Judgment:
1. Stay No. 183/91.--By this application the applicants have pleaded for dispensation of pre-deposit of a total demand of Rs. 10,18,632.69 demanded on two counts and also for dispensation of pre-deposit of a penalty of Rs. 10,000/- levied in terms of the impugned order of the Collector of Central Excise, Coimbatore dated 16.11.1990.
2. Since the appeal itself is proposed to be decided on a short point of law, we propose to take up the same with the consent of the parties along with the stay petition for disposal on merits.
3. The Ld. Advocate for the appellants pleaded that the officers of the Department checked the stock of cut tobacco received by the appellants for the manufacture of cigarettes under Chapter X procedure and also of the tobacco waste, sweepings, dust etc. arising in the manufacture of cigarettes and found a shortage of 13589 kgs. of tobacco stated to be tobacco dust, floor sweepings against the tobacco received with reference to the total quantity entered in their R.G. 16 stock register. He pleaded that the Production Manager Sri R. Mohan of the appellant's factory gave a letter inter alia stating that since the tobacco waste etc. were occupying lot of space and its continuing storage led to infestation in the place of storage of cut tobacco, the same was dumped in a pit inside the factory and the officers during the survey of the factory noticed the shortage. The Ld. advocate pleaded that no doubt, that he stated that there was a shortage as per the check conducted by the officers but this fact stated by Shri R. Mohan should not be read in isolation. He pleaded that Shri Mohan had clearly stated that they had removed the tobacco dust and sweepings to the pit with the oral permission of the Assistant Collector on 20.6.1989. The Ld. advocate pleaded that the Central Excise officers had not weighed the total quantity which was lying in the pit and had done only partial weighment of the same and they informed the factory management orally that they were satisfied about the accountal of the waste and since they had done partial weighment, the appellants felt that the Excise authorities had taken note of the storage of the waste and the removal of the same to the pit and found no discrepancy in regard to the same.
He pleaded that the appellants were surprised to receive a show cause notice pointing out that they had not accounted for 13,589 kgs. of floor sweepings etc. He pleaded that as it is the tobacco waste, sweepings etc. fall under Tariff Heading 2404.13 and chargeable to 'nil' rate of duty. He pleaded that for this reason alone no duty could be demanded. It was pointed out to the Ld. advocate that duty had been demanded from the appellants for the cut tobacco brought under Chapter X procedure under Rule 196 of the Central Excise Rules in the context of non-accountal of cut tobacco. He, therefore, did not press this point further. He pleaded that as it is the Ld. lower authority's order is not maintainable in law inasmuch as the Ld. lower authority has passed the order without affording the appellant an opportunity of cross-examination of the officers who checked the stock and without taking note of the appellant's plea that the full quantity of the waste tobacco which were lying in the pit had been accounted for. He also pointed out that in spite of the appellant's plea that the waste tobacco lying in the pit had been partially weighed by the officers and the waste tobacco was available in the pit, the Collector had observed as under: Therefore, they cannot now claim or say that the waste was dumped in the pit after obtaining oral permission from the departmental officers. There is no evidence forthcoming to prove this point.
Therefore, it is anybody's guess as to when and how much quantity of waste was dumped in the pit. There is no evidence forthcoming.
He pleaded that it is a matter of record that the weighment was done on a particular weighbridge of the vehicle No. MED 6778 and Vehicle No.TNU 5967. He has pleaded that the lower authority has brushed aside this evidence stating that it is not worthy of relevance and has observed as under: Unfortunately, there is no signature of either the officers who have done the weighment or the representative of the factory who must have accompanied the officer to the weighbridge. Apparently, these weighments were made to assess the normal quantity of waste generated in a day. In the absence of authentication which is required under normal circumstances it is not possible to rely upon the weighbridge records and to come to any definite conclusion but there are many other factors which lead to the same conclusion in so far as the shortage of cut tobacco waste is concerned.
He pleaded that the Ld. Collector should have tested the veracity of their plea by calling the officers who did the check. He pleaded that the plea for cross-examination of the Departmental Officers in this context becomes all the more relevant. However, he pleaded that the Ld.
Collector chose to deny them the benefit of this cross-examination observing that in quasi-judicial' proceedings denial for cross-examination of the Departmental officers does not constitute any violation of the principles of natural justice and in this context he observed as under: All the records on which the case has been built have been given to the party. The Departmental officers by themselves do not contribute anything by way of evidence. It is true that they had undertaken stock challenge and verification of accounts etc. All these are available in the factory's own records and the Departmental Officers have not done anything more than that.
He pleaded that the whole case turned on the fact as to whether the weighments of the waste tobacco lying in the factory and in the pit was done properly and whether the weighments done on 25.6.1989 and 26.6.1989 pertain to the waste lying in stock on that day. He pleaded that the officers alone could have confirmed this and therefore, the cross-examination of the officers was essential. In this view of the matter he pleaded that the lower authority's order in regard to the demand on this count is not maintainable and therefore, the prayer for dispensation of the duty and penalty may be allowed.
4. In regard to the demand on the second count the Ld. Advocate pleaded that a duty of Rs. 2,48,457.44 has been demanded from the appellants for the reason that taking into account the theoretical figure of the cigarettes produced per kg. of tobacco the appellants had not accounted for the tobacco received for the manufacture of cigarettes. He pleaded that the appellants are manufacturing cigarettes on behalf of I.T.C.Ltd. who supply their tobacco under Chapter X Procedure. He pleaded that the number of cigarettes manufactured by them does not always correspond to the theoretical weight of the tobacco consumed for a certain number of cigarettes manufactured and sometimes more cigarettes are produced per kg. and sometimes less and it was surprising that the theoretical figures of output were adopted in this regard. He pleaded that the variations took place on account of various factors, both climatic conditions as also the nature and condition of the machines used and pleaded that the Departmental officers had also been accepting this variation in the past. With a view to ascertain the plea in this regard, Bench had directed both the sides to furnish the requisite data in regard to the variations from the theoretical ratio of the cigarettes manufactured out of a certain weight of cut tobacco and whether this variation was earlier accepted by the authorities. The Ld.
advocate furnished the data in this regard for the previous years and pointed out that the number of cigarettes manufactured have been different from the number as calculated based on the theoretical ratio of cigarettes manufactured per unit weight of tobacco in the previous years also and the variation has been different from year to year. He pleaded that no demand has been raised in the past for the period 1980 to 1984 on such variations and the demand has now been raised for the first time only in respect of the period 1985-1989. He has pleaded that in the circumstances, therefore, the question of any demand does not arise and he pleaded for waiver of pre-deposit of the duty on this prima facie ground.
5. Heard Shri Jothipandian, the Learned Departmental Representative for the Department.
6. We observe that the appellant's production manager on 26.6.1989 has admitted to the shortage found by the officers and at the same time has gone on record also that the appellants had removed the tobacco waste from the factory premises with the oral permission of the Asst.
Collector. There is no denial from the Asst. Collector or the Department on record that such oral permission was not granted. The Ld.
Advocate during the course of argument has drawn our attention to the correspondence exchanged between the appellants and authorities about the accountal of the cut tobacco and the waste arising in the course of manufacture of cigarettes out of the tobacco received under Chapter X procedure and the appellants had been asked to give the value of the waste tobacco etc. which they could not furnish and, therefore, they were continuing to store the tobacco waste in their premises. In this context the Ld. Advocate brought to our notice that the appellants on 26.5.1989 requested permission for the removal of the waste tobacco to their scrap yard from their factory premises and that they had been allowed this permission by the letter of the Superintendent dated 29.5.1989. This we observe bears out that part of the waste tobacco had been stored in the pit which does not appear to have been taken note of by the Ld. Lower authority. We observe that the appellants in their pleading before the Ld. Collector had also brought to his notice that the officers who visited the factory had weighed part of the tobacco lying in the pit and the record of weightbridge bears out their plea.
We find that the Ld. Collector had chosen to ignore this evidence cited by the appellants by merely stating that the weighment card had not been authenticated. The Ld. Collector, as pleaded by the appellants, should have verified this fact with the officers who visited the factory and in that context should also have allowed the cross-examination, as sought for by the appellants. The whole case turns on as to whether the tobacco waste was available inside the factory compound corresponding to the stock reflected in the records and, therefore, it was absolutely necessary that the officers should have been called to clarify this position. Therefore, in the interest of natural justice the cross-examination of the officers, who weighed the tobacco in the appellant's factory should have been allowed. We therefore, allow the appellant's prayer for dispensation of pre-deposit of duty and penalty on this prima facie ground.
7. In regard to the second demand relating to non-accountal of tobacco, the Learned lower authority has taken into consideration the cigarettes manufactured with reference to theoretical figures of production out of a given quantity of tobacco. We observe that there is bound to be some variation between the theoretical figures and the actual production of the cigarettes out of the unit weight of tobacco and in fact as seen from the evidence produced there has been variations from theoretical figures all along from 1980 to 1984. There is nothing on record to show as to the basis on which this theoretical figures were arrived at and the factors which have a bearing on the actual production of the cigarettes out of the tobacco consumed. As it is, we find from the copy of the Departmental Manual Instructions on Cigarettes produced before us, the accepted position is that there would be some variation in the number of cigarettes manufactured out of a unit of tobacco even on day-to-day basis. Under paras 64/65 of the Departmental Manual on Cigarettes the following is set out: 64. Difference over theoretical output.--In the absence of reliable data at present, no indication can be given as to what may be treated as permissible difference between the actual number of cigarettes turned out and the theoretical output according to the formula of manufacture. This difference will also depend upon the efficiency of different factories. Wide fluctuation in the difference either from day-to-day or at uncertain interval must, unless they can be definitely traced to mechanical or any other ascertainable cause be treated as indications of malpractices. For each factory, therefore, a normal working difference must be arrived at in the light of actual removals and daily differences between the theoretical and actual output studied with reference to this working average.
65. Specifications of cigarettes.--Normally, 850 to 1000 cigarettes are manufactured depending upon the manufacturer's specifications for every Kg. of tobacco. But a slight reduction in the length of the cigarettes of the packing of tobacco inside them, a large number of cigarettes can be manufactured out of the same quantity of cut tobacco. Officers must therefore ensure that the specifications declared in the formula of manufacture are strictly adhered to where checks in the machine room indicates lighter or smaller cigarettes having been produced from any operation as a whole, it would be reasonable to expect the actual number of cigarettes packed being substantially larger than the theoretical output if this is not borne out by reconciliation the causes must be investigated. In every case where the Supdt. is not satisfied as to the causes for abnormal differences, a full report must be submitted to the Assistant Collector.
Further it has been stated in the Manual under the Heading "Difference between theoretical and actual output as under: Difference between theoretical and Actual out put.--In the absence of reliable data at present, there can be no hard and fast rule as to what may be treated as permissible differences between the theoretical output of cigarettes according to the formula declared and the actual number of cigarette turned out. This difference, will to a great extent depend upon the standard of efficiency of the various machines in different factories. For each factory therefore the normal work difference can be arrived at in the light of actuals.
At the end of each day the officer posted to each section must scrutinise the day's entries in respect of that section and sign the entries in token of having so done.
We observe from the impugned order that the authorities do not appear to have done any verification as above. The Learned lower authority's order is purely based on the theoretical data without examining the fact of the day-to-day production of cigarettes or other relevant factors relating to the production of cigarettes as per the departmental instructions above. Prima facie, therefore, we hold that the Ld. Collector's order has to be held to have been passed without any in-depth examination in the matter and without taking into consideration the guidelines issued by the Departmental authorities in this regard. On prima facie ground therefore, we hold that the appellant's prayer for dispensation of duty has to be allowed and we order accordingly.
8. As mentioned earlier, with the consent of both the sides the appeal itself has also been taken up for disposal along with the stay application. We have already held above that the Ld. Collector's order has been passed in violation of the principles of natural justice and also without examination of the matter in-depth in regard to the demand raised on the above two counts. We, therefore, hold that the lower authority's order is not maintainable in law and the matter is remanded to the Ld. lower authority for de novo adjudication in the light of what we have observed above after affording the appellants a reasonable opportunity of hearing and cross-examination of the officers as pleaded by the appellants in accordance with law. The appeal is thus allowed by remand.