Judgment:
1. This is an appeal against the order dated 29-9-1987 passed by the Collector of Central Excise, Calcutta-I. Briefly stated the facts of the case are that the appellants are carrying on the business of manufacturing 'Cooling Towers' and parts thereof. For the purpose of manufacture of cooling towers, one of the components required is Glass Fibre Reinforced Plastic (GRP) product which is manufactured by the company in their factory by contact moulding in cold curing process.
For the manufacture of GRP products small quantities of styrene monomer, Cobalt Naphthenate and MEKP are added to duty paid resin purchased from manufacturers.
2. The appellants were called upon by a notice dated 28-3-1985 and a subsequent addendum dated 28-11-1985 to the said notice issued by the Superintendent of Central Excise, Calcutta to show cause to the Assistant Collector of Central Excise as to why they should not provide particulars in regard to the quantity of the goods, namely, Titanium Dioxide, Pigments, Aerosil Resin, Black Iron etc. manufactured and cleared for captive consumption without payment of duty and without filing a classification list during the period from November 1985 onwards and why they should not apply for a Central Excise licence for the manufacture of said goods under Section 6 of the Central Excises and Salt Act, 1944 read with Rule 174 of the Central Excise Rules, 1944 and why penalty should not be imposed on them under Rule 173Q of the Central Excise Rules, 1944. They were also asked to show cause why central excise duty amounting to Rs. 71,674.94 on the mixture of Kylok Polyester Resin, Styrene Monomer, M.E.K. Peroxide and BPO (Benzoyl Peroxide) weighing 82,449.90 Kgs valued collectively at Rs. 35,83,747.21 used in the manufacture of Glass Reinforced Polyester classifiable under Tariff Item 15A(1) with the aid of power during the period November 1981 to 21-5-1985 and central excise duty amounting to Rs. 56,802.21 on the mixture of Styrene resin solution, Titanium Dioxide weighing 7524.00 Kgs. valued at Rs. 3,80,648.89 used in the manufacture of paints classifiable under Tariff Item 14-I(5) and cleared for captive consumption during the period November 1981 to 21-5-1985 should not be demanded under Section 11A of the Central Excises and Salt Act, 1944.
3. The appellants in reply to the show cause notice inter alia submitted that the notice dated 28-3-1985 could not be regarded as a show cause notice under Section 11A of the Act since no amount had been specified in the said notice and merely by issuing addendum dated 28/29-11-1985 the notice dated 28-3-1985 could not be converted into one issued under the provisions of Section 11A of the Act. They contended that the addendum dated 28/29-11-1985 was not a show cause notice as required under Section 11A of the Act. They further contended that Glass Fibre Reinforced Plastic Product (GRP Product) were being made by them as components of Cooling Tower by using duty paid resin with pigment added to it (CL Resin). They contended that CL Resin was being prepared by them by manual mixing of Resin, Titanium Dioxide, Black Iron Oxide, Aerosil Powder and some Cobalt Naphthenate but such manual mixing of the components did not result in a new or different product having distinctive name, character or use. It was stated that CL Resin was merely an in-process material and in its preparation there was no chemical reaction or change in the chemical composition of the ingredients by the addition of the pigment or aforesaid material to the resin. They pointed out that resin was contained in styrene monomer and Cobalt Naphthenate was added to the resin as an accelerator to the curing process, while MEKP acted as a catalyst to the curing process and was being added just before the use of the resin in the manufacture of GRP products. They contended that all these facts were always in the knowledge of the Central Excise authorities and were disclosed by them fully and in the classification lists filed by them on 18-6-1977 and 5-11-1980 they had stated that they were manufacturing GRP products and in the classification list dated 9-11-1978 the composition of the said GRP products was also indicated. They also pointed out that proceedings were initiated under show cause notice dated 17-8-1976 by the Department in respect of the classification list of the said GRP product and in the order dated 28-1-1978 passed by the Collector imposing a penalty of Rs. 75,000/- under Rule 173Q of the Central Excise Rules, 1944 on account of the manufacture of GRP products was set aside by the Board by order dated 31-10-1980 and the matter was remanded to the Collector for de novo adjudication. They stated in the de novo proceedings before the Collector they contended that the Department was fully aware that they were preparing CL resin and MEKP Resin for captive consumption. They also pointed out that as required by Central Excise Revenue Audit they had submitted the necessary particulars in regard to these resins and GRP products vide their letter dated 18-12-1982 and their records of the period 18-10-1982 to 28-12-1984 were also checked by the Internal Audit. They contended that the notice to show cause and the Addendum thereto having been issued after expiry of six months from the relevant date were time barred since there was no fraud or any wilful misstatement or suppression of facts. They denied that MX Resin were goods classifiable under Tariff Item 15A(1) or that CL Resin were goods classifiable under Tariff Item 14-I(5). They contended that these products were not new or different excisable or commercial commodities known to the market. They therefore contended that no Central Excise duty could be demanded from them and prayed that the proceedings initiated may be dropped.
4. By the impugned order dated 29-7-1987, the Collector held that mixing of Styrene Monomer with catalyst and activator like MEKP and Cobalt Naphthenate and mixture of paints/enamels obtained by the appellants were excisable goods classifiable under Tariff Item 15A(1) and 14-I(5) respectively. He observed that the taxable event is the manufacture of goods and it was immaterial whether the goods were sold or captively consumed and mere non-marketability of the goods could not make them non-excisable. He also held that the appellants had manufactured such goods without payment of duty and without obtaining a Central Excise licence. On the grounds that the appellant had failed to maintain records relating to the production of such goods and had also not filed a classification list, he held that these contraventions amounted to suppression of fact and the extended period of five years was invokable for the recovery of duty on the said products. On the basis of his findings he ordered the appellants to pay Central Excise duty amounting to Rs. 15,05,173.83 under Tariff Item 15A(1) and Central Excise duty amounting to Rs. 56,802.21 under Tariff Item 14-I(5) as demanded in the show cause notice dated 28-3-1985 and addendum thereto dated 28-11-1985. He also imposed a penalty of Rs. 4 lakhs on the appellants under Rule 173Q of the Central Excise Rules, 1944.
5. On behalf of the appellant, ld. Advocate Shri K. Narasimhan appeared before us. He stated that the appellants are engaged in the manufacture of Cooling Towers for which Glass Fibre Reinforced Plastic products (GRP products) were required to be made and used for captive consumption. He contended that GRP products are manufactured by contact moulding in cold curing process in which two mixtures of resin are prepared without the aid of power. In one of these mixtures, namely, MX Resin which is used for lamination in the moulding process, duty paid Polyester Resin, Styrene (diluent), Cobalt Naphthenate (accelerator) and Methyl Ethyl Ketone Peroxide (MEKP) and catalyst are used as the major ingredients. He stated that in the other Resin Mix i.e. CL Resin which is used for coating the mould surface for getting the desired finish in colour of GRP products, the main duty paid ingredients are Polyester Resin, Pigments (Titanium Dioxide), Styrene (diluent), Cobalt Naphthenate (accelerator) and Aerosil. He submitted that both MX and CL Resins were hand-made mixtures of duty paid resin with other duty paid materials which are used in the lamination process and surface finishing process in the course of manufacture of GRP products in the appellants factory. He contended that the products were not excisable since in mixing the ingredients there was no chemical transformation and MX resin is an unstable product which solidifies within a short period. He added that the same was the case with CL Resin to which MEKP is added just before application to the mould. He stated that it was expressly pleaded before the Collector that these products were not excisable since they were not marketable on account of their extremely short shelf life. He contended that the Collector had not given any finding in regard to the marketability of the product and his finding that mere non-marketability of the goods would not make them non-excisable was not legal and was based on an erroneous understanding of the ratio of the Supreme Court's decision in the case of Empire Industries Ltd. reported in 1985 (20) E.L.T. 179. He submitted that the test of marketability for all goods to determine their excisability was now well settled in view of the Supreme Court's decision in the case of Bhor Industries Ltd. v. Collector of Central Excise reported in 1989 (40) E.L.T. 280 and Collector v. Ambalal Sarabhai Enterprises reported in 1989 (43) E.L.T. 214 in which it has been held that a product which is not marketable cannot be deemed as excisable even if it is covered by an entry of the Excise Tariff Schedule. He submitted that in both the aforesaid cases, it has also been held that the onus of establishing the test of marketability or of being known to the market is clearly on the revenue authorities and not on the assessee. He contended that on the ratio of the aforesaid decision of the Supreme Court the appellants were entitled to succeed on the merit of their contention that neither MX Resin nor CL Resin manufactured and used wholly in captive consumption could be charged to duty. He submitted that even otherwise the demand for Rs. 15,61,876.94 was barred by limitation since the only ground on which the Collector had sought to invoke the longer period of limitation of five years in terms of proviso to Section 11A(1) was that the appellant had not filed the necessary declaration by way of classification list nor had they accounted for the production and removal of the goods in their statutory records and they had also failed to obtain a Central Excise Licence. He stated that this conclusion was based only on what was set out in the show cause notice and the Collector had chosen to ignore completely the previous history as narrated in the reply to the show cause notice duly supported by documentary evidence as summarised in sub-para (e) and (f) of para 4 of the adjudication order. He added that the appellant had contended before the Collector that in earlier period starting from 18-6-1977 a similar dispute had been raised by the Department about the dutiability of GRP products manufactured and used captively by the appellants and in that context the entire manufacturing process of the products MX and CL Resins with bought out materials including the making of resin mixtures was explained and finally the Department had held that no duty could be charged on GRP product. He contended that under these circumstances on the ratio of the Supreme Court's judgment in the case of Collector v. Chemphar Drugs reported in 1989 (40) E.L.T. 276 the extended period of 5 years was not invokable. He argued that the demand for a period of six months from the date of show cause notice would also be barred by limitation since the show cause notice dated 28-3-1985 issued by the Superintendent without mentioning either the period of demand or the amount sought to be recovered could not be deemed as a demand. He argued that under these circumstances the so-called Addendum dated 28-5-1985 to the show cause notice would have to be treated as the first and only demand and this being beyond a period of six months it has to be treated as time barred. In support of his contention that the demand dated 28-3-1985 without mentioning the period of demand and the amount demanded would not be treatable as a valid demand, he placed reliance on the decision of the Bombay High Court in the case of JBA Printing Ink - 1980 (6) E.L.T. 121 and Tribunal's decision in the case of Sundaram Fasteners 1993 (64) E.L.T. 87. Ld. Counsel further submitted that the Collector was not justified in holding that the benefit under Rule 56A was not admissible since he failed to appreciate that no declaration could be made for the purpose of claiming the benefit under Rule 56A until it was finally held that the resin mixtures in question were chargeable to excise duty. Shri Narasimhan also contended that the imposition of penalty on the appellants was unwarranted since the relevant sub-clause of Rule 173Q was not indicated in the order passed by the Collector and even if it is assumed that sub-clause (d) was invoked there was no finding of mens rea which was expressly required in terms of the provisions of the said sub-clause (d).
6. On behalf of the respondent, Shri Sharad Bhansali, Learned SDR took us through the order of the Collector and placed reliance on the finding therein. As regards the appellant's contention that the disputed products were not excisable since they were not marketable on account of their extremely short shelf life, he contended that the products being in the nature of adhesive or coating material based on pigments having wide application in industry, would be marketable if they are kept in air tight container and are not exposed to sunlight.
As regards the appellant's contention that extended period under proviso to Section 11A was not invokable, he submitted that there was no infirmity in the Collector's finding regarding suppression of facts since the appellants had been manufacturing excisable goods in question without filing necessary declaration in the form of classification lists and had failed to maintain the statutory records. He argued that there was no force in the appellant's contention that the first show cause notice dated 28-3-1985 was not valid. He submitted that the allegation of suppression having been clearly made in the show cause notice and the details such as amount of duty and the period etc. could not be given in the show cause notice since the appellant had deliberately held back the information sought by the Department. He justified the Collector's finding that the benefit under Rule 56A was not admissible to the appellant on the ground that they had failed to observe the prescribed procedure.
7. We have examined the records of the case and considered the submissions made on behalf of both sides. It is seen that the main question which arises for consideration in this case is whether the MX Resin produced by mixing bought out duty paid Polyester Resin, Styrene, Cobalt Naphthenate and MEKP and CL Resin having Polyester Resin, Pigments (Titanium Dioxide) Styrene (diluent) Cobalt Naphthenate (accelerator) and Aerosil as the main constituents were excisable under Items 15A(1) and 14-I(5) respectively of the erstwhile Central Excise Tariff when they were used exclusively for captive consumption. The main point raised by the appellants is that both MX Resin and CL Resin being highly unstable products which solidify into a hard mass within a few hours of mixing of the ingredients could not be deemed as excisable since they are not marketable. They have contended that their plea in regard to non-marketability of the disputed product was not examined by the Collector who held that the taxable event was the manufacture of goods and mere non-marketability of the goods could not make them non-excisable. The appellants have contended that it is now well established that the test of marketability has to be satisfied for all goods in order to establish their excisability and particularly so in respect of goods which are unstable in nature. They also contended that in view of the various pronouncements of the Supreme Court the onus of establishing the test of marketability of any product or its being known to the market is clearly on the revenue authorities and not on the assessee. On the question of excisability in regard to the submissions made by the appellants, we refer to para 8.4 of the impugned order in which the Collector had arrived at his finding that the goods in question were excisable.
"8.4 In this context, it is to be noted that the taxable event is the manufacture of goods. It is immaterial whether the goods are sold or captively consumed. Mere non-marketability of the goods cannot make them non-excisable. It was decided in the case of Empire Industries Ltd. v. Union of India [reported in 1985 (20) E.L.T. 179 (SC)] that the taxable event for Central Excise is manufacture and not sale. It was also decided in the case of Metal Forgings (I) Ltd. v. Union of India reported in 1985 (20) E.L.T. 280 (SC) that there can be manufacture even at an intermediate stage if a distinct and different product known to the commercial work comes into existence.
An intermediate product which is an excisable commodity, is liable to duty even though it is not removed from the factory because the taxable event is the manufacture of goods and not their removal."Bhor Industries Ltd. v. Collector of Central Excise reported in 1989 (40) E.L.T. 280 (SC), the Hon'ble Supreme Court has held that marketability is an essential ingredient of dutiability and an article would not be liable to excise merely because of its specification in Tariff Schedule unless it is "goods" known to the market and further the burden to prove that the article in question are "goods" would be on the Revenue. Paras 6, 7 and 11 of the said judgment, being relevant, are reproduced below:Collector of Central Excise v. Ambalal Sarabhai Enterprises reported in 1989 (43) E.L.T. 214 (SC), the Hon'ble Supreme Court has once again held that burden to prove that the goods are marketable and hence liable to duty is on the Department. Para 5 of the said judgment is reproduced below: It is seen that in arriving at his finding as regards the excisability of the disputed products, namely, MX Resin and CL Resin, the Collector did not examine the various points raised by the appellants in support of their contention that the goods were not excisable on account of their non-marketability due to extremely short shelf life. We therefore hold that the impugned order is not a speaking order and suffers from non-application of mind.
9. Another point raised by the appellant is that while invoking the extended period in terms of the proviso to Section 11A for confirmation of the demand on the basis of his finding regarding suppression of fact, the Collector had failed to deal with their submission that the Department was aware right from 1977 onwards that the appellants were producing for captive consumption both the products, namely, MX and CL Resin and, in fact, similar proceedings initiated earlier by the Department had been dropped. We find that in not examining the detailed submission made by the appellants in regard to the Department's knowledge about the manufacture of the disputed products, the Collector had once again failed to apply his mind and had failed to give a reasoned finding in regard to the submissions made by the appellants.
10. In view of the above discussion, we hold that the order passed by the Collector is not a speaking order and suffers from gross non-application of mind inasmuch as he has failed to deal with the detailed submissions made by the appellants on various points. We therefore set aside the impugned order and remand the matter to the Collector for de novo adjudication in accordance with law and after affording an opportunity to the appellants of personal hearing.