Santogen Textile loses Rs 5 Cr case booked by DGCEI - Not 1/95 - Diversion of raw materials - Duty to be paid by consignee and not consignor if consignee has taken delivery of material : Tribunal
By TIOL News Service
MUMBAI, JULY 26, 2007 : THEY came to Settlement Commission to explore whether that can be a safe haven - they were wrong [2002 (141) ELT 580 (Sett.Comm)]. They knocked the doors of the Bombay High Court - but a similar fate awaited them there too! [2002 (143) ELT289 (Bom.)]
Even a trudge to the Supreme Court resulted in utter failure. [2002 (145) ELT A162 (SC)].
So, what's the case all about - nothing novel, but the oldest trick in the EOU Industry - diversion of raw materials procured duty free.
Instead of culling out the details, (yet this report is a longish one ) suffice to say that the Anti Evasion authorities had commenced investigations in the year August 1998 and found that the assessee was procuring raw materials from units located in the DTA or EOU units situated in Silvassa and elsewhere without payment of any duty of Central Excise. The said DTA/supplier EOU was following the procedure as envisaged in law viz. removing goods under the cover of AR3A duly supported by CT-3 certificates, notification 1/95CE. The paper formalities were followed to perfection, inasmuch as the re-warehousing certificates duly signed by the jurisdictional Central Excise authorities were received by the supplier units and the records showed that the raw materials were received and used in production of export goods - in fact, export requirements were sufficiently met!
However, not everything was smooth sailing for the assessee. The officers of Anti Evasion conducted exhaustive investigation with suppliers, transporters and go-down keepers when it was revealed that the goods did not come directly to the factory of the applicant but were unloaded at Bhiwandi and from there the same were diverted. Moreover, the applicant could not produce any proof of transportation of goods from Bhiwandi to their factory at Mumbai. Statements were recorded by the dozen.
Settlement Commission - Taking a chance
In the meantime, the assessee thought that the best way to put a break on these investigations was to explore the beneficial provisions of Settlement Commission which envisaged that once the Settlement application is admitted all the powers are vested with the Commission. They filed an application before any show cause notice was issued by the DGAE/DGCEI authorities. Such an application is allowable in terms of Section 32E(2) of the CEA'44. This application sought settlement of the "entire case" by admitting the duty liability of Rs.2.07 lakhs in respect of three (3) invoices but seeking settlement for the entire period November 1995 to August 1998. The Commission was least amused, but admitted the case and clarified that the Settlement would be restricted to only to the three invoices referred in the application. In the meantime, the Anti Evasion authorities submitted that in all there were 14 suppliers involving a duty of approx 5.26 crores where the applicant had diverted the goods into the local market instead of using the same in the manufacture of export products. The Commission allowed the authorities concerned to go about with issuance of demand notices and enquired with the applicant whether he wishes to offer any settlement in that regard - the answer a stern no - hence they were allowed to contest the other demand notices. A couple of hearings followed thereafter.
Accordingly, the case came to be settled by the Commission vide its order 03/SC/MCX/CE/2002 dated 15.01.2002 and the duty liability was settled at Rs.11,56,270/- (in respect of three invoices). A penalty was also imposed of Rs.2.5 lakhs and so also interest.
Against this the assessee went to the Hon'ble Bombay High Court and the Hon'ble HC had no hesitation in affirming the Commission's order by viewing that the Settlement Commission had exercised its discretion reasonably and judiciously and rightly confined its enquiry to the disclosures made in the application filed under Section 32E(1).
The Petition for Special Leave to Appeal (Civil) No. 9118 of 2002 filed before the Hon'ble Supreme Court by the assessee was dismissed on 8 th May 2002.
The demand of Rs.5.26 crores
Coming back to the other notices issued to the assessee demanding duty of Rs.5.26 crores, here is a piece of inside information.
Since it was proved that the entire diversion and resultant duty evasion was the handiwork of the supplier and the assessee, the department faced a typical problem - from whom should the duty be demanded. The opinion of the highest guiding body was obtained and it was - issue a demand notice for recovery of the duty jointly/severally from all of them! Strange...but is there any other way out?
So, what happened to the demand notices worth 5.26 crores - they were confirmed by the Commissioner(Adjudication), Central Excise, Mumbai vide his order dated 5 th April 2005. Penalty of an equivalent amount was imposed on the company and personal penalty of Rs.50 lakhs each was imposed on the Managing Director, Director and the Executive Director. Naturally interest recovery was also ordered.
Cut to the appeal before the Tribunal.
Before Tribunal - light and then darkness at the end of the tunnel!
The appellant claimed that the entire case was bogus for the reason that the goods have been received by them in their 100% EOU premises and used by them in the manufacture of export products & which is supported by the fact that re-warehousing certificates duly signed by the jurisdictional officer were submitted and the yarns so received were sent to job worker under proper challans and also received under challans and these challans were signed by the officers.
The Tribunal apparently was initially tempted to get convinced by these arguments and observed -
- Therefore in such a case where the documentary evidence is available to show receipt and utilization of raw material received under exemption, Revenue's case cannot sustain which is based only on the statement of some persons and that documentary evidence has to prevail in comparison to the oral the evidence.
- We find some force in this contention of the appellants but cannot disregard the evidence produced by the department which shows that the goods were never delivered at the premises of 100% EOU, job workers were not existing to whom the goods are said to have been sent for weaving.
Light?
In fact, this was the probable reason that the Tribunal had in its Order dated 26.08.2005 in the matter of Stay application found a good case for ordering full waiver of pre-deposit requirement on the part of the EOU and its Directors and stay recovery.
Darkness!
However, upon a minute study of the issue involved and the results of the investigation, the Tribunal concluded thus, pursuant to the final hearing held on 9 th May 2007 -
A) Diversion of raw materials:
• It was found that the appellants did not have any permission from the Assistant Commissioner to store the goods in Bhiwandi as contended by them. [ that is another story in itself... ]
• All above facts prove that the goods were not transported to the premises of 100% EOU in view of the statements of suppliers/transporters, delivery orders and the octroi receipts which do not show entry of any vehicles in which it is claimed that the goods have been transported up to Mumbai.
• The appellants claimed exemption from octroi but failed to produce necessary 'N-Form' required for exemption claimed by them.
• None of the suppliers or the transporters who have given statements have been asked for cross examination nor were cross examined and therefore those statements cannot be discarded.
- We further note that it is on record that the appellants did not have machinery for weaving at the time of visit by investigating team and only one stentering machine and three knitting machines were found installed whereas sewing machine (not found in operational condition) were found in the factory but were not installed. This shows that they have no machine for weaving fabrics or carrying any processing except stentering machine. The appellants have claimed that all these weaving and other processing were got done on job work basis for which they had requisite permission from the Assistant Commissioner.
- However, till today they are unable to produce any such permission and do not have any such permission. Even otherwise such permission can be granted only by the Commissioner and not the Assistant Commissioner as claimed by them and further sub contracting is allowed only for part processing and not for the entire processing whereas the appellants had only facility of some knitting and stentering and no facility of weaving, dyeing, etc.
- All these facts therefore prove that any job work whatsoever was neither done nor permissible under the law nor the appellants had permission to do it and that job worker's unit either did not exist or had not carried out any job work.
• As regards certificates and challans signed by the jurisdictional officers it is established on account of above factors that the officer incorrectly signed those certificates by looking at the fabrics which were different from the one which were procured as it is on record that they did not verify marks, numbers and composition of the fabrics.
• This fact that the re-warehousing certificates have been falsely obtained, is also established from the fact that in respect of three shipping bills, they have themselves admitted before the Settlement Commission that raw material was diverted and was not used in the export products and in case of one supplier they have admitted that instead 72 MT for which re-warehousing certificate was issued only 25 MT were received.
• In view of this, it is held that exempted goods though received by the appellants at Bhiwandi were diverted elsewhere and not used in the manufacture of export products, therefore exemption under Notification No.1/95-CE was not available and duty is accordingly demandable on the same.
B) Duty liability on the consignee in the context of Notification 1/95-CE in the face of receipt of re-warehousing certificates:
• The appellant submitted that assuming that the department's plea that goods were not at all received by them, then in such a circumstance the duty liability is on the consignor viz. supplier of the goods. Reliance was placed on the Tribunal decision in the case of Carrier Aircon Limited 2002(144)ELT70 wherein it was held that once re-warehousing certificates are not produced and the goods are cleared under exemption Notification No.1/95, the liability to pay duty is on the supplier of the goods.
• The Tribunal distinguished this decision by observing that in this case, it is not denied that the goods were delivered to the appellant though delivery as per their instruction was up to Bhiwandi.
• Therefore in a case where the goods after taking delivery are not brought into hundred per cent EOU and not used in the manufacture of export products, exemption ceases to be available and duty becomes demandable for non accountal of the goods because as per terms of notification 1/95, goods cannot be put to any other use & this interpretation is required to be made in view of the Apex Court decision in the case of Sneh Enterprises vs. Commissioner of Customs, New Delhi-2006 (202) ELT 7 (SC) where it has been held that it is trite law while interpreting the statute, the courts not only may take into consideration the purpose for which the same had been enacted, but also the mischief.
• Since in this case the purpose of the bond and condition is to prevent misuse of the goods, it is the consignee only who has to be held responsible for accountal of the goods once he has taken delivery of the goods and the goods are no longer under control of the consignor.
• The above view is supported by a catena of decisions e.g. CCE, Cochin vs. BPL Systems & Projects-2002 (144) ELT 437 (Tri.); CCE, Madras vs. Madras Radiators & Pressings Ltd.-1994 (69) ELT 409 (Tri.) and in the case of CCE, Mumbai-II vs. Godrej & Boyce Mfg. Company Ltd.-2004 (172) ELT 477 (Tri.Mum).
Accordingly, the Tribunal held that the duty of Rs.5.26 crores was rightly demanded from the appellants and hence upheld the demand.
C) Imposition of penalties - the Tribunal's view:
• Neither show cause notice nor the impugned order brings out any material to show that the Managing Director and Director were in any way involved in the illegal activity or have physically dealt with the goods which were liable to confiscation; hence penalty imposed on them under Rule 209A is consequently set aside.
• As regards penalty on Shri Manik Sharma, Executive Director since there is enough material to show that he was involved in the illegal activity, the penalty imposed on him is justifiable. However, the penalty of Rs.50 lakhs is considered to be exorbitant and the same is reduced to Rs.10 lakhs only.
• As regards imposition of penalty of Rs.5,26,56,632/- on the assessee under section 11AC and Rule 209A, though no submission were made on the same at the time of hearing nor in written submissions which followed them, since it is considered to be excessive, same is reduced to Rs.25 lakhs only.
So, there ends the nine year long saga - probably. The Anti Evasion authorities ought to be mighty pleased and also the officers who signed the re-warehousing certificates - at least for the time being!
(See 2007-TIOL-1016-CESTAT-MUM in 'Excise' + 2007-TIOL-1016-CESTAT-MUM in 'Legal Corner')
