Judgment:
1. M/S. Mutual Industries Ltd. (hereinafter called as MIL) manufacture plastic articles using moulds. Moulds are excisable products. On a visit to the factory of M/s. MIL the officers noticed 172 moulds which were detained on the failure of M/s. MIL to show that duty had been paid thereupon. Later, the used and old moulds were released. Certain moulds which were shown to have been cleared on payment of duty were also released. 83 moulds totally valued at Rs. 1,64,75,610/- were seized. The factory of M/s. Shreeji Engineering Works (hereinafter called as SEW) was thereafter searched. These two firms had Shri Manoj K. Gandhi as the common partner. He deposed that the moulds were got made by M/s. MIL from M/s. SEW on job work basis where the raw materials were provided by M/s. MIL. Such job work was done under challans issued under Rule 47F(3) of the Rule, or under Notification No. 214/86. He deposed that moulds were manufactured in M/s. SEW, that they were tested and if found deficient, the deficiencies were corrected by M/s. SEW. In his several statements he made the admission that the moulds cleared from M/s. SEW were in a ready to use condition.
Similar deposition was made by Shri Pingle, Engineer of M/s. SEW as also Shri Maiya, Manager of M/s. MIL, M/s. MIL had a Tool Room Worker in MIL who certified that M/s. MIL was not equipped to manufacture moulds. Certain other workers of M/s. MIL also made similar statements.
The project manager of M/s. MIL, Shri S.M. Pawatkar, Shri J.M. Gandhi, CMD of M/s. MIL, however deposed that the final processing on the moulds on receipt from SEW was done in the factory of M/s. MIL. In his statement dated 16-12-1999 he made a specific claim that final machining was done at Kandivli, factory of M/s.MIL.
2. At the end of enquiry, the show cause notice was issued alleging that M/s. SEW had manufactured moulds and had cleared them without payment of duty. It was alleged that the statements made that M/s. MIL were the manufacturers in as much as the finaj finishing was done by them and that they had discharged the burden of duty either paying duty in the case of clearance outside factory, or under the benefit of the captive consumption Notification was a mis-statement. It was claimed that M/s. MIL and M/s. SEW had colluded in misrepresenting and suppressing the facts. The show cause notice dated 5-6-1998 alleged short levy amounting to Rs. 1,94,48,754/-, on the clearances made during the period 93-94 to 97-98. These figures included the duty leviable to the extent of Rs. 21,41,829/- on the seized goods. After the issue of the show cause notice and after hearing the concerned persons, the Commissioner passed orders confirming the duty, ordering appropriation of the interim deposits made by M/s. SEW. He ordered confiscation of the 83 moulds seized from M/s. MIL but allowed redemption on payment of fine in addition to the duty leviable. He imposed a penalty of Rs. 1,94,48,754/- on M/s. SEW. He also imposed a Rs. 50,000/- each on Shri J.M. Gandhi and Shri M.K. Gandhi and of Rs. 25,000/- on Shri Maiya. He confiscated the land, building etc. The present appeals are against this order.
3. We have heard Shri J.J. Bhatt Sr. Counsel along with Shri T.Guna-shekharan, Advocate for the assessees and Shri K.M. Patwari for the Revenue.
4. Shri J.J. Bhatt stated that the demand for the extended period was hit by limitation. He stated that the facts at all the time were in the knowledge of the department. He took us through the correspondence between the department and M/s. MIL concerning M/s. SEW from 11-8-1987 onwards. On 11-8-1987 the MIL made an application for transfer of material to M/s. SEW under either Rule 57Q(2) and/or Notification No.214/86-Cus. The various processes were described as Milling, Sparking, Grinding and Dye Shrinking repairing etc. The final product describe was moulds for Plastic falling under Heading 8480.00. The permission was granted under Rule 57F of the Rules. At a later stage that is on 2-4-1990, M/s. MIL wrote to the department doubting the availment of the procedure under Rule 57F(2) of the Central Excise Rules in the light of the fact that moulds were excluded from the purview of the Mod-vat scheme. After protracted correspondence. On 11-4-1991 the permission under Rule 57F(2) was withdrawn. Further correspondence ensued. The department vide letter dated 7-4-1992 suggested and permitted such movement in terms of Notification No. 214/86 formal application was thereafter made by M/s. MIL on 10-4-1992 giving same details as were earlier given. This application covered a number of job workers, apart from M/s. SEW. Thereafter M/s. MIL sent the raw materials to M/s. SEW and received back the moulds during the period 1992-96.
5. The claim of Shri Gandhi that the processing required to undertaken was disclosed. The final product that would emerge from such process was also declared. It is his claim that in terms of the Notification, M/s. SEW could clear, the imposed free of duty when such moulds were consumed captively in the factory of M/s. MIL. It is his case that where the goods were not so used and where the moulds were cleared to outsiders M/s. MIL have paid the duty. It is his alternate submission that in terms of the statement of Shri J.M. Gandhi final processing amounting to manufacture was done in the factory of M/s. MIL only. In that case for captive consumption the benefit of Notification No.220/86 was available and where the goods were cleared on'payment of duty, M/s. MIL were declaring such moulds in then classification lists filed from time to time.
6. Shri J.J. Bhatt also claimed that the very situation as is before us today, existed earlier also. On 28-7-1987 a notice was issued alleging that M/s. SEW were manufacturing excisable products and had omitted to pay duty during the period January 1987 to March 1987, as the benefit of Notification No. 175/86 was not available to them, in as much as they had exceeded the permissible limits during the previous year. The case was adjudicated by the Assistant Collector vide order dated 30-9-1991. He held that M/s. SEW were job workers for M/s. MIL. He held that after the goods were supplied by M/s. SEW, further work was required thereupon to make it a complete moulds. He therefore held that the notice did not sustain and dropped the proceedings. The department then filed an appeal before the Collector (Appeals). The Collector observed that the department had not established that the operations done by M/s. SEW resulted in dutiable products emerging. The Collector in dismissing the department's appeal observed as under :- "The appellant Assistant Collector had sufficient time and resources to verify the process being undertaken by the respondent's company in order to determine whether they amount to manufacture and also to examine the surrounding circumstances. Such a contracts, orders etc.
As a result of such examination the appellant Assistant Collector could have come to a definite findings supported by evidence regarding the nature of the operations and if these were contrary to what had been held in the order of the Assistant Collector could have effectively challenged it. None of this has been alone and there is no specific or even vague point in the appeal that the Assistant Collector's finding are factually unacceptable--------." It is Shri J.J. Bhatt submission that this order was accepted by the department and no further appeal was filed.
7. On these two developments he submits that the demand is hit by limitation. Shri K.M. Patwari adopts the reasoning (especially paragraph 11 of the adjudication order) and the various observations made by the Commissioner on the point of limitation.
8. We have carefully considere rival submissions and have also seen the relevant rules and Notification especially Notification No. 214/86.
During the entire correspondence from 11-8-1997 to 4-4-1992 which has been traced above, it would appear that the assessees were repeatedly seeking the advice of the department as to how the movement of the material was to be done between M/s. MIL and M/s. SEW. They were of the opinion that since moulds were falling in the exclusion category prescribed in Rule 57A, they may not be eligible for the procedure under Rule 57F. As an alternative, they had proposed the availment of Notification No. 219/86 . The department had earlier permitted them to follow the rule and at a later stage had extended the benefit of the Notification. We have examined the language of the Notification. It excludes from its purview items of machinery etc. Thus, on the face of the Notification the benefit thereof was not available for the final goods namely moulds. In addition we find that whereas the preamble to the notification speaks of dutiable goods to be manufactured by the job workers from the raw material sent by the primary manufacturer; in explanation (I) the expression "job work" has been so defined as to include any process even not amounting to manufacture. We will revert to this at a later stage.
9. In the applications for availing of the facility given by the department, M/s. MIL had listed certain processes were the job workers would undertake on the raw materials. The final goods which described as moulds. It would appear that M/s. SEW were the "Manufacturers" of the goods but the claim made by M/s. MIL is that the moulds were finally manufacture in the factory of M/s. MIL and not in M/s. SEW. A number of statements have been cited in the proceedings. Except for the statement of Shri J.M. Gandhi, who was the CMD of M/s. MIL, others namely the technical staff of both units as also working partner of M/s. SEW have deposed that the manufacturing activity was completed, in the premises of M/s. SEW. In Shri J.M. Gandhi statement the exact processing undertaken has not come out clearly. At one place it is claimed to final machining, and at another place it is the testing. It is stated that unless the customers accept the moulds they are not completed. In precision Engineering products, the actual stage of manufacture has often been contested. In some cases the Board of Excise and Customs had issued certain guidelines as to what stage certain commodities are to be taken as excisable. But these instructions are not exhaustive and in each case, the jurisdictional officer and the assessee would have to get together to determine the "RGl phase" of a particular product.
10. In this background the second significant disclosure is the earlier adjudication proceeding. In his order dated 30-9-1991, the Jurisdictional Assistant Collector had held that the process undertaken by M/s. SEW could not amount to process of manufacture. This observation was upheld by the Collector (Appeals) mainly on the lack of contest on part of the department. The Ld. Collector made a very significant observation in dismissing the department's (Appeal), we have extracted that part in our recountal of facts earlier. Infact it would appear that the Ld. Collector was giving a broad hint to the department as to what corrective action could be taken. Even if the department had lost the proceedings before the Collector, in iffect he had advised and authorised than to scrutinize the actual process of manufacture. Unfortunately the department did not pay any heed to this advise. That the said judgment has not been appealed against does not seem to be in doubt.
11. In the background of the extended correspondence as well as the certificate given by the department to M/s. SEW we find it difficult to accept the benefit of the Ld. Commissioner that M/s. SEW and M/s. MIL deliberately organised a plan to defraud the Government of its legitimate revenue. In these circumstances we find no hesitation in accepting the plea that the significant part of the demand was barred by limitation. The confirmation of demand on that ground does not sustain and the imposition of penalty, in so far as it relates to the larger period would also not sustain.
12. At this stage in dealing with the demand not hit by limitation, we are required to pronounce our finding as to the identity of the manufacture of the moulds. The various declarations filed under the claims for benefit of the notification had made the declarations that the final goods manufactured by M/s. SEW were "Moulds" falling under sub-heading 8480.00. This is as per the application dated 11-8-1989. A similar declaration was made later on 10-4-1992. This declaration was signed by the person incharge of M/s. MIL. We have earlier dwelt upon various statements made by the person incharge of M/s SEW as well as the technical personnel of both the units. Although we have earlier observed about the difficulty in accurately identifying the "RG1 Phase" the limited submission of Shri J.M. Gandhi that testing by the Customer was the final process does not appear to correct. Therefore at the stage without prejudice to our finding on limitation, we hold that the moulds were manufactured by M/s. SEW. We have taken cognizance of the fact that the duty was being paid by M/s. MIL but that was the requirement of the notification, even where the goods were without doubt manufactured by the job worker and where those goods were not captively consumed by the principal manufacturer.
13. Shri J.J. Bhatt assure us that even at the time of visit of the officer which led to the issue of show cause notice M/s. MIL and M/s.
SEW were operating under the benefit of the notification. In that case the duty to be paid by M/s. SEW would be determined upon the extent of compliance with the condition of this notification. In other words if the goods cleared by M/s. SEW, during this period are duly received by M/s. MIL and either used captively or are cleared on payment of duty, then there may not be any duty leviable. This being a question of fact will have to be determined by the Jurisdictional authority.
14. During the course of proceeding Shri J.J. Bhatt also referred to Annexure B-I to the show cause notice where the computation is done.
The sum total of the component parts comes to 110%. He submits that the computation is made in an arbitrary manner. This would have also to be gone into by the Jurisdictional Assistant Commissioner.
15. 83 moulds seized from premises of M/s. MIL in fully manufactured condition are confiscated. The cause for passing this order was the belief that they had been manufactured by M/s. SEW and had been cleared without payment of duty. We have exhaustively dealt with the situation above whereby under the benefit of notification, these goods could and had been cleared from M/s. SEW to M/s. MIL. In the light of our finding what would be required to be seen is whether the correct procedure had been followed for such transfer to release their liability to confiscation.
16. Since the bulk of demand has been found not sustainable, we find no reason to uphold the orders of confiscation of the plant and machinery, these orders are specifically set aside.
17. To sum up, accepting the plea of limitation, we set aside the demand confirmed for the extended period and also remit the penalties imposed upon all the five appellants. As regards the demands made within the normal period as also for dealing with the liability to confiscation of the seized goods, we remand the proceedings back to the Jurisdictional Commissioner. He shall permit the appellants to make due submissions and pass appropriate orders on the extent of confirmation of duty. At that time he shall be free to deliberate upon the fact whether penalties are required to be imposed on the five appellants afresh within the scope of the remand. In'view of the significant period that has been passed we expect the Ld. Commissioner to grant an early hearing.