Full Judgment
2. The respondents are engaged in the manufacture of Polyurethane Foam, Sheets, Mattresses, Pillows, Sofa Seats, and Cushions etc. and during the relevant period were availing the benefit of Small Scale Notification No. 1/93 dt. 28.3.93, as amended. Their factory was visited by the Central Excise Officers, who conducted various checks and verifications. As a result, final goods worth Rs. 15.48 lakhs were found to be in excess and excisable goods valued at Rs. 1.50 lakhs involving Central Excise duty of Rs. 37,733.50 were short found. The Revenue entertained a view that the various goods manufactured by the assessee were actually articles of Polyurethane Foam and were not entitled to the benefit of the said notification. They further entertained a view that since the final product was being supplied to Ministry of Defence without payment of duty in terms of exemption under Serial No. 3 of Notification No. 64/95-CE dt. 15.3.1995, they were required to pay duty on the intermediate product i.e. PUF Foam Blocks.
3. Based upon the above facts show cause notice dt. 24.10.1997 was issued to the assessee for: (a) demanding Central Excise duty amounting to Rs. 11,38,967.50 under proviso to Sub-section (1) of the Section 11A of the Act, read with Rule 9(2) of the Central Excise Rules, 1944 (hereinafter referred to as 'the Rule') for the extended period 1995-96 and 1996-97; (b) imposition of penalty under Section 11AC of the said Act and/or a penalty under Rule 173Q and/or Rule 209 and/or Rule 225 and/or Rule 223A and/or Rule 210 of the Rules: (c) charging and recovery of interest at the appropriate rate on delayed payment of duty under Section 11AB of the said Act; (d) confiscation of excess quantity of excisable goods seized under Panchanama dated 26/4/1997 valued at Rs. 15,48, 754,50 under Rule 173Q and/or Rule 210 and/or Rule 226 of the Rules; (e) demanding and recovery of Central Excise duty amounting to Rs. 37,733.50 in respect of goods found short on verification; (f) confiscation of land, building, plant, machinery under Rule 173Q of the Rule; (g) imposition of penalty on Shri Hussani S. Bhanpurwala, Director under Rule 209A of the Rules.
4. The appellant in their defence submitted that they had filed classification list for each and every item, which stand approved by the proper officer; that the goods classified by them under Chapter 94 can never be called as articles of PUF as they are nothing but Mattresses, Sheets, Pillows, Sofa Seats and are specifically covered under Heading 94.01 and 94.04; that the exemption under Notification No. 1/93 was availed by them with the acceptance of the concerned Assistant Commissioner. In support of their above contention they referred to the interpretative Rules as also to Hyderabad Collectorate Trade Notice No. 10/92 dt. 31.1 1992 reported in 1992 (58) ELT-(T 9), clarifying that "Mattresses of expanded foam or sponge rubber made by moulding are classifiable under heading No. 9404 of the Schedule to Central Excise Tariff Act and not as other plates, sheets etc. of celluer plastics under sub-heading No. 3921.00". They also challenged the demand on the point of limitation. Explanation was also given for the excess found and short found goods.
5. The said show cause notice was adjudicated by the Commissioner who inter alia observed as under: (a) No attempt has been made in the show cause notice as to the classification of Foam Mattress etc. and whether they fall under Chapter 94.04 or they are infact articles of Polyurethane Foam classifiable under Chapter Sub-heading No. 3921.00 and 3926.90 Chapter heading No. 94.01 refers to "seats" whether or not converted into beds and parts thereof and chapter heading No. 94.04 refers to the "Mattress supports articles of bedding and similar furnishing (for example Mattresses, Pillows, Cushions head and pillows) filled with any material or by the cellular rubber or plastic whether or not covered. It has not been disputed that the goods cleared are known as Mattress, Pillows etc. and they are made of plastic which covers polyurethane foam also. No evidence has also been produced that in the market, the Mattresess and Pillows will be known as articles of Polyurethane foam. Having regard to the description given in HSN Notes Chapter Sub-heading No. 94.04 and the clear mention in the declaration that the goods manufactured are Matterss, these product was classifiable Chapter No. 94.04 and not Chapter 39 as alleged in the show cause notice.
(b) Since the goods are classifiable under chapter 94 and not under Chapter 39 and no evidence has been brought out clearly that the goods are nothing but articles of Polyurethane foam and that there was not bar in respect of goods falling under Chapter 94 for claiming exemption under the Notification No. 1/93, the exemption under Notification. No. 1/93 was not deniable to the Mattress, Pillows, Bolsters, Seat etc. manufactured by the assessee. In addition to mattress, cushion, seat covers etc. manufactured by the assessee. In addition to mattress, cushion, seat covers etc. the assessee also manufacturers Polyurethane Foam Sheets Polyurenthane Foam cut to size and shapes, Polyurethane Foam cut pieces and waste, which are correctly classifiable under Chapter 39 under Sub-heading No. 39,21,39.26 and 39.50. The Mattress, Pillows covered/uncovered are distinguishable from the Polyrethane Foam Sheets and Polyurethane Foam cut to size for which classification has been indicated as Chapter 94 by the assessee in the classification list establishing that the assessee is claiming Notification No. 1/93 and in respect of Polyurenthane Foam Sheets or Polyurenthane cut to size and shape etc. which are infact the articles of polyurethane no such exemption has been claimed. This also supports assessee's eligibility for benefit of Notification No. 1/93 as amended in respect of foam Mattresses, Pillows, Cushion seats, Furnitures and parts thereof and covers for Mattresses etc. which fall under Chapter heading No. 94.01/94.14.
(c) As per Clarification given by the assessee, from the stage of Foam to the cutting of sheets and shaping them into Mattresses is a continuous process and the goods are accounted at the final stage for clearance for the Naval Stores. The foam blocks, being not marketable as such, there can be no objection for the non-accounting of the goods by way of final products. It has not been alleged that there is any attempt made to remove the Polyurethane Foam Blocks clandestinely without accounting and thus evaded the duty. Since the goods are accounted in the form of cut sheets classifiable under 39.50 or foam cut to shape and size under 39.26 and those blocks in the foam Mattress in farms of Chapter 94 and that the goods are cleared to Naval Depot for use on board, the Naval vessel the claim of Nil rate of duty under Notification was correct and was not deniable. The allegation that foam blocks meant for mattress cleared for Naval Depot should be accounted at the intermediate stage, when the same was not objected to in respect of blocks used for Mattress etc. for duty payment was not correct and maintainable.
(d) The difference in the finished stock was due to the difference in accounting. The Foam Blocks which directly go into the Mattress are not at all marketable, and hence, they need not be specifically accounted for. However, since the assessee are clearing foam Sheets/Mattress, their accountability will come into picture only when they are properly covered and labeled. The assessee accounts for these goods accordingly. The goods are therefore not liable for confiscation. However, the shortages which have not been accounted for satisfactorily attracts Central Excise duty. Accordingly the duty of Rs. 37,733/- was payable. Since the shortage has nor been accounted, in addition to the duty, in terms of Rule 223A, the assessee was liable to penalty.
(a) Since, the Mattress, Pillows etc. are classifiable under Chapter 94 and not under Chapter 39, the assessee was eligible for Notification No. 1/93. Accordingly, the demand for denial of benefit of Notification No. 1/93 and on intermediate goods in respect of goods cleared under Notification No. 64/95 are not maintainable.
Accordingly, the proceedings on account of these allegations are dropped. Since the shortage was not accounted for to the satisfaction of the proper officer and confirmed the demand of Rs. 37,733/- only.
6. As against above, the Revenue has contested that the big foam blocks, which emerge at the intermediate stage are marketable inasmuch as, the same, after being sliced can be used for manufacture of sofas and the other furniture items. Reference has been made to the statement dt. 28.4.1997 of the Director wherein he has stated that foam sheets are physically accounted only if the same are being sold as standard sheets.
They have also contested that mattresses, pillows, cushions, bed sheets are nothing but articles of Polyurethane Foam. It has also been contested that show cause notice also proposed confiscation of excess found excisable goods and imposition of personal penalty under Rule 209A on the Director. The impugned order of the Commissioner is silent on the above two prepositions made in the notice.
7. After hearing both the sides, we find that the Revenue has not given any concrete reasons for adopting the classification of Mattress, Polyurethane etc. under Chapter 39 in preference to Chapter 94 where the same are specifically mentioned. Similarly we have seen the photographs produced on record by the Respondents and find that the PUF blocks, which the Revenue seeks to hold as marketable and hence excisable. It is seen that no evidence showing marketability of the same has been produced by the Revenue. It is well settled by now that onus to prove marketability upon the Revenue and in the absence of any evidence to show that such huge blocks usually come to the market for being bought and sold or are capable of being bought and sold, it cannot be held that they are marketable and hence excisable. The Hon'ble Supreme Court decision in the case of Cadila Laboratories Pvt.
Ltd. v. Commissioner of Central Excise, Vadodara 2003 (152) ELT 262 (S.C.) has held that the order passed only on the basis that the goods "can conceivably be sold" cannot be sustained. We find that the Revenue in their appeal memo try to establish that somebody who is engaged in the manufacture of furniture may require some blocks and after getting the same into requisite thickness, can use in the manufacture of furniture etc. is in the realm of surmises and conjectures and not on any evidence on record. As such, we hold that huge blocks of PUF Foam are not excisable.
8. As regards non-passing of order in respect of excess found goods and for imposition of penalty upon the director, we find the Revenue's contention to be correct. As such, we remand the matter for Commissioner (Appeals) for cassing order on the above two issues raised in the show cause notice. The Revenue's appeal is disposed off in above terms.