1. This appeal is directed against the Order-in-Appeal No. 79/2001 (M-I) dated 26.12.2001 passed by the Commissioner of Central Excise (Appeals) Chennai whereby the Commissioner has held that there was no infirmity in the order of the original authority and hence he has rejected the appeal of the appellants.
2. Brief facts of the case are that the appellants are engaged in the manufacture of Polyol Glycol etc. failing under Chapter heading 28 and 29. Appellants were alleged to have (i) cleared samples drawn from the Drumming Plant to the R & D Section within the factory for testing (ii) final products and inputs on which modvat credit was availed were cleared for test purposes, outside the factory (iii) Nitrogen was cleared for non-plant and non-manufacturing purposes within the factory premises. Show cause notice was issued proposing to demand duty in terms of the proviso to Section 11A (1) and the show cause notice culminated in the order of adjudication passed by the original authority by his order dated 26.2.2001 by which he has confirmed a duty demand of Rs. 92.464 towards samples cleared to their lab and R & D department under proviso to Section 11A(1) of the CE Act, 1944. He has also confirmed a duty demand of Rs. 20,430 on the raw materials cleared as samples outside their factory under proviso to Section 11A(1) of the Act. He has also confirmed a duty demand of Rs. 3,12,935 on Nitrogen manufactured and cleared for non-plant and non-manufacturing activities under the proviso to Section 11 A(1) of the Act. He has also appropriated the sum of Rs. 92,464 debited by the appellant vide Sl.
No. 1044 dated 27.8.99 and another sum of Rs. 20,434 debited vide PLA Sl. No. 1301 dated 22.9.99 towards the duty amounts. The appellants were also imposed mandatory penalty of Rs. 4,91,421 under Section 11 AC and penalty of Rs. 2,34,408 under Rule 173Q of the CE Rules, 1944.
Aggrieved by the said order, the party moved the Commissioner (Appeals) who by the impugned order rejected the appeal and hence this appeal. In the grounds of appeal, the appellants have taken the following grounds: (a) Removal of samples to R&D department and clearance of similar items for trial/testing purpose outside the factory should not attract duty when the goods have not attained its commercial identity as the samples drawn for testing are destroyed.
(b) The removal and use for testing outside the factory do not render any marketable identity and products do not have any utility after the test operations.
(c) Nitrogen is wholly exempt from duty and the same is used within the factory of production. The administrative block and R&D place has been approved as part and parcel of the factory premises.
Therefore, duty cannot be demanded on the Nitrogen.
3. Shri M. Venkataraman, learned Counsel appearing for the appellants reiterated the grounds of appeal. He has also invited our attention to the following judgments:Gas Authority of India Ltd. v. CCE Bhopal, 2001 (135) ELT 475 wherein it was held that Nitrogen gas used within the factory for purging the tanker belonging to others, amounts to consumption within the factory of production and eligible for exemption in terms of Notification No. 40/85-CE.Maruti Udyog Ltd. v. CCE, Delhi, 2002 (84) ECC 14 (T) : 2002 (147) ELT 881. In this case, the Tribunal found that Audit report of 20.3.1986 to Assistant Collector and his reply thereto indicating that marketing pattern, taking of deposit and appropriation of portion interest on same by assessee was known to the department and hence the allegation by the department that there was wilful mis-statement/suppression of facts was rejected by the Tribunal.
3.1 The learned Counsel further submitted that the classification list submitted by the appellants was approved by the department and in such circumstances, the question of alleging suppression does not arise. He therefore, prayed for allowing the appeal.
4. Shri A. Jayachandran, learned JDR on the other hand submitted that Nitrogen was used in the R&D, air conditioning area and also in the Canteen and hence it cannot be said that Nitrogen was used for the production of the goods within the factory and hence the duty has to be paid for such use.
5. We have considered the rival submissions and gone through the case records. We find that we are called upon to answer the following questions in the instant case: (1) Whether the facts and circumstances warrant invocation of longer period of limitation? (2) Whether Duty is demandable for the quantities removed to the R&D Department for analysis as samples within the factory premises? (3) Whether duty is demandable in respect of final products cleared outside the factory premises to other agencies and customers for trial and testing without payment of duty.
(4) Whether duty is demandable in respect of utilization of Nitrogen for non-plant and non-manufacturing activities within the factory premises.
6. Now we proceed to answer the above questions. As regards the 1st question, we find from the records that the Appellants are Registered with Central Excise. They have filed declaration and price list periodically which have been approved by the Department. This position has not been controverted by the Department. In the circumstances it cannot be held that appellants have held back information from the department so as to warrant invocation of longer period of limitation as the ingredients as set out under Section 11A for invoking the provisions of the said Section are lacking in this case. We, therefore, hold that longer period of limitation cannot be invoked in this case.
7. As regards the second question viz. whether duty is demandable in respect of goods removed to the R&D Section for testing, we observe that the department itself on verification has confirmed vide their letter C.No. V/28/2/235/2002 JC dated 14.10.03 that R & D Division of the appellants are situated within the factory compound and is also marked in the Ground plan. What is therefore to be examined now is whether the goods removed to R & D Section within the factory is dutiable or not. We note that the Tribunal in the case of CC v.Bhansali Engg. Polymers Ltd., 1999 (114) ELT 947 has held that ABS Polymer samples drawn for quality control testing within the factory, is not liable to duty. The appeal filed by the Commissioner against this order has been dismissed by the Hon'ble Supreme Court on 16.4.2001 as reported in ELT (140) page A-82. Further the Tribunal in the case of JK Industries Ld. CCE, Jaipur-II, 2003 (58) RLT 133 has held that Samples of tyres taken for in house quality control test and destroyed during testing is not liable to duty as tyres become marketable after testing only. This judgment has also relied upon the judgment in the case of Bhansali Engg. Polymers (supra) and six other judgments. The Hon'ble Supreme Court in the case of ITC Ltd. v. CCE, Patna, 2003 (85) ECC 1 (SC) : 2003 (153) ELT 875 (SC) has categorically observed that if samples are drawn for in house testing and proper records are maintained, then no duty is payable on the quality taken for testing within the factory. We, therefore, respectfully following the ratio of the above judgments hold that no duty is demandable in respect of the goods which were taken to R&D department of the appellants within the factory, for the purpose of testing.
8. Coming to the next question whether the final product and modvat inputs which were taken outside the factory for trial and testing by other agencies including customers is dutiable or not, the contention of the appellants is that they depend not only on their internal test reports but also get the test done through various outside agencies to test the quality control and technical parameters. They have not cited any authority or citation in support of their plea that such removals need not suffer central excise duty. No data with regard to the actual quantity taken for testing, the date of testing, the exact locations where these were taken for testing and by whom the testing was done, whether any documentary documents have been maintained for such outside testing and if so such documents have been verified by the Department, has been placed before us for our consideration. The only plea is that goods taken for such testing outside would not attract duty liability.
In such circumstances, we are left with no other alternative except to hold that the goods, which are taken outside the factory for testing purpose, are required to suffer duty as applicable, at the appropriate rate.
9. As regards, use of Nitrogen within the factory of production, the party has submitted that Nitrogen is used on various plants such as Propylene Oxice, Propylene Glycol, Polyol and Prod. Handling. They have also taken the plea in the grounds of appeal that Nitrogen cannot be used as a refrigerant and is not being used so and that the assumption of the Revenue that Nitrogen is employed for non plant purpose is erroneous. In the reply to the show cause notice, the appellants have submitted that nitrogen is not used for non-manufacturing activities like, Administrative block, Canteen and R&D for the reasons that properties of Nitrogen is itself against general usage. They have also contended that nitrogen is also used for purging purposes when the plant vessels are taken for maintenance for removing hydro carbons.
They have also taken the plea that even assuming that Nitrogen is dutiable when used in R&D, Canteen and Administrative Blocks, the consumption is within the factory of production and when that be so, it is fully exempted as per Notification No. 8/96 dated 23.7.96, vide Serial No. 28.9 of the table annexed to the said Notification. We note that the definition of the term "factory" as per Section 2(e) of the Central Excise Act, 1944 is as under: "factory" means any premises, including the precincts thereof, wherein or in any part of which excisable goods other than salt are manufactured, or wherein or in any part of which any manufacturing process connected with the production of these goods is being carried on or is ordinarily carried on".
9.1 The finding of the original authority that "if one looks at Rule 9 or Rule 49, which are the relevant Rules, there may not be any necessity to consider the inclusive definition of factory as stated in Section 2(e)" cannot be accepted for the simple reason that when we are dealing with a particular term used in the Notification issued under the Central Excise Rules, as for example "consumed within the factory of production", the definition as appearing in the Central Excise Act for the term "factory" as in this case, has to be referred to for the purpose of giving a finding on the issue involved. The objection of the department is that nitrogen is used for manufacture of chilled water which in turn was used for refrigerating the non-plant area. The appellants have in reply to the show cause notice submitted that the nitrogen is used in the Refrigeration lines and equipments or purging freon or ammonia during long and exhaustive maintenance jobs. We note that the Tribunal in the case of Gas authority of India Ltd. v.Commissioner, 2001 (135) ELT 475 has held that Nitrogen gas consumed within the factory of production for purging of tankers belonging to other parties would be eligible for the benefit of exemption under Notification No. 40/85-CE dated 17.3.85. The appeal filed by the Department against the said decision of the Tribunal has been dismissed by the Hon'ble Supreme Court as reported in ELT Vol 140 A-82. Further, as we have noted above, the department itself on verification found that the administrative and R&D place has been approved as part and parcel of the factory premises. In the instant case, nitrogen is used within approved factory premises and in terms of the Notification cited supra, no duty is payable if the same is used within the factory of production. The original authority also found that nitrogen is used for manufacture of chilled water and the chilled water is used in the non plant area. This would mean that it is not directly used in the administrative block as alleged by the Department. Further, the definition of the term "factory" also includes precincts. In any event the nitrogen was used for manufacture of chilled water and the chilled water was used in the non-plant area. As noted above nitrogen was used for refrigeration lines and equipments for purging, and so far as the use of nitrogen for purging is concerned, the benefit is available even when certain charges have been taken from the owner, as held in the cited case. In view of above, we are inclined to agree that it is too narrow a view to be taken if we are to hold that nitrogen used for manufacture of chilled water and a portion of that chilled water even if used for certain administrative purposes within the factory premises, should suffer duty. We, therefore, extend the benefit of the Notification in respect of Nitrogen used within the factory of the appellants as in the present case.
10. In view of our finding above, we hold that imposition of mandatory penalty on the appellants under Section 11AC is not warranted. So far as imposition of penalty under Rule 173Q is concerned, since we have ruled in favour of the appellants on all the issues except in the case of samples taken outside the factory premises for quality control testing etc. and the amount involved for such removal is Rs. 20,430 as noted in the Order-in-Original, we reduce the penalty to Rs. 2,000 (Rupees two thousand). In the result the appeal is disposed of as under: (2) No duty is leviable on samples of the goods drawn for testing within the factory.
(3) Duty is leviable on the samples taken outside the factory premises for testing.
(5) Penalty imposed under Rule 173Q is reduced to Rs. 2,000. Ordered accordingly.