1. The factory of the respondents herein who are engaged in the manufacture of HDPE pipes and fittings falling under Chapter 39 of the first schedule to the Central Excise Tariff Act, 1985, was visited by preventive officers of central excise on 8.9.1998 and on verification of the stock of finished goods, shortage of stock compared to the balance recorded in the RG1 register was detected. The finished goods, i.e. HDPE pipes of various qualities involving duty of Rs. 3,75,791/-, were found short. The assessee paid central excise duty on such shortage. Further scrutiny of records revealed that the assessees cleared their goods, viz. HDPE pipes sprinkle irrigation, to various depots all over India, from where they finally sold to customers/dealers. Price declaration of the finished goods was filed by the assessees and it was noticed that the assessees had charged a higher price for sprinkler coupler than declared in annexure-II. It was also found that they were charging their customer for one more item viz. pump connecting nipple (PCN) but duty was not paid thereon when it was cleared from factory to their depots. Statement of Shri A.V. Deore, deputy manager of the factory, was recorded in September 1998 and January 1999. As regards the enhanced price of the coupler, he stated that one bought out item, viz. saddle, was added in the price of sprinkler coupler and together cleared from the depot. The price of sprinkler coupler and saddle was shown separately in depot invoices of Hyderabad but not shown separately in the invoices issued in Jaipur and Ahmedabad depots. As regards PCN, Shri Deore deposed that initially they were procuring it from local market as bought out item and clearing the same along with their consignments to various depots, but during the year 1996-97 they paid excise duty on certain numbers of PCN but suddenly stopped paying duty on this item from 16.1.1997. They started sending sprinkle coupler along with saddle for assembly on job work basis to various job workers. The manager of one of such job workers, viz. M/s. Mohit Engineering, stated that they used to sell required HDPE components to their supplier for assembly of sprinkle coupler and PCN and after assembly, the items were sent to various depots from where the goods were finally sold to customers. He categorically admitted that saddle was very essential in nature and without it, sprinkle cannot function and that one PCN is required for installing on sprinkle irrigation system essential for functioning of portable irrigation system.
2. In the light of the above, show cause notice proposing confirmation of duty already paid on finished goods found short and proposing recovery of duty of Rs. 12,20,623/- on the clearance of sprinkler coupler during the period November 1996 to January 1999 and PCN during the period November 1996 to August 1998 and proposing recovery of interest and imposition of penalty and confiscation of land, plant, building, machinery etc., was issued. The notice was adjudicated by the Additional Commissioner who confirmed the duty on shortage of finished goods and duty of Rs. 9,49,880/- and Rs. 2,70,743/- together with interest and also imposed a penalty of Rs. 16,00,000/- + Rs. 1,00,000/- upon the respondents. He, however, refrained from confiscating land, building, plant, machinery etc. The Commissioner (Appeals) set aside the demand and penalty, holding that PCN and saddle baton whose value was held to be includible in the value of the sprinkle irrigation system, had independent function and did not have any integral connection with the pipes and fittings manufactured by the respondents.
He also set aside the demand on shortages on the ground that there was no manufacture of finished goods on the material dates and held that the entries of finished goods on the material dates in the RG1 register was due to clerical mistake. Hence this appeal by the Revenue.
We have heard learned Joint CDR and perused the records - the notice issued to the respondents has been returned.
3. We find that the Revenue is correct in its contention that the date of manufacture of the finished goods found short is not relevant and they could have been manufactured on a prior date and the entry of finished goods in the RG1 register shows clearly that finished goods were manufactured and since they were not physically found in stock during the verification, confirmation of duty of Rs. 3,75,791/- by the Additional Commissioner is required to be upheld. We order accordingly.
4. As regards bought out items like saddle and PCN, what is relevant for determination of the issue as to whether their value is required to be added to the assessable value of goods manufactured by the respondents is whether they are integral parts of the sprinkle irrigation system. The Commissioner (Appeals) has only considered that the final products of the respondents are pipes and fittings and has not examined the question as to whether bought out items form an essential part of the sprinkle irrigation system which was cleared to various depots for ultimate sale to customers. The deputy manager of the respondents as well as the manager of M/s. Mohit Engineering, one of the respondents' customers, have both categorically stated that saddle and PCN are integral parts of the sprinkler coupler and vital for its function. Therefore, they are both essential items and the value thereof is required to be included in the assessable value of finished goods cleared by the respondents. Therefore, the duty demand on the bought out items is required to be sustained. As regards penalty, in view of the fact that the demand has been confirmed by application of the extended period of limitation, we hold that penal action is warranted against the respondents. However in the facts and circumstances of the case, we reduce the penalty imposed under Section 11AC to Rs. 5,00,000/- and penalty under Rules 173Q, 210 and 226 is set aside.
5. The appeal is thus partly allowed by upholding duty demand and penalty under the provisions of Section 11AC of the Central Excise Act, 1944.