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CX – Whether in respect of packing machines for gutka duty would be payable only on pro-rata basis for number of days in month during which machine had functioned or would be payable for whole month without giving abatement for period for which machine was sealed - Pre-deposit ordered: CESTAT

By TIOL News Service

NEW DELHI, SEPT 14, 2012: THE Appellant manufactures gutka i.e. pan masala containing tobacco pouches of Rs. 1/- MRP and chargeable to duty under sub-heading 24039990 of the Central Excise Tariff. The period of dispute is from May 2010 to Sept. 2010.

According to the Department, the maximum number of operating packing machines during May, 2010, June 2010, July 2010, August 2010 and September, 2010 was 9, 9, 15, 7 and 5 respectively. On this basis, their duty liability for May 2010 to September, 2010 period was Rs.5,62,50,000/-. However, the Appellant, in respect of machines, which on account of having been sealed during the months worked only for part of the month, paid duty on pro-rata basis for the portion of the month for which the same had been operated and on this basis, paid total duty of Rs.4,50,00,000/- during May 2010 - Sept. 2010 period. According to Department, the Appellant were liable to pay duty on each machine which had operated during the month, as if the same operated during the whole of the month, even if on account of being sealed.

So, a demand notice was issued for recovery of short paid central excise duty amounting to Rs.1,12,50,000/- along with interest under Section 11AA and imposition of penalty on the Appellant under Rule 17 of Pan Masala Packing Machines (Capacity Determination and Collection of Duty) Rules, 2008 [PMPM Rules].

The CCE, Delhi-I confirmed a demand of Rs. 1 Crore holding that in the month of May the number of machines installed was 8 and not 9 and also imposed penalty of Rs.25 lakhs and interest.

The assessee is before the CESTAT with a Stay application and submits –

+ that during each month of the period of dispute, on the request of the Appellant, the officers had sealed certain machines for some particular period, that the machines sealed admittedly had not been operated and, therefore, in respect of these machines duty cannot be charged;

+ that the Appellant in their letter to the Department had requested for allowing them to deposit the duty on pro-rata basis and since there was no objection from the Department, they discharged duty liability on pro-rata basis, that each machine in respect of which duty had not been paid for the period of its sealing, the period of sealing was continuous period of 15 days or more and therefore, in respect of those machines the Appellant were legitimately eligible for abatement under Rule 10, that a provision has been inserted in Notification No. 8/2010-CE (NT) dt. 27.2.2010 that in case of new units the duty for the first time would need to be paid on proportionate basis and, therefore, payment of duty on pro-rata basis has been duly recognized, that in this case, the duty has been demanded for non-manufacture which is against the basic tenets of Central Excise law;

+ that Punjab & Haryana High Court in case of Godwin Steel (P) Ltd. vs. CCE reported in 2010 (254) ELT 202 (P&H) has held that it was wholly unjust for the Department to recover duty for the whole month during which the factory had not commenced production, that the ratio of this judgement is squarely applicable to the facts of this case;

+ that the same adjudicating authority in case of other similarly-placed manufacturer - M/s Rajat Industries Pvt. Ltd. and on similar set of facts, has held the payment of duty on pro-rata basis as valid and the demand for duty in that case has been dropped,

+ that the impugned order, prima-facie, is contrary to the provisions of law, that the Appellant have a strong prima-facie case in their favour and, therefore, the requirement of pre-deposit of duty demand, interest and penalty may be waived for the hearing of the appeal and recovery thereof may be stayed till the disposal of the appeal.

The Revenue representative reiterated the findings of the adjudicating authority.

The Bench observed -

"5. We have carefully considered the submissions from both the sides and perused the records. During the period of dispute the Appellant was required to discharge duty liability under PMPM Rules, notified under Section 3A of Central Excise Act, 1944, read with Notification No. 42/2008-CE dated 1.7.2008. Under Rule 7 of PMPM Rules, the duty payable by a Pan Masala/Gutka manufacturing unit during a month is to be determined by applying appropriate rate of duty under Notification No. 42/2008-CE to the number of operating packing machines. Under Rule 8, the number of operating packing machines for a month is the maximum number of machines installed on any particular day during the month. In terms of 2nd proviso to Rule 8, in case of non working of an installed packing machine during the month for any reason whatsoever, the same shall be deemed to be operating packing machine for the month. There is no dispute that the maximum number of machines installed on any day during May 2010, June 2010, July 2010, August 2010 and September 2010 was 8, 9, 15, 7 and 5 respectively. Since the Appellant were manufacturing Gutka pouches of MRP of Rs. 1/- per pouch, the rate of duty per operating machine per month under Notification No. 42/2008-CE was Rs. 12/- lakhs. On this basis, according to Department, the Appellant's duty liability for May 2010 - September 2010 would be Rs. 5.5 cr. and since the Appellant have paid duty of Rs. 4.5 crore only, the duty demand of Rs. One crore has been confirmed against them. However, it is not disputed by either side that during each month during the period of dispute, certain number of machines had been got sealed and these machines had not been operated for the whole month but had been operated only for part of the month. The point of dispute is as to whether in respect of such machines the duty would be payable only on pro-rata basis for the number of days in the month during which the machine had functioned or would be payable for the whole month without giving abatement for the period for which the machine was sealed.

6. The only provision for abatement is PMPM rules is in rule 10 but for invoking this rule -

(a) the entire factory must be closed for a continuous period of 15 days or more;

(b) during the period of closure there should not be any manufacturing activity whatsoever and no removal of goods by the manufacturer, and

(c) prior intimation of at least three days prior to closure must be given to jurisdictional Central Excise Officer who shall seal all the packing machines available in the factory in such a manner that the same cannot be operated during the period of closer.

In this case, it is not the case of the Appellant that entire factory was closed for continuous period of 15 days or more during which there was absolutely no manufacturing activity and no removal of the finishing goods. Therefore, abatement under Rule 10 is not available. From a perusal of this rule it is clear that this rule is not applicable when during part of a month some of the installed machines have been sealed and were non-operational, but other machines were being operated. We are, therefore, of prima-facie view that abatement under Rule 10 cannot be given in respect of individual machines which may have been sealed for a continuous period of 15 days or more, when during that period, other machines were functioning.

7. Other than Rule 10, there is no provision for charging duty on pro-rata basis in respect of the machines which for the reason of being sealed, were operating only during part of the month. The provision of 4th and 5th proviso to Rule 9 regarding recalculating of monthly duty liability where - (a) the manufacturer commences manufacturing of goods of a new RSP during the month or permanent discontinuance of manufacturing of goods of existing MRP; and (b) there is revision in rate of duty effective from a particular date during the month, cannot be interpreted to mean that when a machine has not worked for certain days in a month for the reason that the same had been sealed, duty in respect of that machine shall be payable on pro-rata basis, only for the period during the month when it was working.

8. Notification No. 42/2008-CE prescribes rate of duty per machine per month for Gutka/Pan Masala pouches of different MRP. Under Rule 7, monthly duty liability is to be calculated by applying appropriate rate of duty specified in the Notification No. 42/2008-CE to the number of operating packing machine. Under Rule 8. the number of operating packing machine for a month is the maximum number of machine installed on any day during the month. Thus, if a manufacturer is manufacturing gutka pouches of only one MRP - say Rs. X per pouch for which rate of duty prescribed in the notification is Rs. r per month per machine, the duty liability for a particular month shall be-

x (n)max,

where (n) max is the maximum number of machines installed on any day during the month. Thus, if in a month the maximum number of machines installed on one single day was 10 and on all other days, except for one machine other nine machines were in sealed condition, (n) max for the month will remain 10 only and duty liability for that month shall be determined on that basis. There is no provision for abatement of duty on the machine which were in sealed condition during the month and for this reason were not operational. Though this provision is PMPM rules may appear to be harsh, it has to be borne in mind that the Government notifies items under Section 3A having regard to-

(a) Nature of process of manufacture or production of excisable goods of any specified description;

(b) extent of evasion of duty in regard to such goods, or

(c) Such other factors as may be necessary to safeguard the interests of revenue.

PMPM Rules have been framed taking into account the ground reality of rampant duty evasion by Gutka and Pan Masala units.

9. In the case of Godwin Steels (P) Ltd. vs. CCE, Chandigarh (supra) cited by learned Counsel for the Appellant, the Appellant had commenced production from middle of the month while the Department wanted duty under Rule 96ZP(2) for the whole of the month and in these circumstances Hon'ble High Court held that duty can not be charged for the period when the assessee had not even commenced the production. In this case, the dispute is of totally different nature and hence we are of prima-facie view that the ratio of this judgement is not applicable to the facts of this case.

10. Another plea of the Appellant that the same Commissioner in case of M/s Rajat Industries Pvt. Ltd. in similar set of facts has held the payment of duty on pro-rata basis as valid is not acceptable as one wrong decision cannot be the basis for another wrong decision."

Holding that the applicant has not been able to establish a prima facie case in their favour, they were directed to deposit the entire duty demand of Rs.1 Crore and report compliance.

(See 2012-TIOL-1219-CESTAT-DEL)