P.G. Chacko
In this appeal filed by the Department, the short question is whether the Ayurvedic soap manufactured by the respondent (assessee) and cleared under the brand name âMEDIMIX during the period from August 1999 to April 2001 was classifiable under sub-heading 3401.12 of the First Schedule to the Central Excise Tariff Act, 1985 directing nil rate of duty for the said period or classifiable under sub-heading 3401.19 of the said Schedule and chargeable to duty on MRP basis.
2. In a show-cause notice dated 13.6.2003, issued by the Commissioner of Central Excise on the basis of the results of the investigations conducted during November 2000 to April 2001, it was alleged that the assessee had manufactured ayurvedic bath soaps with the aid of power and had cleared the goods under the above brand name without payment of duty or complying with other provisions of the Central Excise Rules, though the product was classifiable under sub-heading 3401.19 during the aforesaid period. It was alleged that the product was not classifiable under sub-heading 3401.12 of the said Schedule. It was further alleged that the assessee had suppressed before the Department the use of power for testing the raw materials and finished goods as also for transferring one of the raw material from lorry tankers to storage tankers, with intent to evade payment of duty on the product and therefore, the extended period of limitation prescribed under the proviso to sub-section (i) of Section 11A of the Central Excise Act was invocable for recovery of duty on the clearances in question. On the basis of these and other allegations, the show-cause notice demanded duty of over Rs.4.5 crores from the respondents for the period from August 1999 to April 2001, also demanded interest thereon under Section 11AB of the Act, proposed a penalty under Section 11AC of the Act and also proposed separate penalty under Rule 209A of the Central Excise Rules on the Senior Manager (Development) of the factory. All the demands / proposals were contested. In adjudication of the dispute, the learned Commissioner of Central Excise dropped all the proposals after holding (a) that as no power was used in the process of manufacture of âMEDIMIX soap by the respondent the product would be rightly classifiable under sub-heading 3401.12 and chargeable to nil rate of duty, (b) that there was no suppression of any fact by the respondents and hence the proviso to Section 11A(1) of the Act was not invocable and (c) that consequently there was no question of levy of penalty from the assessee or from co-noticee. The present appeal of the Revenue is directed against the Commissioners order.
3. Heard both sides. The submissions of the learned Joint Commissioner (AR) are summarized below:-
(a) The respondent used electrically operated equipments in the factory to test palm oil and coconut oil (raw materials) for determining their saconification values as also test caustic soda lye (raw material) for its concentration (percentage of Sodium Hydroxide) and specific gravity, as also to test the final product (soap) for its PH value, free fatty acid content and total fatty acid content. These laboratory tests were integrally connected with the process of manufacture of the soap. Moreover, power was also used to unload caustic soda lye from tankers. For these reasons the final product was appropriately classifiable under sub-heading 3401.19 of the CETA Schedule and chargeable to duty of excise.
(b) Officers of the Department who searched the factory premises in November 2000 noticed that power was being used for the aforesaid purposes and therefore the learned Commissioner ought to have confirmed demand of duty for the period from August 1999 to November 2000 atleast.
(c) That the quality control equipments were operated with the aid of power was admitted by Shri T. Karthikeyan, Chemist, in his statement dated 22.11.2000. He also gave a list of equipments and these equipments were physically found in the factory in November 2000. In the circumstances, learned Commissioners finding that no power was used by the respondent for manufacture of soap during the material period is erroneous.
(d) In the case of Commissioner Vs. Gurukripa Resins Pvt. Ltd. 2011 (270) ELT 3 (SC), the Supreme Court held that the assessees activity of lifting water to overhead tank with the aid of electric motors was integrally connected to the ultimate manufacture of their final products. In the case of Collector Vs. Rajasthan State Chemical Works - 1991 (55) ELT 444 (SC), the Supreme Court held that, transfer of raw material to the reaction vessels was a preliminary operation and a part of a continuous process without which the manufacture of the product would be impossible and, if power was used for handling such raw material, it was a case of the manufacture having been carried out with the aid of power. In the case of Commissioner Vs. Surya Vinayak Industries Pvt. Ltd. - 2010 (258) ELT 513, electric power was found to have been used for drawing water from tube well and lifting it to a high rise water treatment plant. The treated water was filled in a boiler with the help of electric motors and the boiler was used to generate steam required for the process of manufacture of essential oil. In view of these decisions, the unloading of caustic soda lye from tankers with the aid of power should be considered to be an activity integrally connected with the manufacture of soap in the respondents factory and consequently the product should be classified under sub-heading 3401.19.
(e) In the case of Sonarome Chemicals Pvt. Ltd. Vs. Commissioner of Central Excise, Bangalore - 1998 (101) ELT 328, laboratory tests of raw materials and finished goods with the aid of power where held to be commercially necessary to maintain the quality of the end product. In the case of Commissioner Vs. Birla Tyres - 2001 (138) ELT 168, it was held that the testing of input before its actual use in the manufacture of tyres was essential for the process of manufacture. In the case of Flex Engineering Ltd. Vs. Commissioner - 2012 (276) ELT 153 (SC), testing of machines (capital goods) was held to be inextricably connected with the process of manufacture of final product. In view of such decisions, the testing of raw materials and the final product in the present case also should be held to be integrally connected with the process of manufacture of the final product (soap).
4. The learned counsel for the respondents made the following submissions:-
(a) Though the equipments / apparatus mentioned in the mahazar were available in the factory at the time of the visit of the officers of the Department, there is no evidence of such equipment / apparatus having been actually used in the process of manufacture of soap by the respondent during the material period. No statement of the proprietor was recorded by the officers. The statement given by Smt. P. Ponnammal, Assistant Manager (Office Administration) does not contain anything to indicate that any electrically operated equipment / apparatus was employed for testing raw materials or the final product. The statement given by Shri T. Karthikeyan is not reliable as he was only a trainee who was not fully trained in analysis of oils and soaps. Even his statement does not prove, beyond the pale of doubt that electrically operated equipments / apparatus were actually used for testing raw materials or finished goods in the factory during the material period.
(b) In the case of another unit of the assessee, this Bench held that the transportation of raw material upto the storage tanks could not be held to have been done in, or in relation, to the manufacture of soap. In that case, power was admittedly not used in the conversion of raw materials to soap. On this basis the soap was classified under sub-heading 3401.12 as claimed by the assessee and the demand of duty was set aside vide Final Order No. 1483/2007 dated 11.12.2007 in Appeal No. E/55/2005 (Cholayil Pharmaceuticals Vs. CCE, Puducherry). As the decision was not appealed against by the Department, it can be followed as a precedent in the present case.
(c) In any case, the allegation of suppression of facts by the respondent with intent to evade payment of duty on âMEDIMIX soap is not sustainable on the facts of this case. The learned Commissioners finding that nothing was suppressed by the assessee has not been challenged by the Department. Therefore, in any case, the demand of duty raised in the show-cause notice dated 13.6.2003 for the period of dispute is heavily time-barred.
5. The learned counsel for the respondent has also claimed support from a line of decisions while claiming that the Department failed to prove the alleged use of power by the respondent to manufacture âMEDIMIX soap during the material period. Several decisions have also been referred to in support of the plea of limitation.
6. We have given careful consideration to the submissions. Insofar as the use of power for brining caustic soda lye to the storage tanks of the respondent is concerned, the case of the respondent is fully supported by Final Order No. 1483/2007 dated 11.12.2007 ibid which was passed by this Bench in Appeal No. E/555/2005. It is not in dispute that the said final order was passed in respect of another âMEDIMIX soap manufacturing unit. In that case, the raw material supplier had contracted to supply the raw material at the storage tanks of the assessee and, as part of transportation of the material upto the tank, they took the aid of power. The Bench that such transportation of raw material could not be held to have been done in, or in relation, to the manufacture of soap. This was taken by drawing support from Shalimar Paints Ltd. Vs. Commissioner - 2001 (136) ELT 451, wherein it had been held that emptying of lorry-borne tank in the storage tank had no connection with the process of manufacture of the final product and accordingly exemption under Notification No. 230/86-CE dated 3.4.1986 (based on manufacture without the aid of power) was denied to the assessee. It is nobodys claim that Final Order No. 1483/2007 ibid was not accepted by the Department. In this scenarios, we are inclined to accept the submission of the respondent that their product cannot be classified under sub-heading 3401.19 by reason of the fact that power was used to bring one of the raw materials to the factory.
7. As regards testing of raw materials and the final product, we find that the appellant is yet to prove that electrically operated equipments were used for such testing in the respondents factory during the period of dispute. Some equipments were found in the factory by the investigating officers of the Department in November 2000. The respondent has claimed that these equipments were removed from the factory soon thereafter under intimation to the Department. This claim has not been contested in the appeal. The question, therefore, to be considered now is whether these equipments were electrically operated and used for testing raw materials / final products in the factory prior to the removal of the equipments from the factory. In this connection, the appellant would rely on a statement of Shri T. Karthikeyan. We have perused this statement which, inter alia, gives list of 7 equipments (electrically operated) but does not categorically state that any of these equipments was used for testing the vegetable oils or caustic soda lye or the final product with the aid of power during any part of the period of dispute. On the other hand, Shri T.Karthikeyan states that he was ânot fully trained in analysis of oils and soaps completely and most test were done to gain exposure. He further stated that he âdid not take much care sending them to QC (quality control). The case of the respondent is that Shri T.Karthikeyan used the above equipments as part of a training programme, which has not been denied by the appellant. Though a statement was recorded from Smt. P. Ponnammal, B.Sc. (Chemistry), Assistant Manager, of the factory, she was not confronted with anything stated by Shri T.Karthikeyan. As a matter of fact, in her statement, Smt. Ponnammal gave an account of how the raw materials were used in the manufacture of âMEDIMIX soap. But, nowhere in this statement, is there anything to indicate that any electrically operated equipment was used in the process of manufacture of soap. Smt. Ponnammal was also required to explain quality control checks. She did not mention any electrically operated equipment in this context either. Shri T. Karthikeyans name does not figure at all in the statement of Smt. Ponnammal. The respondent is a Proprietary concern. No oral evidence of its proprietor was taken by the Department. In these circumstances, Ground No.4.3 which is to the effect that the assessee admitted that the quality control equipments and machinery were operated with the use of power has no substance. As rightly pointed out by the learned counsel for the respondent, the appellant has not been able to come anywhere near proving the use of power by the respondent in the manufacture of âMEDIMIX soap during the material period. That electrically operated equipments were used for testing raw materials and the final product is a far cry or a ipse dixit.
8. It is also interesting to note that the appellant notes the period of dispute as August 1999 to April 2001 and the disputed amount of duty is Rs.4,50,33,770/- in the Memorandum of Appeal but, in its conclusive part, states that the Commissioner ought to have confirmed the demand of Rs.3,16,31,192/- for the period from August 1999 to November 2000. It would appear that the appellant has abandoned their claim that the respondent uses electrically operated equipments in their factory after November 2000. Thus the grounds of this appeal are beset with ambiguities.
9. Now that we have found no evidence power have not been used by the respondent in the manufacture of âMEDIMIX soap during any part of the period of dispute, there is no need to consider the decisions cited before us.
10. It is pertinent to note that the findings recorded by the adjudicating authority on the limitation issue have not been challenged by the Department. Therefore, we do not find it necessary to examine the plea of limitation raised by the counsel for the respondent.
11. In the result, the appeal fails and is dismissed.