1. M/s Ralson Carbon Black Ltd. is a manufacturer of Carbon Black. They classify the carbon black produced by them under different grades - "Carbon Black - HAF N-330, FEF N -350, GPF N-360, GPF HS N-650 Off Grade, Floor Sweep" etc. The prices also vary according to the grade from Rs. 9000/- per metric tonne for "floor sweep" to Rs. 34,200/- for ISAF - HM N-220 as would be seen from the Table below : Since the goods were liable to duty on ad valorem basis they discharge their duty liabilities also on the basis of the sale price for the relevant grade.
2. The impugned order has held that the appellant was misclassifying regular grade goods as "Off Grade" - HAF N - 330 Grade and this has led to short-payment of duty in respect of that Grade. Consequently, duty demand of over Rs. 21 lakhs has been made against the appellants under proviso to Section 11A of the Central Excise Act, 1944. There is also confiscation of 9 tonnes of carbon black, demand for interest and imposition of penalties on the appellants officers. The present appeals challenge this order.
3. The main evidence supporting the finding in the impugned order is that a consignment of about 9 metric tonnes, despatched by the appellant to their consignment agent was examined at Hyderabad on 11-3-99 by Central Excise Officers. It was seen that even as the invoice described the consignment "Off Grade" package of the goods bore the label "HAF N - 330". This consignment was seized and has been confiscated under the impugned order. The Commissioner has also relied on the chemical examiner's report, statement of Hyderabad consignment agent, expert opinion etc. to support the finding that the appellant had under-valued the goods and removed them in the guise of cheap inferior grade goods and thereby evaded Central excise duty.
4. M/s. Ralson Carbon Black Ltd. contends the findings are entirely erroneous. At the outset, it is their submission that production of certain quantity of 'off grade' carbon black takes place in any factory on account of various factors and these goods have to be sold at much lower prices. The appellants have pointed out that production of such grade material is very small in their factory and that alone would show that the appellant's classification of grades was right. With regard to label HAF N-330 found during examination of off grade goods, it is their submission that packing material for HAF N-330 was used for packing "off grade" material. The goods, in fact, were "off grade".
Appellants have pointed out that the chemical examination of goods has borne this out. During the hearing of the case, the learned Counsel for the appellants pointed out that carbon black grade classification is based on ASTM Tables and a comparison of the chemical examination report of the goods under confiscation with ASTM Table clearly brought out that goods under seizure did not satisfy ASTM Standard. Learned Counsel also pointed out that the chemical examination report of the appellant's own laboratory in respect of the goods sold as HAF N-330 grade further showed that the goods sold under that grade by the appellants satisfy the ASTM standard, while the goods under confiscation did not satisfy the appellants own standard for HAF N-330.
It is the submission of the learned Counsel for the appellants that the use of packing material with different labels in the present case was not at all indicative of misclassification of grade with intent to evade payment of duty. Learned Counsel for the appellants also stressed that grade is very important for determining for what product a particular carbon black is suitable. Therefore, sale and purchase of carbon black takes place based on the grade.
5. The appellants have also pointed out that the adjudicating authority has clearly misunderstood the evidence on record. The impugned order has noted in para 5.2 as under : "Equally undeniable is the confessional statement tendered under Section 14 of Central Excise Act, 1944 by the consignee wherein Shri Ramakant Maheswari admitted receipt of 'HAF N330' grade carbon black".
During the hearing of the case, the learned Counsel referred to the statement dated 11-3-1999 of Shri Ramakant Maheswari, managing partner of the consignment Agency, wherein it was stated that they had not received higher grade carbon black as "Off Grade" and submitted that the finding of the Commissioner is clearly contrary to the evidence on record.
6. We have perused the records and have heard the learned SDR who highlighted the fact that goods with different label on the packing than their description in the corresponding invoice showed that goods were being misclassified.
7. The finding in the impugned order is that all the carbon black cleared by the appellant as 'off grade' during the period May, 1997 to March, 1999 had been misclassified and that the goods were in fact, HAF N-330, a higher grade, and loss of revenue has taken place. The principal evidence in this regard is the consignment of about 9 metric tonnes which was seized in Andhra Pradesh. Sample from this consignment was chemically examined. It is not in dispute that carbon black is produced in different grades and different grades are suitable raw material for different products. The prices also vary depending upon the grade. The grades are to be found in ASTM standard. A comparison of the ASTM standard for HAF N - 330 and the appellant's own chemical examination report in respect of HAF N-330 with the chemical examination report of the consignment at Hyderabad clearly brings out that the seized goods do not satisfy ASTM standard or the composition noticed for HAF N-330 in the appellant's own laboratory report, for example, iodine absorption No. in the case of consignment under seizure is 95.6 g/kg whereas the ASTM Table and the product test report of the appellant's own laboratory for HAF N-330 give iodine absorption No. 82 for HAF N-330. From this it is clear that the carbon black under seizure was not of HAF N-330 as indicated by the labels on the packages of the consignment. Therefore, the seized consignment cannot be the basis for holding that appellants were misclassifying carbon black "off grade" with intent to evade payment of duty, even while commercially transacting in it as higher grade.
8. The expert opinion in question is that of Dr. S.M. Chakravarty, Polym Consultants, New Delhi who has observed as under : "During the production, if the material is not up to the required specification of the buyer and the properties are of not that particular grade then this carbon black is generally made 'Off Grade' carbon black. Reason for Off-grade generation could not be many like higher "Fines Content/Grit Content', 'Hard Pelletes', High or Low 'DBF' & 'Iodine values etc. etc. In production off-grade are generated by power failure, high moisture content, mechanical break down, grade change over etc. etc.
For the production of carbon black different parameters like feeding quantity/flow of Carbon Black Feed Stock (CBFS), air flow, reactor temperature, salt spray etc. are to be controlled very strictly to achieve quality production. The quality of carbon black is checked during production for control. However, often due to variation in one of the parameter the quality level of carbon black under production changes and by the time this is detected certain quantity has already been produced. Such non-uniform and inconsistence product quantity of carbon black cannot be graded into a specified grade. Obviously then this quantity has to be made "off-grade".
Major organised rubber products manufacturing companies like Auto Tyre units have their own specification and will not accept any material which deviate their specification. Such companies will not accept any material which is not standard and passes through their Quality Control test. So, 'off-grade' material cannot be marketed to organised companies.
Off-grade carbon black, if used normally in the manufacture of rubber products, will obviously have effect on the processing characteristics and finished product. For example, if carbon black contain high grit or the pelletes have high hardness it will result in poor dispersion in the compound leading to problems like puncture in case of a tube or surface blisters problem for thin items like car channel strip etc. The product will be rejected.
Pneumatic Tyre is the most sophisticated rubber product and high performance in all respect are required to be guaranteed by the companies. Tyre is also associated with safety because any failure of tyre during movement of vehicle at high speed will have disastrous effect. Because of this tyre companies never use any 'off-grade' materials. Such material will influence negatively on the properties of rubber compound and vulcanizate like Tensile Strength. Elongation, Abrasion, Flex Fatigue, Heat Development etc.
etc. which are all important for the satisfactory performance of the finished product.
If carbon black high fines this will result in feeding problem in Banbury mixing and/or flying loss during mixing especially with open mill mixing. Due to this loss weighed quantity of carbon black will not got into the compound resulting in variation in properties of the vulcanizate.
If there are variation in structure and particle size (DBF value and Iodine value) it will have impact on the physical properties like abrasion resistance and heat development which are very critical for product like of auto tyre. Obviously no standard product manufacturer will accept 'Off-grade' carbon black for their production.
Thus the 'off-grade' material needs to be marketed in different area like to small local manufacturer of rubber products who produce non-critical items and with whom quality is not the deciding factor but they are concerned with price factor only.
Due to the above mentioned reasons carbon black manufacturer do offer some 'off-grade' materials at a discounted price depending on the nature of 'off-grade'. For example a so-called grade 'Sweep' is available in the market at about 35% of the original price. This is used for certain type of product by poor quality product manufacturer.
9. The above extract of the report of Dr. Chakravarty brings out that it is normal that certain portion of carbon black under production becomes off-grade and has to be sold at a lower price. What is normal should be so in respect of M/s. Ralson Carbon Black Ltd. also. The appellants have produced a statement showing the carbon black produced by them as for the year 1997-98 and 1998-99. According to this Table the position was under : It is not the Revenue's case that quantity or percentage of Floor Sweep (1.54%) or Off Grade (2,65%) is abnormally high in respect of the appellant manufacturer and it is so because the appellant has been misclassifying the goods for the purpose of evading Central excise duty. Thus, no abnormality has been brought out on this score also.
10. Statement of the consignment Agency is also against the charge of misclassification of goods by the appellants. On 11-3-1999, the Superintendent, Central Excise, Hyderabad recorded a statement from Shri Ramakant, Managing Director to Maheshwari Enterprises (Consignment Agent of the appellant), for whom the consignment under seizure had been despatched. The following questions and answers are relevant: "Q.7. Please see the invoice No. 1913 dated 3-3-1999 issued by M/s.
Ralson Carbon Black Ltd. in favour of your firm and also see what is the description in grade of the goods mentioned in the invoice? Ans. Yes, I have seen the invoice cited above and noted the description off grade and appended my dated signature on the same.
Q.8. Please see the goods loaded in the lorry bearing registration No. PB-23-1963 what is the grade of carbon black noted on the packages? Ans. Yes, I have seen the carbon black loaded in the cited lorry and noted that the grade of carbon black mentioned on the packages as HAF -N-330.
Q.9. What is the meaning of 'off grade' What is the difference between off grade and HAF-N-330? Ans. I do not know the technical differences between off grade and HAF-N-330 but HAF-N-330 is superior to off grade as HAF -N-330 is costlier to off grade.
Ans. The rate as seen from the invoice of HAF-N-330 is Rs. 29,800/- PMT and off grade is Rs. 11,000/- PMT. Q.11. Do you accept that you have received HAF-N-330 grade of carbon black actually under the guise of off grade vide invoice No. 1913 dated 3-3-1999? Q.12. How often you receive the carbon black of higher grade under the guise of off grade? Ans. We have not received carbon black of higher grade under the guise of off grade.
Q.13. What do you understand by off grade and how do you know that the goods received are of particular grade? Ans. We are not technical related but simple trader and we go by invoice and marking." In reply to Question No. 12 Shri Ramakant has clearly replied that they have not received the carbon black of higher grade under the guise of off grade. Thus, the testimony of Shri Ramakant is contrary to the Commissioner's finding of misclassification of 'off grade' carbon black by the appellant M/s. Ralson Carbon Black Ltd. 11. In view of our findings above, we are of the definite opinion that the finding of the Commissioner that the appellant M/s. Ralson Carbon Black Ltd. had misclassified superior grade carbon black as "off grade" and had evaded Central excise duty is not sustainable. For that reason, the demand of duty, confiscation of goods and imposition of penalties made in the impugned order are required to be set aside. We do so, and allow the appeals with consequential relief.