ORDER
S.L. Peeran, Member (J)
1. In this appeal the appellants have challenged the order-in-original dated 27-10-1987 wherein the Collector of Central Excise, Madras has confirmed a demand of Rs. 3,69,471.38 p. and also imposed a penalty of Rs. 1,52,000/- invoking Rule 9(2) read with proviso to Section 11A (i) of the Central Excises & Salt Act, 1944 and Rule 173Q of Central Excise Rules, 1944.
2. The facts of the case are that officers of the Headquarters Preventive Unit visited the appellants unit on 13-11-1985 and noticed that the appellants company, a small scale unit was registered under the Factory’s Act from 1971 and were manufacturing Calibration oil, Synthetic pine tar, Petroleum jelly, Paraffin wax and refined wax Mahatone Factice falling under Tariff Item 68 of the erstwhile Central Excise Tariff without taking out a Central Excise licence and clearing the same without paying the Central Excise duty and without observing other Central Excise formalities. The value of clearances and the products manufactured during the period 1980-81 to 1985-86 was ferreted out. It was discovered that the aggregate value of clearances of Calibration oil, Synthetic pine tar, Petroleum jelly and Mahatone Factice was alleged to have exceeded the exemption limit in every year from 1981-82 to 1985-86. The records were recovered under a mahazar dated 13-11-1986. The statement of Shri R. Sanjeevi, Manager was recorded on 13-11-1986 and that of Shri Ananthanarayanan, Managing Partner of the film was recorded on 24-11-1986 and a show cause notice dated 26-3-1987 was issued demanding duty of Rs. 3,69,471.38 p.
3. Shri R. Sanjeevi, Manager of M/s. Mahatha Petro Chemicals gave a statement on 13-11-1986 wherein he has stated that they had taken out a Central Excise licence L-4 No. 1/71 during the year 1971 during which the manufacture was started and surrendered the licence during December, 1979 as the products were exempted and the value of clearances was within the exemption limit; that they had not filed any declaration under Notification No. 111/78 for availing the exemption from licensing control and also not paid any duty from 1980 onwards; that the unit had been resigstered under the Factory’s Act as Small Scale industry and that they are prepared to pay the duty wherever the goods have exceeded the exemption limit. Shri R. Sanjeevi, Manager also furnished the value of clearances for the period from 1980-81 to 1985-86.
4. Shri Ananthanarayanan, Managing Partner of the firm, in his statement on 24-11-1986 reiterated the statement of his Manager and further stated that on 23-10-1986, they had filed declaration under Notification No. 2/82 dated 17-1-1982 for the year 1986-87 to the Superintendent of Central Excise, Range Madras Division I; that they were not aware of the exemption limit and hence they had not paid the duty; that the default was not at all intentional and that he was prepared to pay whatever was due to the Central Excise Department.
5. It was alleged in the show cause notice that they had cleared Tariff Item 68 goods during the period from 1981-82 to 1985-86 without payment of duty and without obtaining Central Excise licence and without following the Central Excise formalities. It was alleged that on introduction of new Central Excise Tariff Act, the unit had taken out a Central Excise licence L-4 No. 1/86. Even at the time of taking out the licence, a declaration dated 27-10-1986 was filed for the year 1986 but failed to intimate the above facts thereby suppressing the production and clearance of Tariff Item 68 goods and thus contravening the provisions of Section 6 of the Act read with Rule 174, Rule 9(1) read with Rules 52A, 178-B, 173-C, 173-F, 173-G and 226 of the Central Excise Rules, 1944.
6. In response to the show cause notice, the appellants filed a detailed reply dated 18-6-1987 submitting that the licence L-4 No. 1/71 was held by them till 20-12-1979 when the licence was surrendered by them as their products were declared as wholly exempted. They obtained licence again in 1973 L-4 No. 1/73 for manufacturing vapourising oil. They submitted that during these periods, several officers of the Department from the Range, from the Preventive offices of the Department and Internal Audit of the Department had visited their factory. They had scrutinised their records several times. The Tariff Item 68 was brought in force from 1975 and that they were having licence till 1976. The officers were visiting and scrutinising all the records till this time. They submitted that if the commodities were excisable than the same should have been assessed right from the year 1975. They submitted that while their factory was under licensing control, they had filed classification list and had stated under item 7 – “Particulars of the other goods produced or manufactured and intended to be removed by the assessee”. The Department finding the goods excisable, had not instructed them to take the licence and to follow any procedure. They further submitted that on 28-8-1978, in response to the letter OC No. 1935/78 dated 28-8-1978, a declaration was submitted to Superintendent of Central Excise, Range III Madras wherein the firm had notified the manufacture of the above commodities and had also stated that the goods were exempted as per classification list dated 19-5-1978. Again on 27-5-1985, the Asstt. Collector of Central Excise, Madras-I Division alongwith the Inspector visited the factory and had scrutinised the accounts as well as the nature of processing of the various goods. They complied with their instructions and filed a report on 5-3-1985 to Mr. Padmanabhan, Inspector of Central Excise, Madras-IV Dn Preventive Range. They further submitted that on the introduction of new Tariff, they addressed a letter on 7-3-1986 to the Superintendent Range I wherein they furnished the production, clearances and value of the goods for the years 1983-84, 1984-85 and 1985-86 (upto February 1986) alongwith the process write up for the goods manufactured in its factory. They sought for an ad-‘ vice from him as to whether the Central Excise licence has to be taken and also the procedures to be followed thereto. In response the firm was granted a licence on 26-3-1986 were dutiable. They submitted that no duty prior to 26-9-1986 can be demanded inasmuch as the fact of manufacture and clearances of the goods in question was within the knowledge of the Central Excise Department as early as from 1971. They submitted that the licence was granted on 26-3-1986 and not on 27-10-1986 as stated in the show cause notice and in response to their enquiries made in their letter dated 7-3-1986. They submitted that the show cause notice was issued on 26-3-1987 the demand for duty for the year 1981-82 is beyond the period of five years and hence not enforceable in law. Further no duty can be levied for clearances made on and from 27-2-1985 as the Central Excise officers had visited the factory and gathered all the relevant particulars including the write up on the manufacture of their products. They further submitted that the petroleum jelly being a bulk drug is wholly exempted from duty as per Notifications No. 104/82 and 234/82 and for this, they relied upon the citation as reported in 1983 (14) E.L.T. 1835 Oil Dale Trading Pvt. Ltd., Calcutta v. Collector of Customs, Calcutta wherein the manufacturer had also not taken a licence. They submitted that Mahatal RT 25 was also not assessable to duty as it was manufactured without the aid of power. They purchased duty paid furnaces oil, which they distilled with aid of electric blowers and that this process was not manufacture as even after distillation, the furnace oil contained to be furnace oil without change in name, character or use after distillation. The process of distillation could be considered as manufacture. The power was used in non-manufacturing activity and hence it should not be considered as use in manufacture of Mahatal RT 75. They relied upon the citation in Adreena Industries v. Collector of Customs, Chandigarh [1987 (28) E.L.T. 364-T] wherein it had been held that if power had been used in a process which does not turnout to manufacture, it cannot be said that power had been used in the manufacture of the said article. They submitted that the furnace oil was mixed with resin and pine oil and packed in containers and in terms of Notification No. 179/79 as amended, the Mahatal RT 75 was not liable to duty as it was wholly exempted. They submitted that Mahatal RT 75 was distilled furnace oil classifiable under Tariff Item 10 and it had suffered duty, no further duty could be levied. They relied on the ruling in Nava Bharath Enterprises (P) Ltd., New Delhi v. Collector of Central Excise, Madurai reported in [1983 (13) E.L.T. 1134]. They further submitted that the value of drums and barrels in which calibration oil and Mahatal RT 75 were sold were returnable containers and its value should not be computed. If the value of these items are deducted, their clearances would be less than the exempted limit of Rs. 30 lakhs and they relied upon the citation as reported in Associated Cement Corporation Ltd v. Collector of Central Excise, Indore [1987 (27) E.L.T. 746] wherein it had been held that the cost of packing of durable nature and returnable use was not includible under the assessable value. The duty cannot be imposed as the firm had not been charged to duty from 1975 when the excise levy was imposed on the products in question. They relied upon citations as reported in Steel Authority of India Ltd., Durgapur v. Collector of Central Excise, West Bengal, Calcutta [1985 (22) E.L.T. 487] and Inarco Ltd. v. Collector of Central Excise, Bombay (1984 ECR 2164 CEGAT).
7. Lastly, they contended that Shri Anantnarayanan, Managing Partner of the firm, was a distinguished person in the field and an expert. He was a man of integrity, would never stop to suppression of any facts from the Department and hence relied upon the citation as reported in Hindustan Steels Ltd. v. Collr. of C. Ex. [1978 (2) E.L.T. 159].
8. The learned Collector in the impugned order held that the Notification No. 234/82 did not apply to petroleum jelly as it was a chemical product used for manufacture of V belts and tyres and tubes. He held that the Mahatal RT 25 was not merely a furnace oil but synthetic pine tar used for paints and varnishes as a softner in plaster and rubber processing in asphaltic compositions etc. He held the furnace oil and synthetic pine tar were different from each other. Therefore, he held that there was manufacture by use of power and Notification No. 179/77 was not applicable to them. The test certificate produced by the appellants to show that the product was a furnace oil was not accepted by the Collector. The Collector held petroleum jelly and synthetic pine tar were classifiable under Tariff Item 68. He further rejected the plea of the appellants to give deduction of the packing materials from the assessable value in the case as the drums and barrels were not returned to the assessee. The Collector also did not accept the contentions of the appellants that Department had knowledge of the assessee doing the manufacture and all the contentions and submissions in this regard including time-bar was rejected by him.
9. Shri K.V. Subramanyam, Advocate appeared for the appellants and submitted the case of the appellants as stated by them in their reply to the show cause notice and the grounds made out in the appeal Memo. Their case is that Mahatal RT 75 is a mixture of furnace oil, pine oil and resin and used in Rubber industry as Plasticizers. They purchase duty paid furnace oil and remove lighter fraction by process of distillation for which an electric blower is used. Their case is that even after distillation the furnace oil remains as such and it is known in the market as furnace oil. There is no change in the name, character or use of furnace oil and that the process of distillation is not manufacturing activity. After distillation, they mix manually with pine oil and resin and as no power is used, their claim for exemption under Notification No. 179/77 is justified. Their further case is that furnace oil even after distillation and addition of pine oil and resin continues to be furnace oil as described in Tariff Item 10 of the Central Excise Tariff. They relied upon the Test Certificate. They have relied upon the definition of furnace oil in Item 10 which is stated as –
(i) which has a smoke point of less than 10 mm;
(ii) possesses a viscocity of 100 seconds or more by Redwood I visco meter at 37.08 C;
(iii) leaves a carton residue of not less than 1/4th per cent by weight; and
(iv) is as dark as or darker than, 0.04 Normal Iodine solution when tested by colour comparison test.
They stated that according to the Test Certificate, the smoke point is so low that it cannot be measured and evidently it is less than 10 mm. Carbon Residue is shown as 16.5 in Test Certificate which according to them is well within the condition prescribed by the Tariff. Carbon residue is not less than l/4th per cent by weight and the viscocity when tested by Redwood I viscounted at 37.08 C is 3,018 and if the viscosity is 100 or more, according to appellants, it qualifies to be called as furnace oil and fourthly they say, that the colour comparison test states positively that the sample was much darker than 0.04 normal Iodine solution. Therefore, according to them, furnace oil after distillation and addition of pine oil and resin has continued to be furnace oil and it possesses all the characteristics of furnace oil to satisfy the requirements as laid down in Item 10 of Central Excise Tariff. Their submission is that the learned Collector did not apply his mind to the Test Certificate. According to them, the Collector’s observation that except the last condition regarding the colour comparison Test, the remaining three conditions were not fulfilled, was not correct and hence they relied upon the ruling in Nava Bharat Enterprises (P) Ltd., New Delhi v. Collector of Central Excise, Madras [1983 (13) E.L.T. 1134], Kwality Products v. Government of India [1980 (6) E.L.T. 579], Shakti Insulated Wires v. Union of India [1982 (10) E.L.T. 10] and also relied upon the extract from the book “Rubber Technology” 2nd Edition edited by Manrice and Morton. Their further case is that a similar product produced by Indian Oil Corporation in a Trade name of “Process Oil” is not subjected to Excise duty.
10. Their further ground is that petroleum jelly is also exempted by virtue of Notifications No. 104/82 and No. 234/82 which exempts bulk drugs and relied upon the citation of Oil Dale Trading Company Pvt. Ltd., Calcutta v. Collector of Central Excise, Calcutta [1983 (14) E.L.T. 1835]. They have sought for exclusion of clearances of Mahatal RT 75 and petroleum jelly in accordance with the explanation given in Notifications No. 105/80, 74/83 and 77/85 and after giving deductions of these two items, there will be no duty liability. They have reiterated in their grounds of appeal the question of time-bar as taken by them in reply to the show cause notice as already noted supra. In this connection, they have relied upon the railing in Rishi Enterprises v. Collector of Central Excise [1984 (15) E.L.T. 260 Tribunal].
11. Sh. K.V. Subramanyam, Advocate making his submissions has further relied on the definition of ‘pine tar’ as given at page 818 of the Condensed Chemical Dictionary, Tenth Edition Revised by Gessner G. Hawley. He further relied upon the following rulings :-
1. Mahabir Jute Mills v. Collector of Central Excise, Ahmedahad [1988 (35) E.L.T. 119]
2. Adreenalndustries v. Collector of Central Excise, Chandigarh [1987 (28) E.L.T. 364]
3. National India Rubber Works Ltd. v. Union of India and Ors. [1988 (34) E.L.T. 19 Delhi]
4. Rajbir Singh Santokh Singh and Anr. v. Collector of Customs (Prev.), Bombay [1988 (35) E.L.T. 122]
5. Collector of Central Excise v. Protein Products of India [1988 (38) E.L.T. 749 SC]
Shri K.V. Subramanyam, Advocate finally sought for allowing the appeal.
12. Shri A.S. Sunder Rajan, Departmental Representative appearing for the Revenue, justified the reasoning given by the Collector in the impugned order and submitted that the Department is justified in invoking the longer period of five years. He referred to the Test Certificate and pointed out that the Test Certificate relied upon by the appellants does not state that the product is furnace oil. Further he submitted that in order to claim exemption for petroleum jelly under the notification, the appellants should have drug licence which they did not have. As regards giving deductions to the value of barrels and drums, since the same were not returned to the appellants by their customers, they were not entitled to ask for deductions and the Collector was justified in disallowing their claim. He further submitted that if power was used in the process of manufacture, then the benefit of Notification No. 179/79 was not available to them. He further pointed out that the decision rendered in [1987 (28) E.L.T. 369] has been overruled by Supreme Court in the case of Standard Fireworks Industries Sivakasi and Anr. v. Collector of Central Excise, Madurai [1987 (28) E.L.T. 56]. He further submitted that there has been mis-declaration of Rs. 10,924/-.
13. We have heard both sides, perused the records and the rulings cited by them carefully considered the submissions of both the sides. The main points for con sideration is as to whether the appellants have manufactured the items shown in show cause notice for the period 1981-82 to 1985-86 without obtaining Central Excise licence and following the Central Excise formalities; whether the Department is justified in involving larger period of five years under Section 11(1)A of the Act; whether their manufacturing process in preparation of Mahatal RT 75 or it continued to remain as furnace oil as contended by the appellants; whether the appellants are entitled to claim\ex-emption as claimed by them under Notifications No. 105/80, 74/83 and 77/85 by excluding clearance of Mahatal RT 75 and petroleum jelly; whether the appellants are entitled to succeed and what relief?
14. In the show cause notice dated 26-3-1987, it is stated that “on introduction of new Central Excise Tariff Act, the unit has taken out a Central Excise licence L-4 No. 1/86. Even at the time of taking out the licence during the year on 27-10-1986 on which a declaration was filed for the year 1986-87. M/s. Mahatha Petro Chemicals have not intimated the above facts to the Department and thereby suppressed the production and clearances of Tariff Item 68 goods cited above. It also appears that they have deliberately contravened the provisions of Section 6 of the Central Excises and Salt Act, 1944 read with Rule 174, Rule 9(1) read with Rules 52-A, 178-B, 173-C, 173-F, 173-G and 226 of the Central Excise Rules, 1944”. This change has to fail as admittedly the assessee was holding a licence L-4 No. 1/71 until 20-12-1979 when the licence was surrendered as the products were declared as exempted. Further correspondence and regular visits of the Departmental officials clearly discloses the fact that there is no suppression of production and clearances of Tariff Item 68 goods. The appellants were holding licence L-4 No. 1/73 for manufacturing of vapourising oil until 29-11-1976, when it was surrendered on their discontinuing the manufacture of vapourising oils. The Superintendent of Central Excise, Range III, Madras by his lettter dated 12-5-1978 in OC No. 892/78 sought for revised classification list. The appellants by their letter dated 19-5-1978 enclosing a detailed classification list in Form 1 submitted to the Superintendent of Central Excise, Madras III Dn. In coloumn 6, they have disclosed in detail all the items manufactured by them. The Superintendent in his letter dated 16-6-1978 sought for further particulars of manufacture of paraffin wax. By his letter dated 15-7-1978 the Superintendent sought for total value of clearances. By letter dated 17-8-1978, the appellants were asked to furnish the particulars. The appellants by their letter dated 28-8-78 complied with the details sought. By letter dated 8-7-79, the Superintendent informed the appellants that paraffin wax was not dutiable and the show cause notice by the office to be treated as cancelled.
15. The Section Officer, Central Excise Revenue Audit, Madras by his letter dated 21-9-1979 directed the appellants to keep the relevant records including the private records ready for inspection. The appellants by his letter dated 5-10-1979 informed them to inspect their records. The appellants submitted that the audit checked all the records and inspected the entire factory on 23-10-1979 in accordance with their letter dated 21-9-1979. The appellants on 30-11-1979 wrote to the Department seeking the procedure to obtain licence for manufacture of Nepthenates. The Department by their letter dated 12-12-1979 informed the appellants to contact the Superintendent Group IC Madras in this connection. On 5-3-1985 Inspector of Central Excise IV Division, Preventive Group issued a detailed note of his inspection and sought for details. The appellants by their letter dated 7-3-1985 gave the enclosures with entire details of production and clearances and value of goods manufactured in their unit for the years 1983-84,1984-85,1985-86 upto February 1986. A detailed reading of these correspondence clearly discloses that there was no suppression of production of goods manufactured. The Department has been making regular checks, visits and has been calling for details regularly. They were quite satisfied about the non-excisability of the goods and hence remained silent about issuing demand. By their letter dated 8-7-1979 they informed the appellants that paraffin wax was non-dutiable so alleged suppression of production of excisable goods does not stand to reason, more particularly when the licence held by them was cancelled by Department on the belief that it is not excisable. The Collector in his order has observed “It is true that the Asstt. Collector of Central Excise, Madras I Dn had paid a visit to firm on 27-2-1985. Ironically even after this visit of the Central Excise party, the appellants did not think it fit to approach the Department and seek clarification”. Just before these two lines, the Collector has written, “The Department is expected to guide/will guide the assessee when approached in proper form”. It is strange how the Collector is blowing hot and cold in these sentences. If the Department is expected to guide/will guide the assessee, then why did the Asstt. Collector remain silent after the visit of 27-2-1985 to the appellants factory and how does it hold for the Department to allege that the assessee had suppressed the production of goods from 1980 when admittedly the Department is fully aware of the existence of factory of the appcllant/assessee and their production of goods. Hence this charge of suppression by invoking proviso to Section 11(1)A of the Act for extending longer period of five years fails except for six months from the date of the show cause notice. The assessee has stated that they have obtained licence on 26-3-1986 on introduction of new Tariff of 85 and Computing six months from the date of show cause notice dated 26-3-1987 will be 26-9-1986 and no demand prior to this could be made. To this extent if the duty is liable by the assessee a claim is maintainable subject to the observations.
16. The next question is with regard to Mahatal RT 75. The assessee claims this to be dutiable furnace oil and that there is no-manufacturing as no new product emerges despite distillation by use of electric blower and manually pine oil and resin is added to it. The same is packed as Mahatal RT 75. Merely by giving a new or similar product a different name, the nature of the product does not change. They have relied upon the citation in 1988 (34) E.L.T. 16 Delhi High Court in the case of National India Rubber Works Ltd. v. Union of India and Ors. and several citations on manufacture. They have heavily relied upon the Test Certificate to show that the product is a duty paid furnace oil and has continued to remain so despite the distillation, addition of pine oil and resin and being packed and named as Mahatal RT 75. They claimed exemption and submitted that similar product of Indian Oil Corporation has not been levied with any duty. The Collector has not accepted the Test Certificate on the ground that the Test Certificate satisfies only one condition. But what is significant is that the test of sample has not been done by the Department. The Test Certificate also does not disclose as to what the ultimate material is, after the analysis of the product. On mere results, an inference cannot be drawn by us. The appellants seek to draw the conclusion by the test results that it satisfies the conditions of furnace oil. Such conclusions cannot be drawn by us without proper sample being drawn by Department and a finding obtained as to whether the product is still a furnace oil or not. Hence, on this question we have to remand the matter to the Collector with a direction to draw the representative sample and get it tested and indicate in the Test report with clarity as to what the product is. Only afterwards, the Collector has to de novo decide about this product by giving a finding of its being manufactured or not and as to the entitlement of exemption sought for by the appellants.
17. The claim of the appellants to seek deduction on the value of drums and barrels is also left open for reconsideration after giving due opportunity to the appellants to show as to whether the same is durable and returnable. There is no evidence on record as to this and hence the remand on this question also for consideration.
18. As regards the Petroleum jelly, the said product is squarely covered by the decisions of this Tribunal reported in the case of Oil Dale Trading (P) Ltd. v. Collector of Customs, Calcutta [1983 (14) E.L.T. 1835]. In this case, it is held that there is no need for taking prior licence from the Drug Controller for manufacture or importing drugs for the assessment of goods under Item 68. Hence, the contention of Shri A.S. Sunder Rajan that drug licence is required for grant of exemption to Petroleum jelly does not require consideration.
19. The matter is remanded to the Collector for fresh consideration on the lines indicated in preceding paragraphs. The appeal is allowed by remand for de novo consideration and redetermine the demand for duty for a period of six months prior to date of show cause notice only.