1. By the impugned Order-in-Original, Commissioner of Central Excise, Indore confirmed a duty demand of Rs. 1,10,40,613/- against the appellants apart from imposing a penalty of Rs. 10 lakhs on them. The appellants have filed this appeal and have sought the setting aside of the said order.
2. Appellants are engaged in the manufacture of "Ariel Microsystem" brand Detergent Powder (hereinafter referred to as "AMS") falling under Chapter 34 of the Schedule to the Central Excise Tariff Act, 1985 at their factory situated at Mandideep, Dist. Raisen (M.P) within the jurisdiction of the Commissioner of Central Excise, Indore. The Department alleged that during the period December, 92 to December, 93, the appellants had removed AMS in bulk packing of 25 Kgs from their factory at Mandideep for packing them further in sachets of 20 gms. and 30 gms. to the premises of M/s. Industrial Enterprises (Detergents), Kanpur ("IED" for short) and the duty paid by the appellants on the 25 Kg bulk packing on the basis of price declared on 25 Kg bulk packets from Mandideep on the basis of cost thereof was not the correct duty leviable on the goods and the appropriate duty to be levied on the goods was the duty on AMS in the condition in which it emerged after its packing by IED at Kanpur on the price of AMS of 20 gms. and 30 gms.
sachets. The Show Cause Notice (SCN) dated 10-6-94 alleged that IED, Kanpur did not have a separate identity or existence other than that of an 'extended arm or facility' of the appellants since IED, Kanpur which was set up by the appellants in 1990 was provided with the plant and machinery for the manufacture of AMS and for packing of AMS by the appellants themselves and the appellants had also met the expenses incurred by IED in connection with erection and installation of plant, machinery, fabrication, etc. The machines which were supplied by the appellants free of cost to IED remained with the appellants and no cost of utilisation of the machineries and plant by IED had been recovered from the IED by the appellants. Other expenses were also met by the appellants in terms of their agreement. In terms of the agreement between IED and the appellants, the appellants were required to pay a fixed amount to IED for the goods IED manufactured or packed for the appellants irrespective of the quantity manufactured or packed. The SCN also noted that though 25 Kg bulk packs were removed from the Mandideep factory to IED, Kanpur, the intention was only of getting it repacked in 20 gms. and 30 gms. sachets by IED at Kanpur. There was no sale of the 25 Kg bulk pack at the factory gate and only the cost of 25 Kg bulk pack was declared for payment of Central Excise duty at the time of removal from Mandideep factory. The Department's allegation in the SCN was that the appellants had suppressed the correct price of AMS in the condition in which it was removed after packing in 20 gms. and 30 gms.
sachets from IED at Kanpur, on which they were required to discharge Central Excise duty. According to the SCN, since IED was only an 'extended arm' of the appellants and IED had packed the goods in 20 gms. and 30 gms. sachets for the appellants, the appellants were required to pay duty on the assessable value of 20 gms. and 30 gms.
sachets supplied by IED to the appellants' depots for further sale of the product. Based on the price of 20 gms. and 30 gms. sachets, a duty demand of Rs.1,10,40,613/- was raised and it was alleged that since the said duty had been evaded the extended period under Section 11A (1) proviso of the Central Excise Act was fully justified. On adjudication, the impugned order was passed.
3. We have heard Shri A. Hidayatulla, Sr. Advocate along with Shri Vikram Nankani and Shri P.K. Ram, Advocates for the appellants and Shri Sanjeev Srivastava, ld. JDR for the Respondent.
4. Ld. Counsel raised three main contentions while arguing the Appeal.
The first related to the jurisdiction of the Commissioner, Indore to demand duty on the goods processed at Kanpur. The second objection was on limitation. It was contended that the SCN contained no allegation relating to the question of the valuation of 25 Kg bulk packs. The SCN had worked out the demand only on the basis of price of 25 gms. and 30 gms. sachets. Ld. Counsel in this connection drew attention to the fact that the value of bulk packs had been finally approved by the Commissioner, Indore as declared in the price list filed in Proforma VII for captive consumption and not for sale. This had also been supported by the Chartered Accountant's certificate. The third point raised related to the merits of the case and the claim of the Department that the appellants were liable to pay duty on the 20 gms.
and 30 gms. packs on the ground that IED is only an 'extended arm' of the appellants. It was argued on behalf of the appellants that during the period under dispute the only activity carried on by IED at Kanpur was repacking of bulk packs of 25 Kg into small sachets of 20 gms. and 30 gms. which activity was admittedly not 'manufacture1 within the meaning of Section 2(f) of the Central Excise Act, 1944 at the relevant time. No excise duty was therefore leviable on the 20 gms. and 30 gms.
sachets and accordingly the question whether IED was an arm or an extension of the appellants was irrelevant. Further, there was also no question of any suppression of information on the part of either the appellants or IED to justify the invoking of the proviso to Section 11A(1) of the Act.
6. Explaining the facts of the case in detail. ld. Counsel for the appellants submitted that the appellants who were intending to introduce AMS in India for the first time had initially entered into an arrangement with IED by an agreement dated 26-7-90 for producing and marketing the said product on a test basis and for that purpose, IED was provided with raw materials, packing materials and other equipments to carry out the processing of AMS. IED had also independently invested capital, manpower, land & buildings and deployed their own resources in terms of Agreement between the appellants and IED dated 26-7-90. The manufacture and clearances of AMS on an experimental basis started with IED at Kanpur in October, 1990 and continued up to April, 1991.
Subsequently, around April, 1991 the appellants' manufacturing facility at Mandideep became operational and the appellants started despatch of Coarse Detergent Agglomerate ("CDA" for short) which was an intermediate product, and despatch of the same to IED was for further processing by way of adding enzymes, optical brightness, perfumes etc.
at IED in Kanpur. For the clearance of CDA, appellants had filed Classification List as well as Price Lists which had been duly approved. Since the CDA was not sold to IED but was despatched for further manufacture of AMS on job work basis, appellants had filed Price List in respect of CDA in Proforma VII duly supported by a certificate from their Chartered Accountant certifying the cost of manufacture of the said AMS as provided for in Rule 6(b)(ii) of the Central Excise (Valuation) Rules, 1975. During the period November, 1991 to December, 1992, appellants had despatched CDA in bulk to IED for further manufacture of AMS and during the entire period between October, 1990 and December, 1992, IED was despatching AMS after packing, to the various depots of the appellants from where the goods were sold by the appellants. However, the situation had changed from January, 1993. From January 1993 after the appellants started AMS production in their Mandideep factory, the pattern changed. Certain quantity of AMS manufactured at appellants' factory at Mandideep were being cleared in 500 gms. glass jars and 200 gms. polypacks after packing from Mandideep itself after payment of duty. Certain further quantities of AMS manufactured at Mandideep were cleared by the appellants from Mandideep in 25 Kg bulk packs on payment of duty to IED for re-packing into 20 gms. and 30 gms. sachets. The packing of 20 gms.
and 30 gms. sachets was undertaken by IED, Kanpur on job work basis.
Before commencing the packing operations of the goods into 20 gms. and 30 gms. sachets, IED Kanpur had sought clarification from the Asst.
Collector, Kanpur on the question whether packing and re-packing of duty-paid AMS amounted to manufacture and the Asst. Collector had by letter dated 11-11-91 informed IED that no duty was leviable on repacking of duty-paid detergent powder. Thereafter IED by letter dated 26-11-92 had informed the Asst. Collector, Kanpur that they had entered into a contract with the appellants for re-packing of duty paid detergent powder from bulk packing into smaller packs and since re-packing did not amount to manufacture, IED was not liable to pay excise duty. Subsequently by letter dt. 5.3.93 IED had also informed the Department that they had stopped manufacturing operations and therefore, they were surrendering their L.4 Licence.
7. Ld Counsel contended that it was an admitted position in the present case that there was no sale by the appellants of the bulk packs to IED.The goods were used by IED on behalf of the appellants in the production of other articles. In such a case, the value has to be based on the cost of manufacture of the goods in accordance with the Rules 6(b)(ii) of the Valuation Rules. Ld. Counsel drew attention to the fact that during the relevant period i.e., December, 1990 to December 1992, the activity of repacking of detergent powder did not amount to manufacture and it became "deemed manufacture" only with the introduction of Chapter Note 6 to Chapter 34 in terms of Finance Bill, 1994. It was submitted that the terms of the agreements dated 26-7-90 between appellants and IED related to the period prior to the commencement of production of AMS by themselves at their Mandideep factory. Appellants had started production of AMS at Mandideep around April 1991. The demand of duty had been made for the period December 1990 to December 1992. The terms of the agreement dated 26-7-90 was totally irrelevant for the period after April 1991. During this period IED had stopped any activity in relation to production of AMS and it was engaged only in the activity of packing of 25 Kg bulk packs of AMS into 20 gms. and 30 gms. sachets. Since the terms and conditions of the agreement dated 26-7-90 relating to supply of plant, Machinery etc. did not apply to the period under dispute reliance placed on the terms of the said agreement by the Department was totally misplaced. During the relevant period IED was an independent entity and the stand taken by the Department that IED was only an 'extended arm' of the appellants was totally incorrect. Appellants and IED were two independent and separate entities and their dealings were on principal to principal basis. There was therefore no legal basis for treating IED as an 'extended arm' of the appellants and to allege that the appellants were required to pay duty on the assessable value of 20 gms. and 30 gms.
sachets of AMS supplied by IED to the depots of the appellants. The duty demand on that basis was therefore not maintainable. It was also contended that since the activity of packing was carried out at Kanpur, only the Commissioner, Kanpur had jurisdiction to levy, assess or demand excise duty thereon and the SCN issued by Commissioner of Central Excise, Indore was not competent. In view of the submissions made, ld. Counsel prayed for allowing the appeal and for setting aside the impugned order.
8. Ld. JDR, Shri S. Srivastava submitted as under: There was no dispute on the facts of the case viz., that the appellants had cleared detergent powder in bulk of 25 Kg packs from their factory at Mandideep for repacking into smaller sachets by IED at Kanpur. However, the smaller sachets were also sold by the appellants themselves. There was no change of ownership of the goods at any time and it remained with the appellants as there was no sale when the goods were transferred to Kanpur from Mandideep. The appellants' contention that the repacking done by IED at Kanpur was on job work basis is without merit. IED Kanpur was in fact only an 'extended arm' of the appellants as was evident from the factual position appearing from the records as well as from the statements given by the Officers of the appellant firm and IED to the effect that the plant and machinery located at Kanpur and operated by IED remained the property of the appellant and that IED did not reimburse any amount for utilisation of the plant and machinery.
Further, the manufacture was done under the quality control supervision of the appellants and as per agreement between the appellants and IED appellants were to pay a fixed amount to IED for the services rendered by them on monthly basis. Even during the period when there was no manufacturing activity by IED these amounts continued to be paid. This clearly showed that the amounts paid to IED were not job work charges but payments made to IED to meet expenditure incurred on their establishment such as labour, land etc. at Kanpur. Extra expenditure incurred by IED was also paid by the appellants. Even medical expenses of employees of IED were borne by the appellants which were ascertainable from the debit notes raised on the IED by the appellants.
This showed that the employees said to be engaged by IED were in fact employed and were working for the appellants. It was also noted from the record that when the appellants first started their unit at Mandideep they had shifted part of the machinery from IED Kanpur to Mandideep from where Coarse Detergent Agglomerate (CAD) was being manufactured. Subsequently more machines were shifted to Mandideep for manufacture of AMS. There was therefore enough material to show that IED was nothing but an extended arm of the appellants and not a separate manufacturer doing job work for the appellants. On the question of valuation also, ld. JDR reiterated the findings of the Commissioner and submitted that the appellants had deliberately chosen to under-value the detergent powder cleared from Mandideep. The appellants had declared the price of detergent removed from Mandideep at the unit price of one Kg or 500 gms. as price of the goods sold to independent buyers at factory gate. At the time of filing Price List for the bulk quantity they had chosen not to disclose the fact that the same was being cleared for repacking into smaller packages of 20 gms.
and 30 gms. The proforma in which the Price List was filed provides for disclosure of information about the reasons why normal price is not ascertainable under Section 4 or the Valuation Rules. The appellants had simply indicated in the relevant column "not applicable". The non-disclosure of the fact that no sale was involved in the clearance of bulk packages from Mandideep and it was intended for further repacking in smaller sachets of 20 or 30 gms. at Kanpur was not disclosed deliberately. Withholding of this information was with the intention of under-valuation of the goods for evading payment of duty.
Had this information been given at the time of filing the Price List, the Department would have been able to raise objection to the method of valuation adopted by the appellants. Ld. JDR submitted that the contention of the appellants that the Asst. Commissioner, Kanpur had clarified that repacking of detergent powder by IED at Kanpur would not amount to manufacture amounted to knowledge on the part of the Department cannot be accepted. First of all, the appellants had not disclosed full facts to the Asst. Commissioner at Kanpur. Secondly the said information was suppressed from the proper Officer at Bhopal within whose jurisdiction the goods were manufactured in the first phase. The valuation arrived at by the assessing authorities at Indore was on the basis of insufficient information and on the basis of suppressed information about the goods being sent for repacking in smaller sachets at Kanpur. Therefore, the earlier valuation having been made on a wrong basis, re-determination of duty payable on the goods worked out on the basis of depot price of the smaller packs of 20 and 30 gms. subject to applicable deductions such as transportation charges was fully justified and the demand of duty made in the SCN invoking proviso to Section 11A (1) was fully justified. As regards the question of jurisdiction of the Commissioner of Central Excise, Indore to decide the issue, ld. JDR submitted that the demand of duty raised, in the SCN was not on the repacking of the detergent but on the basis of correct determination of value of the goods cleared in bulk from Mandideep which was within the jurisdiction of the Commissioner of Central Excise, Indore.
9. We have heard the rival submissions and have perused the case law.
As regards the question of jurisdiction, the main contention of the appellants is that since the repacking of the goods into smaller sachets had taken place in Kanpur, the proper Officer who had jurisdiction to decide the question relating thereto was the Commissioner, Kanpur and the adjudication order passed by the Commissioner, Indore was without jurisdiction and without the authority of law. Appellants had relied on the Tribunal's decision in Owens Bilt Ltd. v. CCE, Pune 1998 (101) E.L.T. 642 (T) in which it was held that the Commissioner at Pune had no jurisdiction to direct reversal of credit of duty paid on certain machinery renovated and reconditioned by a job worker in Bombay. The contention of the assessee in that case was that since the assessment in question was with regard to the duty paid by the job worker carrying out the renovation, reconditioning within the jurisdiction of the Bombay Commissioner, no other Commissioner had jurisdiction to sit in judgment over the assessment made by the Asst.
Commissioner in Bombay. This was accepted by the Tribunal. The Tribunal observed that the process undertaken by the job worker in Bombay amounted to manufacture and since the same machine could not be manufactured twice over, the goods had become liable to duty and assessment made by the proper jurisdictional Officer could be set aside only by a competent superior authority having jurisdiction over the assessing authority and not by another authority outside his jurisdiction. Ld. Counsel had also relied on the decision in the case of Engee Industrial Services (P) Ltd. v. C.C. 1996 (87) E.L.T. 152 (T) in which the Tribunal had held that the Commissioner, Bombay could not exercise the power of issuing notice of adjudication in a matter (or grant extension of period for issue of SCN) in respect of goods imported at Mangalore Port but seized at a place falling within the Jurisdiction of the Bombay Commissioner, since Section 47 of the Customs Act conferred jurisdiction for issuing SCN and for passing the order of adjudication only on the competent Officer having territorial jurisdiction over the place of import/clearance. The Tribunal had however upheld the Jurisdiction of the Collector of Customs, Bombay to decide on the question of clandestine removal of the goods.
10. We find that reliance placed by the appellants on the aforesaid decisions regarding jurisdiction do not advance their case inasmuch as the question to be decided in the instant case is different from those cases inasmuch as the instant case relates to valuation of goods initially cleared from the appellants' factory falling within the jurisdiction of the Commissioner, Indore and not in relation to a job work or importation of goods. It is true that the Department has not questioned the clarification given by the Asst. Commissioner, Kanpur on the question whether repacking of the goods in smaller sachets amounted to manufacture or not. This does not however take away the jurisdiction of the Commissioner, Bhopal to issue notice or adjudicate it in a case where the dispute is about under-valuation of the goods cleared from Man-dideep on the ground of deliberate suppression of information in the price list. The Tribunal's judgment in Owens Bilt Ltd. (supra) primarily dealt with the aspect of whether the renovation and re-conditioning carried out amounted to manufacture. The second decision relied on by the appellants, namely, Engee Industrial Services (P) Ltd. related to the exercises of jurisdiction by another Commissioner over clearance of imports which had taken place at Mangalore Port. Since in that case the power nought to be exercised by the Commissioner, Bombay related to the import of goods which took place in Mangalore Port, it was held that invoking of the extended period of time for issuing notice by the Commissioner, Bombay was not sustainable. In the facts of the present case, the question relates to proper valuation of detergents manufactured within the jurisdiction of the Commissioner, Indore and the fact that the said goods were re-packed subsequently in smaller sachets at Kanpur does not bar the exercise of the jurisdiction by the Commissioner, Indore when the manufacturing activity had taken place within his jurisdiction.
11. As regards the question of valuation, it is evident from the declaration filed by the appellants that they had not disclosed to the Asst. Commissioner, Indore that the bulk clearance of the goods from their factory at Man-dideep was a stock transfer of the goods and there was no transfer of ownership. It is significant to note that in the proforma filed by the appellants they had indicated "not applicable" instead of giving reasons why normal price was not ascertainable under Section 4 of the Valuation Rules (sic). We are therefore in agreement with the observations of the Commissioner that the appellants had deliberately suppressed the factual position. In these facts, we are satisfied that the extended period for issuing notice under proviso to Section 11A(1) has been correctly invoked. In view of the factual position as emerging from the above discussion it is not necessary for us to go into the question whether IED was an 'extended arm' of the appellants or whether they were a job worker. In any event, if IED were a job worker and they were entitled to benefit under Notfn. No. 214/86 the procedure thereunder should have been shown to have been satisfied.
12. As a result, we are of the view that the impugned order does not call for any interference. The duty demand and penalty adjudged in terms of the impugned order is accordingly confirmed and the appeal dismissed.