2013 (10) TMI 351 - AT - Central Excise

100% EOU - Duty on Clearance of Reject fabrics to DTA Duty of needles found short which was imported free of duty / procured duty free - Revenue was of the view that the appellant cleared goods of good quality in the guise of rejects Held that- Appellant has explained how the defects can arise in major part of a roll due to thickness or thinness of yarn rather than for bits - It is quite possible that the appellant had not accounted defective goods as rejects separately till they got permissions to sell such goods in DTA at concessional rate of duty because such separate accounting would not have served any purpose - Revenues argument that some of the buyers who bought the rejects did not get the full quantity billed in their name can only create a doubt but cannot prove that the goods were not actually rejects - This is especially so because the goods were sold through brokers who were not examined to find out their version. Revenues argument that in the past the appellant had been exporting defective goods and hence appellant should have exported the impugned rejects also is not an acceptable argument because possibility of such export depends on the market conditions and it is for the manufacturer to decide the quality of the goods to be exported without affecting his reputation - Revenues interest is safeguarded through the maximum permissible limits for rejects and net foreign exchange to be earned - These safeguards were not contravened - So the arguments advanced by Revenue to say that the goods were of good quality and its value was suppressed are not acceptable in the absence of positive evidence. Regarding Exemption Notification No.13/98 Held that - The condition that fabrics should have been stamped as Rejects is plain and simple to understand - If the appellants did not stamp it so it can be only due to the fact that it will affect the price it can fetch in domestic market at different levels - So it cannot be taken as an innocent mistake - The whole matter came to light only due to detailed investigation. Extended period of limitation - Held that - The plea of the appellant that Revenue was aware of the issue is not acceptable because there is nothing on record to show that the appellant had informed Revenue that the fabrics are not being stamped as Rejects while claiming exemption under notification of the type 13/98-CE - The show cause notice issued was for the reason that they were seen to be using imported needles obtained from another manufacturer and claiming said exemption meant for goods manufactured solely from indigenous goods - When a new fact which has been suppressed from Revenue came to light Revenue was justified in issuing Show Cause Notice invoking extended period of time. A demand based on value at which the goods were cleared to DTA as evidenced from the records of the appellant but without extending the benefit of exemption in notifications of the type will survive. Regarding duty on needles found short - Held that - The inputs cleared as such by the appellants to 100% EOUs cannot be deemed to have been manufactured by the appellants - the supplies (which are deemed exports) cannot be treated on par with export under bond for the purpose of Rule 57F - The appellants are not entitled to remove the inputs without reversal of the credit or payment of equivalent amount of duty. - There is no warrant or justification to extend the instructions dated 31.12.1996 issued by the Ministry/Board to cover supplies to 100% EOU which are treated as deemed exports for certain purposes under EXIM Policy - Decided partly in favour of Assessee.

Summary

Issues Involved:
1. Demand of duty on clearance of 'Reject fabrics'
2. Demand of duty on local needles
3. Demand of duty on imported needles
4. Imposition of penalty on the Company Secretary and Authorized Signatory

Detailed Analysis:

1. Demand of Duty on Clearance of 'Reject Fabrics':
The primary issue was whether the appellant cleared good quality fabrics as 'Rejects' and whether they complied with the conditions stipulated in the relevant notifications and permissions. The Export and Import Policy 1997-2002 allowed clearance of rejects up to 5% of the value of production in the Domestic Tariff Area (DTA), provided they were invoiced and stamped as 'Rejects' and certified as unavoidable due to manufacturing defects.

The Department alleged that the appellant cleared good quality fabrics as 'Rejects' without stamping them as such on the products, which was a condition for availing the exemption. The adjudicating authority found that the appellant's records indicated a transfer of good quality fabrics to the 'Rejects' folio in RG-I, leading to the conclusion that the appellant cleared good quality fabrics as 'Rejects'. However, the tribunal found that the appellant maintained separate stock of reject fabrics and duly recorded it in RG-I register, and the buyers confirmed purchasing defect/reject fabrics. The tribunal concluded that the appellant was not eligible for the exemption notifications due to non-compliance with the stamping condition, but the goods were indeed rejects, and the demand should be re-determined based on the invoice values without extending the benefit of the exemption notifications.

2. Demand of Duty on Local Needles:
The appellant received needles duty-free under CT-3 certificates in terms of Notification No.1/95-CE dated 4.1.1995 from M/s. Lakshmi Automatic Looms. The Department demanded duty on these needles, arguing that they were cleared without permission and without payment of duty. The appellant contended that the supplier had paid the duty subsequently. The tribunal directed the adjudicating authority to examine the demand in light of the Larger Bench decision in Lakshmi Automatic Loom Works Ltd. Vs CCE, Trichy, which held that a manufacturer could not supply inputs on which credit was taken to a 100% EOU under CT-3 certificate without paying duty.

3. Demand of Duty on Imported Needles:
The Department found a shortage of imported needles and alleged that they were cleared without permission and without payment of duty. The appellant did not seriously contest the demand but argued that duty should be quantified at the depreciated value. The tribunal upheld the demand of Rs.2,91,370/- on imported needles, along with interest and penalty, rejecting the appellant's claim for depreciated value since there was no proof of use before removal.

4. Imposition of Penalty on the Company Secretary and Authorized Signatory:
The Department imposed a penalty on the Company Secretary and Authorized Signatory, alleging involvement in duty evasion. The tribunal found that the Company Secretary was an employee of the company and did not make any personal gain from the duty evasion. Therefore, it was not justified to impose a penalty on him, and the appeal filed by him was allowed.

Conclusion:
The tribunal ordered the re-determination of the demand of Rs.83,15,372/- based on invoice values without extending the benefit of exemption notifications, upheld the demand of Rs.2,91,370/- on imported needles, and directed the adjudicating authority to examine the demand of Rs.5,24,296/- on local needles. The penalty on the Company Secretary was set aside.