Judgment:
1. The above appeal arises out of the order dated 24-12-1996 passed by the Collector of Central Excise, New Delhi by which he has confirmed a duty demand of Rs. 26,59,620/- on 850 Trollies, 4,710 Bins and 330 Pallets of iron and steel manufactured by the appellants during the period May, 1989 to March, 1992 through fabricators by supplying fabricated materials and imposed a penalty of an equal amount under Rule 173Q of the Central Excise Rules read with Section 11AC of the Central Excise Act, 1944.
2. The brief facts of the case are that the appellants supply raw material for the manufacture of the above mentioned three items which are in the nature of material handling equipment, to the following fabricators who fabricated the same in the appellants' premises : The appellants did not file any classification list or price list for these items nor did they maintain any statutory records for he same nor did they pay any Central Excise duty leviable thereon; hence a show cause notice dated 1-6-1994 was issued to them proposing recovery of a sum of Rs. 30,63,946/- under Rule 9(2) of the Central Excise Rules read with proviso to Sub-section (1) of Section 11A of the Central Excise Act and proposing imposition of penalty for contravention of the Rules.
3. The appellants' claim to the benefit of Notification No. 217/86, dated 2-4-1986 was denied by the Adjudicating authority for the reason inter alia that items of the category of material handling equipment were excluded under the Explanation to the Notification. The plea that the fabricators above named are the real manufacturers was rejected, holding that the fabricators were only in the nature of hired labourers and that the appellants were the real manufacturers of the Trollies, Bins and Pallets. By order dated 26-5-1995, the Collector of Central Excise, Delhi confirmed a duty demand of Rs. 26,59,620/- (the duty demand in the show cause notice was reduced after accepting the appellants' contention that quantification of duty is to be made by taking the margin of profit at the rate of 4.25%, 3.23% and 1.87% for the period 1989-90,1990-91 and 1991-92 respectively). Penalty of Rs. 4 lakhs was imposed under Rule 173Q.4. The appellants came up in appeal to the Tribunal in Appeal No.E/1415/95-B1 which was disposed of vide Final Order No. E/414/95, dated 12-10-1995 = 1996 (82) E.L.T. 293 (T), allowing the appeal by way of remand. The present impugned order was passed Subsequent to the Tribunal's order of remand. Hence this appeal.
5. We have heard Shri V. Sridharan, learned Counsel and Shri K.K. Jha, learned DR and carefully considered their Submissions. The following five issues arise for determination in this case : (I) Whether the material handling equipments are eligible to exemption from duty in terms of Notification No. 217/86? (II) Whether the appellants are to be treated as the real manufacturers or the fabricators are the independent job workers who are the real manufacturers of the items in dispute? (IV) Whether the appellants are liable to pay interest under Section 11AB of the Central Excise Act, 1944? (V) Whether the appellants are liable to penalty under Rule 173Q of the Central Excise Rules read with Section 11 AC of the Central Excise Act, 1944? Issue No I. Notification No. 217/86 exempts goods specified in Col. 2 of the Table annexed thereto (herein referred to as 'inputs') manufactured in a factory and used within the factory of production, in or in relation to the manufacture of final products specified in Col. 3 of the said table from the whole of duty of excise leviable thereon which is specified in the Schedule to the Central Excise Tariff Act, 1985. The Notification provides that nothing contained therein shall apply to inputs used in or in relation to the manufacture of final products which are exempt from whole of duty of excise leviable thereon or are chargeable to nil rate of duty. We find that it is not in dispute in the present case, that both the Material handling equipment (inputs) falling under Chapters 73 and 94 and Motor Vehicles (final product) falling under Chapter 87 are covered by the table annexed to Notification 217/86. The material handling equipment are undoubtedly used within the factory of production in or in relation to the manufacture of the final products i.e. Motor Vehicles which are neither chargeable to nil rate of duty nor wholly exempt form duty but cleared only on payment of duty. The question arises when considering as to whether they are excluded by Clause 1 of the Explanation to the Notification. The Explanation reads as under : (I) machines, machinery, plant, equipment, apparatus, tools or appliances used for producing or processing of any goods or for bringing about any change in any Substance in or in relation to the manufacture of the final products.Tata Engineering & Locomotive Company Ltd. v. Collector of Central Excise [1994 (70) E.L.T. 75] in which the majority has held that material handling equipment used within the factory of production of a motor vehicle manufacturer are eligible for exemption under Notification 217/86 and such equipments are not covered by the exclusion clause.
However, we find that in a series of cases decided in the context of Rule 57Q of the Central Excise Rules, material handling equipments have been held to be used for producing or processing goods and hence covered by the definition of capital goods occurring in explanation to Rule 57Q. Some of those cases are discussed below :Collector of Central Excise, Meerut v. Uttam Industrial Engg. Pvt. Ltd. [1996 (86) E.L.T. 498], the Tribunal held that electrical overhead travelling cranes used for moving parts of heavy machinery and their raw materials inside the production hall can definitely be considered to be used in the production of processing of the final goods, since but for the movement of the parts and raw materials for the purpose of assembly, there would be no production or processing of final goods, and hence eligible for Modvat under Rule 57Q of the Central Excise Rules, 1944.Collector of Central Excise v. Mansurpur Sugar Mills Ltd. reported in [1996 (87) E.L.T. 91], cane unloader used by the respondents for unloading cane from truck, cart etc. to the conveyer belt which in turn feeds it to the sugar crusher in the respondents sugar mill, was held to be used for processing of goods since the process of manufacture of sugar is an integral and continuous process commencing from unloading cane and ending with manufacture of sugar; and hence benefit of Modvat credit was extended to the cane unloader treating it as capital goods within the meaning of Rule 57Q. In this order of the Tribunal, the earlier order in the case of TELCO Ltd. v.Collector of Central Excise, Pune (cited supra) was noted and distinguished on the basis of the judgment of the Hon'ble Supreme Court in the case of Collector of Central Excise v. Rajasthan State Chemical Works reported in [1991 (55) E.L.T. 444 (S.C.)]. In that decision, the Supreme Court had held that process of handling/lifting, pumping/transfer; transportation of raw material is also a process in or in relation to manufacture if it is integrally connected with further operations leading to manufacture of goods.Mahindra & Mahindra v. Collector of Central Excise reported in [1996 (86) E.L.T. 258], the contention of the Revenue that baskets and fixtures used for placing components in the oven do not bring about a change in the raw material nor do they produce the components by themselves and are, therefore, not used for producing or processing any goods or for causing any change in the Substance for the manufacture of final products and are therefore, not covered by the definition of capital goods under Rule 57Q, was rejected by the Tribunal which held that fixture and baskets which were material handling equipment contributed to the processing of the components since without them, the oven cannot be effectively used for the purpose of change in the components. The Tribunal extended the benefit of Modvat to fixtures and baskets considering them to be covered by the definition of capital goods contained in explanation to Rule 57Q.9. In the case of Collector of Central Excise v. MM. Forgings reported in [1997 (89) E.L.T. 617], the Tribunal, relying upon the judgment of the Apex Court in the case of Collector of Central Excise vi Rajasthan Chemical Works (cited supra) held that the term 'capital goods' has to be read in the context of the use of the equipment in the assessee's factory and what has to be seen is whether equipment used is a part of the manufacturing stream in the assessee's factory and whether the use is for production or processing or for bringing about any change in the materials used in the manufacture of final product, in that case, the goods were four Fork lifts used for lifting raw materials from one place to another place within the respondent's factory. The respondents had pleaded that unless iron forgings of various sizes manufactured by them are lifted and materials out of which they are manufactured are transported, the manufacturing process is not possible. The Tribunal observed that the respondents' claim will have to be considered in the light of the judgment of the Hon'ble Supreme Court referred to above and hence remanded the matter to the lower authority for this purpose, holding that if the respondents were able to show that the use of fork lifts is essential in their factory and that without the use of the same, the final product could not be manufacture, they would be entitled to the benefit of Modvat credit in terms of Rule 57Q.Collector of Central Excise, Jaipur v. R.K. Marbles Ltd. [1997 (92) E.L.T. 276], the benefit of Modvat credit under Rule 57Q was extended to gantry crane and trolley used for transfer or raw materials for sawing marble holding that the handling of raw materials by these goods is integrally connected with the process of manufacture of marble, relying upon the Supreme Court decision in the case Rajasthan Chemical Works (supra).Man Structurals Ltd. v. Collector of Central Excise, Jaipur reported in [1997 (93) E.L.T. 457], mobile crane used for handling raw materials, semi-finished goods etc. used in the course of manufacture of final product was held to be eligible to the benefit of Modvat credit under Rule 57Q for the reason that the handling of material and shifting of goods in the course of manufacture of the product for which purpose the crane is used, would constitute part of manufacturing process. The Tribunal relied upon judgment of the Supreme Court in the case of Rajasthan Chemical Works case.
12. The argument of the learned Counsel that the judgments rendered in the context of Rule 57Q are not relevant in the context of Notification 217/86, is not tenable. The explanation to Rule 57A excludes 'machines, machinery, plant, equipment, apparatus, tools or appliances used for producing or processing of any goods or bringing about any change in any Substance in or in relation to the manufacture of final products.
These vary items are covered by exclusion clause (1) contained in the explanation to Notification 217/86. On the other hand, capital goods have been defined in clause (1)(a) of the explanation to Rule 57Q to mean 'machines, machinery, plant, equipment, apparatus, tools or appliances' used for producing or processing of any goods or for bringing about any change in Substance for the manufacture of the final products'. Therefore, what is excluded from the scope of Notification No. 217/86, is automatically covered by definition of capital goods under Rule 57Q. Viewed from this angle, we hold that the judgments in the context of Rule 57Q are directly applicable to the present case.
Since it has been held in the above decisions that material handling equipment is used for processing goods in relation to the manufacture of the final product, such equipment are excluded from the scope and ambit of Notification No. 217/86. The items in dispute viz. trollies, bins and pallets are material handling equipment used for storing, stacking, handling and bringing together various materials/components used in the manufacture of motor vehicles of different types and are therefore, to be regarded as used for processing goods .in relation to the manufacture of final product namely motor vehicles and hence fall outside the coverage of Notification No. 217/86. This issue is answered in the negative.
Issue No. II : The trollies, bins and pallets were coated, fabricated through the following three fabricators : The terms and conditions as per Clause II-B of the order dated 27-6-1990 placed by the appellants herein on M/s. Yusuf Fabricators, Gurgaon are as under: "B. The party will be required to do the fabrication work at our works. The raw materials required for fabrication/repair/modification will be supplied by MUL. The consumables like welding, electrodes, gas, paint, primer, thinner, pre or post treatment solutions, screws, nuts, bolts, PVC tube etc.
will be supplied by MUL. However, the party will be required to arrange for power hacksaw, drilling machines drills and power hacksaw blades, pipe bending machine, gas cutting torch, nozzles, regulators and welding sets with proper safety equipment for welding. Hand tools like hammers, chisels, files, hand hacksaw, taps, punches, etc. are also to be arranged by the party. Wherever slot milling is required for fabrication of the pallets, key way milling machine will be made available by us and the party will have to get this machine operated through their skilled workers. Any damage caused to machine by the party's operator is to be recovered from the party".
13. Another order dated 9-4-1987 placed on M/s. Gupta Electronics & Engineering Co. Gurgaon describes the terms and conditions of job work as follows: (a) All raw materials required will be supplied by Maruti Udyog Ltd. (hereinafter referred to as MUL); (b) All material preparations, painting, wood-fixing are the responsibilities of the party.
(c) Electric power, water compressed air, oxygen, D/A fastners, welding rods, paint, primer etc. will be supplied by MUL free of cost for the exclusive purpose or carrying out the entire work".
The terms and conditions of work order dated 2-8-1986 of M/s. Process Engineers are as under : 1. All raw material like steel, wood etc. will be supplied by Maruti Udyog Ltd. (MUL).
2. Material preparation for manufacturing the above jobs is the responsibility of the party.
3. Electrical power, water, compressed air, oxygen, DA, fastners electrodes and paint etc. will be provided by MUL free of cost for the exclusive purpose of carrying out the work awarded under this contract.
4. The party is to make its own arrangement for the hacksaw machine, drilling machine for material preparation.
5. Also, the party will arrange its own gas cutting torch, nozzles, regulators, and welding sets with proper safety equipments for welding hand tools like files, hammers etc.
6. The keyway milling machine will be made available by us to the party wherever slot milling is required for fabrication of the pallets. The party will arrange to operate the Slot Keyway Milling machine with their skilled workers for making the slots on the pallets if required. Any damage caused to the machine by the party's operators is to be recovered from the party.
When Tool Room machines are operated by the contractor's workers, it is fully at the risk of the contractor with no obligation on the part of MUL whatsoever.
This work is to be carried out urgently and completed latest by 15th October, 1996.
14. From the above, it is seen that the fabrication of the items in dispute was not only carried out by the three different job workers within the factory premises of the appellants, but also on their shop floor itself. The appellants supplied all the raw materials for fabrication/repair/modification as well as the samples like welding electrodes, gas, paint, primer, thinner etc. They were also to make available to the fabricator, the slot milling machine and the Keyway Milling machine without any charges. The Terms and Conditions of the various work orders clearly spell out a master and servant relationship between the appellants on one hand and the fabricators on the other, as not only did the appellants have the right to tell the fabricators what to do, but also how to do it. In other words, the work was to be carried out under the total control and supervision of the appellants.
Hence the three fabricators have rightly been held to be hired labour of the appellants herein and not independent manufacturers. The case laws relied upon the learned Counsel in support of the contention that it is the fabricators who are the actual manufacturers, is distinguishable.
In the case of Vasant Industries v. Collector of Central Excise, Kanpur reported in [1995 (75) E.L.T. 21 (S.C.)], the Hon'ble Supreme Court has recorded that the Tribunal found it as a fact that the appellant had no control over either the manufacturing process or the manufacturing apparatus and hence the Court set aside the finding of the Tribunal that oil driven pumps manufactured by the independent units on payment were manufactured on behalf of the appellants.Collector of Central Excise v. M.M. Khambhatwala reported in [1996 (84) E.L.T. 161 (S.C.)], the Apex Court found that the respondents who are suppliers of raw materials for manufacture of agarbatti/ dhoop to household ladies at their house, outside the factory premises, had no supervision over the manufacture and hence held that the respondents were not the manufacturers of agarbatti/dhoop etc. but that the household ladies were the manufacturers of the goods in question.
In the case of Britannia Biscuit Company Ltd. reported in [1997 (89) E.L.T. 22 (S.C.)], the Supreme Court held that the appellants who supplied metal for conversion into containers for packing of biscuits (manufactured by the appellants) could not be treated as the container manufacturers, having regard to the terms and conditions of the agreement entered into between them and the job workers to whom the metal was supplied by the appellants and the value of which was adjusted against the amounts that were required to be paid for the manufacture of the containers and having regard to the right of the appellants to reject the containers and having further regard to the fact that the four job workers had their own licence and employed their own workers.
15. In the present case, however, not only do the fabricators fabricate the disputed items in the factory premises of the appellants but the appellants also had total control and supervision over their manufacture. Hence the ratio of the judgments relied upon by the learned Counsel is not attracted in this case. We therefore, hold that in the eye of law, the appellants are the manufacturers of the bins, trollies and pallets of iron and steel. Issue No. II is answered accordingly.
16. Issue No. III: The period of demand is May, 1989 to March, 1992 and hence the show cause notice dated 1-6-1994 has been issued beyond the normal period of six months. The basis on which the proviso to Section 11A has been invoked is that the appellant did not declare the fact of manufacture of the disputed items within their factory premises and therefore, the appellant suppressed the fact and contravened the provisions of Central Excise Act and the Rules with intent to evade payment of duty (para 13 of the impugned order). There is no finding by the Collector that there was deliberate attempt to withhold information by the appellants. The appellants claim is that they were under a bona fide belief that material handling equipment such as the goods on which the demand has been confirmed, were entitled to the benefit of exemption under Notification No. 217/86 and this bona fide belief has been further strengthened by the decision of the Tribunal in the case of TELCO reported in [1994 (70) E.L.T. 75]. In that case, the Member (Judicial) relied upon the explanation/proviso to the Notification and held that the benefit was not available to lifting tackles, trollies and conveyers (Material Handling equipment). The Hon'ble Vice President dissented from this view and held that the benefit of notification is available. The difference of opinion was referred to the Third member to decide the issue whether in view of the phraseology used in Clause 1 of the Explanation to Notification 217/86, restricted meaning was required to be adopted for exclusion in the context of the notification in the light of the judgment of the Supreme Court in the case of J.K.Cotton Spinning & Weaving Mills [1997 (91) E.L.T. 34 (S.C.)], and Rajasthan State Chemical Works [1991 (55) E.L.T. 444 (SC)]. After dealing with the Supreme Court judgment, the benefit of notification was extended to the assessee. Thus the majority held that the exemption under Notification 217/86 was available for material handling equipment. On the impugned order, the Collector has held that since in a number of Modvat cases relating to capital goods, the Tribunal has held that the use of material handling equipment is direct in the manufacturing process and such use is prohibited under Explanation 1 of Notification 217/86, the exemption is not available to the appellants with reference to the TELCO case. While it is true that in a series of decisions, the Tribunal has been extending the benefit under Rule 57Q for material handling equipment, treating them as capital goods (what is included under the definition of capital goods under clause (a) of the First Explanation to Rule 57Q corresponds to the items excluded from the benefit of Notification 217/86 under the proviso), this only highlights the fact that the question regarding availability of exemption under Notification 217/86 was a matter of considerable debate and opinion. Even the Excise Department was of the view that the benefit of Modvat credit under Rule 57A was available to material handling equipment, in the case of the appellants themselves, as seen from the latter dated 25-8-1994 issued to the appellants by the jurisdictional Superintendent of Central Excise. The letter is reproduced below : "Copy of letter No. CE/57G/MUL/R-VI/94/533, dated 25-8-1994 from the office of the Superintendent, Central Excise, Range VI, Maruti Complex, Palam-Gurgaon Road, Gurgaon addressed to M/s. Maruti Udyog Ltd., Gurgaon Road, Gurgaon Sub. : CE-Availment of Modvat credit on measuring instrument and material handling equipments.
Please refer to the judgment passed by the CEGAT vide Final order No. E/391/93-B1, dated 16-11-1993 in the case oi Tata Engineering & Locomotive v. Collector of Central Excise, Pune (May 1994 (70) E.L.T. 75 (Tribunal)). In view of the above, no Modvat credit under Capital Goods heading is available on material handling equipments and weighing instruments. It means, however, that Modvat credit can be availed under Rule 57A for these items. You are advised to take corrective measure in this regard." 17. Although the above letter is Subsequent to the issue in question, it only reflects the view of the department relevant at that time when exemption under the above mentioned notification was available to material handling equipment. In these circumstances, a bona fide belief can be held to be entertained by the appellants about the availability of exemption under the notification and therefore, we hold that the fact of non-declaration of manufacture of material handling equipment by the appellant was neither conscious nor deliberate. It is also seen that bona fide belief of the appellants also stems from the fact that they were under the impression, based upon the decisions of the Tribunal and the Hon'ble Supreme Court, that the job workers engaged by them were the actual manufacturers of the goods in question. Under these circumstances, it cannot be said that the appellants knew that they were the manufacturers and still consciously and deliberately withheld information regarding manufacture of material handling equipment from the department. The extended period of limitation is therefore held to be not available to the department and therefore, the entire demand is barred by limitation. This issue is therefore, answered in the affirmative.
18. Issue No. IV: Section 11AB of the Central Excise Act, 1944 provides for levy of interest equal to the duty amount in cases where the duty became payable on clearances effected after this section was introduced in the Statute and such duty has not been paid. Section 11AB(2) states that the provisions of Sub-section (i) of Section 11AB shall not apply to cases where the duty become payable before 28-9-1986. The expression 'duty become payable' is significant. Under the Central Excise law, duty on manufactured goods becomes payable at the time or removal of goods and this is the scheme of the various provisions of the Rules such as Rules 9,49,173F, 173G, etc. Further, Section 11A refers to duty short paid, not paid etc. from which it is clear that is only when the duty is otherwise payable at an earlier point of time but was not paid that proceedings under Section 11A for recovering such unpaid duty (which was otherwise payable) are initiated. It is settled law that the liability to tax is by virtue of a charging section and the tax becomes payable by virtue of the charging section. Assessment is only a method of calculation of the tax which is to be paid and it cannot pertake of the nature of levy under the charging section. It only particularises the amount payable.
19. In the case of Neptune Assurance Company Ltd. v. LIC of India [AIR (1963) SC 900], 'the Apex Court was dealing with the question of entitlement of the appellants to refunds under the provisions of the Income Tax Act, 1922 which was resisted by the respondent Corporation created under the Life Insurance Corporation Act, 1956. In para 8 of the judgment, the liability to be charged to tax, if any, exists all along. The amount of the liability depends upon the Finance Act of the year concerned.' The Court further held that 'the assessment to income-tax only particularises the amounts; it did not create the right for the right came into existence as soon as according to the relative Finance Act, it became ascertainable that the tax deducted at source or treated as paid on its behalf had exceeded the tax payable'.
20. In Keshoram Industries v. Commissioner of Wealth-tax, Calcutta reported in [AIR 1966 SC 1370], the Apex Court held that 'liability to pay income-tax is a present liability though it becomes payable after it is quantified in accordance with the ascertainable data. There is a perfected debt at any rate on the last day of the accounting year and not a contingent liability. The rate is always easily ascertainable. If the Finance Act is passed, it is the rate fixed by that Act; if the Finance Act has not yet been passed, it is rate proposed in the Finance Bill pending before Parliament or the rate in force in the preceding year, whichever is more favourable to the assessee'. The Court followed the judgment of the Privy Council in the case of Wallace Brothers and Co. Ltd. v. Commissioner of Income-tax, Bombay reported in [(1948) 16 ITR 240] and its own judgment in the case of Chatturam Horalram Ltd. v.Commissioner of Income-tax, Bihar [(1955) 27 ITR 709] in which the principle laid down was that liability to pay tax arises under the Income-tax Act although its quantification depended upon the passing of the Finance Act (paras 30 to 32).
21. There is a clear cut distinction maintained between the expressions 'duty become payable' and 'date of determination'. The date of determination is as provided in Section 11A(2). Wherever the legislature wanted to refer example, Section 11A(2), Section 11AA(1).
Even Section 11AB(1) maintains the above distinction. Therefore, when Section 11AB(2) uses the expression 'duty become payable', it is used in contra distinction to 'date of determination, under Section 11A(2).
Interest is a Substantive liability and it is settled principle of construction of fiscal Statutes, particularly those provisions relating to creation of levy, that they should be treated strictly and retrospective operation should not be attributed to the provisions for levy of interest, unless warranted by the expressed language of the section. (See the judgment of the Hon'ble Supreme Court in the case of J.K. Synthetics Ltd. v. Commercial Tax-Officer [(1974) 94 STC 422] in which it has been held that 'when a statute levies a tax, it does so by inserting a charging section by which a liability is created or fixed and then proceeds to proivde the machinery to make the liability effective. It therefore, provides the machinery for the assessment of the liability already fixed by the charging section and then provides the mode for the recovery and collection of the tax...ordinarily a charging section which fixes the liability is strictly construed..." "The Provision by which the authority is empowered to levy and collect interest, even if construed as forming part of the machinery provisions, is substantive law for the simple reason that in the absence of contract or usage, interest can be levied under law and it cannot be recovered by way of damages for wrongful detention of the amount".
22. We therefore, hold that the appellants are not liable to pay interest as the provisions of Section 11AB, are not applicable in the present case. This issue is therefore, answered in the negative.
23. Issue No. V : The Adjudicating authority has imposed a penalty of Rs. 26,59,620/- (equivalent to the duty demand) under Rule 173Q of the Rules read with Section 11 AC of the Act. The Section inter alia provides that where any duty of excise has not been levied or paid or has been short-levied or short-paid or erroneously refunded by reason of fraud, collusion of any wilful mis-statement or suppression of facts, or contravention of any of the provisions of the Act or the Rules made thereunder with intent to evade payment of duty, the person who is liable to pay duty as determined under Sub-section (2) of Section 11 A, shall also be liable to pay penalty equal to the duty so determined. The present case relates to the period between May, 1989 and March, 1992 when Section 11 AC was not on the Statute book. It came into force only on 28-9-1996 i.e. before the date of adjudication order. It is the contention of the appellants that Section 11 AC cannot be applied retrospectively in respect of demands raised for the period prior to 28-9-1996. We find that the Central Board of Excise & Customs has issued Circular No. 354/118/96-TRU, dated 6-1-1997 clarifying that in respect of show cause notice issued prior to 28-9- 1996, penalty cannot be imposed under Section 11 AC of the Central Excise Act, 1944.
The relevant extract from the circular (which is binding on the Revenue authorities) is reproduced below : [Copy of letter F. No.354/118/96-TRU, dated 6th January, 1997 from the Director (TRU), Ministry of Finance, Department of Revenue, Central Board of Excise & Customs addressed to all Commissioners of Central Excise/All Commissioners of Customs].
"I am directed to refer to the provisions of Section 11 AC of the Central Excise Act, 1962 and to say that information have been received from some Commissioners of Central Excise whether Section 11AC would be applicable even in those cases where show cause notices had been issued prior to the date of enactment of Finance (No. 2) Bill, 1996, on which date Section 11AC came into force, or it would apply only to cases where the show cause notices have been issued after that date.
The matter has been examined. It is observed that Section 11 AC provides for imposition of penalty equal to the amount of duty evaded in the cases mentioned therein. The amount of mandatory penalty mentioned in Section 11 AC is less than the amount of penalty which may be imposed under Rule 173Q of the Central Excise Rules, 1944. This gives rise to the impression that Section 11 AC can also be applied to cases pending adjudication as on the date of enactment of Finance (No. 2) Bill, 1996. However, there is one more aspect of Section 11 AC. The section has the effect of imposition of a mandatory penalty which is equal to the amount of duty evaded and there is no discretion to the adjudicating authority to impose penalty less than or more than the amount of duty evaded. It is obligatory upon him to impose the mandatory penalty, once the adjudicating authority comes to the conclusion that the duty has been evaded and he determines the amount of duty so evaded. These powers of imposition of mandatory penalty can be said to have been provided to the adjudicating authority only w.e.f. the date of enactment of Finance (No. 2) Bill, 1996. The Board is therefore, of the view that the provisions of Section 11AC shall not apply to cases pending adjudication on the date of enactment of Finance (No. 2) Bill, 1996 and shall apply only to such cases where show cause notices have been or are issued on or after this case." Further we find that the Hon'ble Supreme Court in the case of Brijmohan v. Commissioner of Income-tax [1979 (120) ITR 1] has held that 'in case of a penalty however, we must remember that a penalty is imposed on account of the commission of a wrongful act clearly it is the law operating on the date on which the wrongful act was committed which determined the penalty. Where penalty is imposed for concealment of particulars of income, it is the law prevailing on the date when the act of concealment takes place which is relevant.' 24. In view of the above, we hold that the provisions of Section 11AC are not attracted in the present case and the imposition of penalty equivalent to. the duty amount cannot be sustained and is accordingly set aside.
Penalty under Rule 173Q also cannot be sustained in view of the fact that the demand has been set aside on the ground of limitation, applying the ratio of the judgment of the Apex Court in the case of Collector of Central Excise v. H.M.M. Limited reported in [1995 (76) E.L.T. 497 (S.C.)] wherein it has been held that the question of penalty will arise only if the department is able to sustain its demand which has been successfully challenged on the ground of limitation. The above judgment has been followed by the Tribunal in the case of Rajshi Foam Therm & Pack v. Collector of Central Excise, Allahabad reported in [1997 (20) RLT161].
26. With respect to ld. Member (J), I am writing separate order as under: 2. I agree that the impugned goods are excluded from the scope and ambit of Notification 217/86 for the reasons mentioned the ld. Member (J).
2.2 I also agree with ld. Member (J) that terms of various work orders clearly spell out a Master-servant relationship between the appellants and the fabricators. The three fabricators, therefore, have to be held hired labour of the appellant and not independent manufactures. The appellants in this case are the manufacturers of the, impugned goods.
2.3 I also agree for the detailed reasons given by ld. Member (J) that considering the phraseology used in Section 11AB(2) appellants are not liable to pay interest.
2.4 Considering that penalty is imposed on account of commission of a wrongful act and it is the law operating on the date on which wrongful act was made which would determine penalty, I also agree that Section 11 AC directing the mandatory penalty would not apply.
27. I, however, with respect to ld. Member (J), do not agree in regard to limitation, and imposition of penalty under Rule 173Q. Considering the terms of work orders, I find appellants have not succeeded in proving the ingredients of a bona fide belief to entitle them to the benefit of limitation. The terms of the work order as set out from pages 5 to 8 of the Order of Commissioner clearly make out that there could be no ground for entertaining any bona fide belief that the workers were not hired and the appellants were not manufacturers of the impugned goods. It is not that the appellants were not exposed to Excise Law. In fact, they have been dealing with excise law for years together and it would have been clear to them that the terms of work order clearly spell out a Master-servant relationship which made them the manufacturers.
28. I, therefore, hold that the demand is sustainable. While I agree that mandatory penalty as provided in Section 11 AC is not attracted, I hold that penalty under Rule 173Q would be attracted. Considering the facts and circumstances of the case, I am of the view that penalty of Rs. 5,00,000/- (Rupees Five lakhs only) would meet ends of justice. I accordingly uphold order of Commissioner confirming duty demand of Rs. 26,59,620/- but reduce penalty to Rs. 5,00,000/- (Rupees Five lakhs only).
The following difference of opinion is framed for reference by the Hon'ble President to a Third Member - Whether the entire demand is barred by limitation and the penalty in terms of Rule 173Q is required to be set aside as proposed by learned Member (Judicial) The extended period of limitation is applicable and the duty demand is sustainable along with reduced penalty of Rs. 5 lakhs, as proposed by learned Member (Technical).