2000 (9) TMI 710 - AT - Central Excise

Issues Involved:
1. Classification and duty applicability on cut pieces of woollen felts.
2. Applicability of Rule 57-S(1) and Rule 57U of Central Excise Rules.
3. Alleged clandestine removal and evasion of duty.
4. Imposition of penalties and interest.
5. Limitation period for issuing the show-cause notice.

Issue-wise Detailed Analysis:

1. Classification and Duty Applicability on Cut Pieces of Woollen Felts:
The appellants argued that the cut pieces of woollen felts, which were discarded after outliving their utility in the manufacturing process, were waste and scrap, not liable to any duty under Chapter 59 of the Central Excise Tariff. They contended that these pieces were neither known nor treated as carpets commercially. The Department, however, alleged that these cut pieces could be used as carpets and were classifiable under Tariff sub-heading 5702.00, attracting a duty of 30%. The Tribunal noted that during the relevant period, there was no provision for levying duty on waste and scrap of felts under Chapter 59. The Tribunal accepted the appellants' explanation and held that the cut pieces were indeed waste and scrap, not liable for duty.

2. Applicability of Rule 57-S(1) and Rule 57U of Central Excise Rules:
The Department invoked the second proviso to Rule 57-S(1), which provides for duty calculation on capital goods removed for home consumption or export after use, by allowing a deduction of 2.5% of the credit taken for each quarter of use. The Tribunal found that the appellants did not clear the felts as such for home consumption or export. Therefore, the second proviso to Rule 57-S(1) was inapplicable. The Tribunal also noted that there was no provision for levying duty on waste and scrap of felts under Chapter 59. Consequently, the demand for duty under Rule 57-S and Rule 57U was set aside.

3. Alleged Clandestine Removal and Evasion of Duty:
The Department alleged that the appellants removed felts prematurely, cut them into pieces, and sold them clandestinely without paying duty or reversing Modvat credit. The Tribunal found no evidence to support the Department's claim of premature scrapping for financial gain or the marketability of the cut pieces. The Tribunal held that the felts were removed from the machine only after becoming waste and scrap and were not liable for duty.

4. Imposition of Penalties and Interest:
The Commissioner imposed penalties under Rules 173Q and 209 and a further penalty under Rule 57U read with Section 11AC, along with interest under Section 11AB. The Tribunal noted that Sections 11AC and 11AB came into force only after the period of dispute and had no retrospective effect. Therefore, the imposition of mandatory penalties and interest was invalid. The Tribunal also found no justification for the penalty of Rs. 25 lakhs under Rules 173Q and 209, as the demand for duty itself was unsustainable.

5. Limitation Period for Issuing the Show-Cause Notice:
The appellants contended that the show-cause notice was barred by limitation as it was issued beyond six months. The Tribunal observed that the notice did not state any valid ground for invoking the extended period of limitation. The allegation of clandestine removal and wrong definition of capital goods was found baseless. The Tribunal concluded that the demand for duty was time-barred, referencing the case law of National Radio & Electronics Co. Ltd. v. CCE.

Conclusion:
The appellants succeeded both on merits and on the point of limitation. The impugned order was set aside, and the appeal was allowed. The Tribunal held that the cut pieces of woollen felts were waste and scrap, not liable for duty, and the provisions of Rule 57-S(1) and Rule 57U were inapplicable. The penalties and interest imposed were invalid, and the demand for duty was time-barred.

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