Full Judgment
2. The appellant has been engaged in the manufacture of Iron Ore Pellets falling under Chapter Heading No. 2601.00 of Central Excise Tariff and has been clearing the Iron Ore Pellets on payment of duty to his own unit at Hazira to other industrial consumers and for export, for melting in blast furnaces or for direct reduction for manufacture of other iron and steel products like Coils etc.
3. The manufacturing process is that as soon as the final product (i.e.) Iron Ore Pellets emerge from the furnace, the pellets in red hot condition are passed over a conveyor system to the open stockyard which is situated far away; even before they reach the stockyard the weight of the 'dry pellets' is ascertained by an automatic weighing system by means of a weightometer fixed to the conveyor belt and the weight so ascertained is accurately recorded in the RG-1 account and duly accounted for. The pellets recorded at this stage do not contain any water/moisture. Immediately after the weight is recorded by the weightometer, water is sprinkled on the pellets to reduce dust and escape of other fine particulate into the atmosphere in compliance with the statutory requirements of the pollution control board and stored in the open are exposed to vagaries of atmosphere and during the monsoon are fully drenched and soaked in rainwater. Water required to be sprinkled while transferring the pellets to the ship over a conveyor and after loading into the ship to comply with the requirement of the Pollution Control Board.
4. (a) The appellant commenced trial production during November 1996 and initially all the dispatches made by him up to 11-8-97 were for consumption in own plant at Hazira. There was no sale involved and duty was paid adopting the assessable values as declared by us and fixed by the department.
(b) In August 1997, the appellant started receiving orders from other parties, domestic and foreign when they adopted the international practice that the weight for payment purposes should be recorded on dry basis and the moisture content should not be taken into account for determining the amounts to be paid. From the purchase orders received, it is clear that the prices quoted were on dry weight basis while the wet weight was recorded for shipment particulars and elaborate methods/ formulae were provided to re-determine and arrive at the 'dry weight'.
(c) The appellant cleared the following quantities from his factory either on payment of duty or for export under Bond on valid invoices issued under Rule 52A during the period November, 96 to September 98.
Qty. cleared for captive consump-tion at Hazira (No sale involved) (in MT) During the material period, a quantity of 39,87,952.300 MTs was cleared for captive consumption as against a clearance of 66,188.734 MTs to outside buyers and 9,34,716.760 MTs cleared for exports. The department has not raised any objection regarding the quantity/ value of goods cleared for export.
(d) While the practice of charging the price based on the dry weight was going on, the Commissioner of Central Excise, Visakhapatnam issued a Show Cause Notice dtd. 13-12-99 proposing demand of differential duty of an amount of Rs. 60,00,428/- being the duty payable on the excess quantity of Iron Ore Pellets alleged to have been cleared in the guise of moisture during the period 11-8-97 to 30-9-99. The notice alleged that excess weight of Iron Ore Pellets were cleared in the guise of moisture without payment of duty and the extended period of limitation under Section 11A(1) was also proposed to be invoked apart from imposition of mandatory penalty under Section 11AC and interest under Section 11AB and imposition of penalty for contravention of Rule 173Q.Contravention of Rules 9(1), 52A, 53, 173G, 173F and 226 were also alleged.
(e) The ld. Commissioner demanded duty for the period 11-8-97 to 26-2-2000 by way of a common adjudication order. He also invoked the extended period under proviso to Section 11A of Central Excise Act, 1944 and imposed a mandatory penalty equal to the amount of duty under Section 11AC of Central Excise Act, 1944 and also imposed a penalty of Rs. 15,00,000/-under Rule 173Q of Central Excise Rules, 1944 and demanded interest under Section 11AB of Central Excise Act, 1944.
(a) The entire case of Revenue has been built on the fact of the appellants having cleared the quantities with the moisture content and they had paid the port charges on the draft survey reports without claiming any deductions towards the said moisture content and also, the fact that the investigations conducted at Hazira where the goods were sent for captive consumption no draft survey of the vessels were conducted at that port and the quantities despatched as per the draft survey report at Visakhapatnam and shown on the bills of lading were considered as receipted quantity in the records of the appellants' plant at Hazira. This was considered to be evidence enough that no moisture content was deductable from the goods despatched. The Revenue's contention is that a sample survey also had reported that no moisture was deducted by other manufacturers in the trade supplying such pellets. The appellants herein had suppressed the facts of clearing the pellets in the guise of 'moisture' by adopting an unusual practice which was not followed by them earlier and also by the other manufacturers and thus the appellants have cleared certain quantities of pellets in the guise of moisture on which duty was payable and this was a wilful evasion of duty payment attracting the contraventions of the provisions of Rules 9(1), 52A, 53, 173G, 173F and 226 of the Central Excise Rules.
The Commissioner has come to a finding: - (i) The reasons advanced for non-deduction of 'moisture' prior to 11-8-97 when they shifted to duty payment on 'dry weight' were lacking conviction, inasmuch as the appellants, a major corporate entity would be not unaware of application of international norms prior to 11-8-97 when they themselves have paid duty on the weights with the 'moisture' content and no professionally managed company would pay extra duty on 'moisture' weight and the norms should remain constant, whether for trial production or otherwise. Even before 11-8-97 bulk of production at Visakhapatnam plant was meant for captive consumption at Hazira and other documentary evidence clearly established that prior to 11-8-97 quantity ascertained by weight was done without deduction of any 'moisture' content.
(ii) Chapter 26 of Central Excise Tariff Act, 1985 and a perusal of Heading 26.01 thereunder would indicate that it is only for manganese ores and concentrates falling under Ch. Heading 26.02 dry weight calculations are mentioned and not for Iron-ore pellets and concentrates. Therefore, dry weight calculations were not correct for this duty under consideration.
(iii) 'Moisture' is an integral part of any product and not separable and therefore deductions of percentages towards such content was not based on Central Excise Law and cannot sustain since Iron Ore pellets were nothing but reduced form of Iron Ore containing 60% Fe content and 40% is again inert and waste material.
When the assessee was paying CED on the weight of such inert material, there is no logic to resort to claim deduction of 1-2% towards 'moisture'.
(iv) The appellants have not cited any legal validity/case law to substantiate their claim.
(v) Payment of port charges on full draft survey report quantity without any deduction for any 'moisture' content corroborates that there was a substantive mis-declared quantity as declared in RG-1 account and what was actually shipped to Hazira.
(vi) Two plants belonging to the same corporate group would not be adopting two different and varying accounting standards and their plea on adherence to common standard international norms and practices following two different and contradictory accounting practices at different locations cannot be accepted.
(vii) The plant at Visakhapatnam records production in RG-1 Account on 'dry weight' basis whereas the plant at Hazira records the same product in RG-23A Part-I Account despatched from Visakhapatnam on 'wet weight' basis (gross). The 'moisture' content reduction is conveniently recorded for Visakhapatnam plant but for some strange reason it is not reflected in the Hazira plant records or other documents, which confirm the departmental allegation of excess clearance.
(viii) Sample survey conducted by the Department indicate that no 'moisture' was deducted by any other manufacturer in the trade supplying Iron Ore pellets including some other suppliers to their plant at Hazira and the appellants had failed to furnish evidence of dry weight basis supply.
(ix) At Hazira plant, the appellants were receiving pellets from Vikram Ispat, Raigad, Maharashtra and M/s. Mandovi Pellets Limited, Goa and copies of these invoices show there is no such practice of deduction of 'moisture'.
(b) the appellants have admitted that the Iron-Ore pellets emerged from the furnace in red hot condition and are passed over a conveyor system to the open stock yard situated far away. Even before they reach the stock yard, the weight of the cooled dry pellets is ascertained by an automatic weighing system fixed to the conveyor belt and the weight so ascertained is accurately recorded in RG-1 Account and duly accounted for. Revenue has not brought out anything on record in the impugned order or in the submissions made before us that this factual position is in any way impugned. When RG-1 Accounts are maintained of the 'dry weight' of pellets and that is not being questioned, then we find that no different weight can be reckoned especially 'moist weight' ascertained by draft survey methods to consider the quantity removed. The quantity removed in the 'moist' condition is unquestionably excess than the 'dry weight' quantity recorded in the RG-1. If these 'moist' quantities are considered as the quantities of pellets actually removed from the premises, then the RG-1 would definitely result into a negative balance of 'stock of ready goods produced in store'. Since each removal as per Rule 53 and 49 and 173G has to be accounted in the recorded production balance in the RG-1, being maintained. RG-1 is an essential and important account prescribed. It is intended to prevent clandestine removal of excisable goods without making an entry thereof. This record, provided under Rule 53 of the Central Excise Rules, is to be maintained daily. If the Commissioner had any reasons to consider, the wet 'moist' weight to be the actual quantities produced, then this account as being maintained on 'dry weight' basis should have been first questioned. The Commissioner has not questioned the same. No material has been brought before us to show that under this Rule 53, wet 'moist' pellets has been prescribed as fully manufactured goods. Goods which have not reached 'marketable stage' will not be excisable and therefore need not, however, be entered in the RG-1, merely because they confirm to the tariff description. It was therefore imperative for the Commissioner to have come to a positive conclusion as to when the goods have reached marketable stage. If they reach the marketable stage, only when they are 'moist and wet', then that should be the accounted weight in RG-1. Not only that, it was required to be determined as to what percentage of moisture content renders them marketable. In absence of the same, we cannot consider recovering duty on increased weight due to moistening of the dry pellets, as in this case, by spraying water on them when they are stacked and stored in the yards or are being removed from such yards after manufacture, to be loaded at Visakhapatnam port into ships. The appellants have submitted that this spraying of water was required to keep the Environment Pollution free, by reducing the escape of fine particles into the atmosphere. This was the statutory requirement of the Pollution Control Board. In the case of Delhi Cloth and General Mills Ltd. reported in 1978 (2) E.L.T. (J 121), the Hon'ble High Court has held "if the use and exchange of goods is regulated by law, unless the relevant roles are not played with, the product cannot become goods" and "the duty can be imposed only on 'goods' i.e. things which have economic significance i.e. value, utility and exchangeability." Therefore, if goods are required to meet any specific requirement of another lower Boiler test or Drugs Act then they are required to be entered into RG-1 only after such tests/standards activity/ process conducted as are required to be complied and met. In the present case there is no such finding. The requirement of spray of water appears to be a Transport Requirement and not that of fully manufactured product. Therefore, we cannot find anything amiss in the goods being accounted in the RG-1 on 'dry weight' basis and subsequent removals even though any moist condition being converted to dry weight basis to effect and pay duty thereon. Nothing amiss has been arrived at on this 'dry weight' accounting maintained.
(c) The pleading of the appellants is appreciated inasmuch as free moisture loss is passed on the certificate of analysis issued by an independent 'assesee/compere' fixed by the buyers. A perusal of various purchase orders placed on the appellant by national and international buyers, placed before us which are said to have been shown to the adjudicating authority, but not considered by him, they prescribed free moisture losses 2-4% with their increasing to 4-6% during monsoon season. These documents also show how the dry basis is to be arrived at the percentage of Fe content required along with other materials and also prescribed for relating the wet moist weight as per draft survey reports. There is force in the pleadings made before us that the moistening of the pellets is a requirement to meet the Pollution Control Board's requirements when these pellets are being transported either on a conveyor system to the port or thereafter loaded in the ships or transported by sea. There is no material placed to consider moistening to be incidental or ancillary to the manufacturing process. The appellants have shown standard publications like the Japanese Industrial Standard - JISM and International Standard - ISO 3087 which, clearly recognize the free moisture content and stipulate the method of determination thereof in a consignment of Iron Ore Pellets. The Commissioner appears to have ignored these standard publications in his enthusiasm to confirm the demand. Such an order cannot be upheld. The Commissioner's finding that the moisture theory was something invented by the appellant and is non-existent is required to be held as his imagination in view of the purchase orders and the publications presented before us.
(d) The Commissioner has referred in his order to manganese ore covered under Ch. Heading 2602.00 of the Central Excise Tariff to be only eligible for dry weight basis. The two entries 2601.00 and 2602.00 read as follows : - Manganese Ores and concentrates, including fer-ruginous manganese ores and concentrates with a manganese content of 20% or more, calculated on the dry weight A mere perusal of the same would indicate that the reasoning adopted by the Commissioner to restrict dry weight basis only to manganese ore concentrates is totally incorrect and irrelevant to the issues in the present case. A perusal of the HSN notes under chapter 26 thereof indicates that moistening of the Iron ore is not mentioned as one of the physical or physio-chemical operations permissible to retain the entity for classification under chapter 26.01. Infact the notes under Heading 26.01 read as under: - "The Heading also covers iron ores and concentrates with a manganese content of less than 20% calculated on the dry weight (the ores and concentrates being heated to a temperature of 105 to 110 C) (see Explanatory Note to heading 26.02). Depending upon their manganese content, these ores are known either as manganiferous iron ores or as ferruginous manganese ores.
The heading excludes finely ground magnetite and other finely ground iron ores for use as pigments (Chapter 32)." Therefore, the adjudicator's finding that wet or dry weights are not relevant for Iron ore and concentrates under 26.01 are not upheld by us.
(f) As regards Commissioner's finding that the appellant being a corporate entity run by professional management would not absorb huge losses by paying extra duties on moisture weights recorded due to adoption of wrong practice earlier to 11-8-97 when the appellants were paying duty on the wet basis weight. It is found, he has failed to observe that was not a pure commercial transaction entered; inasmuch as the removals were trial production removal to their other unit of Hazira from Visakhapatnam and whatever duties they would pay, Hazira plant would obtain the Modvat credit. Similarly, the non-recording of the dry weights at Hazira and recording of the wet basis practice at Hazira will not result in coming to a conclusion that excess goods have been delivered. The allegations of 75,000 MTs of goods having been cleared without payment of duty in the guise of moisture are the subject matter of these proceedings.
The proceedings nowhere allege that there was suppression of production to this great extent. To manufacture 75,000 MTs of Iron Ore pellets a large quantity of raw materials and other inputs would be required, there is no allegation to that effect. Therefore, alleging clandestine removal of 75,000 MTs without even a whisper as to how, the raw material was obtained and or the quantities manufactured, cannot be sustained. The pleading of Revenue neutrality and absence of any extra commercial consideration by the appellant, lead to the conclusion that the clandestine removal of 75,000 MTs could not have taken place in the manner as arrived at by the Commissioner.
(g) The Commissioner's reliance on the appellants having paid charges to the Port Trust on 'Wet basis' will not be proof enough to substantiate that the clandestine removal of goods has taken place.
The charges paid to Port Trust would be as per their tariff and on their specifications. This would be same for shipping charges. It has been already found in this case that 'moistening' the pellets was an essential requirement only for its transportation. Charges relating to transportation on actual weight cannot be a reason to levy duty on the 'dry pellets', which are exigible goods in this case. The Supreme Court in the case of J.K. Spinning and Weaving Mills Ltd. [1987 (32) E.L.T. 234 (S.C.)l while considering whether duty on yarn should be paid on sized yarn (i.e. yarn with starch etc. to render it fit to be transferred to beams and thereafter transport it for weaving of cloth) or unsized yarn, upheld the views of the High Court reported in Para 30 of the decision in 1983 (12) E.L.T. 239 (Delhi), wherein the Hon'ble High Court held as under : - "30 ..... The question before us is whether sized or unsized yarn would be liable for duty in an integrated process of manufacture.
Sizing is relevant to weaving and not to spinning. It is a process necessary for weaving cloth and not to spinning yarn. Therefore, reading the amended rule 49, the utilization of yarn in a continuous process of manufacture 'immediately' before such consumption or transaction would have reference to unsized yarn and not sized yarn.
The deemed 'issue out' or 'removal' for purposes of weaving would be 'issue out' or 'removal' of unsized yarn. Once this deemed removal takes place, the unsized yarn is first sized, the process being the first-process in the many processes, which ultimately, results in weaving being completed and cloth being fabricated." In the present case, substituting the words 'sized or unsized yarns' with the words 'moist or dry pellets' and considering the fact that 'moistening' is relevant only for transportation, and not for manufacture of the Iron ore pellets, in question, and applying the ratio of the above said decision, recovery of duty would be attracted, the moment the 'dry pellets' are shifted on the conveyor after spraying water on their onward journey to Hazira by sea for further manufacture of steel, no reason to demand duty on moisture content can therefore be arrived at.Geep Industrial Syndicate Ltd. v. Collector -1999 (114) E.L.T. 850 (Trib.) (ii) Commissioner v. Escort (JCB) Ltd. - 1999 (113) E.L.T. 711 (Trib.) (iii) Tigrania Metal & Steel Inds. v. Collector -1990 (45) E.L.T. 581 (Trib.) (iv) Gammon far Chems Ltd. v. Collector - 1994 (71) E.L.T. 59 (Trib.) (v) Electrical Mfg. Co. Pvt. Ltd. v. Collector -1989 (40) E.L.T. 472 (Trib.) (vi) United Cables v. Collector -1993 (68) E.L.T. 423 (Trib) = 1993 (22) ETR 366 (Trib.) (vii) Collector v. Patson Transformers Pvt. Ltd. - 1993 (68) E.L.T. 439 (Trib.) - 1993 (22) ETR 379 (Trib.) and submitted that the Show Cause Notice dtd. 13-12-1999 proposing demand of differential duty on the moisture content from 11-8-97 was barred by limitation. It is found that duty has been discharged in this case as submitted by the appellants, on the total amounts received from the buyers, on the dry weight of the goods cleared.
There is no allegation of any extra considerations or amounts to have been received. In fact the plea of Revenue neutrality for the goods sent to Hazira has been strongly urged. Therefore, we find prima facie a very strong case of bar of limitation under Section 11A, in favour of the appellant as far as Show Cause Notice dtd.
13-12-99 is concerned. The documentary evidences have been cited by the appellant in the form of the invoices showing the 'wet weight' and the 'dry weight' and that analysis will be done at the loading point; which indicate that the appellants have not suppressed the fact of dispatch of moist pellets. Therefore, the reasons advanced by the adjudicator on limitation are not upheld. In this view of the matter and the fact that no duty liability on the moisture content could be arrived at as per the findings herein above there is no case or cause for penalty under provisions of Section 11AC and/or 173Q or interest under Section 11AB as arrived at in the impugned order.