Judgment:
(a) The appellant is engaged, inter alia, in the manufacture of cut-tobacco and cigarettes falling under Chapter 24 of the Schedule to the Central Excise Tariff Act and also gets cigarettes manufactured on job work basis by various smaller cigarette manufacturers including M/s. Hyderabad Deccan Cigarette Factory Ltd., (HDCF) and M/s. Venus Tobacco (VTC) out of the cut-tobacco manufactured by the appellant; (b) The Excise duty, on cut-tobacco was introduced in 1986 and in terms of Notification No. 356/86 dated 24.6.1986, cut-tobacco was subjected to a concessional rate of duty of 10 paise per kilogram.
In the budget of 1992-93, the Tariff Rate of 225% ad valorem was introduced.
(c) The appellant buys unmanufactured leaf tobacco from outside sources, and despatches the same to the company's cigarette factory in Azamabad, Hyderabad. At the cigarette factory, the unmanufactured tobacco is processed into cut tobacco after blending and cutting at the Primary Manufacturing Department.
(d) This cut-tobacco is then issued to the cut tobacco stores where it is normally stored for about 24 hours. d.1 Cut-tobacco from the cut tobacco stores is then issued to the Cigarette Making Department for being made into cigarette sticks in the cigarette making machines. While the cigarettes are made in the cigarette making machines, certain quantity of cigarette sticks get wasted and are generated as waste cigarettes in the cigarette making machines.
Further, certain quantity of dust and sand from the cut-tobacco is also generated and collected in the Dust Recovery Units. Certain quantity of tobacco dust/sand gets mixed with the atmospheric air and is lost since it cannot be collected in the dust recovery units.
The cigarette making machine also filters and throws out shorts and winnowings, as waste. A certain quantity of waste is also collected as floor sweepings.
d.2 The quantity of such dust/sand, recovered on a daily basis along with floor sweepings are physically weighed and entered in the records. The winnowings generated in the Cigarette Making Department are physically weighed and returned to the Primary Manufacturing Department to be added to the cut-tobacco.
(e) The appellant is also required to declare to the Excise Department, the theoretical specifications, weight, for each of its brands of cigarettes. This has all along been done by means of letters by the appellants and acted upon by the Excise authorities.
The standard weight of tobacco in a cigarette is called "the specification weight" or "theoretical weight". This theoretical weight represents the quantity of tobacco that should ideally be in a cigarette stick, assuming certain standard processing and manufacturing parameters. Standards are, therefore, a reference point in order to consistently improve performance. The difference between the standard theoretical weight and the actual performance is known as "variance" which may be either on the higher side (i.e.
more tobacco is actually contained in the cigarettes as compared to the standard) or the lower side (i.e. less tobacco is actually contained in the cigarettes as compared to the standard.) (f) Based on the 'variance' of actual weight and theoretical weight and the formula submitted to the department, seven show cause notices were issued covering the period October 1993 to January, 2000 seeking to demand a sum of Rs. 3,24,51,134/- under Rule 9(2) of the Central Excise Rules read with proviso to Section 11A(1) from the appellant on the ground that a quantity of 4,22,365 kgs. of cut-tobacco had been cleared without payment of duty/at concessional rate of duty for captive consumption and in view of the formula the same did not appear to have been used in the manufacture of machine rolled cigarettes and had gone unaccounted during the said period.
The SCN also sought to impose an equivalent penalty under Section 11AC of the Central Excise Act and demanded interest at the rate of 20% per annum under Section 11AB of the Act.
(g) The Commissioner of Customs and Central Excise, Hyderabad-III Commissionerate, by her common order being Order-in-Original No. 18/2000 dated 31.22000 without even dealing with any of the evidences placed before her confirmed the demand in all the seven show cause notices under Rule 9(2) read with proviso to Section 11A(1) of the Act on cut-tobacco and imposed mandatory penalty for an equivalent amount under Section 11AC of the Central Excise Act read with Rule 173Q and ordered payment of interest at 24% per annum with effect from 1.11.1993 under Section 11AB. (a) that the entire case based on comparison and 'variance' is based on registers and formula declared by the appellant as per departmental manual instructions which were under constant scrutiny and verification of the departmental authorities. Therefore, the present SCN has been made out only a hypothetical basis of non-accountal and consequent assumed clandestine removal of cut-tobacco; (b) there was no requirement under the said Notifications viz.
355/86 & 121/94 to declare any specification of weight or that cigarettes should be made as per the declared formula only to entitle eligibility of the Notification claimed; (c) theoretical weight cannot be matching the actuals since, theoretical norms are claimed prior to production and in any case the cigarette production was under physical control; (d) departmental manual itself prescribes and admits that theoretical norms and the actuals will not conform and an elaborate procedure has been prescribed as to how the differences have to be resolved when observed. There is no material in the notice that this has been verified; (e) the department was having full knowledge of the various factors and issues in the present proceedings and there is no cause or case to allege suppression and invoke the proviso clause of Section 11A(1); (f) the findings of the adjudicator have travelled beyond the allegation in the show cause notice which was of concocting of records and not projecting the actual quantity used in the manufacture of cigarette while the findings arrived at is that the specifications themselves have been misdeclared and false. This, therefore, exhibits lack of application of mind; (g) they rely on the proceedings held by SCN dated 14.11.1978 which was decided by the Collector vide Adjudication Order No. 13/80 dated 2.6.1980 and the show cause notice culminated by Order No. 294/95(H) CE dated 28.5.1995 of Commissioner (Appeals), wherein the proceedings against them were dropped; (h) fifteen SCNs on the ground that there has been excess consumption of cut-tobacco wherein all the charges were dropped by Order-in-Original No. C.Ex. 66/97 dated 24.10.1997 have not been considered in the correct perspective by the adjudicator in the present case; (i) they rely upon the Supreme Court decision in the case of Cosmic Dyes and Chemicals 1984 (18) 6 (SC) wherein the Supreme Court has held follows: Now so far as fraud and collusion are concerned, it is evident that the requisite intent, i.e. intent to evade duty is built into these very words. So far as mis-statement or suppression of facts are concerned, they are clearly qualified by the word "wilful" preceding the words "mis-statement or suppression of facts" which means with intent to evade duty. The next set of words "contravention of any of the provisions of this Act or Rules" are again qualified by immediately following the words "with intent to evade payment of duty". It is, therefore, not correct to say that there can be a suppression of mis-statement of fact, which is not wilful and yet constitutes a permissible ground for the purpose of the proviso to Section 11A. Mis-statement of suppression of fact must be wilful.
and submitted that there is no suppression or mis-statement in the present case and overruled decision of the Tribunal relied upon by the Commissioner, would not be a correct law; (j) The findings of the Commissioner that there can be only positive variance is not correct decision which is arbitrary since variance can be positive or negative; (k) Ld. Commissioner has failed to fix and arrive at the tolerance levels due to various factors and has confirmed a demand on the basis of conjuctures. There was no material to prove allegation of clandestine removal and the allegation of concocting of the records is a serious allegation made without any basis and it cannot be upheld in a physical control system as held by the tribunal in the case of Leather Chemicals and Industries . They to submit that there cannot be any case to come to a conclusion of clandestine removal in this case; (l) the burden of proving the clandestine removal was clearly on the department as has been settled by various case-laws on the subject.
The results of the cross-examination have been ignored and submissions made have not been considered; (m) mandatory penalty under Section 11AC cannot be imposed retrospectively as has been held in many decisions and the major part of the demand in the present case was prior to the date of introductions of Section 11AC and 11AB. Therefore, the order is perverse.
3. We have heard Shri S. Sasidharan, ld. Senior Advocate alongwith Ms.
Mythili, ld. Advocate appeared for the appellants and Shri K.Veeraraghavan, Addl. Solicitor General of India appeared for Revenue.
After considering the same we find- (a) the Departmental Instructions on Cigarettes and Cigarette factory, vide paras 64 & 65 thereof, recognises the difference viz.
between theoretical output & actuals as an established feature in the cigarette rolling industry. These paras admit that no morms of permissible variation could be prescribed. It recognises the problem in para 64 in the following words and mandates a solution as: ...While fluctuations in the difference either from day to day or at uncertain interval must, unless they can be definitely traced to mechanical or any other ascertainable cause, be treated as indications of malpractice. For each factory, therefore, a normal working difference must be arrived at in the light of actuals....
...Officers must, therefore, ensure that the specifications declared in the formula of manufacture are strictly adhered to. Where checks in the machine room indicate lighter or smaller cigarettes having been produced from any operation as a whole, it would be reasonable to expect the actual number of cigarettes packed being substantially larger than the theoretical output....
These prescribed checks have not found to be relied to find fault with in this case. There is no material to indicate, if any physical verification of any declared formula from the weighed Tobacco Consumption to rolling of cigarettes, or in reverse, i.e. by obtaining the tobacco from rolled cigarettes, by slitting and weighing the same, was conducted. To a question from the Bench, it was submitted that the Anti-Evasion officers on the surprise visit, did not find any unaccounted stock/storcs/stash of cut-tobacco nor did they conduct any physical verification of the formula as prescribed by the manual to arrive at 'normal working difference' was done. When we find that the procedure established by law, vide the manual to determine the 'normal working difference' i.e.
variation between the theoretical and actuals has not been complied with, then we cannot find 'variance' being alleged to be abnormal.
These proceedings, therefore, initiated and continued are having no foundation.
(b) From the total quantity of cut-tobacco, over a period of the demand, which is found to have been removed without using the same in the manufacture of cigarettes as alleged it would appear that large quantities of unaccounted tobacco were being generated and or removed. Since the Anti-Evasion Officer have visited the factory on specific information and by surprise, they should have, therefore, found certain quantities of cut-tobacco which was to be clandestinely removed by the appellants, if there is an iota of fact, in the allegation that over a period of years, the appellants were systematically removing clandestinely large quantities of cut-tobacco. No such quantity was found. Since there is no finding of any variations found in the cut-tobacco stores and or stocks before us, and no seizure of cut-tobacco has been conducted on the date of this surprise visit, by the Anti-Evasion Officers, we cannot accept that cut-tobacco was being systematically removed clandestinely, by showing excess consumption in the cigarette rolling mills, as a regular feature over the past many years by the appellants. It was stressed before us by the Learned Counsel for the Revenue that cut-tobacco is under SRP system of control. However, we find that even though cut-tobacco was under the SRP system of control, cigarettes were under the physical control and the cigarettes manual prescribes a detailed accounting and duties for the officers at the cigarette factory for verification of receipt, consumption of the same by prescribing various registers and returns, including consumption of cut-tobacco waste etc. It is indeed surprising that officers have not found anything amiss in the normal course of their working over a period of many years.
(c) We find that appellant has submitted that such variations on account of diverse factors like humidity, nature of machine etc., were on record ever since 1978. The matter was being agitated by the department, from time to time e.g. vide a show cause notice dated 14.11.1978 covering the period 1.10.1977 to 30.9.1978; by another SCN for the period 1944 to February 1995 which culminated in Order-in-Appeal No. 294/95(H) CE dated 20.8.1995, Fifteen SCNs issued for the period 1.3.1989 to 15.3.1995 which were dropped by Order-in-Orig-inal No. C. Ex. 66/97 dated 24.10.1997. No material has been produced and arrived at in the present proceedings to substantiate the charge of 'concocting of records' as alleged in the SCN to be established. This xvould induce us to come to a conclusion, that there was no special revelation which xvas made/discovered as the result of the operation of Anti Evasion Officers, pursuant to which show cause notice invoking proviso to Section 11A(1) xvas issued in this case. We find that the fact of 'variance', xvas a well known fact to the Department all over the cigarette industry including the appellants' factory premises.
Therefore, in the facts of this case, xve do not find any reason in the SCN before us to invoke proviso clause to Section 11A(1). We, therefore, find that the show cause notice to be barred by limitation.
of various authorities which also persuade us to come to a conclusion that when the Anti-Evasion Officers have not fixed after arriving at any 'normal working difference' as per the procedure established by law, relying upon these case laws and on merits, we connot find any case for confirmation of demand as made out by ld. Commissioner. We find that ld. Commissioner has relied upon the statements of various persons but has not relied upon the cross examination of the deponent of these statements especially that of the General Manager (Operations), Mr. Mukherjee and Mr. M.M. Sami that it was practically impossible for even a handful cut-tobacco to go out of the factory unaccounted, which leave alone lorry loads of the quantity alleged to have been removed from the factory premises.
(e) Ld. Counsel for the Revenue during the hearing relied upon Board's instruction No. 67/88-CX.6, dated 9.6.1988. We do not understand how this instruction would help the case of Revenue. This instruction itself, provides that "no end-use certificate of cut-tobacco was necessary". Therefore, reading of this instruction and the instructions in para 64 of the cigarette manual, which are binding on the Department, we find that the variation between the theoretical formula and the actuals is an accepted all industry feature and only when it exceeds the normal difference, then the matter should cause suspicion and alarm in the minds of the officers. This normal difference should be established by physical experiment conducted by using weighed quantity of cut-tobacco and weighing the tobacco content therein. The non-establishment of this normal difference which was pleaded before the Commissioner which was fatal to the proceedings should have been dealt with by the Commissioner. Failure to do the same does not cause presumption to shift on the appellants, to discharge the onerous charge of clandestine removal. Since this has not been done, either by the investigator or the Commissioner, we find that the SCN only is based on assumptions and presumptions or at the most secondary evidence.
There is no direct evidence and or material to come to any conclusion regarding alleged clandestine removal. We cannot uphold such an order.
(f) When we find that a major portion of the demand is for the period before the introduction of mandatory penalty clause and also that a demand on assumptions and presumptions cannot be made, we cannot find any reason to sustain any penalty in the facts of this case.
4. In view of our findings above, the orders demanding duties and penalty as imposed are set aside and appeal allowed.