1989 (8) TMI 80 - SC - Central Excise

Whether Section 11A of the Act applies or not? Held that - the tribunal was in error in applying the provisions of Section 11-A of the Act. There were no materials from which it could be inferred or established that the duty of excise had not been levied or paid or short-levied or short-paid or erroneously refunded by reason of fraud, collusion or any wilful mis-statement or suppression of facts, or contravention of any of the provisions of the Act or of the rules made thereunder. The Tribunal in the appellate order has, however, reduced the penalty to ₹ 5000/- and had also upheld the order of the confiscation of the goods. In view of the fact that the claim of the revenue is not sustainable beyond a period of six months on the ground that these dhoop sticks, etc. were not handicrafts entitled to exemption, we set aside the order of the tribunal and remand the matter to the Tribunal to modify the demand by confining it to the period of six months prior to issue of show cause notice and pass consequential orders in the appeal on the question of penalty and confiscation. Appeal allowed.

Summary

Issues Involved:
1. Classification of dhoop sticks, coils, and powder as handicrafts.
2. Applicability of exemption under Notification No. 55/75.
3. Requirement of a license under Rule 174 of the Central Excise Rules, 1944.
4. Applicability of the extended period of limitation under Section 11A of the Central Excises and Salt Act, 1944.

Detailed Analysis:

1. Classification of Dhoop Sticks, Coils, and Powder as Handicrafts:
The appellants contended that their products (dhoop sticks, coils, and powder) should be classified as handicrafts under Notification No. 55/75, which exempts handicrafts from excise duty. They argued that their manufacturing process involved significant manual labor, which qualifies their products as handicrafts. The Tribunal, however, referred to the definition of 'handicrafts' in the Concise Oxford Dictionary and the Encyclopaedia Britannica, emphasizing that handicrafts must be the result of manual skill. The Tribunal found that the essential processes in manufacturing dhoop sticks, such as kneading and extrusion, were carried out using power, and only a small portion of the work was done by hand. Consequently, the Tribunal concluded that the products could not be classified as handicrafts, and this view was upheld by the Supreme Court.

2. Applicability of Exemption under Notification No. 55/75:
The appellants claimed exemption from excise duty under Notification No. 55/75, arguing that their products were handicrafts. The Tribunal examined trade notices and certificates from various authorities, including the Basic Chemicals, Pharmaceuticals, and Cosmetics Export Promotion Council, which indicated that dhoop sticks and similar products were considered agarbathies and eligible for exemption. However, the Tribunal and the Supreme Court found that the use of power in significant stages of the manufacturing process disqualified the products from being classified as handicrafts. Therefore, the exemption under Notification No. 55/75 was not applicable.

3. Requirement of a License under Rule 174 of the Central Excise Rules, 1944:
The appellants argued that under Notification No. 111/78, which exempts goods exempt from excise duty from the operation of Rule 174, they were not required to obtain a license. The Tribunal disagreed, stating that since the products were not classified as handicrafts and thus not exempt from excise duty, the appellants were required to obtain a license under Rule 174. The Supreme Court upheld this finding, noting that the failure to take out a license was due to the misclassification of the products.

4. Applicability of the Extended Period of Limitation under Section 11A of the Central Excises and Salt Act, 1944:
The Tribunal held that the extended period of five years under Section 11A was applicable because the appellants had manufactured and removed the goods without informing the Central Excise authorities, constituting suppression of facts. The Supreme Court, however, found that there was scope for confusion regarding the classification of the products as handicrafts, and mere failure to obtain a license or pay duty did not constitute suppression of facts or fraud. Therefore, the Supreme Court limited the demand to six months prior to the issue of the show cause notice, setting aside the Tribunal's application of the extended period of limitation.

Conclusion:
The Supreme Court upheld the Tribunal's finding that the appellants' products were not handicrafts and thus not eligible for exemption under Notification No. 55/75. However, it limited the demand for excise duty to six months prior to the issue of the show cause notice, as there was no evidence of fraud, collusion, or willful misstatement by the appellants. The matter was remanded to the Tribunal to modify the demand and pass consequential orders on the penalty and confiscation.