2017 (5) TMI 598 - AT - Central Excise

Clandestine manufacture and removal - manufacture of of automatic data processing machines - it was alleged that IDS had manufactured and cleared computer systems without payment of duty in the guise of trading activity by issuing trading invoices and splitting the value into different categories and adopting such other practices to show as if it was a trading activity - case of appellant was that they have bought out computer systems and merely added peripherals and software which does not amount to manufacture to it and instead amounts to trading. Held that - appellants obviously were following an ingenious modus operandi of camouflaging their manufacturing activities in the guise of trading. In the process, they were issuing split invoices purporting to be parts and components of computer systems while actually clearing fully assembled workable computer systems which they subsequently installed at the premises of their customers. Thus a fraud was perpetuated by the appellant to deprive the exchequer of duty liability amounting to ₹ 38,21,398/- as worked out in respect of 397 computer systems. The modus operandi has been corroborated in the statement of Shri R. Balakrishnan, then General Manager of the appellant (second appellant herein) wherein he admitted in his voluntary statement dt. 25.01.1995 that they were clearing fully assembled workable computer systems to the customers against orders, but, however, splitting the orders while issuing invoices as per instructions of company Directors - none of the customers or officials of the appellant from whose statements have been recorded have subsequently retracted their say. The activity carried out by the main appellant is nothing but manufacture of computer systems on which duty at applicable rate is very much liable to be discharged. We therefore find no infirmity with the findings of the adjudicating authority on this score. In the event, no merit is found in the appeals with respect to duty demand of ₹ 38,21,398/- on Integrated Data Systems. Penalties - Held that - The imposition of penalty should always be proportionate and commensurate with the acts of omission and commissions of the persons concerned and should also have some bearing on the quantum of duty or tax that has been short paid or not paid on account of such acts of omission and commissions - we set aside penalties imposed by the de novo adjudicating authority in the impugned order against the appellant herein and restore the level of penalties to the extent imposed in the first round of adjudication namely to ₹ 10,00,000/- on IDS and ₹ 50,000/- on Shri R. Balakrishnan (second appellant herein). Appeal allowed - decided partly in favor of appellant.

Summary

Issues Involved:
1. Whether the activity undertaken by IDS amounted to manufacturing or trading.
2. Validity of the duty demand and penalties imposed on IDS and its General Manager.
3. Appropriateness of the enhancement of penalties in the de novo adjudication.

Issue-Wise Detailed Analysis:

1. Whether the activity undertaken by IDS amounted to manufacturing or trading:
The department alleged that IDS was manufacturing and clearing computer systems without paying duty by misrepresenting their activities as trading. The adjudicating authority relied on statements from IDS’s Director and General Manager, as well as customers, indicating that IDS supplied fully assembled computer systems. IDS contended that they were merely adding peripherals to fully functional systems purchased from vendors, which did not constitute manufacturing. However, the adjudicating authority, upon reevaluating the evidence, concluded that IDS assembled computer systems from various parts and supplied them as complete systems, thereby engaging in manufacturing. The Tribunal upheld this conclusion, noting that the modus operandi of splitting invoices to show trading activity was a deliberate attempt to evade duty.

2. Validity of the duty demand and penalties imposed on IDS and its General Manager:
The original adjudication confirmed a duty demand of ?53,20,821/- and imposed penalties on IDS and its General Manager. Upon remand, the duty demand was revised to ?38,21,398/-. The Tribunal found that IDS had indeed manufactured computer systems and was liable to pay the revised duty amount. The contention that the activity was merely trading was rejected, as the evidence indicated that fully assembled systems were supplied. The Tribunal also noted that the valuation of the systems was correctly done by excluding the value of peripherals, in line with the Supreme Court’s decision in ORG Systems.

3. Appropriateness of the enhancement of penalties in the de novo adjudication:
In the de novo adjudication, penalties on IDS and its General Manager were significantly enhanced. The Tribunal found this enhancement unjustified, noting that the duty demand had actually been reduced in the de novo adjudication. There was no new evidence or discussion to justify the increased penalties. The Tribunal cited the principle that penalties should be proportionate to the acts of omission and the quantum of duty evaded. Consequently, the Tribunal set aside the enhanced penalties and restored the penalties to the levels imposed in the first round of adjudication, i.e., ?10,00,000/- on IDS and ?50,000/- on the General Manager.

Conclusion:
The Tribunal concluded that IDS was engaged in manufacturing activities and was liable to pay the revised duty amount of ?38,21,398/-. The enhancement of penalties in the de novo adjudication was found to be unjustified and was reverted to the original amounts. The appeals were disposed of accordingly.