Civil Appeal Nos. 3821-23 OF 2005
1. These appeals preferred under
Section 35L(b) of the Central Excise Act, 1944 (hereinafter referred to
as 'the Act') are directed against a common order dated 22.12.2004
passed by the Customs, Excise and Service Tax Appellate Tribunal
(hereinafter referred to as 'CESTAT') West Regional Bench, Mumbai by
which Appeal Nos. E/304/2004, E/314/2004 and E/315/2004 filed by the
respondent-assessee were allowed.
2. The facts briefly stated are
3. The respondents - M/s. Danmet Chemicals Pvt. Ltd. (hereinafter
referred to as 'DCPL') were manufacturing the products 'CRC 2-26
Aerosol' and 'CRC Acryform Aerosol' since 1983. They were claiming
exemption under Notification No. 120/84-CE dated 11.5.1984 for the
product 'CRC 2-26' and SSI exemption under Notification No. 175/86-CE
dated 1.3.1986 for the product 'CRC Acryform'. In their declarations
they claimed the classification of the products 'CRC 2-26' under Chapter
2710.99 and 'CRC Acryform' under Chapter 3203.40.
4. On the basis of the material gathered during the routine transit
checks and other information the Department issued show cause notice
dated 12.2.1993 to the respondent-assessee calling upon it to show cause
as to why Central Excise duty of Rs. 56,69,872.80p should not be
demanded and recovered for the period 26.2.1988 to 24.10.1992. In the
said show cause notice mainly 4 issues were raised, namely:
(i) That the product 'CRC 2-26' was
not a blended lubricating oil and was, therefore, not entitled to the
benefit of Notification No. 120/84-CE dated 11.5.1984;
(ii) That the product 'CRC Acryform' was not entitled to the benefit of
Notification No. 175/86 CE dated 1.3.1986 inasmuch as the product
carried on it the brand name/trademark of a person not entitled to the
benefit of the Notification;
(iii) That the respondent-assessee was a dummy or a fagade of Bharat
Bijlee Ltd. (for short 'BBL') and also that the respondent and BBL were
related persons and that therefore the price at which BBL sold the
respondent's products should be taken as the assessable value;
(iv) That the respondent-assessee had suppressed the facts with intent
to evade duty and therefore the proviso to Section 11A (1) of the Act
had been invoked.
5. The Department issued 12 six-monthly show cause notices between
27.10.1997 to 3.4.2003 for the period April, 1997 to 31.10.2002,
demanding an aggregate amount of Rs. 22,55,444/-
6. The matter was initially
adjudicated by the Commissioner (Adjudication) vide order dated
31.8.1998 which was challenged by the respondent-assessee in appeal and
the Tribunal having set aside the order of the Commissioner remitted the
case to the Commissioner for de novo adjudication. Accordingly, the
Commissioner adjudicated all the show cause notices vide his order dated
31.10.2003 whereby and whereunder it was held that the respondent-assessee
is not entitled to exemption of duty under Notification No. 120/84-CE
for the product 'CRC 2-26' and exemption under Notification No.
175/86-CE in case of product 'CRC Acryform'.
7. Aggrieved by the said decision
the respondent-assessee filed an appeal against the aforesaid order
dated 31.10.2003 passed by the Commissioner, Central Excise, Mumbai-IV.
The CESTAT decided all the issues that had arisen for its consideration
and accordingly allowed the appeal preferred by the respondent-assessee.
We shall refer to those issues adjudicated by the CESTAT in detail
appropriately. Being aggrieved by the decision of the Tribunal,
Commissioner of Central Excise, Mumbai-IV preferred these appeals.
8. We have heard Shri Vikas Singh, learned Additional Solicitor General
for the appellant and Shri D. B. Shroff,learned Senior Counsel for the
9. Elaborate submissions were made
by both the counsel. We have perused the orders passed by the
Commissioner as well as the Tribunal. We have also gone through the
material available on record.
10. The learned Additional Solicitor
General mainly contended that the product 'CRC 2-26' manufactured by the
respondent-assessee cannot be characterized as lubricating oil as it was
predominantly anticorrosive in nature and was used for air conditioners,
panel boards and other electrical and electronic gadgets primarily to
prevent corrosion and for improving electrical properties. It was also
submitted that the respondent-assessee was not entitled to SSI exemption
for 'CRC Acryform' since the respondent-assessee manufactured and
cleared goods in the brand name of M/s. BBL and also the logo of M/s.
CRC Chemicals Europe. Further submission was that DCPL and BBL are
related persons and relation led to under valuation of the goods. The
respondent-assessee is guilty of suppression of facts warranting
invocation of the extended period.
11. Shri D.B. Shroff, learned senior
counsel for the respondent-assessee supported the findings and
conclusion recorded by the Tribunal and reiterated the case of the
respondent-assessee that he is entitled for the benefit of both the
Notifications referred to hereinabove.
12. Broadly, the following issues
arise for our consideration in these appeals namely:
1. Whether the product 'CRC 2-26' is
a blended lubricating oil and thus is entitled to exemption under
Notification No. 120/84?
2. Whether the respondent is
entitled to the benefit of Notification No. 175/86 in respect of the
product 'CRC Acryform'?
3. Whether there was any willful
misstatement or suppression of facts with intent to evade duty with
regard to the products 'CRC 2-26' and 'CRC Acryform' or about the
relationship between the respondent and BBL so as to enable the
Department to invoke the proviso to Section 11A(1) in show cause notice
dated 12.2.1993 and whether the demand raised in the said show cause
notice is substantially time-barred?
4. Whether the Department can impose
5. Whether the respondent was a
fagade or dummy of BBL and/or whether the respondent and BBL are related
persons within the meaning of Section 4 (a) and 4 (3) (b) of the Act?
ISSUE NO.1: Whether the product 'CRC 2-26' is a blended lubricating oil
and thus is entitled to exemption under Notification No. 120/84?
13. The material available on record
suggests that 'CRC 2-26' mainly contains petroleum base oil 25%, mineral
oil 72% and rust preventives 3%. It is the case of the respondent-assessee
that these ingredients are blended together with a stirrer until
thoroughly mixed. This blended lubricating oil is sold and used as a
penetrating lubricating oil by many industries including government
owned for the purposes of lubricating the ball and roller bearings,
circuit breakers, connectors, switches, push buttons etc. The petroleum
base oil undisputedly is also mineral oil has lubricating properties and
is the most important ingredient in 'CRC 2-26'. Its main function is
lubrication. It is explained that when it is sprayed on moving parts,
the product forms a thin film on the surface and this film lubricates
the parts. The film forming property is called lubricity. As corrosion
and rust increases friction amongst moving surfaces, a small percentage
of proprietary rust preventives is also added so as to keep the surface
rust free as far as possible for effective lubrication by the film. The
certificates issued by various industrial concerns including the
government industries are part of record. Their genuineness is not put
in issue. The test report on 'CRC 2-26' carried out by Prof. M.C.
Dwivedi, Professor of IIT categorically states that 'CRC 2-26' is a
blended lubricant and that the lubricating oil used in the formulation
conforms with the requirements of the Bureau of Indian Standards
requirements. The Department did not controvert the expert opinion given
by the Professor.
14. Be that as it may, the
Department itself drew samples on the said products on more than one
occasion i.e. in 1984, 1990 and 1993. The Deputy Chief Chemist has given
the test reports and communicated the same vide letter dated 3.5.1985
stating that the sample which forms of a liquid is composed of mineral
oil and small amount of additives; 1990 analysis has been communicated
vide letter dated 15.4.1991 stating that the sample is composed of
mineral oils and additives, the percentage of mineral oil is more than
70% and the result of 1993 analysis was communicated vide letter dated
10.1.1994 specifically stating that it is a product primarily used as
lubricant though it has anticorrosive properties also. It is well
settled and needs no restatement at our hands that the test reports
given by the Chemical Examiner are binding upon the Department in the
absence of any other acceptable evidence produced by it in rebuttal. In
the present case, the Department has neither produced any evidence to
rebut the reports of the Chemical Examiner nor impeached the findings of
the test reports.
15. Much reliance was sought to be
placed by the Department on the label affixed on the container which
says that " 'CRC 2-26' is a precision blended multi purpose lubricating
oil that prevents malfunction due to the deteriorating effects of
moisture and corrosion, extends operational life, claims, protects
metal, reduces downtime and maintenance." Under the heading Directions,
it is mentioned that 'CRC 2-26' is to be used to clean, lubricate,
protect precision mechanism. We fail to appreciate as to how this
information contained in the label supports the plea of the Department.
It is true that the product in some measures contains anti-corrosive
properties. The HSN explanatory notes specifically declares that oils
classified under the head remain classifiable if various substances have
been added to render them suitable for particular uses, provided the
product contains by weight 70% or more of petroleum oil or oils obtained
from bituminous minerals as the base and that they are not covered by a
clear specific heading. There is no dispute whatsoever the product in
question to be a preparation containing 70% or more of mineral oil apart
from 20% petroleum oil. The product is predominantly a blended
lubricating oil. Negligible percentage of rust preventives does not make
the product in question to be a rust preventive one. The plea of the
Department that the product is not a lubricating oil is untenable. There
is no material or evidence in support of the said plea. The findings
recorded by the Tribunal based on material and evidence available on
record in our considered opinion do not suffer from any error requiring
our interference in exercise of our appellate jurisdiction.
ISSUE NO.2 : Whether the respondent
is entitled to the benefit of Notification No. 175/86 in respect of the
product 'CRC Acryform' ?
16. The contention of the Department
in this regard mainly was that labels 'CRC Acryform' carried the logos
"B" of BBL and 'CRC' of CRC Chemicals Europe, who admittedly are not
entitled to the benefit of notification. It was submitted, in the
circumstances 'CRC Acryform' is not entitled to the benefit of
Notification No. 175/86. There is no dispute that the respondent-assessee
has been using the trademark 'CRC Acryform' as its own ever since 1987.
It had applied to the Trademarks Registrar for registering the trademark
as early as in the year 1992.
The Trademark Registrar has
registered 'CRC Acryform' as respondent's trademark on 14.10.1992 with
retrospective effect from the date of use in the year 1987. It is true
the registration of the trademark on 14.10.1992 after the commencement
of lis between the parties by itself may not be binding on the
Department but its evidentiary value cannot be altogether ignored. So
far as the CRC Chemicals Europe is concerned it had given an affidavit
and a certificate specifically stating that they do not manufacture and
have not manufactured or sold any product under the name and style "Acryform"
or "CRC Acryform" either in India or abroad and they have not claimed
any title, right or ownership in the aforesaid names. This affidavit has
been ignored altogether by the Commissioner on the ground that it was
procured by the respondent-assessee and it was a false document. There
is no evidence made available by the Department that the same trade name
or brand name is used by some other company apart from the respondent-assessee.
There is also no evidence available on record indicating any connection
between the 'CRC Acryform' and CRC Chemicals Europe. In the absence of
any specific statement in the show cause notice to this effect burden in
this regard cannot be cast on the respondent-assessee.
Admittedly the use of the logo was
discontinued from 1990 and the same was informed to the Department. So
far as the 'CRC Acryform' is concerned it bears the mark 'CRC Acryform'
which is registered and shown in the trademark certificate. We are also
not impressed by the submission made on behalf of the Department that 'CRC
Chemicals Europe' could not have permitted the manufacture of the
product and supply the concentrate without having title to the trademark
for the simple reason that the licence agreement referred to and relied
upon by the Department merely permits the respondent-assessee to
manufacture 'CRC Acryform' from the concentrate supplied by 'CRC
Chemicals Europe'. The Commissioner mis-interpreted the clause in the
agreement relating to the product 'CRC 2-26' and made it applicable to 'CRC
Acryform'. The licence agreement dated 30.9.1986 is nothing but
extension to the license agreement dated 1.10.1983 for 'CRC 2-26' of
course in addition permitting the manufacturer of 'CRC Acryform' to
label it as such. It is nowhere mentioned in the original license
agreement and in the subsequent agreement dated 30.9.1986 that 'CRC
Acryform' is a trademark or brand name of CRC Chemicals Europe. The
Tribunal upon appreciation of the evidence available on record came to
the correct conclusion that respondent-assessee continues to be a small-
scale industry and entitles to the benefit of Notification No. 175/86 in
respect of 'CRC Acryform'. We find no error in the conclusion so arrived
at by the Tribunal.
ISSUE No. 3: Whether there was any
willful misstatement or suppression of facts with intent to evade duty
with regard to the products CRC 2-26 and CRC Acryform or about the
relationship between the respondent and BBL so as to enable the
Department to invoke the proviso to Section 11A(1) of the Act, in the
show cause notice dated 12.2.1993 and whether the demand raised in the
said show cause notice is substantially time-barred?
17. The classification lists filed
by the assessee from time to time categorically mention in the column
relating to the process of manufacture as "blending of various
anti-corrosive chemicals and solvents with mineral turpentine". It is
mentioned that the product is a blended lubricating oil manufactured by
blending mineral turpentine oil with anti-corrosive in a base of
The stand taken by the
assessee is consistent as is evident from the letter dated 20.3.1985
addressed to the Superintendent of Central Excise that they were the
manufacturers of 'CRC 2-26' which was a blended lubricant comprising of
various anticorrosive oils and mineral turpentine oil and that the same
was fully exempted under Notification No. 120/84. The required
information was supplied to the Superintendent of Central Excise when he
visited the factory of the respondent-assessee. Samples were again drawn
in 1990 and 1993 to determine whether the product was not a lubricating
oil. We have already referred to the analysis of the Deputy Chief
Chemist who opined that the samples contained mineral oil which was more
than 70% and additives.
The chemical test reports so
obtained by the Department were never put in issue. No dispute has been
raised in this regard. The declarations furnished by the respondent-assessee
were totally inconformity with what has been stated in the test reports
of the Deputy Chief Chemist. It is true that the exemption under
Notification No. 120/84 was applicable to lubricating oil and greases
which had a primary and permanent function of lubrication and not for
the product having a primary function of anti-corrosive protection. But
the evidence available on record reveals that the quantum of rust
preventives in 'CRC 2-26' is only 3% whereas mineral oil is 70%. The
evidence of the people in the trade, testimonials given by them
including various government bodies reveal that the product 'CRC 2-26'
is primarily used as a lubricating oil. The test reports of the Deputy
Chief Chemist coupled with the evidence referred to hereinabove lead to
one and only one irresistible conclusion that the product was primarily
used for the lubricating purposes. No evidence has been produced by the
Department to rebut the voluminous evidence made available by the
18. In the circumstances, we find it
difficult to hold that there has been conscious or deliberate
withholding of information by the assessee. There has been no willful
misstatement much less any deliberate and willful suppression of facts.
It is settled law that in order to invoke the proviso to Section 11A(1)
a mere misstatement could not be enough. The requirement in law is that
such misstatement or suppression of facts must be willful. We do not
propose to burden this judgment with various authoritative
pronouncements except to refer the judgment of this Court in Anand
Nishikawa Co. Ltd. Vs. CCE [ 2005 (188) ELT 149 (SC)] wherein this
"We find that "suppression of facts"
can have only one meaning that the correct information was not disclosed
deliberately to evade payment of duty, when facts were known to both the
parties, the omission by one to do what he might have done not that he
must have done would not render it suppression. It is settled law that
mere failure to declare does not amount to willful suppression. There
must be some positive act from the side of the assessee to find willful
19. It is clear from the material available on record that the Excise
Authorities had inspected the manufacture process, collected the
necessary information and details from the respondent-assessee and even
collected the samples and sent to chemical analysis. The Authorities
were aware of the tests and analysis reports of the products
manufactured by the respondent-assessee. The relevant facts were very
much within the knowledge of the Department Authorities. The Department
did not make any attempt to lead any evidence that there was any willful
misstatement or suppression of facts with intent to evade payment of
20. For the reasons aforesaid, we
are of the view that the Tribunal did not commit any error in holding
that the extended period of limitation was not available to the
Department for initiating the recovery proceedings under Section 11A (1)
of the Act.
21. So far as 'CRC Acryform' is
concerned, the allegation was that the respondent-assessee did not
mention about the license agreement in the classification lists. But the
fact remains the copies of the labels on the product which were
furnished to the Department at the time of filing declarations and
classification lists contain information that 'CRC Acryform' was
manufactured under the license of CRC Chemicals Europe. The Department
had even taken samples of 'CRC 2-26' which had contained labels of the
aforesaid product. This Court in O.K. Play (India) Ltd. vs.
Commissioner of Central Excise, Delhi-III, Gurgaon [2005 (188) ELT
300 (SC)] while dealing with the effect of approval of the
classification lists observed:
"The classification lists were duly
approved by the department from time to time. All the facts were known
to the department, whose officers had visited the factory of the
assessee on at least 12 occasions. In the circumstances, we do not find
any infirmity in the reasoning given by the Tribunal in coming to the
conclusion that there was no willful suppression on the part of the
assessee enabling the department to invoke the extended period of
limitation under the proviso to Section 11A (1) of the 1944 Act."
22. The same principle is reiterated
in Commissioner of Central Excise, Jamshedpur Vs. Dabur India Ltd.
[ 2005 (182) ELT 308 (SC)].
23. On the facts of the case, we
hold that non-mentioning of the license agreement in the classification
lists does not lead to the conclusion that there has been willful
suppression of facts with intent to evade duty. The demand in respect of
'CRC Acryform' is, therefore, totally time barred.
ISSUE NO. 4: Whether the Department
can impose any penalty?
24. The only ground for levying the penalty is that the respondent-assessee
had suppressed the facts and had evaded the payment of duty. In view of
our conclusion that there has been no suppression whatsoever, the
question of imposition of penalty does not arise. The duty demanded by
invoking the extended period of limitation itself is untenable and
unsustainable for the aforesaid reasons. In such view of the matter no
elaborate discussion on this aspect is necessary.
ISSUE NO. 5: Whether the respondent
was a fagade or dummy of BBL and/or whether the respondent and BBL are
related persons within the meaning of Section 4 (a) and 4 (3) (b) of the
25. The Department in the show cause
notice dated 12.2.1993 alleged that: (i) the assessee-respondent is a
dummy/facade of BBL; (ii) the assessee-respondent and BBL are related
persons. The assessee in response to show cause inter alia contended
that it is a wholly independent and separate company incorporated under
the Companies Act, 1956 as early as on 21.5.1983 having two directors,
namely Mr. N.J. Danani and his wife. A manufacturing unit was registered
as a small-scale unit. It has no borrowings or loans from BBL or any
other manufacturing unit. The machineries required for the purposes of
manufacturing the products are purchased and owned by the
respondent-company. The required raw materials and packing materials for
manufacturing and packing the products were always purchased from its
own resources and BBL in no manner exercises any supervision or control
over the affairs of the respondent-company.
26. It is no doubt true that the registered office of BBL and the
respondent-company was located in the same premises. The BBL owns the
industrial gala in which respondent's factory exists for which the
respondent-company pays market rent for its operation. The BBL before
entering into a lease agreement on each occasion obtained a valuation
report from an independent Valuer for the purposes of fixing the quantum
of rent. The BBL entered into a lease agreement with the
respondent-company under the Board Resolution of the company. Mere fact
that both the registered offices are situated in the same premises and
the manufacturing unit of the respondent-company is situated in the
industrial gala owned by the BBL would not make both the companies are
related to each other. There is no mutuality of interest between both
27. BBL admittedly does not hold any
shares in respondent-company nor the respondent-company owns any shares
in BBL. One of the Directors in both the companies appears to be common.
The respondent-company was incorporated in 1983 and at that time Mr.
N.J. Danani was only an employee of BBL and became its Director in June,
1988 and was one out of seven Directors. It is required to appreciate
that the respondent first started manufacturing 'CRC 2-26' in the year
1984. The manufacture of 'CRC Acryform' was started after September,
1986 but well before Mr. N.J. Danani became Director of BBL.
28 There is no evidence on record in
support of the allegation that the transactions between the
respondent-company and BBL were not on a principle to principal basis.
The Commissioner found that the transaction between both the companies
was not a simple relationship between manufacturer and seller, because
respondent-company manufactured the product but did not mention its name
on the product or carton, but mentioned that the product was marketed by
BBL and put the logo of BBL thereon and that BBL did not pay any
consideration to the respondent-company in that regard. This is totally
contradictory to the evidence available on record as held by the
Tribunal. The name of the manufacturer is also mentioned on the product.
There is no evidence to arrive at any conclusion that there was a hidden
flow back of money between both the companies. The respondent did not
take any loan or advances from BBL. The appellant did not produce any
evidence to show that BBL has an interest in the respondent-company's
business. The appellant however, placed much reliance upon the finding
of the Commissioner which is as follows:
"The respondent had a list price
beyond which BBL could not sell and the arrangement between the parties
was that BBL would be billed at 60% of the list price and that the
difference in the prices would recover the cost incurred by BBL for
providing security services, and for expenses incurred by respondent for
putting the logo and the name of BBL as also the cost of printing the
leaflets, advertisement material provided to BBL."
29. The Tribunal after elaborate
consideration of the matter and upon appreciation of the evidence found
that BBL was a bulk buyer of the product manufactured by the respondent-assessee
and there is nothing wrong in giving 40% discount. It was a normal trade
practice. This Court in Metal Box India Ltd. Vs. Collector of Central
Excise, Madras [ 1995 (75) ELT 449 (SC)] held that:
"If a special trade discount is
given to such a customer who is a buyer of 90% of goods, it would amount
to a normal trade practice. At any rate it would not be an impermissible
trade practice. In fact such type of concessions are usually given by
manufacturers whose goods are lifted by whole-buyers whose availability
avoids lot of marketing and advertising costs for the manufacturer and
also ensures a guaranteed quantity of sales year after year. In order to
keep such a wholesale monopolistic buyer attached to it, if under such
circumstances by way of business expediency, the manufacturer offers him
a special trade discount, it cannot be said that it is not in accordance
with normal practice of wholesale trade."
30. There is no evidence available
on record that the respondent-assessee received something further from
BBL other than the price charged. There is no evidence to suggest that
the profit made by the BBL had flown into the respondent-company. BBL
obviously is a distributor and not a relative within the meaning of
Section 4 (a) and 4 (3) (b) of the Act.
31. This Court in Union of India
Vs. Atic Industries [ 1984 (17) ELT 323 (SC)] held that: "For
treating the customer as a related person, the first part of the
definition of 'related person' as given in Section 4 (4) (c) requires
that the person who is sought to be branded as a 'related person' must
be a person who is so associated with the assessee that they have
interest directly or indirectly in the business of each other. Thus, it
is not enough that the assessee has an interest directly or indirectly
in the business of the person alleged to be a related person nor is it
enough that the person alleged to be a related person has any interest
directly or indirectly in the business of the assessee. It is essential
to attract the applicability of the first part of the definition that
the assessee and the person alleged to be a related person must have
interest direct or indirect in the business of each other.
The equality and degree of interest
which each has in the business of the other may be different; the
interest of one in the business of the other may be direct while the
interest of the latter in the business of the former may be indirect,
but that would not make any difference so long as each has got some
interest direct or indirect in the business of the other. In cases,
where 50% share of the manufacturing company is held by7 the customer
company, the customer company can be said to be having interest in the
manufacturing company as a shareholder but for this reason, it cannot be
said that the manufacturing company has any interest direct or indirect,
in the business carried on by one of its shareholders even though the
shareholding of such shareholders may be 50%. In the absence of
mutuality of interest in the business of each other, the customer
company holding shares in the manufacturing company cannot be treated to
be a 'related person'." (Emphasis supplied)
32. In such view of the matter it
cannot be said that the respondent-assessee and BBL were related
persons. The finding arrived at in this regard by the Tribunal is
correct. No interference is called for.
33. In view of our findings, it is
not necessary to go into the various alternative submissions made during
the course of hearing of these appeals.
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