ORDER
K.S. Venkataramani, Member (T)
1. These two appeals, namely, one against the order dated 26-10-1990 passed by the Collector of Central Excise, Allahabad and another dated 3-7-1991 passed by the Collector of Central Excise (Appeals), Allahabad involved the same issue i.e. demand of differential duty on ripped tobacco and were argued together and are disposed of by this common order. The facts, briefly, are that the appellants, herein, are manufacturers of Panama brand cigarettes classifiable under Heading 2403.11 of C.E.T.A., 1985. The raw-material used by them in the manufacture of cigarettes is cut tobacco classifiable under sub-heading 2404.13. Prior to 1-3-1989, the appellants had been bringing cut tobacco on payment of duty under Notification 356/86 dt. 24-6-1986. According to this notification, cut tobacco for the use in the manufacture of machine-rolled cigarettes is leviable to duty @ Rs. 10 paise per kg. This notification was amended on 1-3-1989 adding the proviso, “provided that where the use of cut tobacco in the manufacture of machine-rolled cigarettes is elsewhere than in the factory of production of such tobacco, the procedure is set out in Chapter X of the Central Excise Rules is followed”. Accordingly, the appellants, thereafter applied for a facility of bringing cut tobacco into their factory from outside and were granted the necessary L6 licence for the purpose. The department found that from 1-3-1989 to 30-6-1990, the appellants had brought certain quantity of cut tobacco from M/s. Deccan Tobacco Processor Ltd. (DTPL) and that the records of the appellants show that certain quantities of ripped tobacco had emerged and the appellants had sent back ripped tobacco to their processors, namely, DTPL. The department took the view that ripped tobacco is nothing but cut tobacco, which should have gone into the manufacture of cigarettes and that their transaction of ripped tobacco with the processor by sending it back is not covered by Chapter X Procedure since this tobacco had not gone into the manufacture of cigarettes in terms of Rules 192 and 196. The department was of the view that it should pay full duty without exemption. The department held that on the equivalent quantity of cut tobacco as of ripped tobacco removed from the factory premises of the appellants to their processor, the differential duty was payable at the full rate. On 3-8-1990, a show cause-cum-demand notice was issued by the Assistant Collector of Central Excise, Varanasi tinder Rule 196(1) for duty on the ripped tobacco since it has not been used for the purpose for which remission of duty was granted. This case was adjudicated by the Collector of Central Excise, Allahabad. The appellants submitted their explanation in response to the notice. They pointed out that the Assistant Collector had permitted them, during the period 20-3-1980 to 20-4-1989, to remove certain quantity of ripped tobacco to DTPL under Rule 196BB. This rule empowers the Collector to permit partially the processed material received under Chapter X Procedure to place outside the factory for purpose, inter alia, of refining, re-condition or any other operation necessary for completion of the industrial process and return thereof to the factory. The appellants, further, submitted in their reply that the Superintendent, subsequently, issued a show cause notice on 8-6-1989 raising demand of duty under Section 11A and withdrawing the permission granted under Rule 196BB. The appellants, further, submitted that later on they came to know about the instructions of the Central Board of Excise and Customs (CBEC) in Circular No. 58/89, dated 5-10-1989 saying that ripped tobacco was treated as cut tobacco and could be sent to the original manufacturer in terms of Rule 196(B)(i). This rule says that if any excisable goods obtained under Chapter X Procedure on receipt found to be defective or damaged or unsuitable to the needs of the assessee for any reasons such goods with the permission of the proper officer can be returned to the original manufacture from whom the assessee had obtained them under bond and every such returned goods shall be added to the non-duty paid stock of the original manufacturer and dealt with accordingly. The Assistant Collector, after considering this defence of the appellants, passed an order dated 22-2-1990 that the despatches of ripped tobacco already made under Rule 196BB to DTPL may be treated as the removal under Rule 196B(i) as per the Board’s circular. The appellants, further, contended before the Collector that the demand cannot be made under Rule 196 and that it could be only made under Section 11A of the Central Excises and Salt Act, 1944 for which the demand was barred by limitation in the absence of a formal show cause notice under Section 11A. The Collector of Central Excise, Allahabad considered the defence of the appellants. He noted that the demand of duty raised subsequently dropped by the Assistant Collector for the period 20-3-1989 to 20-4-1989 was also included in the present notice which is a subject of adjudication by the Collector. The Collector observed that Rule 196 under which the duty was sought to be recovered, did not specify the issue of show cause notice. The Collector of Central Excise, Allahabad held that cut tobacco is good tobacco on receipt and when used in the manufacture of machine-rolled cigarettes. However, in course of such use a portion of such tobacco, the Collector observed, is obtained by ripping the defective cigarettes. He held that the cut tobacco is not defective or unsuitable but it is used in manufacture of cigarettes the ripped tobacco emerges from defective cigarettes and the question was that the removal of such ripped tobacco which is, the Collector observed, nothing but cut tobacco. The conclusion was that Rule 196B(i) could not apply as it was not a case of the cut tobacco being found to be unsuitable. He held that the Board’s clarification does not squarely cover the situation and observed that he is unable to persuade himself to go by this clarification of the Board. The Collector concluded that it cannot, therefore, be said that the ripped tobacco which is re-cycleable but was not re-cycled and was cleared on payment of partial duty on the assessable value of Rs. 2/- instead of the assessable value of Rs. 11/- per kg. approved at the time and place of removal of cut tobacco and was accounted for as having been used for the industrial purpose. Payment of duty at Rs. 21 -per kg. could not be treated as duty payable for the purpose of Rule 196. Duty under this rule could be the equivalent to the duty not paid on the cut tobacco due to concession availed under Notification 356/86 read with provisions of Chapter X. In the result, the Collector demanded duty of Rs. 31,53,431.25 under Rule 196(1) of Central Excise Rules and in terms of the related bond executed for the purpose by the appellants. He, further, ordered that he has not adjudicated the payment of duty of Rs. 2,59,150.00 as finally demandable because this amount has been dropped by the Assistant Collector of Central Excise in his order dated 22-2-1990. The Collector, further, observed that this order of the Assistant Collector is to be reviewed by the Collector tinder Section 35E(2) of Central Excises and Salt Act, 1944 because the Collector has found that the Assistant Collector’s order was not legal and proper for which separate action was being taken by the Collector.
2. The order of the Collector of Central Excise (Appeals), which is an Order-in-Appeal E/No. 4191 /91-D, is as consequence of action for review taken by the Collector of Central Excise, Allahabad of the order of the Assistant Collector, Varanasi. In that order, the Collector (Appeals) held that the Assistant Collector was not correct in withdrawing the demand and, therefore, set aside the Assistant Collector’s order.
3. Shri M. Chandershekharan, Sr. Counsel appearing for the appellants submitted that ripped tobacco emerges as a result of production cigarettes that are found to be defective. It cannot be marketed and, therefore, they are ripped. Their processor, DTPL to whom these are sent, reprocessed the tobacco again into cut tobacco. The ripped tobacco loses its moisture. Department is seeking to recover duty on the ripped tobacco which the appellants have returned to the processor. The ld. Sr. Counsel urged that there is no case for demanding duty on ripped tobacco because, admittedly, the cut tobacco received under concessional rate of duty has been used in the manufacture of cigarettes and ripped tobacco is generated out of defective cigarettes. Therefore, the material obtained has been used for the purpose for which the concession was given. Therefore, there cannot be any duty thereon under Rule 196 whereunder duty is demandable if the material is not used for the purpose for which it was obtained. The ld. Sr. Counsel contended that the fact cigarettes made by using exempted rated cut tobacco found to be defective cannot be a ground for recovery under Rule 196.
3A. Further, the Sr. Counsel pointed out that the appellants had been clearing such ripped tobacco only on payment of duty on assessable value duly approved by the Assistant Collector. When provisions of Rule 196 are not attracted, the demand would be only for duty short levied under Section 11A Central Excises and Salt Act, 1944 and since no such formal show cause notices have been issued in this regard, the demand is hit by limitation. It is well-settled, the ld. Sr. Counsel pleaded, that for recovery under Section 11A there has to be a formal show cause notice. The ld. Sr. Counsel drew attention to the Circular of the CBEC which clearly laid down that ripped tobacco received under Notification 356/86 as amended can be returned to the original manufacturer under provisions of 196B(i). The Bombay High Court judgment in the case of Solar Pesticides Pvt. Ltd. v. Union of India -1992 (57) E.L.T. 201 (Bom.) was cited in support of the proposition that the departmental authorities are bound by clarification received vide Board’s circular. The ld. Sr. Counsel also relied upon the Tribunal’s decision in the case of Tractors and Farm Equipment v. Collector of Central Excise – 1985 (21) E.L.T. 753 holding that the provisions of Rule 196B would apply and would permit the return of not only goods found defective immediately on receipt but also those found defective before use.
4. Smt. Shanti Sundaram, ld. SDR contended that Notification 356/86 exempts cut tobacco if used for manufacture of machine-rolled cigarettes. If they are not so used, the exempted rate is not available. The proviso to the Notification prescribes the following Chapter X Procedure for the removal of cut tobacco under the concessional rate to another factory where machine-rolled cigarettes are made and to no other purpose. The ripped tobacco cleared to DTPL cannot be considered as cut tobacco used in the manufacture of machine-rolled cigarettes. Therefore, for that quantity of cut tobacco, the fact that the DTPL had paid concessional rate of duty, will not amount to full discharge of duty thereon because that quantity of cut tobacco has not gone into the production of machine-rolled cigarettes which is the object of the concession. Therefore, on that quantity the differential duty can be demanded from the appellants. The ld. SDR also urged that the notification grant concessional rate of duty to cigarettes which are fully finished and have reached the RG 1 stage. Ripped tobacco emerges before that stage. According to the manual of the department on cigarettes and procedure thereto, the cigarettes when they are put in trays and ready for packing are to be considered finished cigarettes. Even, according to the Board’s circular, the ld. SDR urged that Para 4 thereof would cover the department’s case and duty had to be paid at the full rate of ripped tobacco which is only cut tobacco and it is sent to DTPL who are in any case not manufacturers of machine-rolled cigarettes, but are only processors. The ld. SDR argued that in the circumstances Rule would clearly apply and when cut tobacco not found to have been used for the purpose for which exempted rate was allowed, differential duty has to be demanded from the appellants.
5. We have carefully considered the submissions made by both the parties herein. Notification 356/86 originally granted the exemption to cut tobacco for use in the manufacture of machine-rolled cigarettes. It is seen that before its amendment, which prescribed the following Chapter X Procedure where the use of the tobacco in cigarette making takes place in another factory, the rationale behind the concession is indicated in Trade Notice No. 154/86, dated 3-7-1986 of the Hyderabad Collectorate reproduced at T54 Volume 25 E.L.T. 1986, which is as follows :-
“The Trade is hereby informed that duty on cut tobacco has to be discharged at the stage when it is removed from the cut tobacco store and issued for the manufacture of cigarettes in the factory. In case cut tobacco is returned back from the manufacturing section, in the form of damaged cigarettes floor sweepings, etc., such quantities of cut tobacco returned back to the cut tobacco store, should be kept separately and also properly accounted for. Since this quantity of cut tobacco has already suffered duty, no further duty liability would arise on such quantities of cut tobacco received back into cut tobacco store room cutting and blending room and used for blending with other non-duty paid cut tobacco.”
It is, further, seen that the Board’s Circular No. 58/89-CX. 3, dated 5th October, 1989 is the result of discussion in a Tariff Conference of Collectors and it has held that ripped tobacco arising out of the ripping of defective cigarettes would be classifiable under sub-heading 2404.13 as cut tobacco since it is nothing but cut tobacco taken out of the ripped cigarettes. Para 6 of the Board’s Circular is reproduced below :
“If such ripped tobacco or cut tobacco arises from cut tobacco received from another factory under Chapter X procedure as per Notification 356/86-C.E., dated the 24th June, 1986, as amended, then such ripped tobacco or cut tobacco can be returned to the original manufacturer under Rule 196(B)(i). However, at the time of such clearance, any credit of duty availed of on such cut tobacco as per the provisions of Notification 355/86-C.E., dated 24th June, 1986, as amended, will have to be reversed since such cut tobacco has not been used in the manufacture of machine-rolled cigarettes. The original manufacturer will have to clear the concerned goods again on payment of duty at appropriate rates. Such ripped tobacco can also be sent to any place outside under Rule 196BB for reprocessing and return thereafter to the consignor’s premises. In this case also at the time of such clearance, the credit of duty already availed of on such cut tobacco as per Notification 355/86-C.E., dated the 24th June, 1986, as amended, will have to be reversed since such cut tobacco has not been used in the manufacture of machine-rolled cigarettes.”
6. It is clear from the above the Board has clearly envisaged the possibility of cut tobacco in the form of ripped tobacco emerging from a factory making machine-rolled cigarettes using the concessional rated cut tobacco under Notification 356/86 and has clearly indicated that the return of such ripped tobacco can be accommodated under provisions of Rule 196B(i). It has also laid down the further requirement that the original manufacturer will have to clear goods again at payment of duty at the appropriate rate. It is, further, noticed that there is another Trade Notice No. 104/90, dated 11-9-1990 of the Indore Central Excise Collectorate, which is with reference to cut tobacco dust but it deals with parallel situation which has been stated as under :
“Under Notification 356/86, dated 24-6-1986, cut tobacco can be sent to another factory for use in the manufacture of machine-rolled cigarettes on availment of concessional rates of duty by following Chapter X Procedure. Now in the context of this notification, doubts have been expressed whether differential duty in respect of such quantities of cut tobacco received under Chapter X Procedure contained in tobacco refuse is to be realised or not. It is clarified that it would not be correct to vary the credit when non-dutiable tobacco arises out of cut tobacco, whether the cut tobacco is used within the factory of manufacture or in any other factory under Notification 356/86, dt. 24-6-1986 as amended.”
Therefore, the perusal of the above clarifications would show that with reference to the concessional rate to the cut tobacco received under Notification 356/86 and the ripped tobacco arising therefrom, the view of the authority issuing the notification has been consistent that the return of such tobacco to the original manufacturer is permissible. In this context, it is relevant to bear in mind the well-settled principle of interpretation that the interpretation put upon an enactment and provisions of a statute by the authority whose duty it is to construe, execute and apply the enactment has to be given much weight –Collector of Central Excise, Guntur v. Andhra Sugar Ltd. – 1989 (19) E.C.C. 46.
In this case, further, it is noted that there is no dispute about cut tobacco received under Notification 356/86 by the appellants has been issued for manufacture of machine-rolled cigarettes in the appellants’ factory. Further, the Tribunal’s decision in the case of Tractors and Farm Equipment v. Collector of Central Excise – 1985 (21) E.L.T. 753 would also largely support the case of the appellants since the goods in this case have in fact been put to the use for which concession was intended except that the ripped tobacco emerged out of cigarettes which were found defective and, therefore, ripped open. In the result, there is a lot of substance in the contentions put forth by the appellants herein and the reasoning of recovery of duty as contained in the impugned orders of the Collector of Central Excise, Allahabad and Collector of Central Excise (Appeals) is not sustainable. The appeals are, therefore, allowed. The Cross-Objections are only supportive of the impugned orders and not arising out of any grievance. They are, accordingly, dismissed as mis-conceived.