Judgment
1. These two appeals arise from Order-in-Original No. 25/88, dated 4-5-1988 passed by Collector of Central Excise, Cochin in terms of which he demanded Central Excise duty of Rs. 15,72,664.75 from the firm M/s. Jona Caps and Containers and its partners, and imposed a penalty of Rs. one lakh on the firm besides imposing a penalty of Rs. 50,000/- on Shri M.J. Johnson, its Managing Partner. The said decision was taken by the Collector on the ground that the firm had manufactured certain quantity of crown corks that fell under Item 41 of Central Excise Tariff during the period before 28-2-1986 and under Tariff sub-heading 8309.10 thereafter and that they cleared the same without payment of the duty leviable thereon. The Collector based his finding of such clandestine production and clearance of the goods on the statements recorded from their employees who mentioned about the shifts and the days the factory worked, the production capacity per shift as well as the statements of some of the customers who had purchased crown corks from them. These statements indicated that the appellant produced more crown corks than what had been brought on record and that the customers had purchased more quantities of crown corks and paid more price for them than those shown in the respective invoices. The Collector imposed the penalty on the Managing Partner of the appellant firm, Shri M.J.Johnson under Rules 9(2), 52A(5), 226 and 173Q of the Central Excise Rules while refraining from imposing any penalty on the other partners.Crown corks (175 gross) seized from the residence of Shri Norbert D'Silva, Manager of the appellant firm were confiscated, giving the option for redemption subject to payment of fine in lieu of confiscation of Rs. 500/-. The order has been challenged by the appellant firm as regards the demand of duty and penalty imposed and by Shri Johnson insofar as the imposition of penalty on him.
2. Shri M. Chandrasekharan, learned Counsel for the appellants stated that the demand of duty on alleged clandestine removal of crown corks without payment of the duty leviable is based entirely on the theoretical calculations with reference to the production capacity as stated by some of their employees. This capacity has been over stated.
The statements were not voluntary and these had been retracted. These persons were not permitted to be cross examined despite their request for the same. Appellants had given a detailed reply contesting the demand stating that their machinery was old and not capable of producing the alleged quantity. They had given the figures of possible production based upon the power consumed, the quantity of the materials used in the manufacture of crown corks. They had purchased and used 196 kilograms of Egg Albumen flakes from which only 2,87,878 gross crown corks could have been produced. Again, on the basis of the coating material used, the production could have been only 2,98,005 gross. The production as per the register found in the residence of their Manager, Shri Norbert D'Silva was 3,03,876 gross. The production has, however, been taken by the Collector as 5,33,571.4 gross. Duty has been demanded after allowing the exemption available under Notifications 83/83, 85/85 and 175/86 as the case may be taking the price as Rs. 19/- per gross instead of Rs. 14/- per gross. The Collector did not accept their plea that the rate of duty should be applied at the rates which were in force in the respective years when the production and clearances in question are alleged to have taken place and not the higher rate as in force at the time of issue of show cause notice. They had produced certificates issued by the State Electricity Board regarding the power consumed by the appellant factory and also a certificate regarding Thanneermukkom Bund remaining closed during the period which will disprove the charge that they had moved certain quantity of their product through that Bund. It was contended that the Collector had not considered these properly while passing the impugned order.
3. The submissions were resisted by Shri M. Ali, JDR who supported the Collector's findings in the order in question. The demand for duty has been made on goods clandestinely manufactured and removed which had been worked out on the basis of statements of their own employees and also of their customers. The retraction from the statements was belated, after receipt of the show cause notice. Apart from the statements of these concerned persons, there was also the recovery of a register from the residence of the Manager, Shri Norbert D' Silva showing the particulars of removal of the product in excess of the quantity removed on payment of duty. The Manager as well as the employees of the factory had clearly admitted that only part of the quantity of raw materials received was entered in their registers and that raw materials not so accounted for were used for manufacture of finished product removed without record. They had stated that the capacity of plant was 750 gross per shift and that the factory was working 6 days in a week with 9 shifts per week. The Managing Partner had admitted in his statement that the capacity was 600 gross per shift. The Collector has gone on the basis of 500 gross per shift. Shri Ali pleaded that the submissions made in support of the appeal that the electricity consumption as certified by the State Electricity Board has no bearing on the production of the goods in the factory as has been held by the Collector. The Board's certificate was self contradictory and covered a period different from the period in question. Shri Ali strongly supported the Collector's order and pleaded for they dismissal of the appeal.
4. We have considered the rival contentions. We have gone through the record. The Collector has based his findings of unaccounted production and removals of the product, crown corks without payment of duty on the statements of the employees of the factory and the Managing Partner, Shri Johnson who is also an appellant herein regarding the production per shift and the number of shifts per week as also the statements of their customers regarding their purchases without bills in certain cases and payment of a higher price of Rs. 19/- per gross as against the price of Rs. 14/- per gross shown in the bills in other cases. The defence of the appellant firm is mainly that the factory was not in a position to have produced the alleged excess and unaccounted quantity.
This has been sought to be established on the basis of power consumption and some of the raw materials utilised. Thus it has been claimed that the total quantity of crown corks that could be produced by consumption of 53760 units of electricity was only 299126. With reference to the use of Egg Albumin Flake, an essential item required for the manufacture of crown corks, the claim is that for 190 kilograms of that material, the production could only be 2,87,878 gross.
Likewise, on the basis of use of 922 litres of Gold Lacquer used, the production could only be 2,98,129 gross. The maximum production in any case could only have been 3,03,876 gross as entered in the register found in the residence of the Manager, Shri Norbert D'Silva. These claims which were made before the Collector had been considered and rejected by him on the ground that the raw materials in question were available in the open market and that only part quantity of such materials purchased had been brought on record, such a practice also having been admitted by the employees. The production capacity per shift claimed by the appellant has not been accepted by the Collector as he held that no evidence had been produced by them to prove their claim. On the other hand, he has gone by the statements recorded from the Manager and two other employees of the factory. Relevant portions of the Manager's are extracted below :- "Entire quantity of the raw materials purchased are not accounted for in the records of the factory. Only l/3rd of the total purchases are accounted in the accounts of the factory. The payments towards the accounted purchase of raw materials are made by way of Bank DD. The remaining amount for the unaccounted purchase i.e. 2/3rd of the total purchase are made by cash. The despatches of materials via Thaneermukham Bund were not accounted in the records of the factory even though goods sent via Aroor are covered with delivery notes, there will be excess quantity than that shown in the transport documents.
The value of crown corks per gross shown in the invoices is Rs. 14/-. But actually we are collecting Rs. 19/- per gross for the sales effected. The cost as per account is collected as cheque or DD, the differential amount of Rs. 5/- per gross is collected as cash. The sale proceeds other than those shown in the invoices (i.e.
the excess quantity of crown corks sold) is also collected as cash." 6. In his statement, the Manager also admitted about the recovery of register from his residence wherein details of receipt and issue of crown corks had been entered. He stated that actual clearances were those shown in the column "issue" but in the records of the factory a lesser quantity as shown in the remarks column of the register were shown. He also stated that the excess quantity of raw material noticed in the factory were kept for unaccounted production in the factory.
7. Shri M.V. Sathyanesan, Supervisor of the factory stated that the average weekly production of the factory was 750 x 9 gross, the former quantity being the production per shift and 9 representing the number of shifts. Shri T.B. Shibu in-charge of assembling machine in the factory, also confirmed that in one shift, 500 gross crown corks were manufactured. Shri Prasanan who was in-charge of the coating of sheet metal in the factory stated that the factory used to work on all days except Sundays and that there was 2 shift working in 3 days of a week and one shift daily on other three days of a week.
7A. The Managing Director, Shri M.J. Johnson mentioned in his statement that the production capacity of crown corks in the factory was 600 gross per shift but that they were not utilising the full capacity and 500 gross of crown corks per shift were being manufactured. He stated that in a week usually there were 9 shifts but during the months of July, August and September, one shift production was adhered to. He stated that goods were taken from the factory to Ernakulam via Thanneermukkom Bund to avoid the checkpost at Arroor. He admitted that they were collecting Rs. 19/- per gross but snowed only Rs. 14/- per gross in the invoice and the difference was collected in cash. He was shown the Register seized from the residence of the Manager of the factory, Shri Norbert D'Silva when he explained that the figures 3500,3500 and 2700 on 25-8-1986,26-8-1986 and 29-8-1996 (sic) shown therein represented the issues while Bills were issued only for 1400,1400 and 550 and that the differential cost was received by him in cash from the customers.
8. Appellant has contended that the statements had been recorded from the Managing Partner and other persons as per the dictation of the officers and these were not true or voluntary statements. The Managing Partner, Shri Johnson has contended that he had originally given the production capacity as 400 gross per shift but as he was forced by the officers he had to change it to 600 gross per shift. No doubt, as pointed out by him, the figure originally written by him was 400 but this was scored out and the figure 600 was written. This cannot be taken as an indication of the statement taken under coercion. The production capacity has been given by others also. We find that, after referring to 600 gross per shift, he has proceeded to state that they were not utilising full capacity and 500 gross per shift was being manufactured. The statement has been written in his own handwriting. As observed by the Collector in his order Shri Johnson is a law graduate and his plea that he had given statement under duress is an afterthought. It is claimed by him that he could realise that he had given a factually wrong statement only after seeing the show cause notice as a copy of the statement had not been given to him earlier.
This is not acceptable. He is an educationally qualified person and a law graduate at that. Even if a copy of the statement had not been given to him, as claimed by him, he would have known that he had written an incriminating statement and if it was not actually true and was contrary to his own perception but given as per the direction of the officers, nothing prevented him from making the position clear immediately, instead of waiting for the show cause notice and then raise a plea that his statement was not voluntary and not factually correct. The plea has been rightly rejected by the Collector.
9. The impugned order has, in addition, been assailed, inter alia, on the following grounds :- (i) The appellant's request for permission to cross-examine their employees whose statements had been relied upon for raising the demand of duty.
(ii) The certificate of the State Electricity Board produced by the appellant has been rejected by the Collector on the wrong ground that it was for a period different from the period under dispute.
(iii) The certificate produced by them regarding the opening of the Thanneermukkom Bund for vehicular traffic on 30-12-1985 had been wrongly rejected by the Collector on the ground that the department's charge was not that goods had been removed by them without payment of duty through that fund before 30-12-1985.
We find that though the first two contentions mentioned above are correct, the Collector's findings against the appellant cannot, however, be faulted on that ground. Thus, taking up the first plea, it is seen that though the Collector had neither permitted the cross-examination of the concerned employees nor given a finding as to why he did not consider it necessary to permit their cross-examination, he had taken note of the retraction statements of such persons filed by the assessee and rejected them taking note of the fact that they had not retracted their statements till the time of replying to the show cause notice. He held that such retraction was clearly an after thought to escape from further proceedings. We agree. We also find that the original statements of the said employees were consistent with the statements of the buyers of the goods manufactured by the appellant.
Such buyers were proceeded against in the same adjudication proceedings and they took the same stand while replying to the show cause notice.
They did not retract from their statements about their receiving extra goods not covered by documents from the appellant and of having paid to the appellant the price on the basis of Rs. 19/- per gross and not the price of Rs. 14/- per gross shown in the bills. In the circumstances, we hold that the denial of the facility of cross-examination has not vitiated the findings of the Collector.
Coming to the question of the Collector having rejected their plea based on the power consumption as certified by the State Electricity Board, we agree with the contention that the Collector should not have come to his finding on the ground that the period mentioned in the certificate, viz., 1984 to 1987 was different from the period in dispute. The former period was a longer one fully covering the latter, namely, the period in dispute. If anything, the power consumed in the shorter period of May, 1984 to January, 1987 would have been less than the number of units of power certified by the Electricity Board and the quantity of PP Caps that could be produced using such quantum of electricity could be only lower than the quantity indicated by the appellant. But such data and formulae had been disclosed by the appellant only when confronted with the charge of clandestine production and removal and not at any previous stage. The claim could not be proved. The said claim also does not accord with the statements regarding the production capacity and performance and the number of shifts worked. The plea is rejected.
Nothing turns on the plea that the Thanneermukkom Bund was opened for vehicle traffic only on 30-12-1985. It is not the case of the department that the goods clandestine removed were transported via that bund. That certain removals were made through Thanneermukkom bund was mentioned in some of the statements of the appellant's own employees and the Managing Partner. Such statements were recorded in February, 1987. It was also stated by the Manager, Shri Norbert D'Silva that even in the case of removals through the Arroor route, the quantities removed were more than that shown in the relevant documents. Hence there is nothing significant about the said bund being officially opened for vehicle traffic only from December, 1985. That fact is also not repugnant to the charge and findings of clandestine removals of goods by the appellant.
10. The statements of the employees admitting supply of excess quantities of crown corks to customers and getting a price of Rs. 19/- per gross as against the price of Rs. 14/- per gross shown in the bills, as stated above, have been corroborated by the statements given by the concerned customers also. It has been contended in the appeals that these statements were recorded behind their back and hence not admissible as evidence. We find that these persons had not retracted from their statements. On the contrary, they had, even at a later stage viz. while replying to the show cause notices issued to them, stated that they had asked the appellant to issue proper invoices but they had refused to do so and they had to accept such terms as they were dependent upon them for supply of crown corks.
11. In view of such a position, we uphold the Collector's finding that there was excess unaccounted production and clearance from the appellant's factory and that the crown corks were sold at Rs. 19/- per gross and not at Rs. 14/- as shown by them in their bills. We, however, find that on the quantification of production and the rate of duty to be applied, the appellant's submissions need to be examined. In the show cause notice it was indicated that the short levy involved was Rs. 19,55,286.34, on a total production of 2,16,000 gross, 2,34,000 gross and 1,93,500 gross during the periods May, 1984 to March, 1985, April, 1985 to March, 1986 and April, 1986 to January, 1987 respectively. The Collector had accepted the plea made before him about single shift operation during the months of July, August and September, viz. 6 shifts per week and not 9 shifts. He had also accepted their plea that they had given intimation of stoppage of production for 80 days. On that basis he had reduced the quantity of production to 1,96,500,1,83,000 and 1,54,071 gross. The value of such production of the aforesaid quantities has been arrived at by the Collector applying the rate of Rs. 19/- per gross. From such values he has allowed deduction of Rs. 15 lakhs on account of small scale industry exemption and arrived at the balance quantity on which he has demanded duty, applying the rate of 5 paise per cap less 10% ad valorem. The appellant has raised two objections in this regard, namely, excess computation of production by taking a greater number of days in the three years and a higher production per day and a higher rate of duty which was applicable only in the last period, rejecting their plea that the rates as applicable in the respective years when the removals without payment of duty had allegedly taken place. These contentions are now taken up for examination.
12. A plea has been raised in the appeal that though in the show cause notice the production per shift was taken as 500 gross, the order goes by the figure of 600 gross per shift and that the production figure has been arrived at by including even Sundays and holidays. We find from a scrutiny of the Collector's order that both these contentions are not correct. The Collector has gone by the figure of 500 gross per shift.
This is actually less than the production capacity per shift as admitted by the factory staff in their statements. The Managing Partner has also admitted this figure in his statement. We have rejected his plea that he had stated the figure 400 gross only but that he had to alter it as 600 as directed by the officers. As regards the number of days of production in the three periods in question namely May, 1984 - March, 1985, 1985-86 and April, 1986 - January, 1987, we find the Collector had not shown the days of production in para 30.3 of his order where he has given a tabular chart but only shown the total quantity produced. As during part of the period, the factory had admittedly worked single shift while in the other period there was 9 shift work per week and as deduction of 80 days for non-working of the factory was also in the exact computation of the working days arrived at by the Collector cannot be gleaned from his order. It has, however, been contended in the appeal that the factory did not worked more than 744 days during the entire period in question, namely May, 1984 to January, 1987. They had explained the position as follows :-______________________________________________________________________________Total No. of days from May, 1984 April, 1985 April, 1986 TotalMay, 1984 to January, 1987 to March, to March, to January, 1985 1986 1987______________________________________________________________________________ 335 365 306 1006(1)Sundays 48 20 44 144(2) Holidays 20 21 19 60Non-working days ...58...
58intimated to Excise ____________________________________________________________________ __________ The department's stand is that leaving Sundays, the factory worked 6 days a week. In addition, the appellant's claim is that there were 60 holidays in the 33 month period. In addition the number of non-working days reported by them to the Excise department is stated to be 58. Thus a total of 118 days are involved. The Collector has allowed 80 days deduction as the non-working days reported by them. There is thus an excess of 36 days which appears to be due to the holidays claimed by them. This appears to be acceptable. This difference of 38 days relates to a period of nearly 33 months. We accept the plea that production is to be worked out for 744 days.
13. Appellant has taken a production figure of 400 gross per day and claimed the production to be 744 x 400 - 2,97,600. This plainly incorrect. As already held by us, the production capacity is to be taken as 500 gross per shifts. Moreover barring the three months period July, August and September when a single shift operation was carried on, in the other months, it was admittedly a 9 shift per week schedule that was followed. It works out to 11/2 shifts per day, a week consisting of 6 working days. On that basis, when out of 744 days, in months other than July, August and September, the production per day has to be taken as 500 x 11/2 = 750 gross. As the break up of the holidays claimed by appellant and the non-working days (total 58 for the entire period) is not available either in the appeal or in the Collector's order, we are not in a position to accept either the total quantity of production claimed by the appellant or that decided by the Collector in his order. Moreover, in the Collector's order the production in the 10 months period May, 1984 to March, 1985 has been taken to be 1,96,500 which is more than the production of 1,83,000 taken for a whole year viz. April, 1985 to March, 1986. If other factors are the same, it is not clear how, for a shorter period of 10 months the production is more than that taken for the longer period of 12 months. The matter, therefore, requires to be remanded to the adjudicating authority for working out the duty amount on proper basis.
14. At this stage, it becomes necessary to take note of the contention raised in the appeal that the Collector had wrongly applied the rate of duty applicable at the time of issue of the show cause notice instead of the respective rates applicable during the three Financial years when the duty rates on crown corks had undergone changes. The Collector had rejected this plea of theirs made before him observing that as per Rule 9A(5) of Central Excise Rules, the rate of duty applicable shall be the rate in force on the date on which the notice for demand is issued or the date on which duty is paid, whichever is earlier. The Collector, we find, erred in applying Rule 9(5). This is a residual Sub-rule and starts with the words "in all other cases." In other words, this Sub-rule will apply only where the earlier sub-rules are not applicable. It was contended by Shri Chandrasekharan, learned Counsel for the appellants that the removals in question have been alleged to have been made in the different earlier periods and the calculation chart in the impugned order also shows the production yearwise and hence the appropriate rate in force in these years should apply. We note that under Sub-rule (1)(ii) of Rule 9, the rate of duty applicable in the case of goods removed from a factory shall be the rate in force on the date of the actual removal of the goods from the factory. Here the allegation is that crown corks were produced in the factory and removed without payment of duty. The production has been worked out on the basis of production capacity on a daily basis for the respective periods. It cannot be that the production was on a day to day basis in the respective years but the clearances were effected only subsequently when the higher rate as applied in the impugned order came into effect. Though the exact date of removal may not be known in the case of clandestine removals, that exact date of removal will fall within the respective years, except in those cases at the end of each Financial year where a change of rate of duty had taken place when it may not be clear whether the removals would attract the rate of duty applicable before the amendment or thereafter. This will also require decision at the hands of the Commissioner with reference to the evidence that may be made available by the appellant. The matter thus needs to go back to the Commissioner for de novo decision for working out the amount of duty on the re-determined quantity of goods produced and cleared and applying the correct rate of duty and on the basis of the finding in this order. The quantum of penalty may need revision, with reference to the duty involved. We set aside the order and allow the appeals for de novo decision after granting the appellant the opportunity of personal hearing.