Full Judgment
2. The Commissioner of Central Excise, Noida, in his order-in-original dated 15.11.2002 held that, the said notifications envisage exemption duty for those goods which are used in the manufacture of final products. He referred to the Supreme Court's decision in the case of J.K. Spinning & Weaving Mills Co. Ltd. v. Sales Tax Officer 1997 (91) ELT 34 (SC), according to which the building materials which are used for the construction of plants cannot be treated as capital goods used for the manufacture of final product to support his view. The learned Commissioner, therefore, confirmed the demand and interest raised against the appellants besides imposing penalty under Section 11-AC equal to duty demanded. Aggrieved by this order, the appellant has filed this appeal before us.
3. The main contention of the appellants is that, the goods, namely, REYNOBOND (aluminium sheets), Toughened Glass and Steel Doors are covered against the Serial Nos. 1 or 5 or 17 of the Table annexed to Notification No. 53/97-Cus dated 1.3.1997, as amended. Similarly, these items, according to them, are also covered as per Serial No. 1 or 13 of Annexure I to the Central Excise Notification No. 1/95-CE dated 4.1.1995, as amended. It was also contended that para 3.10 of Exim Policy, includes even accessories required for manufacture of production either directly or indirectly which can fall within the term 'capital goods'.
4. The learned advocate for the appellants distinguished the expressions used in these Notification, viz., 'in the manufacture of goods' and 'brought in connection with the manufacture' being distinct from the phrasal construction 'for the manufacture of goods'. He argued that the cases of CCE v. Shanmugaraja Spinning Mills (Pvt.) Ltd. and Hindustan Adhesive Ltd. , relied upon by the Commissioner and said that the judgment of the Supreme Court in the case of CCE v. Jawahar Mills Ltd. , has over ruled these decisions. The learned advocate also pointed out that penalty imposed under Section 112 of the Act (Rs. 11,75,009/-) is not called for especially when the adjudicating authority not ordered confiscation of the goods. Section 112 of the Act provides that the persons who n relation to any goods do or omit to do which act render such goods liable to confiscation under Section 111 of the Act, shall only be liable to penalty. He referred to the Tribunal's decision in the case of Delco Prectone Jewelers (Pvt.) Ltd. and Ors. v.CCE 2000 (39) RLT 587 (T), wherein it was held that, since there were no findings on confiscation, there cannot be any penalty. He also contested the imposition of penalty under Rule 209 read with Section 11-AC (Rs. 6,65,900/-) arguing that a composite penalty under two provisions is not imposable. He relied on the Tribunal's decision in the case of Alagappa Cement (Pvt.) Ltd. v. CCE 2000 (53) RLT 324. He also contested the imposition of penalty as vague and arbitrary.
6. The learned Advocate for the appellant refers to the Customs exemption Notification (No. 53/97-Cus, as amended) which exempts capital goods "for the purpose of manufacture of articles for export out of India" He emphasizes the difference between "for the manufacture" and "for the purpose of manufacture", stating that the latter expression - as in the subject notification - has a wider ambit than the former.
7. Further it was contended by the appellants that Condition No. 6(i) in Notification No. 63/97-CE has been duly complied with by them and it is not the Department's case that the capital goods are not proved to have been found installed or otherwise used within the bonded premises.
The goods imported by them are very much part and parcel of their bonded premises. They have never been diverted or removed out of their premises. It was reiterated that a quantity of 20.92 square meters of REYNOBOND and 14.4 square meters of Toughened Glass used in areas other than production area by them to maintain uniformity of colour etc. has already suffered the duty. It was also contended that a prayer made by them on 12.11.2002 for Joint Inspection of the site to resolve the disputed facts was side-lined by the learned adjudicating authority, which is a gross violation of principles of natural justice.
8. The learned Advocate also states that the goods-in-question are very much available in the bonded premises in which they are engaged in the manufacture of export articles and hence there is no question of diversion or clandestine removal. He pointed out that neither Notification No. 53/97-Cus nor 1/95-CE has defined what is capital goods. However, Notification No. 14/96-CE(NT) dated 23.7.1996 which had amended Rule 57-Q(2) has assigned the meaning to the "capital goods" to include all goods falling under Chapter 84, components, spares and accessories. According to him the CDR manufacturing plant is classifiable under heading 84.79. Therefore, all accessories of CDR manufacturing plant should also invariably come within the meaning assigned to term "spares of capital goods".
9. The learned advocate refers to the Development Commissioner, Deptt.
Of Commerce letter (vide F No. 1-68/98 -100% EOU-I dated 1.11.2000), conveying their approval for Aluminium Sheet in question under the "list of capital goods" annexed therein. He contended that the learned Commissioner has erred not only by demanding duty but also by imposing penalty despite such categorical approval of goods available on record.
Further, he also produced the copies of CT-3 certificates authenticated by the Departmental Authorities for procurement of the goods in question as "capital goods and spare thereof".
10. He also relied upon the following citations, which go, according to him, in their favour : If at all the Department had any doubt about the entitlement of goods imported for the benefit of Notification, they should have immediately addressed the CBEC for clarification It is also a fact that authorization issued by STPI has not been cancelled.CCE. Pune-I v. Weikfield Agro Products The Revenue has not adduced any reasons for supporting the contention that the 4 items in dispute cannot be treated as capital goods or components or consumables". (The 4 items here are : 1.
Fibre-woven reinforced plastic sheets to cover the mushroom bags, 3. Hot insulation materials (Glass wool), and 4. Cold insulation materials).
Final Order No. 521/05-B-Misc/M/154-155/05-B CLF Zippers India Ltd. v. CCE, Jallandhar The imported materials are in Customs Bond. Occasion for demanding duty in such a case arises when the goods are ex-bonded. That stage has not been reached in the present case.
11. The learned SDR, representing the respondent, produces some photographs depicting the usage of aluminium sheets in the outer walls of the appellants' factory facing the roadside. He sought to establish that they were used more for aesthetic or decorative reasons than for any functional requirement, as contended by them.
12. The learned SDR recalls the following condition as contained in the Asstt. Development Commissioner, Department of Commerce's letter F.No.I-66/98-100% EOU-I dated 27.9.2000; while conveying their approval : The procedures and formalities under the Customs & Central Excise Law shall be complied with.
13. He also showed a sketch plan of the factory premises to prove that the so-called "capital goods" found their use in total periphery facing the road but not even on the roofing. Further, they were found used only in patches and in pattern on the outer walls aesthetically and that too on the road side of the building. Saying that they were used "to protect the production hall from ultra-violet rays" as claimed by the appellants is, therefore, not tenable. According to him, they were actually used for decoration of walls as they had special shining effect. To prove this point, he also produced a copy of panchnama dated 10.11.2005 under which the Officers conducted physical measurement of the periphery (i.e boundary in running length) of main production area and administrative block, packing and store area and polycarbonate store and canteen area and also the whole area covered by glass and aluminium sheets called Reynobond. As the so called "capital goods" have been found to be used even in canteen/administrative areas of the factory, he wondered how these goods could be any longer referred to as "capital goods".
14. An earlier copy of Panchnama dated 10.4.2002 was also produced before us by the learned SDR which reads as follows: ...Aluminium sheets/profiled/tinted glass which were mostly used on the outer walls facing roadside of the factory and there was use of only a small quantity of Aluminium sheets on one of the other sides of the wall of the factory.
These sheets were also used on that part of the factory building which focused the office of the company as well as the portico of the office premises which had no relation with the production activities or production hall.
15. As regards the steel doors, it was argued that they were used only as construction items for the building.
16. The learned SDR relies upon the following case laws to support the contention of the Revenue : Section 111(o) of the Customs Act Section 111(o) of the Customs Act provides for confiscation of exempted goods when condition of exemption not observed.
The case of the respondents is that the goods imported by the appellants which availed of the said exemption, subject to the condition that they would not be sold, loaned, transferred or disposed of in any other manner, had been disposed of by the appellants. The Customs authorities, therefore, clearly had the power to take action under the provisions of Section 111(o).
We do not find in the provisions of the import and export policy or the Handbook of Procedure issued by the Ministry of Commerce, G.O.I., anything that even remotely suggests that the aforesaid power of the Customs authorities had been taken away or abridged or that an investigation into such alleged breach could be conducted only by the licensing authority. That the licensing authority is empowered to conduct such an investigation does not by itself preclude the Customs authorities from doing so.
The assessee has claimed exemption in respect of table, chairs, air conditioners etc. which cannot be said to be "goods" used in the manufacture of cotton or filament yarn." (The learned Advocate for the appellants butts in to say that these observations are not pertinent to the case in hand, since the language of the notification here is different. The use of the words "in connection with the manufacturer of has a wider reach as observed by the Apex Court in para 9 of the very same order.) It is well settled that the definition of 'capital goods' in Rule 57-Q of the Central Excise Rules is restrictive and relates to goods used in production, processing, and bringing about any change in the substance for the manufacture of final products.
Commissioner's finding that investigation cannot be conducted during the currency of export obligation period is contrary to the Apex Court decision in the case of Sheshank Sea Foods Pvt. Ltd. (This order holds that in the case of non-fulfilment of export obligations, goods are liable to confiscation, penalty imposable and interest chargeable.) 17. Having gone through the case records and heard both sides at length, we would like to formulate a series of queries that arise here seeking an answer in order to deal with the whole issue in full perspective through its various facets : (a) Whether the goods-in-question viz. Reynobond (aluminium sheets, profiles and pipes), reflective toughened glass and special type steel doors imported by the appellants are covered under both the exemption notifications viz.. Notifications 53/97-Cus dated 3.6.1997 and 1/95-CE dated 4.1.1995.
There are two Notifications - Notification No. 1/95-CE (as amended) extends exemption from the whole of the duty of excise and the addl.
Duty of excise if excisable goods specified in Annexure I are "brought in connection with the manufacture"... for export of goods and services out of India into a 100% export oriented undertaking.
Sl. No. 1 of the said annexure I reads as "capital goods and thereof". (It is essential to bear in mind that the said Annexure I does not provide a "blanket" exemption to all and sundry goods brought into the undertaking).
Notification No. 63/97-Cus (as amended), on the other hand extends exemption from the whole of the duty of customs and the additional duty, if any, if goods specified in the Table when imported or procured from a warehouse "for the purpose of manufacture of articles for export out of India or for being used in connection with the production...for export of goods or services out of India etc." A perusal of Table given below this Notification lists down 17 entries out of which the following entries are relied upon by the appellants to interprete the issue :5.
Spares and accessories for capital goods and material handling17.
Any other item required in relation to production of export goods with The impugned order has questioned the validity of the disputed goods brought in duty-free under the above notifications into their premises (100% export oriented undertaking) stating that they were not capital goods or accessories in as much as they were not used in connection with the manufacture of goods and also they were hot strictly categorizable in any of the sl. Nos. contained in the Tables annexed to the respective notifications, as contented by the appellants.
We are of the view that the disputed goods do not appears to have been strictly used for the purposes for which they were brought.
Even the appellants admit in para 5 of their appeal papers that "they were mainly being used in connection with the manufacture", even though a "small quantity" of 20.92 sq.m reyonbond and 14.4 sq.m. of Toughened glass have been admittedly used by the appellants in areas other than production areas to maintain uniformity of colour etc. and the special type steel doors have also been found to have been used in the construction of the buildings by the respondents. It is, therefore, clear that the disputed items have not been used strictly in terms of the requirements under the two Notifications. The appellants have, however, tried to convince us that the disputed items can be brought under Sl. No. 17 of Table under Notification No. 53/97-Cus, as amended. This entry reads as follows : "Any other item required in relation to production of export goods with the prior approval of the Board". Even had they obtained such prior approval for the purpose of Notification No. 53/97-Cus, their items would not have become strictly eligible for the exemption sought by them under Notification No. 1/95-CE (as amended) as similar provisions do not exist in the Table below this Notification, as it is well-established by the Department that they have been used more for "aesthetic" purposes than for their "functionality".
(b) Whether the permission granted by the Development Commissioner in r/o categorized goods can be reviewed by the Customs and Central Excise Department, subsequently w/o taking up the matter with the Development Commissioner's Office To answer this question, we place our reliance on the Apex Court's decision in the case of Sheshank Sea Foods (Pvt.) Ltd..
. While dealing with imports under Advance Licence Scheme, it was held that the jurisdiction of the licensing authority to investigate the violations of conditions of import licence does not by itself preclude the Customs authorities from doing so. It is also observed here that the breach is not only the terms of the licence, but it is also a breach of the conditions in the Exemption Notification; upon which the appellants obtained exemption from payment of Customs Duty and therefore the terms of the Section 111(O) enable the Customs authorities to investigate. Here it was also argued that the bond furnished by the appellants pursuant to the licences also provided for action by the licencing authority which was not accepted by the Apex Court. We, therefore, hold that the Customs and Central Excise Authorities have not exceeded their jurisdiction and have correctly acted to safeguard the revenue interests in time.
(c) Whether the disputed items procured/imported under the Exemption Notifications have been used for purposes other than what was envisaged under the said Notification : If we take a view that the goods-in-question were procured as "capital goods and accessories thereof", it is clear that the said items have not been used for their declared "functional" characteristics. The appellants' contention is that the said items have been used for protecting/maintaining the production areas without which they could not have ensured the required quality of the export goods. However, this argument does not subscribe to the role of "capital goods" particularly as one notices their actual end-use. Entry No. 17 of the Table to Notification No. 53/97-Cus, however, seems to lend a "crutch" to the otherwise sagging pleas of the appellants on the end-use issue of the materials, though they have not produced evidence to the effect that they had obtained "prior approval" in r/o the disputed items from the Board of Approval. Even if such approval is made available, the other Notification (1/95-CE) does not envisage similar provisions.
(d) Whether the Show Cause Notice issued on 23.07.2002 demanding duty and contemplating interest/penalty is invalid particularly since the appellants are regd. as 100 % EOU : While we are of the view that in the case of non-fulfilment of export obligations, goods are liable to confiscation, penalty imposable and interest chargeable, any such action once the offence is established during the currency of export obligation cannot be questioned on the plea that the appellants are Regd. As 100% EOU. We would rather go by the maxim "strike while the iron is hot"! which should be the maxim of any responsive administration. The ratio adopted by the Tribunal in Bhawana Export's case (supra) which held that investigation can be conducted during the currency of export obligation period lands support to our views here. Hence the demand raised for violation of Section 111(o) is valid particularly since it stands as endorsed by Supreme Court in the case of Sheshank Sea Foods' case supra.
18. It is also seen that the appellants have executed bond to comply with all the conditions of the two Notifications and for proper use of the said goods. As per the terms and conditions of the bond, the appellants are bound to pay the duty occurring on account of any flout, if noticed subsequently, of provisions of Notifications. Hence the demand made in this case is not hit by any time bar.
19. In view of the foregoing discussions, we are of the view that the appellants have contravened the provisions of Section 110(o) of the Customs Act in as much as they have not utilized the disputed items procured duty free in the way as was prescribed under the Exemption Notifications. There is also a clear contravention of provisions of Rule 192 of the erstwhile Central Excise Rules, 1944 as they had not consumed/used the goods received under Chapter X Procedure in the manner as specified in the aforesaid Notifications. In the result, the impugned order of the Commissioner with regard to demand of Customs and Excise duties is hereby upheld. However, considering the circumstances of the case viz. (a) the fact that the undertaking is a bonded warehouse engaged in export of goods; (b) the fact that the appellants have followed the procedural requirements prescribed under the law; (c) the fact that no malafide on their part to evade payment of customs and excise duties has been proved by the Department; and (d) the fact that the disputed goods never left bonded premises and still form part and parcel of their manufactory (which is not disputed by the Department), we find that the penal action initiated against the appellants is not warranted. We, therefore, set aside the penalty imposed by the learned Commissioner in toto under Section 11-AC. In our view, the interest demanded @ 20% per annum in terms of Notification NO. 53/97-Cus dated 3.6.1997 and 1/95-CE dated 4.1.1995 has been correctly made, as per law and hence the same is upheld.