Commissioner of Central Excise vs Sutham Nylocots

T.S. Sivagnanam, J.—This appeal by the Revenue is directed against the final order passed by the Customs, Excise and Service Tax Appellate Tribunal (The Tribunal) dated 23-6-2005 in Pinal Order No. 876 of 2005 [2005 (188) E.L.T. 26 (Tri.-Chen.)] The appeal has been admitted on the following questions of law :

Whether the Appellate Tribunal is correct in setting aside the orders passed by the lower authorities with regard to payment of interest for the period in dispute namely, 1-4-2001 to 31-1-2002 when Section 11AB of Central Excise Act, 1944, which stands amended with effect from 11-5-2001?

Whether the Appellate Tribunal is correct in holding that the respondent has not misstated the description of the goods with intent to evade payment of duty when the respondent has not disputed the descriptions of the goods as proposed by the Department and paid the duty?

Whether the Appellate Tribunal is correct in holding that since the respondent has now registered with the Excise Department and is following the procedures and hence the respondent can legitimately claim the benefit of Modvat credit on the yarns used in the manufacture of fabrics for the period in dispute?

The respondent/assessee are manufacturers of the industrial fabrics (cotton and nylon). The respondent classified the goods under Chapter Heading Nos. 52.08 and 54.06. The Department did not accept the said classification and classified the goods under Heading 59.11 of the Central Excise Tariff Act schedule (CETA Schedule). The period in question is from April 2001 to January, 2002 and during this period, the respondent had removed products without payment of excise duty by claiming benefit of exemption under a Notification. Since the Department did not agree with the classification of the product by the respondent/assessee, a show cause notice dated 5-4-2002 was issued proposing a demand of duty and penalty. Subsequently, the respondent/assessee accepted the classification as done by the Department and accordingly paid duty on the goods. It is relevant to note that during the said period, the respondent was not registered with the Central Excise Department. The Original Authority by order dated 31-12-2003 confirmed the duty and imposed equivalent penalty under Rule 173Q of the Central Excise Rules, 1944 and demanded interest at appropriate rate on the duty amount under Section 11AB of the Central Excise Act.

Aggrieved by the same, the respondent/assessee preferred appeal to the Commissioner (Appeals). The First Appellate Authority, by order dated 14-6-2004 reduced the penalty to Rs. 2,35,000/-, upheld the order demanding interest under Section 11AB of the Act and thus rejected the appeal as regards the demand of duty, claim for Cenvat credit and interest on duly. Thus the appeal was partly allowed, as regards the penalty to the extent indicated. Aggrieved by such order, the respondent/assessee preferred appeal to the Tribunal, in which three questions were considered by the Tribunal viz.

(i) Whether the penalty imposed on the respondent/assessee should be set aside in toto;

(ii) Whether the demand of interest deserves to be set aside and

(iii) Whether the respondent/assessee was entitled to Modvat credit on inputs used in the final products cleared during the period in dispute?

The Tribunal pointed out that the respondent/assessee had classified their product under Chapter Heading 52.08 based on certain decisions of the Tribunal. However, there was contrary decisions rendered by other benches of the Tribunal and ultimately, the larger bench of the Tribunal upheld the classification initially adopted by the respondent/assessee. Though the respondent/assessee had accepted the classification of the Department, the Tribunal observed that the facts and circumstances of the assessee''s case cannot be treated as a case of misclassification or misdeclaration of the description of the goods and the Tribunal held that in the context of classification, there is hardly any difference, mis-statement of description of goods and misclassification of goods and in such circumstances, the party cannot be held to have misclassified their products with intent to evade payment of duty. Further, it pointed out that the assessee''s claim to classify the goods under Chapter 22 was supported by decisions of the Tribunal and therefore, the ground raised by the department for levying interest cannot be sustained.

Learned Standing Counsel appearing for the Revenue reiterated the contentions raised in the memorandum of grounds of appeal and submitted that the Tribunal erred in deleting the penalty and interest and extending the benefit of Modvat credit, when the respondent/assessee was not registered with the Department during the relevant time.

Learned counsel appearing for the respondent/assessee seeking to sustain the order of the Tribunal submitted that the Larger Bench decision of the Tribunal has upheld the classification initially adopted by the respondent/assessee and therefore there was no intention to evade payment of duty and the Tribunal rightly deleted the penalty and the same is equally applicable to the demand for interest and therefore, prayed for conforming the order of the Tribunal.

As regards the claim for Modvat credit, it is submitted that since the goods in question were claimed to be exempted as per the Notification according to the assessee, they were not registered with the Department and there is no requirement for such registration in accordance with clause 1(i)(b) of Notification No. 36/2001-C.E. (N.T.), dated 26-6-2001, which deals with exemption from registration.

Learned counsel placed reliance on the decision of the Hon''ble Supreme Court in the case of Formica India Division Vs. Collector of Central Excise and Others, and submitted that they are entitled for the benefit of the Notification.

We have heard the learned Standing Counsel appearing far the Revenue and the learned counsel for the assessee.

The first question that falls for our consideration, is with regard to penalty.

Admittedly, there was a dispute as regards the classification of the product. The respondent classified the product under chapter heading Nos. 52.08 and 54.06. This was not accepted by the Department, which resulted in the issuance of show cause notice. Though, initially the respondent/assessee contested the show cause notice, subsequently, accepted the Department''s view and accordingly paid duty on the goods. Thus the said classification issue attained finality and the respondent/assessee would not be entitled to contest the demand of duty stating that the concession given by them is not binding on the respondent/assessee.

In such circumstances, the next question would be whether the levy of penalty was justified in accordance with Section 11AC of the Central Excise Act, 1944. The penalty in the instant case has been imposed under Rule 173Q of the erstwhile Central Excise Rules, 1944 and Rule 25 of the Central Excise (No. 2) Rules, 2001 enforceable under Section 38A of the Central Excise Act, 1944. Since Rule 173Q of the erstwhile Central Excise Rules, 1944 is in pari materia to Rule 25 of the Central Excise (No. 2) Rules, 2001, though proceedings were initiated relying on both the said Rules, it would be suffice to refer to Rule 25 of the Central Excise (No. 2) Rules, 2001, which reads as follows :

"Rule 25. Confiscation and penalty.-(1) Subject to the provisions of Section 11AC of the Act, if any producer, manufacturer, registered person of a warehouse or a registered dealer,-

(a) removes any excisable goods in contravention of any of the provisions of these rules or the notifications issued under these rules or

(b) does not account for any excisable goods produced or manufactured or stored by him; or

(c) engages in the manufacture, production or storage of any excisable goods without having applied for the registration certificate required under Section 6 of the Act; or

(d) contravenes any of the provisions of these rules or the notification issued under these rules with intent to evade payment of duty,-

then, all such goods shall be liable to confiscation and the producer or the manufacturer or registered person of the warehouse or a registered dealer as the case may be, shall be liable to a penalty not exceeding the duty on the excisable goods in respect of which any contravention of the nature referred to in clause (a) or clause (b) or clause (c) or clause (d) has been committed, or rupees ten thousand, whichever is greater.

(2) An order under sub-rule (1) shall be issued by the Central Excise Officer, following the principles of natural justice."

In terms of the above Rule, it should be seen whether the ingredients such as fraud, collusion, wilful mis-statement, suppression of fact or contravention of any of the provisions of the Rule, postulates a positive act to result in intention to evade payment of duty and mere failure to pay duty would not be sufficient to attract the penal provision under the aforesaid rule. When we perused the case of the facts, it is evidently clear that there is no allegation against the assessee and having committed any fraud or made any willful mis-statement or suppressed the facts or contravened any of the provisions of the Rule with an intention to evade payment of duty. Unless these ingredients are present in the show cause notice, the question of levying penalty does not arise. Therefore, the Tribunal rightly deleted the penalty.

The next issue would be whether the demand of interest was justified and whether the reasons assigned by the Tribunal to delete the levy of interest was proper and justified.

Section 11AB of the Central Excise Act 1944 deals with interest on delayed payment of duty, which reads as follows :

"(1) Where any duty of excise has not been levied or paid or has been short-levied or short-paid or erroneously refunded by reason of fraud, collusion or any wilful mis-statement or suppression of facts, or contravention of any of the provisions of this Act or the rules made thereunder with intent to evade payment of duly, the person shall liable to pay duty as determined under sub-section (2) of Section 11A shall in addition to the duty, be liable to pay interest at such rate not below ten per cent and not exceeding thirty per cent, per annum, as is for the time being fixed by the Board, from the first day of the month succeeding the month in which the duty ought to have been paid under this Act or the rules made thereunder or from the date of such erroneous refund, as the case may be, but for the provisions contained in sub-section (2) of Section 11A, till the date of payment of such duty.

(2) For the removal of doubts, it is hereby declared that the provisions of sub-section (1) shall not apply to cases where the duty became payable before the date on which the Finance (No. 2) Bill, 1996 receives the assent of the President.

Explanation-1 Where the duty determined to be payable is reduced by the Commissioner (Appeals), the Appellate Tribunal or, as the case may be, the Court, the interest shall be payable on such reduced amount of duty.

Explanation-2-Where the duty determined to be payable is increased or further increased by the Commissioner (Appeals), the Appellate Tribunal or, as the case may be, the Court, the interest shall be payable on such increased or further increased amount of duty.

Penalty for short-levy of duty in certain cases."

In terms of the above provision, whether any duty of excise has not been levied or paid or have been short levied by reason of fraud, collusion or any willful misstatement or suppression of facts, or contravention of any of the provisions of this Act or the rules made thereunder with intent to evade payment of duty, the person shall liable to pay duty as determined under sub-section (2) of Section 11A shall in addition to the duty, be liable to pay interest. Therefore, the liability to pay interest would arise in case where there has been a delayed payment of duty as determined under Section 11A(2) of the Act, which was with an intention to evade payment of duty and in such circumstances, the assessee would be liable to pay interest.

In the preceding paragraphs, we have held that there was no intention on the part of the assessee to evade payment of duty and there was a dispute as regards the classification of the product. Therefore, the Tribunal was justified in deleting the interest. Even though interest on the duty demanded, is statutory, yet when the statute requires the stated conditions as referred to above, the Tribunal rightly concluded that interest was not chargeable on the facts of the case.

The next issue would be whether the Tribunal was correct in holding that the assessee was entitled for Modvat credit. It is not in dispute that at the relevant point of lime, the assessee was not registered with the Department.

Learned counsel for the assessee placed reliance on the decision of Formica India Division (cited supra). The said decision was also pressed into service before the First Appellate Authority and the First Appellate Authority while considering the aspect went into the factual issue and pointed out that the assessee had not obtained Central Excise Registration Certificate while manufacturing industrial fabrics and had not followed any Central Excise procedural formalities while clearing such industrial fabrics and this aspect was not disputed by the assessee. Therefore the First Appellate Authority held that the assessee had not fulfilled the several conditions stipulated statutorily such as duty paid nature of the inputs, use of the duty paid inputs in the manufacture of dutiable finished goods to substantiate their claim for Cenvat credit. After taking note of the decision in the case of Formica India Division (cited supra), the First Appellate Authority pointed out that the assessee had not satisfactorily explained before the original authority or substantiated before the First Appellate Authority that they are entitled to the claim for Cenvat credit. This finding of fact recorded by the First Appellate Authority has not been set at naught by the Tribunal rather no reasons have been given by the Tribunal for permitting the credit to be availed by the assessee.

Admittedly, at the relevant point of time, the assessee was not registered with the Department and in fact, it subsequently obtained registration from the Department and therefore, if at all the assessee is entitled to any credit it would accrue only subsequent to the date of the registration with the Department. Even though the assessee claimed exemption on the ground that they had subsequently registered with the Department, as regards the liability as found in the order of adjudication as well as in the order of the Tribunal, we do not find any justifiable ground to accept the plea of the assessee based on the exemption Notification alone that the registration being not a mandatory one, the assessee would be entitled to the benefit of Modvat credit.

In the circumstances, we set aside the order of the Tribunal that the credit effected on the industrial fabrics could be availed of only after the registration that the assessee had taken, which was not there during the relevant period of time. In the result, appeal is partly allowed by setting aside the order of penalty and interest. No costs.