M/s The Supreme Industries Ltd. and Another vs The Custom Excise and Service Tax Appellate Tribunal and Others

Rajendra Menon, J.

Challenging the orders passed by the assessing authority, namely; Deputy Commissioner, Central Excise, Gwalior vide Annexure P/7, dated 9th February, 2000, confiscating certain goods under rule 173-Q(b) of the Central Excise Rules, 1944 (hereafter referred to as the Rules) with an option to redeem the same on payment of redemption fine of Rs. 2.00 lacs (Rupees two lacs only) and further imposing penalty of Rs. 50,000/- which is confirmed by the appellate authority vide Order dated 8th May, 2002 (Annexure P/10) passed by the Commissioner (Appeals), Customs and Central Excise, Bhopal and further confirmed by the Customs, Excise and Gold (Control) Appellate Tribunal, New Delhi vide final order dated 28th March, 2003 (Annexure P/11), so also order, Annexure P/13 dated 29th April, 2004 dismissing a application for review by the Customs, Excise & Service Tax Appellate Tribunal, New Delhi, petitioner has filed this petition.

Petitioner No. 1 is a public limited company incorporated and registered under the Companies Act, 1956 having its registered office at 612, Raheja Chambers, Nariman Point, Fort, Mumbai and a industrial unit in Malanpur, district Bhind. In the unit at Malanpur petitioners manufacture various types of rigid PVC Films. The items manufactured by the petitioner/company are liable to duty for central excise under sub-heading 39.20 of the First Schedule to the Central Excise Tariff Act, 1985.

According to the manufacturing process, petitioners contend that they have already informed the authorities concerned the procedure and the process followed and have intimated them that the finished product after quality control test when ready for despatch to the customers is entered in the RG-I register. It is the case of the petitioners that ever since the beginning it is only after the quality control test on the finished product is concluded that the RG- 1 stage under rule 53 of the Rules is reached and the stock are accounted for only at this stage. Petitioners contend that vide letter, Annexure P/2 dated 8th June, 1998 they have intimated the process of manufacture to the revenue and are following the same without any deviation right from the year 1988 and there has been no compliant in this matter.

On 8th July, 1999 certain officials of the department visited the factory at Malanpur and after inspection detained 27 metric tonnes of PVC film valued at Rs. 16.40 lacs vide memo, Annexure P/3, inter alia contending that these finished goods are not recorded in the RG-I register. It is stated that statement of some representative of the petitioners was recorded. Petitioners'' immediately by their letter dated 13th July, 1999 (Annexure P/4) explained to the revenue that the goods detained were in unfinished condition, and therefore, they cannot be accounted for in the RG-I register. It was pointed out that after the rolls are transferred from the manufacturing unit, they have to undergo various quality control test and the rolls which are found not fit for sale by the quality control department then they are not transferred to the packing department. Only such rolls which are approved by the quality control department are transferred to the packing department for further process. It was emphasised that stickers denoting "H" for hold when certain problems are to be rectified before transferring the same in the finishing room and "R" for rejected goods by the quality control department are pasted on the rolls. It was the case of the petitioners in the present case that all the items detained were having the sticker marked "H" as they were kept under hold awaiting approval by the quality control department, as such these items cannot be accounted as finished product and it was not necessary to be entered in the RG-I register at this stage. However, it is stated that ignoring these contentions, show cause notice dated 23rd July, 1999 (Annexure P/5) was issued by the Deputy Commissioner, Central Excise, Gwalior, inter alia pointing out that the petitioners have deliberately not accounted for the material which is fully manufactured material in the RG-I register, therefore, they have been held liable for being proceeded against under rule 173-Q of the Rules. The petitioners were asked to show cause as to why fine of Rs. 2.00 lacs in lieu confiscation of the goods and further penalty of Rs. 50,000/- be not imposed. Petitioners again appeared and submitted their reply and reiterated their earlier stand. However, rejecting the contentions raised, the Deputy Commissioner by the impugned order dated 9th February, 2000 imposed fine of Rs. 2.00 lacs in lieu of confiscation and further penalty of Rs. 50,000/-. Appeals filed before the Commissioner (Appeals), Bhopal and the Appellate Authority and the Appellate Tribunal met with the same fate, petitioners are before this Court assailing the orders passed.

Shri Patil, learned counsel for the representing the petitioners submitted that in the instant case, the stage for accounting RG-I stock would arise only when the goods were ready to be despatched to the packing section and from there to the customers and as the goods in question the sticker ''hold'' was affixed, it was never intended to be accounted as finished goods until and unless cleared by the quality control department. It was emphasised by him that there being no intention to defraud the revenue and there being no intention to evade payment of duty, authorities have committed grave error in imposing fine and penalty. Taking me through the provisions of rule 53 read with rule 173-Q of the Rules, Shri Patil emphasised that mere non-accounting of the goods in itself is not liable to be punished. The penalty, according to Shri Patil could be imposed only if there is a intention to evade payment of duty. Placing reliance on a judgment of the Supreme Court in the case of Jain Irrigation System Limited vs. Commissioner of Central Excise, 2006 (197) ELT 320 (SC), so also judgment of the Andhra Pradesh High Court in the case of Southern Steel Limited, Hyderabad vs. Union of India and others, 1979 (4) ELT (J 402) (AP) and various other judgments of the Central Excise and Customs Tribunal, as per compilation submitted by him, Shri Patil emphasised that in the present case all the authorities have committed error in confiscating the goods and imposing penalty when the goods were not fully manufactured and fit for transfer to the customer and when there was no intention to evade payment of duty. Accordingly, Shri Patil submits that the action taken by the revenue be quashed and the petition be allowed with costs.

Refuting the aforesaid contention, Shri V.K. Sharma, Assistant Solicitor General for the department emphasised that from the statement of the executives of the petitioners'' establishment particularly Shri Kamal Sharma, Commercial Manager, it is clear that the goods were completely manufactured and as goods were completely manufactured, they were to be accounted under rule 173-Q (b) of the Rules. This having been not done by the petitioners, provisions of the rules being violated, revenue has proceeded in the matter in accordance with law, and therefore, no case for interference is made out. It was emphasised by Shri Sharma, that once the manufacturing process is completed, entry in the RG-I register is a mandatory requirement and once this mandatory requirement is found to be violated, the revenue is entitled to confiscate the goods and impose penalty. Citing various judgments in support of his contention, Shri Sharma submitted a written submission to emphasise that in the facts and circumstances of the case, no case for interference is made out and he seeks for dismissal of the petition. By filing a rejoinder to the written submissions, Shri Patil has tried to distinguish each and every judgment relied upon by Shri Sharma on behalf of the respondents.

I have heard learned counsel for the parties at length and perused the record.

From the records, it is seen that on 13th July, 1999 when the goods were detained admittedly the goods in question which were detained were not entered in the RG-I stock account. The reason given by the petitioners was that the goods were kept on "hold" as the same were not subjected to quality control test and approved by the quality control department for sale to the customers. According to the petitioners, it is only after the quality control test if it is found fit then the goods becomes fully manufactured finished goods ready to be transported for delivery to the customers and it is at this stage that entries are made in the RG-I stock register. This has been the consistent stand of the petitioners throughout. During the course of hearing, Shri Patil, learned counsel for the petitioners has invited my attention to certain circulars and trade notices issued by the department. One such notice issued by the Chandigarh Collectorate being Trade Notice No. 9 dated 14th March, 1995 pertains to fixing of RG-I stage for BOPP Films. In this notice, it is indicated that RG-I stage for the items notified in the notice, coming under heading No. 39.20 of the Schedule to the Central Excise Tariff Act, 1985 is after they have been inspected and packed. Similar trade notice is also issued by the Hyderabad Collectorate No. 158/83 on 26th November, 1983 and in this notice for all plastic items, it is pointed out that RG-I point was fixed after subjecting and completing the laboratory tests and inspection. It was tried to be emphasised by Shri Patil that as the RG-I stage in the present case comes only after the goods are subjected to quality control test and approved, therefore, in detaining the goods when it was specifically pointed out that they are kept under ''hold'' and not fit for transfer to the packing department and thereafter to the customer, the revenue, according to Shri Patil committed irregularity in treating the goods as finished product. There is much force in this contention of Shri Patil. The trade notices referred to hereinabove relied upon by Shri Patil clearly indicates the stage at which RG-I entry has to be made. Under rule 53, the stock account in the prescribed form is to be maintained for all the quantity manufactured and under rule 173-Q, non accounting for excisable goods manufactured is an illegality. "Manufactured goods" as is normally understood are those which are ready to be dispatched to the customers. Until and unless the goods are fit for dispatch to the customer, it cannot be considered to be a fully manufactured goods. That apart, under sub-rule (d) of rule 173-Q of the Rules, contravention of the provisions of the rules is a penal offence when the same is undertaken with intent to evade payment of duty. In the case of Jain Irrigation Systems Ltd. (surpa), certain scrap was lying in the factory premises and as they were not accounted for, action was taken under rule 173-Q. In the aforesaid case, it was observed by the Supreme Court that until and unless intention to take the material outside the factory premises is established confiscation and proceeding under rule 173-Q is not permissible. The same view is taken by the Andhra Pradesh High Court in the case of Southern Steel Ltd. (supra). In the said case, it has been held by the Court that mere violation of the rule by itself is not a penal offence. Even if the goods are lying in the factory until and unless there is a intention to evade duty, penal provision should not be enforced. It has been held by the High Court that penal provisions have to be construed strictly and intention to evade payment of duty should be established before imposing penalty and proceeding to confiscate the goods. In most of the judgments passed by the Tribunal relied upon by Shri Patil, similar principles are laid down. In the case 2000 (69) ECC 192 , it has been held by the Tribunal that mere non accounting of the goods in the RG-I register without there being any material to show that there was intention to evade duty, imposition of penalty and enforcing the penal clause is not proper. The views expressed by the Tribunal in the case of Bhilai Conductors (P) Ltd. (supra) is followed in various other cases.

In the cases relied upon by Shri Sharma, learned counsel for the respondents, the factual aspects are somewhat different. In the case of Natco Pharma Ltd. vs. Commissioner of Central Excise, Hyderabad, 2001 (136) ELT 282, the goods were found without entry in the RG-I register after all the tests were conducted and it was in fully packed condition ready for transportation. Similarly in other cases stock found were completely ready for dispatch and in most of the cases intention to evade duty was apparent. In the present case, except for finding that the goods were lying in the factory, there is neither any material to show that there was intention to evade duty, on the contrary, the evidence that has come on record only indicates that the goods were not subjected to quality control test and they were kept on ''hold'' they were to be cleared by the quality control department and only thereafter were to be sent to the packing department after the quality control test was concluded. In such circumstances, the revenue, in the present case has not acted in a reasonable manner in the matter of enforcing the penal clause against the petitioner. Enforcement of penal clause has to be done subject to strict proof of intention to evade payment of duty. In the present case, neither intention to evade duty is established nor is there any material to establish the same and on the contrary the explanation of the petitioners and the fact that the material was not subjected to quality control test has been totally ignored. Merely because in the statement, the Commercial Manager of the petitioners has stated that the goods were manufactured that by itself cannot be a ground for holding that the goods were ready for dispatch to the customer. The learned Tribunal incorrectly applied the principles laid down by the Bombay High Court in the case of Kirloskar Brothers Ltd. Vs. Union of India (UOI) and Others, as the facts of that case and the present case are entirely different. In the case of Kirloskar Brothers (supra) intention to remove the air conditioners, and in fact, the removal of air conditioners were established. In the present case, stock was lying in the factory kept on ''hold" which was to be subjected to quality control test. As such, in the facts and circumstances of the present case. I am of the considered view that the assessing authority has incorrectly applied rule 173-Q of the Rules by ignoring the facts that are available on record, so also the principles indicated in the trade notices referred to hereinabove issued by the Chandigarh Collectorate and the Hyderabad Collectorate in the matter of reaching of RG-I stage for similar items. Considering the totality of the facts and circumstances of the case. I am of the considered view that the action taken against the petitioners and the impugned orders passed by the assessing authority, Annexure P/7 dated 9th February, 2000, Annexure P/10 dated 8th May, 2000 passed by the appellate authority, Annexure P/11 dated 28th March, 2003 and Annexure P/13 dated 29th April, 2004 passed the Tribunal are clearly unsustainable and are hereby quashed.

Accordingly, petition stands allowed and disposed of without any order so as to cost.