P. Anjani Kumar ORDER
P. Anjani Kumar, Member (T)
1. Heard both sides and perused the records of the case. The issue involved is whether the demand of duty from the appellants on the issue of shortages, shrinkages, non accountal and non-receipt of goods from job workers etc. and as to whether the allegation is sustained by evidence so as to be legally valid.
2. Briefly stated the facts of the case are that department has conducted stock taking of the unit of the appellants, M/s. Eastern Silk Industries, an EOU unit, initially themselves and after wards with the help of officers of CSTRI officials. The department alleged that
(i). There was a shortage to be 2140.03 Kg in the stock of raw material (Duty demanded Rs. 5,94,928)
(ii). The appellants have imported silk fabric, in place of raw material, in 2002 and cleared in domestic market (Duty demanded Rs. 6,96,138)
(iii). Shortage of raw material in godown register (Duty demanded Rs. 8,65,739)
(iv). The appellants availed wastage over and above permissible limits (Duty demanded Rs. 14,84,941)
(v). The appellants did not receive back the waste from job workers (Duty demanded Rs. 2,49,983)
A show cause Notice dated 20.7.2004 was issued. Commissioner, vide impugned order No. 34/2005 dated 15-3-2005, confirmed the duty demanded and imposed a penalty of Rs. 40,00,000/- on the appellant-company and Rs. 10,00,000/- penalty was imposed on Shri U.B. Venkatesh, Managing Director of the appellant-company. Hence, these appeals.
3. Learned counsel for the appellants submits that the stock taking was conducted on actual as well as estimated basis; stock of some sections was taken by Excise officers and some by CSTRI officers; report was given after a month; CSTRI officials have confirmed during cross examination that they have taken stock of preparatory and weaving sections only and stock of other sections was taken by excise officers; the report cannot be termed to be by experts. He submits that shortage cannot be alleged on presumptions and assumptions; department did not produce any evidence for diversion of goods found short. He relied upon the following cases.
• Oudh Sugar Mills Ltd. vs. Union of India: 1978 (2) ELT (J 172) SC
• CCE, Faridabad-II vs. Equipment Conductors and Cables Ltd.: MANU/PH/2590/2018 : 2019 (367) ELT 247 (P & H)
• ITC Limited vs. CCE, Bangalore: MANU/CB/0129/2002 : 2002 (149) ELT 1116 (Tri.-Bang.)
• Laxmi Exports vs. CCE & ST, Indore: MANU/CE/0702/2017 : 2018 (364) ELT 509 (Tri. -Del.)
• CCE, Surat-II vs. Special Project Finance (I) P. Ltd.: MANU/CS/0238/2008 : 2008 (225) ELT 533 (Tri-Ahmed.) - affirmed by Supreme Court [2016 (341) ELT A220 (SC)].
3.1. He further submits that there are factual errors in the report;
(i). The report considered only 22 of 42 arms of the machines; balance 20 could hold around 90 kg;
(ii). Out of 3375 kg of yarn available in the weaving section only 2496.74 kg was considered; this difference accounts for 200 kg;
(iii). 375 kg of cut bits (amounting to 575 kg) were not considered.
(iv). In respect of finished goods, book stock of 56,752 Mtr was considered against physical stock of 57,870.60 Mtr; this difference accounts for 200 kg;
(v). The report though saying that grammage varied from 100 gm-220 gm took a median of range 140-145; had they taken average of 142.5 gm, 400 kg would have been accounted.
Therefore, the alleged shortage in raw material was due to inputs contained in work in progress/finished good, discrepancy in conversion factors. As held in CCE vs. Mudra Texturizing Private Ltd.: 2009 (235) ELT 674 (Tri.-Ahmd.) duty demand if any, ought to have been on sale of goods, with evidence
4. Regarding the allegation of import and clearance of fabric in to DTA without permission, Ld. Counsel submits that there was no restriction on import of fabric; they have clearly described the good sin the bills of entry and no objection was raised; the imported goods were bonded in the warehouse in the presence of Customs Officer, who raised no objections; the fabrics were tested to be defective and therefore, were sold in DTA; there was no misstatement in the documents.
5. Ld. Counsel says demand of duty on the basis of shortage noted in private records is not sustainable; the raw material is hygroscopic and weight is likely to vary 10-11 percent; the person in charge of issuing bales to production, noted down the physical weight in the register; it could be some times less or more than the warehoused quantity as per bill of entry; entries showing excess were not considered by the officers; when a shortage of 3112 kg of raw material was already noted, there was no basis for shortage of 2140 kg; to this extent demand is duplicated.
6. On the allegation of availment of excess wastage, Ld. Counsel submits that Exim Policy as on April 2001 permitted 53% of wastage; during that time they have accounted for shrinkage of 49%; Public Notice No. 43 (RE-01)/1007-2002 was issued, w.e.f. 19-10-2001, prescribing wastage of 35% and procedures to be adopted; the appellant followed the same; it was in correct to demand duty saying that the appellant has taken advantage of the lacunae in policy during the period; it was held in Kiran Syntex Limited vs. CCE, Surat-I 2009 (238) ELT 481 (Tri.-Ahmd.) that duty equivalent to import duty cannot be demanded even if wastage exceeded the prescribed limit given in Hand Book of Procedures; Public Notice cannot be effective retrospectively. He relies upon the following:
• S.J. Fabrics Pvt. Ltd. vs. Union of India: MANU/WB/1356/2014 : 2015 (325) ELT 713 (Cal.)
• Uni Colloids Impex Pvt. Ltd. vs. Commissioner of Customs, Ahmedabad: MANU/CS/0064/2014 : 2014 (310) ELT 583 (Tri.-Ahmd.)
• Arviva Industries (I) Ltd. vs. Union of India: MANU/MH/0115/2004 : 2004 (167) ELT 135 (Bom.) affirmed by Supreme Court reported in 2008 (10) STR 534 (Supreme Court)
7. On the allegation of non-receipt of wastage from job workers, Ld. Counsel submits that out of the 3 job workers, one job worker has state on 23-7-2003 that processed fabrics along with visible shrinkage has been returned to the appellants; the documents, Annexure-II challans and delivery challans, in respect of another Job worker, Veda Silks were produced after personal hearing; it was alleged that job workers had no requisite machinery to process the fabrics of the appellant; However, it is on record that the job workers, further sub contracted the work to others and have returned processed fabrics to the appellants; as per Para 9.17 of EXIM policy scrap can either be returned to the EOU or can be cleared on payment of duty from the job worker; As per Para 9.30, the duty payable on wastage was the applicable duty on such wastage; Silk Waste (including cocoons, unsuitable for reeling, yarn waste and garneted waste is classifiable under 50.03 of CETA an attracts 'Nil' duty; therefore, the demand cannot be sustained.
8. Learned counsel further submits that the adjudicating authority has held that as the goods are not available for confiscation, no redemption fine is imposable. However, that can be taken care while imposing penalty. He submits that these findings shows the prejudice and perverse or vindictive mind-set of the adjudicating authority; in the instant case, demands have been raised on assumptions and presumptions; no proof of clandestine sale or use of raw material in clandestine manufacture has been established; when confiscation cannot be held to be sustainable, penalty can also not be sustained.
9. Learned AR for the department reiterates the findings of the OIO and submits that the stock taking has been recorded in Mahazar dated 11.6.2003 which was also signed by the Managing Director of the company; they have not disputed the method of stock taking; the SRO, CSTRI, Ms. Jamila has confirmed during the cross-examination that as the humidification plant was operational, the submissions on addition or subtraction due to environmental conditions is not acceptable. Learned AR further submits that while valuating the goods, the latest value near to the date of Mahazar was taken from a Bill of Entry of May 2003; the submissions on degumming losses are not valid as per standard input-output norms wastage of 35% was allowed; the appellants could not substantiate the shortages in raw material during the visit.
10. The learned AR further submits that the submissions of the appellants on the clearance of imported fabrics has been considered by the adjudicating authority; in terms of the license issued under Section 58 of Customs Act, 1962, the appellants were permitted to manufacture such fabrics from the imported raw silk, that means, import of fabrics was not permitted; it is not the case of the appellants that the rejects were generated during the manufacture of the finished goods; fabric was imported and the same was cleared under the guise that they are defective.
11. On the issue of shortage of raw materials as indicated in the godown register, learned counsel submits that it is not possible for the investigation to prove with mathematical precision; the very existence of katcha register is unexplained; Shri Balachandran Potti, who maintain registers could not explain the difference in book stock and physical stock; Shri U.B. Venkatesh, Managing Director accepted the shortage of 3112 kg. with reference to the stock katcha register vide his statement dated 22.5.2003.
12. On the issue of allegation of excess wastage percentage utilized by the appellant, learned AR submits that the issue has been considered by the adjudicating authority; the permissible wastage on raw silk prior to 1.4.2001 was 35%; EXIM Policy with effect from 1.4.2001 has erroneously mentioned this percentage as 53% which was corrected public notice dated 19.10.2001 to read as 35% again. Appellant has taken advantage of this mistake and shown high wastage of 49%.
13. Coming to the allegation of wastage from the job worker, the learned AR submits that it is evident on record from the statements of job worker that they have accounted the wastage and not returned any wastage to the appellant; in the absence of any documents to show that the waste was generated and sent back to the appellant-company or duty was paid on wastage, the demand was sustainable.
14. Heard both sides and perused the records of the case. We find that main allegation on the appellant is about non-reconciliation of stock of raw material and shortage of raw material. The shortage in the stock was arrived on the basis of stock taking by different officers of the department as well as CSTRI and the notings made in the katcha register. The appellants submits that the stock taking was conducted partially and the report was finalised after one month, therefore, it was illogical to say that the Managing Director of the company has not objected to the shortages on the day of stock taking; the CSTRI officials during the cross-examination accepted that they have taken stock only in the preparatory and weaving sections and rest was taken by the customs officers; he also submits as discussed above that around 1400 kgs. of shortage was explainable on the basis of his submissions of not considering different aspects like the number of arms of the machines, conversion from metres to grams, non-considerations of cut bits and wrong adoption of average GLM. We find that these submissions have not been considered in the impugned order. It was alleged on the basis of the existence of a katcha register that there was a shortage of 3114.17 kgs. Appellant submits that on the one hand the officers have taken the total shortage by way of joint stock taking along with officers of CSTRI; this being the case, it is not understood how additional shortage can be alleged on the basis of a katcha register; the officers did not consider the excess noticed in the katcha register wherever it was noted but were only interested in shortages. The appellant submits that the katcha register was maintained by the person who was in-charge of issuing bales for production. As the material is hydroscopic in nature, excess or shortage is bound to occur from the Bill of Entry quantity; therefore, the person was recording the actual weight of the material issued for production. We find that these aspects have also not been considered in the impugned order. Therefore, we find that the shortage has been arrived at on the basis of assumption or presumption or on the basis of calculations. Moreover, going by the case laws submitted by the appellants, we find that finding of shortage cannot in itself be a conclusive proof of raw material being sold clandestinely or being used for manufacture of fabric which has been sold clandestinely. We find that there is neither any allegation nor evidence regarding the clandestine clearance of such short-found material in the domestic market. That being the position, demanding of duty on mere shortages cannot be acceptable. We find that the apex court in the case of Oudh Sugar Mills Ltd. (supra) has held that allegations based only on calculation of raw material fed into the process or on working of the machinery is not a basis for demanding duty.
15. With regards to the alleged import and clearance of fabrics in DTA, we find that the department alleges that the appellants have imported fabrics whereas as per the license they were entitled to import only raw silk and that, they have cleared the imported fabrics under the guise of defects/waste. We find force in the appellant's contention that they have not mis-declared and the imports have been permitted by the customs officers after due examination at the time of import and they were also warehoused in the presence of customs officers. That being the position, it cannot be said that the appellant is at fault. It was incumbent on the officers to verify whether the import of fabric was permissible in view of the license issued to them. Keeping in view, the fact that a Bill of Entry was filed at the time of import and the goods were warehoused under the supervision of an officer, the appellants cannot be found fault with. It was an act which was performed under the glare of the light and customs cannot allege that the appellants have wrongly imported the fabrics. It was open to the officers to disallow the clearance and warehousing. In case, it was a mistake on the part of the department, show-cause notice could have been issued within normal period and not invoking extended period.
16. The department alleges that the appellants have used the excess waste formula due to an error in the EXIM Policy. EXIM Policy as on 1.4.2001, admittedly allowed wastage of 53% and therefore, there was nothing wrong in the appellant's utilising the same. It was not for the appellants to guess that there was a mistake in the policy. The appellants cannot be faulted for a lacuna in the law. With effect from 19.10.2001, with the issuance of public notice, permissible wastage was taken back to 35% and it is not the charge of the department that even after 19.10.2001, the appellants continued to avail excess percentage of wastage than the permissible limit. We find that any change in the law is to be applied prospectively only and cannot, in any case, be applied retrospectively to the detriment of the appellants. In view of the same, we find that demand of duty on this count is not sustainable. The case law cited by the appellants supports this view.
17. It was also alleged that the appellant had sent goods to three job workers and that, the wastage was not returned from the job workers along with the processed fabrics. It was alleged that one job worker has accepted that they have not sent back the wastage. The appellants however submit that it was accepted in the OIO that they have submitted delivery challans pertaining to one job worker i.e., Veda Silks, however, the same was not considered. We find that the appellants have not submitted any such evidence in respect of other two job workers. Therefore, the appellants are required to pay duty on the wastage not returned by the other two job workers. However, we find that in case such wastage is not returned, the department is in its right to collect the duty applicable on such waste and not certainly on the raw material that has gone into the generation of such waste. Such a conclusion does not seem to be the intention of the provisions of law. The appellant submits that in view of para 9.30, Clause - C of EXIM Policy, EOUs make clear scrap or waste/reminisce arising out of subcontracting of production from the job workers premises, on payment of applicable duties or bring it back to its own premises. Clause-D of the same para states that sale of waste/scrap/reminisce shall be subject to payment of applicable duties. The appellant submits that silk waste (including cocoons unsuitable for reeling, yarn waste and generated stock) falls under heading 50.03 of Central Excise Tariff Act, 1985 attracting 'Nil' rate of duty. Under such circumstances, even if it is held that the appellants have not received waste back from their job workers or the subcontractors of job workers, the applicable duty payable would be 'Nil'. The whole exercise will be futile. Moreover, like the case of shortage in raw material, we do not find that the department has proved anything with evidence to show that the scrap has been cleared in the domestic market.
18. In view of the discussion above, we find that the show-cause notice and the impugned order are not sustainable on any of the issues raised therein. Therefore, the duty demand is not sustainable. Once the duty demand itself becomes non-sustainable, the levy of penalties, on the appellant-company and the Managing Director, does not arise.
19. In view of the above, the impugned order is set aside and the appeals are allowed with consequential relief, if any.
(Order was pronounced in Open Court on 20/12/2019.)
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