1998 (8) TMI 533 - AT - Central Excise

Issues Involved:
1. Classification of products as cosmetics or ayurvedic medicines.
2. Imposition of penalties on the applicants.
3. Applicability of the extended period of limitation.
4. Relationship between the first and second applicants.
5. Financial hardship claims by the applicants.
6. Bona fide belief regarding product classification.

Detailed Analysis:

1. Classification of Products:
The central issue revolves around whether the products (skin beautification creams, lotions, moisturizers, shampoos, etc.) manufactured by the first applicant should be classified as cosmetics and toilet preparations under CET sub-headings 33.04, 3305.90, 3307.10, and 3401.10, or as ayurvedic medicines under CET sub-heading 3003.30. The Department concluded that the items are cosmetics based on various pieces of evidence, such as the first applicant's self-identification as a cosmetics manufacturer, orders from hotels for cosmetics, and product literature indicating usage as cosmetics. The adjudicating authority relied on previous decisions, including Richardson Hindustan Ltd. and Shree Baidyanath Ayurved Bhawan, to support their classification.

2. Imposition of Penalties:
Penalties were imposed on the first applicant (Rs. 1 crore), the second applicant (Rs. 25 lakhs), and the third applicant (Rs. 35 lakhs) under Rule 209A of the Central Excise Rules, 1944. The penalties were based on findings of duty evasion through under-valuation and mutual interest between the first and second applicants. The third applicant was deemed the main person managing both companies.

3. Applicability of Extended Period of Limitation:
The extended period of limitation was invoked due to the first applicant's failure to furnish product manuals and literature with their declaration, fraudulent acquisition of a drug license, and suppression of facts. The Department argued that the first applicant knew the products were not cosmetics and took steps to avoid excise issues.

4. Relationship Between First and Second Applicants:
The adjudicating authority found that the first and second applicants were related persons, not operating at arm's length, with mutual interest in each other's business. Evidence included shared ownership by the third applicant and her family, shared management, and pricing patterns indicating non-arm's length transactions.

5. Financial Hardship Claims:
The applicants claimed financial hardship, highlighting minimal profits and losses. The first applicant reported a profit of Rs. 12 lakhs for the year ending 31-3-1997, while the second applicant reported a profit of Rs. 3.6 lakhs for the same period and a loss in the current financial year. The third applicant's taxable income was Rs. 2.83 lakhs in 1997.

6. Bona Fide Belief Regarding Product Classification:
The applicants argued that they operated under a bona fide belief that their products were ayurvedic medicines, supported by a valid drug license renewed until 31-12-1999. They cited past departmental acceptance of similar products by M/s. Shahnaz Herbals as ayurvedic medicines. They contended that there was no willful intent to evade duty.

Conclusion:
The Tribunal found the classification issue debatable and acknowledged the applicants' prima facie case regarding the extended period of limitation. The Tribunal noted the bona fide belief supported by the drug license and past departmental actions. Consequently, the Tribunal waived the requirement for pre-deposit of duty and penalties, staying recovery during the appeal's pendency.

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