1. The learned counsel stated that the appellant is a public limited company engaged in the manufacture primarily of Ayurvedic medicines in its factories located at Patna, Calcutta, Nagpur, Jhansi and Naini (Allahabad). The present proceedings relate to its factory in Naini (Allahabad) and concern the product 'Dant Manjan Lal' of which stocks valued at Rs.5,18,949 were lying in the said factory on 17-2-1986, fully accounted for in the appellant's records, and which stocks were placed under seizure by a team of Central Excise Officers, ostensibly under the "reasonable belief that M/s. Baidyanath are manufacturing Dant Manjan Lal falling under T.I. 68 with the aid of power; without Central Excise licence.
2. Dant Manjan Lal is a preparation compounded out of raw materials.
They are mixed together in the proportion and in accordance with the formula set out in the publication 'Ayurved Sar Sangraha' and marketed in containers. Prior to 1-3-1975, Dant Manjan Lal as also the other ayurvedic preparations manufactured by the appellant were treated as "Exclusively Ayurvedic Medicines" within the scope of the description carried by T.I. 14E, not containing alcohol, opium, Indian hemp or other narcotic drugs or other narcotics than those medicines which are exclusively Ayurvedic. And by virture of their express exclusion from the scope of T.I. 14E, they were not treated as excisable to duty.
3. On 1-3-1975, a residuary item, being Item No. 68, came to be introduced. Even though Ayurvedic Medicines had been specifically excluded from the scope of T.I. 14E, as aforesaid, the Excise Department nevertheless took the view that the said medicines would with effect from 1-3-1975 fall under T.I. 68 and be liable to duty.
There is no dispute that during that period immediately after the introduction of T.I. 68 on 1-3-1975, Dant Manjan Lal and other Ayurvedic preparations were being cleared only on payment of duty.
4. On 1-3-1978, the Government was pleased to issue a notification, being Notification 62/78, by which total duty exemption hitherto provided in respect of certain goods under Notification 55/75 dated 1-3-1975, was extended to "all drugs, medicines, pharmaceutical and drug intermediates not elsewhere specified". Dant Manjan Lal and other Ayurvedic medicines, even on the assumption that they were classifiable under T.I. 68, stood completely exempted from duty. The position was accepted by the department: the licence held by the appellant was surrendered and the surrender accepted.
5. In April, 1980, in view of the Gujarat High Court order in Darshan Hosiery Works v. Union of India 1980 (6) ELT 390 (Guj.) that the expression "not elsewhere specified" referred to in Item 68 means the total omission or failure to specify goods in the Schedule to the Central Excise Act either for the purpose of taxability or for the purpose of exemption from liability to duty; and that once an article or goods is specified in any of the tariff items between Item 1 to 67, irrespective of the purpose for which they are specified, Item 68 does not come into play and does not render such goods liable to duty.
Ayurvedic medicines reverted for purposes of classification to T.I. 14E under which they were not liable to duty at all by virtue of the express exclusion.
6. During 1981, however, an explanation was added to T.I. 68. This explanation nullified the effect of the Gujarat High Court decision and with effect from 19-6-1980, Ayurvedic medicines once again became classifiable under T.I. 68 but continued to be exempt from duty under Notification 62/78 dated 1-3-1978.
7. On the basis of this view quasi-judicial proceedings were initiated against the appellant in respect of all its factories as also against other manufacturers like Dabur and Hamdard who were also manufacturing similar preparations for care of the teeth and treatment of dental diseases. Some Collectors including Appellate Collector of Central Excise, Delhi, the Appellate Collector of Central Excise, Calcutta and the Collectors of Central Excise Calcutta held that the product Dant Manjan Lal was an Ayurvedic medicine entitled to exemption whereas these Collectors including Collectors of Central Excise, Patna and Nagpur came to finding that it was only a Dentifrice and not a medicine and thus not entitled to exemption in terms of Notification 234/82. In so far as the appellant's unit in Naini is concerned, the matter was remanded by Collector (Appeals) New Delhi, to the Assistant Collector, Central Excise, Allahabad with the direction that the matter should be decided by reference to the particular book of Ayurvedic systems of medicines in which the ingredients used by the appellants in the manufacture of Dant Manjan Lal and the process employed for the production of this preparation have been described or alternatively by obtaining the expert advice of the Drugs Controller. In the remand proceedings, as aforesaid, the appellant made detailed submissions on merits. The appellant also pointed out to the Assistant Collector that since no power was being used by the appellant in the manufacture of Dant Manjan Lal, the said product would in any case be exempt from duty vide Notification No. 179/77-C.E., dated 18-6-1977 as amended by Notification 74/83-C.E., dated 1-3-1983.
8. In the meanwhile proceedings relating to the appellant's units in Patna and Nagpur had become the subject matter of appeals, filed both by the appellant and by the Collectors concerned. The said proceedings were adjudged in June and July 1985, vide 1985 (22) ELT 844 and 1985 (22) ELT 175, the decision given by the Hon'ble Tribunal being that the product Dant Manjan Lal is not a medicine and was not entitled to exemption : the demands raised were, however, confined to a period of six months only. The principal reasoning on which the said decision was arrived at was that in common parlance i.e. in the public and even commercial understanding the product is understood as a tooth cleaning powder and not as a medicine. An appeal against the decisions of the Tribunal has been filed before the Hon'ble Supreme Court. Interim orders of stay of recovery of duty demanded from the appellant have been passed and the appeals are pending.
9. After the appellant had written to the Assistant Collector on 26-11-1985 that since the appellant was not using power in the manufacture of Dant Manjan Lal, the said product was entitled to exemption under Notification 179/77, dated 18-6-1977, as amended by Notification 74/83, regardless of whether or not it was a medicine the Asstt. Collector deputed two officers. The two officers visited the appellant's factory on 28-11-1985 and found that the appellant was not using any power in the manufacture of Lal Dant Manjan. A copy of the report addressed by the Range Superintendent to the Asstt. Collector in this behalf is appended to this appeal petition marked as Annexure 'B'.
10. With the matters resting as above, the appellant's factory was visited by a team of Central Excise Officers of Allahabad Collectorate on 17-2-1986. Even though no manufacture of Dant Manjan Lal as such was being carried on and there was no complaint, allegation or evidence of any contravention having been committed in relation thereto, the said stock was placed under seizure without any indication being provided to the appellant about the ground on which the said seizure was being effected. The statement of the appellant's General Manager was recorded but no copy thereof was provided to the appellant: the show cause notice which came to be issued six months later, on 14-8-1986, however makes a mention of the said statement but says that the same did not throw any light on the issue involved.
11. The appellant protested against the said seizure but no heed was paid to the protest. It had no alternative but to ask for its provisional release which was allowed on 25-9-1986, on execution of a bond.
12. On 8-8-1986, i.e. more than 5 1/2 months after the seizure of goods on 17-2-1986 the factory of the appellant was visited again by Central Excise Officers, when certain documents and records were resumed and the statements of some of the factory Officers recorded.
13. A show cause notice was issued to the appellant which revealed for the fresh time in paragraph 5 thereto that the seizure on 17-2-1986 was effected because there was "reasonable belief that M/s. Baidyanath are manufacturing Dant Manjan Lal falling under Tariff Item 68 with the aid of power; without Central Excise licence, without maintaining any records as provided in the Central Excise Act and Rules and clearing the same without payment of Central Excise Duties and gate passes". It will be seen that the "reasonable belief as mentioned in the notice was sought to be sustained on the basis of certain facts set out in paragraph 6 which had allegedly come to the notice of the Department on 8-8-1986 and which are mentioned as (i) Shri K.N. Mehrotra's statement of 8-8-1986 in which he is alleged to have misled the Department; (ii) Shri Sada Nand Mishra's statement dated 8-8-1986 in which he is alleged to have admitted that a record of grinding was being maintained (without there being any specific mention that grinding with the aid of power was being resorted to in the case of ingredients used in the manufacture of Dant Manjan Lal; (iii) Shri S.P. Sharma's statement, again of 8-8-1986, who allegedly confirmed Shri Sada Nand Mishra's statement and agreed to produce the Nirman registers. On the basis of these statements and certain invoices and orders which also were resumed on 8-8-1986, and on which they placed their own interpretation, the Department seems to have inferred that Dant Manjan Lal was being manufactured by the appellant with the aid of power and that this justified the seizure effected more than 5 1/2 months earlier on 17-2-1986.
14. The appellant replied to the show cause notice. Briefly recapitulated the submissions made were - (i) that since the question whether or not Dant Manjan Lal was a medicine entitled to exemption had not achieved finality, being still under consideration before the Hon'ble Supreme Court, the instant proceedings may kindly be kept in abeyance; (ii) That the seizure effected on 17-2-1986 was clearly illegal because on the said date the officers had no reason to believe that stocks of Dant Manjan Lal lying on the premises were liable to confiscation and therefore to seizure, particularly when just about two months earlier it had been found by two officers of the rank of Superintendent that no power was being employed in the manufacture of Dant Manjan Lal and also when the question of excisability of the product was still under dispute or under consideration and that the power to seize did not extend to goods lying within the factory premises; (iii) that even on merits and on the basis of the test of trade and commercial identity, Dant Manjan Lal qualified as a medicine and was entitled to exemption under Notification 234/82.
(iv) That the reliance placed on the show cause notice, on the statements of Shri Sadanand Mishra and S.P. Sharma which statements were recorded on 8-8-1986 was completely misplaced; and (v) that Dant Manjan Lal manufactured as it was without the aid of power was in any case exempt from duty.
15. A copy of Appellant's communication dated 4-4-1987 and the Gazette of India Extraordinary dated December 8, 1986, in which the Notification referred to was published is appended to this appeal petition collectively as Annexure 'F'. The short point was that since the product Dant Manjan Lal was being manufactured exclusively in accordance with the formulae described in the authoritative book "Ayurveda Sar Sangraha" which is specified in the First Schedule to the Drug and Cosmetics Act, 1940, it was fully covered by the definition of "Ayurvedic (including Sidha) or Unani drug" appearing in Section 3(a) of the Drug and Cosmetics Act, 1940. There could now be no room for doubt or controversy that it was an Ayurvedic medicine falling under T.I. 68 and entitled to exemption under Notification 234/82 dated 1-11-1982.
16. The order passed by the learned Additional Collector is not a speaking order at all in as much as it does not deal with several vital issues raised in the two replies submitted by the appellant and in its communication about the approval and notification of the publication "Ayurved Sar Sangraha" in the Schedule to the Drug and Cosmetics Act, 1940 including (i) the illegality of the seizure effected on 17-2-1986, when the proper officer had no reasonable belief that the goods lying on the premises were liable to confiscation in terms of Section 110 of the Customs Act, as applied to Central Excise; (ii) the liability to duty of Dant Manjan Lal irrespective of whether it was produced with or without the aid of power in view of the submissions made; (iii) the effect of incorporation of Ayurved Sar Sangraha in the schedule of authoritative books on Ayurveda and (iv) the numerous judicial pronouncements which were expressly cited in support of the stand taken by the appellant. The order of the learned Additional Collector deserves to be set aside on this ground alone.
17. In the instant proceedings there being no indication, not even a suggestion that any reasonble belief that Dant Manjan Lal lying on the premises on 17-2-1986 when excise officers visited the premises of the appellant was liable to confiscation. The information which the officers allegedly collected on 8-8-1986 cannot obviously be used to provide the foundation of reasonable belief for an action taken 5 1/2 months, earlier. In this context the appellant relies, among other, on 1983 ELT 1715 (S.C.) Shanti Lal Mehta v. Union of India and Ors., in which it was held that "Reasonable belief as required by Section 110 refers to the point of time when the goods in question are seized and not to a time subsequent to the act of seizure; and that the condition precedent that there was such a reasonable belief must exist before the presumption under Section 123 can be invoked.
18. That even otherwise the seizure effected was lawful in terms of ratio enunciated by the Andhra Pradesh High Court in Southern Steel Ltd., Hyderabad v. Union of India and Ors., 1979 ELT (J 402).
19. In so far as the liability to duty of Dant Manjan Lal is concerned the appellant submits with the greatest respect that the incorporation of "Ayurved Sar Sangraha" in the list of authoritative books on Ayurveda as mentioned in the schedule to the Drug and Cosmetics Act, 1940 clearly imported to the question a new dimension which was non-existent and conspicuously absent at the time when the Hon'ble Tribunal delivered its judgments already adverted to. There can now be no room for any doubt or controversy that it is an Ayurvedic medicine.
And being an Ayurvedic medicine the same falls outside the scope of T.I. 14E by virtue of the express exclusion in favour of "medicines which are exclusively Ayurvedic, Unani, Sidha or Homeopathic" built into the description of the Tariff item itself and becomes classifiable under T.I. 68, in view of the Explanation added to the said item effective from 19-6-1980. Having regard to these facts it would not be permissible to hold that for the purpose of its entitlement to exemption it falls outside the scope of the expressions "all drugs, medicines, pharmaceuticals and drug intermediates not elsewhere specified", or "All bulk drugs and medicines not elsewhere specified" as used in Notifications 62/78 and 234/82.
20. The learned Additional Collector's reliance on the statements of Shri Sada Nand Mishra and Shri Sharma is completely misplaced. The learned Additional Collector's reliance on order/s/invoices resumed by the officers and the insinuation that they had been manipulated is completely uncalled for. Such corrections or insertions as appear in the said orders had been made originally (and not subsequently as has been erroneously assumed) and the fact could have been easily verified from copies available with the suppliers. Similarly, the insertions/corrections found in the bills were made by the suppliers, a fact which could have been easily verified from the originals. The appellant had in certain cases received raw materials before they were ground but in all such cases they were sent outside the factory to other parties for "grinding" and return to the appellant factory before they were taken into use for manufacture of Dant Manjan Lal. The fact that the appellant had grinding machinery installed on its premises can have no relevance or significance in this behalf.
21. The learned Additional Collector has erred in taking no cognizance of the fact expressly brought to her notice that the entire matter concerning the duty liability of Dant Manjan Lal was under consideration of the Hon'ble Supreme Court of India, and that further proceedings may be stayed till the final decision of the Supreme Court was available. The appellant relies in this behalf of the Gujarat High Court judgment in Commissioner of Income Tax v. Surendra Gulab Chand Modi, 1983 ITR-517. Because at the time of recording the statement of Shri Sadanand Vaidya, which was after about 5 1/2 months, we were paying duty on the product in question and therefore, his statement has no relevance as Notification No. 179/77 was then withdrawn.
22. The learned SDR stated that the officers on visit to the factory seized the goods in question for violation of Section 6 and the rules as the same had been manufactured with the aid of power and were therefore not eligible to exemption from licencing and other provisions.
23. The investigations made by the officers reveal that power was being used for grinding of ingredients and for sealing tins of various sizes.
24. The appellants, in reply to show cause notice had drawn attention to the Superintendent's letter dated 19-12-1985 referring to the observaions that no power was being used but the officers proceeded on the basis of what was found on 17-2-1986 and subsequently during the investigation.
25. The officers had occasion to resume the appellants' private records which go to show that they had procured many raw materials in solid form and further that they had electrically operated grinding machines and there was every reason to believe that grinding was done within the factory as stated by one of the employees during interrogation. It was in these circumstances that the department has relied on the statements of Shri Sadanand Mishra. That apart there was also reason to believe that powers was also being used for packing tins of various sizes.
26. In view of the above position, the learned Addl. Collector was justified in holding that the goods had been manufactured in violation of the law and therefore were liable to seizure and confiscation.
27. In this respect he would in particular draw attention to the discussion and findings recorded in the order in original which go to show that the appellants were liable to pay the duty and the imposition of fine and penalty was also justified.
28. We consider that the submissions of the learned counsel have a strong force. The seizure of goods of a manufacturer is an action which very seriously affects the operation of a unit and results in temporary deprivation of use of his own property by a citizen. Therefore the power to seize is required to be exercised very carefully and cautiously and it is necessary to ensure that all the pre-requisites for such an action are duly satisfied.
29. One of the most important pre-requisites of course is that the seizing officers must have a reason to believe that a violation of law has in all probability taken place or is likely to take place (in those cases where an attempt is an offence). That apart the grounds on which the seizure is proposed to be made or is made should be clear and tangible and must be made known to the person concerned at the time of seizure itself.
30. In other words, the position regarding the facts or the law as it stood at the relevant time was required to be taken into account and the department was required to show with reference to them that the goods were liable to seizure at the time it was effected. However the records available before us including the impugned order and the submissions of the learned DR do not disclose as to how the goods were liable to seizure on the date it was made. On the contrary it appears from the learned counsel's submission that the question of excisability and durability of the product (and relevant aspects of classification and exemption etc.) had not been settled finally as yet in so far as the appellants' Naini unit was concerned and if this issue itself was unsettled then use or otherwise of electric power, which was a secondary issue, did not make any difference at that stage. In fact taking this aspect of the matter into account first amounts to putting the cart before the horse.
31. It is also observed that the learned counsel has mentioned that earlier the appellants had taken out a licence but the same was subsequently surrendered in view of the change in legal position and the surrender was accepted by the department; And we note that this submission of the learned counsel has not been controverted or contradicted by the department. In the context of these circumstances we are of the view that once the department had accepted the surrender of licence on the ground of non-dutiability of the product if subsequently it comes round to the view that the licence was required to be re-issued, for whatever reason, it was open to the department to have communicated its views to the unit and to direct the management to take out a licence and observe the Central Excise formalities after giving a notice in this regard and hearing them on this point. But merely because of a difference of opinion between the licencee and the department on the issue, it was not necessary to seize the goods which had been produced and had been duly accounted for in the business records in the normal course particularly when the excisability and dutiability of the product was still under debate and the remand proceedings had not concluded. In other words as rightly mentioned by the learned counsel the departmental action of seizure was to say the least premature. In fact in view of the. pending proceedings the officers could not possibly have a reason to believe that the goods were liable to seizure at that stage. Even otherwise in view of the Superintendent's enquiry and letter dated 19-12-1985 certifying that no power was being used in manufacture of their product, there could not be at the face of it of any cause for seizure in the normal course; And officers could not have foreseen, on the date of seizure as to what would happen in future and could not have known what the documents taken subsequently and the statement recorded subsequently would disclose. Indeed the departmental officers could have at the most a suspicion and could not possibly have a reason to believe that the goods were liable to seizure; And the utmost they could do, in the circumstances, was to take an appropriate undertaking.
32. We also take note of the learned counsel's submissions that it was not communicated to them as to on what grounds the seizure was being made at the time it was effected (or soon thereafter).
33. In view of the above position, we consider that the seizure itself was not proper and had not been made in accordance with law.
34. This still leaves us with the question as to what was the result of the further investigations and what were the implications thereof? 35. In this connection we note that admittedly power was being used in operating the grinding machines in the premises. But we also take note of the learned counsel's submissions, which have not been contradicted, that the appellants were manufacturers of a large number of items, other than those in question and the power operated grinding machines were being used in that connection and that some of the ingredients used even in the products in question were common with those which were not in question.
36. We also note that a statement of the Managing Director said to have been recorded has not been discussed in the order in original and has not been produced even now before us; And the department has sought to establish the use of machine for the purpose of products in question merely on the basis of the statements of a couple of employees and no attempt has been made before us to show that they relate to or specifically refer to the period in question, the period in which goods were manufactured. It is noteworthy that time factor was important in view of frequent changes in legal position leaving scope for bona fide difference of opinion and even confusion or doubt. In this context recording of the statements several months after the seizure adds to the complexity of the situation... as it has been asserted by the learned counsel, and not contradicted by the department, that the appellant had started using the grinding machines even in respect of the ingredients for the products in question after the change in the notification when such a use did not make any difference towards duty liability. The Bench had asked pointed questions on these aspects and the learned counsel succeeded in giving plausible explanation as to why they had not used the facility available within the factory (of using the power operated grinding machines) during the period in question and why they had subsequently started using it. The learned counsel had in this connection pointed out that they had adopted this course in view of the language of the exemption notification(s) to avoid taxation during the period in question and started using the facility again when the change in the notification did no longer affect their liability.
This type of action could not be seriously objected to by the department as a citizen is entitled to plan and organise his work in such a way as to be liable to minimum taxation only.
37. We also note that in the written memorandum the appellants have accepted occasional use of power operated machines for sealing the containers. This would have affected the case and would have been a point in favour of the department if only it could be shown that in the first instance the products were excisable and liable to duty. Since as observed above, this question is yet to be finally determined by the authorities concerned, therefore this by itself does not help the department's case at this stage.
38. Since it has not been contradicted that the goods had been duly accounted for in the records maintained in the normal course of business and were still in the factory at the time of seizure and the duty liability had not yet been finally determined, we hold that the goods were not liable to seizure and confiscation and the penal action against the appellants was premature.
39. We therefore set aside the impugned order. But in view of the fact that the matter regarding liability to duty was still pending, order that the consequential relief will be limited for the time being to the refund of fine, and the amount of deposit, and the refund of amount charged as duty shall be subject to the orders of the Tribunal/Courts in respect of excisability and duty liability of the product for the period in question as already announced in the open court.