ORDER
Gowri Shankar, Member (T)
1. Each of the three appellants M/s. Parle Beverages (Parle for short), Thums Up Beverages Ltd. and Voltas Ltd. (Voltas for short) is a manufacturer of sweetened and flavoured aerated waters. Each of them purchased from its manufacturer the concentrates which is referred to as “non alcoholic beverage base” (NABB) which when mixed with syrup, water citric acid and carbonated, gives the drink being manufactured its colour, flavour and other characteristics that render it unique. M/s. Parle Beverages one of the appellants, also manufactures during the relevant period some of the NAAB. Each appellant is a franchisee and has licence from the owner of the trade mark to manufacture particular branded beverages. The manufacturers of the NABB prescribes a formula according to which it requires that the beverages will be manufactured. The formula contemplates use of specified quantities of NABB and other raw materials in order to arrive at a given quantity of the beverages. According to this formula, one unit of NABB should give to M/s. Parle Beverages and M/s. Thums Up 400 cases of the drinks, and in the case of M/s. Voltas Ltd. of Pepsi 567 cases. Each contains 24 bottles of 250 ml each).
2. The officers of the department on examination of records of the manufacturers found that the quantity of drinks which was produced felt short of the quantity that could have resulted by applying the formula. The shortfall was 1.77,1.28 and 2% in the case of Parle, Thums Up and Voltas. Notice was accordingly issued demanding duty on the quantity of drinks represented by this percentage which the department was of the view had been manufactured and cleared without payment of duty. Each of the notices invoked the extended period. The Commissioner in each of the three orders confirmed the demand for duty and also imposed penalties. Hence these appeals.
3. The following contentions are raised on behalf of the appellants. There is no contractual obligation on the part of the appellants to strictly adhere to the formula. The object of the formula is to ensure consistency of the product in different batches and in each bottle of the same batch. It is, therefore, more of a working guide than an inflexible requirement in terms of quantity of end product. While every effort is made to adhere to it in order to maximise the production, it is not always possible to this. The losses which take place during manufacture and by their clearance of such duty have not been taken into account. It is not permissible to demand duty only on the basis of a consumption of a single raw material without consideration of whether other raw material has been used of the extent required. The action of the Commissioner in determining the production on the basis of raw material amounts to invoking the provisions in Rule 177E which cannot be resorted to unless the requirements specified in that rule have been complied with. Duty cannot be demanded on clandestinely removed goods unless such removal is established by means of evidence. It was argued in addition on behalf of Voltas that there was no allegation that there has been any payment by the bottlers to the supplier of NABB. It was further contended that the demands were entirely barred by limitation. There was no requirement on the part of the manufacturer to supply to the department any formula of production and therefore, there was no suppression in the formula not having been supplied.
4. Departmental Representative contends that what has been done in effect is to apply to the provisions of Rule 173E. He argues that the essential requirements of the provisions of the Rule have been complied with. The Commissioner has determined the normal quantum applying the consumption pattern of the essential raw material which gives the drink its particular characteristics. Sub-rule (1) of Rule 173E did not require the norms prescribed unless be applied prospectively. Therefore Commissioner was justified in applying the norm to the past clearances prior to fixation of the norm. He cites case law in support.
5. In the course of the investigations which preceded the issue of notice and statements of various parsons were recorded. With one exception, none of the persons concerned with the production of the commodity had agreed that there was either a contractual requirement generally practicable or that it was possible to produce the quantity of the beverages as specified in the formula. While they say that it is their attempt to adhere to the formula in the case of production of the drinks they also say that it is not possible for various reasons. Prakash Jha, Managing Director of M/s. Parle & Thums Up has stated that it is technically not possible to achieve for the formula because it does not provide for wastages caused during start up and shut down and on account of substandard production. R.P. Mugale, Chief Executive of Parle, takes the same stand. C.G. Hegde an employee of Parle International, another franchisee also states that the yield of 400 crates in the formula is theoretical. The same view is expressed by R.N. Ranade the Production Manager of Voltas. The exception is of Krishnan, the Production Manager of Thums Up who says that it is the bounden duty of the franchisee to achieve the production of 400 cases. He however, also says in the same statement that “we try our best to achieve our target on fixed norms of 400 crates”. Now a statement of one man cannot prevail over the statements of various other employees at various levels of the manufactures. Krishnan himself agrees in his statement that it is not possible to achieve the target. The oral evidence in this case therefore, does not support the view that target is either required as a matter of contractual obligation to be achieved or that it is possible to achieve it.
6. One of the factors which it was cited as standing in the way of achieving the formula was stated to be wastage. This is stated briefly to arise on the following accounts when the machinery is switched over to produce a beverage different from the one which was being manufactured. In such cases the quantity of beverage in the storage tanks, pipes and other parts of the plant has to be drained out and these flushed with the beverages whose production is to be taken up; into shut down losses, when the plant is shut down for maintenance or of failure when the goods in process have to be abandoned; the quantity in bottles which are under filled or over filled which cannot be received and breakages in bottles after filling. It was contended on behalf of the appellant that these account for a significant part of the deficiency, alleged in production.
7. Departmental Representative contended that in the case of Parle and Thums Up the notice had specifically taken into account the production and other losses in arriving at the quantity on which duty was demanded. These losses were quantified in a statement referred to as the M. 5 statement which was being prepared by the manufacturer.
8. The M.5 statement was among the documents which was seized from the appellants’ premises. In the written submissions submitted to the Commissioner after the hearing referring to the question asked by the Commissioner about the records of wastage, the appellant pointed out that the M.5 statement seized on 1-2-1994 contained details of only some of the process wasted particularly, half filled bottles. In this situation the conclusion that wastage has been taken into account cannot be accepted.
9. The position is different in the case of Voltas. The notice did not provide for wastage of any quantity. The Commissioner declined to accept the contention that the shortfall was attributable to wastage by saying that waste only occurs when production commences i.e. start up loss. In any event the Commissioner does not quantity the loss on account of start up loss deficiency attributable which he admits exists.
10. The question of how much loss is attributable to the waste is not of any great significance to the central issue required to be decided. That issue is whether duty was demanded on a quantity of production of excisable goods based upon the consumption of single raw material. It has been consistently held by the Tribunal that production of commodity cannot be taken only assuming the raw material. In Padmanabh Dyeing & Finishing Work v. C.C.E. – 1997 (90) E.L.T. 343 the Tribunal set aside the order of Collector demanding duty on a quantity of processed fabrics determined entirely by the electricity consumption of the assessee. In Lili Foam Industries (P) Ltd. v. C.C.E. – 1990 (46) E.L.T. 462 the Tribunal took into account the fact that raw materials other than one had not considered by the department been shown to have been used for the quantity of finished products on which the duty was demanded in striking down the demand. In V.K. Thampy v. C.C.E., 1994 (69) E.L.T. 300 the Tribunal noted that “while every thing does not appear to be in order in regard to return of the reclaimed rubber, the fact remain that there was no conclusive evidence also to show that reclaimed rubber was in fact used by the appellant to produce tread rubber and no investigation has been done in regard to the use of other materials to ascertain whether the quantum of other raw materials used could be such as to result in additional production of tread rubber by using the alleged short quantity of 1000 Kgs of reclaimed rubber.” These decisions and others reiterate the principle that clandestine removal cannot be established only on the basis of one raw material alone.
11. It appears to us that the Rule 173E requires the following to be done. The officer duly empowered by the Commissioner has to fix a quantum of goods produced in a period when production in a particular factory is considered normal having regard to the factors specified in the rule. This shall be the norm. The assessee can be called upon to explain any shortfall in production applying the norm. If he is not able to explain it satisfactorily duty may be assessed as short paid. The rule does not sanction determination of a norm based only upon one raw material without taking into consideration, other factors specified. The demand again from each of the assessee is for clearances during a period of 5 years. The Commissioner does not say that during five year period production was normal. It is obviously not possible to conclude the entire period would be a period of normal production of each assessee. During such a long period and there would be variations in manufacture and losses, on account of difference in power supply, labour factors etc. The Departmental Representative’s reliance on Supreme Court’s decision in Triveni Rubber and Plastics v. C.C.E. – 1994 (73) E.L.T. 7 is not appropriate to the facts of this case. There was no attempt by the appellant before that court to question the applicability of Rule 173C. Advocate for the appellant argued that the power consumption alone cannot be taken as a basis and that the several factors mentioned in the rule that will be taken together. Court refused to accept this contention. It said “on a reading of Rule 173E we cannot agree that the officer empowered by the Collector or the Collectors cannot determine the normal production unless all the factors mentioned in the rule are present simultaneously. The rule does not say so nor is it can be capable of being so interpreted” . This observation does not support the view that production can be determined on the basis of one raw material alone, as has been done in this case. The Court in coming to its conclusion took note of the fact that the accounts were found fabricated and untrue. There is no such allegation here.
12. The position in Standard Pencils P. Ltd. v. C.C.E. – 1996 (86) E.L.T. 245 as follows. The Collector had determined the quantity of eyebrow pencils manufactured on the basis of formula mentioned in “MICAL Test Register” and the quantity of four essential raw materials. Before the Tribunal the appellant accepted these norms. Tribunal ordered that the quantity of eyebrow pencils removed without payment of duty be worked out on the basis of quantity of four essential raw materials used exclusively in the manufacture of eyebrow pencil as indicated in the raw material account on the formula adopted by the Collector. The decision therefore is to be confined to a situation where there is an admission as to the acceptability of formula of production.
13. It is also not possible to accept the contention of the Departmental Representative that the franchise agreement stipulates production of the quantity as specified in the formula since clause (3) of the agreement provides that the beverages should be manufactured only in accordance with the formula and procedure provided with the company. Acceptance and application of a particular formula for a product mix does not necessarily lead to an inevitable production of a pre-determined quantity of goods formula. There is no contention that the franchisee in any case were held accountable for contravention of the agreement by not having produced according to the formula. Nor was the contention of the Voltas that it has not been established or suggested that there has been any flow back to it of money but on account of production in excess of the quantities shown rebutted.
14. The essence of Rule 173E is that the norm of production to be complied must be on the fixed at a time the production was considered normal having regard to the various factors mentioned there. It may be possible that not all the factors can be taken into account. There is in the present case however, no attempt to consider any of the factors other than raw material before arriving at the norm. It cannot therefore be held that the formula by itself, without consideration of any of the other factors would not amount to determination of a norm under Rule 173E. It has, therefore to be held that there is insufficient basis for the demands of duty. In view of this we do not propose to answer the question as to whether the demands were barred by limitation. The demand for duty and penalty is set aside.
15. Appeals allowed. Consequential relief if any, if permitted by law.