By TIOL News Service

MUMBAI, JUNE 21, 2013: BEFORE we go to the case, here is an interesting observation from the order of the Member (Technical) - " …Applicant appears to have succeeded in this fraudulent action for number of years. "

Over to the case - The applicant is procuring Cocoa Butter and Cocoa Powder from their factory at Jammu. The goods are cleared by the Jammu unit to the applicant on payment of duty and applicant took the credit of the duty so paid. The applicant also imports Cocoa Butter & Cocoa Powder on payment of duty. The applicant also takes the credit of duty paid thereon and thereafter applicant affixed two labels described as label 1 and label 2 on the goods procured by them and same were exported on payment of duty. Thereafter, the applicant filed rebate claim which were sanctioned to them.

Revenue is of the view that putting label A and label B on the boxes does not make the product marketable to the consumer. Therefore, same does not amount to manufacture as the product is already marketable before affixing label.

Therefore, show-cause notice was issued and an order was passed by the CCE, Belapur confirming the above said demand as under -

a) Demand for the wrongly availed credit of Rs. 23,02,53,752/-.

b) Rebate erroneously granted on the duty on exported goods by utilizing irregular availed credit to the tune of Rs. 13,22,30,368/-

c) Interest on the above (a) & (b) and penalty of Rs. 23,02,53,752/-.

Before the CESTAT, the applicants are seeking waiver of pre-deposit of the adjudged dues on the premise that as per the Note 3 to Chapter 18 of the Central Excise Tariff Act, 1985, the activity of labeling or re-labelling of containers or repacking form bulk packs to retail packs or the adoption of any other treatment to render the product marketable to the consumer, shall amount to manufacture; that it is an admitted position by the adjudicating authority that applicants are putting labels i.e. label A & label B on the carton; that the activity undertaken by the applicants was in the knowledge of the departments from the day one as the goods exported are factory stuffed and same were sealed by the Central Excise officer in their factory itself and, therefore, the extended period of limitation is not invokable.

The Revenue representative submitted that merely putting label A & label B does not amount to manufacture as the same does not make the product more marketable to the consumer as per Note 3 to Chapter 18 of the Central Excise Tariff Act, 1985; that since the applicant has not made out a case for waiver, they be asked to make pre-deposit of the entire amount.

The Member (Judicial) observed -

" 6. We note that mere labeling would not amount to any activity as held by this Tribunal in the case of M/s. Sree Leathers vs. CCE, Kolkata-V reported in - ( 2011-TIOL-1999-CESTAT-KOL). Therefore, prima facie we are not convinced with the arguments of the Ld. Counsel that activity labeling amounts to manufacture. The issue whether the activity of amounts to manufacture or not shall be dealt in detail at the time of final hearing. We find that the impugned goods are factory stuffed goods and at the time of stuffing, the concerned Range Inspector of Central Excise has verified that CENVAT Credit not availed wrongly thereafter the factory stuffing was allowed. Further, the rebate claim has been sanctioned to the appellants by following procedure laid down in Rule 18 of the Central Excise Rules read with Notification No. 19/2004. Prima facie we are of the view that demands for extended period cannot be demanded at this stage. As show cause notice was issued on 9.10.2012 and rebate claim was sanctioned in 2011-12 to the tune of Rs. 3,39,70,960/-. Therefore, at this stage we direct the applicant to make a pre-deposit of Rs. 1 Crore within eight weeks. On such compliance the remaining demands of duty, interest and penalty shall remain stayed during the pendency of the appeal. Compliance is to be reported on_______________. "

However, the Member (Technical) had a differing view -

"8. The brief facts of the case are that the applicant has a unit at Jammu, where they manufacture Coco Butter and Coco Powder. Goods are fully manufactured and can be sold or exported in the condition in which these are being cleared from factory in J&K. Goods manufactured in this unit, being located in J &K are exempt from payment of duty vide Notification Nos. 56/2002-CE and 57/2002-CE both dated 14.11.2002. Vide the said notifications, the exemption is operated first by payment of excise duty on the goods manufactured and thereafter refunding of duty paid on monthly basis.

9. Normally, when any goods are exported out of India, the excise duty is not required to be paid. Exporter has option to clear the goods by executing a bond without payment of duty (Rule 19) or pay duty and claim refund of duty, (option is generally used if accumulated credit is available) known as rebate of duty (Rule 18). These two schemes are operated through various notifications. Notification 19/2004-CE (N.T.) dated 6.9.2004 relates to rebate of duty. (This notification is relevant in the present case).

10. In the case, goods manufactured in J&K exempted, (vide notification NO. 56.2002-CE and 57/2002-CE, both dated 14.11.2002) are exported out of India, no refund or rebate of duty is granted. This is for the simple reasons that such goods are already exempt from duty (though operated through a procedure prescribed under Notification Nos. 56/2002-CE and 57/2002-CE). Notification No.19/2004-CE (N.T.) governs Rebate of duty on export of goods to all countries other than Nepal and Bhutan. Clause (2) of the said notification details "Conditions and limitation "Sub-Clause (h) of Clause (2) - which is relevant for the present case reads as under:-

"(h) that in case of export of goods which are manufactured by a manufacturer availing the notifications of the Government of India in the Ministry of Finance (Department of Revenue) No. 32/99- Central Excise, dated the 8th July, 1999 [G.S.R. 508(E), dated the 8th July, 1999] or No. 33/99- Central Excise, dated the 8th July, 1999 [G.S.R. 509(E), dated the 8th July, 1999] or No. 39/2001-Central Excise, dated the 31st July, 2001 [G.S.R. 565(E), dated the 31st July, 2001] or notification of the Government of India in the erstwhile Ministry of Finance and Company Affairs (Department of Revenue) No.56/2002-Central Excise, dated the 14th November, 2002 [G.S.R. 764(E), dated 14th November, 2002]or No.57/2002-Central Excise, dated the 14th November, 2002 [ GSR 765(E), dated the 14th November, 2002 ] or notification of the Government of India in the Ministry of Finance (Department of Revenue) No. 56/2003-Central Excise, dated the 25th June, 2003 [ G.S.R. 513 (E), dated the 25th June, 2003] or 71/2003-Central Excise, dated the 9th September, 2003 [G.S.R.717 (E), dated the 9th September, 2003] or No. 20/2007- Central Excise, dated the 25th April, 2007 [G.S.R. 307(E), dated the 25th April, 2007], the rebate shall not be admissible under this notification."

Thus, in brief, if the goods manufactured in J&K availing exemption vide Notification NO. 56/2002-CE and 57/2002-CE are exported out of India, no rebate of excise duty is allowed/granted under the excise law.

11. In order to circumvent the said law, the applicant adopted an ingenious method. Goods manufactured in J&K, availing exemption from payment of duty, were brought to Mumbai. Coco butter was packed in corrugated and card board boxes each containing 25 Kgs. of Coco butter. Each corrugated box had two similar labels to indicate content, net weight manufacture's name, marketers name etc. This was the position at the time of clearance at J&K and receipt in Mumbai. Goods could have been exported straightaway. However, before exporting, two extra but similar labels were affixed in Mumbai. Applicants claims that this affixing of extra labels, is a process amounting to manufacture in terms of Note 3 to Chapter 18. Since applicant, are manufacturing the goods in Mumbai, they availed credit of duty paid on Coco butter in J&K (though refunded as per Notification 56 & 57/2002-CE dated 14.11.2002) and thereafter paid the duty on the so called manufactured Coco Butter from the said credit and claimed rebate such duty paid in cash. Thus overall, they got refund of duty paid in J-K twice, first in Jammu and second in Mumbai.

12. The two labels pasted at the time of clearance from the factory in J&K and in Mumbai are scanned and are part of para 8 of the Show Cause Notice. However, for correct appreciation these are again reproduced below:

Labels already existing at the time of clearance in J&K

Extra Labels Pasted in Mumbai unit before export.

1.

LABEL - A

(Container wise Sr. No. is put up in Label -A)

AND

2.

LABEL - B

(Packing date is mentioned in Label -B)

13. It is to be noted that all the information indicated in two extra labels is already available in earlier Labels. I do not find any purpose of putting these extra labels from marketing or consumer or purchaser's point of view, except committing fraud on public exchequer by claiming refund second time (in the name of manufacture at Mumbai).

14. Note 3 of chapter 18 reads as under:

"3 In relation to products of this chapter, labeling or relabeling or repacking from bulk packs to retail packs or the adoption of any other treatment to render on product marketable to the consumer, shall amount to manufacture."

15. The concept of manufacture has been subject matter of large numbers of disputes and in the famous case of DCM, the Apex court has described the three attributes of the manufacture viz., distinctive name, character or use. The expansive definitions in various Chapter notes/Section Notes etc. are generally extension of these three attributes and try to capature value addition, due to carrying of certain process/activities on the goods already manufactured- particularly after introduction of Modvat Credit scheme etc.) Process/Activities of course have to have some purpose generally with reference to these three attributes. In the present case, process or activity of putting two extra labels has no such purpose. This is not even covered by Note 3 of Chapter 18, as the goods are already labeled. Putting extra label particularly when all the relevant information is already available on the product is not even labeling. There is no relabeling or any other process mentioned in Note 3. In fact, this Tribunal in catena of cases where label/sticker was put on the goods, has taken view that activity does not amount to manufacture. Many of such judgment s have the approval of Hon'ble Supreme Court also. Infact, in some cases, there was some purpose for putting the extra label/sticker. Ld. Brother has quoted one such judgment. Some other case Laws are Lal International Pvt. Vs. CCE reported in 2003 (154) ELT 520 (Tri-Del) Commissioner of C. Ex, New Delhi vs. Panchsheet Soap Factory reported in - (2002-TIOL-22-CESTAT-DEL).

16. In view of facts discussed earlier, I am of the prima facie view that activity being carried out does not amount to manufacture and whole exercise of putting the extra labels in Mumbai has been done in order to get refund of duty twice, once in J&K and second time in Mumbai. Refund in Mumbai in respect of goods manufactured in J&K, availing exemption is specifically not allowed as per Notification No. 19/2004-CE (N.T.) dated 6.9.2004. Applicant appears to have succeeded in this fraudulent action for number of years.

17. It is well settled principle of law that what cannot be permitted directly should not allowed to be done in indirect way. This has been held so by the Hon'ble Supreme Court in the case of Sharp Business Machines Pt. Ltd. Vs. C.C. - (2002-TIOL-283-SC-CUS) reported in 1990 (49) ELT 640 (S.C.) and Johney D'Couto Vs. State of Tamil Nadu reported in1987 (32) ELT 225 (S.C.). When rebate is specifically prohibited in respect of goods produced, availing exemption, same cannot be permitted in the above manner.

18. My Ld. Brother in respect of extended period has observed that the impugned goods are factory stuffed goods and at the time of stuffing, the concerned Range Inspector of Central Excise has verified that the Cenvat Credit not availed wrongly thereafter the factory stuffing was allowed. Further, rebate was sanctioned after the following procedures. I am unable to agree with my Ld. Brother both on assumed facts and conclusion. Factory stuffing in presence of Central Excise Officer only implies that the goods stuffed in the export container are as per the description and quantity gives in invoice and packing list. The Officer only certifies the quantity and description of goods stuffed in the containers. Inspector is not required to verify the Cenvat Credit taken or activity amounts to manufacture or not or any other thing under the Excise Law during factory stuffing. Facility of factory stuffing is only to obviate the need of examining the goods import area by Customs. Central Excise Rules 2002 or Cenvat Credit Rules 2004 do not require even to examine the goods for export (without getting in stuffed in presence of Excise Inspector and large number of exporters do that). Factory stuffing is an activity for customs purposes and is therefore under Customs Law and nothing to with Central Excise Law. In any case, stuffing Inspector is not an authorized under law to decide about correctness of Cenvat Credit or duty Leviability or whether activity amounts to manufacture. There is no evidence that the officer who supervised factory stuffing was aware that the refund of duty is being claimed twice. Even if he was aware I would only amount to his collusion in the nefarious activity of the applicant. Applicant cannot be allowed to take advantage of all his intentional wrongs in the name of factory stuffing by Inspector. Similarly, while sanctioning the rebate, officers are required to check that goods have been exported (i.e. left the country) and duty was paid and the rebate claim is as per the duty paid. One must appreciate, there is hierarchy of officer and various offices within Central Excise Department. Each officer is authorized to exercise certain power/duties. Just because an Inspector has supervised stuffing of container, one cannot say that department has knowledge of each and every issue/activity of that manufacturers. I am therefore of the prima facie view that extended period is incorrectly invoked in this case.

19. Section 35F of Central Excise Act, 1944 envisage that duty demanded or penalty imposed is required to be deposited pending the appeal. However, proviso to the said section state

" Provided that where in any particular case, the [Commissioner (Appeals)] or the Appellate Tribunal is of opinion that the deposit of duty demanded or penalty levied would cause undue hardship to such person, the [Commissioner (Appeals)] or, as the case may be, the Appellate Tribunal, may dispense with such deposit subject to such conditions as he or it may deem fit to impose so as to safeguard the interests of revenue."

The two things to be seen are undue hardships to the applicant and safeguarding the interests of revenue. Hon'ble Supreme Court and various High Courts have deliberated in various judgments on this issue and have evolved three criterion viz. (a) prima facie case (b) balance of convenience, and (c) irreparable loss or financial hardship.

As elaborated earlier, applicant has not been able to make any prima facie case. Even my Ld. Brother is of this opinion. On the contrary, case appears to be strongly in favour of Revenue.

As far as balance of convenience is concerned, in this case what is being demanded is rebate of duty paid second time and the credit of duty taken in Mumbai. As discussed earlier, applicant has got back refund of duty paid twice, one at Jammu and second time as rebate in Mumbai. What is being asked to pay back is refund of duty paid in Mumbai. Even after paying this to Revenue, applicant will continue to retain the refund of duty paid in Jammu. In view, balance of convenience therefore lies in ensuring that the amount of rebate is deposited back to the public exchequer. As far as demand of credit taken is concerned, a part of it was utililzed for payment of duty. To that extent it will not be appropriate to ask that. As far as balance credit amount is concerned, that must be freezed till the disposal of appeal.

In connection with balance of convenience, Hon'ble Supreme Court in the case of Dunlop India Ltd. and other reported in - (2002-TIOL-156-SC-CX) has gone to the extent of saying that even if there is prima facie case in favour of company, it is not sufficient justification for granting of stay. Balance of convenience has also to be seen. Hon'ble A.P. High Court in the case of SQL Star International Ltd. vs. C.C. Hyderabad reported in - (2012-TIOL-146-HC-AD-ST) has observed that the balance of convenience must be clearly in favour of making an interim order and that should not be slightest indication of a likelihood of prejudice to the interest of revenue. I am therefore of the view that in the circumstances of the case balance of convenience lies that amount is paid/deposited to public exchequer.

I also note that applicant has not pleaded any financial hardship. Even otherwise, all that is being asked is deposit of refund twice, and freezing of credit, financial hardship cannot be a reason to pay back the same.

20. In view of proceeding paras, we order

(a) Applicant to deposit in cash an amount of Rs. 13,22,30,368/- (Rupees Thirteen Crores Twenty Two Lakhs Thirty Thousand Three Sixty Eight).

(b) Freeze the Cenvat Credit amounting to Rupees Nine Crore Eight Lakhs Twenty Three Thousand Three Hundred Eighty Four only (23,02,53,752-13,22,30,368=98023384) or the balance of credit available, whichever is lower.

(c) On compliance of (a) & (b) stay from recovery of interest penalty and balance amount of credit.

Above amount credit to be paid within 8 weeks from the date of pronouncement of order."

The matter, therefore, came to be referred to the 3rd Member.

Difference of Opinion

" Whether the Member (Judicial) is correct is holding that prima facie demand for extended period of limitation cannot be demanded at this stage and deposit of only Rs. 1 Crore out of Rs. 3,39,70,960/- would be sufficient.

Or

Whether the Member (Technical) is correct in holding that department has strong case, applicant cannot get refund of duty twice, when it is specifically prohibited and stuffing in presence of inspector cannot imply that extended period cannot be invoked and since balance of convenience lies in the money be with the Government and therefore ordering deposit in cash of Rs. 13,22,30,368/- (Rupees Thirteen Crore Twenty Two Lakhs Thirty Thousand Three Hundred Sixty Six Only) and freezing of credit of Rupees Nine Crore Eighty Lakhs Twenty Three Thousand Three Hundred Eighty Four Only or balance of credit available, whichever is lower. "

In passing: We will keep you posted…labels or otherwise!

(See 2013-TIOL-939-CESTAT-MUM)