.

The appellant put forward the argument that stentering (known as tentering) is not manufacture process. For this, they rely upon meaning of stentering give in Fair Child Dictionary:-

"Tentering-A finishing process for holding a fabrics to the desired width and drying. It generally is the final step in finishing, giving the fabrics its finished appearance. See Tenter Frame."

Thus, it is only for the purpose of width setting and nothing else. After this process if they wash cotton fabrics, it loses its width setting. Thus, this change is not of lasting character. Hence, it can not be termed as "manufacture" as no new commodity with different name, character emerges. Theyhave only process of stentering in their factory. Thus, the processing done by them on cotton fabrics seized by department is not manufacturing process and as such no duty can be demanded from them.

In this regard, they rely upon Apex Court decision in case of SIDDESHWARI COTTON MILLS 11989(39)ELT-498(SC) wherein it was held that calendaring of cotton fabrics is only a temporary process and does not amount to manufacture. Similarly stentering is a temporary process and does not amount to manufacture. As such, no duty liability arises on their fabrics.

They also submitted that the chapter note in chapter 52 read as follows :-

3.ln relation to products of heading Nos. 52.07, 52.08 and 52.09, bleaching, mercerizing, dyeing, printing, water-proofing, shrink-proofing, organdie processing or any other process or any one or more of these processes shall amount to `manufacture'.

This does not include stentering in its definition. Whereas chapter 55 contains chapter note is which reads as follows :-

4.-In relation to products of heading Nos. 55.11,55.12, 55.13 and 55.14, bleaching, dyeing, printing, shrink-proofing, stentering, heat-setting, crease-resistant processing or an^y other processes or any one or more of these processes shall amount to 'manufacture'.

Thus, it is ample clear that process of stentering is included in chapter 55 and omitted in chapter 52. This clearly implies that the duty cannot be demanded only for process of stentering. The appellant are undertaking only the same process.

For this contention, reliance is placed on MADRAS HIGH COURT decision in case of AS HER TEXTILES V/S. ACCE [1993(65)ELT- 181]. It was based on tribunal decision wherein the tribunal has referred to notes in chapter 52 and has referred to deliberate omission in respect of the note dealing with yarn which is being is mercerising which process finds a place while dealing with fabrics. It was held that it is mercerising of yarn that does not amounts to manufacture. Following, the same ratio decidandia, it can be very well said that deliberate omission of process of stentering in definition of manufacture for cotton fabrics clearly brings the position that it is not manufacture for cotton fabrics whereas it is included in Chapter 55 (Man Made Fabrics).

Reliance was also placed on the decision of Highest Tribunal in matter of Excise & Customs in case of JCT LIMITED B/S. CCE, JAIPUR [2001(133)ELT-651]where in it was held that calendaring can not be termed as process of "manufacture". Therefore, following the ratio decidandia of above, the duty can not be demanded. If duty can not be demanded, then penalty can not be imposed.

Therefore, it was respectfully submitted that process of stentering is not manufacture. Thus, duty can not be demanded from them. If it is waived then penalty can not be imposed on them.

It was further submitted that the learned adjudication authority has simply brushed aside their submission by saying that stentering is a major process in processing of fabrics and after stentering some changes in character of fabrics takes place. Further, it was said that the same is covered by clause "or any other process" as mentioned in chapter note 3 of chapter 52. In this regard, the appellant submitted that their contention can not be brushed aside by simply saying that it is a major process and imparts some changes. It is not the question whether the process is major or minor, big or small but whether it brings about any change with which a new commodity with new name, character and used is emerging. The appellant are receiving dyed or printed fabrics. After the process of stentering, it remains dyed or printed fabrics only. The sole purpose of stentering on cotton fabrics is width setting. It does not bring any change of lasting character in fabrics. The dyed, printed fabrics after processing is known as dyed or printed fabrics in market. As such, it is not change.

They further submitted that bleaching, dyeing, printing and mercerising are not like process like stentering. As such, the process of stentering can not be covered by "any other process". Different machines as well as method are employed for undertaking these processes whereas a totally different stentering machine is used for doing stentering. By no stretch of imagination, it can be said that stentering is like process of bleaching, dyeing or printing. Thus, it can not fall under "any other process". This process is not ejusdem generis to process of bleaching, dyeing, printing, mercerising, dubbling, water proofing or shrink proofing or organic processing.

The Hon'ble Apex Court has defined ejusdem generis in case of SIDDESHWARI COTTON MILLS (P) LIMITED 1989(39)ELT-498(SC)which defines words "any other process". It read as under:-

"Interpretation of statute-ejus-dem-generis-Principle of-Similar words how to be construed-The expression ejus-dem-generis 'of the same kind or nature' . .................................................... Signifies a principle ofconstruction whereby words in a statute which are otherwise wide but are associated in the test with more limited words are, by implication, given a restricted operation and are limited to mutters of the same class or genus as preceding them. If a list or string or family of genus-describing terms are followed by wider or residuar^y or sweeping-up words, then the verbal context am] the linguistic implications of the preceding words limit the scope of such words. The principle underlying this approach to statutory construction is that the subsequent general words were only intended to guard against some accidental omission in the objects of the kind mentioned earlier and were not intended to extent to objects of a wholly different kind. But the proceeding words or expressions of restricted meaning must be susceptible ofimport that they represent a class. If no class can be found, efus-dem-generis rule is not attracted and such board construction of subsequent words may admit will be favoured. The preceding words in the statutory provision which, under this particular rule of construction, control and limit the meaning of the subsequent words must represent a genus or a family which admits a number of species or members. If there is only one species it can not supply the idea of a genus."

Thus, the Apex court while deciding with same chapter which has said that "any other process" will have limited scope and will be read with earlier words. The appellant have proved that stentering is not like process of bleaching, dyeing and printing. It does not impact any change of lasting character as it does not add any chemicals etc to fabrics. Hence, following the same, the contention of learned adjudication authority is wrong and it can not be termed as manufacture. Hence, process of stentering does not tantamount to manufacture for cotton fabrics and as such duty can not be demanded from them. If duty can not be demanded then penalty can not be imposed on them.

Apart from the above submissions, it was also submitted that It is general practice to enter the goods in the register when these are received them. But the material was received from M/s. G.P. Cotton Mills without invoice & challan. Thus it could not be entered into the Form IV or RG-1 Register. Thus, it was only a clerical mistake. Thus, there was no intent to evade payment of duty as alleged in the SCN.

It was also submitted that the Central Excise Officer intercepted taxi and seized 102 thans as there was no duty paying document available with the fabrics. They visited their factory and took statement of the munim, who accepted the clearance of goods without invoice. But this cannot prove that there was any clandestine removal. Thebonafides of the appellant is also proved from the fact that no other discrepancy was noticed in their factory when physical stock taking wasdone by the officer of .Central Excise. All the stock was tallied. If there had been any intention to evade payment of duty then there should have been excess stock of fabrics in their factory. Thus, there was no intention on their part at all.

It was also submitted that the appellant have only Hot Air Stentering Machine installed in their factory premises. Prior to Budget 2001, the Cotton fabrics was totally exempt undergoing the process of stentering. The duty is imposed from Budget 2002 only. Thus, traders of cotton were operating under this procedure and was not knowing the new rules and were not covered under Central excise. They do not send the bill alongwith the material. There was no intention to evade payment of duty at all. It was further submittedthat duty was once again exempted on Cotton fabrics processed on Hot Air Stentering Machine by exemption Notification No. 47/2002-CE dt. 28.06.2001. The proceeding for retrospective exemption under11C was going on. If it is done, there is no need to pay duty and so the duty should not be demanded. Further, the Board has clarified vide Circular No. 684/75/2002-CX dt. 26.12.2002 that no demand should be issued when proceeding under 11C is going on. Thus, the SCN issued was contrary to same and is not legally sustainable.

The appellant also submitted that penalty under Section 11 AC and penalty under Rule 25 are alternative penal provision. Both of them can not be imposed. But the SCN has invoked both provisions against them. They submitted that the penal action under Section 11AC can be imposed when there is intent to evade payment of duty. This is completely absent in their case. Thus, the penal action can not be invoked against them. Further, the penalty under Section 11AC is discretionary and not mandatory. It is held by CEGAT in case of EXCORS JOB.

They also drew the kind attention of adjudication officer to Section 11A (2B) which says that penalty should not be imposed when duty is paid before issue of Show Cause Notice. Thus, the penalty should not be imposed. Theyrelied on CEGAT Decisions which says that if the duty is paid before issuance Show Cause Notice, the penalty should not be imposed. The different case laws are as under:-

·         NETPLAST LTD. V/S. CCE, ALLAHABAD [2000(93) ECR-430]
·         SIMENDS LTD. V/S. CCE, ARUNGABAD [1999(34) RLT-    ]
·         TATA ENGG. & LOCOMOTIVE CO. LTD. V/S. CCE, PATNA [1994(4) RLT-762] & [1994(72) ELT-882]
·         SUNSILK DYEING & PRINTING MILLS (P) LTD. V/S. CCE, VARODARA [1999(105) ELT-56]
·         GOVT. OF INDIA Vs. IN. RE. DHARMPUR SUGAR MILLS LTD. [1990 (46) ELT-400 ]

Thus, no penalty should be imposed on them.

The appellant further submit that there is no evidence of the clandestine removal and onus of the same lies on the department. They have cited number of decisions before the appellate authority. But the appellate authority ignored all case laws. Such an order is not sustainable in eyes of law. Further they submit that the Cotton fabrics, stentering does not amount to manufacture. They are doing only stentering process on the fabrics. This was also cotton fabrics. Therefore no duty can be demanded from them. But the adjudication officer did not hear to their submission. They rely upon the decision in case of Comm. of Cus. C. Ex., Pune vs. Swastik Dyeing & Bleaching Factory [2004 (170) ELT 491]. But learned Commissioner did not pay weight to the same. Such an order is liable to be set aside. The appellant have categorily submitted that stentering is not included in chapter 52 as done by them but is covered by chapter 55. It also does not fall in “any other process”. As such it does not amount to manufacture. It is used for drying only. But the appellate authority did not discuss and distinguish the same in length and just passed the order-in-appeal. Such an order should be set aside. As the “stentering” does not amount to manufacture then the duty demand does not sustain. As such, penalty can not be imposed on them. Furthermore, the appellant submit that they have taken different grounds before the authority. This was listed in appeal itself that grounds taken in the adjudication and appellate stage are without prejudice of each other. Thus, the contention of the appellate authority that it is contrary to stand taken by them is totally erroneous. The order-in-appeal should be set aside. The appellant submit that stentering of cotton fabrics does not amount to manufacture then no duty liability occurs on them.

The appellant submit that penalty under Section 11AC should not be imposed on them as they have deposited duty before issuance of show cause notice. They have given Apex Court decision in case of Rashtriya Ispat Nigam Limited wherein it was held that there is no need of imposition of penalty when duty is deposited before issuance of show cause notice.

The recent landmark judgment of Larger Bench of Tribunal in the case of CCE, Delhi,-III vs. Machine Montell (I) Limited [2004 (62) RLT-709 (CESTAT-LB) waived serious penalty. But the appellate authority did not accept to their submission. Further, the Karnataka High Court has also waived the penalty in case of CCE, Mangalore vs. Shree Krishna Pipe Industries [2004 (113) ECR 718] when the duty was deposited before issuance of show cause notice. In that case the assessee has cleared material after crossing the permissible exemption limit. The department officer has visited and caught him. He has paid the duty. Thus, it is clear cut case of clandestine removal. It was deposited on being caught by the department. Hence, the Hon’ble Court case should be applied in instant case also. Following the same, the penalty is not imposable on them. Further, they submit that harsh penal provision under Section11AC is imposable only in grave offences like clandestine removal only. The Hon’ble Apex Court and High Court Larger Bench have waived the penalty in such cases only. Thus, the above cited case is clearly applicable in instant case. As such, the penalty should not be levied on them.

Reasoning of the CESTAT:-

The Hon’ble CESTAT held that the issue involved in this case stands decided by the Tribunal in the case of CC & E, Pune vs. Swastik Dyeing and Bleaching Factory [2004 (170) ELT 491 (Tri.-Mumbai)]. It stands held in this decision that since the goods involved is “Cotton Fabrics”, the question of heat setting of thermoplastic material through stentering does not arise being relevant only in the case of man-made fabrics. It is not the case in the SCN that SDBF undertake stentering for fixation of chemical finishes. It is therefore evident that the “Stentering” was undertaken only for drying. Therefore, the ratio laid down by the Hon’ble Supreme Court in the ‘Siddeshwari Cotton Mills’ case (supra) with regard to “calendaring” equally apply to the process of “stentering” carried on by the Respondents on Cotton Fabrics and the same would also not amount to “manufacture” as envisaged under Section 2(f) of the Act. In view of the said decision, they set aside the impugned order of confirming demand of Rs. 18,639/- and imposing penalty on the appellants.

Decision:- The appeal was allowed.

Conclusion:- The analogy drawn from this case is that when the process of “stentering” itself undertaken on cotton fabrics does not amounts to manufacture, in view of the provisions contained in Chapter 52 and the decision given by the Tribunal, demand of excise duty cannot be made from the assessee as when the process does not amounts to manufacture, the question of levying excise duty on the same does not arise.

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