ORDER
S.L. Peeran, Member (J)
1. Both the appeals raise common question of facts of law and hence they are taken up together for its disposal as per law.
E/3139-3141/90-D
These appeals arise from Order-in-Original No. 28/90 dtd. 12-6-1990 passed by C.C.E., New Delhi.
2. The appellants M/s. Kanam Foam Industries (hereinafter referred to as KFI) are manufacturers of rubber foam goods namely Micro Cellular (M.C.) sheets & Hawai Chappals. The department claims that these goods fall under Heading 16A(1) of the First Schedule of the erstwhile tariff of the CESA, 1944 and after the introduction of new Tariff under Tariff Heading 9404.00 of CET Act, 1985.
3. The department officials raided the premises of the appellants and also the residences of the proprietor of the appellant industry Shri. P.V. Var-ghese and that of Shri AVM Achuthan on 10-9-1987 and searches were carried on. This raid was done on the information received by the department that the appellants were incorrectly availing the exemption granted to SSI units under Notification Numbers 83/83, 85/83 and 175/83. As a result of the raid, and the extensive investigation done by the department, the appellants were issued with a show cause notice dtd. 18-12-1987 alongwith detailed annexures running into about 233 pages: Page 20 of the SCN states that:
“From the scrutiny of records pertaining to M/s. KFI and the investigation made on various aspects from different agencies including those who purchased Rubber foam products from M/s. KFI, it appears that M/s. KFI have evaded central excise duty by adopting the following modus operandi and mis-used the exemption granted to the small scale units by the Govt. from time to time.
(i) M/s. KFI suppressed production of rubber foam goods viz. cavity sheets, pillows, cushions in the records maintained under Central Excise Rules (as required under Rule 173G and Rule 226 of the said rules).
(ii) M/s. KFI had shown less value of the said goods in the bills/invoices issued for the sale of said goods with an intention to keep the total value of said goods cleared in each financial year during 1982-83 to 1987-88 within the limit stipulated in the exemption notification for small scale units.
(iii) M/s. KFI have wrongly shown the said sale of Hawai chappals and MC sheets in their account books with a view to suppress the production and clandestine removal of foam rubber products.
(iv) M/s. KFI did not declare the total value of Rubber Foam goods manufactured and cleared from their factory during each financial year in the declaration which they had filed in terms of Notification No. 111 /78 dtd. 1-3-1978 as amended for the financial years 1982-83, 1983-84, 1984-85, 1985-86, 1986-87 and 1987-88.”
3.1. Para 21 (a)states:
“From the accounts maintained by M/s. KRC it appears that they have been passing on huge amount to M/s. KFI without any purchase of goods on record. As per ledgers maintained by M/s. KFI/M/s. KRC, the following amounts were received by M/s. KFI during the years as noted against each:
1982 Rs. 9,90,731.00
1983 Rs. 9,58,504.00
1984 Rs. 15,18,500.00
1985 Rs. 6,58,384.00
1986 Rs. 7,58,700.00
Photo copy of the statement of Shri. O.P. Punnoose dtd. 23-9-1987 admitting the receipt of these amounts is enclosed as Annexure XIV. It appeared that the amount pertains to the value of the goods which M/s. KFI had transferred to M/s. KRC after clearing the same from factory clandestinely”.
3.2 21(e)
“No records have been found in the factory premises or in the premises of M/s. KRC which could show that the chappals were being manufactured in the factory as declared by M/s. KFI in their balancesheets and ledgers.
In respect of sale of chappals, it has been observed from the seized records that mostly the sales were on cash payment and on the invoices the names of the buyers were not indicated. In absence of such particulars, the buyers could not be identified. This has been done with intention to suppress the clearances of foam goods in the garb of sale of chappals.”
3.3 21(f) reads as follows:
“As already stated in the foregoing paragraph that M/s. Kanam Group has one more concern M/s. Trust Rubber Industries (hereinafter referred to as M/s. TRI). This firm is registered in sales tax and is housed in the same premises in which the factory of M/s. KFI is housed. M/s. KFI never declared in the declarations filed with the department about the existence of this firm which appears to be their own family concern. This firm M/s. TRI is dealing with sale purchase of foam goods, rubber compounds/M.C. sheets and latex adhesive. It appears that this firm has been created and housed in the same premises in which the factory of M/s. KFI is located with an intention to cover the clandestine removal of the foam goods manufactured by M/s. KFI as is evidenced from the following facts and circumstances:
(i) As per the accounts maintained by M/s. TRI they had sold the various goods during each financial year as under:
—————————————————————
Product 1982-83 1983-84 1984-85
----------------------------------------------------------------
Foam 14,04,842.70 9,61,804.20 NIL
Rubber Com- 2,84,692.50 5,36,822.70 1,10,112.75
pound & M.C.
Sheets
------------------------------------------------------------------
M/s. TRI are reported to have purchased foam goods from the following firms:
(i) M/s. Thomson Rubber Industries;
(ii) M/s. Nisi Trading Co.
Shri Thomas Kuruvilla, proprietor of M/s. Thomson Rubber Industries has stated in his statement dtd. 24-9-1987 and 25-9-1987 that the rubber foam products were not actually sold to M/s. TRI. His statement is corroborated by the very fact that neither in his account books nor in the account books maintained by M/s. TRI there is any mention of any expenditure relating to transportation of rubber foam goods to the premises of M/s. TRI. In the absence of this important aspect, it appears mat M/s. TRI have accounted for purchase of these goods with an intention to account for the goods which were clandestinely cleared from the factory of M/s. KFI. It is also observed that the M/s. TRI purchased the goods viz. foam products from a factory located far away from its premises, whereas, the same goods are available within the factory premises, whereas the same goods are available within the factory premises belonging to a firm of their own sister concern who are predominantly manufacturing foam products. The statement of Shri Thomas Kuruvilla dtd. 24-9-1987 and 25-9-1987 are enclosed as Annx. XVIIA & XVIIB.
It has also come to notice that M/s. TRI had been purchasing foam products from a firm Nisi Trading Co. Devnagar, Karol Bagh, New Delhi. With a view to ascertain the correct position regarding supplies made by them to TRI, they were summoned to give evidence. The summons issued to them were however returned by postal authorities with the remarks that addressee was not available. Therefore, the officers sent to serve the summon personally also drew blank as no company by such name was found at the given address. It is worthwhile to note that M/s. TRI had reportedly sold latex adhesive to M/s. Nisi Trading Co. These facts indicate that M/s. TRI have also not been getting supplies to foam products from M/s. Thomsons and M/s. Nisi Trading Co. It is difficult to understand why TRI preferred to purchase foam products from M/s. Nisi Trading Co. who are not manufacturer of rubber foam goods, rather than from M/s. KFI who manufacture these goods in the same premises and is a sister concern. This also tends to show mat the purchase of rubber foam products has been shown in the books by M/s. TRI to actually cover the clandestine removal of rubber foam products manufactured in the factory of M/s. KFI. It also appears that the latex reported to have been sold to M/s. Nisi Trading Co. by M/s. TRI was diverted to M/s. KFI. The statement of Shri Tilak Raj dtd. 18-9-1987 (owner of premises of so called Nisi Trading Co.) is enclosed as Annex. XVHI.
It has also come to notice during investigation that M/s. KRC have been storing latex purchased by them in the factory premises of M/s. KFI as is evidenced from the statement of Shri O.P. Punnose of M/s. KFI and Shri Thampan of M/s. KRC. Their statements in this regard have already been referred to in this notice in foregoing paragraphs. This arrangement appears to have been made wife a view to divert the stock of latex to M/s. KFI clandestinely and to cover such removal, M/s. KRC could issue bills showing sates of latex to other buyers. This intention of M/s. KRC is corroborated by the statement of Shri Thomas Kuruvilla dtd. 25-9-1987 in which Shri Kuruvilla has stated that sales of latex as shown in the ledgers of M/s. KRC was deliberately being stored within the premises of M/s. KFI with a view to divert the same for the production of foam goods.
M/s. KRC which is a related concern of M/s. KFI (as Shri P.V. Varghese is the Managing Director of this firm and he is proprietor of M/s. KFI) is engaged in trading of rubber foam products manufactured by M/s. KFI under the brand name of KOOLFOAM. The product manufactured by M/s. KFI is marketed by M/s. KRC. This firm is also dealing in other goods and as per their accounts, it is noticed that they have also purchased foam rubber products viz. cavity sheets, pillows, cushions etc. from other manufacturers like M/s. Thomsons Rubber Industries, New Delhi and M/s. Mahabir Indl. Enterprises (hereinafter referred to as M/s. Thomsons and M/s. KIE). Enquiries made have revealed mat M/s. KRC have accounted for the sale of rubber foam products from these units in their accounts just to cover the receipt of rubber foam goods from their own sister concern M/s. KFI which M/s. KFI had cleared from their factory clandestinely without accounting for the same in their excise records with an intention to keep the total value of clearances within the exemption limit laid down in the various notifications as referred to above in the foregoing paragraphs.”
3.4 Paras 27 to 30 reads as follows :
“From the above facts and circumstances it appears that the following products with the value as indicated against them in each financial year are liable for inclusion in the value of clearance of rubber foam goods from the factory of M/s. KFI, manufactured in the factory of M/s. KFI.
(i) Value of Hawai Chappals.
————————————————–
Year M/s. KFI Sale
--------------------------------------------------
1985-86 8,484.00
1986-87 11,57,518.00
1987-88 3,20,331.50
--------------------------------------------------
(ii) The value of sale of foam products as reflected in the books of M/s.TRI.
------------------------------------------------------------
Year Value of Value of M.C. Sheets
R. Foam Goods
------------------------------------------------------------
1982-83 5,86,272.00 5,267.00
(12/82 to 3/83)
1983-84 9,61,804.00 5,36,822.00
------------------------------------------------------------
(iii) Value of foam products shown in the books of M/s. KRC.
------------------------------------------------------------
Year Value of such goods
1982-83 2,11,547.00
(12/82 to 3/83)
1983-84 6,22,404.00
1984-85 13,77,990.00
1985-86 16,62,676.00
1986-87 10,04,030.00
1987-88 4,57,316.00
(upto 9-9-1987)
------------------------------------------------------------
As stated in the foregoing paragraphs, M/s. KFI have been working as a small scale unit and have availed exemption both from the licencing control and also from the payment of excise duty. They were also permitted to dear goods on the basis of value declared in the invoices/bills.
From the scrutiny of the records and the investigation made, it appears that M/s. KFI have deliberately declared less value in their invoices issued during the financial year 1982-83 to 1987-88 upto 9/87. This fact is borne out from the following prices mentioned in their bills/invoices:
————————————————————
Products Cavity Sheets Factory price per PCS
------------------------------------------------------------
1.465 KCS 75x36x4 Rs. 340/-
2.365 KCS 75x36x3 Rs. 290/-
3.865 KCS 75x36x2 Rs. 250/-
4.75605 KPS Rs. 90/-
5.162 KCS Rs.125/-
6. 1565 KCS Rs. 180/-
7. 301 KSC 21x22x3 Rs. 40/-
8. 421 KSC 21x22x4 Rs. 50/-
9. 318 KSC 18x18x3 Rs. 35/-
10. 418 KSC 18x18x4 Rs. 40/-
------------------------------------------------------------
The above prices remained effective for the entire period right from 1982 to 1987 though the cost of production including labour charges went on increasing with the passage of time. The statement of Shri. O.P. Punnose admitting the above fact is enclosed Annexure XIV.
(ii) During the course of search in the residential premises of Shri P.V. Var-ghese on 10-9-1987 a few price lists were recovered. These price lists bear prices for Kool Foam/Kanam Foam which the factory M/s. KFI are manufacturing bearing brand name Kool Foam/Kanam Foam. Photocopies of price lists are enclosed as Annex. XXI and Panchnama covering search of residential premises of Shri P.V. Varghese is enclosed as Annex. XXII.
Shri A.V.M. Achuthan, Chief Executive of M/s. KFI, has admitted in his statement dtd. 22-9-1987 that he has circulated these price lists under cover of the letter issued by M/s. KRC to various prospective clients. A perusal of these price lists has revealed that the prices of Kool Foam/Kanam Foam products are much higher than that declared by M/s. KFI in their invoices/bills issued to M/s. KRC e.g. the price of KCS 465 (cavity sheets) of 75X36X4 size is Rs. 780/- per piece in this price list, whereas, according to the bill M/s. KFI declared the price as Rs. 340/-. This shows that M/s. KFI had declared incorrect price in respect of rubber foam products manufactured in the factory. Similar is the case with other products. A chart showing prices of each product as shown in the bills issued by M/s. KFI and that shown in this price list has been prepared and is enclosed as Annex. XXIII. The statement of Col. A.V.M. Achuthan is enclosed as Annex. XXIV.
(iii) As per seized record No. 41 maintained by M/s. KFI for each rubber foam product, the following quanity of latex rubber is required.
————————————————————
Cavity Sheets Size Latex rubber required
for 1 PCS.
------------------------------------------------------------
1. 465 KCS 75x36x4 20 Kgs.
2. 365 KCS 75x36x3 18 Kgs.
3. 265 KCS 75x36x2 14 Kgs.
162 KCS 75x36x1 10 Kgs.
4. 301 KCS 21x22x3 2 Kgs.
5. 421 KSC 21x22x4 2.5 Kgs
6. 318 KSC 18x18x3 1.5 Kgs.
7. 418 KSC 18X18X4 2 Kgs.
8. 2466 KP 22x16x5 2 Kgs.
9. KBS45T 45x16x3. 5 Kgs.
5x2.5
10. KBS SOT 80x16x3. 7 Kgs."
5x2.5
------------------------------------------------------------
3.5 Paras 34 to 43 reads as follows :
“It is also noticed from the seized records that M/s. KRC and M/s. KFI are related concerns as Shri P.V. Verghese is Director in M/s. KRC and Prop, in M/s. KFI. The papers of both the firms are signed by employees of both the companies as is clear from the statement of Shri O.P. Punnose and Shri Tham-pan referred to above. Both the firms have interest in each other company and both the companies have promoted the business of each other. The godown of latex of M/s. KRC is housed in the premises of M/s. KFI. In view of this fact, the price as indicated in the price lists of M/s. KRC appears to form the price of product of M/s. KFI for assessment.
In view of facts and circumstances as discussed in the foregoing paragraphs, the aggregate value of clearances of Rubber foam goods during each financial year from the factory of M/s. KFI works out to be as under: (Details given in Annex. XXVI).
————————————————–
Year Total value of the goods (in Rs.) -------------------------------------------------- 1981-82 Rs. 35,66,188.00 1982-83 Rs. 45,31,874.00 1983-84 Rs. 46,73,843.00 1984-85 Rs. 37,85,498.00 1985-86 Rs. 39,55,642.00 1986-87 Rs. 48,32,955.00 1987-88 Rs. 21,75,537.00 (upto 9-9-1987) --------------------------------------------------
36. Since, the aggregate value of excisable goods falling under erstwhile T.I. 16A cleared during 1981-82 from the factory of M/s. KFI, had exceeded Rs. 15 lakhs, they were not entitled to exemption under Notification No. 80/80-C.E., dated 19-6-1980 for the year 1982-83, and accordingly duty was leviable on all goods cleared from the factory right from 1-4-1982.
37. Since, the aggregate value of excisable goods cleared from the said factory during financial year 1982-83 and 1983-84 had exceeded Rs. 25 lakhs, the said factory was not entitled to exemption under Notification No. 80/80-C.E., dated 19-6-1980, as amended by Notification No. 83/83-C.E., dtd. 1-3-1983, and the duty on said goods was leviable on all goods cleared from the factory right from 1-4-1983 to 31-3-1984 and from 1-4-1984 to 31-3-1985. Keeping in view the provisions of relevant notifications that remained in force during the period 1-4-1982 to 9-9-1987 the duty liability has been worked out which is detailed in Annexure-XXVI-A to this notice. Financial yearwise duty deman-dable is as under :-
——————————————————————-
Year Basic (Rs.) Spl. (Rs.) Total (Rs.)
-------------------------------------------------------------------
1982-83 9,75,561.40 48,778.07 10,24,339.47
(From Dec. '82)
1983-84 25,70,613.65 1,28,530.68 26,99,144.33
1984-85 20,82,023.90 1,04,101.19 21,86,125.09
1985-86 21,75,603.10 1,08,780.15 22,84,383.25
1986-87 16,66,477.50 16,66,477.50
1987-88 3,37,768.50 - 3,37,768.50
(Upto 9-9-1987)
-------------------------------------------------------------------
98,08,048.05 3,90,190.09 1,01,98,238.14
-------------------------------------------------------------------
38. From the facts and circumstances as discussed above, it appears that M/s. KFI were not entitled to exemption from licencing control and, therefore, were required to take out central excise licence for manufacture of excisable goods as required under Rule 174 of the said rules. It is thus seen that M/s. KFI had contravened the provisions of Central Excise Rules as under:
(i) they failed to take out central excise licence for manufacture of foam rubber products and so called M.C. Sheets falling under erstwhile T.I. 16A(1)a and now under sub-heading 9404.00 of the said Tariff Act thereby contravened the provisions of the Rule 174 of the said Rules read with Section 6 of the Central Excises and Salt Act, 1944.
(ii) They removed excisable goods without cover of gate pass or any other documents containing all information contained in the gate pass (with full particulars) as required under Rule 52A of the said Rules.
(iii) They failed to submit classification list/price list in respect of excisable goods manufactured in the factory as required under Rules 173B & 173C of the said Rules.
(iv) They failed to maintain account for the goods manufactured as required under Rules 173G and 226 of the said Rules.
(v) They removed the excisable goods without determining duty liability as required under Rule 173F and without cover of gate pass as required under Rule 52A of the said Rules.
(vi) They removed the excisable goods from the factory without discharging duty liability as required under Rules 9(1) and 173G of the said Rules.
39. It appears that the said M/s. Kanam Foam Industries have wilfully suppressed the material true and correct information in the declarations filed by them for the financial years 1982-83 to 1986-87 as referred to in para-13 of this notice and also furnished wrong certificates on such declarations and thus availed exemption under Notification Nos. 80/80-C.E., dated 19-6-1980, 83/83-C.E., dated 1-3-1983, 85/85-C.E., dated 17-3-1985 and 175/86-C.E., dated 1-3-1986 as amended with intention to evade payment of excise duty. They have also not shown true and correct value in the invoices/bills for the sale of Rubber foam goods and contravened the provisions of the Central Excise Rules as aforesaid with intent to evade payment of duty. Therefore, the extended period of five years as provided under Section 11A of the Central Excises and Salt Act, 1944 is applicable in this case.
40. Since M/s. KFI have contravened the provisions as aforesaid, they are liable for penal action under Rules 9(2), 52A, 173Q and 226 of the said Rules.
41. Since M/s. KRC have received excisable goods without cover of excise gate pass as required under Rule 52A from M/s. KFI, and thus appear to have contravened the provisions of Rule 52A of the said Rules, they are liable for penal action under Rule 52A of the said Rules.
42. Now, therefore, M/s. Kanam Foam Industries are required to show cause to the Collector of Central Excise, Central Revenue Building, New Delhi within 30 days of the receipt of this notice as to why:
(i) the goods seized from the factory of M/s. KFI on 10-9-1987 valued at Rs. 15,025/- should not be confiscated under Rule 9(2) read with Rule 173Q of the Central Excise Rules, 1944,
(ii) the duty amounting to Rs. 1,01,98,238.14 only (Basic Rs. 98,08,048.05 & Rs. 3,90,190.09 as special excise) should not be demanded and recovered under Rule 9(2) of the said Rules read with Section 11A of the Central Excises & Salt Act, 1944 (as detailed in Annexure-XXVI-A)
(iii) why penalty should not be imposed on M/s. Kanam Foam Industries under Rules 9(2), 52A, 173Q and 226 of the Central Excise Rules, 1944,
(iv) the land, building, plant and machinery, material conveyance or any other thing used in connection with the manufacture, production, storage, removal or disposal of such goods or any other excisable goods on such land or in such building or produce or manufactured with such plant and machinery, materials or things should not be confiscated under Rule 173Q(2) of the said Rules.
43. The said M/s. Kanam Rubber Co. (P) Ltd., are required to show cause to the Collector of Central Excise, Central Revenue Building, New Delhi within 30 days of the receipt of this notice as to why:
(i) the goods seized from their godown on 10-9-1987 valued at Rs. 49,440/- should not be confiscated under Rule 9(2) read with 52A of the Central Excise Rules, 1944.
(ii) penalty should not be imposed on them under Rule 52A of the Central Excise Rules, 1944.”
4. In response to the show cause notice, the appellants – M/s. KFI filed a detailed reply, dated 23-12-1988 along with annexures running to about 748 pages. A separate reply was filed by M/s. KRC vide dated 9-5-1989 along with annexures running to 919 pages.
5. Thus the main contentions raised in the show cause notice is paraphrased in paragraph-10 of the Memorandum of Appeal by appellants which is reproduced herein below :-
“10. The main contentions raised in the show cause notice were:
(i) That during the period Dec. 82 to 9th Sept. 87 KFI were not manufacturing Micro Cellular sheets (M.C. Sheets) or Hawai chappals and sheets as indicated in the books of accounts but all such clearances of M.C. sheets and Hawai chappals were in fact rubber foam goods manufactured and cleared as M.C. Sheets and Hawai chappals and thus the entire value of sales of M.C. Sheets and Hawai chappals were to be considered as rubber foam goods and excise duty to be paid on the same.
(ii) Kanam Rubber Company Pvt. Ltd., was showing in their records purchases of rubber foam goods not only from KFI but also from other companies like Thomson Rubber Industries, Mahavir Industrial Enterprises, etc. But all such purchases of rubber foam goods from units other than KFI were all to be alleged as purchases from KFI only and thus excise duty ought to have been paid on those quantities of rubber foam goods by KFI.
(iii). The sales of rubber foam goods by TRI were also to be construed as those manufactured by KFI and duty to be paid by KFI on all quantities of rubber foam goods sold by TRI.
(iv) The sales of Dry rubber goods like M.C. Sheets effected by TRI were in fact rubber foam goods manufactured by KFI and KFI should pay excise duty on those quantities also.
(v) The value of the rubber foam goods originally cleared by KFI should be discharged and the value at which rubber foam goods were ultimately sold by KRC in accordance with the printed price list resumed from the residence of Mr. P.V. Verghese alone should form the basis and the value of rubber foam goods cleared by KFI, was to be increased to that extent.
(vi) The goods seized in the premises of KFI and KRC were to be confiscated”
6. The appellants had also filed a detailed written submission before the learned Collector. The learned adjudicating authority had granted them opportunity of taking the copies of document seized/relied by them and also granted them opportunity to cross-examine the witnesses. After a detailed hearing and examination of the case the learned Collector has passed the impugned order. In the impugned order, the learned Collector also put the case of the Department at page 5 of his order, which is as follows :-
“To put in a nutshell, the investigating officers came to a tentative conclusion that KFI was indulging in evasion of excise duties in the following manners
1. KFI undervalued their goods;
2. KFI cleared rubber foam goods in the guise of MC sheets and Hawai chappals;
3. The value of purchase of rubber foam goods by KRC are to be taken as rubber foam goods cleared by KFI;
4. The value of the sale of rubber foam goods by TRI purchases from other manufactures are to be treated as rubber foam goods manufactured by KFI and
5. The value of MC sheets cleared by TRI are to be treated as value of clearances of rubber foam goods by KFI. Accordingly, a show cause was issued dated 19-12-1987 in which the total value of rubber foam goods cleared by KFI were alleged to be as under:
————————————————–
Year Total value of the goods (in Rs.)
--------------------------------------------------
1981-82 Rs. 35,66,188.00
1982-83 Rs. 45,31,874.00
1983-84 Rs. 46,73,843.00
1984-85 Rs. 37,85,498.00
1985-86 Rs. 39,55,642.00
1986-87 Rs. 48,32,955.00
1987-88 Rs. 21,75,537.00
--------------------------------------------------
6. The show cause notice alleged that duty amount of Rs. 1,01,98,239.14 was evaded by KFI as given in the Tabular Column below :-
-------------------------------------------------------------------
Year Resin (Rs.) Spl. (Rs.) Total (Rs.)
-------------------------------------------------------------------
1982-83 9,75,561.40 48,778.07 10,21,339.47
(from Dec.1982)
1983-84 25,70,613.65 1,28,530.68 26,99,144.33
1984-85 20,82,023.90 1,04,101.19 21,86,125.09
1985-86 21,75,603.10 1,08,780.15 22,84,383.25
1986-87 16,66,477.50 - 16,66,477.50
1987-88 3,37,768.50 - 3,37,768.50
-------------------------------------------------------------------
98,08,048.85 3,90,190.09 1,01,98,238.14
-------------------------------------------------------------------
The show cause notice proposed to confiscate the seized goods valued Rs. 15,025 from KFI apart from the proposal to impose penalty for the violations of Rules 173B, 173C, 173G, 226 and Rule 9(1).
7. The same show cause notice was issued to KRC for the confiscation of goods valued Rs. 49,440/- seized from the premises apart from imposition of penalty on them under Rule 52A."
7. The learned Collector has summarised the replies and the submissions made before him in pages 7 to 26 of his order. Pages 27 to pages 48 deal with his finding on the points raised before him. The final order passed by the learned Collector is at para-40 at page-49 of his order, which is reproduced herein below:
“40. In view of the finding above, I order as under :-
(i) Value of MC Sheets/Hawai chappals sold by KFI during the years 1982-83 to 1987-88 shall be treated as the value of foam rubber goods manufactured and sold by KFI and the value of MC Sheets/Hawai chappals sold by KFI shall be added to the value clearances of foam rubber goods effected by KFI, for purposes of assessment to duty.
(ii) Foam rubber goods purchased by KRC from M/s. Thomson Rubber Industries and M/s. United Enterprises shall be treated as clearance of foam rubber goods from KFI to KRC. The value of foam rubber goods sold by KRC corresponding to the purchases shown to have been made from M/s. Thomson Rubber Industries, M/s. United Enterprises shall be added to the aggregate value of clearance of foam rubber goods effected by KFI for purposes of assessment to duty.
(iii) Value of dry rubber goods and foam rubber goods sold by TRI shall be treated as representing the value of foam rubber goods manufactured and removed by KRI and shall be added to aggregate value of clearances of foam rubber goods by KFI for purpose of assessment to duty.
(iv) Assessable value of foam rubber goods manufactured and cleared by KFI shall be determined on the basis of the sale price charged by KRC from the dealers to whom supplies of foam goods were effected directly from the factory premises of KFI.
(v) The aggregate value of clearance of foam rubber goods effected by KFI during the years 1982-83 to 1987-88 (upto 9-9-1987) determined in the manner indicated above has been worked out and shown in the chart enclosed with this order. The amount of duty payable for clearances of foam rubber goods effected by KFI during the respective years has also been worked out and shown in the enclosed chart. The aggregate amount of duty payable by KFI for the years 1982-83 to 1987-88 (upto 9-9-1987) works out to be Rs. 70,39,900.66 I, therefore, confirm the demand of duty of Rs. 70,39,900.66 under Rule 9(2) of Central Excise Rules, 1944 read with Section 11A of Central Excises and Salt Act, 1944 and require M/s. Kanam Foam Industries, Kirti Nagar Indl. Area, New Delhi to forthwith pay the aforesaid amounts.
(vi) Foam rubber goods valued at Rs. 15025/- seized from the factory premises of KFI were provisionally released and since the party failed to produce the goods in terms of the bond, I order for enforcement of bank guarantee to the extent of Rs. 5000/- towards value of the goods.
(vii) Foam rubber goods valued at Rs. 49,440/- seized from the godown premises of Kanam Rubber Co. and listed in Annexure ‘B’ to the Panchnama dated 10-9-1987 are held to be liable to confiscation under Rules 173Q and 226 of the Central Excise Rules, 1944. However, since these goods have already been released provisionally to the party and the party failed to produce the goods in terms of bond, I order enforcement of Bank guarantee to the extent of Rs. 17,000/- towards value of the goods.
(viii) In view of serious nature of offence committed by M/s. KFI, I impose a penalty of Rs. 7.25 lakhs on M/s. KFI under Rule 173Q of Central Excise Rules, 1944 and penalty of Rs. 1000.00 on M/s. K.R.C. under Rule 52A of the said rules. The balance of the amount covered under the Bank guarantee executed by M/s. KFI is ordered to be adjusted towards the penalty imposed under this order on KFI. As far as the Bank guarantee executed by M/s. KRC is concerned, the balance of the amount after inforcing Rs. 17,000/- towards value of goods of Rs. 1000/- towards penalty under this order is ordered to be returned to M/s. KRC.”
8. We have heard Shri V. Lakshmikumaran, learned Advocate for the appellants and Smt. J.M. Shanthi Sundaram, learned SDR for the Revenue. Each ground raised and argument pertaining thereto and its finding is given against each of the ground raised by the appellants.
9(i)A. The main ground is regarding the Classification of the impugned product: The main raw materials for the rubber foam goods is rubber latex and for MC sheets Hawai chappals are dry Rubber (RMA), Synthetic rubber etc. They contend that MC sheets are totally exempted from payment of duty under Notification No. 71/68, as the said sheets were not used for retreading or re-rolling of old tyres. Hawai chappals were also wholly exempted from excise duty under Notification No. 49/86 as the value per pair of Hawai chappal was much less than the price fixed for qualifying the exemption during the relevant time. It is stated by them that while sub-item (1) of erstwhile Tariff 16A covers latex foam sponge, sub-item (2) covers plates, sheets and strips of unhardened rubber whether or not vulcanised. They state that admittedly plates, sheets and strips of latex foam are of unhardened variety but vulcanised. Thus cavity sheets and other plates, sheets and strips of latex would squarely fall under 16A(2). They state that Item 16(A)(2) is more specific for plates, sheets and strips of latex foam. Only those latex foam sponge which are not in the form of plates, sheets and strips could be covered under sub-item (1). They draw attention to Heading 40.08 of CET, 1985 and submit that sub-Heading of 40.08 specifically differentiates between plates, sheets and strips of cellular rubber and others. This distinction is always kept and hence sheets, strips plates of rubber foam or latex foam should necessarily be classified under Tariff Item 16A(2) and not under 16A(1), prior to 28-2-1986. They contend that by Notification No. 71/68-CE, dated 1-4-1968, all goods falling under 16A(2) which are used for purposes other than retreading, re-rolling of old tyres are wholly exempt from duty and hence goods in question normally cavity sheets and other rubber foam sheets would be wholly exempt from payment of duty.
9(ii). Regarding Classification : It is argued by the learned Advocate that there is no dispute regarding MC sheets and chappals being wholly exempted as no latex had been used in the manufacture of these items from rubber using Coagulated rubber only. It is urged that the item fall under erstwhile T.I.16A(2) and not under T.I. 16A(1) as classified by the Department, and hence the exemption cannot be denied to them. The item is not latex foam sponge and cannot be so considered and its classification has to be done under T.I. 16A(2) only as sheets. It is manufactured in a mould and, what comes out is in the form ‘Scooter Seat’ an article of latex foam sponge, it is in the form of sheet and not latex foam sponge by itself. Latex foam sponge can be in any shape, even of a shape of scooter seat and hence as a sheet it should be classified under T.I. 16A(2) and not as a latex foam sponge, as above by Department. It is sold as Cavity Sheet, as admitted by the Department and not as latex foam sponge. If the item is such as to be classifiable under both the headings, then only that heading, which is .more acceptable has to be assigned. In this context reliance is placed on the ruling rendered in the case of Pelisetty Somasundaram (P) Ltd. v. Govt. of India , as reported in 1984 (17) E.L.T. p. 306, Madras High Court. In the new tariff it requires to be classified under Heading 4008 as a cellular sheet. On a specific query from the Bench, Shri V. Lakshmi-kumaran, learned Advocate admitted that the ingredients being identical, the item could be considered as latex foam sponge but as it emerged in the form of a sheet and Scooter Seat, an article of Sheet had emerged, hence the goods are more appropriately classifiable under T.I. 16A(2). He also admitted that all other types, shapes or forms of latex foam sponge would come under Tariff Item 16A(1) but those in the form of sheets, and strips would come under T.I. 16A(2). He also admitted that the party had classified the goods under T.I. 16A(1) upto the year 1971 but has become wiser on receipt of show cause notice to contend the correct classification under T.I.16A(2). Merely because the party had earlier accepted one classification, it did not mean, the correct classification cannot be challenged.
9(iii). Replying to the arguments of learned Counsel, Smt. Shanthi Sundaram, the learned SDR contended that whatever was made from latex foam sponge would fall under T.I. 16A(1). T.I. 16A(2) would attract in respect of those items which are not made from latex foam sponge. She referred to the finding of the Collector at page-28 of his order regarding classification.
10. We have carefully considered the submissions of both the sides on the aspect of classification of the products in question. The learned Collector in the impugned order has held at page 28 of his order that:
“Thus all products of latex foam sponge are classifiable under sub-item (1) explanation to sub-item further makes it clear that this sub-item includes articles made of latex foam sponge. Thus, not only the latex foam sponges in its primary forms like plates and sheets but also articles made from such primary forms are covered by sub-item (1). Sub-item (2) relates to plates, sheets and strips of unhardened rubber. If the tariff under item 16A are read and viewed as a whole it would be evident that only such plates, sheets and strips of unhardened rubber would be covered by sub-item (2) as are not made of latex foam sponge. Sub-item (1) of T.I. 16A is a more specific tariff entry to cover mattresses, cushions etc of latex foam sponge than sub-item (2) which is applicable to plates, sheets and strips of rubber other than that of latex foam sponge. I, therefore, reject party’s contention that rubber foam goods in question were properly classifiable under T.I. 16A(2) during the relevant period and hold that classification of these products under T.I. 16A(1) as indicated in the show cause notice is the correct classification.”
11. We are agreeable with this finding that the goods emerging from the mould are not in the nature of plates, sheets and strips. They emerge in the shape of latex foam sponge in that there are cavities. They are put to uses of pillows and mattresses and not as plates which are put to uses of re-rolling, retreading or repairing of tyres as referred to in the Notification No. 71/68-C.E., dated 1-4-1968. Those emerging in the form of latex foam sponge cushion seats in unfinished or naked foam have been held to be classifiable under T.I. 16A(1) in the case of CCE, Madras v. M.M. Rubber Co. Ltd., Madras, as reported in 1984 (15) E.L.T. 198. The finding given by the Tribunal in paragraphs 5 & 6 are reproduced below :-
“5. We have carefully considered the matter. A part or accessory of a motor vehicle is one which is ready for fitment to the motor vehicle either as original equipment or as replacement. This is the popular or common understanding of the concept of machinery parts or spare parts. No customer of a part or accessory for his motorcycle or scooter would like to buy an unfinished article which cannot straightaway be used by him for fitment. Cushion seats cleared by the appellants in unfinished or naked form cannot be called a part or accessory of a motor vehicle. No doubt, they are purchased by manufacturers of motor vehicles. But the point is that those manufacturers cannot and do not use the naked seats as such. They have to carry on further manufacturing operations thereon like stitching the leather or rexin cover before the seats become ready for fitment to the motor vehicle. We, therefore, hold that the subject cushion seats, in the form they are cleared from the respondent’s factory, do not merit classification under Item 34A of the tariff. The argument that the seats were specially designed for a specific use ultimately cannot decide classification of the unfinished seats at the time of clearance. All the authorities cited by the respondents relate to cases of finished articles which could straightaway be fitted to the appliance or machinery and they do not, therefore, advance the respondents’ case for classification of the subject goods as parts and accessories of motor vehicles.
6. The only question that remains to be decided by us is whether the subject seats could be classified as “Latex foam sponge” under Item 16A(1). The respondents had been declaring their latex foam sponge pillows, cavity sheeting, chair cushions, cinema seats, scooter seats, bus seats etc. under the broad description “Latex Foam Sponge Brand ‘M.M. Foam”‘. There has, therefore, never been any doubt that all these articles were only different varieties of latex foam sponge and the entry 16A(1) covered them specifically. We were informed by the respondents that their subject seats are moulded as such from latex and are not cut from any bigger piece of latex foam sponge. The Explanation added to Item 16A(1) on 1-3-1983 to include thereunder “articles made of latex foam sponge” is, therefore, hardly relevant for classification of the subject seats. We hold that the original entry “Latex foam sponge” covered latex foam sponge in all its forms and varieties and hence the subject seats too were covered by it.”
This ruling has again been followed in the case of Collector of Central Excise, Madras v. Apex Rubber (P) Ltd., as reported in 1987 (32) E.L.T. 593. Paragraph-6 is reproduced below:
“6. The point for decision in this appeal is whether the products in dispute be classified under TI 16A(1) or under T.I. 68. Item 16A(1) of the C.E.T. prior to 1-3-1982 read as “latex foam sponge”. After 1-3-1982 also, the item read as “latex foam sponge”. The explanation to the item includes articles made of latex foam sponge. The goods were cleared as “latex foam sponge” in specific shapes and sizes both before and after 1-3-1982. The Appellate Collector was of the view that latex foam sponge in specific shapes and sizes are classifiable as motor vehicle parts under TI 34A prior to 1-3-1979 and under TI 68 as non-specified motor vehicle parts after 1-3-1979. The process of manufacture has been set out by the respondents as follows:
“Latex cushions are made by frothing 60% centrifuged liquid latex by mechanical whipping, after adding necessary frothing chemicals. This whipping is carried out in metal bowls and using wires whisks. Different chemicals required for vulcanisation and improved gelling qualities are also added before whipping. When the frothed latex reached the desired volume, a delayed action gelling agent is added and thoroughly mixed. At this stage when the froth is still liquid, the same is transferred to aluminium moulds, which is to give the desired shape of the article produced. Then the liquid compound starts setting gradually inside the mould.
The next stage of vulcanisation. For this once the gelling is over, the moulds containing the gelled froth are kept under steam heating. After heating the moulds for the required time, they are opened and the vulcanised cushions are stripped and washed in water. The washed cushions are squeezed in rollers and then fed into drying chambers. After drying, the cushions are trimmed, inspected and kept for despatch.”
It is seen from the above process that frothed latex is transferred to aluminium moulds to give a desired shape of the article. The frothen latex at that stage is still in the form of a liquid and gradually sets in the mould. The items are produced to desired specifications laid down by the consumers. In order to fix the tariff classification, resort to the residuary item should be the ultimate resort and initially we have to find out whether the product could be classified in any one of the other descriptions. If Items 1 to 67 are not attracted, then the levy under TI 68 could be justified. From the facts of the case, it is dear that the items are latex foam sponge “in the form of bus seats, scooter seats” etc. The product have a close affiliation to TI 16A(1) because they are nothing but latex foam sponge. TI 16A (1) does not specify that the product should not be in specific size or shapes. From the process of manufacture set out earlier, it is clear that the product is nothing but latex foam sponge. The mere fact that the frothed sponge is transferred to aluminium moulds of particular shapes will not take away the products out of the ambit of the Tariff Item 16A(1).”
12. The reasoning of the Tribunal is well founded and there is no reason to differ from the same. The learned Advocate relied on the ruling of Pelisetty Somasundaram (P) Ltd., case (supra). This case deals with general principles of interpretation of taxing statute and does not have a direct bearing on the classification of the Tariff Entry and hence in view of the ruling in M.M. Rubber Co.’s case (supra) and that of Apex Rubber (P) Ltd.’s, case (supra), settling the issue of classification, the ruling relied by the learned Advocate is on general principle of interpretation of Taxing Statute would not be of much help. Moreover admittedly the appellants themselves were classifying these products under T.I. 16A(1) and as such, the learned Collector’s finding is confirmed. As regards chappals, there is no dispute regarding its classification under T.I. 36. As regards classification of the impugned goods in the new Tariff, GET 1985, the appellants have not raised any dispute about it before the lower authorities and also before us and no arguments have also been placed. Thus no findings are called for.
13(i)(B). Grounds regarding allegation KFI never produced MC Sheets & Hawai Chappals: The charge is that the appellants had suppressed the production and clandestine removal of foam rubber goods. It is alleged that they had cleared foam products like mattresses, cushions, pillows etc. in the guise of MC sheets, and Hawai Chappals. The ground relied in the show cause notice is that they had not declared manufacture of MC Sheets and Hawai Chappals in the declaration filed by them with the Central Excise authorities, while claiming exemption from licencing control. The appellants’ contention is that they are not required to file declaration in respect of these two items, as the same are exempted goods. The learned Collector has rejected this plea on the ground that there is no stipulation in the notification or in the schedule to the form prescribed under the said notification to the effect that the manufacturer is required to furnish information about the description of the goods only in respect of such goods as are claimed to be exempt from duty on the basis of the aggregate value of clearances in a financial year. The learned Collector has held that, Item 4 of the said schedule requires the manufacturer to furnish full description of all the goods manufactured by the factory and the description has to be furnished itemwise. He has held that Hawai Chappals were exempt from duty on the basis of value of the goods vide Notification No. 171/67 dated 24-7-1967 as amended and, therefore, in terms of Clause 2(a) of the Notification No. 111 /78 as amended, KFI was required to have filed declaration and furnish complete information which they had failed to do so.
13(ii). As regards the allegation that KFI had sold foam rubber goods in the guise of MC Sheets and Hawai chappals, the learned Collector has held the sale documents of MC sheets and Hawai chappals cannot be considered to be adequate enough to prove manufacture of MC sheets and Hawai chappals. The reason for such an inference drawn by learned Collector is due to absence of specific record of production not having been maintained in respect of MC sheets and Hawai chappals and that the appellant cannot rely on the sale documents of MC sheets and Hawai Chappals, which have been questioned by Department. Learned Collector has held that Shri B.P. Punnose had failed to explain the huge difference between the purchase and sale figures of dry rubber and he did not disclose or even hint at the possibility of sale of MC sheets and Hawai chappals having been accounted for under the head ‘dry rubber.’ He has also held that no documentary evidence had been furnished by the party to show that any damaged pieces of MC sheets were converted into rubber compound and latex rubber, which is generally used for manufacture of foam rubber goods was actually used for dry rubber goods. The learned Collector has also held that in the absence of any authoritative basis to work out the input/output ratios, particularly with regard to requirements of dry rubber and other chemicals, it is difficult to accept the party’s plea that quantity of pending stock of semi-finished goods shown in the balance sheets represented the quantity of rubber compound available with the factory for manufacture of dry rubber goods and that for manufacture of one MC sheet it required 2.5 kg. of rubber compound and for manufacture of one Hawai sheet, it required 2.2 kg. of rubber compound. He has also upheld Department’s contention that KFI could not have manufactured and sold MC Sheets and Hawai chappals of the value shown to have been sold by them in their balance sheets for the respective years, since they are found to have been selling dry rubber in the form of rubber compound and apart from the expenditure involved in purchase of other chemicals required for manufacture of MC sheets/Hawai chappals is not at all commensurate with the actual expenditure incurred on purchase of other raw material as shown in the balance sheets or purchase bills. The proof of payments of ST on MC Sheets/Hawai chappals have been rejected by the learned Collector on the ground that KFI had not maintained the required account of consumption of various raw materials for manufacture of MC Sheets/Hawai chappals nor any daily production account of finished goods. He has also held that KFI had prepared accounts to show consumption of dry rubber even when there was no manufacture of dry rubber goods as per their own admission. Hence the learned Collector has held that KFI maintained incorrect accounts of receipt and consumption of dry rubber and such records cannot be relied.
13(iii). As regards Hawai Chappals, the learned Collector has held that the party had failed to give any explanation as to why no account was kept of production and stock of chappals or even of rubber sheets for chappals. He has also held that they had failed to produce any documentary evidence to show that they were sending the rubber sheets manufactured in the factory to M/s. Rub Plast for cutting into chappals and also rejected their plea that no payment was made to them, as no documentary evidence had been produced showing the quantity of waste generated and the quantity given away to M/s. Rub Plast, towards cutting charges. The oral evidence of S/Shri Punnose & Ver-ghese has not been considered and the evidence of S/Shri Sharma & Jagdish Chand has been rejected and their first recorded statement has been taken as correct one and thus the learned Collector has held that M/s. KFI did not actually manufacture MC Sheets & Hawai chappals and that they depicted the sales of MC sheets and Hawai chappals in their accounts and balance sheet with a view to suppress the figures of production and clearances of foam rubber goods.
14(i). The appellants state that the assumption of the Department regarding the value of clearances of MC sheets for period 12-1983 to 31-3-1983 for Rs. 7,46,747.00, 1-4-1983 to 31-3-1984 of Rs. 12,13,645.00, 1-4-1984 to 31-3-1985 of Rs. 9,19,427.00, 1-4-1985 to 31-3-1986 of Rs. 12,58,962.00, 1-4-1986 to 31-3-1987 of Rs. 40,142.00; 1-4-1987 to 9-9-1987 of Rs. 1,46,415.00 and clearances alleged of Hawai chappals for period 1-4-1985 to 31-3-1986 of Rs. 8484.00; period 1-4-1986 to 31-3-1987 of Rs. 11,57,518.00 and 1-4-1987 to 9-9-1987 of Rs. 3,20,331.00 – as those of value of clearance of rubber foam goods is wrong for several reasons stated by them in the written replies.
14(ii). As regards the allegation in show cause notice that the declarations given during the relevant time, KFI did not indicate the manufacture of MC sheets and Hawai chappals, they have stated that KFI was engaged in manufacture of rubber goods right from 1971. During the relevant time, i.e. prior to 1978 there was no exemption to rubber foam goods manufactured by SSI. Hence, excise duty was paid during the relevant time. Necessary classification lists were duly filed in this regard. In the Classification List production of MC sheets were specifically shown and exemption was claimed. They corresponded with Department during 1978 when Notification 71/78 was introduced regarding the total value of clearances of rubber foam goods during the preceding financial year. In the documents, Classification list and correspondence with Department, production of MC sheets had been shown. The annual value of clearances of rubber foam goods right from 1971 was only between Rs. 4 lakhs to Rs. 10 lakhs. They have also filed details of clearances and state that even upto 81-82 the value of clearances of rubber foam goods was of the order of only Rs. 4 lakhs to Rs. 10 lakhs and it cannot suddenly jump to Rs. 35 lakhs to Rs. 40 lakhs from 1983-84 onwards. They state that the correspondence with the Department at the time of surrendering the excise licence would prove that the Department was satisfied with the value of clearances. The officer did not insist for showing the clearances of MC sheets in the declaration. They state that MC sheets were wholly exempt from duty in terms of Notification 71/78. They state that as the goods were wholly exempt under Notification No. 71/ 78, they did not feel necessary to include the concerned value of clearances of MC sheets in the declaration given under Notification No. 111/78. They state that Notification Nos. 71/78, 80/80 and 83/83 specifically excluded the wholly exempted goods from the computation of value of clearances. They say that under these circumstances not mentioning the clearances of MC sheets in the declaration filed with the Department cannot straightaway lead to a conclusion that MC sheets were never produced during the relevant time. Therefore, they state that the learned Collector without appreciating these arguments and has wrongly concluded that KFI were required to file a declaration furnishing the complete information in respect of MC sheets and Hawai chappals. They state that even assuming without admitting that the clearances of MC sheets and Hawai chappals should have been included in the declaration, it could only be construed as a technical and bona fide mistake, which could have been rectified by the Department during the innumerable visits to the factory.
14(iii). As regards the allegation that KFI were not maintaining daily stock account or production register for the manufacture of MC sheets and Hawai chappals, it is stated by them that the goods MC sheets and Hawai chappals are wholly exempt from duty, and even from licencing control there was no need for maintaining a separate account for production of MC sheets and Hawai chappals. They state that prior to 1978 when the appellants were maintaining daily stock account for rubber foam goods which were dutiable items, no daily stock account was maintained for MC sheets even then i.e. from 1971 onwards. They state that right from the time they started production of rubber foam goods, MC sheets, it was never their practice to maintain separate daily production register for MC sheets; as what was produced was sold to the customers. All the sales of MC sheets were duly mentioned in the delivery challans, invoices, sales register, ledger entries and balance sheet. They state that there is a separate section called dry rubber section in the factory to manufacture MC sheets and later on Hawai chappals. They state that the very purpose of starting the dry rubber section in their factory apart from the latex foam section, was to make use of those dried (coagulated) rubber latex which over a period of time gets spoiled by becoming dry which could otherwise be sold only as scrap. The coagulated rubber latex can never be used for making latex foam sponge goods. They state that right from 1971 onwards this dry rubber latex was used in the dry rubber section along with bought out dry rubber (RMA) and synaprene (synthetic rubber) to make MC sheets, Hawai chappals etc. Hence, they deny the charge that they never produced these items and value of clearances of MC sheets and Hawai chappals should be deemed to be the value of clearances of rubber foam goods. They rely on the register called “latex rubber (coagulated)” manufactured by them which indicated the utilisation of dry rubber latex in the rubber section, to prove their point that dried rubber latex was being used in the dry rubber section for the manufacture of MC sheets and Hawai chappals and rubber compound etc.
14(iv). As regards these findings of the Collector :
“On examining the defence plea taken by the Counsel for the party, I find that he is placing reliance on the very same documents of sale to prove manufacture of MC sheets and hawai chappals which have been questioned by the Department as to their genuineness. The allegation made against KFI is that they have sold foam rubber goods in the guise of MC sheets and hawai chappals. In the circumstances documents showing sale of MC sheets and hawai chappals cannot be considered to be adequate enough to prove manufacture of MC sheets and hawai chappals”
the appellants counter by stating that KFI had sold MC sheets to a number of customers directly and also through KRC. All the invoices of sales of MC sheets made by KFI to independent parties including their sales tax declarations like ‘C’ forms/ST-1 form etc., were submitted to Collector and has also been produced before us. Letters written by the customers namely Karnataka Leather Industries Devel. Corp. Ltd., (A Government of Karnataka undertaking) GJ Traders, Kakkar Rubber Agency etc mentioned that they had purchased MC sheets and Hawai chappals from KFI (produced as exhibits before lower authorities and here). All the sales made by KRC to outside parties and others were also those which were purchased by KRC from KFI only. Hence, they state that they never purchased MC sheets from any party other than KFI., that many of the customers were public sector undertakings and the allegation that KFI never produced MC sheets is not correct and not proved by Department.
14(v). They submit that they were purchasing number of commodities namely, Raw rubber (RMA), synaprene, Polyxn, China Clay, Titanium dioxide, Aluminium silicate, Reclaim rubber, Carbon black etc used exclusively in the manufacture of MC sheets and Hawai chappals. They had purchased these goods from PSUs like Synthetic Chemicals Ltd etc. They had paid rubber cess to the Rubber Board and had been filing periodical returns showing consumption of RMA (Raw rubber) to the Rubber Board. They had produced balance sheets and the ledgers as the basic documents apart from the sales invoice and purchase invoices, giving all the details and also payment of rubber cess for manufacture of MC sheets (documents also filed before us as annexures). They state that the learned Collector was not at all justified in rejecting these documents and the great detailed corroborated and unflinging evidence produced by them. The learned Collector had taken a view that no documentary evidence had been produced in respect of 1976 and hence on this basis had rejected the entire evidence. They state that they produced the documents in annexure D enclosed as Anx. 14 to written submissions but the learned Collector had chosen to ignore these vital pieces of evidence in their favour to deny the allegations as false. They state that Collector had taken a view that 6 kgs. of rubber compound are needed for making one MC sheet, is based on their project report. They state that project report had considered the MC sheets of size and thickness of 36x38x6 inch, but the actual production as per invoices seized by the Department discloses that the manufacture of MC sheets were only of the size of 32×36 and 16×16 with 3mm/4mm thickness. This was shown to the Principal Collector and the Principal Collector, Shri T. Roy had also visited the factory and had verified the facts. Hence they state that question of using 6 kg. of rubber compound to produce 2.5 kgs. MC sheet does not arise. They state that they were selling a number of mini sheets of smaller size and smaller thickness. Chit of 57810 pieces sold in the year 1983, 32576 pieces were of size 16″x l6″x 3 mm and they were mini sheets, their weight was less than 2.5 kg. Hence the inference of the Collector to reject their manufacture of MC sheets was totally wrong and baseless.
14(vi). As regards the allegation that sales registers of KFI mentioned sale of dry rubber and that not MC sheets, they contend that in KFI sales register, sales figures were entered under two categories, i.e. foam rubber and dry rubber goods; the sale of rubber foam goods were entered in the foam rubber column and that of rubber compound, MC sheets and Hawai chappals were mentioned under the category of dry rubber goods. The balance sheets specifically mentioned about the sale of MC sheets, Hawai chappals and rubber compound. Even the sales register relied in the show cause notice specifically referred to sale of MC sheets and Hawai chappals along with dry rubber goods. They state that learned Collector has not referred to these pieces of evidence, despite being shown to him during the hearing.
14(vii). As regards the allegation in the show cause notice of recovering of price list recovered from the residence of Shri P.V. Varghese there was no mention of MC sheets. They submit that the said price list was showing the retail price of various rubber foam goods and this retail price list is normally exhibited by retailers selling bedding furniture etc. They state that mention of MC sheets in such retail price list was inappropriate since MC sheets were never sold by the retailers to anybody because MC sheets were sold by KFI to customers directly or through KRC. Hence they contend that no inference should therefore, be drawn from this that MC sheets were never produced by KFI.
14(viii). As regards the allegation that there is contradiction in the statement of Shri Punnose (Manager of KFI) and Shri Varghese (Proprietor of M/s. KFI) as regards both of them having stated that there was no cutting machine and show cause notice drew an inference that MC sheets could not have been manufactured; they state that it had been explained that Shri Varghese was merely stating that KFI did not have a cutting machine for making Hawai chappal. They state that for manufacture of MC sheet no cutting machine was needed. It is contended that as soon as the rubber sheets are made in green stage itself, cutting is done for the required size by hand blades and, thereafter the green sheet is cured and thereafter it is sold. Therefore, there is no need for a cutting machine for MC sheets. They say that Principal Collector Shri T. Roy had seen this on his visit to the factory and had been satisfied on this point. Therefore, in the show cause notice, the Department had attempted to raise an unnecessary confusion regarding the statements of Shri Varghese and Shri Punnose.
14(ix). As regards the reliance of the workers of Jagdish Chand & S.P. Sharma by the Department regarding non-manufacture of MC sheets during the last three years, it is explained that Shri S.P. Sharma had given the statement that the production of MC sheets was stopped for three months but wrongly written as three years. As regards Jagdish Chand, it is explained that he had been employed only for 10 days prior to the visit of the officers and his statement that MC sheet was not produced for the last three years is not a correct statement, as he could not have been in a position to verify the facts. It is stated that affidavits of both these workers had been filed before the Collector. Shri S.P. Sharma had been cross-examined by Department’s advocate and during the cross-examination he had confirmed that MC sheet production had been stopped only for three months. Therefore, they contend that the Collector was not justified in rejecting the testimony of these workers, who had stood the test of cross-examination done by Departmental Advocate. The attendance register which was seized and in custody of Department had also been shown during the hearing to corroborate the fact that Jagdish Chand had been employed 10 days prior to the date of raid but the Collector had not given any reasons to reject this piece of evidence.
14(x). As regards the allegation in show cause notice that Hawai chap-pals had not been manufactured in KFI, as they did not have a cutting machine, and that there is no proof for transporting of sheets for cutting them into shape of Hawai chappals, to job workers premises. It is explained that the sheets were sent to job worker along with the worker of KFI, who merely used the cutting machine for making them into chappal. The waste generated was given to the cutter to adjust its value towards the cutting charges. They had produced the vouchers for the transportation cost. The vouchers had stated “carriage outwards” and these charges were incurred locally and the transportation charges were covered by these vouchers. They contend that the Collector was not justified in rejecting the evidence.
15. On all other charges, Shri V. Lakshmikumaran, the learned Advocate argued as per the grounds already stated above. He contended that KRC sales and purchases were from more than 15 persons shown at page 760 of paper book onwards. They had paid 7% ST in Delhi and all ST assessments had been finalised and referred to the entire evidence from pages 703 to pages 1314 of Paper Book, which had not found in favour with the learned Collector. He contended that the learned Collector had failed to consider these evidences and non-appreciation of the evidence on record and not giving any findings to reject them also would make the order unsustainable in law. The learned Collector had also not considered the evidence of Shri Punnose, which had not been demolished by cross-examination also. The Department had engaged a very competent Advocate and the witnesses had all been cross-examined and the testimony of the witnesses of S/Shri Punnose, Varghese, Jagdish Chand and S.P. Sharma, was bound to have been accepted. That non-consideration of these evidence has made the order bad in the eye of the law.
16. In purchase ledger, dry rubber had been referred, which meant raw rubber other than latex or synthetic rubber. In sales ledger also rubber foam goods had been distinguished with other goods of Hawai chappals, MC sheets and they had also been referred to as dry rubber goods. But the Department had come to a wrong conclusion that they had sold dry rubber as such in dry stage. Such a conclusion is wrong as no rubber cess is leviable on dry rubber. The cess is paid on consumption of dry rubber for manufacture of dry rubber goods like MC sheets and chappals. They had purchased synthetic rubber and paid ST in form 1 for use as a raw material in the manufacture of MC sheets and chappals. The learned Collector had failed to appreciate these evidences referred at pages 389 to 413 regarding rubber licence, licence to acquire rubber and of payment of rubber cess, certificate issued by CA for consumption of raw rubber. They had produced the chart of total transaction between KFI and KRC annexed at page 910 of the Paper Book but for the entire period of 1982-87, the learned Collector had ignored it and not given any finding thereto. The extract of sales register at page 910 of Paper Book is also not commented by learned Collector. There is proof of payment for purchase by KRI to KRC and they were maintaining mutual running account and the entire transaction had been referred to by them during the hearing extracted from the seized accounts yet the learned Collector chose not to refer to these evidences. He argued that the learned Collector was not justified in rejecting the balance sheet on the ground that he disbelieves the invoices. He argued that such reasoning was flimsy and fallacious. They had produced evidence of pledging the raw materials to the same (pages 1063 to 1068). They had also filed affidavits of P.B. Manivan and K.P. Singh (pages 905, 906) but Department had ignored to cross-examine. Therefore, the learned Collector was bound to have accepted these evidences.
As regards the allegation of removal of MC sheets, Hawai chappals in the garb of foam rubber sheets, the learned Collector has relied on the fact that there is no manufacture of MC sheets, as the party had not declared from 1982 onwards and no Classification List had been filed. Only declaration had been filed for goods cleared under TI 16A(1) for foam rubber sheets. There is no evidence of manufacture of MC sheets and the learned Collector was justified in rejecting the party’s evidence as held in page 29 of his order. She contended that all the goods manufactured had not been declared. The learned Collector had appreciated the evidence of purchase of ingredients and sale of MC sheets but this by itself would not establish manufacture of MC sheets. Learned Collector has also dealt on the plea of payment of Rubber Cess and that of Rubber latex at page 31 of his order.
17. We have carefully considered the grounds, submissions and the evidence of the appellants on this point. We have noted in detail the charge on this point, the finding of the learned Collector the grounds and arguments urged by the learned Advocate. The learned Collector has totally rejected the evidence both oral and documentary placed by the appellants with regard to the manufacture of MC sheets and Hawai Chappals. The question is as to whether the learned Collector is justified in rejecting the evidence placed by the appellants and if not how much reliance can be placed to compute the total value of clearances for these two products. The learned Collector has come to this conclusion due to the fact that the appellants were not declaring to the Assistant Collector and filing details of input and output ratio as per the notification regarding the production of these two items; absence of records of production; that they had failed to explain the huge difference between purchase and sale figures of dry rubber and they did not disclose or even hinted at the possibility of sale of MC sheets and Hawai chappals having been accounted for under the head of dry rubber. That they had not produced documentary proof to show that any damaged pieces of MC sheets. That in absence of any authoritative basis to work out input/output ratio, it is difficult to accept the party’s plea. The other grounds have already been noted supra and they need not be repeated here. With all due regard to the learned Collector, this line of reasoning does not appeal to us. There is certainly some laches on the part of the appellant in not maintaining the production records and their explanation also is too flimsy and unacceptable. But, there are several other clinching records and factors, which cannot be rejected and require due consideration. The evidence, which in our opinion, which cannot be rejected and requires acceptance are noted below. The appellants have relied on the delivery chal-lans, invoices, sale registers, ledger entries; ST assessment records, payment of cess to Rubber Board. The utilisation of inputs dry rubber (RMA); synaprene aluminium silicate, paraffin, wax, carbon black etc used in the manufacture of MC sheets and Hawai chappals have all been shown. The sales of these two items made to several customers especially Government Units like Karnataka Leather Industries Development Corporation has also been placed on records. It is not the case of the Department; and also it could not be, that these are all fabricated documents. The most important clinching evidence is payment of Sales Tax and Rubber Cess and filing of Sales Tax return and regular returns to Rubber Board. Both the returns are statutory returns. These are required to be accepted. The Department has not placed any evidence nor have they examined the officers of both the statutory authorities to show that they were fabrications and a fraud. It will be too far-fetched also to make such an assumption against another statutory authority who have accepted returns and taxes and cess towards the sales of these products. There is also the corroboration from the documents of pledge of these items to the Banks. The Banks generally do not advance sums unless the goods are hypothecated to them and it is well known that the key of the godown where goods are stocked, are retained by the banker. It will not be proper at all to reject these evidence. It is not the case of the Department as noted earlier that the party has kept on fabricating every piece of evidence. On the date of raid, there was no production of these items. The statement of two workers namely Sharma and Jagdish Chand is relied by the learned Collector. However, both of them filed affidavits clarifying their stand and they were subjected to cross-examination by the Advocate engaged by the Department and the Department was not able to shake their testimony inasmuch as that the items were manufactured and also in respect of Jagdish Chand’s statement that he had joined only 10 days ago. The attendance register had been placed to show that Jagdish Chand had joined the service only 10 days prior to search and raid done by Department. The Department has not placed independent evidence to contradict the stand of these witnesses. The statement of Punnose is an independent testimony. He was only a manager and not the proprietor. The Department despite their cross-examination has not been able to show any contradiction or variations in their stand with that of Varghese or other workers. The appellants has produced the affidavit of two other workers namely Mani Ram and K.P. Singh to show that these items were manufactured. The Department did not choose to cross-examine them. Therefore there is sufficient corroboration of production of these goods.
18. As regards the non-production of proper evidence of getting the rubber sheets cut into chappals from M/s. Rub Plast, the rejection done by learned Collector is also not proper for the single reason that the Department had recorded the statement of Proprietor of M/s. Rub Plast and he had confirmed about the job work done by him. There is on record charges paid for transportation of rubber sheets. The party has admitted having not paid any cutting charges but has explained that the party was giving the waste towards the charges. Although, this version raises suspicion but as is well-settled that suspicion however grave it might be, it cannot take the place of proof. Moreover the Department has not chosen to cross-examine the statement of proprietor of M/s. Rub Plast. The statement of party of getting the sheets cut with M/s. Rub Plast, has not been denied but accepted by them. Therefore, the Department has not been able to show that these statements are fabricated and unbelievable. The evidence requires acceptance, in view of corroborated un-rebutted evidence being on record. The main ground for rejection is non-placement of input/output ratio. In this regard the Tribunal in the case of IPCL v. Collector of Central Excise as reported in 1992 (61) E.L.T. 138, has laid down that there is no one to one relationship of input and final product for the purpose of utilisation of credit. This ruling is based on several rulings of the Tribunal rendered in Sarvattan Ispat (P) Ltd. v. Collector of Central Excise, 1989 (41) E.L.T. 181; Collector of Central Excise v. Wipro Information Technology, 1988 (33) E.L.T. 172 and that of Delhi High Court as rendered in Good Year India Ltd. and Ors. v. Union of India and Ors. as reported in 1990 (49) E.L.T. 39. These decisions have been rendered in respect of availing credit/MODVAT. We have to observe that this proposition holds good for the case in hand. Although, the party should have maintained separate production register to buttress their claim but its absence is not sufficient to reject their claim, in the light of the independent corroborative evidence placed by them. Although we accept the evidence that they had manufactured and cleared MC sheets and Hawai chappal but the extent to which they have cleared requires to be assessed again, in the light of the evidence produced by them, by the original authorities, to give deductions for the same. However, we find that the Department has not placed any independent evidence to prove the charge that the appellants had cleared Rubber Foam goods in the guise of MC sheets/Hawai chappal, and hence this charge fails. But the extent of clearances of both the items is required to be verified to arrive for computing the total clearances of the goods for the period in question. We make it clear that balance sheet alone cannot be taken as a proof for the quantity of clearances of the two items but the appellants should corroborate the figures in balance sheet with the evidence on records, as we have held that the evidence placed before the authorities requires acceptance.
19.1 (C) Grounds made out against the allegation regarding purchase of Rubber foam goods by KRC to be treated as were of KFI
(i) The show cause notice alleged that purchases of rubber foam goods by KRC from different manufacturers/suppliers, other than from KFI, were all to be treated as those manufactured and supplied by KFI, has been vehemently denied as totally incorrect. They have produced voluminous evidence to contradict the stand of the Department and to prove that both the Units are having independent purchase/sales and to show that the allegation is unfounded. They state that KRC was purchasing rubber foam goods from the following suppliers/manufacturers, for which evidence has been placed both before the lower authorities and before us :
(i) Thomson Rubber Industries
(ii) Mahavir Enterprises
(iii) Paradise Foam Industries
(iv) Venus Rubber Industries
(v) En Kay Foam Udyog
(vi) Harmilap Foam Industries
(vii) Jay Pee Foam Industries
(viii) United Enterprises
On the basis of evidence produced, it is contended that the Collector should have accepted the same and should have held that the charges were unsustainable. The Department had relied on the statement of Thomas Kuruvilla of M/s. Thomson Rubber Industries, who had stated that they had not supplied rubber foam goods to KRC. In this regard, the appellants state that the said statement of Thomas Kuruvilla had been extracted under duress and he had given an affidavit to that effect. He had stated in the affidavit that he was suffering from fracture of rib due to major accident, at the time of recording of his statement and he had given the statement at the behest of the officials and, therefore, his correct statement is as the one given in the affidavit. The appellants, namely KRC had produced evidence of payments by cross cheque to Thomas Rubber Industries. Regular sales tax returns had also been filed by Thomas Rubber Industries immediately these sales and clearance figures had been included by Thomas Kuruvilla in his declaration filed with excise Department indicating the total value of clearances. Thomas Kuruvilla had also been cross-examined by the learned Collector and he had withstood the cross-examination. Despite the overwhelming evidence, the Collector had rejected their plea, which according to them is totally unjustified.
(ii) It is stated by them that there had been no allegation in the show cause notice of purchase of rubber foam goods from United Enterprises, yet the learned Collector in his Order, had held that KRC had failed to furnish proof of any payments having been made to United Enterprises and that this transaction cannot be considered as genuine. They state that there was no allegation on this point and hence no evidence was produced and, therefore, the Collector had to go beyond the charges in show cause notice and such findings were unsustainable. They have produced proof of such payments in paragraph-17 before the Tribunal. They contend that the learned Collector had accepted about the payments made to Mahavir Jain and, therefore, there was no reason to have accepted the evidence of payments made to other parties also.
19.2 As regards the allegation that whatever goods purchased by KRC is to be deemed to be purchased by KRI, he contended that the learned Collector had accepted the evidence of Mahavir Jain but the rejection of evidence of Thomas Kuruvilla & of United Enterprises was wholly unjustified. Thomas had given his statement in a state of shock as he had been bedridden due to fracture and major accident. Later he filed affidavit and without the cross-examination. Evidence of payment by KRC to Thomas and United Enterprises had been placed on record. Therefore, the rejection of their evidence was wholly unjustified. He contended that if deduction to these clearances, which are legitimate are given then the entire clearances would be within the exemption limit. He relied on the ruling rendered in the case of Ramlal Khataria v. Collector of Central Excise, Patna, reported in 1992 (43) ECR 310 in support of this plea.
20. As regards the allegation of manufacture by KRC as that of Kanam Rubber Industries and that of TRI, the learned SDR reiterated the findings of learned Collector on this point.
21. On a careful consideration of this charge, it has to be noted that learned Collector has upheld this charge solely on the basis of the statement of Thomas Kuruvilla, Proprietor of M/s. Thomas Rubber Industries. The effect is that the aggregate value of all the purchases of the rubber foam goods made by KRC from manufacturers other than KFI are included in the aggregate value of clearances of rubber foam goods of KFI. It follows that the learned Collector is treating both the units as one and the same in so far as this item is questioned. The learned Collector has observed that Thomas Kuruvilla had admitted on 24-9-1987 that no sale or supplies of foam rubber goods was entered in the ledgers of 1983-84; 84-85, and 85-86 as no sales/or supplies were actually made to KRC and that of value of Rs. 25360/- latex said to have supplied to him is incorrect. Later, Thomas Kuruvilla has resiled from this statement and he has filed affidavit and he has also been cross-examined by appellants’ advocate. During cross-examination, he has stated that the cheque received by him was later paid back in cash to KRC. He has also stated that his earlier statement was under shock due to accident, he had suffered. He had told the officers at the time of recording the statement that the transaction is genuine but officers had not accepted it. The learned Collector has rejected the affidavit and statements given in cross-examination by Thomas and has accepted the earlier statement to confirm the charge. As regards the purchases made by KRC from Mahavir Industrial Enterprises, the learned Collector has held that Department has not brought out any specific evidence to support the allegation that KRC had been merely accounting for the purchase of foam rubber goods made by KRC from Mahavir Industrial Enterprises without actually making the payment and hence has held that the purchases of foam rubber goods made by KRC cannot be added to the clearances of KFI. He has found that there is no evidence of transportation charges having been effected from Thomas Rubber Industries and United Enterprises to KRC. Although, there is statement of Thomas in first instance, which has been resiled and are relying on other documentary records like ST payments and assessments for sales made by Thomas for sales to KRC, the learned Collector has not referred to this evidence. Therefore, a statement, which has been resiled loses its evidential value. If the first statement is corroborated by other circumstantial evidence and other documents, then the resilement has no effect and first statement becomes acceptable. In this case, the learned Collector has held that no documentary evidence of payment or transportation charges has been taken as a circumstance to hold that clearance was done by Thomas & KRC. It is noticed that Thomas’s statement is not corroborated by Varghese or Punnose or anyone from KRC. There are ledger entries in his account books for transport payment also. At best, this transaction raises a suspicion, but it cannot be a sole instance to uphold this charge. In fact the Department has not placed any evidence in respect of United Enterprises and its clubbing of clearances with KRI aggregate clearances is wholly unjustified.
22. The appellants have pointed out that KRC and KRI are independent units. KRC being a Private Limited Company and KRI is an independent proprietory concern, they have been having mutual business and maintained records. The contention of the appellants is that the KRC had purchases of foam rubber goods from several other manufacturers also. M/s. KRC has maintained separate accounts, filed separate Sales Tax/Income Tax returns and made payments towards taxes and had been carrying on business in other goods, which amounted to 80% of their transactions. The learned Collector has not given any findings on these pleas. The learned Collector has accepted the plea on independent purchases of KRC in respect of Mahavir Industrial Enterprises, thereby admitting KRC to be having independent transactions also. Therefore, a solitary tainted evidence of Thomas Rubber Industries is not sufficient to uphold this serious charge and we are constrained to set aside the finding of the learned Collector on this charge.
23.1 (D) Grounds regarding the allegation that TRI never produced MC sheets, latex, adhesives, etc.:
(i) They contend that the learned Collector was not justified in upholding these charges as they contend that:
(i) TRI was in operation only during the period 1979 to 1984. As far as the present show cause notice period is concerned, the period would be from December 1982 to March 1984;
(ii) TRI was manufacturing MC sheets, latex adhesives and rubber compound right from the beginning in the premises adjacent to the premises of KFI;
(iii) TRI before commencing the manufacturing operations for MC sheets, latex adhesives, rubber compound, etc. obtained manufacturing licence from the Directorate of Industries.
(iv) TRI obtained Rubber Board Licenses for the purchase of consumption of RMA (dry rubber) and latex.
(v) Registered with MCD for the manufacture of footwear articles;
(vi) Obtained sales tax registration for the sale of footwears articles;
(vii) Filed regular returns to the Rubber Board and rubber cess was paid on the quantity of RMA used by them.
(viii) Purchased reclaim rubber from the market by invoices, and payments made through cheques;
(ix) Purchase of RMA (Raw rubber), synaprene, carbon black, titanium dioxide and other rubber chemicals which were exclusively used in the manufacture of MC sheets, and rubber compound and which were never used in the manufacture of rubber foam goods;
(x) No statement was recorded from anybody (unlike in the case of Shri S.P. Sharma and Shri Jagdish Chand in the case of KFI) to the effect that TRI never produced MC sheets and rubber compound;
(xi) Sales of MC sheets, rubber compound etc. were made by TRI on regular invoices and payments received through cheques;
(xii) No verification has even been made by the Department from the customers as to whether they received MC sheets, rubber compound or rubber foam goods;
(xiii) Officers were regularly visiting the premises of KFI and TRI because of the declaration given by KFI to the Provident Fund Department:
(ii) They rely on the order of the Provident Fund Commissioner who has held on investigation that TRI workers and KFI workers are different and independent as TRI had different plant, machinery and manufacturing facilities and hence workers of both the Units cannot be clubbed for Provident Fund purpose. The learned Collector had ignored to look into the evidence, which is not justified.
(iii) They contend that the Department had not placed any evidence to prove this charge and the learned Collector had also not got any reasons to hold that TRI never manufactured MC sheets, rubber compound and latex adhesives. They contend that TRI is an independent unit with separate plant and machinery for manufacture of MC sheets and rubber compound etc. and they were preparing their own balance sheets.
23.2 (E) Grounds relating to allegation of purchase of rubber foam goods by TRI to be treated as rubber goods manufactured by KFI:
(i) They give the following grounds to deny the charges :
(i) At the time of inception of TRI’s manufacturing activity a conscious decision was taken by TRI not to manufacture rubber foam goods lest there could be an allegation that the clearance of rubber foam goods manufactured by TRI were to be treated as clearance of rubber foam goods by KFI.
(ii) Simultaneously another conscious decision was taken not to purchase rubber foam goods from KFI lest there could be an allegation that the price charged was not genuine. Accordingly all the rubber foam goods sold by TRI were purchased from outside parties other than KFI.
(iii) All the purchase of rubber foam goods by TRI were against regular invoices against which ‘C’ forms/ ST-1 forms were issued to the respective parties and payment were made by crossed cheques which were duly accounted for in the books of accounts of the sellers.
(iv) While the learned Collector was considerate towards the purchase of rubber foam goods by KRC when he has accepted the KRC’s contention with regard to the purchase of rubber foam goods from suppliers other than Thomson Rubber Industries and United Enterprises, he has not accepted this contention with regard to TRI and no reason whatsoever given for such a conclusion.
(v) No shread of evidence has even been led in the show cause notice or in the order in original to prove that the sale of rubber foam goods by TRI are to be treated as the goods manufactured by KFI.
(vi) TRI does not have any manufacturing licence for the manufacture of rubber foam goods from Director of Industries, MCDetc.
23.3 As regards the allegation of TRI never purchased rubber foam goods and MC sheets from KFI, he contended that the Department had failed to prove this charge. TRI was an independent trust. The evidence of Thomson was conclusive on this point. He had clearly stated that he had sold goods to TRI. Invoices of TRI at pages 492 to 496, 911, 920, 927 to 940, 938 to 1049 were referred to in support of their plea, but the learned Collector had ignored to consider these evidences. He stated that if these evidences were accepted charges 2 & 3 would fail, even if not taken into consideration, even then the clearances would be within the exempted limit. The officers had visited the office of NISI Trading at Devnagar at Karol Bagh in 1987. But the owner of the building one Shri Tilak Raj had stated that the NISI Trading, his tenants, had vacated the building. The Department however had without any shread of evidence concluded that all purchases made by TRI from NISI Trading should be considered as those done by Kanam. The learned Advocate stated that this could not be done with any corroborative evidence at all. The reference is a mere conjucture and Department had not proved this charge. The statement of Shri Tilak Raj supported the appellants and the learned Collector was not justified in ignoring this aspect of the matter. He contended that total supplies by NISI trading to TRI was less than Rs. 2 lakhs, even if they were added the clearances would be less than the exempted limit.
24. On a careful consideration of this allegation, we find that the learned Collector has given a very brief finding on this issue. He has proceeded on the basis of the statement of Punnose that “TRI is under one roof in a hall which is connected with our factory”, and also has proceeded on the basis of the statement of Varghese, that TRI did not own any plant and machinery and utilised the plant and machinery installed in the premises of KFI. The learned Collector has held that dry rubber goods like MC sheets claimed to have been manufactured by TRI and the purchases of foam rubber goods made by TRI, from other manufacturers/traders were nothing but foam rubber goods manufactured and cleared from the factory of KFI. Hence, he has held that the value of dry rubber goods claimed to have been manufactured by TRI and the value of foam rubber goods claimed to have been purchased from other manufacturer/traders is liable to be included in the aggregate value of foam rubber goods manufactured and cleared by KFI. In this context, the appellants are relying on the order of Provident Fund Commissioner that the workers of KRI and TRI are independent and that TRI had independent Unit. The appellants have contended that TRI suspended its manufacture activity in 1984, that they were enjoying the exemption during 78-80 and hence the Department was aware of the correct facts. The TRI has produced evidence of payment of ST, Cess to rubber board, MCD Licence registration, utilisation of raw materials. The Department has not done any investigation with TRI nor they have brought any independent evidence on this issue. The two statements of Var-ghese & Punnose by itself may not be sufficient without corroboration from TRI side. Varghese had only stated that TRI were utilising cutting machines which has been interpreted by Collector to mean that TRI were using all the machinery of KFI. We have perused the statement of Shri Varghese and Pun-nose and we do not find any such statement given by them. The learned Collector has not given any finding on the entire evidence placed by the TRI and hence the Department has not proved this charge and the finding requires to be set aside.
25.1 (F) Grounds regarding the allegation under valuation :
(i) The allegation in the show cause notice is that KFI and KRC are related persons and the assessable value of rubber foam goods sold by KFI should be based on the selling price of rubber foam goods by KRC. The Department has relied on the printed price list recovered from the residential premises of Shri Varghese. The appellants are denying the charges on the following grounds.
(ii) KFI is a proprietorship firm with Varghese as the owner while KRC is a limited company with eleven shareholders and five directors. It is stated that Varghese is one of the shareholders of the company and one of the directors and hence he could not be said to control the affairs of KRC. KRC is basically a trading company being the main distributor of titanium di-oxide manufactured by Travancore Titanium Products Limited, a public sector undertaking. KRC had been in business right from 1962 much before KRI had ever started. More than 80% of the turnover of KRC was from Titanium Dioxide and the sale of MC sheets or rubber foam goods formed less than 20%. It is situated in a busy trading area namely Darya Ganj and therefore, it is not easy to stock and sell some of the goods like rubber foam goods, MC sheets etc apart from the major activity of dealing in Titanium dioxide. They also buy and sell natural rubber and latex for which they hold licence from Rubber Board. They were filing proper returns to the Rubber Board. The price of rubber foam goods sold by KFI to … was the same as the price at which rubber foam goods were sold by KFI to KRC. They had produced the invoices and all the necessary evidence and thus they being independent persons with different activities, the learned Collector not upholding their contention was not justified; moresoever when fully covered citations on this point had been relied by them (The Collector of Central Excise v. Vikrama Engineering Co., 1989 (39) E.L.T. 143; Bajaj Electronics v. Collector of Central Excise, 1990 (47) E.L.T. 462; and Order No. 55/89A).
25.2 They also relied on the invoices of other rubber foam manufacturers which were in the Department’s premises to show that the price of rubber foam goods by those manufacturers were comparable with the rubber foam goods manufactured by KFI, but the learned Collector had not taken these evidences into consideration at all, which was not justified. They state that the learned Collector had adopted the sale price of KRC in respect of the sales made by KFI to direct customers without assigning any reasons.
26. On the charge of under-valuation, the learned Advocate referred to Department’s reliance on price list of Patni Foam recovered from the residence of Verghese. He contended that the learned Collector had held that the valuation of rubber foam goods as of PL of Patni Foam had been dropped by the Department and therefore, there could be relationship between KRC and RFI as related persons. The valuation of KRC of goods sold in the market has to be accepted. He contended that there was no justification to consider them as related persons as there is no mutuality of interest and the findings are contrary to the rulings laid down in Collector of Central Excise v. Babul Products as reported in 1991 (54) E.L.T. 408, Cosmos Rubber Works v. Union of India, (1988 (17) ECR108 (Bombay), and Kantilal v. Union of India 1986 (26) E.L.T. 209 (SC). He referred to the prices of different manufacturers (page 422) and pointed out that they were sold higher than their competitors.
27. He contended that even if they were held to be related persons even then the price sold by related person cannot be taken for the purpose of valuation and in this context he relied on the ruling rendered in the case of Collector of Central Excise v. Enfield India as reported in 1988 (34) E.L.T. 654. He argued that when 80% of sales are made to others, the fact of only 20% sales made to KRI cannot be the factor to enhance the valuation and in this context he relied on the ruling rendered in the case of Collector of Central Excise v. Vikram Engineering as reported in 1989 (39) E.L.T. 143, para-9.
28. On a careful consideration of this charge of under-valuation, we find that the learned Collector has not considered the various rulings given by the Tribunal, High Court and Supreme Court on this point and the Department has failed to value the goods as per Section 4 of the Act. We find that the price list found in the residence of Verghese does not pertain to KRC. The evidence shows that Verghese was to proceed legally against the competitor M/s. Patni Foam Industries who was misusing their brand name. The evidence and defence of the appellants on this charge has not been appreciated by learned Collector. It is on record that the learned Collector has dropped the valuation of rubber foam goods as of price list of Patni Foam. The prices of different manufacturers were referred to appellants to show that their competitors were selling the rubber foam goods at higher prices. They have also contended that sales were made to Karnataka Government Unit and therefore, there cannot be under-valuation. The learned Collector’s finding is not in keeping with the law laid down under Section 4 of the Central Excises & Salt Act, 1944 and that of rulings given in the case of Bajaj Electronics; Vikram Engr. Co.’s case; CCE v. Babul Products, Cosmos Rubber Works v. UOI and Kantilal v. Union of India (supra). In view of this case law, the matter requires to be reconsidered by the learned Collector and we direct him to re-consider de now on the question of undervaluation in the light of these citations, and our finding that KRC and KRI clearances cannot be clubbed and we direct the Id. Collector to take into consideration the submissions of the appellants in this regard before passing a fresh order.
29. (G) Grounds regarding quantum of duty adopted by Department:
(i) They state that the calculation of duty has been wrongly arrived at. They state that the total sales value of rubber foam goods for the year 1982-83 arrived by learned Collector was Rs. 16,78,593.00 which was less than exempted limit of Rs. 25 lakhs under Notification No. 83/83, hence they could be included for computing duty.
(ii) They state that duty was required to have been calculated as per Section (4) of the CE&SA, 1944. The value of rubber foam goods as alleged to have been cleared in the show cause notice was as under:
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1-2-1982 to 31-3-1983 Rs. 1,16,329.00 1-4-1983 to 31-3-1984 Rs. 7,60,439.00 1-4-1984 to 31-3-1985 Rs. 8,13,284.00 1-4-1985 to 31-3-1986 Rs. 9,15,967.00 1-4-1986 to 31-3-1987 Rs. 13,63,622.00 ------------------------------------------------------------ But the learned Collector had not taken these figures but had substituted with some other figures in the final order, which is not sustainable.
(iii) They contend that the learned Collector has held that the clearances of MC sheets by KFI are to be treated as clearances of rubber foam goods by KFI but while computing the value of MC sheets, the value of rubber compound and latex adhesives had also been taken into account, while it should have been excluded from computation, as there had been no allegation in the show cause notice or in the impugned order that KFI never sold these items. They state that the figures as below as per Department’s own contention should have been taken to read in Sl. No. 2:
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1-2-1982 to 31-3-1983 Rs. 7,43,979.00 1-4-1983 to 31-3-1984 Rs. 11,76,109.00 1-4-1984 to 31-3-1985 Rs. 3,38,177.00 1-4-1985 to 31-3-1986 Rs. 10,47,141.00 1-4-1986 to 31-3-1987 Rs. 29,558.00 --------------------------------------------------
(iv) They state that TRT was not manufacturing and clearing MC sheets but while computing the value of clearances of MC sheets in the impugned order, the value of clearances of rubber compound and latex adhesives had also been added, hence it required to be excluded and give the figures as follows to read in Sl. No. 4:
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1-2-1982 to 31-3-1983 Rs. 4830.00 1-4-1983 to 31-3-1984 Rs. 4360.00 1-4-1984 to 31-3-1985 Nil --------------------------------------------------
(v) They contend that purchase by TRI from parties other than Thomson Rubber Industries should not have been taken for computation of rubber foam goods as manufactured by KFI and hence they say that S. No. 5 of the annexure to impugned order should read :
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1-2-1982 to 31-3-1983 Rs. 99,580.00 1-4-1983 to 31-3-1984 Rs. 1,25,415.00 --------------------------------------------------
(vi) They state that purchases by KRC of Thomson Rubber Industries and United Enterprises cannot be included in the clearances of KFI for the reasons stated supra by them and if these figures are excluded then Sl. No. 6 annexed to the impugned order should read as :
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1-2-1982 to 31-3-1983 Rs. 1,56,070.00 1-4-1983 to 31-3-1984 Rs. 2,02,855.00 1-4-1984 to 31-3-1985 Rs. 5,52,290.00 1-4-1985 to 31-3-1986 Rs. 4,54,300.00 1-4-1986 to 31-3-1987 Rs. 5,07,765.00 --------------------------------------------------
They state that if correct duty valuation is taken even as per the Department’s case, the duty liability would be only Rs. 19,79,137.30 and that no duty would be payable, if their contentions are accepted. In view of our findings given on the above charges, this issue requires to be redetermined and we remand this issue for reconsideration in the light of our findings and the defence taken by the appellants.
30. (ii) Grounds pertaining to confiscation of goods in the premises of KRC:
(i) It is contended by the appellants that goods were seized from the premises of KRC vide panchnama, dated 10-9-1987 on the reasonable belief that these goods cleared from KFI were not accounted for by KRC and that John Sebastain, Godown incharge, could not reconcile the figures immediately. They state that after inspection of documents, they had prepared a chart from the books of account and arrived at the balance of stock as per the books of account after taking into account the purchase bills, sales bills and the open stock and had been presented to the learned Collector during the hearing and had been shown that the balance had tallied to the last piece of the goods seized and that there was no discrepancy. However, the learned Collector had rejected the same, without giving any findings and as such the order of confiscation requires to be set aside.
On a careful consideration of the submission made on this point, we find lot of force in the contentions raised by the appellants. We hold that seizure of goods made in the godown is not proper and therefore, we are constrained to set aside this order, in view of our finding that the clearances of KRC and KRI cannot be clubbed.
31. (I) Grounds relating to time bar:
It is contended that the appellants’ demands are hit by limitation. They state that KFI had Central Excise Licence upto 1971 and were paying duty on rubber foam goods. They mentioned about the manufacture of MC sheets in the Classification List. In 1978, when Notification No. 71/78 conferred exemption for the first time, there were lot of correspondences between them and the Department and licence was surrendered only when the officers were duly satisfied with the clearances of rubber foam goods by KFI which were well within the exemption limit. They state that the Department could have refused to accept the surrender of licence, if they were of the view that the value of clearances of MC sheets were also to be added for computing for the value limit for exemption from licencing control. They state that they were maintaining simplified production register which had been duly verified by the Department periodically. It is further stated that the Department had seen the production of MC sheets during the periodical visits and hence the Department was aware of the manufacturing activity of MC sheets and hence longer limit of limitation cannot be applied and all demands beyond six months are hit by time bar.
32. The appellant gave up the ground of denial of principles of natural justice with regard to non-supply of some relied documents.
33. As regards the confiscation of goods, the learned Counsel referred to the paragraph 38 of the impugned order, wherein the learned Collector had accepted the defence of the appellants but yet had gone on to impose redemption fine which is per se illegal and not maintainable at all and hence even penalty is not imposable.
34. We do not find any substance in the plea of the appellants on the time bar. The appellants having surrendered the licence have given an impression that they were not going to manufacture MC sheets and chappals, but had been clearing it on manufacture. They should have obtained clarification from the Department on the changed classification, in which they thought, the goods fell in. Therefore, the findings given by the learned Collector on this aspect is maintainable and has to be upheld. However, in the facts and circumstances of the case, the penalty imposed is set aside and the matter is kept open for the learned Collector to reconsider this aspect. In the result the appeals are allowed by remand for re-determination on the question of under-valuation and quantum of duty in terms of our findings given in this order.
E/A. No. 266/92-D
35. In this appeal, the learned Collector has confirmed the demand of duty of Rs. 9,73,256.00 and special excise duty of Rs. 46,345.50 under Rule 9(2) of the Central Excise Rules read with Section 11A(i) of the Central Excises & Salt Act, 1944 and has also imposed penalty of Rs. 50,000/- on Kanam Foam Industries.
The allegation in the show cause notice dated 13-10-1988 has been issuing on the basis of earlier show cause notice, dated 18-12-1987. The allegation is that since the aggregate value of the excisable goods had exceeded the limit of Rs. 15 lakhs during the period 1-4-1987 to 9-9-1987 (in terms of the earlier show cause notice, dated 18-12-1987), they were required to take out a Central Excise Licence, file Classification List and clear their goods valued at Rs. 19,99,701/-and Rs. 7,00,085.00 during the period from 10-9-1987 to 31-3-1988 and 1-4-1988 to June 1988 respectively.
36. The appellants in the reply dated 29-12-1988 have stated that the present show cause notice is based on the facts which came to the knowledge of the Department in the show cause notice, dated 18-12-1987 and also have stated that the goods do not fall under Heading 94.04 of Central Excise Tariff, 1985 and are not selling at the maximum retail price as presumed by the Department. As regards the allegation that they did not approach the Department for a licence as per paragraph-2 of the declaration on reaching clearance of Rs. 10 lakhs, they have pleaded that Notification No. 111 /78 does not contain any clause or stipulation requiring them to take out a Central Excise licence when they reached the value of clearance of Rs. 10 lakhs. They have contended that after issue of Notification 11/88, dated 15-4-1988, they had applied for a Central Excise Licence, which had been granted to them on 17-6-1988. Among other defences, they urged that the demands were time barred as the show cause notice had been issued on the basis of earlier show cause notice, which was under adjudication.
37. The learned Collector rejected all their pleas and confirmed the demands for the period 10-9-1987 to 31-3-1988.
38. We have heard Shri V. Lakshmikumaran, the learned Advocate for the appellant and Smt. Shanthi Sundaram, learned SDR. We find that the present proceedings and the show cause notice, dated 13-10-1988 is based on the previous show cause notice, dated 18-12-1987. The show cause notice, dated 18-12-1987 is based on the searches carried on in the premises of the appellant on 10-9-1987. After adjudication, the order was passed on 12-6-1990. We have already given our findings against the order-in-original, dated 12-6-1990 in the other appeals in our main order. The findings on various issues are noted in the order above.
39. As regards the plea of time bar, raised in this appeal, we are inclined to agree with the arguments of the learned Advocate. The impugned order itself states that the show cause notice is based on the previous show cause notice, dated 18-12-1987. The appellants’ premises was raided and searches carried on 10-9-1987. The Department was fully aware of all facts, when first show cause notice, dated 18-12-1987 was issued. Subsequent show cause notice passed on the previous show cause notice has been issued clearly after a period of six months and hence the demands are time barred and we therefore allow this appeal by setting aside the impugned order.