By TIOL News Service

MUMBAI, MAY 13, 2015: NORMALLY, the department would have been happy if an assessee claims that he is manufacturing excisable goods but if such a claim is with an eye on the "rebate" involved upon payment of the duty by debit in CENVAT account, then it is a cause of worry for the department.

The present case follows the above route and more twist is due to the fact that the assessee has a unit located in J&K and avails the region-specific exemption 56/2002-CE and 57/2002-CE.

Two years ago when the Majority decision came on the stay application filed by the drug company Revenue officials were mighty pleased as the appellant was directed to deposit in cash Rs.13,22,30,368/- and freeze the credit of Rs. 9,80,23,384/-. But that was two years ago.

The appeal was heard and again there was a difference of opinion and the matter came to be referred to the third Member, this time Member (Judicial).

And the Revenue has lost the case.

Take a look at the eventful journey of this case as it began in the corridors of the CESTAT in April 2013.

The appellant procured Coco Butter and Coco Powder cleared from their factory at Jammu. As far as unit located in Jammu is concerned, the goods are cleared to the appellant on payment of duty and they take CENVAT credit of the duty paid by their Jammu unit. The applicant also imports Coco Butter & Coco Powder on payment of duty. The applicant also takes the credit of duty paid thereon and thereafter affixes two labels described as label A and label B on the goods procured by them and these are then exported on payment of duty under claim for rebate. Needless to mention that the 'rebate' claims were never rejected!

After some time, the Revenue had a re-think and took a view that putting label A and label B on the boxes does not make the product marketable to the consumer and, therefore, the activity does not amount to manufacture as the product is already marketable before affixing label.

A gigantic SCN came to be issued and confirmed by the CCE, Belapur to the following effect -

a) CENVAT credit wrongly availed of Rs.23,02,53,752/-.

b) Rebate erroneously granted Rs.13,22,30,368/-

c) Interest on the above amounts and penalty of Rs. 23,02,53,752/-.

Before the CESTAT while seeking stay on the recovery of the adjudged dues, the appellant submitted that as per Note 3 to Chapter 18 of the CETA, 1985, the activity of labeling shall amount to manufacture and that the activity undertaken by the applicants was in the knowledge of the department from the day one as the goods exported are factory stuffed and same were sealed by the Central Excise officer in their factory itself and hence extended period is not invokable.

The AR strongly opposed the contention of the appellant and submitted that mere putting label A & label B does not amount to manufacture as the same does not make the product more marketable to the consumer as per Note 3 to Chapter 18 of the CETA, 1985. Therefore, applicant has not made out a case for waiver of pre-deposit and hence they be directed to make pre-deposit of the entire amount.

The Member (Judicial) inter alia observed -

+ Mere labeling would not amount to any manufacturing activity - M/s. Sree Leathers - 2011-TIOL-1999-CESTAT-KOL.

+ The Range Inspector has verified that CENVAT Credit is not availed wrongly and thereafter the factory stuffing was allowed. Prima facie demands for extended period cannot be demanded at this stage.

The Member (Technical) differed by observing -

+ Goods manufactured in the unit being located in J &K are exempt from payment of duty vide Notification Nos. 56/2002-CE and 57/2002-CE in terms of which the exemption is operated by payment of excise duty on the goods manufactured and thereafter refunding of duty paid on monthly basis.

+ In case, goods manufactured in J&K are exported out of India, no refund or rebate of duty is granted. Clause (2) of the notification 19/2004-CE(NT) details 'Conditions and limitations'and Sub-Clause (h) of Clause (2) lays down that in case of export of goods manufactured by availing notifications 56 & 57/2002-CE the rebate shall not be admissible under the notification.

+ In order to circumvent the said law, the applicant adopted an ingenious method. Goods manufactured in J&K, availing exemption from payment of duty, were brought to Mumbai. Coco butter was packed in corrugated and card board boxes each containing 25 Kgs. of Coco butter. Each corrugated box had two similar labels to indicate content, net weight manufacture's name, marketers name etc. This was the position at the time of clearance at J&K and receipt in Mumbai. Goods could have been exported straightaway. However, before exporting, two extra but similar labels were affixed in Mumbai. Applicant claims that this affixing of extra labels is a process amounting to manufacture in terms of Note 3 to Chapter 18. Since applicant, are manufacturing the goods in Mumbai, they availed credit of duty paid on Coco butter in J&K (though refunded as per Notification 56 & 57/2002-CE dated 14.11.2002) and thereafter paid the duty on the so called manufactured Coco Butter from the said credit and claimed rebate such duty paid in cash. Thus overall, they got refund of duty paid in J-K twice, first in Jammu and second in Mumbai.

+ All the information indicated in two extra labels is already available in earlier Labels. There is no purpose of putting these extra labels from marketing or consumer or purchaser's point of view, except committing fraud on public exchequer by claiming refund second time (in the name of manufacture at Mumbai).Applicant appears to have succeeded in this fraudulent action for number of years.

+ Just because an Inspector has supervised stuffing of container, one cannot say that department has knowledge of each and every issue/activity of that manufacturer. Prima facie view is that extended period is correctly invoked in this case.

+ Applicant has not pleaded any financial hardship. Even otherwise, all that is being asked is deposit of refund taken twice, and freezing of credit, financial hardship cannot be a reason to pay back the same.

The matter came to be referred to the third Member. See 2013-TIOL-939-CESTAT-MUM.

The Third Member(Technical) on reference connoted the activity undertaken by the appellant as 'resorting to deception' and concurred with the view taken by the Member(T).

We reported this Majority decision as 2013-TIOL-1785-CESTAT-MUM.

The appeal was heard on 07.08.2014 & the Division Bench passed an order on 05.01.2015. Incidentally, the Member(J) remained the same.

Again, there was a difference of opinion and, therefore, the following points were referred to the third Member.

1. Whether Member (Judicial) is correct in holding that the allegation in the show-cause notice as well as in the order-in-original is that the labeling done at Taloja unit does not render the product more marketable to the consumer as the product is already marketable therefore, the same does not amount to manufacture as per Note 3 to Chapter 18 of the CETA 1985.

Or

Member (Technical) is correct that the allegation in the show-cause notice as well as in the order-in-original is also that the process adopted by the appellant at Taloja does not amount to manufacture as per Note 3 to Chapter 18 of CETA 1985.

2. Whether Member (Judicial) is correct in holding that the labeling done at Taloja unit amounts to manufacture as per Note 3 to Chapter 18 of CETA 1985 and does not require the labeling should enhance the marketability of the product.

Or

Member (Technical) is correct in holding that the process adopted by the appellant does not amount to manufacture as per Note 3 to Chapter 18 of CETA 1985.

3. Whether Member (Judicial) is correct in holding that in case of imported material, process of labeling has taken place in the factory of the appellant at Taloja on the basis of evidence available on record and, therefore, the same amounts to manufacture as per Note 3 to Chapter 18 of CETA 1985.

Or

Member (Technical) is correct that re-packing or labeling done of the imported goods does not amount to manufacture on the basis of available evidences.

4. Whether Member (Judicial) is correct in holding that the demand pertains to the extended period of limitation are not sustainable in the facts and circumstances of the case.

Or

Member (Technical) is correct that extended period of limitation is invokable in the facts of this case.

5. Whether Member (Judicial) is correct that no penalty is warranted to be imposed on the appellant in the facts and circumstances of the case.

Or

Penalty is imposable on the appellant as held by Member (Technical).

The Third Member on reference viz. Member (Judicial) heard the matter on 20/03/2015 and an order was passed on 16/04/2015.

After extracting the alleged facts liberally from the SCN and the O-in-O, the Member (J) reproduced the Chapter note 3 to Chapter 18 as below -

Note 3 to Chapter 18, prior to 1.3.2008, read as follows:

"In relation to products of this Chapter, Labeling or relabeling of containers and repacking from bulk to packs to retail packs or the adoption of any other treatment to render the product marketable to the consumer, shall amount to manufacture."

Note 3, post 1.3.2008, read as follows:

"In relation to products of this Chapter, labelling or relabeling of containers or repacking from bulk packs to retail packs or the adoption of any other treatment to render the product marketable to the consumer, shall amount to manufacture."

And observed -

+ In my view, the Parliament has substituted the word "or" in place of "and" appearing between the words "labelling or relabeling of containers" and "repacking from bulk packs to retail packs" to widen the scope of note 3 to Chapter 18. This, in my view, necessitated to overcome the judgment of the Hon'ble Apex Court in the case of Johnson and Johnson and BOC India Limited holding that the activity of labelling or re-labelling alone would not amount to manufacture unless it is coupled with packing or repacaking in view of use of expression "and" in note 5 to Chapter 30, which note was identically worded as note 3 to chapter 18.

+ In my view, amended note 3 is in three parts. The first part covers labelling and re-labelling, the second part covers "packing or repacking from bulk to retail "Packs" and the third part covers "adoption of any other treatment to render the products marketable to the consumer".

+ In my view, any one of the activities referred to in note 3 viz. (i) Labelling or re-labelling, (ii) packing or repacking from bulk and retail packing; and (iii) adoption of any other treatment to render the product marketable to the consumer being undertaken would deemed to be manufacture and note 3 stands attracted.

+ In my view, the contention of the revenue does not merit acceptance as to that labelling must enhance the marketability. The argument of the revenue that labelling or relabeling must enhance the marketability is contrary to the plain reading of note 3 to Chapter 18. In may view, the contention raised on behalf of the revenue would render the amendment to various chapter notes including note 3 to Chapter 18 substituting the word "and" with "or". The amendment is made with a view of separate each of the activities covered by note 3 to Chapter 18 to be independent activities and each of them deem to be manufacture.

+ In my view, labelling per se will amount to manufacture in view of the first part of note 3 of Chapter 18. There is no requirement in said note 3 that the labelling should enhance the marketability. It only the last part of note 3 that provides for adoption of any other treatment to render the product marketable. The note 3 is deeming provisions. It deems three of the specified activities as deemed manufacture.

+ In view of admitted position both in the show cause notice and in the impugned order that the Appellant have undertaken the activity of labelling, I agree with Member (Judicial) that that the activity of the appellant is covered by note 3 to Chapter 18 and the activity of the Appellant of labelling the goods received from Jammu factory amounts to manufacture.

The Member (J) also noted that the apex court decision in Liquide North India Pvt. Ltd. has not held that what is understood by the Commissioner or being argued on his behalf.

In respect of Activities undertaken by the appellant on the imported coco butter, the Member (J) observed -

++ I cannot sustain the findings of the learned Commissioner that repacking is not satisfactorily proved for want of maintaining of records at factory. I find that even though it is claimed by the department that no records of labels is maintained at the factory it is accepted by the department that labelling is done by the Appellant.

++ In my view, the evidence on record prove beyond reasonable doubt that the appellant have repacked the imported coco butter in new cartons &exported them after labelling. I find that the learned Commissioner had held that the appellant have affixed two labels on the imported coco butter and exported in the same manner in which they did it on coco butter received from Jammu factory.

++ I find that the appellant have changed the cartons of the imported coco butter and the labels are affixed on the new cartons. This is clearly labelling. Note 3 is applicable and the activity amounts to manufacture. I find no material on record which would suggest that the appellant affixed two labels on the imported coco butter on the original carton in which they were imported.

++ In my view the contents of the label affixed on the imported cartons cannot be the decisive factor to hold that no repacking and labelling has been done on the imported cocoa butter. Neither the show cause notice nor impugned order proceeds on the basis that contents of the label affixed on the exported coco butter raises doubt about repacking. The show cause notice admits and accepts that repacking is done on the imported coco butter, no dispute can be raised by the learned Commissioner on repacking of imported coco butter.

++ I am in full agreement with the learned Member (Judicial) that the activity of labelling undertaken by the appellant amounts to manufacture in terms of note 3 of chapter 18 of CETA, 1985.

Limitation:

++ The verification required to be carried out by the Assistant Commissioner in terms of the aforesaid permission (granted by Commissioner of Customs (Export), JNCH) was not restricted to verification of the identity of the goods mentioned in the ARE-1 and particulars of duty paid or payable as contended on behalf of the revenue. The Inspector/Superintendent of Central Excise while visiting the factory of the appellant for stuffing and sealing of the export cargo, were required to verify various details including drawing of representative samples in duplicate. The role of the Inspector/Superintendent of Central Excise in the factory stuffing and sealing was not limited to the verification of the identity of the goods and particulars of duty paid.

++ In view of the obligation of the Inspector/Superintendent to verify various other details, it could not have been held that the Inspector/Superintendent had no knowledge of the activity undertaken by the appellant.

++ It is the settled position of law, the extended period can be invoked only when the assessee takes positive steps to withhold the information from the department. In the present case, the documents on record clearly show that, not only the Appellant had disclosed the description of the final product, major raw materials and that no machinery is available in the factory at Taloja, it cannot be said that the department was not made aware of the activities of the appellant. The only conclusion that can be drawn from the documents on record is that the appellant kept the department informed that it will be doing the activity of labelling or relabeling or packing or repacking. In such a situation, it will not be possible for me to hold that the department was unaware of the activity undertaken by the Appellant.

++ Considering the totality of the circumstances, I agree with the Member (Judicial) that the extended period is not available to the department in the present case.

Penalty:

In view of my findings on the point nos. 1 to 3 and 4, I agree with Member (Judicial) that no penalty can be imposed. The appellant have undertaken the activity of labelling, which is covered by note 3 and amounts to manufacture. The appellant are entitled to credit of duty paid on the coco butter received from Jammu factory in view of special dispensation contained in Rule 12 and credit of CVD paid on the imported coco butter. I have further found there is no suppression on the part of the appellant and extended period is not available to the department. The Appellant have rightly granted rebate. Therefore no penalty can be imposed on the appellant.

Conclusion:

In view of the majority decision, the appeal was allowed.

In passing: Consequential relief… Probably, not the end of the road as yet…

(See 2015-TIOL-857-CESTAT-MUM)