Commissioner of Cus. and C. Ex. vs J.S. Gupta and Sons

Heard Sri Ramesh Chandra Shukla, learned Counsel for the appellant and Sri Pankaj Bhatia, learned Counsel for the respondents. This appeal under Section 130A of the Customs Act, 1962 has been filed against the judgment and order passed by the Customs, Excise & Service Tax Appellate Tribunal, New Delhi dated 27-9-2011 in Excise Appeal No. C/436/2001 (2012) 275 ELT 449 (Tri.-Del.)].

Brief facts giving rise to the present appeal are that:--

"M/s. J.S. Gupta & Sons village Jivai, Delhi Road, District J.P. Nagar (hereinafter referred as M/s. JSG) a 100% EOU was granted by the permission of Assistant Development Commissioner, NEPZ, Noida vide order dated 15-12-2000 and subsequently by an amended order dated 12-12-2003, Customs License No. EOU/17/2001 w.e.f. 18-1-2001. The EOU scheme governed by the Export & Import (EXIM) Policy provides for duty free imported/indigenous procurement of raw materials, capital goods etc. for the manufacture of export. M/s. JSG to manufacture (1) Metal wares, glass wares, wooden wares, (2) Decorative clocks, Lamps sheds, Upholstery, (3) Corrugated boxes (captive consumption) and (4) Sculptures & statuary in stone, cement or other material subject to observance with certain conditions. The relevant conditions are as follows:--

(a) The unit shall export its entire production excluding rejects and sales in the DTA as per provisions of Exim Policy for a period of five years.

(b) The unit would be under obligation to achieve the minimum stipulated level of NEPF as prescribed in Appx-1 of the Exim Policy.

(c) The unit shall be Customs bonded and execute a general bond in form B-17 (with surety/security) binding themselves, inter alia--

(i) to observe all the provisions of Customs Act, 1962, Central Excise Act, 1944 and the rules regulations made thereunder;

(ii) pay on demand all duties and rent and charges claimable on account of the said goods under Customs Act, Central Excise Act and Rules/Regulations made thereunder;

(iii) to observe and comply with all the provisions of the manufacture and other operations in a Warehouse Regulation, 1966, Warehoused Goods (Removal) Regulation, 1964;

(iv) to maintain detailed accounts of all imported and indigenous goods used in the manufacturing processes and in operation in proper form including of those remaining stocks and those sent outside."

There was also pre-condition that the unit shall comply with such other terms and conditions as imposed by the jurisdictional Customs and Central Excise authorities and the substantial activity of manufacture shall be carried out within the bonded premises in terms of C.B.E. & C. Circular No. 65/2002-Cus. dated 7-10-2002 . The relevant provisions of said circular are as follows:--

"(i) The EOU shall be required to submit an application to jurisdictional Assistant/Deputy Commissioner of Customs/Central Excise furnishing information such as the name and address of the job worker, Central Excise registration No. of the job worker, (if registered with Central Excise), processing capacity of the job worker, the details of processes to be carried out by the job worker, justification for processing of the goods outside the bonded premises, value addition to be achieved by the job worker etc.

(ii) It should be ensured that the substantial activity of manufacture is carried out within the bonded premises.

(iii) It should be possible to establish the identity of finished products received after job work with the raw materials/components/partially processed goods so that there is no substitution/diversion of duty free goods in the DTA.

(iv) The unit sending out goods for job work in DTA shall be required to give an intimation to the jurisdictional officer and a sample of the goods being sent out for job work shall be drawn and retained in the range office. On receipt of the goods after job work, the bond officer shall establish the identity of the goods so returned with reference to the sample retained by him at the time of removal.

(v) The unit sending out imported or domestically procured raw material/components etc. as it is, i.e. without being subjected to any processing in the unit for job work in the DTA, shall be required to furnish 100% Bank guarantee to cover the duty foregone on such duty free materials being taken out."

M/s. JSG was granted all facilities and privileges of EOU scheme. The EXIM Policy provided for duty free imported/indigenous procurement of raw-materials, capital goods etc. for the manufacture of export goods. At the same time, it was also obligatory on the part of an EOU to strictly follow the prescribed procedures, as laid down in Condition No. (3), (4) & (6) of Notification No. 53/97-Cus., dated 3-6-1997, Condition No. 3(b), (c) & (d) of Notification No. 52/2003-Cus. dated 31-3-2003 and Condition No. (d) of Notification No. 1/95-C.E. , dated 4-1-1995, as amended.

Conditions No. (3), (4) & (6) of Notification No. 53/97-Cus., inter alia, envisages as under:--

"(3) The importer carries out the manufacture, production, packaging or job work or service in Customs bond and subject to such other conditions as may be specified by the Commissioner of Customs in this behalf.

(4) Importer exports out of India 100% or such other percentage, as may be fixed by the said Board, or article manufactured wholly or partly from the goods during the period stipulated by the said Board or such extended period as may be specified by the said Board.

(6) The importer executes a bond in such form and for such sum and with such security or surety as may be prescribed by the Assistant Commissioner of Customs, binding himself to fulfill the export obligations and conditions stipulated in this notification and in or under said Export and Import Policy and to pay on demand an amount of equal to the duty leviable on the goods as are not proved to the satisfaction of the Assistant Commissioner of Customs to have been used in the manufacture of articles or in connection with the production or packaging or job work for export of goods or services out of India."

Condition No. 3(b), (c) & (d) of Notification No. 52/2003-Customs dated 31-3-2003 , inter alia, reads as under:--

"(b) To maintain proper account of receipt, storage and utilization of the goods;

(c) To dispose of goods or services, the articles produced, manufactured, processed and packaged in the unit or the waste, scrap and remnants arising out of such production, manufacture, processing or packaging in the manner as provided in the EXIM policy ad this notification;

(d) To pay on demand--

(i) an amount equal to duty leviable on the goods and interest at a rate as specified in the notification of the Govt. of India in the Ministry of finance (Department of Revenue) issued under Section 28 AB of the said Customs Act on the said duty from the date of duty free import of said goods till the date of payment of such duty, if-

(ii) in the case of goods other than capital goods, such goods as are not proved to the satisfaction of the said officer to have been used in connection with the production or packaging of goods for export out of India or cleared for home consumption within a period of three years from the date of import".

Condition No. (d) of Notification No. 1/95-C.E., dated 4-1-1995, as amended, inter alia reads as under:--

(d) the user industry executes a Bond with jurisdictional Assistant Commissioner of Central Excise for proper accountal of receipt, storage and utilization of such goods and to fulfill export obligation and to comply with the conditions stipulated in this notification and the Export and import Policy, and binding itself to pay on demand an account equal to the duty leviable on the goods and interest on the said duty from the date of duty free procurement of the said goods till the date of payment of such duty, if-

(i)....

(ii) in the case of goods other than capital goods, such goods are not proved to the satisfaction of the Assistant Commissioner or Deputy Commissioner of Customs or Central Excise to have been used in connection with the production or packaging of goods for export out of India or cleared for home consumption...."

In the present matter controversy started, when an information were collected by the officers of the department that M/s. JSG were engaged in diverting the imported duty free raw material through its related firm M/s. C.L. Gupta & Sons, Rampur Road, Moradabad (hereinafter referred to as M/s. CLG) and accordingly, searches were conducted simultaneously at both the premises on 2-1-2004 by the department. During the course of search conducted at M/s. JSG, physical verification of duty free imported/indigenous goods viz. Kraft paper, Clock movements, zinc ingots and lamp parts at work-in-process stage was conducted, which on correlation with warehousing register reveals shortages. Physical verification of the raw material was also conducted at the premises of M/s. CLG, having common partners with M/s. JSG, which resulted into recovery and seizure of the goods.

It has also been alleged that at the time of search, the account officer of M/s. CLG could not produce any record showing purchase/receipt nor could furnish any plausible reasons for acquisition of the goods of foreign origin. As such the officers had drawn a reasonable belief that the goods of foreign origin were not acquired validly and seized the same under Section 110 of the Customs Act, 1962. In this regard, show cause notice had been issued to the opposite parties on 30-6-2004. It has been alleged that from scrutiny of the records/documents resumed from the premises of M/s. JSG and M/s. CLG, it appears that M/s. JSG, through sister unit namely, M/s. CLG, instead of utilizing the duty free goods in the manufacture of the export goods, as laid down in Condition No. 3 of notification dated 22-4-2003 and as per Condition No. (d) of notification dated 4-1-1995 as amended, have diverted the same. In the relevant period, M/s. JSG had imported/duty free copper weighing 149.330 tons and also procured 82.776 MT Zinc. This quantity during this period, they exported Brass articles weighing 195.04 tons and there was closing balance of 10.92 tons of finished goods made of Brass and raw material weighing 7.45 tons at the end of the year. Finally, it has been alleged by the department that during 2001-2002 M/s. JSG have diverted duty free Copper Cathodes, Zinc Ingots, Clock Movements & Kraft Paper involving Customs duty amounting to Rs. 2438802.00, SAD amounting to Rs. 466820.00 & Central Excise duty amounting to Rs. 2547332.00 (total duty Rs. 5284399 after deducting Rs. 168555 on account of 4.137 MT Copper Cathode/Zinc Ingots said to have been used during in house manufacture of 3.889 MT brass silli by the party during the year 2001-02 from the total duty of Rs. 5452954) from their factory in contravention of Notification No. 53/97-Cus., dated 21-2-98 (sic) and Section 71 of the Customs Act, 1962. Finally it had been observed that during the period 1-4-2002 to 26-9-2002 M/s. JSG have removed duty free Kraft Paper, Aluminum Ingots, Copper Cathodes, Zinc Ingots, HSD, Tin Ingots and Clock Movements involving Customs duty amounting to Rs. 1698872.00, SAD amounting to Rs. 368285.00 and Central Excise duty amounting to Rs. 4653950.00 from their premises to M/s. CLG in an irregular manner in contravention of provisions of Notification No. 53/97-Cus., dated 3-6-97, Notification No. 1/95-C.E., dated 4-1-1995, C.B.E. & C.''s Circular No. 88/98-Cus., dated 21-2-1998 and Section 71 of the Customs Act, 1962.

In defence, reply was filed by M/s. C.L. Gupta Exports Ltd. and M/s. JSG and its partners on 8-12-2006. It has been stated that M/s. C.L. Gupta Exports Ltd. made a humble beginning in the year 1889, promoted by late C.L. Gupta, a visionary, philanthropist and eminent citizen of Moradabad who was the great grandfather of the present Directors. The firm C.L. Gupta & Sons, as it was known then, was engaged in the manufacturing of brass utensils and art wares which further diversified into exports in the year 1955. In 1955, the firm established manufacturing facility at Rampur Road, Moradabad, however, later when the manufacturing activities and the quantum of export increased, the firm established another manufacturing facility at the village Jiwai in the year 1994. After establishment of the two factories, the unit at the Rampur Road was known as C.L. Gupta & Sons, Head Office or Unit-I, whereas, the Jiwai unit was known as C.L. Gupta & Sons, Unit-II.

It has been further stated that in the year 2000, in order to consolidate export activities, another partnership firm M/s. J.S. Gupta & Sons was established as a 100% EOU. M/s. J.S. Gupta & Sons, later applied and obtained a letter of Permission to operate as 100% EOU vide LOP No. 3-243/2000-100% EOU-1/9593, dated 15-12-2000 issued by the Development Commissioner, NSEZ, and a Warehousing Licence No. EOU/17/2001, dated 18-1-2001 issued by the jurisdictional Central Excise Division, Moradabad.

M/s. J.S. Gupta & Sons, the 100% EOU, commenced commercial production with effect from 19-5-2001 and performed extremely well on export front and achieved commendable Net Foreign Exchange Earnings.

The Noticee''s achievements were recognized by the Ministry of Commerce and M/s. J.S. Gupta & Sons were awarded Top Export Award by the Export Promotion Council for Handicrafts (EPCH) for the year 2004-2005 and also outstanding Export Award for the year 2004-2005 by the Export Promotion Council for EOUs. Besides, the noticee M/s. JSG was also awarded recognition certificates for excellent performance. M/s. JSG was also granted 2-star Export House Status by the Ministry of Commerce and Industry.

It has been emphatically stated that the M/s. JSG were providing direct and indirect employment to thousands of artisans/workers for the past five years. On the date of amalgamation of the noticee firm J.S. Gupta & Sons into C.L. Gupta Exports Ltd., the unit had a capital layout of approximately Rs. 51 crores and provided direct employment to approximately 2000 artisans in Moradabad and indirect employment to another 2000 persons throughout the country.

The M/s. JSG and its predecessors are in existence for the last 115 years and have a glorious history of impeccable reputation in the global market and clean track record of compliance to the law of the land. The noticee and its predecessor who are in the field of export since 1955 have never been found erring by any agency till 2004 when the impugned raids were conducted. Though during the interregnum the statutory Central Excise Audit parties and the jurisdictional officers of various government agencies visited the unit on a number of occasions however, on all occasions not a single instance of any violation, international or inadvertent was ever noticed by any of the agencies/officers.

The M/s. JSG came into existence in 2000 and was established as a 100% EOU under LOP dated 15-12-2000 issued by the Development Commissioner, NSEZ and on creation of JSG, a part of the CLG-II factory at Jiwai was transferred to JSG which was later appointed as a private bonded warehouse and manufacturing unit under Section 58 and Section 65 of the Customs Act, 1962 vide a warehousing Licence No. EOU/17/2001, dated 18-1-2001 issued by the Jurisdictional Central Excise Division, Moradabad. Though on creation of the JSG, the larger part of the unit at Jiwai was converted into 100% EOU and declared a bonded area, a part comprising a two storey building was retained by the CLG Unit-II and was not bonded.

It has been further stated that due to the compulsion that JSG was a nascent unit and workers were also not willing to relocate themselves to a far off area, the unit was constrained to outsource certain operations to CLG (HQ) premises and for the aforesaid purpose, a number of independent job work contractors and salaried employees of JSG were deployed at CLG (HQ) premises who carried out the manufacturing operations for JSG from the material supplied by JSG. Besides two senior employees of JSG were also stationed at the aforesaid premises for the supervision of receipt, dispatch and manufacturing, inventory control and accounting of payments made to the employees/job workers of JSG stationed at CLG premises.

The manufacturing space and equipments to JSG''s contractual job workers also known as "Karkhanedars" were provided at both the premises by the JSG so also the power connections. The material for job working was issued to them through Lal Bahi and the material received from them was also entered into the same. The payments to job workers were thereafter made after deduction of TDS.

The manufacturing of brass art ware and the allied products is basically a labour intensive manufacturing process carried out by individual artisans having expertise in various aspects of manufacturing such as casting, carving, polishing, art work etc. which are basically handicrafts. Due to this peculiar nature of operations, an inventory control system and issue, receipt system have been devised and developed over decades to suit the peculiar operations of the industry which is prevalent in most of the manufacturing units at Moradabad."

The opposite parties through their reply has vehemently opposed the show cause notice and by means of reply they had submitted that allegation of abating diversion of duty free goods were not correct and their allegation that M/s. C.L. Gupta and sons had colluded with JSG in diversion of duty free goods was not tenable and they had not misused any provisions of aforesaid circulars, rules and regulations.

We have heard the rival submissions and perused the record.

The M/s. JSG & Sons is a 100% EOU approved by GOI for manufacture of (1) Metal Wares, Glass Wares, Wooden Wares (2) Decorative clocks, Lamp Sheds, Upholstery (3) Corrugated Boxes (4) Sculptures and Statutory in stones, Cement and other material.

The department have received certain information against M/s. JSG regarding some diversion of the raw material imported duty free to their sister concern M/s. CL Gupta and sons, simultaneous searches were made on both the premises on 2-1-2004 and on the basis of searches certain shortages of imported goods were found in the premises of JSG and certain materials which were detected at the premises of M/s. CLG proprietors, and they were unable to show proper documents and other records. It has been alleged that goods imported duty free by M/s. JSG were diverted to M/s. CLG in contravention of the circular dated 7-10-2002 and as per circular while sending out such material, the procedural clearance were required from the department. The assessee has submitted its reply that there might be some deviation in the procedure but all goods which were send out for job work to M/s. CLG, were received back and were properly accounted. The Adjudicating Authority constituted a Committee of officers to look into the claim of M/s. JSG and by inspecting all documents produced before him.

It appears that from scrutiny of the records/documents resumed from the premises of M/s. JSG and M/s. CLG for an allegation that duty free imported raw material were diverted through sister unit, instead of utilizing the duty free goods in the manufacture of the export goods in the bonded premises and the revenue through show cause notice dated 31-5-2005 had issued detailed demand notice to the assessee under Customs Act, 1962 and Central Excise Act, 1944. In reply the assessee had filed very detailed reply refuting the allegation levelled by the Revenue and finally the Commissioner, Central Excise passed the order dated 30-4-2007.

After hearing the parties and perusing the material on record, the Commissioner of Central Excise, Meerut-II had passed the following order dated 30-4-2007 against the opposite party:--

"(1) Invoking the extended period of limitation I confirm the duty demand of Rs. 1083063.00 under Section 72 of the Customs Act, 1962, read with Section 28 of Customs Act, 1962 and Section 11A of the Central Excise Act, 1944, read with Section 28 of the Customs Act, 1962, together with the interest chargeable under Section 28AB and Section 11AB of the Acts ibid on M/s. J.S. Gupta & Sons (now M/s. C.L. Gupta Exports Limited), as under:

(a) of Rs. 205916.00 + Rs. 622903.00 : Rs. 828819.00 in respect of HSD

(b) of Rs. 16293.00 in respect of plywood.

(c) of Rs. 200101 in respect of cobalt oxide

(d) Rs. 37850.00 in respect of the semi-finished articles and brass samples which the party failed to get them verified for the period 1-4-2002 to 26-9-2002.

(2) A penalty of Rs. 5 lakh (Rupees five Lakh only) is imposed on M/s. J.S. Gupta & Sons (now M/s. C.L. Gupta Exports Limited) under Section 112 read with Section 72 of the Customs Act, 1962, under Section 11AC of Central Excise Act, 1944 and Rule 25 of the Central Excise Rules 2002.

(3) A penalty of Rs. Two lakh is imposed on M/s. C.L. Gupta & Sons, Rampur Road, Moradabad under Section 112 of the Customs Act, 1962 under Section 11AC of Central Excise Act, 1944 and Rule 25 of the Central Excise Rules, 2002.

(4) The goods in respect of which duty has been demanded are liable for confiscation. I confiscate the same under Section 111(J) and 111(O) of the Customs Act, 1962 and Rule 25 of the Central Excise Rules, 2002 and impose a fine of Rs. One lakh for their redemption.

(5) No penalty is imposed on the partners and the employees.

(6) The rest of the demand is vacated and I order accordingly.

(7) The proposal for cancellation of licence under Section 58 of the Customs Act, 1962 is dropped.

Ordered accordingly."

Aggrieved with the order dated 30-4-2007 passed by the Commissioner of Central Excise, Meerut-II, the department has preferred Appeal No. C/534/2007 (C.C.E., Meerut-II v. M/s. J.S. Gupta & sons) and finally the Tribunal vide order dated 21-7-2011 2012 (275) ELT 449 (Tri.-Del.)] had rejected the appeal filed by the Revenue with following observations:--

"15. We have considered the arguments on both sides. In principle we are in agreement with the argument of Revenue that verifications conducted with reference to documents when the goods are not available cannot in most situations identify the goods as the ones manufactured using imported raw material. But we are of the view that the whole facts have to be seen together before coming to a final conclusion. This is a factory which worked under the supervisions of two Central Excise officers posted in the factory. All documents relating to removals were under scrutiny by these officers. Further the returns filed by the unit also were to be scrutinized. The department did not point out any contraventions. So issuing a demand in the year 2005 for non-compliance with procedural rules for the years 2001-02 to 2003-04 is not justified. In such a situation the verification got done by the adjudicating authority based on records has to be respected. In the facts of the case such as that the officers were supervising the clearances and the Respondent had documents showing satisfactory accounting of the goods and that they had exported goods earning sufficient foreign exchange, the case made out by revenue cannot be sustained in the absence of evidence showing sale of the imported goods in the local market. No such evidence has been produced by Revenue.

The decision of the Apex Court in the case of Hari Chand Shri Gopal (supra) is with reference to the facts of that case where there were no mitigating factors as pointed out by us above and therefore, we cannot apply the decision in that case to the facts of this case.

In the facts and circumstances of this case we do not see any merit in the appeal filed by Revenue and we approve of the very detailed and well-reasoned order passed by the adjudicating authority. So the appeal filed by Revenue is rejected. Misc. application is also disposed of accordingly."

Aggrieved with the rejection of the Custom Appeal No. C/534/2007, the present appeal is filed by the Revenue and initially following substantial question of law had been framed:--

"(i) Whether party has not fulfilled the mandatory condition of Exemption Notification and Board''s Circular meant for EOU when they diverted duty free imported material to DTA in the guise of job work for which they have not obtained any permission and thus the party has not carried out substantial compliance as defined in the judgment of Hon''ble Supreme Court in the case of Commissioner of Central Excise, New Delhi Vs. Hari Chand Shri Gopal and Others, etc. etc., wherein it has been held that:--

"substantial compliance - Test for determining applicability of substantial compliance doctrine-Question to be examined is whether requirements related to "substance" or "essence" of the statute and if so, strict adherence to such requirements is a precondition to give effect to the doctrine-Requirements, if procedural or directory and not of the "essence" but given for orderly conduct of business, to be fulfilled by substantial, if not strict compliance-Actual compliance of factors considered as essential required and mere attempted compliance not sufficient.

Words and Phrases-Substantial compliance-Substantial compliance means actual compliance in respect of the substance essential to every reasonable objective of the statute."

This Court vide order dated 27-11-2012 had passed the following order:--

"Questions of Law framed by the appellant in the memo of appeal are argumentative in nature and does not bring out the real controversy involved.

Let Questions of Law be re-framed.

List in the next cause list."

In compliance of the said order, the learned Counsel for the appellant had filed supplementary affidavit and framed the following questions of law:--

"(1) Whether on the facts and in the circumstances of the case, the CESTAT, New Delhi is justified in law in holding that the decision of the Hon''ble Supreme Court in the case of Commissioner of Central Excise, New Delhi Vs. Hari Chand Shri Gopal and Others, etc. etc., is distinguishable and would not apply to the facts of the present case?

(2) Whether on the facts and in the circumstances of the case, the CESTAT was justified in law in holding that the case made out by the Revenue cannot be sustained in the absence of evidence showing sale of imported goods in local market, while in fact JSG was well aware of the procedures to be followed in respect of removal raw material from an 100% EOU and SSG had followed such procedures for removal to all other units other than CCG in the past?

(3) Whether on the facts and in the circumstances of the case, the CESTAT was justified in law in holding that contravention of the condition 3(b)(c) and 9(d) of the Exemption Notification No. 52/2003 Cus., dated 22-4-2003 and 1/95-C.E., dated 4-1-1995 was bona fide mistake and no loss is caused to Revenue but if fact failure on the part of SSG was not bona fide but was intended to gain advantage by selling imported goods in local market?

(4) Whether on the facts and in the circumstances of the case, the CESTAT was justified in law in overlooking that as per Export and Import Policy 2002-07 and C.B.E. & C. Circular No. 65/2002-Cus., dated 7-10-2002 on EOU can send material for job work on the basis of proper application and prior permission of the competent authority subject to condition that substantial activity of manufacture is carried out within the EOU and identity of finished goods received after job work is established as having been manufactured out of the raw material sent for job work to ensure that no substitution/diversion of duty free goods takes place?"

Initially in the present appeal, the questions of law were framed by the appellant in the memo of appeal and this Court vide order dated 27-11-2012 had observed that the said question of law were argumentative in nature and does not bring out real controversy involved and accordingly, leave was granted for re-framing the substantial questions of law and again the question of law as indicated above had been filed alongwith supplementary affidavit.

The main controversy in the present matter is that the some diversion of raw material imported duty free to their sister concern M/s. C.L. Gupta and sons and on the basis of searches certain shortages of imported goods were found in the premises of JSG. The M/s. JSG was granted Custom licence and as per scheme governed by the export and import EXIM policy, it had been provided for duty free imported/indigenous procurement of raw materials, capital goods etc. for the manufacture of export and there was also pre-condition that the unit shall export its entire production including rejects and sales in the duty. As per provision of EXIM Policy it is no doubt that the unit had executed a general bond in form B-17 (with surety/security) binding themselves to observe all the provisions of Customs Act, 1962, Central Excise Act, 1944 and the rules regulations made thereunder.

It was also paramount responsibility of JSG that it had to carried out the substantial activity to manufacture within the bonded premises in terms of C.B.E. & C. dated 7-10-2002. It was also pre-condition to the unit, if they were sending out goods for job work in DTA shall be required to give an intimation to the jurisdictional officer and a sample of the goods being sent out for job work shall be drawn and retained in the range office and after receipt of the goods after job work, the bond officer shall establish the identity of the goods so returned with reference to the sample retained by him at the time of removal.

During the year 2001-02, the Imported Raw Material Register indicate that M/s. JSG have shown to have issued 107.464 MT Copper Cathodes and 55.778 MT Zinc ingots totally weighing 163.242 MT for manufacture of Brass articles within their premises. During this period M/s. JSG had imported/duty free copper weighing 149.330 tons and also procured 82.776 MT zinc. Against this quantity during this period, it had exported Brass articles weighing 195.04 tons and there was closing balance of 10.92 tons of finished goods made of Brass and raw material weighing 7.45 tons at the end of the year. As per the manufacturing process, during the course of manufacture of the brass articles, brass silli emerges at the intermediate stage and in the process loss to the tune of 6% occurs during the course of manufacture of Brass Silli by conversion of copper cathodes and zinc ingots.

A plea was taken by the manufacture that brass art ware and the allied products is basically a labour intensive manufacturing process carried out by individual artisans having expertise in various aspects of manufacturing such as casting, carving, polishing, art work, etc. which are basically handicrafts. Due to this peculiar nature of operations, an inventory control system and issue, receipt system have been devised and developed over decades to suit the peculiar operations of the industry which his prevalent in most of the manufacturing units at Moradabad.

It is also apparent from the record that the calculation and determination of job work charges, a peculiar practice of accounting specific to metal handicraft industry is prevalent in Moradabad for decades whereunder after negotiation of job charges material is issued to the job workers indicating notional price and the finished product is also received against a notional price and the difference of the two is paid as job work charges. This peculiar practice helps in controlling cost and weight of individual articles besides inventory control and avoidance of theft.

It had been consistently pleaded by the manufacturer that at every stage the entire operations were carried out in the bonded area and in the cases where part operations were carried out at CLG premises, in addition to the initial operation of segregation, etc., the operation of final finishing, inspection and packing were carried out in the bonded area before exportation.

A categorical plea has been taken on behalf of manufacturer that during the relevant period, all the material procured, whether duty free or duty paid, were being entered into Material Receipt Note (MRN) and thereafter the duty free material was being entered into Warehousing Register and was stored in the Excise Warehouse after physical examination and under supervision of the Bond Officer.

Basically, the main charge against the manufacturer that it had diverted the imported/legally procured duty free raw material and had not utilized in manufacture and export of product and had diverted duty free material to local market and had substituted the same with legally procured material is also unsustainable specially on the ground that no evidence, whatsoever, of sale of duty free raw material or any clandestine procurement of local raw material could be established by the Revenue and further the allegation of violation of EXIM Policy, notification and guidelines stipulated in the circulars, the M/s. JSG had complied with substantive provisions and used the material in accordance with the purposes of the scheme for manufacture of articles/products, which were eventually exported under the physical supervision of authorities and if there is any minor lapses, the same was only procedural in nature.

It is also relevant to highlight at this stage, the procedural lapse of non-obtaining permission for the job work was also regularized by M/s. JSG by obtaining requisite work from the jurisdictional Commissioner on 11-5-2005.

It is not denied that there might be some lapses in the observance of said notification, however, from the record there is no glaring averment which could establish that there was some deliberate deviation/disposal of material or any other loss to Revenue, but imported/duty free procured material were utilized in accordance with the notifications, for the manufacture of export products which were exported under physical supervision of Central Excise officers.

The Hon''ble Apex Court in the case of Mangalore Chemicals and Fertilisers Ltd. Vs. Deputy Commissioner of Commercial Taxes and others, held that non-compliance with substantive and mandatory requirement fatal but non-compliance with formal and procedural requirement not fatal to the application for grant of permission. The relevant paragraph Nos. 18, 19, 20, 23, 24 are reproduced herein below:

"18. Learned Counsel submitted that the point was not whether there was any justification for delaying the permission; but, more importantly, whether appellant at the relevant point of time had such prior permission or not and that if, in the meanwhile, the period itself expired, no relief was possible as, quite obviously, the requirements of ''prior permission'' became impossible of compliance.

Shri Narasimhamurthy relied on the following observations of this Court in Kedarnath Jute Manufacturing Co. case to support this contention:

"...But the said exemption is made subject to a proviso. Under that proviso, in the case of such sales a declaration form duly filled up and signed by the registered dealer to whom the goods are sold and containing the prescribed particulars on a prescribed form obtainable from the prescribed authority has to be furnished in the prescribed manner by the dealer who sells the goods....

The provision prescribing the exemption shall, therefore, be strictly construed.... To accept the argument of the learned Counsel for the appellant is to ignore the proviso altogether, for if his contention be correct it will lead to the position that if the declaration form is furnished, well and good; but, if not furnished, other evidence can be produced. That is to rewrite the clause and to omit the proviso. That will defeat the express intention of the legislature."

We have given our careful consideration to these submissions. We are afraid the stand of the Revenue suffers from certain basic fallacies, besides being wholly technical. In Kedarnath case, the question for consideration was whether the requirement of the declaration under the proviso to Section 5(2)(a)(ii) of the Bengal Finance (Sales Tax) Act, 1941, could be established by evidence aliunde. The Court said that the intention of the legislature was to grant exemption only upon the satisfaction of the substantive condition of the provision and the condition in the proviso was held to be of substance embodying considerations of policy. Shri Narasimharnurthy would say the position in the present case was no different. He says that the Notification of August 11,1975 was statutory in character and the condition as to ''prior permission'' for adjustment stipulated therein must also be held to be statutory. Such a condition must, says Counsel, be equated with the requirement of production of the declaration form in Kedarnath case and thus understood the same consequences should ensue for the noncompliance. Shri Narasimharnurthy says that there was no way out of this situation and no adjustment was permissible, whatever be the other remedies of the appellant. There is a fallacy in the emphasis of this argument. The consequence which Shri Narasimharnurthy suggests should flow from the non-compliance would, indeed, be the result if the condition was a substantive one and one fundamental to the policy underlying the exemption. Its stringency and mandatory nature must be justified by the purpose intended to be served. The mere fact that it is statutory does not matter one way or the other. There are conditions and conditions. Some may be substantive, mandatory and based on considerations of policy and some others may merely belong to the area of procedure. It will be erroneous to attach equal importance to the non-observance.

Francis Bennion in his Statutory Interpretation, (1984 edn.) says at page 683:

"Unnecessary technicality: Modern Courts seek to cut down technicalities attendant upon a statutory procedure where these cannot be shown to be necessary to the fulfilment of the purposes of the legislation."

Shri Narasimharnurthy again relied on certain observations in CCE v. Parle Exports (P) Ltd., in support of strict construction of a provision concerning exemptions. There is support of judicial opinion to the view that exemptions from taxation have a tendency to increase the burden on the other unexempted class of tax payers and should be construed against the subject in case of ambiguity. It is an equally well known principle that a person who claims an exemption has to establish his case. Indeed, in the very case of Parle Exports (P) Ltd. relied upon by Sri Narasimharnurthy, it was observed:

"While interpreting an exemption clause, liberal interpretation should be imparted to the language thereof, provided no violence is done to the language employed. It must, however, be borne in mind that absurd results of construction should be avoided." The choice between a strict and a liberal construction arises only in case of doubt in regard to the intention of the legislature manifest on the statutory language. Indeed, the need to resort to any interpretative process arises only where the meaning is not manifest on the plain words of the statute. If the words are plain and clear and directly convey the meaning, there is no need for any interpretation. It appears to us the true rule of construction of a provision as to exemption is the one stated by this Court in Union of India v. Wood Papers Ltd.:

"...Truly speaking liberal and strict construction of an exemption provision are to be invoked at different stages of interpreting it. When the question is whether a subject falls in the notification or in the exemption clause then it being in nature of exception is to be construed strictly and against the subject but once ambiguity or doubt about applicability is lifted and the subject falls in the notification then full play should be given to it and it calls for a wider and liberal construction...."

(emphasis supplied)"

There are condition and conditions, some may be substantive mandatory based on considerations of policy, and some others may merely belong to the area of procedure. It will be erroneous to attach equal importance to the non-observance of all conditions irrespective of the purposes they were intended to serve. A distinction between the provisions of statute which are of substantive character and were built in with certain specific objectives or policy on the one hand, and those which are merely procedural and technical in their nature on the other, must be kept clearly distinguished. In fact, it is now a trite law that the procedural infraction of notifications/circulars etc. are to be condoned if exports have really taken place and the law is settled now that substantive benefit cannot be denied for procedural lapses. Procedure has been prescribed to facilitate verification of substantive requirements. The core aspect or fundamental requirement for debate is its manufacture and subsequent export. As long as this requirement is met, other procedural deviations can be condoned.

In Uday Shankar Triyar Vs. Ram Kalewar Prasad Singh and Another, , the Supreme Court held that procedure, a hand maiden to justice, should never be made a tool to deny justice or perpetuate injustice, by any oppressive or punitive use. The relevant para is reproduced here as under:--

"17. Non-compliance with any procedural requirement relating to a pleading, memorandum of appeal or application or petition for relief should not entail automatic dismissal or rejection, unless the relevant statute or rule so mandates. Procedural defects and irregularities which are curable should not be allowed to defeat substantive rights or to cause injustice. Procedure, a hand-maiden to justice, should never be made a tool to deny justice or perpetuate injustice, by any oppressive or punitive use. The well recognized exceptions to this principle are:--

(i) where the Statute prescribing the procedure, also prescribes specifically the consequence of non-compliance.

(ii) where the procedural defect is not rectified, even after it is pointed out and due opportunity is given for rectifying it;

(iii) where the non-compliance or violation is proved to be deliberate or mischievous;

(iv) where the rectification of defect would affect the case on merits or will affect the jurisdiction of the Court.

(v) in case of Memorandum of Appeal, there is complete absence of authority and the appeal is presented without the knowledge, consent and authority of the appellant."

In the case of Mulji Mehta & Sons Private Limited v. Commissioner of Central Excise, Mumbai - 2006 (206) E.L.T. 463 (T), the Tribunal held that even when wrong procedure has been followed, but if goods have been exported, no demand is sustainable. Para 4 from that decision is extracted below:--

"4. Considering the arguments made on behalf of the appellants as well as verification of the case records, I find that the explanation given by the appellants is satisfactory regarding their claim that the impugned goods have indeed been exported through this has been done following the wrong procedure. As such, the duty demand confirmed against the appellants is set aside. However, the small penalty of Rs. 5,000/- imposed by the lower authority for infection of the rules and procedure is confirmed. The appeal is thus allowed in the above terms. The stay application also stands disposed of."

The Hon''ble Apex Court in CC (Preventive) Amritsar Vs. Malwa Industries Ltd., has considered the controversy regarding exempting finishing agents, dye carriers, printing paste, etc. used in the same factory for manufacture of textile articles-Question whether goods to be used must be manufactured in the same factory. Held: Imported goods evidently not manufactured in same factory-Statutory scheme in terms whereof such a notification issued should also be considered - "same factory" meaning that imported goods required to be used in factory belonging to importer where manufacturing activity takes place. The relevant paragraph Nos. 9, 10, 11, 12, 13, 14 & 20 are reproduced below:--

"9. The short question which arises for consideration is Does the ''nil'' rate of duty, as provided for in the said notification dated 1-3-2006, subject to the condition that the same are used in the same factory would mean that the goods which were to be used must be manufactured in the same factory?

An exemption notification should be read literally. A person claiming benefit of an exemption notification must show that he satisfies the eligibility criteria. Once, however, it is found that the exemption notification is applicable to the case of the assessee, the same should be constructed liberally.

Section 3 of the Act, on its plain reading, provides that the goods imported into India would be liable to additional duty. The object of levy of the said duty is that an importer should not be placed at some more advantageous position vis-�-vis the purchasers/manufactures of similar goods in India.

A notification like any other provision of a statute must be construed having regard to the purpose and object it seeks to achieve. For the aforementioned purpose, the statutory scheme in terms whereof such a notification has been issued should also be taken into consideration.

It is a well-settled principle of law that where literal meaning leads to an anomaly and absurdity, it should be avoided. When the goods are imported evidently, the same would not be manufactured in the same factory. It would, therefore, be impossible to apply the provisions of Section 3(1) of the Act vis-�-vis the notification issued in the case of imported goods.

The expression "same factory", therefore, in our opinion, would mean the factory where the goods are actually manufactured. It only means that the imported goods are required to be used in the factory belonging to the importer where the manufacturing activity takes place. There is nothing in Section 3 of the Act and in particular the explanation appended to subsection (1) thereof mandating actual production or manufacture in the said factory itself. There cannot be any doubt whatsoever that if Excise duty is not leviable on manufacture of goods, the question of the importer paying any additional duty for import of like goods would not arise. That is principally the question which fell for determination in Thermax Private Ltd. (supra) and answered in the following terms:

"6. It is common ground that Customs duty is payable and has been paid on the imported goods under Customs Tariff Item No. 84.17(1) at 40 percent of the value of the imported goods plus a surcharge of 25 percent thereon. The rate of CVD, however has to be determined on the basis of Item No. 29-A of the Central Excise Tariff. It is common ground that "chillers" fall under sub-item (3) of Item No. 29-A and that the basic Excise duty payable thereon was at 80 percent of the value of the goods under the above item read with Notification No. 42 of 1984/C.E., dated March 1,1984.

****

The assessee''s claim for concession has, however, been rejected not on the ground that the second of the above conditions has not been fulfilled but on the broader ground that the procedure of Chapter X is designed to facilitate clearances only for the purposes of Central Excise and that the said procedure cannot be fulfilled at all in the case of an importer. In other words, the vie was that the second condition was such that it was attracted only for purposes of Central Excise and could not at all be invoked to claim a concession in CVD. It is the correctness or otherwise of this conclusion that has to be determined in these appeals."

We, as noticed herein before, have no quarrel with the proposition that exemption notification should be construed strictly which means that benefit thereof should not be granted to one, who is not entitled therefore. But it is also true that those who are entitled to the benefit cannot be deprived therefrom by taking recourse to the doctrine of narrow interpretation simplicity, although the purpose and object thereof would be defeated thereby.

In Kartar Rolling Mills Vs. Commissioner of Central Excise, New Delhi--> , this Court held:

"...It is trite to say that exemption notification has to be construed strictly. Since the notification came into effect from 11-4-1994, the benefit of the notification cannot be extended to the appellants retrospectively w.e.f. 1-3-1994."

In Eagle Flask Industries Limited Vs. The Commissioner of Central Excise, Pune, , this Court held:

"6. We find that Notification No. 11/88 deals with exemption from operation of Rule 174 to exempted goods. The notification has been issued in exercise of powers conferred by Rule 174A of the Rules. Inter alia, it is stated therein that, where the goods are chargeable to nil rate of duty or exempted from the whole of duty of Excise leviable thereon, the goods are exempted from the operation of Rule 174 of the Rules. The goods are specified in the Schedule to the Central Excise Tariff Act, 1985 (in short "the Tariff Act"). The proviso makes it clear that where goods are chargeable to nil rate of duty or where the exemption from the whole of the duty of Excise leviable is granted on any of the six categories enumerated, the manufacturer is required to make a declaration and give an undertaking, as specified in the form annexed while claiming exemption for the first time under this notification and thereafter before the 15th day of April of each financial year, as found by the forums below, including CEGAT, factually, the declaration and the undertaking were not submitted by the appellants. This is not an empty formality. It is the foundation for availing the benefits under the notification. It cannot be said that they are mere procedural requirements, with no consequences attached for non-observation. The consequences are denial of benefits under the notification. For availing benefits under an exemption notification, the conditions have to be strictly complied with. Therefore, CEGAT endorsed the view that the exemption from operation of Rule 174, was not available to the appellants. On the facts found, the view is on terra firma...."

In Tata Oil Mills Co. Ltd. Vs. Collector of Central Excise, , Ranganathan, J., despite accepting the proposition that the exemption notification should be construed strictly, opined:

"These words may be construed literally but should be given their fullest amplitude and interpreted in the context of the process of soap manufacture. There are no words in the notification to restrict it only to cases where rice bran oil is directly used in the factory claiming exemption and to exclude cases where soap is made by using rice bran fatty acid derived from rice bran oil. The whole purpose and object of the notification is to encourage the utilization of rice bran oil in the process of manufacture of soap in preference to various other kinds of oil (mainly edible oils) used in such manufacture and this should not be defeated by an unduly narrow interpretation of the language of the notification even when it is clear that rice bran oil can be used for manufacture of soap only after its conversion into fatty acid or hydrogenated oil."

All documents relating to removal were under scrutiny by these officers and relevant documents relating to removals were subjected to proper scrutiny. It is relevant from the record that the department did not point out any contraventions. In this background, the issuance of demand in the year 2005 for non-compliance with procedural rules for the year 2001-02 to 2003-04 are unsustainable and liable to be rejected.

In the above mentioned facts of the case such as that the officers were supervising the clearances and respondent had documents sharing satisfactory accounting of the goods and that they had exported goods earning sufficient foreign exchange, the case of the Revenue cannot be sustained specially in the background that the Revenue could not give even one stance, where they could prove that the respondents had indulged in sale of the imported goods in the local market, complete products were exported and earned foreign exchange substantially.

In the facts and circumstances as indicated above, we do not find any merit in the appeal filed by the Revenue and accordingly, we approve the detailed and well considered order passed by the adjudicating authority and also Appellate Tribunal. All the four questions of law as noted above are answered in favour of assessee and against the Revenue. Therefore, the appeal filed by the Revenue is devoid of merit. In the result, the appeal is dismissed.