2019 (6) TMI 68 - AT - Central Excise

Classification of goods - Covered yarn manufactured by the appellants - whether classified under 5605.10 or 5605.90 or 5605.00? - benefit of N/N. 45/1986 - Clandestine removal - undervaluation of metallized yarn - undervaluation of covered yarn - CENVAT Credit on inputs. Classification of goods - Covered yarn - Appellants submit that the obtain metallic yarn by micro-slitting lacquered metalised polyester film; Department has accepted its classification under heading 5605.10 - benefit of N/N. 45/1986 Central Excise dated 10.02.1986 - HELD THAT - Heading 5605 covers metalised yarn, whether or not gimped, being textile yarn, or striped or light heading No.54.06 or 54.07, combined with metal in the form of thread, striped or powder or covered with metal. It is evident that the covered yarn manufactured by the Appellants contained metalised yarn (67%) and nylon/polyester/viscose yarn (33%) in terms of Chapter Note 1 to the Chapter 54 - there is no doubt that nylon/polyester/viscose are man-made filaments. Therefore, metalised yarn of man-made filaments falls under 5605.10. The classification requires to be arrived in terms of section notes and chapter notes and the references to the respective headings or sub-headings - the impugned goods are classifiable under 5605.10 and are covered by the exemption notification 45/1986 Central Excise dated 10.02.1986. Clandestine removal - covered yarn - period April 1990 to March 1991 - HELD THAT - The averment that the total clearances of the Appellant to M/s. Hiro Industries tally with the invoices issued by M/s. Hiro Industries cannot be accepted. We find that the Appellants have not accounted for the clearance of 1776.75 kg of covered yarn - the Learned Commissioner had correctly confirmed the duty of ₹ 1,04,525 on the Appellants. Under-valuation - it has been alleged that the Appellants have under-valued the goods in as much as they have cleared 90% of the covered yarn to M/s. Hiro Industries @ ₹ 150 to ₹ 200/Kg and that M/s. Hiro Industries sold the same to other buyers at ₹ 425/kg - related party transaction - Extended period of limitation - HELD THAT - The department has not made out any case to establish that the Appellants and M/s. Hiro Industries are related; no mutuality of interest is established; no proof of flow back of money has been brought out. The value adopted by M/s. Hiro Industries to their customers cannot be adopted just for the reason that M/s. Hiro Industries are purchasing 90% of the clearance of the Appellants and for the reason that they are selling at higher price to their customers - Other than mentioning the entries in the petty cash book the department could not establish that the entries pertained to the sale of goods and monies recovered back by the Appellants. Moreover, the impugned period was under the regime of filing an approval of classification and price lists - extended period of limitation also cannot be invoked - the allegation of under valuation is not sustained. Demand of duty of ₹ 1,12,321 by holding that exemption under notification No.175/86 is not applicable to the Appellants during the year 1991-92 - HELD THAT - The exemption under notification 45/86 as claimed by the Appellants is applicable to them. Therefore, the exemption contained under 175/86 is also applicable to them. Confiscability of 777.175 kg of covered yarn - HELD THAT - Out of 1546.21 kg of covered yarn lying in the factory only 769.035 kg was accounted in RG1 register. We find that the Appellants have not given any satisfactory explanation for the same - the Learned Commissioner was right in confiscating the 777.175 kg of covered yarn - quantum of redemption fine reduced. CENVAT credit - inputs - demand of ₹ 7, 21,507 on account of clearance of metalised polyester film without reversing the credit availed on such raw material - Scope of SCN - HELD THAT - Though CESTAT has held that lacquering does not amount to manufacture, the fact that credit has been availed on the inputs used in the clearance of metalised yarn cleared as such or after lacquering. However, the Appellants submit that the issue raised by the Learned Commissioner is beyond the scope of the Show Cause Notice. On-going through the Show Cause Notice we find that the Appellants contention are correct - Learned Commissioner has travelled beyond the scope of the Show Cause Notice. Therefore, the demand is liable to be set aside. Penalties in terms of Rules 173 Q, 9(2), 52A, 210 226 - HELD THAT - The sustainable demand is now limited to ₹ 1, 04,525 we find that the penalty be also restricted to ₹ 1,00,000 - other penalties also set aside. Appeal allowed in part.

Summary

Issues Involved:
1. Classification of Covered Yarn
2. Eligibility for Notification No. 45/1986
3. Duty Liability for Alleged Clandestine Removal and Undervaluation
4. Reversal of Credit on Inputs
5. Allegation of Related Person and Under-Valuation
6. Confiscation and Penalty

Detailed Analysis:

1. Classification of Covered Yarn:
The primary issue was whether the covered yarn manufactured by the appellants should be classified under sub-heading 5605.10, 5605.90, or 5605.00. The appellants contended that the covered yarn, consisting predominantly of metallic yarn (67%) and other man-made filaments (33%), should fall under 5605.10 as per Section Note 2(A) and 14A of Section XI. The Tribunal agreed, noting that the yarn is used for weaving fabrics requiring metallic yarn patterns and that the covered yarn's predominant material is man-made filament. Thus, the classification under 5605.10 was upheld.

2. Eligibility for Notification No. 45/1986:
The appellants argued that the covered yarn should be exempt under Notification No. 45/86-CE, which grants exemption to man-made metallic yarn under sub-heading 5605.10. The Tribunal concurred, stating that since the covered yarn is classified under 5605.10, the exemption under Notification No. 45/86-CE is applicable.

3. Duty Liability for Alleged Clandestine Removal and Undervaluation:
The department alleged clandestine removal of 1776.75 kg of covered yarn, resulting in a duty demand of ?1,04,525. The appellants failed to provide satisfactory documentary evidence to counter this claim. Hence, the Tribunal upheld the duty demand. Regarding undervaluation, the department claimed that the appellants sold covered yarn to Hiro Industries at a significantly lower price than Hiro Industries' resale price. The Tribunal found no evidence of mutual interest or financial flowback between the appellants and Hiro Industries, thus rejecting the undervaluation claim.

4. Reversal of Credit on Inputs:
The department demanded the reversal of ?7,21,507 credit on inputs used in lacquered metallized polyester film (LMPF), arguing that the finished product was cleared without payment of duty. The Tribunal noted that this issue was beyond the scope of the show cause notice and set aside the demand.

5. Allegation of Related Person and Under-Valuation:
The department alleged that Hiro Industries was a related person to the appellants, justifying the use of Hiro Industries' resale price for valuation. The Tribunal found no evidence supporting this relationship or financial flowback, thus rejecting the related person allegation and the undervaluation claim.

6. Confiscation and Penalty:
The Tribunal found that 777.175 kg of covered yarn was unaccounted for in the RG-1 register, justifying the confiscation. However, it reduced the redemption fine from ?1,00,000 to ?30,000. The penalty imposed on the main appellant was reduced to ?1,00,000, considering the sustainable demand was limited to ?1,04,525. The penalty on the other appellant was set aside, as his role in the main appellant's actions was not established.

Conclusion:
- The covered yarn is classifiable under 5605.10, with applicable exemptions under Notification No. 45/86-CE and 175/86-CE.
- Duty of ?1,04,525 on clandestinely removed yarn is confirmed.
- Penalty on the main appellant reduced to ?1,00,000; redemption fine reduced to ?30,000.
- Penalty on the other appellant set aside.

(Order pronounced on 31.05.2019)