ORDER
Jyoti Balasundaram, Member (J)
1. The above appeal arises out of the order passed by the Collector of Central Excise, Bombay confirming a duty demand of Rs. 55,26,720.38 P. on (1) Durafil (2) Siotex RT (3) Siotex FRA and (4) Siotexize manufactured and cleared by the appellants during the period from 1-3-1986 to 31-3-1990 on the ground that these were finishing agents for textiles, which fell for classification under sub-heading 3801.90 for the period prior to 1-3-1987 and under sub-heading 3809.00 of the Central Excise Tariff Act, 1985 subsequent thereto and holding that they were not Organic surface agents falling under Heading 3402 and were not eligible to the benefit of exemption in terms of Notification No. 101/66-CE dated 17-6-1966 (as amended) and imposing a penalty of Rs. 20,000/- on the appellants herein. The above mentioned four products were used exclusively as textile softeners and finishing agents of various textile materials and contained a very low percentage (approximately 1.5%) of organic surface active agents.
2. The classification confirmed by the Adjudicating authority is not disputed by the appellants herein in view of the decision of the Tribunal in the case of Collector of Central Excise, Bombay v. L.N. Chemicals and Industries reported in [1996 (83) E.L.T. 458] wherein it has been held that the product Allenol Pesp’ used as softening agent in textile industry is a finishing agent classifiable under Chapter 38 and not under I leading 3402 of the Central Excise Tariff Act, 1985 and is not eligible to exemption under Notification No. 101/66 – the Tribunal inter alia relied upon the HSN Explanatory notes under Heading 3809 in coming to this conclusion. Therefore, the only question that is to be decided in the present case is the applicability of the extended period of limitation – the show cause notice dated 11th July, 1990 proposes to recover duty for the period between 1-3-1986 to 31-3-1990 – the period from 11th January, 1990 to 31-3-1990 alone is within the normal period of 6 months while the period prior to 11-1-1990 falls within the extended period of limitation of 5 years.
3. We have heard Shri R.S. Dinkar, learned Counsel and Shri J.M. Sharma, learned DR.
4. We find that the appellants have specifically mentioned in the classification list filed as far back as 1975 that the disputed products were softeners and had been described in their literature as such. That on 11th August 1977, they had specifically informed the department that their products were sold to Textile mills and processing houses and were used at the finishing stage in the processing department (Exhibit C) (Page 87 of the paper book). By two letters dated 1st December 1977, they had again informed the department that end use of the product was finishing of cloth in textile mills (Exhibit F1 and F2 at pages 92-93). This was in response to the information sought for by the department about the detailed composition of ingredients and end use, after samples had been drawn in November 1977. In their declaration under Notification 111/78 (Exhibit G) at page 95, the appellants had declared that the products were ‘textile softeners and finishing agents’. After coming into force of CETA 1985, there was no separate entry (finishing agents) and as Notification 101/66 continued in force, therefore, the appellants filed fresh declaration under Notification 111/78 claiming exemption under Notification 101/66 (Exhibit J at page 98). On 20-10-1986, samples of the disputed products were again drawn for testing as to whether these products would be covered by Notification 101/66 and entitled to the benefit thereunder and in January 1988, the test results were communicated by the Superintendent of Central Excise to the appellants. The test result showed that all the four samples contained a very negligible amount of organic surface active agent (Exhibit L at page 112).
5. Thereafter, the department wrote to the appellants on 29-1-1988 seeking clarification as to classification of the disputed items under Chapter 34 as claimed by them (page 113) and on 28-3-1989, the appellants were directed to submit details of quantum manufactured and removed during the past 6 months and for the last five year’s (sic) directed not to effect any further clearance without excise formalities and put on notice that failure to do so would render the goods liable to seizure (page 114). The appellants responded to this direction by sending a statement of clearances along with a certificate from Dr. W.B. Achwal, Head of the Textile Chemistry Division, Bombay University certifying that textile softening agents manufactured by the appellants can be regarded as surface active preparations, irrespective of the percentage of OSAA used therein (pages 115 and 116).
6. Subsequently on 12th May, 1989, the appellants were directed to apply for Central Excise licence for the finishing agents, softeners manufactured by them and classifiable under Heading 38.09 and informing them that declaration in terms of Notification 11/88 dated 15-4-1988 claiming the benefit of total exemption from duty under Notification 101/66 was not accepted and that the exemption Code No. allotted to them, if any, in 1986, stands cancelled (page 121). Samples of the disputed products were again drawn in May, 1989 for the purpose of testing whether the products were organic surface active agents and whether Notification 101/66 would be attracted there to (P.122).
7. On 26th May, 1989, the appellants replied to the Superintendent’s letter dated 12th Mav, 1989 reiterating that their goods were not classifiable under Heading 3809 and requesting the department to issue a show cause notice giving grounds therein for amending the approved classification list and requesting for personal hearing before adjudication. In the same letter, the appellants stated that they would not be paying any duty until the dispute about classification of their products was determined by the Assistant Collector who was the competent authority for the purpose (page 123).
8. On 19th July, 1989, the department called upon the appellants to take out a Central Excise licence and follow up the Central Excise formalities (page 124). The appellants replied on 25-7-1989 that the question of applying for and obtaining Central Excise licence does not arise as the classification issue is yet to be decided. They however, furnished sales clearance figure for the period March to June 1989(Page 126).
9. On 9-10-1989, the results of the samples drawn on 22-5-1989 were communicated to the appellants (P.131). On 25-6-1990, the Superintendent again directed the appellants to take out a Central Excise licence and follow the procedures laid down under the Rules for the production and clearance of the goods manufactured by them and informed the appellants that all clearances made without taking out of the licence, would be treated as a serious lapse giving rise to penal liability (P.138).
10. This was followed up by a reminder issued on 11 th July 1990 (P. 139). On 14-6-1990, Trade Notice No. 15/90 came to be issued clarifying that Soft finish mixtures used in the textile industry for imparting scrooping and lubricating effect to staple fibre is classifiable under Heading 38.09 of the CETA 1985 (P.140). On 16-7-1990, the appellants informed the department that they were eligible for exemption as their products were used as softeners by the Textile industry and not for scrooping and lubricating staple fibre and requested for an opportunity to explain their case (P. 141).
11. It is just before this above mentioned letter that the show cause notice was issued on 11th July 1990. From the above exchange of correspondence, it is clearly established that the material information regarding the disputed products was fully known to the department including the vital piece of information that the products were used for textile finishing. This, coupled with the fact that in their own factory in Kalol (Gujarat), where they manufactured identical products and cleared them as textile softeners at nil rate of duty in terms of Notification 101/66, no action was taken by the department for reclassification of the goods under Heading 38.09, supports the plea of the appellants that there was no suppression of any material facts or wilful misdeclaration on their part with intent to evade payment of duty. Further, we notice that after the personal hearing was granted by the Collector of Central Excise, Bombay, the appellants have put on record in the form of a letter dated 11th February 1991 the fact that during the course of submissions being made by their Counsel on the aspect of suppression as set out in para 15 of the show cause notice, the adjudicating authority stated after perusing certain correspondence that he would be holding that there was no suppression and informed their Counsel to only argue on the limited extent on merits for the period within the normal limitation period and in view of this, the appellants did not make any further submission on suppression. In these circumstances, the finding of the Adjudicating authority in para 39 of the impugned order that there was no disclosure of end use by the appellants, cannot be sustained and is accordingly set aside.
12. Since we have held that the products were not misdeclared by the appellants as softeners, we hold that the appellants have not committed any contravention of the relevant Central Excise Rules rendering themselves liable to penalty and accordingly, set aside the penalty imposed.
13. In the result, we hold as under :
(i) the items in dispute fall for classification under sub-heading 3801.90 of the CETA 1985 prior to 1-3-1987 and under sub-heading 3809.00 thereafter;
(ii) the demand for the period from 11th January 1990 to 31st March 1990 is confirmed;
(iii) the demand for the period from 1-3-1986 to 10-1-1990 is set aside as barred by limitation;
(iv) the penalty is set aside.
The appeal is disposed of in the above terms.
Sd/-
(Jyoti Balasundaram)
Member (J)
S.K. Bhatnagar, Vice President
14. With due respects to Hon’ble Member Judicial, my views and orders are as follows :-
It is observed, inter alia, that the learned D.R. has drawn attention to the impugned order and emphasised that the explanations, reasonings advanced by the appellants were not acceptable in view of the fact that the products in question were not merely softeners; they were something more, namely finishing agents. This is because they did not merely act as softeners, but had other qualities or properties as well. It is these additional qualities which were relevant and important but had not been declared. The finishing agents includes in their function softening also, but the assessee did not disclose full facts; and therefore, the officers remained under the impression that they were softeners and the concerned officers only considered their subsequent reference to finishing only in this context. Hence, the appellants intention to misdeclare the products as softeners is clearly borne out.
15. The appellants had-filed classification list in 1975 and had declared their product as softeners classifiable under 15AA (read with Notification No. 101/66) and, therefore, all the correspondence exchanged between them and the Department hinged upon the consideration that the products were softeners.
16. It is also matter of fact that when the products were subsequently examined and tested, they were found to have qualities or properties in addition to those of softening and, therefore, were finishing agents with softening as merely one of the functions.
17. The real facts about these aspects and the end-use were not disclosed by them to the Department and, therefore, the extended period of five years could be invoked and the demand was payable.
18. The learned D.R. also mentioned that now that the learned counsel is not contradicting or opposing the classification determined by the Collector, the Department’s case is on a stronger footing and he would like to contend that once the classification was no longer in dispute, demand and penalty were required to be confirmed.
19. I have considered the submissions of both the sides and observe that the appellants have described in details as to what they had declared right from 1987-88 and the exchange of correspondence since then and the chemical tests, during that period but since the Tariff changed substantially in 1996, we are concerned with the legal and factual position with reference to this change and as to whether this made any difference and the appellants were required to declare more than what they had already done in the light of the changed position in law.
20. I also observe that once the Collector’s finding on classification is not challenged at this stage, it is required to be upheld that the goods were classifiable under the heading proposed by the Department under Chapter 38 (and not Chapter 34 in which it was claimed by the manufacturer even in the appeal memo before the Tribunal, but since given up). I also find that the Pleading 34.02 which the appellants had claimed all along till the time of this hearings at which they did not press their claim for classification under this heading, includes :
Head- Sub- Description of goods Rate of
ing Heading duty
No. No.
34.02
Organic surface-active
agents (other than soap);
surface-active prepara-
tions, washing preparations
(including auxiliary washing
preparations) and cleaning
preparations, whether or
not containing soap.
This means they now accept that their product did not fall in any of the categories of products specified in this heading.
21. I also find that Chapter 38 covers "Miscellaneous chemical products" including, inter alia, finishing agents.
22. A question which arises is that if a manufacturer, as in this case, had claimed this products to be organic surface-active agents throughout (from 1975 onwards) and continued to claim the same as such even after coming into existence of the new Tariff (and its amendments) whether it could be said that this was being done innocently or there was a deliberate misstatement of fact. In my opinion, if a person knew and was fully aware of the fact that his products were not organic surface-active agents or any type of preparation classifiable under Heading 34.02 and still continued to press and pursue this claim, the burden shifts on him to show that it was only a bona fide error and not a deliberate mis-statement.
23. It is seen in this connection that the appellants had described their goods as softeners from the very beginning. They had also indicated the ingredients and claimed classification under Tariff Item 15AA and mentioned later that they were used in textile mills for finishing of cloth as evident from the correspondence of 1977 and 1978 which indicates, inter-alia, that even samples had been drawn and tested accordingly. However, all this was done during the period of old Tariff when legal requirements were different and, therefore, the communications were exchanged and test conducted in the light of those requirements and declaration. There was no specific heading for finishing agents at that time. Thus the situation was different and the issue of appropriate classification at that time is not before us and, therefore, this point need not be laboured further. What we have to take note of is the fact that during the period of new Tariff a specific provision had been made in the Tariff, first by way of a specific Chapter note covering such items and subsequently as a specific heading and since the present case falls during this period, we have to see what happened during this time. It is observed in this connection that the appellants had written letters and discussed the role of finishing agents and cited the textile terms and definitions given in the Publication of Textile institute of Manchester and Dr. D.K. Sinha’s opinion and Prof. V.A. Shenai’s opinion and extracts from Manmade Textile Encyclopaedia. In other words, they were quite aware that their product was a finishing agent. It is significant that in spite of it, they did not claim classification under the appropriate heading which explicitly includes finishing agents.
24. It is also significant that the correspondence relied upon is subsequent to the Department’s queries and once the investigations had taken place, the situation materially changed and full facts regarding this perspective came to light as a result of the investigation.
25. It is also seen that from 1-34986 to 28-2-1987 the Chapter Note I of Chapter 38 read as follows :-
“This Chapter includes, inter alia, the following goods: –
(a)…
(b)…
(c)…
(d)…
(e)…
(g)…
(h)…
(i) Finishing agents, dye carriers to accelerate the dyeing or fixing of dyestuffs and other products and preparations (for example, dressings and mordants), of a kind used in the textile, paper, leather or like industries, not elsewhere specified or included. ”
26. From 1-3-1987 to 31-3-1990 Heading 38.09 read as follows :-
Head- Sub- Description of goods Rate of
ing Heading duty
No. No.
38.09 3809.00
Finishing agents, dye 15%
carriers to accelerate
the dyeing or fixing of
dye-stuffs and other products
and preparations (for example,
dressings and mordants), of a
kind used in the textile, paper,
leather or like industries, not
elsewhere specified or included.
27. In the normal course it is open to an appellant to claim a particular heading and it is for the Department to either agree or disagree with him and whenever necessary modify the proposed classification or indicate the most appropriate one after enquiry wherever called for. However, in so far as the present case is concerned, while the Department was making queries and calling for information as required, it is the appellants who were still indicating that their products were organic surface-active preparations of the type classifiable under Heading 34.02; and this was not an ordinary situation which we come across in the normal course, because the appellants themselves were fully aware that their products were finishing agents and yet continued to describe them as organic surface-active preparations, i.e., misstated the facts and were not prepared to follow the orders in spite of having been directed to do so.
28. It is noticed in this respect that on one hand the appellants had not filed declarations for 1987-88 and 1988-89 (and filed only a vague one in 1989-90); And it is not only on 30-6-1989 that they have described their ‘softeners’ as organic surface-active preparations (vide statement of Shri Sunil M. Brahmabhatt) (but they have continued to indicate them as such as organic surface-active preparations classifiable under 15AA as OSAA before 1986 and under 34.02 thereafter), on the other hand, the Superintendent of Central Excise had vide his letter dated 28-3-1989 clearly indicated, in the light of his discussions with the Assistant Collector, that their products were “finishing agents/softeners” classifiable under Heading 38.09 attracting duty at 15% ad valorem and directed that they should submit details of the quantity manufactured and cleared writing clearly that “Please also note that no further clearance should be effected without excise formalities and failure for which the goods are liable to seizure” and followed it up by another letter dated 12-5-1989 (in continuation of the former) and once again indicating, inter alia, the Department’s insistence that the product was finishing agent/softener classifiable under 38.09 liable to duty at 15% and directing the appellants “to take out the Central Excise Licence and follow the procedures laid down under Central Excise Rules for the production and clearance of the goods manufactured” by them and further mentioning that “the declaration made by them is not accepted. In other words, the dispute was no longer as to whether the product was a finishing agent or not (both sides having accepted the position). Hence the appellants ought to have applied for the Central Excise Licence and started paying duty (under protest if they still wanted to contest Department’s decision regarding rate of duty), but they could not have continued to clear the goods without payment of duty in violation of the directions given by the competent authority.
29. In view of the above discussion. I consider that the appellants’ exchange of correspondence and declarations, etc. pertaining to the period prior to 1-3-1986 does not advance their cause. It may have a bearing on the pre 1986 period, but we are not concerned with the same in the present case which relates to the subsequent period from 1-3-1986 onwards; And the appellants can hardly be excused for this period as new Tariff had already come into existence and the products had been accepted as finishing agents by both the sides and were as such specifically covered by Chapter 38 (and fell under Heading 3801.90 till 28-2-1987 and under 38.09 thereafter); And it is not even in dispute that Notification No. 101/66 as amended by Notification No. 78/86 dated 10-2-1986 did not exempt the finishing agents. However, at the same time the Superintendent’s letter which first put them on notice was only dated 28-3-1989. Therefore, a question arises as to whether the demand was required to be confirmed for the whole period or was required to be restricted. In my opinion, in the peculiar circumstances of this case, the appellants could be extended the benefit of doubt for the period prior to this letter but not thereafter; And the demand was required to be confirmed prospectively with effect from 28-3-1989. Further, as the appellants had shown contumacious disregard of explicit provisions in the law and deliberately continued to disobey the directions and orders of legally constituted authorities the imposition of penalty was justified and was required to be confirmed.
30. In view of the above position, the impugned order is modified only to the extent indicated above and is otherwise confirmed.
31. The appeal is disposed of in the above terms.
Sd/-
(S.K. Bhatnagar)
Vice President
Dated 6-1-1999
POINTS OF DIFFERENCE
32. In view of the difference of opinion between Hon’ble Judicial Member and the Vice President, the matter is submitted to the Hon’ble President for reference to a third Member on the following points :-
1. Whether in view of the observations and findings of the Vice President, the impugned order is required to be modified and the appeal disposed of accordingly?
2. Whether the appeal is required to be disposed of in terms of the observations and orders of the Hon’ble Judicial Member?
Sd/- Sd/-
(Jyoti Balasundaram) (S.K. Bhatnagar)
Member (J) Vice President
Dated 6-1-1999
G.A. Brahma Deva, Member (J)
33. In view of the difference of opinion between the Member (Judicial) and the then Vice President, the matter is referred to me to express my views as third Member on the following points :-
1. Whether in view of the observations and findings of the Vice President, the impugned order is required to be modified and the appeal disposed of accordingly ?
2. Whether the appeal is required to be disposed of in terms of the observations and orders of the Hon'ble Judicial Member ?
34. Heard both the sides with reference to the difference of opinion.
35. Arguing for the appellant, Shri K.K. Anand, learned Advocate submitted that originally the dispute was in respect of classification of the following products viz :-
1. Durafil
2. SiotexRT
3. Siotex FRA and
4. Siotexize
He said that whether the above products were classifiable under Chapter 34 as claimed by the assessee or under Chapter 36 was an issue.
36. The Collector of Central Excise, Bombay adjudicated the matter classifying them under sub-heading 3801.90 for the period prior to 1-3-1987 and under sub-heading 3809.00 of the Central Excise Tariff Act holding that they were not Organic surface agents falling under Heading 3402 and therefore they were not eligible to the benefit of exemption in terms of Notification No. 101/66-C.E., dated 17-6-1966 (as amended). He observed that the above 4 products were used exclusively as textile softners and finishing agents of various textile materials and contained a very low percentage of Organic surface active agents. Shri K.K. Anand submitted that classification is no longer in dispute in view of the decision of the Tribunal in the case of Collector of Central Excise, Bombay v. L.N. Chemicals and Industries reported in 1996 (83) E.L.T. 458. In that case it has been held that the product ‘Allenol Pesp’ used as softening agent in textile industry is a finishing agent classifiable under Chapter 38 and not under Heading 3402 of the Central Excise Tariff Act, 1985 and not eligible to exemption under Notification No. 101/66-C.E. He said that in view of this position only point to be considered in this case is whether department was justified in invoking the larger period to raise the demand. He submitted that show case notice in the instant case was issued on 11th July 1990 for the recovery of the duty for the period 1-3-1986 to 31-3-1990. He said that the appellant was of the view that the products were classifiable under Chapter 34 on the ground that the disputed products were softners and have been described as such in their literature. This dispute was there even with reference to the old tariff entry and has been continued even after coming into force of Central Excise Tariff Act, 1985, as there was no separate entry (finishing agents) and as Notification No. 101/66-C.E. continued in force. He referred to the correspondence in between the department and the assessee with reference to the clarification of product since 1977 and even in the year 1988 i.e. on 29-1-1988 the department wrote to the appellants seeking clarification as to the classification of the disputed items under Chapter 34 as claimed by them and on 28-3-1989, the appellants were directed to submit details of quantum manufactured and removed during the past 6 months. He said that the details of correspondence, events have been recorded in the order proposed by the Member (Judicial) in detail. Further, he said that department was also not clear about the correct classification of the product in question since the Collector (Appeals) in the case of L.N, Chemicals and Industries has taken the view that item was classifiable under Chapter 34 but ultimately Tribunal decided the issue classifying the item under Chapter 38 [1996 (83) E.L.T. 458]. He said that in view of this confusion on 14-6-1990 the department has issued Trade Notice No. 15/90 clarifying that Soft finish mixtures used in the textile industry for imparting scrooping and lubricating effect to staple fibre is classifiable under Heading 38.09 of the CETA, 1985.
37. On the other hand, Dr. Ravindra Babu, ld. JDR appearing for the Revenue submitted that the point to be considered in this case is as to whether the demand was required to be confirmed for the whole period or was required to be restricted. While justifying the order proposed by the Vice President, he said that the appellants were fully aware that their products were finishing agents and even then continued to describe them as Organic surface active agents. The products in question were not merely softners but they were something more and they are finishing agents. They did not merely act as softners but had other qualities or properties as well. They were finishing agents with softening of as merely one of the functions. The real facts about this aspect and the end use were not disclosed by them to the department. It is nothing but mis-statement of fact and therefore the extended period of 5 years would be invoiced.
38. I have carefully considered the submissions made by both the sides. There is lot of force in the arguments advanced on behalf of the assessee that confusion prevails and continued till 1990 about the classification of the products in question. In the case of L.N. Chemicals and Industries (supra) the department has filed an appeal against the order of the Collector (Appeals) who held that Allenol is classifiable under chapter eading 3402.90 while the Assistant Collector had held the product has classifiable under Heading 3802.00 prior to 11-2-1987 and thereafter under Chapter Heading 3809.00 as the product is a finishing agent used in textile. The view of the Assistant Collector was upheld by the Tribuhal as per Order No. 108/96, dated 2-2-1996 [1986 (83) E.L.T. 458 (T)] The department has issued Circular Trade Notice No. 15/90 clarifying that soft finish mixtures used in the textile industry is classifiable under Heading 38.09. In view of this position the department was also not sure whether the item was classifiable under Chapter 34 or 38 till it was clarified in 1990. If the department was of the firm view that it was classifiable under 38 based upon the information furnisned by the assessee the best course open to the department was to issue notice instead of entering into further correspondence. In view of this position and taking into consideration that correspondence was going on in between the assessee and the department about the correct classification of the products, I am of the view that benefit of doubt should be given to the assessee and not to the department. In the facts and circumstances, particularly, in view of the clarification issued by the department on 14-6-1990, I am of the view that demand should be restricted to 6 months and demand if any beyond the 6 months from the date of show cause notice was barred by time. Accordingly, the view expressed by the Member (Judicial) is concurred with. Case file is returned to the original bench to pass an appropriate order.
Sd/-
(G.A. Brahma Deva)
Member (J)
Dated 28-1-2000
MAJORITY OPINION
In the light of the majority opinion, demand for the period from 11th January 1990 to 31st October 1990 is confirmed, demand for the priod from 1-3-1986 to 10-1-1990 is set aside as barred by limitation and the penalty is set aside. The appeal is partly allowed.