ORDER
I.J. Rao, Member (T)
1. The Collector in the order impugned before us demanded duty of Rupees 12.58 lakhs from the appellants (for the period from May 1985 to December 1986) confiscated four bundles of sheets, with an option for redemption, imposed a penalty of Rs. one lakh and confiscated the land, building and machinery with an option for redemption on payment of a fine of Rs. 20,000/-. The facts in brief resulting in the said order of the Collector are as under:
2. M/s. Lili Foam Pvt. Ltd. is a small-scale unit engaged in the manufacture of polyurethene foam. The appellant company commenced production some time in May 1985 though originally set up in May 1984. A team of Central Excise Officers visited the premises of M/s. Lili Foam Industries on 8-12-1986. Certain quantities of foam was found in excess of what was recorded in RG-1. The said quantities were seized by the visiting Officers. Also, certain accounts and documents were seized under a Mahazar on the same day. Statements were recorded from Shri G.H. Doshi, Managing Director on 8-12-1986 and also from some workers of the factory. Statements were also recorded from some of the customers. Based on the statements recorded from Shri G.H. Doshi, workers and the customers and also on the basis of the documents seized, the Central Excise Department issued a show cause notice to the appellants dated 12-5-1987 in which it was proposed to demand a duty of Rs. 21,43,996.90 paise under Rule 9(2) of the Central Excise Rules read with Section 11A of the Central Excises and Salt Act (Act for short) for the period May 1984 to December 1986.536.5 Kg of polyurethene foam seized from the appellants premises was also proposed to be confiscated and imposition of penalty on the appellants and confiscation of land, building, plant, machinery, etc. were also threatened.
3. Annexure-1 to the show cause notice gives the break-up of the demand of Rs. 21,43,996.90. Firstly the show cause notice has alleged that the appellants had consumed a chemical called TDI to the tune of 42,500 Kgs. during the period in question and the show cause notice has assumed that out of this quantity of TDI the appellants should have manufactured 93,369.23 Kgs of polyurethene foam. (The formula conversion from TDI to polyurethene foam is that 65 Kgs of TDI would yield 142.8 Kgs of polyurethene foam. This has not been disputed by the appellants even during the hearing, before us). The show cause notice assumed that out of this 93,369.230 Kgs of polyurethene foam alleged to have been manufactured and cleared by the appellants, 90% should have been of “Deluxe commercial grade” and the remaining 10% should be waste.
4. The show cause notice further assumed the value of Rs. 1.52 per millimetre of the Deluxe Commercial grade as against 1.40 per millimetre declared by the appellants in the price list, and estimated that duty should have been paid by the appellants Rs. 51,09,164.10. The value of the waste and scrap was assumed to be Rs. 14/- per kg as against Rs. 6 per kg declared by the appellants in the price list. After deducting the actual duty paid by the appellants during this period, the show cause notice proposed to demand a differential duty of Rs. 21,43,996.90.
5. The show cause notice also proposed to increase the assessable value of the Deluxe commercial grade polyurethene foam because, some of the customers had given huge deposits for which interest was not yet paid by the appellants, and this interest was, therefore, an element of the price and assessable value. Similarly the increase in the value of the waste and scrap was based on the statement of one of the customers namely Shri T.V. Mathews, Proprietor, Sky Foams.
6. The appellants replied to the show cause notice and also appeared before the Collector for personal hearing. Both in their written reply to the show cause notice as also written submissions filed before the Collector at the time of personal hearing, the appellants contended that they never consumed 42500 Kgs. of TDI. They repeatedly asked the Collector to give the basis for assuming the consumption of TDI as 42500 kgs. The Collector appears to have not given the basis for this figure of 42500 kgs. but in the order-in-original (para 30.1) he gave the details of the alleged utilisation of 42500 kgs. of TDI. These figures are taken from the raw material register-imported (seized as per Sl. No. 4 & 9 of the Annexure to the Mahazar). The appellants contended before us that this register was not supplied to the appellants and had they been given a copy of the same, the error which crept in the order regarding the consumption of TDI could have been avoided. They had now inspected the said register and during the hearing they explained the alleged discrepancy. According to the appellants during the period in question they consumed only 38750 kgs of TDI and not 42500 kgs as alleged in the show cause notice as also in the order-in-original. They showed us the entries made in the raw material register at page 355 of the paper book wherein out of 10500 kgs of TDI taken for consumption on 25-2-1986, the appellants had hypothecated a quantity, 1250 kgs and 2500 kgs of TDI were released from the bank on 21-3-1986 and 24-9-1986. These were explained by the Advocate of the appellants during the personal hearing before us and he took us through the photocopy of the register which was relied on by the Collector.
7. Apart from pleading before us on the basis of the seized documents, the appellants also moved an application for admission of additional evidence by way of a certificate dated 15-2-1989 given by the Indian Bank confirming the pledging of the 5500 kgs. of TDI and pressed it before us. The learned Departmental Representative opposed the admission of additional evidence and further submitted that the Department was not concerned from where the consumption of TDI was obtained and noted in the raw material register. The learned DR argued that the raw material register seized from the appellants’ premises showed the total consumption of TDI was 42,500 kgs. and the Collector was right in assuming the said figures.
8. We considered the arguments of the appellants as also the Departmental Representative. The Collector relied on the raw material register for computing the consumption of TDI. While relying on this register, it was just and fair that he relied on the register in full and not in part. The said register clearly shows that 5500 Kgs. were pledged to the bank. There is also a notation in the said raw material register that 1250 kgs. was released on 21-3-1986 and 2500 kgs. were released on 24-9-1986 to the appellants. The remarks column clearly mentions this. The said letter given by the Indian Bank, though it is additional evidence in nature, merely supports the facts and figures noted in the raw material register relied on by the Collector. The appellants had, earlier, no occasion to file this document which is, prima-facie, reliable. Therefore, we allowed this document as additional evidence.
9. We have, as mentioned earlier, perused the Raw Material Register and also the Banks’ certificate. Having done so, we are of the view that the Collector was wrong in assuming that the appellants had consumed 42500 kgs. of TDI during the relevant period and on the basis of the evidence before us we hold that the appellants had consumed only 38750 kgs. as contended by them.
10. Having come to the conclusion that the total consumption of TDI was only 38750 kgs., the total clearances of Polyurethene foam from the factory of the appellants cannot be, on the basis of the unquestioned formula, 93369.230 kgs but only 84,165 kgs. In fact, during this period, the appellants had, as submitted by them, actually obtained 84321 kgs of polyurethene foam as computed from the RG-1, still in the custody of the Central Excise Department. Accordingly, we hold that there has been no clandestine removal of any polyurethene foam without payment of excise duty or without the cover of any Excise Gate Pass. The charge of clandestine removal fails. We are fortified in this conclusion by the fact that as submitted by Shri Lakshmikumaran for the appellants, there is not even an allegation, either in the show cause notice or subsequently, that there was a higher consumption of another essential raw material namely polyether. It was argued before us and we are convinced, that to produce the higher quantity of polyurethene foam the appellants not only required higher consumption of TDI but also correspondingly higher consumption of polyether. Both the raw materials were being imported by the appellants and they were maintaining the proforma credit registers and Modvat credit registers for polyether and there is no allegation of excess consumption of polyether.
11. Having held that there was no clandestine removal we now proceed to deal with the other allegations contained in the show cause notice and the contentions of the appellants, and of the Revenue.
12. As mentioned by us earlier, the show cause notice assumed that 90% of the production of polyurethene foam by the appellants was of deluxe and commercial grades and the rest 10% was waste and scrap. However, the Collector, in the impugned order, gave a finding that out of the total quantity of polyurethene foam produced by the appellants good quality (deluxe commercial grade) should work out of 64.25% while the 3rd quality would be 18.25%, side top bottom skins would constitute 13.2% and shreddings 4.3%. The only difference between what the appellants plead and what the Collector held relates to the percentage of good quality and 3rd quality of polyurethene foam. While the appellants were claiming that 36.5% of the total production constituted 3rd grade, the Collector assumed that only 50% of that quantum or 18.25% as 3rd quality and that the remaining 50% was good quality. The Collector gave this finding based on a number of statements from the workers and the staff. During the personal hearing before the Collector these workers and staff were cross-examined by the appellants and the Collector in his order does not squarely deal with the cross examination.
13. We feel that it is not necessary for us to go through the statements of the workers and the staff or the cross-examination since we are looking at this allegation from a totally different angle based on objective assessment of facts. First of all the Collector himself, in the impugned order, after giving a finding that the total consumption of TDI was 42500 kgs. arrived at a specific finding that 2750 kgs. of TDI was rendered useless during the trial and initial stage of production, especially for the period 12th March 1984 to 1st May 1984. In other words he himself accepted that substantial quantities of polyurethene foam was not even obtained by the appellants, and has given the benefit of doubt accordingly. We are keeping this in mind while proceeding to decide on this issue.
14. The appellants explained the manufacturing processes of polyurethene foam and produced some reference books. According to them, in “one shot continuous slab stock foaming process”, chemicals like polyether, TDI and catalysts are pumped together, mixed, homegenised and discharged through a layer on the moving conveyor of the foaming machine. The reaction continues as the mixed material is carried on the conveyor through the foaming tunnel which is about 12 metres in length. Normally the width of the tunnel is adjusted to 40″. By the time the reacting material reaches the other end of the tunnel, foam material is ready except for needing some time for cooling and curing. According to the contentions of the appellants before the Collector, which were not disputed by the Collector in his order, the polyurethene foam blocks manufactured by the appellants are generally of the dimensions 40″ width and 76″ length. This is for the reason that the mattresses which are to be sold ultimately are of the size 36″ x 72″ the height of the foam varies from 26″ to 30″ and assuming a minimum height of 26″ the volume of an untrimmed block would be 79040 cubic inches namely 40″ x 76″ x 26″. While trimming of the side, top and bottom sections the dimensions of the block are reduced to 36″ x 72″ x 21″ and the volume would be 54432 cubic inches. Thus the rejected portion of the foam works out to 24608 cubic inches which is about 31% of the initial polyurethene foam blocks. It is possible to recover some sheets of 3rd grade quality from the top section (dome portion). It appears, from the arguments, that these percentages would be correct in perfectly ideal conditions where the foaming was perfect. It was explained to us during the hearing that polyurethene foam reaction is an exo-thermic reaction and if all the parameters are not observed methodically there can be cracks, air holes, deep cuts, overburning, etc. on the inside of the foam block. Thus when the foam block is sliced for making into mattresses, because of these defects, further 3rd quality and wastages emerge. According to the practice claimed to be followed by the appellants, the commercial grade foam is the one which satisfies the dimensions of 36″ x 72″ and is free from defects mentioned above. Where the density of the said commercial grade is higher (because of the higher consumption of raw materials), the polyurethene foam was termed as deluxe commercial grade. According to the appellants even at the foaming stage itself they would know where a particular batch is meant to produce commercial grade of deluxe commercial grade.
15. The Excise officials who seized a number of documents at the time of the raid at the factory, also resumed a private register maintained by the appellants, called ‘foam register’. The appellants annexed the entire register, page after page, in the appeal paper book. We have perused the remarks made in the said register. The register contained figures of foam blocks with cracks holes, cuts, etc. We have also seen some of the interesting remarks made by Shri Joshi in each of these pages. The learned Advocate arguing for the appellants explained that Shri Joshi, the Managing Director of the Company who handles the activities of the company was maintaining this register date-wise to know the type of defects he was getting in the foaming so as to educate himself so that he would not repeat the mistakes in future. The Departmental Representative submitted that this Register was maintained with a future planning for cheating the Government. We are not inpressed with the submissions of Departmental Representative. It is not in dispute that the foam register was resumed by the Department and it is said to be still in the custody of the Department. It can be believed that Shri Joshi, a young entrepreneur could be making efforts not to repeat past mistakes while foaming. The records and the diagrams shown in the register have to be taken as genuine as there is nothing contrary shown before us. The appellants’ plea that it is not possible in any polyurethene foam industry to make good quality polyurethene foam day after day and month after month seems to be correct. The Collector himself accepted that there were substantial defects in the manufacture of polyurethene foam during a particular period in the early days of the Unit and has in fact given the benefit of doubt to the extent of 2750 kgs. We, therefore, hold that much more than 31% of the foam produced by the appellants could have become waste, scrap or 3rd grade. According to the findings of the Collector in the impugned order nearly 65% of the production must be good quality which would leave only 35% as comprising 3rd grade shreddings, top skin, bottom skin, etc. The assumption made by the Collector in this regard, that 50% of the 3rd grade quality shown by the appellants should be ‘commercial grade’ does not appear to be correct or based on any acceptable evidence. We cannot, therefore, accept it. Further 3rd grade quality of polyurethene foam is always sold in weight by the appellants and this fact was not disputed by the Collector. We, therefore, hold that the percentage of polyurethene foam production as 3rd grade quality namely 36.5% claimed by the appellants has to be accepted.
16. Having decided that the gradation made by the appellants regarding 3rd grade quality was correct we now proceed to see whether the gradation decided by the appellants in respect of foam as ‘commercial grade’ and ‘deluxe commercial grade’ is correct or not. We find that the appellants filed a classification list and price list for commercial grade and deluxe commercial grade. The price lists and the classification lists so filed have been duly verified and approved. RG-1 registers have been maintained where also commercial grade and deluxe commercial grade have been mentioned. This is not disputed by the Department at any point of time. Further the so called private register (“foam register”) seized by the Department and still in their custody (photocopies of which have been placed in the paper-book at pages 69 to 87) clearly mentions CG – commercial grade and DCG deluxe commercial grade. It was strenuously submitted by the appellants in the reply to the show cause notice before the Collector as also during the arguments before us that not all foams are equal. The quality of the foam and the cushioning effect varies according to the density of the foam. It is, therefore, logical that higher the quantum of inputs, higher will be the density of the foam. The private register which is supposed to keep the secrets of the company unknown to the Department, is in the custody of the Department. That register is supposed to indicate the true happenings in the Unit even if the statutory records are not maintained truly. That register itself mentions separately CG and DCG on different dates and on verification we found that on the dates where the private register shows the production of deluxe commercial grade, there are corresponding entries in the RG-1 as deluxe commercial grade and on the dates where the register shows production of commercial grade the RG-1 also shows the production of commercial grade. We, therefore, hold that the gradation of the commercial grade and deluxe commercial grade as done by the appellants is not incorrect and the Collector has gone wrong in assuming that all the polyurethene foam produced by the appellants were of deluxe commercial grade. There is no evidence to disprove the appellants’ claims.
17. In this connection we also note that the Department relied on the statement of Shri P.C. Joseph of Joy Upholstry Liners. He seems to have stated that there is no difference between commercial and deluxe commercial grade. The cross examination of the said Shri P.C. Joseph before the Collector revealed that he has not even seen the samples lying in the premises of the appellants, which were ultimately seized. We find that if anybody has given a statement that there is no difference between the foam of any density, such statement cannot be accepted as being fully true. It is well known that in the market the price of polyurethene foam mattresses of the same dimensions namely 72″ x 36″ vary considerably depending upon density. It cannot be denied that greater cushioning effect would need polyurethene foams of higher densities. Polyurethene foam used as a lining material in ladies’ hand-bags and cheap qualities of such foam cannot be compared with higher density polyurethene foam used in the upholstry and furniture of costly varieties.
18. Having disposed of the finding of the Collector regarding the correctness of the gradation of commercial and deluxe commercial grades of polyurethene foam by the appellants we now turn to the allegation of under valuation. It is true that the appellants had received advances from 3 dealers namely Joshi Trade Links, Everest Industries and Indu Industries. It was stated before us, and not disputed, that in respect of Everest Industries the advance was returned along with interest. The appellants had about 10 dealers and there is no evidence that the appellants raised any advances from dealers other than these 3 dealers. In fact there is a specific finding of the Collector in para 32 that the appellants had not received any deposit from Moh. Usman of J.J. Industries. It is also not in dispute that the prices charged by the appellants to all the dealers were uniform whether or not the appellants received advances from a dealer or not. It was stated and not disputed by the Respondent, that about 54% of the total sales of polyurethene foam were made to the 3 dealers while the rest of the foam was sold to other dealers from whom admittedly no advance was taken. Under these circumstances the question for consideration would be whether there is any case for increasing the assessable value because of the interest element in the advances received by the appellants from the 3 dealers.
19. It is well settled law that where the goods are sold by an assessee, in the course of wholesale trade at a price where the price is the sole consideration and the buyer and seller are not related persons that such prices would become the normal price for the purposes of Section 4 of the Act. Admittedly a substantial portion of the polyurethene foam namely about 46% was sold to dealers who have never given any advance to the appellants. There is no price difference between the dealers from whom advances were taken and others. Under these circumstances we hold that there is no case for invoking the provisions of Rule 5 of the Valuation Rules to include the interest element to the prices for arriving at the assessable value. Even if the 3 dealers happen to be related, which position would be the worst that can be assumed against the appellants, the price charged to others, admittedly unrelated buyers, would still form the basis for assessment in respect of the sales made to the assumed related persons also, according to settled law. The advances seem to have been taken from the 3 dealers only to ensure speedy deliveries but not for a special price.
20. Accordingly we hold that there is no case for increasing the assessable value in respect of sale of polyurethene foam to the 3 dealers.
21. We are now left with the question relating to the valuation of the scrap. In this regard the learned Collector gave a specific finding at para 37.6 of the impugned order that the price realised per kg. of the shredding was Rs. 14/- per kg. and thus the value has to be taken as Rs. 9.50 per kg. instead of Rs. 6/- originally declared by the appellants. Here the contentions of the appellants are not convincing and accepting the submissions made by the learned DR, we hold that the value of the shreddings be increased from Rs. 6/- per kg. to Rs. 9.50 per kg.
22. Similarly the value of the side skin, bottom skin and top skin has also to be increased to Rs. 16.50 per kg. as hereagain we are not convinced with the arguments of the appellants. We, therefore, hold that the orders of the Collector in increasing the value of the side skin, bottom skin and top skin to Rs. 16.50 per kg. and increase in the value of shreddings to Rs. 9.50 per kg. are correct.
23. The appellants raised the issue of the classification of the side skin, bottom skin, top skin and shreddings before the Collector. They also raised the issue of classification of polyurethene foam under Tariff Item 15(A) before 28-2-1986. In view of the findings given by us on the clearances of polyurethene foam, we are not giving any specific finding regarding the correct classification of polyurethene foam sheets under the appropriate sub-item of Item No. 15(A) of the First Schedule as it stood prior to 28-2-1986. However, the correct rate of duty applicable on the side skin, bottom skin and top skin as also the shreddings has to be determined.
24. We have already held that the value of the top skin, bottom skin, side skin and the shreddings are to be increased. The learned Departmental Representative, during the course of the arguments, submitted that the proceedings in the instant case do not call for a finding on the rate of duty applicable on the side skin, bottom skin, top skin and the shreddings. He argued that the appellants had paid duty according to the approved classification list and the present proceedings cannot be used by them to question the correctness of the rate of duty applied. However, we find that the appellants had raised the issue of classification before the Collector and the Collector dealt with the same. Also, even though an assessee may not contest the correct rate of duty on a commodity cleared by him earlier, whenever the Department seeks to reopen the assessment and demands differential duty for whatever reasons, it is open to the assessee to contest the demand of the higher differential duty with an argument that the rate of duty originally applied was wrong. Even if the allegations against them in the proceedings are found to be correct the quantum of differential duty to be paid by them can be questioned. The Tribunal simply cannot shut out such an argument of the appellant on the ground that he has not raised the dispute regarding the rate of duty until the proceedings are initiated against him. After all the Department seeks to rely on Section 11A of the Central Excises and Salt Act for demanding differential duty. The demand of differential duty can arise only when the Department correctly determines the duty payable by an assessee and the duty actually paid by him earlier. The correct quantum of duty payable by an assessee, in cases where the goods are subjected to ad valorem rate of duty, depends on the value of the goods and also the rate of duty. Therefore, determination of the correct rate of duty for the goods on which differential duty is demanded is the first step before quantifying the demand. We accordingly over-rule the objection raised by the learned Departmental Representative that the appellant should not be permitted to raise the dispute regarding the determination of rate of duty.
25. Side skin, bottom skin and top skin were earlier dealt with by the Tribunal in the case of Duro Foam Industries v. Collector of Central Excise [1988 (33) E.L.T. 723]. In that case the Collector of Central Excise, Baroda came on appeal to this Tribunal on the ground that the waste parings and scrap of polyurethene foam should be classified under Heading 39.15. After hearing the arguments of both sides this Tribunal held that side skin, bottom skin and top skin and shreddings would be correctly classifiable under Heading 39.15 as “Waste and Scrap”. In fact the Collector in the impugned order has classified the shreddings under 39.15 but for some reason did not classify the side skin, bottom skin and top skin under Heading 39.15. Collectors have to follow the Tribunal’s orders, according to which the side skin, bottom skin and top skin as also the shreddings are correctly classifiable under Heading 39.15. The Collector is directed to consider the question of classification keeping this in view and pass an order after hearing the appellants in this regard.
26. The appellants have also claimed exemption under Notification No. 222/86-C.E., dated 3-4-1986. This Notification grants exemption to waste and scrap of plastics falling under Heading 39.15 if it arises from goods falling under Chapter 39 or any other Chapter under which duty of excise leviable under Central Excises and Salt Act, 1944 or the additional duty leviable under Section 3 of the Customs Tariff Act, 1975 as the case may be has already been paid.
27. We are not inclined to go into the question whether the appellants are entitled to the benefit of the exemption. We direct that the Collector may decide the point after giving an opportunity to the appellants to put forward their case before him. Only after deciding that question the Collector may issue a demand which would arise as a consequence of this order.
28. We are now left with the question of confiscation of the goods originally seized. Originally the visiting Officers seized 536.6 Kgs. of polyurethene foam as not accounted in the RG-1. The Collector gave a finding that out of this quantity 436.7 Kgs were recorded in the RG-1 as 3rd grade. He accordingly confiscated 4 bundles of 3rd grade foam and one bundle of top skin but has given the option of redeeming the same on payment of a fine of Rs. 500/-. The appellants contended that these goods were awaiting gradation and afterwards entry in the RG-1. But the fact remains that when the visiting Officers came, these cases were packed and not entered in the RG-1. Accodingly we uphold the confiscation of 4 bundles of 3rd grade sheets and one bundle of top skin. We also hold that the redemption fine imposed by the Collector on this quantity was not excessive.
29. In view of the findings given by us on various issues in the preceding paragraphs we feel that that there is no case for imposing a penalty of Rs. 1 lakh on the appellants, nor is there any case for confiscating the land, building, plant, machinery, etc. We set aside the confiscation of the land, building, plant and machinery as also the redemption fine imposed thereon by the Collector. Having held that about 82 Kgs of polyurethene foam and 13.6 Kgs. of top skin were liable for confiscation and liable for redemption fine of Rs. 500/- we reduce the penalty to Rs. 500/-. The appeal is disposed of accordingly.
