CHAPTER 3
 UNION EXCISE DUTIES

3.01     Budget estimates vis-a-vis actual receipts

The budget estimates vis-a-vis actual receipts of central excise duties and number of factories paying excise duty during the year 1994-95 alongside the corresponding figures for preceding four years are given below :-

(Amount in crores of rupees)

Year

Budget estimates

Revised budget estimates

Actual receipts

No. of factories paying excise duty

1990-91

25,125

24,500

24,514

75,094

1991-92

26,888

27,696

28,110

77,642

1992-93

32,211

32,500

30,832

84,662

1993-94

33,751

31,750

31,548

@54,454

1994-95

36,732

36,900

37,208

@@52,409

@ relates to 33 Commissionerates out of 36 Commissionerates

@@ relates to 23 Commissionerates out of 36 Commissionerates

3.02     Trend of receipts

The receipts during the year 1994-95 from levy of basic excise duty and from other duties levied as excise duties are given below alongside the corresponding figures for the preceding year:-

(Amount in crores of rupees)

 

Receipts from Union Excise duties

1993-94

1994-95

A

Shareable duties:

Basic excise duties

26305.44

31074.11

Auxiliary duties of excise

0.01

* - 0.61

Special excise duties

21.08

28.69

Additional excise duties on mineral products

-

**-33.52

Total (A)

26326.53

31068.67

B.

Duties assigned to States :

Additional excise duties in lieu of sales tax

2285.99

2549.01

Excise duties on generation of power

-

0.17

Total (B)

2285.99

2549.18

C.

Non-shareable duties:

Additional excise duty on TV sets

 

0.03

Special excise duties

0.60

53.64

Additional excise duties on textiles and textile articles

440.25

630.85

Other duties

0.39

0.05

Total (C)

441.24

684.57

D.

Cess on commodities

2374.05

2857.13

E.

Other receipts

119.80

48.29

 

Total: (A to E)

31547.61

37207.84

Figures furnished by Controller of Accounts (Central Board of Excise and Customs).

*     Due to payment of drawback

**     Due to refunds

ii)    The products (as per budget, heads) which yielded revenue amounting to more than Rs.100 crores during 1994-95 and corresponding figures for 1993-94 are as under:

Sr. No.

Budget Head

Description

Amount (in crores of rupees)

Percentage variation of Actuals over Budget estimates

1993-94
(Actual)

1994-95
(Budget Estimates)

1994-95
(Actual)

1.

27

Cigarettes & cigarillos of tobacco or tobacco substitutes

2739.57

3050.00

2742.89

(-) 10.06

2.

31

Cement clinkers, cement all sorts

1887.14

2275.00

2016.95

(-)11.34

3.

79

Synthetic filament yarn & sewing thread including synthetic monofilament and waste

1814.82

2300.00

1812.93

(-)21.17

4.

102

Iron and steel

1928.93

2210.00

2946.26

(+)33.31

5.

34

Motor spirit

1358.56

1515.00

1523.58

(+)00.57

6.

61

Plastics and articles thereof

1416.53

1900.00

1405.38

(-)26.03

7.

119

All other goods falling under chapter 84

961.82

1080.00

992.56

(-)08.09

8.

62

Tyres, tubes & flaps

1050.54

1100.00

1305.30

(+)18.66

9.

125

All other goods falling under chapter 85

844.30

960.00

1008.01

(+)05.00

10.

36

Refined Diesel Oil

795.17

800.00

1181.25

(+)47.65

11.

45

Organic chemicals

652.59

790.00

1009.99

(+)27.84

12.

128

Motor cars and other motor vehicles for transport of persons

596.99

725.00

918.22

(+)26.65

13.

17

Cane or beet sugar and chemically pure sucrose in solid form

705.86

751.40

616.48

(-) 17.90

14.

130

All other goods falling under chapter 87

741.54

780.00

738.68

(-)05.29

15.

106

Aluminium and articles thereof

538.64

577.50

540.95

(-)06.32

16.

46

Pharmaceutical products

550.79

670.45

658.57

(-)01.77

17.

103

Articles of iron and steel

429.76

525.00

570.03

(+)08.57

18.

71

Paper and paper board, articles of paper pulp or paper or paper board

488.21

525.00

582.39

(+)10.93

19.

40

All other goods falling under chapter 27

477.27

550.00

583.66

(+)06.12

20.

124

Insulated wires, cables and other electric conductors

403,38

475.00

481.36

(+)01.33

21.

80

Fabrics of man-made filament yarn

478.33

520.00

502.58

(-)03.35

22.

81

Artificial or synthetic staple fibres and tow including waste

452.%

550.00

451.94

(-)17.83

23.

44

All other goods falling under chapter 28

367.76

422.00

570.38

(+)35.16

24.

84

Fabrics of man-made staple fibres

436.33

490.00

592.%

(+)21.01

25.

75

Cotton and cotton yam

383.30

405.00

586.45

(+)44.80

26.

51

Essential oils and resinoids, perfumery, cosmetics or toilet preparation

263.72

310.50

313.51

(+)00.97

27.

49

Paints and varnishes

288.53

378.00

282.91

(-)25.16

28.

99

Ceramic products

272.73

325.00

265.16

(-)18.41

29.

116

Refrigerations and air-conditioners & parts thereof

263.53

300.00

308.38

(+)02.79

30.

53

Organic surface active agents

285.40

375.00

206.10

(-)45.04

31.

100

Glass and glassware

249.85

270.00

261.15

(-)03.27

32.

35

Kerosene

246.85

305.00

305.57

(+)00.18

33.

60

Miscellaneous chemical products

259.50

326.00

406.54

(+)24.70

34.

28

Biris

206.52

240.00

208.05

(-)31.31

35.

52

Soap

253.82

345.00

310.82

(-)09.90

36.

63

All other goods falling under chapter 40

229.60

290.00

248.70

(-) 14.24

37.

120

Electrical motors and generators, electric generating sets and parts thereof

134.54

101.35

145.02

(+)43.23

38.

82

Spun yam containing Polyester or other Synthetic yam

257.79

310.00

204.49

(-)34.03

39.

129

Public transport type passenger motor vehicles and motor vehicles for the transport of goods

62.24

63.00

138.13

(+)119.25

40.

115

Internal combustion engines and parts thereof, steam and other vapour turbines, hydraulic turbines, turbo-jets, other engines and motors

 151.48

185.00

202.80

(+)09.26

41.

118

Ball or roller bearings

172.94

200.00

195.21

(-)02.39

42.

30

Other than falling under chapter 24

53.83

44.00

385.61

(+)776.38

43.

122

Electric accumulators, primary cells and primary batteries

268.87

245.00

248.18

(+)01.29

44.

23

Miscellaneous edible preparations

161.52

215.00

226.48

(+)05.33

45.

76

All others falling under chapter 52

162.25

175.00

230.31

(+)31.60

46.

24

Natural or artificial mineral waters and aerated waters

137.26

150.00

144.82

(-)03.45

47.

37

Diesel oil

60.88

55.00

106.80

(+)94.18

48.

38

Furnace oil

71.53

70.00

183.58

(+)162.25

49.

43

Soda ash

130.73

155.00

181.93

(+)17.37

50.

83

Other man-made blended yam

150.39

175.00

129.38

(-)26.06

51.

98

All other goods falling under Chapter 68

142.13

169.00

157.60

(-)06.74

52

104

Copper and articles thereof

122.41

150.00

170.87

(+)13.91

53.

39

Petro gases/hydrocarbons

85.40

90.00

200.00

(+)122.22

54.

42

Caustic soda and caustic potash peroxides thereof

118.52

138.00

185.00

(+)34.05

55.

133

Optical, Photographic, Cinematographic measuring checking, precious parts thereof

91.64

115.00

105.31

(-)08.42

56.

21

Preparations of flour starch or milk pastry

96.47

110.00

127.92

(+)16.29

57.

123

Reception apparatus for radio broadcasting etc.

194.25

250.00

165.86

(-)33.65

58.

29

Chewing tobacco including kimam

113.75

134.92

150.79

(+)11.76

59.

88

Laminated textile fabrics

75.99

80.25

126.37

(+)57.47

60.

108

Zinc and articles

93.34

105.00

116.04

(+)10.51

The percentage variation of actual receipt over estimated receipt ranged between (-)45.04 and (+)776.38 (Sr.No.30 & 42). In the case of 24 out of 60 commodities in which revenue receipts was more than Rs. 100 crores the percentage variation was more than 20 per cent. In cases of commodities at Sr. No.40, 42, 47, 48, 53 and 59, the actual receipts exceeded the estimates by 57 to 776 per cent. Similarly in the cases of commodities at Sr. No.3, 6, 27, 30, 34, 38, 50 and 57, the actual receipt was less than the estimated receipt by over 20 per cent.

3.03     Cost of collection

The expenditure incurred during the year 1994-95 in collecting Union Excise duties is given below alongside the corresponding figures for the preceding four years: -

(Amount in crores of rupees)

Year

Receipts from excise duties

Expenditure on collection

Cost of collection as
percentage of receipts

1990-91

24,514

126.19

0.52

1991-92

28,110

158.74

0.57

1992-93

30,832

197.17

0.64

1993-94

31,548

223.93

0.71

1994-95

37,208

249.10

0.67

figures furnished by controller of Accounts (Central Board of excise and Customs).

3.04    Exemptions, rebates, refunds and rewards

(i)    Exemptions

The number of subheadings in the Central Excise Tariff, (each with a rate against it) under which goods are required to be classified was 1701 during the year 1993-94 and 1696 during the year 1994-95. The number of exemption notifications in force during the years 1993-94 and 1994-95 aggregated to 646 and 309 respectively.

The amount of revenue foregone by grant of exemptions through issue of notifications by the Ministry of Finance under sub sections (1) and (2) of Section 5A of the Central Excises and Salt Act, 1944 during the years 1993-94 and 1994-95 was as under :

(Amount in crores of rupees)

 

No. of cases

Estimated amount of duty foregone

1993-94

1994-95

1993-94

1994-95

Under sub section (1)

9465

5713

18748.17

9269.36

Under sub section (2)

582

345

604.68

90.45

Note:    Provisional; figures relate to 23 Commissionerates

(ii)    Rebate

Under the Central Excise Rules the amount of rebates on excise duty paid on goods exported as also excise duty not levied on goods exported, in recent years are given below :-

 (Amount in crores of rupees)

 

 

1992-93

1993-94

1994-95

(a)

Rebate under rule 12

687.47

1430.57

4224.23

(b)

Rebate under rule 12A

84.24

76.42

92.37

(c)

Duty not levied under rule 13- Revenue foregone as a result of export under bond

2349.79

1578.81

1515.12

(d)

Differential duty recovered on unrebated amount of goods exported under bond

8.42

0.14

0.11

Note:    Provisional; figures relate to 23 Commissionerates

(iii)    Refunds

The amount of duty refunded by the department in recent years because of excess collection is given below :-

(Amount in crores of rupees)

 

1992-93

1993-94

1994-95

Number of cases

1737

2688

2771

Amount of refunds (other than rebate)

123.93

51.21

75.95

Note: Provisional; figures relate to 23 Commissionerates

(iv)    Reward to informers and departmental officers

The amount of rewards paid to informers and departmental officers and amount of additional duty realised in recent years are" as under :

(Amount in lakhs of rupees)

 

 

1992-93

1993-94

1994-95

(a)

Amount of rewards paid to informers

35.58

30.64

24.30

(b)

Amount of rewards paid to the departmental officers

70.21

95.32

135.88

(c)

Additional duty realised as a result of payment of rewards

261.94

192.25

147.01

Note:     Provisional; figures relate to 23 Commissionerates

Though there has been increase in amount of awards to departmental officers, the additional duty had actually decreased.

3.05    Outstanding demands

The number of cases and amounts involved in demands for excise duty outstanding as on 31 March 1994 and 31 March 1995 are given below :-

 

  as on 31.03.1994

as on 31.03.1995

Number of cases

Amount (in crores of rupees)

Number of cases

Amount (in crores of rupees)

(a)

Pending with Adjudicating officers

10323

4578.54

24001

11369.56

(b)

Pending before Appellate Collectors

795

195.71

1059

153.24

(c)

Pending before Board

2700

46.88

2999

75.41

(d)

Pending before Government

102

9.64

143

13.11

(e)

Pending before Tribunals

4041

747.23

5156

1659.14

(0

Pending before High Courts

1041

257.62

1071

604.00

(g)

Pending before Supreme Court

269

83.54

502

251.72

(h)

Pending for coercive recovery measures

3871

102.22

12553

537.17

 

Total

23142

6021.38

47484

14663.35

Note:     Provisional; figures relate to 23 Commissionerates

3.06    Failure to demand duty before limitation and revenue remitted or abandoned

(i)     Revenue not demanded before limitation

The amount of demands for duty barred by limitation owing to demands not having been raised in time during the last three years was Rs.67.11 lakhs as detailed below :-

Year

Amount
(in lakhs of rupees)

1992-93

14.88

1993-94

34.15

1994-95

18.08

Note:    Provisional figures relates to 23 Commissionerates

(ii)     Revenue remitted or abandoned

The amount of demands remitted, abandoned or written off during the last two years as non-recoverble are given below :-

 

1993-94

1994-95

Number of
cases

Amount
(in lakhs of rupees)

Number of
cases

Amount
(in lakhs of rupees)

Remitted due to:

a)

Fire

62

24.71

58

6575.60*

b)

Flood

09

0.85

2

0.24

c)

Theft

01

0.50

Nil

Nil

d)

Other reasons

32

17.36

124

158.86

 

Total

104

43.42

184

6734.70

Abandoned or written off due to:

a)

Assessee having died leaving behind no assets

21

0.50

15

0.05

b)

Assessee untraceable

31

2.26

44

0.19

c)

Asscssee left India

Nil

Nil

Nil

Nil

d)

Assessee incapable of payment of duly

50

4.09

16

0.31

e)

Other reasons

83

0.23

4

9.30

 

Total

185

7.08

79

9.85

Note:    Provisional; figures relate to 23 Commissionerates

*     Ministry of Finance was requested (December 1995) to recheck the figure for the year 1994-95 as there is significant increase from the previous year's figure.

3.07     Writ petitions and appeals

(i)    Writ petitions pending in courts

Number of writ petitions involving excise duties which were pending in courts as on 31 March 1994 and 31 March 1995 are given below: -

 

In Supreme Court

In High Courts

as on 31.3.94

 as on  31.3.95

as on 31.3.94

as on  31.3.95

Pending for over 5 years

1179

 1051

1002

 1072

Pending for 3 to 5 years

253

 338

377

 372

Pending for 1 to 3 years

256

 164

621

 465

Pending for not more than 1 year 

47

66

285

 231

Total 1735 1619 2285 2140

Note:     Provisional; figures relate to 23 Commissionerates

(ii)     Appeals pending with others

The number of appeals and petitions pending with Collectors/Board/Gov-emment as on 31 March 1995 are given below :-

 

  With Collectors

With Tribunal

With Board

With Govt.

a)

Number of appeals instituted during 1994-95

1674

1394

1

46

b)

Pending as on 31 March 1995 {out of (a) above}

782

1343

Nil

18

c)

Number of appeals/petitions instituted in earlier years and pending on 31 March 1994

905

5046

7

17

d)

Pending as on 31 March 1995 {out of (c) above}

679

4293

1

17

 

Total (b)&(d)

1461

5636

1

35

Note:    Provisional; figures relate to 23 Commissionerates

(iii)    Details of appeals/references disposed of

The number of appeals and references filed before Collectors (Appeals), the Tribunals and the High Courts and Supreme Court and numbers disposed of are given below :-

 

Relating to preceding years and pending on 01 April 1994

 In 1994-95

1.

a)

Number of appeals filed before Collectors (Appeals)

2012

2863

b)

Number of appeals disposed of during 1994-95 out of (a) above

1248

2085

2.

a)

Number of appeals filed before the Tribunal by the assessees

3026

1638

b)

Number of appeals decided during 1994-95 in favour of the assessees

397

311

3.

a)

Number of appeals filed before the Tribunals by the department

1304

567

b)

Number of appeals decided in favour of the department during 1994-95

210

309

4.

a)

Number of appeals filed in the High Courts by the assessees

675

323

b)

Number of appeals disposed of in favour of the assessees during 1994-95

137

73

5.

a)

Number of appeals filed by the department before the High Courts

29

51

b)

Number of appeals decided in favour of the department during 1994-95 (including appeals filed by assessees)

138

210

6.

a)

Number of appeals filed in the Supreme Court by assessees

155

49

b)

Number of appeals decided in favour of the assessees during 1994-95

10

5

7.

a)

Number of appeals filed in Supreme Court by the department

116

39

b)

Number of appeals decided in favour of the department during 1994-95

17

11

Note:    Provisional; figures relate to 23 Commissionerates

3.08     Seizures, confiscation and prosecution

The number of cases of seizures, confiscation and prosecution relating to the excise duties during the last two years are given below :-

(Amount in lakhs of rupees)

 

 

1993-94 1994-95
Number

Amount

Number

Amount

(i)

Seizure cases

1629

11198.97

1687

9693.66

(ii)

Goods seized

1345

6339.68

2456

3332.49

(iii)

Goods confiscated

a) in seizure cases

480

1370.73

2003

1285.13

b) in non-seizure cases

17

62.13

59

344.93

(iv)

Number of offences prosecuted

a) arising from seizure

17

185.32

10

41.25

b) arising otherwise

162

32.71

39

2485.41

(v)

Duty assessed in respect of goods seized or confiscated 

635

2977.50

527

927.08

(vi) Fines levied

a) on seizure and in confiscation cases

561

1783.27

431

146.31

b) in other cases

110

37.72

54

3.94

(vii)

Penalties levied

617

713.69

549

346.08

(viii)

Goods destroyed after confiscation

94

9.11

29

8.55

(IX)

Goods sold after confiscation

11

35.40

11

44.18

(X)

Prosecution resulting in conviction

19

28.16

3

Nil

Note:    Provisional; figures relate to 23 Commissionerates

3.09     Outstanding audit objections

The number of audit objections raised in audit upto 31 March 1995 and which were pending settlement as on 30 September 1995 was 18005. The duty involved in the objections amounted to Rs. 1790.35 crores. These objections broadly fell under the following categories:-

 (Amount in crores of rupees)

Sl. No.

Nature of objection

No. of objections

Amount

1.

Short levy of duty due to undervaluation

2682

292.89

2.

Short levy of duty due to incorrect grant of exemption

1089

235.81

3.

Short levy of duty due to misclassification

1271

161.89

4.

Non levy of duty

2308

281.66

5.

Irregular grant of SSI benefits

425

21.83

6.

Irregular grant of credit for duty paid on inputs and irregular utilisation of such credit

4509

244.06

7.

Cess

367

171.54

8.

Demands for duty not raised

275

56.11

9.

Irregular rebates and refunds

172

28.60

10.

Others

4907

295.96

 

Total

18005

1790.35

Details of the number of outstanding objections and amount involved are given below:

Sl.
No.

Commissionerates

Raised upto 1993-94

Raised in 1994-95

Total

No.

Amount

No.

Amount

No.

Amount

1.

Hyderabad

1725

40.93

428

20.95

2153

61.88

2.

Guntur

260

5.67

50

1.35

310

7.02

3.

Visakhapatnam

71

0.85

27

1.38

98

2.23

4.

Bangalore

460

63.60

130

7.36

590

70.%

5.

Belgaum

99

14.20

29

1.93

128

16.13

6.

Indore

480

18.15

273

9.86

753

28.01

7.

Raipur

309

7.40

159

00.50

468

7.90

8.

Delhi (UT)

316

7.90

51

1.55

367

9.45

Delhi (Haryana)

335

69.56

102

06.34

437

75.90

9.

Kanpur

269

03.65

167

06.74

436

10.39

10.

Allahabad

273

09.08

98

05.18

371

14.26

11.

Mccrut

960

25.91

559

29.31

1519

55.22

12.

Chandigarh (Punjab)

259

40.04

179

17.24

438

57.28

Chandigarh (H.P.)

261

12.09

92

5.25

353

17.34

Chandigarh (J&K)

16

0.74

9

0.36

25

1.10

Chandigarh (U.T.)

21

1.72

6

2.01

27

3.73

13.

Nagpur

93

2.70

58

1.49

151

4.19

14.

Jaipur

197

14.38

89

1.66

286

16.04

15.

Cochin

39

2.01

32

3.51

71

5.52

16.

Patna

75

11.18

20

2.23

95

13.41

17.

Jamshedpur

127

32.37

63

31.52

190

63.89

18.

Shillong

169

147.03

49

56.03

218

203.06

19.

Bombay I

417

22.96

129

6.99

546

29.95

20.

Bombay II

786

48.51

282

35.33

1068

83.84

21.

Bombay III

1508

119.47

371

50.97

1879

170.44

22.

Pune

459

43.11

149

7.95

608

51.06

23.

Aurangabad

284

21.30

134

4.13

418

25.43

24.

Goa

37

1.34

49

4.44

86

5.78

25,

Calcutta I

396

34.71

149

51.39

545

86.10

26.

Calcutta II

614

91.13

194

26.58

808

117.71

27.

Bolpur

161

42.71

57

29.67

218

72.38

28.

Madras

359

16.77

545

12.15

904

28.92

29.

Coimbatore

57

2.90

95

6.17

152

9.07

30.

Madurai

11

1.73

42

1.59

53

3.32

31.

Trichy

56

4.02

122

6.92

178

10.94

32.

Bhubaneswar

184

68.66

89

33.81

273

102.47

33.

Ahmedabad

138

9.85

77

32.19

215

42.04

34.

Baroda

254

45.32

87

7.66

341

52.98

35.

Surat

103

131.54

88

18.91

191

150.45

36.

Rajkot

23

1.50

15

1.06

38

2.56

 

Total

12661

1238.69

5344

551.66

18005

1790.35

3.10     Results of audit

Test check of records in audit in the various Central Excise Commissionerates (Collectorates) and audit of excise records in selected manufacturing units during the year revealed short levies of duty amounting to Rs.673.95 crores where objections were accepted or replies received were not satisfactory. Ministry of Finance/ department of excise have accepted short levies of Rs.29.09 crores. Recoveries amounting to Rs.11.38 crores have been made so far. Besides, show cause-cum demand notices amounting to Rs.609.69 crores have been issued.

The audit objections raised fell under the following categories :-

(a)     Short levy of duty due to incorrect grant of exemption

(b)     Short levy of duty due to undervaluation

(c)     Non levy of duty

(d)     Short levy of duty due to misclassification

(e)     Irregular grant of exemption to small scale manufacturers

(f)     Modified Value Added Tax (Modvat) Scheme

(g)     Irregular availment of monetary credit

(h)     Demands for duty

(i)     Cess collection as excise duty

(j)     Procedural irregularities with revenue implications

(k)     Other irregularities

System studies on 'Pharmaceutical products' and 'Provisional assessments' were also conducted. The study on 'Pharmaceutical products' revealed short levy of duty amounting to Rs.21.93 crores of which the department accepted short levy of duty of Rs.2.77 crores. The findings of the reviews are mentioned in paragraphs 1.02 and 1.03 of this report.

Some of the important cases are mentioned in the succeeding paragraphs:

NON LEVY/SHORT LEVY OF DUTY DUE TO INCORRECT GRANT OF EXEMPTION

As per Section 5A(1) of the Central Excises and Salt Act, 1944, Government is empowered to exempt excisable goods from the whole or any part of the duty leviable thereon conditionally or unconditionally.

Some of the important cases of non levy/short levy of duties due to incorrect grant of exemption are given in the succeeding paragraphs:

3.11    Natural gas

As per notification No.l79/85-CE dated 1 August 1985, as amended, goods falling under specified chapter' headings/sub headings were exempt from payment of whole of excise duty leviable thereon provided the said goods were manufactured in "mine".

As per explanation below the said notification the expression "mine" has the meaning assigned to it in clause (j) of Section 2 of the Mines Act, 1952 (35 of 1952). Accordingly "mine" is defined as under:-

覧 x 覧 x 覧 x 覧 x -覧

2(j)     mine means any excavation where any operation for the purpose of searching for or obtaining minerals has been or is being carried on and inter alia, includes;

-- x 覧 x 覧 x 覧 x -覧

'(xi)     any premises in or adjacent to and belonging to a mine on which any process ancillary to the getting, dressing or preparation for sale of minerals or of coke is being carried on'.

A Government of India undertaking was receiving natural gas at its Hazira Plant from Bombay High through 231 Kms. off shore pipeline. The natural gas, after sweetening and chilling in Hazira Unit, was converted into sweet rich gas classifiable under sub heading 2711.21. The processed gas was cleared for home consumption without payment of duty by availing benefit of exemption under notification dated 1 August 1985, as amended.

The assessee unit at Hazira was not covered by the definition of "mine" under the Mines Act, 1952 as no activity like excavation, searching, or obtaining minerals was carried out in this unit and it was neither "in" nor "adjacent" to the premises of "mine" and, therefore, was not eligible for exemption under the above notification. Incorrect grant of exemption resulted in non levy of duty of excise amounting to Rs. 122.21 crores during the year 1992-93 alone.

On this being pointed out (June 1993), the department did not accept the objection and stated (May 1994) that the complex was getting natural gas which was dressed and prepared to make it saleable and it was covered in the definition of "mine" in Section 2(j)(xi) of Mines Act, 1952.

Reply of the department is not tenable as the processes such as sweetening (removal of gases), dehydration (removal of water) and chilling (removal of some heavier fraction hydrocarbon which are likely to be condensed), are carried out at Hazira complex - which is not a 'mine' - as defined in the Mines Act, 1952.

The Supreme Court in the case of M/s. Bhor Industries Limited Vs. Collector of Central Excise {1989 (40) ELT (SC)} held that marketability is an essential ingredient in order to make the goods liable to duty. Since natural gas attained marketability only after processing at Hazira, the duty was chargeable at the time of clearance from Hazira complex which is not a mine under the Mines Act, 1952. Hence exemption notification could not be extended.

The department has since issued show cause cum-demand notices amounting to Rs.591.38 crores for the period from April 1989 to June 1995 which is pending adjudication.

The Ministry of Finance stated (November 1995) that the matter was under examination.

3.12    Plastics and articles thereof

Rule 57F(2) {now rule 57(F)(3)} of Central Excise Rules, 1944, does not cover cases of removal of waste or scrap arising during the processing of inputs, outside the factory. Such removal of wastes/scrap is governed by the provisions of rule 57F(4) {now rule 57F(5)} of the rules ibid, which provides that any waste arising from processing of inputs in respect of which credit has been taken, may be removed on payment of duty, as if such waste is manufactured in the factory.

As per notifications No.53/88-CE dated 1 March 1988 and No.H/92-CE dated 1 March 1992, waste and scrap of plastics falling under heading 39.15 can be cleared at nil rate of duty if such waste, parings and scraps of plastics arise from goods falling within chapter 39 or any chapter of the schedule to the Central Excise Tariff Act, 1985, on which the duty of excise or the additional duty of Customs has already been paid.

Three assessees manufacturing plastic circular woven sacks/bags (sub heading 3923.90) plastic film, flexible (sub heading 3920.12) and articles of plastics (heading 39.20) respectively which were produced out of duty paid inputs, cleared waste and scrap of plastics without payment of duty under notification No.53/88-CE dated 1 March 1988, as amended which was not in line with provision of rule 57F(4). These assessees had availed of Modvat credit on inputs. The wastes and scraps were generated during the process of the inputs in the manufacture of final products. Therefore, clearance of such wastes and scraps without payment of duty was irregular. This led to non levy/recovery of duty amounting to Rs. 118.74 lakhs on clearances made during different periods from April 1989 to January 1993.

This was brought to the notice of the department in April 1993. The Ministry of Finance admitted the objection (October 1995).

3.13    Soap noodles

As per central excise tariff, sub heading 3401.10 covers 'soap in any form' which is soluble in water. While soap for toilet purposes is chargeable to duty at 20 per cent ad valorem, other soaps are chargeable to duty at 5 per cent ad valorem from 28 February 1993 as per notification No-12/93-CE dated 28 February 1993 (10 per cent from 1 March 1994).

An assessee engaged in the manufacture of soaps falling under chapter 34 cleared 'soap noodles' for conversion into toilet soaps with specific indication of the branded name of the toilet soap. The dry soap noodles which were the intermediates of particular brands of toilet soaps were cleared to the job workers for manufacture of final product (toilet soaps), on payment of duty as applicable for soaps other than for toilet use. This resulted in short levy of duty of Rs. 1.51 crores for the clearances made during May 1993 to July 1994 (except July 1993).

On this being pointed out (September 1994), the department did not admit the objection and stated (February 1995) that although dry soap noodles cleared by the assessee were meant for definite brands of toilet soap, they were only intermediates and did not have the essential character of toilet soap. As such they would be covered under the category of "other soap" attracting duty at 5 per cent ad valorem.

The reply of the department is not acceptable since the definition of soap for the purpose of heading 34.01 given in chapter note 2 of chapter 34 refers to soap soluble in water and not linked to any shape or size. As goods cleared were meant for a definite brand of toilet soap, the exemption meant 'for other soap' was not applicable. This is also in line with rule 2(a) of the the Rules for the interpretation of the schedule to the Central Excise Tariff Act.

Reply of the Ministry of Finance has not been received (December 1995).

3.14    Yarn and fabrics

i)     Cotton yarn for conversion into sewing thread

Rule 96E of Central Excise Rules, 1944, permits removal of cotton yam for processing, packing or for the purpose of manufacture of cotton fabrics, without payment of duty.

An assessee manufacturing cotton yam (heading 52.03) cleared single/double yam to his sister unit in the same Commissionerate under the cover of AR 3A without payment of duty for conversion into sewing thread (heading 52.03) with reference to the rule cited in para 1 supra. As conversion of yam into sewing thread was not for the purposes mentioned in Rule 96E, its removal under the said rule was not in order. Moreover, conversion of yam into sewing thread is not mere processing but amounts to manufacture with reference to note 1 under chapter 52. This is also evident from the fact that both yarn and sewing thread are known as different commodities in the market. Omission to levy duty resulted in loss of revenue of Rs. 79.44 lakhs for the period March 1994 to February 1995.

On this being pointed out (June 1994), the department while not disputing the audit contention, stated that the same issue raised by a mill association was being pursued by them with the Central Board of Excise and Customs for necessary amendment of rule provisions.

The Ministry of Finance stated (October 1995) that the matter was under consideration.

ii)     Laminated fabrics

As per notification No.82/88-CE dated 1 March 1988 as amended and notification No.282/86-CE dated 25 April 1986, textile fabrics classifiable under sub heading 5903.29 are chargeable to concessional rate of basic excise duty and additional duty provided the aggregate value for clearances of the said fabrics for home consumption had not exceeded Rupees one hundred and fifty lakhs in the preceding financial year.

An assessee engaged in the manufacture of laminated fabrics (sub heading 5903.19 and 5903.29) was allowed to clear the product falling under sub heading 5903.29 on payment of duty at concessional rate during 1993-94 although the value of clearances for home consumption exceeded the prescribed limit during 1992-93. The incorrect levy of duty at concessional rate resulted in short levy of duty of Rs.8.22 lakhs on the clearance made during 1993-94.

On this being pointed out (January 1995), the department stated (May 1995) that the assessee had suppressed clearances value and show cause notice would be issued in due course by the competent authority. Further developments are awaited.

The Ministry of Finance admitted the objection (November 1995).

3.15    Parts of computers

As per notification No.81/89-CE dated 1 March 1989, goods falling under sub heading 8471.00 of the schedule to the Central Excise Tariff Act, 1985, are liable to duty at the concessional rate of 15 per cent ad valorem.

Three assessees engaged in the manufacture of complete automatic data processing machines like mini/micro computers including personal computers and parts, paid duty at concessional rate under a notification dated 1 March 1989. But 'add-ons' to computer and floppy disc drives were wrongly treated as complete units instead of spares or parts and assessed to duty at the concessional rate which was irregular. This resulted in short levy of excise duty of Rs.58.22 lakhs during the periods between April 1992 and March 1994.

On this being pointed out (April 1994, March and April 1995), the department accepted the objections and informed (February 1995) that steps were being taken for recovery of short levy of duty.

The Ministry of Finance while admitting the objection in one case stated in two other cases that the matter was under examination (September 1995).

3.16    Metal products - granulated slag

In terms of notification No.27/91-CE dated 25 July 1991, goods falling under chapter 26 of the schedule to the Central Excise Tariff Act, 1985, are exempt from the whole of the duty of excise leviable thereon if no credit of duty paid on the inputs, used in the manufacture of the goods, has been taken under rule 57A of the Central Excise Rules, 1944.

An integrated steel plant manufacturing iron and steel and products thereof falling under Chapters 72, 73, 26, etc. availed of Modvat credit under rule 57A of the Central Excise Rules, 1944, on the inputs viz. oxygen, scrap iron etc. used in the manufacture of granulated slag (sub heading 2618.00) and cleared the said product without payment of duty. As the credit of duty paid on the inputs used in the manufacture of such 'granulated slag' had already been availed, the exemption granted was not admissible. This resulted in non levy of duty of Rs.47.90 lakhs during the period between April 1992 and March 1993.

On the irregularity being pointed out (August 1993), the department did not admit the objection and contended (May 1994) that the inputs were actually inputs for the manufacture of iron and not slag in as much as none of them were contained in the slag nor were they intended to be used in the manufacture of such slag.

The contention of the department is not acceptable as slag is produced in blast furnace where oxygen alongwith other inputs were charged and exemption was not allowable as credit of duty paid on inputs was availed.

Reply of the Ministry of Finance has not been received (December 1995).

3.17    Electrical apparatus for line telephony

As per notification No.73/90-CE dated 20 March 1990 rural automatic exchanges (RAX) (upto 512 ports) and integrated line and trunk exchanges (ILT) (upto 512 ports) are assessed to concessional rate of excise duty. Central Board of Excise and Customs clarified (9 February 1994) that the main distribution frame (MDF) will not get the benefit of concession as it is not a part of RAX. However, by a notification No.56/94-CE dated 1 March 1994, the concessional rate of duty has been extended to MDF also without specifically mentioning its usage either in RAX or ILT (integrated line and trunk exchanges). The concessional rate of duty on MDF assembly was, therefore, not available upto 28 February 1994.

An assessee manufacturing various types of electronic automatic exchanges, parts and accessories (heading 85.17) cleared integrated line and trunk exchanges (ILT) of 512 ports alongwith MDF assembly at concessional rate of duty at 15 per cent ad valorem available for telecommunication net work as per the notification dated 20 March 1990. Since no exemption was available on MDF assembly, this resulted in short levy of duty to the extent of Rs. 13.17 lakhs on the clearances of MDF assembly during the period June 1992 to 28 February 1994.

On this being pointed out (August 1994), the department contended (November 1994) that it had not been clarified that the functions of MDF in the case of RAX and ILT exchanges were the same and that the MDF of ILT exchanges could not be treated as part of ILT.

The reply of the department is not acceptable because MDF became eligible for concessional rate only with effect from 1 March 1994 as per a notification No.56/94-CE dated 1 March 1994.

The Ministry of Finance stated (December 1995) that the matter was under examination.

3.18    Intermediary goods consumed captively

i)    Used in exempted final products

As per notification No.217/86-CE dated 2 April 1986 specified goods manufactured in a factory and used within the factory of production in or in relation to the manufacture of specified final products were exempt from whole of the duty of excise leviable thereon provided that the final product was not exempt from whole of the duty or chargeable to nil rate of duty. However, as per explanation below the aforesaid notification, such exemption for inputs was not admissible in the case of machines, machinery, plant, equipment, apparatus, tools or appliances used for producing or processing of any goods or for bringing about any change in any substance in or in relation to the manufacture of the final products.

Sixteen assesses in seven Commissionerates engaged in the manufacture of different excisable goods did not pay duty on intermediate goods viz. freight loco transformers with smoothing reactors (heading 85.04); molten iron (heading 72.01);

parts of footwears (heading 64.02); and parts of bearing (heading 84.82) etc., which were consumed captively in the manufacture of final products on which no excise duty was leviable. The irregular exemption on captive consumption of such intermediate goods resulted in short levy of duty of Rs.386.08 lakhs during the periods between December 1986 and March 1995.

The irregularities were brought to the notice of the department between August 1992 and March 1995.

The Ministry of Finance admitted the objections in 3 cases and reported recovery of duty of Rs.65.53 lakhs in one of them. In four cases the matter was stated to be under examination. In one case the Ministry of Finance contended (December 1995) that exemption available to "OE parts" for "Diesel oil operated I.C. Engines" was also applicable to parts of bearing used for the manufacture of bearing which were ultimately used as "OE parts" The reply of the Ministry is not acceptable as the parts of the bearings were not cleared as "OE parts" and hence were not covered under the exemption notification dated 8 October 1985.

ii)    Used in final products not covered under exemption notification

By issue of a notification No.23/94-CE(NT) dated 20 May 1994, proviso for providing removal of goods without payment of duty has been omitted from Rules 9 and 49. Simultaneously, the benefit of proforma credit scheme as was in vogue under notification No 223/62-CE, dated 29 December 1962 was also withdrawn from 20 May 1994. By issue of another notification No.24/94-CE(NT), dated 20 May 1994, the benefit of Modvat credit under rule 57A was extended to commodities falling under chapter 53 but proviso of exemption of duty on intermediate products manufactured and utilised within the factory of production in the manufacture of final products was neither included in the exemption notification dated 2 April 1986 nor made by issue of any separate notification. However, the exemption was allowed for intermediate products by notification No.l21/94-CE dated 11 August 1994. Thus, no exemption was available to goods falling under chapter 53 and captively consumed during the period 20 May 1994 to 10 August 1994.

Two jute mills manufacturing jute yarn, falling under chapter 53 of the schedule to the Central Excise Tariff Act, 1985, cleared jute yarn within the factory without payment of duty for the manufacture of jute fabrics from 20 May 1994 to 10 August 1994. This resulted in non levy of duty of Rs. 142.77 lakhs (including cess of Rs. 17.42 lakhs) on the jute yarn captively consumed during the period from 20 May 1994 to 31 July 1994.

On this being pointed out (October 1994), the Ministry of Finance admitted the objection (August and September 1995).

3.19    Availment of sugar incentive scheme

Sugar incentive scheme, introduced by Government of India on 4 November 1987 and amended from time to time contains provisions for eligibility of a factory for the incentives. The excise duty concessions are available as per notification Nos.130/83-CE and 131/83-CE both dated 27 April 1983.

A new sugar factory which was issued letter of intent on 24 June 1982 had started its commercial production on 13 February 1986. The factory was accordingly allowed the benefit of sugar incentives from sugar year 1985-86 for a period of 7 years. The unit approached Government of India (December 1992, January and February 1993) for grant of sugar incentive for a period of 8 years from sugar year 1986-87 (sugar season immediately following 1985-86) by exercising option existing prior to February 1993. Government of India extended the period of incentives by one more year bringing the total period to 8 years from the sugar year 1985-86. However, Government did not extend excise duty concessions for sugar year 1992-93.

It was noticed (September 1993) that the unit cleared 1,06,063 quintals of sugar during the sugar year 1992-93 (upto August 1993) as additional free sale and paid duty at concessional rates as per notification Nos. 130/83 and 131/83 dated 27 April 1983. The clearances of free sale sugar by the factory resulted in short levy of duty of Rs.32.08 lakhs during the sugar year 1992-93.

On this being pointed out (September 1993), the department admitted the objection. The demand was confirmed in May 1995. The assessee has, however, gone in appeal.

Reply of the Ministry has not been received (December 1995). 

3.20    Clearance of goods under exemption to hundred per cent export oriented units

Notification No. 186/75-CE, dated 21 August 1975 and notification No. 123/ 81-CE, dated 2 June 1981 exempt excisable goods from payment of excise duty leviable thereon under Section 3 of the Central Excises and Salt Act, 1944, when brought to Santa Cruz electronics export processing zone, (SCEEPZ) Bombay and hundred percent export oriented undertakings subject to the conditions prescribed in the notifications; one of the conditions was that the goods so brought should be used by the consignee in connection with the manufacture of goods or packing of goods solely meant for export.

Two assessees engaged in the manufacture of woollen carpets sub heading 5701.11 and ceramic tiles (sub heading 6906.10) cleared their final products to a unit in SCEEPZ, Bombay and seven other hundred per cent export oriented undertakings without payment of duty under the aforesaid notifications. It was noticed that the consignee of woollen carpets was engaged in the manufacture of software, wheieas of the seven export oriented units to whom ceramic tiles were cleared, one was jeweller, four units were yarn manufacturers (Chapter 52 or 55) and remaining two units were engaged in chemical industries. Thus the goods brought by the units were not used for manufacture or packing of their final products meant for export and the availment of exemption under the notification was irregular. This resulted in non levy of duty of Rs.4.45 lakhs due to irregular clearance of goods under exemption to hundred per cent export oriented units during the period between November 1990 to March 1992.

On this being pointed out (August 1992 and September 1993), the department stated (January 1993 and April 1994) that the concerned departmental officers having jurisdiction over the hundred per cent export oriented units in question, had been asked to verify the position.

Reply of the Ministry of Finance has not been received (December 1995).

3.21    Other cases

In ten other cases, incorrect grant of exemption resulted in short levy of duty of Rs.46.31 lakhs of which an amount of Rs 23.11 lakhs has so far been recovered in six cases; the details are given below:-

(Amount in lakhs of rupees)

Sl. No. Particulars  Amount of duty accepted

  Amount recovered

1. Aluminium circle 4.02

 

2. Wax 5.54

 

3. HDPE articles 6.83

 2.00

4.

Refrigerating and air-conditioning machinery

3.35

3.35

5.

Heat exchanger

2.89

 

6.

Machinery

3.12

3.15

7.

Transmission apparatus

4.80

1.75

8.

Inorganic chemical

2.90

 

9.

Sugar

6.23

6.23

10.

Paper & paper board

6.63

6.63

 

Total

46.31

23.11

SHORT LEVY OF DUTY DUE TO UNDERVALUATION

As per Section 4 of the Central Excises and Salt Act, 1944, where goods are assessable to duty ad valorem, the normal price at which such goods are sold ordinarily by the assessee to a buyer in the course of wholesale trade for delivery at the time and place of removal would be the assessable value provided the price is the sole consideration for sale. In cases where price is not the sole consideration for sale as per the provisions of rule 5 of Central Excise (Valuation) Rules, 1975, the assessable value of the goods shall be based on the aggregate of such price and the amount or money value or the additional consideration flowing directly or indirectly from the buyer to the assessee.

Some of the important cases of undervaluation noticed in audit are mentioned in the following paragraphs.

3.22     Price not the sole consideration for sale

i)    Dealer's margin

Under Section 4(4)(d)(ii) of the Central Excises and Salt Act, 1944, value in relation to any excisable goods excludes only trade discount (such discount not being refundable to the manufacturer on any account whatsoever) allowed in accordance with the normal practice of the wholesale trade at the time of removal of such goods sold or contracted for sale. The Supreme Court, in the cases of M/s Coromandal Fertiliser Limited {1984 (17) ELT 607 (SC)} and Seshasayee Papers {1990 (47) ELT 202 (SC)} held that commission paid to selling agents is not deductible from the assessable value as a trade discount because such a commission is paid to an agent for the services rendered by him for procuring orders.

(a)    Two assessees engaged in the manufacture of tractors ( heading 8707.00) were selling their products entirely through the autorised dealers and had allowed dealer's commission ranging from Rs.6490 t0 Rs. 8,500 and Rs. 6,210 to 8,900 per vehicle (depending upon the model of the tractor) to such dealers which was not included in the assessable value of the tractor. The maximum retail price was inclusive of the dealer's commission. As per agreements with the dealers, such dealer's commission comprised, inter alia, 'after sales service charges', 'cost of promotion of sales', 'publicity and advertising expenses' etc.. Such commission charges were, therefore, not allowable as deduction from the wholesale price and were includible in the assessable value for the purpose of levy of central excise duty. Non inclusion of the dealers commission in the assessable value resulted in short levy of duty of Rs. 195.75 lakhs on clearances during April 1992 to September 1993.

On the irregularity being pointed out (October 1993 and November 1993), the department contended (January and July 1994) that duty was leviable on the rates at which the goods were sold by the assessee and not by dealer as the dealer's commission did not flow back to the assessee and hence it was not includible in the assessable value. The reply is not tenable as deduction permissible under Section 4 ibid can only be allowed from the price charged from the wholesale dealer and the commission is not an admissible deduction.

Reply of the Ministry of Finance has not been received (December 1995).

(b)    An assessee manufacturing bolts, nuts, rivets etc. (chapter 73), cleared his products to distributors who in turn, marketed the products through the wholesale dealers. The main function of the distributor, as per the terms of agreement was to procure customers orders by pursuading dealers to stock and sell the company's products based on such orders. The goods were cleared by the assessee direct to the dealers and invoices were raised on the distributors for collection. While paying duty on such clearances, on the "invoice value", an abatement of 35 per cent discount was claimed and the distributor was entitled to 5 per cent after passing on 30 per cent to the dealers. Where the consignee (the dealer) failed to make payment within the due date, the distributor was liable. In view of the ratio's cited in para supra, the abatement of the 5 per cent discount, allowed to the distributor was not discount but only commission, which was not eligible for abatement. The incorrect abatement resulted in short payment of duty of Rs.25.28 lakhs for 1992-93 and 1993-94.

On this being pointed out (June 1994), the Ministry of Finance accepted the objection (August 1995).

ii)    Interest charges

(a)    Interest on deposits/advances from customers not included

The Central Board of Excise and Customs in their circulars issued on 4 May 1988, 13 June 1990, and order issued under Section 37B on 31 December 1993 clarified that interest accrued on advances/ deposits received from customers is includible in the assessable value of the goods.

Where the assessees receive interest free advances from the buyers, the interest accrued on such advances should be treated as additional consideration for sale made to such buyers and added to the price charged by the assessee for arriving at the assessable value of such goods. This view was confirmed by the decision of CEGAT in the case of M/s. Sri Ramadas Transport Ltd., Vs. Collector of Central Excise {1988 ELT (36) 629}.

Ten assessees in eight Commissionerates engaged in the manufacture of different excisable goods collected advance payments from the buyers during the periods between 1987-88 and 1993-94. Test check of assessee's records revealed that the assessees did not include the amount of interest accrued thereon in the assessable value. Non inclusion of this additional consideration resulted in undervaluation of goods and consequent short levy of excise duty of Rs. 119.10 lakhs during the years between 1987-88 and 1993-94.

On the short levy being pointed out (between May 1992 and November 1994), the department accepted the objection in one case (May 1995) and reported issue of show cause cum-demand notices in six cases (April 1995).

The Ministry of Finance while admitting the objection in one case stated in another case (September and October 1995) that show cause cum-demand notices were periodically issued and adjudication thereof kept in abeyance till a final decision is taken by the Board. In the third case, the Ministry claimed (October 1995) that the department was seized of the matter and demands were raised (November 1993 and March 1994). However, the demands were raised only after Audit had raised the issue in September 1993. In the fourth case, the Ministry stated (December 1995) that necessary remedial action would be taken after vacation of stay granted by the High Court.

(b)    Over due interest charges received not included

The Board had also clarified (4 May 1988) that interest charges referred to as "delayed payment charges", "interest on receivables", or "credit charges" should be included in the assessable value of the goods.

An assessee engaged in manufacture of paper and paper board (chapter 48) recovered overdue interest charges of Rs. 1.85 crores during 1993-94 on credit sales from his customers. The interest charges were neither included in the assessable value and duty discharged, nor the department had issued show cause-cum-demand notice as per Board's letter dated 4 May 1988. This resulted in short levy of duty of Rs.37.28 lakhs during the year 1993-94.

On this being pointed out (December and July 1994), the department accepted the objection (January 1995).

Reply of the Ministry of Finance has not been received (December 1995).

(c)    Interest on credit sale not included

An assessee, engaged in manufacture of fire bricks, (heading 69.01, 68.07 and 38.16) received interest charges of Rs.46.41 lakhs during the period from March 1991 to October 1993 from the customers on credit sale as well as direct sale. The interest charges were not included in the assessable value. This resulted in short levy of duty of Rs.6.16 lakhs during the period between March 1991 to December 1993.

The irregularity was pointed out in May 1993. The Ministry of Finance reported (December 1994) issue of show cause cum-demand notice for Rs.6.16 lakhs.

iii)    Escalation charges not included in the assessable value

Six assessees in five Commissionerates engaged in the manufacture of different excisable goods had supplied their products to their customers under agreements which provided for a price variation clause in respect of goods manufactured and supplied. Accordingly, the assessees raised invoices for the escalated value aggregating to Rs.450.78 lakhs during the periods between February 1993 and March 1994 but did not pay the amount of duty due on the escalation charges. This resulted in non payment of excise duty amounting to Rs.78.24 lakhs.

On the irregularities being pointed out (during June to November 1994), the Ministry of Finance accepted the objection (between August and November 1995) and reported recovery in five cases. The show cause notice in the remaining one case had been issued.

iv)    Development charges not included

As per advice of the Ministry of Law circulated by the Central Board of Excise and Customs on 23 December 1983, if the agreement to sell goods includes payment by the buyer to the assessee towards technical know-how (engineering, designs and drawings etc), then such payment should be taken into consideration for computing assessable value for the purpose of central excise duty.

An assessee engaged in manufacture of different machineries (chapters 84, 85, 87 and 90) cleared the goods on payment of appropriate duty. It was observed from the balance sheet that the assessee had received development charges amounting to Rs.35.10 lakhs during the years 1989-90 and 1990-91 but did not include the same in the assessable value. The short levy of duty could not be worked out for non availability of details at the time of audit.

On this being pointed out (July 1992), the department admitted the objection and stated (March 1995) that a show cause notice demanding duty of Rs.61.64 lakhs covering the period October 1987 to August 1992 had been issued to the assessee (September 1992). Further developments of the case are awaited (May 1995).

The Ministry of Finance admitted the objection (November 1995).

v)    Modvat credit deducted from the assessable value

The Supreme Court while discussing the validity of Section 4(4)(d)(ii) of the Central Excises and Salt Act, 1944, in the case of M/s. Kirloskar Brothers Limited Vs. Union of India {1992 (59) ELT 3(SC)} held that abatement for excise duty is allowable only for the duty payable on the goods to be assessed and not for the duty already paid on the raw material/component. The Tribunal in the case of Collector of Central Excise Vs M/s. Incab Industries {1990 (45) ELT 342 (T)} held that Modvat credit cannot be used for reducing the assessable value.

(a)    An assessee while calculating the assessable value of the products (man made filaments and fibres) had deducted the Modvat credit element availed of on input from the assessable value of goods cleared to its own unit located elsewhere. During the period April to November 1994 the assessee had cleared goods of the value of Rs.5.75 crores and deducted Modvat credit of Rs.91.97 lakhs on raw material of 443311 Kgs used in the production. This resulted in short levy of duty of Rs. 18.39 lakhs.

On this being pointed out (March 1995), the department stated (March 1995) that a show cause notice had been issued in February 1995 for the period August 1994 to January 1995 for recovery of central excise duty amounting to Rs.13.83 lakhs. Demand for the earlier period was stated to be under issue by the Commissioner.

The Ministry of Finance stated (August 1995) that the matter was under consideration.

(b)    An assessee manufacturing transmission towers for various electricity boards on contract cleared the goods on payment of duty. As per the terms of the contract, price of the goods was arrived at after deducting the Modvat benefits retained by the assessee. The incorrect exclusion of the Modvat credit by the assessee resulted in short levy of duty of Rs.8.57 lakhs in respect of five contracts spread over the period 1991-92 to 1993-94.

The Ministry of Finance stated (November 1995) that the matter was under examination.

vi)    Sales promotion expenses

Two assessees manufacturing chewing gum/bubble gum (chapter 17) and enriched glucose powder with a brand name (chapter 17) cleared the products on payment of duty to bulk buyer and brand name owner respectively. Both the assessees paid duty adopting the value at which goods were sold to the bulk buyer/ brand name owner. In both the cases storing, marketing and advertisement expenses were met by the bulk buyer/brand name owner. In both the cases goods were not available for sale in the wholesale market except to the bulk buyer/brand name owner who in turn sold the goods in wholesale trade at a higher rate. As the goods were not available to any other buyer in the wholesale trade and since the transactions could not be regarded as conforming to section 4(1 )(a) of Central Excises and Salt Act, 1944, the sale promotion expenses met by the bulk buyer/ brand name owner were required to be included in the assessable value. Non inclusion of such expenses resulted in short levy of duty of Rs.42.91 lakhs for the periods between April 1991 and July 1993.

On this being pointed out (May/December 1993) the department contended (July/December 1993) that the transactions between the assessee and the customer were on principal to principal basis and the value adopted was in order in terms of Supreme Court judgements in the case of M/s. Foods Specialities {1985 22 ELT} and M/s. Cibatul limited {1985 (22) ELT 302} as no flow back from the buyer was established.

The contention of the department is not acceptable as the judgments quoted dealt with addition of value of trade mark of the buyers in the value and concept of 'manufacture' under section 2(f) of the Act. The Supreme Court had, however, held in the Bombay Tyre International Case that the expenses on sales promotion cannot be deducted from sale price. The Tribunal in the case of M/s. R.Gac Electrodes {1988 (33) ELT (485)} and M/s. Hindustan Photo Films Manufactured and Company {1988 (35) ELT (354)} have held that when the sale promotion expenses are met by bulk buyers, such expenses are included in assessable value.

Reply of the Ministry of Finance has not been received (December 1995).

3.23    Undervaluation of captively consumed goods to the extent of duty element on the input

According to Section 4 of the Central Excises and Salt Act, 1944, read with rule 6(b) of the Central Excise (Valuation) Rules, 1975, where the normal price of excisable goods is not ascertainable for the reasons that such goods are not sold, the assessable value is to be determined on the basis of the value of comparable goods or cost of production, if the value of comparable goods is not available. The Attorney General of India opined on 3rd October 1985, that the raw materials/ components continued to retain their duty paid character even after duty paid thereon was taken as credit in the proforma account. However, in a contrary opinion dated 19 April 1991, the Attorney General held that the element of excise duty paid on the inputs might not be included while determining the assessable value of the goods consumed captively so that the consumer was not overburdened in the matter of finished goods coming in the market. However, the Supreme Court in the case of M/s. Kirloskar Brothers Ltd., Vs. Union of India {1992(59)ELT 3 (SC)} while discussing the validly of Section 4(4)(d)(ii) have held that abatement for excise duty is allowable only for the duty payable on the goods to be assessed and not for the duty already paid on the raw materials/components.

Twenty nine assessees in eight Commissionerates engaged in manufacture of different excisable goods took Modvat credit of duty paid on the inputs used in their manufacture, under rule 57A of the Central Excise Rules, on finished goods which were used captively either within the factory of production or in their own units situated elsewhere for further manufacture of excisable goods. However, while determining the assessable value of the goods consumed captively on cost basis (Part VI(b) the assessees did not consider the element of duty paid on the raw materials/components. Non inclusion of element of excise duty paid on the inputs in the cost data, led to under valuation of goods and consequent short levy of duty to the tune of Rs.444.26 lakhs.

The Ministry of Finance stated (October and December 1995) that the matter was under examination in consultation with the Ministry of Law.

3.24    Undervaluation of goods consumed captively

Where excisable goods are partly sold to customers and partly consumed captively within factory of production, the normal price determined under Section 4(1 )(a) of the Central Excises and Salt Act, 1944, is taken to be the assessable value both in respect of goods sold as well as in respect of goods captively consumed. Where excisable goods, however, are wholly consumed within the factory of production, the assessable value under Section 4(1 )(b) read with Central Excise (Valuation) Rules, 1975, is to be determined on the basis of the value of comparable goods manufactured by the assessee or by any other assessee or on the cost of production including a reasonable margin of profit if the value of the comparable goods is not ascertainable.

i)    Assessable value not revised

An assessee engaged in the manufacture of goods falling under chapters 18 and 19 of the schedule to the Central Excise Tariff Act, 1985, filed price list in part VI(b) in respect of goods consumed captively on 19 June 1992 based on the cost data for the year 1990-91. No price list was filed based on cost data for the years 1991-92 and 1992-93 even though the cost data for these years were available in December 1992 and November 1993 respectively. The goods were continued to be cleared on the basis of price list declared on 19 June 1992 upto 31 March 1994. Non revision of price list resulted in short levy of duty of Rs. 136.38 lakhs during the period from April 1991 to March 1994.

On this being pointed out (November 1994), the Ministry of Finance stated (September 1995) that the matter was under examination.

ii)    Non adoption of comparable price for valuation

The Tribunal in the case of M/s. Orient Paper Mills {1987 (27) ELT 272 (T)} held (August 1986) that if two normal prices are available of which one is applicable to industrial consumer, then the same price has to be adopted in respect of goods consumed captively by the assessee for his own industrial use also.

(a)    An assessee engaged in the manufacture of organic chemicals (Chapter 29) cleared the finished product for captive consumption in the factory as well as to his sister units. Duty was paid on price fixed as per price list approved on cost basis in part VI determined under rule 6(b)(i) of Central Excise (Valuation) Rules, 1975. It was observed (April 1993) that the said product was cleared to different industrial units on approved price as per price list in part II. The rates approved in part II were higher than the prices charged for levy of duty for the clearance for captive consumption. This resulted in short levy of duty of Rs. 64.17 lakhs during the period from April 1991 to February 1993.

On this being pointed out (April 1993), the department contended (June 1995) that the glacial acetic acid was sold to customers in varying degree of concentration ranging from 20 per cent to 60 per cent depending upon the requirement of customers and therefore, comparing the prices of the two would be fallacious and even if the duty was charged on the higher value of the goods, the same would be available for Modvat credit by their own units and hence interest of revenue had not suffered.

The reply of the department is not acceptable as the strength/quality of glacial acetic acid cleared to their own units as well as to various customers had not been mentioned in the gate passes and availability of Modvat credit to their sister units has no relevance with payment of duty.

Reply of the Ministry of Finance has not been received (December 1995).

(b)    An assessee engaged in the manufacture of gases (sub heading 2804.90) cleared liquid nitrogen to its own plant situated elsewhere for captive consumption and filed price list in part IV instead of in part VI as per rule 6(b) of the Central Excise (Valuation) Rules, 1975, at a price lower than that charged on goods to its customers at factory gate. Since the comparable price (Part I Price) was available, duty was required to be paid on that value in respect of goods consumed captively. Non-filing of the price list in the correct proforma after determining the correct value of goods resulted in short levy of duty of Rs. 10.47 lakhs (approx) on the goods cleared for captive consumption during the year 1992-93.

On this being pointed out (December 1993), the department issued show cum-demand notice for Rs.31.64 lakhs to the assessee to safeguard Government revenue.

The Ministry of Finance stated (September 1995) that the matter was under examination.

iii)    Price list revised but duty paid at lower rate

An assessee manufacturing tubes and pipes falling under chapter 73 filed a price list under Part VI(b) on 22 October, 1993 for the HR/CR strips manufactured by him and captively consumed. The revised price list was effective from 1 October 1993. The assessee however did not give effect to the revision in price for the goods cleared from October to December 1993 which resulted in short payment of duty of Rs.26.47 lakhs.

On this being pointed out (March 1994), the department reported (July 1994 and January 1995) recovery of the entire amount.

The Ministry of Finance confirmed the facts (July 1995).

3.25    Incorrect determination of the shrinkage value of fabrics

Assessable value of processed fabrics under job work is the sum total of the value of grey fabrics, job charges and profit. When grey fabrics are processed shrinkage takes place and the resultant processed fabrics will not be the same quantity of grey fabrics. Thus for working out the assessable value the quantity of grey fabrics used in the processed fabrics should be included and not limited to the length/quantity of processed fabrics.

(a)    Two assessees were engaged in processing of fabrics received from various cloth merchants. It was noticed in audit that there was shrinkage to the extent of 1.5 to 5 per cent on an average on grey fabrics received for processing, during the period from April 1991 to March 1992 but the same was not considered. This resulted in duty being short levied by Rs.8.89 lakhs.

On this being pointed out (November 1992), the department stated (July/ September 1994) that show cause notices for Rs.22.55 lakhs for the period August 1992 to March 1994 had been issued.

Reply of the Ministry of Finance has not been received (December 1995).

(b)    An assessee was engaged in the manufacture of processing of man made fabrics of chapter 54 and 55. It was seen during audit (January 1995) that 4.69 per cent and 5.53 per cent of shrinkage of grey fabrics was shown for the years 1992-93 and 1993-94 onwards. However the assessee had been allowed to clear the processed fabrics without loading of shrinkage for the year 1992 onwards. From April 1994 onwards assessee was loading only 4 per cent of shrinkage (as per Board's orders dated 9 March 1994) though actual average shrinkage was 5.52 per cent. The incorrect computation of assessable value without loading with shrinkage quantity value resulted in short levy of duty to the extent of Rs.22.38 lakhs for the period from April 1992 to December 1994.

This was pointed out to the department in January 1995; its reply has not been received (December 1995).

3.26    Clearance of goods through branches/sale depots

As per the decision of the Bombay High Court in the case of M/s. Godrej Boyce Manufacturing Company Vs. Collector of Central Excise, regional depots (branches) could not be treated as different class of buyers for charging different prices as there was no sale as such but only a transfer of goods and in such cases factory gate price could be applied for working out the assessable value provided it was a genuine price.

Two assessees engaged in the manufacture of iron and steel products (chapter 72) were clearing goods partly through their branches situated at various places and partly through factory gate. It was seen in audit that the value of goods cleared for branches/sale depots was less as compared to factory gate price. This resulted in short levy of duty to the extent of Rs.43.45 lakhs (approximately) for the period from April to September 1994.

On this being pointed out (July and October 1994), the department accepted the objection in one case (March 1995). Duty amounting to Rs.45.25 lakhs had been recovered.

The Ministry of Finance admitted the objections (July and December 1995).

3.27    Goods sold to preferred buyers

An assessee engaged in the manufacture of Oxo-chemical viz Iso-decanol falling under chapter 29 of the schedule to the Central Excise Tariff Act, 1985, was paying duty on the price charged on sales invoices as per rule 173C. The price charged from one particular consignee (the favoured buyer) was Rs.32 per Kilogram and between Rs.38 and Rs.47 per Kilogram from other customers during May and September 1994. The adoption of two different prices on the same goods cleared to the same class of buyers during May and September 1994 resulted in short levy of duty of Rs.30.34 lakhs on clearances of 15,82,900 Kilograms Iso-decanol to favoured buyer. From October 1994 onwards the assessee started charging uniform price from all the buyers including the said favoured buyer.

On this being pointed out (March 1994), the department contended that:-

i)    the buyer (the favoured buyer) of goods is an industrial consumer falling within the purview of section 4(a)(i) and different prices under 4(l)(a)(i) are admissible;

ii)    the Madras High Court in case of Lucas TVS Vs. Assistant Collector of Central Excise {1981 ELT 657 (Mad) (b)} Supreme Court in case of Metal Box India Limited Vs. Collector of Central Excise (1995 (75) ELT 449 (SC)} had observed that value of certain category of goods need not be uniform for all dealers, and

iii)    the assessee had willingly paid the duty of Rs.30.34 lakhs as the benefit of Modvat is available to the buyer hence there is no loss of revenue.

The reply of the department is not tenable as:-

i)    the product so cleared is usable only by the industrial buyers - which are a separate class of buyers;

ii)    the Madras High Court decision in Lucas case is not applicable as in that case goods were cleared at different rates to distributors and the other buyer manufacturers which are different class of buyers;

iii)    Supreme Court's decision in Metal Box is also not applicable as in that case Court had distinguished a bulk buyer and a small buyer as two different class of buyers. In that case the bulk buyers were given special trade discount because of lifting 90 per cent of asseessee's output on guaranteed basis and no such special discount was given to small buyers; and

iv)    availability of Modvat credit to buyer has no relevance with the payment of duty.

Reply of the Ministry of Finance has not been received (December 1995).

3.28    Goods supplied to sister units

The Board issued instruction on 6 December 1980 that the data for determining the assessable value on cost basis should be based on cost data relating to the period of manufacture and if such data was not available at the time of assessment, duty should be levied provisionally and finalised when data for the relevant period becomes available. The cost value should hold good only for one year and that too only if there be no major fluctuation in the price of raw material or margin of profit.

i)    Goods cleared at pre revised valuation

An assessee received snuff in bulk quantity from his own factory situated elsewhere and cleared it in small packings on payment of duty to another factory situated elsewhere for final clearances to wholesale dealers. It was seen in audit that price list filed in proforma I on cost construction basis from April 1989 at Rs.11.20 per kilogram was not revised till the end of April 1992. As the other factory where the goods were sent also belonged to the assessee the prices were required to be revised every year. The short levy of duty due to non revision of prices could not be worked out as the details were not available from the assessee.

On this being pointed out (June 1993), the department accepted the objection and reported (February 1994) issue of show cause cum-demand notice for Rs.15.72 lakhs covering the period 1989-90 to 1992-93.

Reply of the Ministry of Finance has not been received (December 1995).

ii)    Incorrect costing

An assessee, a limited company, which was a wholly owned subsidiary of another company was engaged in manufacture of cathode ray tubes of different types. The assessee cleared the entire production to its parent company for captive use on payment of duty on the basis of price list filed in part I. It was seen in audit that the declared wholesale price was too low with the result the assessee reported huge losses year after year. As there was no sale of goods and goods were consumed captively in its own unit situated elsewhere and in absence of comparable price the price list should have been filed in part VI(b)(ii). The incorrect adoption of assessable value resulted in undervaluation and consequent short levy of duty of Rs.2.82 lakhs (approx.) on the clearances during the period from April 1992 to March 1993 alone.

On this being pointed out (April 1994), the department stated (May 1995) that there was apparently some manipulation of costing and valuation. As such the question of involving extended period under Section 11 A of the Central Excises and Salt Act, 1944 was also being examined even though the assessments for the earlier periods had been finalised.

Reply of the Ministry of Finance has not been received (December 1995).

3.29    Excisable goods not fully valued

As per the Board's letter dated 6 December 1980, the cost of production of the goods shall include all expenditure incurred in the production of a particular product viz, all material, labour, overhead etc.

i)    Cost of dies supplied by the buyers not included

Government in the case of Jindal Aluminium Limited {1979 (4) ELT (J68)} held that if the manufacturer has been receiving the cost of dies from his customer, the same should be included in the assessable value of the final product.

Two assessees manufactured motor vehicle parts and pressed components out of the dies either supplied or financed by the buyer. The cost of the dies were not included in the assessable value of the final products. The non inclusion of their cost in the assessable value for the products manufactured during the period June 1990 to October 1994 resulted in short levy of duty of Rs.8.94 lakhs.

The irregularities were pointed out in March 1994 and January 1995. The Ministry of Finance admitted the objections (September and October 1995).

ii)    Value of raw material not included

An assessee engaged in the manufacture of monoblock prestressed concrete sleepers falling under heading 68.07 had received inserts free of cost form Railways for use in the manufacture of sleepers. Non inclusion of the full value of the input supplied free of cost resulted in short levy of duty of Rs.7.30 lakhs during the period from April 1992 to July 1993.

On this being pointed out (August 1993), the department stated (July 1994) that the assessee had paid Rs.10.79 lakhs on 31 March 1994 being the differential duty payable for the period from October 1990 to February 1994

The Ministry of Finance confirmed the facts (July 1995).

3.30    Other cases

In nineteen other cases, undervaluation of goods resulted in short levy of duty of Rs. 122.02 lakhs, of which Rs.63.75 was recovered in seven cases. The details are given below: -

(Amount in lakhs of rupees)

Sl. No.

 Particulars 

Amount of duty accepted

Amount recovered

1.

Cost of raw material not revised

13.89

13.89

2.

-do-

5.51

5.51

3.

-do-

7.11

 

4.

Value of raw material taken at lower rate

20.40

20.40

5.

Comparable value of raw material not adopted

9.64

 

6.

-do-

9.36

 

7.

Margin of profit omitted to be included

3.61

 

8.

Non payment of duty on impurities

6.32

6.32

9.

Finance charges not included

4.11

 

10.

Design & engineering charges not included

3.37

 

11.

Price list revised but duty not paid on supplementary invoices

3.36

3.36

12.

Cost of containers and repacking not included

3.88

3.88

13.

Agency commission allowed as rebate

2.11

 

14.

Different prices from same class of buyers

1.74

 

15.

Value of semi finished goods not revised

10.39

10.39

16

Price charged less from related person

4.44

 

17.

Shrinkage not considered for valuation of fabrics

12.78

 

 

Total

122.02

63.75

NON LEVY OF DUTY

3.31    Clearance of goods without payment of duty

Under rule 9 read with rule 373G of the Central Excise Rules, 1944, no excisable goods shall be removed from any place where they are produced, manufactured or cured whether for consumption, export or manufacture of any other commodity, in or outside such place unless the excise duty leviable thereon has been paid.

i)    Sandal wood oil

Sandal wood oil is an essential oil dutiable under heading 33.01 of the schedule to the Central Excise Tariff Act, 1985. Aqueous distillates and aqueous solution of essential oils are also dutiable under the same heading. Small scale exemption is not available for the manufacture of sandal wood oil.

A test check of the accounts of seven assessees/manufacturers of sandal-wood oil under Cochin Commissionarate revealed that they manufactured sandal-wood oil from crude sandalwood oil (red oil) which they purchased from undisclosed sources without supporting invoices or gate passes. From the crude sandal wood oil, which had not suffered central excise duty, pure sandalwood oil was manufactured by the assessees by passing steam through it and by filtering the resultant to remove insoluble impurities. As per the accounts maintained by the assessees, for the period from 1992-93 to 1994-95, the amount of excise duty involved on red oil worked out to Rs.6.90 crores.

The department stated (March 1995) that investigations conducted could not locate any red oil manufacturers under the jurisdiction of the Commissionerate.

On this being pointed out (August 1992), the department stated (August 1995) that red oil is an intermediatory stage in the manufacture of purified sandal-wood oil. Conversion of red oil to sandalwood oil does not amount to manufacture and if red oil was be treated as excisable, the final product sandalwood oil cannot again be charged to duty and red oil is incapable of being marketed or used.

The reply of the department is not tenable as dutiability of red oil has already been established by the adjudication orders of Additional Collector Central Excise dated 6 October 1989 wherein a reference was made to Chemical Examiner Report according to which red oil satisfies the analytical constants for natural essential oil of sandalwood although the same was darker than usual sandalwood oil. The product can also not to be treated as intermediatory product as it was not manufactured in an integrated factory. As per rules 9 and 49, duty has to be paid at every stage of manufacture unless it is exempted. The marketability of product is established as product was purchased by the assessees on payment.

The fact remains that the department has failed to devise a system to collect duty from the oil extractors, thereby leading to financial accommodation. The possibility of loss of revenue could also not be ruled out.

Reply of the Ministry has not been received (December 1995).

ii)    Telecommunication cables

A public sector undertaking engaged in the manufacture of telecommunication equipment (heading 85.17) cleared cables (viz. C.B.L. UTP and ATP) as parts of the final product (sub heading 85.17) without payment of excise duty treating them as non-excisable. This resulted in non levy of duty of Rs.7.58 lakhs in the month of March 1993 alone.

On this being pointed out (June 1994) the department accepted the objection and stated (May 1995) that the entire amount of duty amounting to Rs.1.22 crores covering clearances during the period from April 1991 to March 1993 including Rs.7.58 lakhs as pointed out by Audit had been deposited by the assessee during January and March 1995.

The Ministry of Finance admitted the objection (December 1995).

3.32    Duty not levied on storage loss and wastes

i)    Storage loss

Under the provision of rule 223A of Central Excise Rules, 1944, the stock of excisable goods remaining in a factory, warehouse or store room registered or approved for the storage of such goods shall be weighed, measured, counted or otherwise ascertained in the presence of the proper officer, and if the quantity so ascertained is less than the quantity which ought to be found in such premises, shall, unless the deficiency be accounted for to the satisfaction of the proper officer be liable to pay the full amount of duty chargeable on such goods as are found deficient and also a penalty which may extend to two thousand rupees.

Test check of the stock verification report for the year ending 31 March 1993 of a public sector undertaking, engaged in the manufacture of iron and steel products falling under chapters 72 and 73, disclosed shortages of 1778.629 tonne of pig iron and 5399.385 tonne of steel ingots. This resulted in non levy of central excise duty amounting to Rs.62.89 lakhs.

On this being pointed out (February 1994), the department accepted the objection.

The Ministry of Finance stated (August 1995) that a show cause notice had been issued in May 1995.

ii)    Waste of single yam in doubling of yarn

The Customs Excise and Gold (Control) Appellate Tribunal in the case of M/s General Industrial Society Ltd. V/s Collector of Central Excise Calcutta (1983 ELT 2497) held that process of doubling or twisting of yarn is a process of manufacture. Duty is, therefore, leviable on the single yarn consumed in the manufacture of doubled yarn subject to grant of exemption or set off granted, if any.

Four assessees manufactured single cellulosic spun yams (heading 55.05 and 55.06) and removed the products without payment of duty for the manufacture of doubled or multiple yarn. Duty was paid only on the quantity of doubled or multiple yarn cleared from the factory. By adopting this procedure 1,64,901 kilograms of single yarn wasted in the process of doubling or multiplying, which was subsequently cleared as hard waste at 'nil' rate of duty, escaped levy of duty of Rs.21.84 lakhs for the period from June 1989 to March 1993.

On this being pointed out (November 1993 and January 1994), the department contended (March 1994) that single and doubled yams had no distinction under headings 55.04 to 55.06 and rate of duty was also identical in both type of yarns. Moreover, notification dated 25 July 1991 imposed nil rate of duty on doubled or multiple yarn manufactured from duty paid single yam. As such duty was not required to be paid on the single yarn, if the same had been paid on the doubled or multiple yam.

Reply of the department is not acceptable as no exemption was available to single cellulosic spun yarn falling under headings 55.04 to 55.06 captively used in the manufacture of doubled or multiple yarn falling under any notification issued under Section 5A or rule 56A, payment of duty at double or multiple yam stage resulted in escapement of duty on single yam wasted in the process of doubling or multiplying as the same was later on cleared as hard waste at nil rate of duty. Reliance of the department on notification dated 25 July 1991 which exempts payment of duty on doubled or multiple yam if manufactured from duty paid single yam, is not relevant to the facts of this case since no duty was ever paid on single yarn before use in the manufacture of doubled or multiple yam.

Reply of the Ministry has not been received (December 1995).

3.33    Duty not levied on production suppressed or not accounted for

Under rule 53 of the Central Excise Rules, 1944, every manufacturer is required to maintain an account of stock in the prescribed form (RGI). Rule 9 and 49 prescribe that excisable goods shall not be removed from the place of manufacture or storage unless the duty liable thereon has been paid.

i)    Iron and steel products

(a)    A comparison of the annual statistical reports for the year 1992-93 with daily stock account (RGI) of a public sector steel plant manufacturing iron and steel products (chapter 72 and 73) revealed that production of 5272.255 tonnes of plated and H.R. sheets/plates and 112 tonnes of C.R. sheets was short accounted for in the R.G.I, account during the year 1992-93. This resulted in non levy of duty amounting to Rs.76.56 lakhs.

On this being pointed out (May 1994), the department stated (May 1995) that issue of show cause was under examination.

Reply of the Ministry has not been received (December 1995).

(b)    Similarly a quantity of 1274.915 tonnes involving central excise duty of Rs.12.75 lakhs on steel ingots was not accounted for in the excise record.

On the omission being pointed out in audit (February 1994), the department stated (October 1994) that draft show cause-cum demand notice was under issue.

Reply of the Ministry has not been received (December 1995).

ii)    Motor vehicle parts

A comparison of daily stock register (R.G.I.) and annual balance sheet maintained by an assessee manufacturing parts of motor vehicles and machinery (headings 87.08, 84.09 and 84.83), revealed short accounting of different parts valuing Rs.30.30 lakhs in excise records (R.G.I) during the year 1990-91, on which duty of Rs.6.36 lakhs was not paid.

The Ministry of Finance admitted the objection and stated (August 1995) that an offence case had been booked against the assessee and a show cause notice issued.

3.34    Non levy of additional duty of excise

i)    Textile fabrics - buckram

Buckram and similar stiffened textile fabrics of cotton falling under sub heading 5901.10 of the schedule to the Central Excise Tariff Act, 1985, attract basic excise duty at 10 per cent ad valorem and additional duty at 5 per cent ad valorem under the Additional Duties of Excise (Goods of Special Importance) Act, 1957.

An assessee manufactured "Buckram" falling under heading 5901.10 and consumed it captively without payment of duty in terms of notification No.217/86-CE dated 2 April 1986 in the manufacture of LDPE coated cotton fabrics falling under sub heading 5903.11. It was seen in audit that additional duty was not paid on buckram used captively. This resulted in non levy of additional duty to the extent of Rs.36.55 lakhs on the clearances effected during the period March and April 1994.

On this being pointed out (May 1994), the department stated (April 1995) that as the notification issued on 2 April 1986 did not apply in respect of additional duties of excise (Goods of special importance) Act, 1957, the assessee should have paid additional duty on the buckram used captively.

Reply of the Ministry of Finance has not been received (December 1995).

ii)    Tyre cord fabrics

As per notification No.l57/83-CE issued on 21 May 1983, as amended, processed tyre cord fabrics falling under heading 59.02 of the schedule to the Central Excise Tariff Act, 1985, are exempt from the additional duty of excise leviable thereon under the Additional Duties of Excise (Goods of Special Importance) Act, 1957 if such fabrics have been manufactured from unprocessed tyre cord fabrics on which additional duty of excise leviable under the said act has been paid.

An assessee engaged in the manufacture of pneumatic tyres of rubber, compounded rubber etc. (chapter 40) received imported unprocessed nylon tyre cord fabrics from their Madras unit on which no additional duty was paid. The assessee was irregularly allowed exemption from payment of additional duty in respect of the processed nylon tyre cord fabrics under the aforesaid notification. This resulted in non levy of additional duty of Rs. 16.76 lakhs on the imported nylon tyre cord received and processed during the period from April 1993 to May 1994.

On this being pointed out (April 1995) the Ministry of Finance stated (October 1995) that the matter was under examination.

iii)    Sugar

As per Sugar Export Promotion Act, 1958, where sugar delivered by any owner falls short of the export quota fixed for it by any quantity additional duty of excise at the rate of Rs.45.55 per quintal shall be levied and collected on so much of the sugar despatched from the factory for consumption in India as is equal to the quantity falling short of quota fixed for export.

During scrutiny of records of an assessee it was observed the Government fixed quota of sugar to the extent of 10,022 quintals for export purposes during 1990-91 to 1992-93. The assessee had, however, diverted the entire quantity of sugar for home consumption without proper authority or sanction and without payment of additional excise duty at Rs.45.55 per quintal amounting to Rs.4.57 lakhs.

On this being pointed out in audit the Ministry of Finance stated (December 1995) that the matter was still under enquiry stage and full facts would be known after it was over. However, if found otherwise, the necessary action would be taken to recover the duty.

3.35    Omission to levy duty on furnace manufactured and installed in the factory

In terms of rule 9 and 49 of the Central Excise Rules, 1944, excisable goods manufactured in any place and used within the factory for the manufacture of any other commodity are also dutiable subject to certain conditions. Under Section 2(f) of Central Excises and Salt Act, 1944, manufacturer includes any person who engages in the production or manufacture of excisable goods on his own account or who employs hired labour for this purpose.

An assessee manufacturing chemicals (chapter 29) inter alia, fabricated and erected a ketone furnace in his factory at a total cost of Rs.1.15 crores during 1991-92 through job workers, in terms of three contracts entered into for the design, drawing, fabrication, erection and commissioning of the goods. Duty was however not paid on the goods. Heading 84.17 specifically covers industrial furnace and oven attracting duty. Omission to levy duty resulted in non levy of duty of Rs. 11.78 lakhs after reckoning the duty already paid by the job workers on certain components.

On this being pointed out (March 1993), the department contended (October 1993) that the furnace after erection become immovable property and hence could not be considered as goods for the purpose of levy of duty.

The Ministry also reiterated the same point and added that although specific heading exists for plant and machinery in the tariff, the excise duty is levied and collected only on movable goods at the time of removal and in the instant case 'ketone furnace' came into existence only as an immovable property.

The contention of the department/Ministry is not acceptable as the concept of immovability is not valid after the enactment of the Central Excise Tariff Act, 1985, which recognises several items such as reactors, lifts, escalators, furnaces which are prima facie immovable, as excisable.

3.36    Other cases

In four other cases, non levy of duty of Rs. 14.43 lakhs was pointed out, of which Rs.7.61 lakhs had been recovered in two cases; the details are given below:-

(Amount in lakhs of rupees)

Sl. No.

Particulars

Amount of duty accepted Amount recovered

1.

Electrical transformers used as capital goods

4.68

 

2.

High speed diesel oil

4.57

4.57

3.

Cuttings, trimmings of hard gilatin

3.04

3.04

4.

Glue

2.14

 

 

Total

14.43

7.61

SHORT LEVY OF DUTY DUE TO INCORRECT CLASSIFICATION

The rates of duty leviable on excisable goods are prescribed under various headings in the schedule to the Central Excise Tariff Act, 1985. Different rates may be applicable to items of different classification.

Some of the illustrative cases of incorrect classification of goods which resulted in short levy/non levy of duty are given in the following paragraphs.

3.37    Wires and cables

i)    Straight joint closures to the optical fibre cables

As per note 4 to Section XVI of the schedule to the Central Excise Tariff Act, 1985, where a machine (including a combination of machines) consists of individual components (whether separate or interconnected by piping, by transmission devices, by electric cables or by other devices) intended to contribute together to a clearly defined function covered by one of the headings in chapter 84 or chapter 85, then the whole falls to be classified in the heading appropriate to that function.

An assessee engaged in the manufacture of 'straight joint closure' to be used in connection with optical fibre cables falling under heading 85.44 classified the product under heading 90.33 as machinery parts of chapter 90 attracting duty at 15 per cent ad valorem instead of under heading 85.44 as per section Note ibid attracting Central Excise duty at 30 per cent ad valorem. The incorrect classification resulted in short levy of duty of Rs. 1.19 crores on the clearances made during the period from 29 November 1990 to May 1993.

On the irregularity being pointed out (October 1991), the Ministry of Finance stated (September 1995) that the matter was under examination.

ii)    Other insulated electric conductors - overhead bus bars

According to Harmonised Commodity Description and Coding System (HSN), the heading 85.44 includes other insulated electric conductors such as strips and bars.

An assessee manufacturing electrical goods manufactured overhead bus bars, classified them as numerical control panels (heading 85.37) and cleared them on payment of appropriate duty. As the bus bars were primarily intended for conducting electricity, the goods were correctly classifiable under heading 85.44 as "other insulated electric conductors". The short collection of duty due to misclassification amounted to Rs.52.87 lakhs for the period April 1986 to March 1995 (figures updated).

On this being pointed out (June 1987), the Ministry of Finance accepted the point (July 1992) in DAP 243/88-89 and intimated that the differential duty of Rs.2.57 lakhs from July 1990 to December 1990 was confirmed. The case is pending before the Tribunal on an appeal filed, by the Department against the Appellate orders.

The Ministry of Finance confirmed the facts (October 1995).

iii)    Other optical fibre cables

A public sector undertaking manufacturing optical fibre cables made up of fibres which are given a primary coating with U.V. cured acrylate and a secondary coloured polyethylene coating claimed classification of these cables under heading 90.01 with effect from 28 February 1993 and cleared the goods on payment of duty at 20 per cent ad valorem. The optical fibre cables consisting of individually sheathed fibres (by way of protective coatings with polyethylene) merit classification under heading 85.44. The incorrect classification of these goods under heading 90.01 resulted in short levy of central excise duty of Rs.39.60 lakhs during March 1993 to December 1993.

On the irregularity being pointed out (January 1994) the Ministry of Finance admitted the objection and reported (September 1995) issue of show cause cum-demand notice for Rs.42.14 lakhs covering the period from March 1993 to February 1994.

iv)    Semi finished wires and cables

An assessee engaged in the manufacture of electrical goods classified the semi finished cable cuttings under sub heading 8548.00 from 1 March 1989 and as non excisable from 25 July 1991 whereas the said goods were correctly classifiable under heading 85.44. Incorrect classification resulted in short levy of duty to the extent of Rs. 10.50 lakhs for the period from March 1989 to April 1992. It was also seen that the assessee irregularly availed concessional rate of duty amounting to Rs.2.08 lakhs under notification dated 10 February 1986 as the semi finished cables were not used for communication purposes. The total duty involved amounted to Rs. 12.58 lakhs.

On this being pointed out (October 1993), the Ministry of Finance stated (October 1995) that the matter was under examination .

3.38     Plastics and articles thereof

i)     Strips, tapes and sacks of HDPE/LDPE

According to note 1 (c) of section XI of the schedule to the Central Excise Tariff Act, 1985 monofilament strips having width exceeding 5mm fall under chapter 39, while plaits or fabrics and other basketware and wickerwork fall under chapter 46.

An assessee engaged in the manufacture of strips, tapes, sacks of HDPE/ LDPE on circular looms classified the goods under chapter 46 instead of chapter 39. The incorrect classification of goods resulted in short levy of duty to the extent of Rs.88.45 lakhs for the period from July 1992 to January 1994.

On this being pointed out (January 1995), the Ministry of Finance stated (September 1995) that the matter was under examination.

ii)    HDPE sacks

High Court of Madhya Pradesh in the case of M/s. Raj Pack Well Limited, Indore V/s. Union of India (November 1989) held that HDPE sacks are classifiable under sub heading 3923.90. For the purpose of uniformity in classification of such goods by all manufacturers, the Central Board of Excise and Customs on 24 September 1992, issued an order under Section 37B upholding the classification of HDPE Sacks under sub heading 3923.90.

(a)    Two small scale units, engaged in the manufacture of laminated as well as unlaminated sacks from fabrics woven from HDPE tapes both on plain and circular looms classified their final products under heading 63.01, as made up textile articles and cleared them on payment of duty, whereas the goods merited classification under chapter 39. This resulted in short levy of duty amounting to Rs.7 19 lakhs in respect of clearances made during the period from April 1991 to 19 October 1992.

On the irregularity being pointed out (June 1993 and November 1994), the department stated (May and June 1994) that the tariff advice No.47/92 advising classification of the goods under chapter 39 was issued on 20 October 1992 without giving it retrospective effect and as such prior to the date of issue of trade notice, the demand could not be raised. Reply of the department is not acceptable because the classification is to be determined either as per provisions of the rule or the judicial pronouncement and need not await executive instructions.

Reply of the Ministry of Finance has not been received (December 1995).

(b)    An Assistant Collector approved on 14 July 1993, a classification list effective from 5 June 1992 classifying the product HDPE - circular woven sacks - under heading 63.01 attracting duty at 5 per cent ad valorem in accordance with a notification issued on 1 March 1987 HDPE circular woven sacks manufactured from duty free fabrics of plastics by a small scale unit availing SSI duty concessions under chapter 39 as per approved classification lists effective from 1 April 1992 were shifted to chapter 63 with effect from 5 June 1992 attracting duty at five per cent ad valorem upto the clearance of Rs.75 lakhs. Short levy of duty on clearance of such goods during 24 September 1992 to 1 November 1992 amounted to Rs.6.14 lakhs.

On this being pointed out (February 1994), the department stated (May 1994) that heading 63.01 was not covered under Modvat scheme during the material time whereas chapter 39 was covered under Modvat scheme and that if the goods were assessed to duty under sub heading 3923.90, the assessee would have been entitled to Modvat credit of duty paid on HDPE granules.

The above contention does not hold good as the assessee never purchased HDPE granules and used PP woven circular unlaminated cutpieces as raw material on invoices which were not valid documents for availing Modvat credit. However the department classified the product under sub heading 3923.90 with effect from 1 November 1992.

Reply of the Ministry of Finance has not been received (December 1995).

3.39     Inter-mixture of vitamins

Preparations of a kind used in animal feeding are classifiable under heading 23.02 of the schedule to the Central Excise Tariff Act, 1985. However, provitamins and vitamins and inter mixtures thereof whether or not in any solvent fall under tariff heading 29.36. The Central Board of Excise and Customs in a circular dated 17 January 1990 clarified that animal feed supplements which are just intermixtures of vitamins only and which do not contain any other ingredients except solvents, stabilisers or anti-oxidants are specifically classifiable under heading 29 36. This position was also confirmed by the special bench of CEGAT, New Delhi in a judgement dated 3 May 1994.

An assessee engaged in the manufacture of a branded product belonging to another assessee, claimed classification of the product as 'animal feed supplement' falling under heading 23.02 attracting nil rate of duty and cleared the products during the years 1991-92, 1992-93 and 1993-94 without payment of duty. The incorrect classification resulted in non levy of duty of Rs. 61 98 lakhs in respect of 95,612 litres of the product cleared during the period from August 1991 to November 1993.

On this being pointed out (December 1993), the Ministry of Finance admitted the objection (August 1995) and reported issue of show cause notice.

3.40     Electrical machinery equipments

i)     Parts of electic motors

Electric motors and generators (excluding generating sets) are classifiable under heading 85.01 of the schedule to the Central Excise Tariff Act, 1985, and parts suitable for use solely or principally with the machineries of heading 85.01 and 85.02 are classifiable under heading 85.03 of the schedule.

An assessee manufacturing train lighting brushless alternators cleared them alongwith accessories on payment of duty at 15 per cent ad valorem under heading 85.01. As the accessories were suitable for use solely or principally with alternators, they merited classification under heading 85.03 and were chargeable to duty at 20 per cent ad valorem. This resulted in short levy of Rs.33.84 lakhs on clearances during the period from April 1991 to May 1992.

On this being pointed out (June 1992), the department stated that six show cause notices (September 1992 to February 1995) demanding duty of Rs.72.84 lakhs issued to the assessee were subsequently dropped on adjudication by Assistant Collector in July 1993. The Collector of Central Excise, however, on review of the case, held (July 1994) that the components must be classified under heading 85.03 only. The assessee has gone in appeal before the CEGAT, Madras (March 1995).

Reply of the Ministry of Finance has not been received (December 1995).

ii)    Commercial water heaters

Heaters of all types are classifiable under sub-heading 85.16 of the schedule to Central Excise Tariff Act, 1985 attracting duty at the rate of 25 and 20 per cent ad valorem from April 1993 to February 1994 and 1 March 1994 onwards respectively.

A manufacturer of 'heating elements' cleared the product under heading 85.14 whereas the product mentioned in the approved price lists were commercial water heaters, industrial water heaters and air heaters etc. which were classifiable under heading 85.16. This resulted in short payment of duty of Rs.13 lakhs on clearance of 10028 heaters during the period April 1993 to March 1994.

On this being pointed (July 1994), department stated (May 1995) that three separate demands for Rs.21.81 lakhs had been raised for the period 1 February 1994 to 31 December 1994. Out of these one demand of Rs. 4.45 lakhs (February 1994 to July 1994) had been confirmed and remaining two demands were pending adjudication. Action taken to raise the demands for the amount of Rs. 11.18 lakhs for the period April 1993 to January 1994 was awaited (June 1995).

The Ministry of Finance confirmed the facts (November 1995).

3.41     Paper and paper board

Paper and paper board coated, impregnated or covered with plastic (excluding adhesive) are covered under sub heading 4811.30. Such products if printed are classifiable under sub heading 4811.90 and chargeable to duty at 35 per cent ad valorem plus Rs.2100 per tonne till 27 February 1993 and at 30 per cent ad valorem thereafter. The Central Board of Excise and Customs vide its circular dated 22 February 1989 had clarified that 'printed waxed wrapping paper' is appropriately classifiable as a converted paper under sub heading 4811.90

i)    An assessee manufactured 'printed polycoated paper' from duty paid base paper and other inputs on which Modvat credit under rule 57A of the Central Excise Rules, 1944, was availed of, classified the product under sub heading 4811.30 and cleared it on payment of duty at the concessional rate of 15 per cent ad valorem till 27 February 1993. As the product was printed, it became printed

converted paper and hence its classification under sub heading 4811.30 instead of 4811.90 was irregular. Incorrect classification of the product resulted in short levy of duty of Rs.7.64 lakhs during the period from April 1992 to February 1993.

On this being pointed out (August 1993), the Ministry of Finance admitted the objection (August 1995).

ii)     Another assessee manufactured 'printed plastic coated paper' from duty paid base paper, polyethylene granules and other inputs on which Modvat credit under rule 57A. of the Rules ibid, was availed of, classified it under sub heading 4811.30 and cleared the same on payment of duty at 20 per cent ad valorem under notification No.30/93-CE dated 28 February 1993. As the product was 'printed', its classification and payment of duty under sub heading 4811.30 instead of the correct sub heading 4811.90, was irregular. This resulted in short levy of duty of Rs.4.77 lakhs during the period from April 1993 to December 1993.

On this being pointed out (January 1994), the department admitted the objection and stated (September 1994) that necessary action for reclassification of the product under sub heading 4811.90 attracting duty at 30 per cent ad valorem, had been initiated.

Reply of the Ministry of Finance has not been received (December 1995).

3.42     Paints and varnishes

i)     Reducing medium - Varnish

Heading 32.08 covers paints and varnishes based on synthetic polymers and solutions as defined in note 3 to chapter 32 of the schedule to the Central Excise Tariff Act, 1985. As per this note the said heading includes solutions (other than collodions) consisting of any of the products specified in headings 39.01 to 39.13 in volatile organic solvent when the weight of the solvent exceeds 50 per cent of the weight of the solution. It, therefore, follows that products in the form of solutions as defined in the note, ibid, and having the characteristic properties of varnish are classifiable under sub heading 3208.90 and are chargeable to duty at 30 per cent ad valorem till 28 February 1992 and 35 per cent ad valorem thereafter.

An assessee engaged in the manufacture of printing ink (sub heading 3215.00) also manufactured reducing mediums meant for use with printing inks and was allowed to clear under sub heading 3215.00 on payment of duty at 15 per cent ad valorem till 28 February 1992 and 10 per cent ad valorem thereafter. According to the chemical test report (August 1991), the products conformed to the definition of resin solutions and, therefore, merited classification under sub heading 3208.90 attracting higher rate of duty. Incorrect classification of the product thus resulted in short levy of duty of Rs.8.67 lakhs during the period from November 1990 to December 1990 and from April 1991 to March 1993.

On this being pointed out to the department (May 1991) and Ministry of Finance (July 1995), the Ministry stated (December 1995) that the matter was under examination.

ii)     Rosinaied alkyd solution

CEGAT in the case of M/s. Tansi Polish Unit Vs Collector of Central Excise [1993(67) ELT 173(Tribunal)} have held that a product having the characteristics viz. to form hard lustrous typically transparent and tack free coating of varnish is classifiable under heading 32.08 even though the weight of the solvent is less than 50 per cent of the weight of the solution.

A small scale unit manufacturing 'Rosinated alkyd solution' of different strength like 60 per cent, 52 per cent (percentage represents solid matter content) was allowed to clear the goods on payment of concessional rate of duty under sub heading 3907.50. On a suggestion made by Audit samples of the product were tested by the chemical examiner who certified (November 1993) that the product was composed of alkyd type of synthetic resin in a medium of volatile organic solvent containing more than 50 per cent by weight of non volatile residue and it gave a tack free and transparent adhering coating. These characteristics of the product being akin to those of varnish, the product would be rightly classifiable under 3208.90 as varnish as per the CEGAT's aforesaid judgement. The incorrect classification of the product, therefore, resulted in short levy of duty of Rs.4.67 lakhs on the clearances during the period from 1 April 1992 to 28 February 1994.

On this being pointed out (April 1993), the department contended (August 1994) that the product was rightly classified as alkyd resin since the chemical examiner in his report had certified (December 1993) that the product was composed of alkyd type of synthetic resin. This did not prevent the department to classify it under alkyd resin.

The department's contention is not acceptable since the chemical examiner had specifically certified on the second occasion (when his opinion was obtained at the suggestion of Audit) that the product gave a tack free and transparent adhering coating and such type of product merited classification under 3208.90 as varnish.

Reply of the Ministry of Finance has not been received (December 1995).

3.43     Parts of conveyor system

While heading 84.28 of the schedule to the Central Excise Tariff Act, 1985, covers only complete machinery, parts suitable for use solely or principally with that machinery are correctly classifiable in terms of note 2(a) of section XVI, of the schedule to the Central Excise Tariff Act, 1985, under heading 84.31 attracting duty at 25 per cent ad valorem.

An assessee entered into a contract for manufacture, supply and erection of a plant known as 'mill house equipment'. The assessee manufacturing certain parts of conveyor system classified those under heading 84.28 as 'belt conveyors' attracting duty at 10 per cent ad valorem as per notification No.51/93-CE dated 28 February 1993. The conveyor system being part of the total plant would be complete only after erection thereof at the site with other bought out parts. The classification of these parts under heading 84.28 instead of under heading 84.31 was incorrect. This resulted in short levy of duty of Rs.11.62 lakhs on the clearances made during the period 1993-94.

On this being pointed out (May 1994), the department justified (June 1994) the classification under heading 84.28 on the ground that the assessee entered into contract for a total plant for which 9 items of different types of conveyors were manufactured and supplied. Those items being complete in all respect could run independently in their respective fields in the whole mechanism.

The department's contention is not acceptable since the conveyor system would be complete only after erection at site with other bought out parts. As the conveyors were the parts of the whole system, its classification under heading 84.28 was not correct as per note 2(a) of Section XVI of the Central Excise Tariff Act, 1985. This position was accepted by the Ministry of Finance in a similar case featured at paragraph 3.14(v) of the Audit Report for the year ended 31 March 1991.

Reply of the Ministry of Finance has not been received (December 1995).

3.44    Waste of filaments and fibres

According to note 5 of chapter 54 of the schedule to the Central Excise Tariff Act, 1985, "waste" means wastes arising in or in relation to the manufacture of (i) filaments; or (ii) strips and the like of synthetic or artificial textile materials of an apparent width not exceeding 5 millimetres. It would mean that any waste arising after the manufacture of filaments cannot be considered as waste.

An assessee manufacturing nylon filaments yam of various deniers (chapter 54) cleared most of the yarn for captive use for the manufacture of tyre cord fabrics. The yam waste arising during the manufacture of tyre cord fabric was classified as waste of synthetic filament (heading 54.01) instead of heading 54.02, in view of chapter note cited above. The incorrect classification resulted in short levy of duty amounting to Rs.11.01 lakhs during the period from April 1992 to March 1994.

On the incorrect classification being pointed out (June 1993 and August 1994), the department contended (March 1994) that in terms of Board's clarification (27 January 1988) all waste arising during the course of manufacture of filament yam would be covered under heading 54.01.

The reply of the department is not acceptable as the Board's clarification was regarding classification of waste arising during the course of manufacture of filament yarn, but the waste in question arose after the manufacture of yarn i.e. during the process of manufacture of tyre cord fabric from tyre cord yarn.

Reply of the Ministry of Finance has not been received (December 1995).

3.45     Made up textile articles

Made up textile articles not elsewhere specified are classifiable under heading 63.01 of the schedule to the Central Excise Tariff Act, 1985, and chargeable to duty at 12 per cent ad valorem till 2 February 1993 and at 15 per cent ad valorem thereafter. As per note 5 to Section XI of the central excise tariff covering 'textiles and textile articles' the term , 'made-up' for the purpose of this section, interalia, means cut otherwise than into squares and rectangles. Therefore, any product manufactured by bias cutting of fabrics will be, as per the said section note, classifiable as made up textile articles.

A leading manufacturer of footwear (chapter 64) also manufacturing 'cotton bias binding tape', classified the same under sub heading 6401.91 as parts of footwear and cleared the goods without payment of duty under notification No. 100/ 91-CE dated 1 November 1991. The subject product was in the form of strip of fabrics cut bias from long and wide cotton fabrics after the same had been folded and stitched at the ends. The product in running length was finally rolled into spool form for use in the manufacture of footwears. As the product was neither recognisable as parts of footwear nor known as such in trade parlance, its classification under sub heading 6401.91 was incorrect. The product emerged from bias cutting of fabrics was thus made up textile articles and was correctly classifiable under subheading 63.01. The incorrect classification of the product resulted in non levy of duty of  Rs.9.63 lakhs during the period from March 1988 to November 1993.

On this being pointed out (February 1994), the department contended (June 1995) that the disputed product was exclusively used as parts of footwear and that the same having no other use, its classification was approved under sub heading 6401.91 as parts of footwear. The department further stated that in terms of note 1 (h) to Section XI of the schedule, parts of footwear were excluded from the purview of that section covering 'Textile and textile articles.'

The contention of the department is not tenable as:-

i)    the subject product is not identifiable as parts of footwear in the form (i.e. cotton tape of width 2 to 5 cm. with sides folded and stitched and then rolled into a spool) in which it is cleared;

ii)    in the trade parlance the product is also not known as parts of footwear as is evident from gate passes wherein the same has been described as 'cotton bias tapes'; and

iii)    Note 1(h) to Section XI is not applicable as the product is not to be treated as parts of footwear. This view also finds support from a recent judgement in the case of Collector of Customs Vs. Hydranautics Membrane (India) Ltd. {1994 (71) ELT 711 (Tribunal)} where it was held that material in running length is not treatable as parts. The ratio of this judgement is applicable in this case also.

Reply of the Ministry of Finance has not been received (December 1995).

3.46     Containers for liquified gas

Containers for compressed or liquefied gas, of iron or steel are classifiable under sub heading 7311.00 of the schedule to the Central Excise Tariff Act, 1985 and chargeable to duty at 15 per cent ad valorem from 28 February 1993.

An assessee engaged in the manufacture of 'Steam generating boiler' (chapter 84) also manufactured a product known as 'Hydrogen bullet' and cleared the same on payment of duty at 10 per cent ad valorem under sub heading 8479.00 instead of under sub heading 7311.00 attracting duty at 15 per cent ad valorem. This resulted in short levy of duty of  Rs.7.73 lakhs during the period from November 1993 to February 1994.

On this being pointed out (June 1994), the Ministry of Finance stated (July 1995) that the matter was under examination.

3.47     Rear view mirrors

Heading 70.06 of the schedule to the Central Excise Tariff Act, 1985, covers glass mirrors whether or not framed including rear view mirrors for vehicles. Rear view mirror will, therefore, fall under sub heading 7006.10 and assessable to duty at 40 per cent ad valorem.

An assessee engaged in the manufacture of goods falling under chapter 87 of the schedule to the Central Excise Tariff Act, 1985, had brought into the factory duty paid rear view mirrors for vehicles (duty paid at 40 per cent ad valorem) falling under sub heading 7006,10 and had put them in a suitable frames for use with the motor vehicles after including the value of rear view mirrors in the assessable value of the vehicle on payment of duty at the rate applicable to the vehicles. Further, these rear view mirrors were not sent duly fitted to the vehicles but were sent alongwith vehicles in separate packing. Since the rear view mirror is only framed, it cannot go .outside the ambit of heading 70.06. The incorrect classification resulted in short levy of duty of Rs.6.25 lakhs on clearances made during the period from April 1992 to June 1993.

On this being pointed out (December 1993), the department contended (April 1994) that, the rear view mirrors were brought as duty paid inputs and form integral part of vehicles which is classified under chapter 87.

The department's reply is not acceptable because sub heading 7006.10 specifically covers rear view mirrors for vehicle and the same has been cleared separately. Besides the duty had been paid on such goods at 20 per cent under chapter 87 as against the credit at 40 per cent availed under Modvat scheme. Similar para appeared at 2.14(I)(i)Pt in Audit Report 1992-93 which was admitted by the Ministry.

Reply of the Ministry of Finance has not been received (December 1995).

3.48     Articles for funfair

Articles for funfair, table or parlour games are covered under heading 95.04 attracting duty at 15 per cent ad valorem under notification No.81/90-CE dated 20 March 1990.

An assessee engaged in the manufacture of goods viz., "Scotland yard" detective game (Code No.4500) classified the goods under heading 95.03 cleared at nil rate of duty in terms of notification No.81/90-CE dated 20 March 1990. As per the description, literature and contents the manufactured game consisted of game board, pawns tickets, start cards double move cards and at a time minimum of three and a maximum of six players could play the game (i.e it was not for a single player). Since the game could be played by group on single board by movement of pawns with the help of cards and tickets it was classifiable under heading 95.04. The incorrect classification thus resulted in non levy of duty of Rs.5.95 lakhs on clearances during the period from April 1990 to February 1994.

On this being pointed out (March 1994) the Ministry of Finance contended (September 1995) that the perusal of the instructions for puzzle game showed that this was a puzzle game rather than specific article for a table game and therefore fall under category 'C' of HSN notes to heading 95.03 i.e. puzzles of all kinds.

The reply of the Ministry is not acceptable as HSN note (c)(2) proviso (f) 10 heading 95.03 clearly excludes card games (heading 95-04) from the purview of heading 95.03.

3.49     Other cases

In sixteen other cases of incorrect classification the Ministry/department have accepted the objections involving duty of Rs. 156.22 lakhs. Details of these cases are given below:-

Particulars

Classifications adopted Ch./Hd./SHd.

Correct classification Ch./Hd./SHd.

Amount of duty short levied
(Rs. in lakhs)

Period

Ducco putty

32.14

3208.30

21.84

December 1992 to February 1994

Plastic wastes

39.15

3901.10

3.09

April 1992 to December 1993

Articles of paper and paper board - cut to size

48.17

4823.90

6.56

April 1990to August 1994

Industrial scaling/stuffing material made of PTFE

3926.90

56.09 .

3.15

May 1990 to July 1993

filament yarn Graphite tapes, packing rings foils etc.

84.13

68.07

8.42

March 1993 to May 1994

Cutting of FIR sheets from manufacture of LPG cylinder

72.04

72.12
72.13
72.14

2.06

June 1992 to July 1993

Heat exchanger and condenser for cooling

84.79

84.19

16.92

April 1993 to August 1993

Spare parts, electrical equipments toolings of lathe machines

84.58
84.66

84.43
84.58
84.66

5.03

December 1993 to September 1994

Taps, cocks, valves and similar appliances for pipe

3926.90

8481.90

6.76

April 1990 to March 1995

Gear box

8485.90

84.83

4.84

August 1991 to September 1991

Parts of transformers

85.48

85.04

11.25

February 1992 to January 1993

Wind shield wiper assembly

85.01

85.12

15.65

January 1994 to June 1994

Cine sound magnetic films

8523.11

8523.19

18.48

October 1991 to February 1994

Relays of various types (less than 1000 volts)

85.30

8536.90

24.90

April 1993 to May 1994

Plastic components of motor vehicle

3926.90

87.00

5.02

December 1989 to October 1993

Rubber rafts

89.06

89.07

2.25

1990-91

Total

 

 

156.22

 

IRREGULAR GRANT OF SSI BENEFITS

Duty reliefs and exemptions are allowed to small scale manufacturers of specified excisable goods under various exemption notifications issued under the Central Excises and Salt Act, 1944. The reliefs and exemptions are subject to fulfilment of conditions prescribed in the notifications.

A few illustrative cases of non levy or short levy of duty, arising from irregular grant of exemptions to small scale manufacturers are mentioned in the following paragraphs.

3.50     Registration by Industries department becoming invalid

As per notification issued on 1 March 1986, concessional rate of duty is applicable to a factory which is an undertaking registered with the Director of Industries of any State or Development commissioner (SSI) as a small scale industry. This condition was dispensed with effect from 1 April 1994 vide notification No.59/94-CE, dated 1 March 1994 applicable from 1 April 1994.

For registration of an industrial unit as a small scale industry, investment in plant and machinery should not exceed Rs.35 lakhs, raised to Rs.60 lakhs from 2 April 1991.

Eight assessees in seven Commissionerates were allowed SSI concessions as per notification dated 1 March 1986 as amended on the strength of small scale industry certificates of registration issued by the Director of Industries. It was seen from the Annual Reports and accounts of the assessees that the value of investment in the plant and machinery of the units as at the end of the accounting year had exceeded Rs.60 lakhs in each of these cases and the assessees were, therefore not entitled to SSI concession under the above notification. Grant of small scale concession to ineligible units resulted in short levy of duty of Rs.65.54 lakhs (basic and special) in respect of clearances made between April 1989 and May 1994.

The Ministry of Finance did not admit the objection and stated (August 1995) that small scale concession was allowed as per the small scale registration certificate and the aggregate value of clearances in the preceding financial year. The Ministry added that small scale industrial unit had not been defined in the notification allowing exemption/concession for such unit and accordingly the investment limit of Rs.60 lakhs prescribed in the notification No.S.0.232(E) dated 2 April 1991 issued by the Ministry of Industry had no relevance in the instant cases.

The contention of the Ministry is not acceptable in view of the specific provisions in the notification dated 1 March 1986 and 28 February 1993 that the exemption in the notification shall be applicable only to a factory which is registered as a small scale industry under the Industries (Development and Regulation) Act, 1951 in terms of which the investment in plant and machinery should not exceed Rs.60 lakhs. The assessee ceased to be SSI unit as soon as the investment in plant and machinery exceeded the limit of Rs.60 lakhs. The absence of any mechanism to check the validity of small scale registration certificate already issued, resulted in irregular availment of exemption/concession.

3.51    Branded goods

As per para 7 of notification No. 175/86-CE, dated 1 March 1986 as amended (Para-4 of the notification No.1/93-CE dated 28 February 1993) the benefit of SSI exemption is not applicable to the specified goods where a manufacturer affixes such goods with a brand name or trade name, whether registered or not, of another person who is not eligible for the grant of exemption under the said notification.

i)     A manufacturer of electronic goods (chapters 84, 85 and 90) entered into an agreement with a foreign firm and manufactured and cleared the goods by issuing the trade mark of a foreign firm. This resulted in short levy of duty of Rs.22.74 lakhs during the period April 1989 to September 1994.

On this being pointed out (November 1994), the Ministry of Finance stated (December 1995) that an amount of Rs. 17.34 lakhs for the period 1989 to April 1994 had been confirmed besides imposing a penalty of Rs.50 thousand and issue of show cause cum-demand notice for another demand of Rs.2.75 lakhs for the period May 1994 to September 1994. Periodical demands were issued denying the exemption. A demand of Rs.2.65 lakhs could not be issued due to time bar. The assessee had started paying duty under protest with effect from 16 March 1995 without claiming SSI exemption.

ii)    A small scale unit manufacturing 'disinfectants', cleared some of his products with the brand name of a foreign manufacturer in addition to products of his own brand name during 1993-94 and 1994-95 claiming full exemption/concessional rates of duty under the notification dated 28 February 1993 in respect of all such products. This resulted in short levy of duty amounting to Rs.7.79 lakhs.

On this being pointed out (October 1994), the department accepted the objection.

Reply of the Ministry of Finance has not been received (December 1995).

3.52    Legal avoidance of duty

According to notification No.l75/86-CE dated 1 March 1986 as amended, full or partial exemption on value of clearances of specified excisable goods is allowed to a small scale unit upto an aggregate value of Rs.75 lakhs provided that the value of clearances of all excisable goods for home consumption did not exceed Rs.200 lakhs in the preceding financial year. For the purpose of arriving at the value of clearances, the clearances made for home consumption by a manufacturer from one or more factories are to be clubbed together.

The Supreme Court in their judgment in the case of Mcdowell and Company Limited Vs. Commercial Tax Officer {1985 (5) ECR 259} held that a corporate entity can be disregarded if it is used for tax evasion or to circumvent tax obligation.

As per notification S.0.2(E) dated 1 January 1993 issued under the Industries (Development and Regulation Act, 1951, an industrial undertaking is deemed to be controlled by another undertaking if the management control of an industrial undertaking is passed on to another undertaking by way of managing director being common or if the managing director is a director of another industrial undertaking.

(a)     An assessee engaged in the manufacture of metal containers (chapter 73), was allowed to avail of the small scale exemption under the notification dated 1 March 1986. This unit was a private limited company having one Managing Director and one Director. Another unit also functioning as private limited company in the same premises with the same two persons as Directors, was manufacturing and clearing the similar goods at a concessional rate of duty under the same notification. Both the units were nothing but inter connected units and had proprietary interest in each other in terms of notification S.0.2(E) dated 1 January 1993 referred to above. The aggregate value of clearances from the two units during the year 1992-93 was Rs.3.96 crores and therefore the assessee unit was also not eligible for the concession for the year 1993-94. This resulted in short levy of duty of Rs.6.68 lakhs on the clearances made from April 1993 to July 1994.

(b)     An assessee manufacturing articles made of 'Glass fibres' (Chapter 70) and 'Electrical insulators' (Chapter 85), was allowed to avail of the SSI benefit under the aforesaid notification. The assessee unit was a private limited company having one Managing Director and Director. Another unit with a different name was also functioning as a private limited company with the same persons as Managing Director and Director. Both the units were allowed to avail of the exemption benefit separately treating the units as individual entities The units cleared goods of the value of Rs. 152.17 lakhs and Rs.70.24 lakhs during the year 1991-92. As such SSI exemption was not available for 1992-93. This resulted in legal avoidance of duty for Rs.8.62 iakhs for the year 1992-93.

(c)     A unit was set up in 1990-91, in which another industrial undertaking and its nominees were holding 55 per cent of its total equity shares The Managing Director of the industrial undertaking was also one of Directors of the present unit. Since both the units were under the same management, their total clearance were required to be clubbed. Though the value of goods cleared by the assessee unit was within the ceiling limit of small scale exemption, the aggregate value of clearances from the two units had far exceeded Rs.200 lakhs during 1990-91 and subsequent years. The SSI exemption was therefore not available for the year 1991-92 and subsequent years. This resulted in legal avoidance of duty of Rs. 13.61 lakhs during 1992-93 and 1993-94

(d)     Two units, a partnership firm (assessee) and a private limited company were engaged in the manufacture of coated paper and paper craft (chapter 48) respectively in the common premises. All the four partners of the assessee firm were also the directors in the second unit which was a major unit having clearances of more than Rs.200 lakhs during a year. The assessee was allowed to avail of SSI benefits on the grounds of separate legal entity, although the two units had common members having proprietary interest in both the units Non clubbing of clearances of the two units resulted in avoidance of duty of Rs.8.20 lakhs during the period from April 1992 to February 1994.

On these cases being pointed out (June 1993 and August 1994), the department in all the cases contended (June, October, September 1994 and April 1995) that the units were distinct legal entities having separate central excise registration and the mere fact that a common person held the post of Managing Director or Director in more than one company would not by itself be sufficient to establish that one company was a dummy of the other. The department also added that the aforesaid view was upheld by a number of CEGAT decisions. The department also observed that the deemed provision of notification S.0.2(E) dated 1 January 1993 under the Industries (Development and Regulation) Act, 1991 was not applicable for the purpose of levy and collection of central excise duty.

The contention of the department is not acceptable. Treatment of two inter connected units as separate entities, if accepted, would result in avoidance of payment of duty by any manufacturer by setting up units in different names so that no single manufacturer on paper would own more than one factory and each would enjoy the exemption available to small scale units. Such legal avoidance of duty was adversely commented upon by the Public Accounts Committee in para 54 of its 49th Report (Eighth Lok Sabha)-1986-87 and the Committee had desired that special attention should be paid by the law enforcing agencies to ensure that benefits intended for small scale units were not abused or misused.

Reply of the Ministry of Finance has not been received (December 1995).

3.53    Use of job working small scale units to evade duty

As per judgement of the Supreme Court in the case of Shri Agencies {1977 ELT (J168) S.C) and Bajrang Gopilal Gajabi {1986 (25) ELT 269} the supplier of the raw material is to be treated as the real manufacturer. The Central Board of Excise and Customs in consultation with the Ministry of Law, clarified (14 September 1994) that cases where the goods were manufactured by a job worker out of raw materials supplied by a person or a manufacturer and where the relationship between the raw material supplier and the job worker was on principal to principal basis the job worker would be the actual manufacturer. Otherwise the supplier of the raw material could be the actual manufacturer.

i) (a)     Three small scale manufacturers were engaged in the manufacture of goods under chapter 86 on job work basis on behalf of principal manufacturers who supplied raw materials free of cost to the job workers. The small scale manufacturers cleared them back to the supplier of raw material, on payment of duty at concessional rates under the notification issued on 1 March 1986. Neither the principal manufacturer was entitled to the concessional rates nor his relationship with the job workers was on principal to principal basis. The availment of SSI exemption by the job workers was irregular and resulted in short levy of duty of Rs.19.76 lakhs on goods cleared during different periods between April 1992 and October 1993. This was reported to the department between September and November 1993.

(b)     An assessee - a small scale unit manufactured various excisable goods falling under chapter 85 on job work basis as the raw material was supplied by the principal manufacturer free of cost. The goods were cleared after availing exemption from duty under the notification dated 1 March 1986. As the principal manufacturer a public sector unit was not in the small scale sector availment of concessional rate of duty by the job worker (the assessee) was irregular and resulted in short levy of duty of Rs.8.36 lakhs on the clearances of the goods during the years 1989-90 to 1992-93. This had also helped the principal manufacturer to avail of higher notional Modvat credit to the extent of Rs.3.92 lakhs by taking benefit of rule 57B of Central Excise Rules, 1944. This was reported to the department in June 1993.

The Ministry of Finance did not admit the objection and stated (October 1995) that the assessee could not be treated as a manufacturer on behalf of others because the dealings between the two were on principal to principal basis and the case was squarely covered by Board's circular dated 14 September 1994.

The reply of the Ministry is not acceptable because there was no sale of inputs by the principal manufacturer to the small scale unit (doing the job work) and the principal manufacturer continued to retain the ownership of goods throughout the period. The relationship between the principal manufacturer and small scale unit was not on principal to principal basis and therefore the grant of small scale industrial concession to the manufacturer was irregular.

ii)     An assessee availing SSI concession manufactured black vulcanising cement (heading 35.06) under the supervision of a big manufacturer who not only supplied the required raw/packing materials, but also marketed the product. Duty was, however, paid at concessional rates intended for a small scale manufacturer on the value arrived at on the basis of cost and entire production was cleared to the big manufacturer. This resulted in benefit of Rs.34.51 lakhs to the large scale manufacturer during the period April 1991 to May 1994.

The Ministry of Finance while not accepting the objection stated (December 1995) that in terms of circular dated 14 September 1994 if the relationship between the raw material supplier and the job worker is on principal to principal basis and no financial assistance is provided to the job worker, then the job worker will be the actual manufacturer and entitled for SSI concession.

Reply of the Ministry of Finance is not acceptable since the manufacturer was not only supplier of the raw material but also marketed the product manufactured by the job worker, therefore, the transaction between them was not on principal to principal basis.

3.54     Exemption availed beyond the prescribed limit of clearances

According to notification dated 1 March 1986, as amended, exemption based on value of clearance would be available to a manufacturer at concessional rates of duty upto an aggregate value of clearances of Rs.75 lakhs. However, the notification is not Applicable and the exemption is not admissible if the aggregate value of clearances of all excisable goods for home consumption by a manufacturer, from one or more factories or from any factory, by one or more manufacturers had exceeded rupees two hundred lakhs in the preceding financial year.

i)     Availment beyond exemption limit

(a)     An assessee engaged in the manufacture of different varieties of aerated water cleared one variety during the year 1992-93 and 1993-94 at concessional rate of duty under the said notification As the total value of clearances of all excisable goods exceeded Rupees two hundred lakhs during 1991-92 (Rs.272.64 lakhs) and 1992-93 (Rs. 311.74 lakhs), the assessee was not eligible for duty concession during 1992-93 and 1993-94. The irregular availment of SSI exemption resulted in short levy of duty of Rs. 14.86 lakhs on the clearances made during the period April 1992 to August 1993.

On this being pointed out (August 1993), the department issued show cause-cum demand notice (25 September J993) for the period April 1993 to August 1993. However, no action was taken in respect of the period May 1992 to March 1993.

Reply of the Ministry of Finance has not been received (December 1995).

(b)     An assessee engaged in the manufacture of various excisable goods falling under chapters 84 and 86, was allowed to avail of exemption during 1994-95 though the value of clearances of all excisable goods (Rs.200.55 lakhs) had exceeded Rs.200 lakhs during 1993-94. This resulted in short levy of duty of Rs.5.44 lakhs on the clearances during the period from 1 April 1994 to 31 October 1994.

On this being pointed out (November 1994), the department admitted the objection (December 1994). The assessee had paid the differential duty of Rs.5.48 lakhs relating to the period April 1994 to 14 November 1994 during March 1995.

The Ministry of Finance confirmed (December 1995) the facts.

ii)     Value of goods manufactured on job work basis not included

For computation of value for determination of exemption limit in case of job work, the Central Board of Excise and Customs in its circular F.No.213/70/66-CX.6 dated 24 December 1986 clarified that if the processes at the premises of job worker amounted to 'manufacture' then the value of goods (not merely job charges) manufactured on job work basis would be taken into consideration at the end of the job worker.

An assessee engaged in the manufacture of HDPE/PP sacks and bags (heading 39.23) and availing SSI exemption on such goods also manufactured similar goods on job work basis under rule 57F(2) (now 57F(3) and cleared such goods without payment of duty. As the goods manufactured on job work basis were the final goods (and not intermediate goods) provisions of rule 57F(2) were not applicable.

The total value of clearances of goods manufactured on his own account together with the goods manufactured on job work basis exceeded the limit of Rs.200 lakhs during 1990-91, 1991-92 and 1992-93; consequently the assessee was not eligible for small scale exemption during the following years viz., 1991-92, 1992-93 and 1993-94 respectively. Irregular grant of exemption, resulted in short levy of duty of Rs. 20.71 lakhs on clearances during the period 1991-92 to 1993-94.

On the irregularity being pointed out (January 1994), the Ministry of Finance did not admit the audit objection (October 1994) and stated that the raw material supplier had fulfilled all the conditions of notification No.214/86-CE dated 25 March 1986 correctly and by virtue of explanation II of notification No. 175/86-CE dated 1 March 1986 the value of exempted goods would not be taken for computation of the aggregate value.

The contention of the Ministry is not acceptable as:-

(a)     the notification No.214/86-CE dated 25 March 1986 was not applicable in the instant case since as per clause (v) of Explanation II to the notification ibid bags or sacks made out of fabric (whether or not coated or laminated with any other material woven from strips or tapes of plastics) stood excluded for the purpose of the notification; and

(b)     the subject goods were manufactured and not merely processed, the value of clearances of such goods was required to be taken into account for purposes of notification No. 175/86-CE dated 1 March 1986 as per Board's instructions dated 24 December 1986.

This was pointed out to the Ministry in August 1995. Further reply of the Ministry has not been received (December 1995).

iii)     Value of goods cleared through merchant exporters not included

An assessee engaged in the manufacture of para chlorophenol falling under sub heading 2907.90 computed the aggregate value of clearances of all excisable goods during the financial year 1991-92 at Rs.189.28 lakhs and availed of the exemption during the year 1992-93. It was noticed that while computing the aggregate value of clearances of excisable goods for 1991-92, the value of 'chlorophenol' cleared on payment of duty during the period September 1991 to January 1992 amounting to Rs.22.21 lakhs was not included in the aggregate value on the plea that the goods were cleared on payment of duty for export for which no proof of export had been required.

As the goods were cleared on payment of duty to a consignee within the country, the value of such clearances should have been included in the aggregate value of clearances Non inclusion of such clearances resulted in understatement of clearances during 1991-92 and incorrect grant of exemption leading to short levy of duty to the extent of Rs.6.52 lakhs for the period upto July 1992.

On this being pointed out (August 1992), the department stated (September 1992) that the value of such clearances cannot be taken as home consumption because the goods were exported, and the goods were cleared under rule 12 of the Central Excise Rules, 1944, for which the party was granted rebate by the Assistant Collector of Central Excise, Refunds.

The reply of the department is not acceptable, because the goods were exported through a third party (Merchant exporter) and were to be treated as clearance for home consumption only in view of the Tribunal decision in the case of Collector, Central Excise Vs. Gavs Labs (P) Limited {1994 (71) ELT 717 (T)}.

Reply of the Ministry of Finance has not been received (December 1995).

3.55     Other cases

i)     An assessee, manufacturing adhesives and special shoe polishes falling under sub heading 3506.00, 3405.00 and 3405.10 had availed SSI concession as per notification dated 1 March 1986 even though the aggregate value of clearance of excisable goods cleared for home consumption had exceeded Rs.75 lakhs. The irregular grant of exemption resulted in short levy of duty amounting to Rs.3.91 lakhs in respect of clearances during the period 1991-92 and 1992-93.

On this being pointed out (July 1994), the department admitted the objection and stated (March 1995) that an amount of Rs. 1.02 lakhs had already been recovered and the balance amount was in the process of recovery.

The Ministry of Finance admitted (October 1995) the objection.

ii)     The Central Board of Excise and Customs in their circular No.28/90-CX.4 dated 20 July 1990 clarified that steel tubular transmission poles were classifiable under sub heading 7308.90. But the CEGAT (Special Bench) New Delhi in a case {1993 (65) ELT 513} decided that steel tubular poles would be classifiable under heading 73.06. It, therefore, follows that after the CEGAT judgement such goods are classifiable under 73.06 and not under 73.08 as clarified by the Board

The exemption benefit for small scale vide notification No.1/93-CE dated 28 February 1993 had not been extended to heading 73.06 upto 31 March 1994.

An assessee manufacturing steel tubular poles classified the product under sub heading 7308.90 instead of heading 73.06 and was allowed to clear the goods on payment of concessional rate of duty. The irregular grant of exemption on account of misclassification resulted in short levy of duty of Rs.6.25 lakhs on the clearances made 1993-94.

On this being pointed out (September 1994), the department contended (October 1994) that the classification was approved on the basis of the explanatory notes to HSN as well as the circular issued by the Board on 20 July 1990. The CEGAT judgement in a particular case was not binding on the department.

The department's contention is not acceptable in view of decision which took into consideration the explanatory notes to HSN and decided classification of the product to be under heading 73.06 and not under heading 73.08.

Reply of the Ministry of Finance has not been received (December 1995).

iii)     Notification No.l75/86-CE dated 1 March 1986 regarding exemption to small scale unit was amended by issue of a notification dated 1 September 1989 whereby a new provision was inserted extending the benefit of small scale exemption to those units registered with Directorate General of Technical Development (DGTD) also. This was however, withdrawn with effect from 1 April 1992.

An assessee engaged in the manufacture of cartons and boxes was registered with DGTD and availed small scale exemption from April 1992 in terms of amended notification dated 1 March 1986, though the exemption was withdrawn by virtue of notification issued on 31 March 1992. This resulted in non levy of duty of Rs. 8.58 lakhs during 1992-93.

On this being pointed out (June 1994), the department did not accept the objection and stated (August 1994) that the small scale exemption available to DGTD units in terms of notification issued on 1 September 1989 was also available under notifications issued on 31 March 1992 and May 1992.

The department's reply is not acceptable as the substitution by issue of notification on 31 March 1992 had not only disallowed small scale exemption to DGTD units but also to unregistered (other than DGTD) units. The said exemption was restored by notification issued in May 1992 in respect of unregistered units only and not to DGTD units.

In a similar objection which appeared at para 3.47(iv) of the Audit Report for 1993-94, the department/Ministry had admitted the objection.

Reply of the Ministry of Finance has not been received (December 1995).

  MODIFIED VALUE ADDED TAX (MODVAT) SCHEME

The provisions of the Modified Value Added Tax (MODVAT) Scheme are contained in rules 57A to 57J and 57Q to 57U of the Central Excise Rules, 1944. Application of the rules is guided by issue of notifications by the Government and instructions by the Central Board of Excise and Customs (CBEC).

The provision for levy of interest introduced with effect from 31 May 1995 by amending provisions of rules 571, 57P and 57U did not provide levy of interest for the period where the assessee has availed incorrect/fraudulent Modvat credit. The Public Accounts Committee in para 88 of its 104th report (Tenth Lok Sabha) have recommended that the Ministry of Finance should consider the desirability of incorporating suitable provision in the Central Excise Law for collection of interest on excess/fraudulent availment of Modvat credit.

3.56     Availment of credit without valid documents

As per rule 57G of the Central Excise Rules, 1944, credit of duty is admissible, only if the inputs are received under the cover of duty paying documents evidencing payment of duty. Such documents have to be submitted to the Superintendent of Central Excise every month for verification. The Central Board of Excise and Customs in their letter dated 25 December 1992 clarified that no Modvat credit would be allowed based on the 'certified copy' or 'authenticated copy' of the original Gate Pass I (GP.I).

With the introduction of invoice based assessment with effect from 1 April 1994, Modvat credit is available only on duplicate invoices. System of endorsement of duty paying documents has been discontinued. Registered dealers are also authorised to issue excise invoice on the basis of which buyers can take Modvat credit

During the course of audit in 16 Commissionerates, 26 cases of irregular availment of credits involving duty effect of Rs. 125.83 lakhs were noticed. The department/Ministry admitted the objections and reported recovery of duty of Rs.38.19 lakhs in 9 cases and issue of show cause cum-demand notices for Rs.35.69 lakhs in 11 cases.

The details are given below:-

Particulars

No. of cases

Duty

Recovery

SCN issued

Credit taken twice once on original copy and again on photocopy of gate pass/challan cum gate pass 

2

3.06

3.06

 

Opening balance struck in the RG23A II account without documents

2

23.15

23.15

 

Credit taken on zerox copy of gate pass/bills of entry

3

10.49

2.04

6.44

Credit taken of assessable value

3

2.47

2.47

 

Credit taken on the basis of stock yard challans after 1 April 1994

1

4.60

 

4.60

Credit taken on extra gate copy of delivery challans of stock yards

1

3.33

 

3.33

Credit taken on invoice issued in favour of someone else

1

2.26

 

2.26

Credit taken on endorsed gate passes even after 1 April 1994

2

12.49

 

6.60

Credit taken on gate passes endorsed more than twice

2

4.40

 

4.40

Credit taken on invalid endorsement on invoices

7

45.61

 

8.06

Credit taken on invalid endorsement on bill of entry

2

13.97

7.47

 

Total

26

125.83

38.19

35.69

3.57     Availment of credit on capital goods

i)     Credit availed before the capital goods were put to use

By a notification No.4/94-CE(NT) dated 1 March 1994, the benefit of Modvat scheme was extended in respect of the capital goods from 1 March 1994 by inserting rules 57Q to 57U in Central Excise Rules, 1944.

Rule 57Q of the Central Excise Rules, 1944, allows credit of specified duty paid on the capital goods used by the manufacturer in his factory for the production of excisable goods and for utilising the credit so allowed towards payment of duty of excise leviable on the final products.

(a)     An assessee manufacturing iron and steel products (chapter 72 and 73) availed credit of duty of Rs. 1.28 crores paid on capital goods received during the period from March 1994 to 7 July 1994. The total credit was utilised during the period from 29 August to 31 August 1994, towards payment of excise duty on clearance of goods from other plants of the same factory, though the new plant was installed/inaugurated on 18 October 1994, This resulted in an irregular credit of Rs.1.28 crores.

This was pointed out in audit by issue of preliminary objection memo (October 1994) and Inspection Audit Report (December 1994).

The Ministry of Finance stated (September 1995) that show cause cum-demand notice had been issued on 20 December 1994 for Rs.419.60 lakhs covering the period from March 1994 to August 1994.

(b)     Four assessees in two Commissionerates took credit of Rs.23.84 lakhs during August and September 1994 being duty paid on the capital goods namely "plastic injection mould" and other machineries. Though the capital goods were not actually used by the assessees, the credits were utilised incorrectly for payment of duty on final products during the period from August to September 1994.

On this being pointed out (October 1994), the department admitted the objection and intimated (December 1994) recovery of an amount of Rs.16.64 lakhs in two cases and issue of show cause cum-demand notice for Rs.5 lakhs in the remaining two cases.

The Ministry of Finance accepted the objection in all the cases (August and November 1995).

ii)     Availment of credit on capital goods not covered under the Modvat Scheme

As per notification No.11/95-CE(NT) dated 16 March 1995, credit of specified duty paid on capita! goods falling under chapter 69 shall not be allowed under the provision of rule 57Q of the Central Excise Rules, 1944, if such goods were received in the factory before 16 March 1995.

An assessee engaged in the manufacture of iron and steel products (chapter 72) irregularly availed credit of duty of Rs. 18.61 lakhs paid on capital goods (refractory bricks - chapter 69) towards duty on final products cleared during the period from March 1994 to November 1994.

The Ministry of Finance stated (October 1995) that the matter was under examination.

iii)    Credit availed on capita! goods used for testing purposes

(a)     An assessee engaged in the manufacture of paper and paper board (chapter 48) was allowed to take credit of Rs.8.49 lakhs on "flow meter" (sub heading 9026.00) and "ABB Master" (sub heading 9032.80) under rule 57Q of the Central Excise Rules, 1944, between the period August and October 1994. Since the flow meter was a measuring instrument for measuring the pressure, flow rate and discharge rate of paper pulp and ABB Master was a computerised multi-dimensional performance measuring electronic device used for measuring uniformity of thickness of paper, quantum of waste in the course of production etc., the same did not qualify for being covered under the definition of capital goods as per explanation to rule 57Q of the rules ibid. Hence the availment of credit of Rs 8.49 lakhs under rule 57Q on the above items was irregular.

On the irregularity being pointed out (March 1995), the Ministry of Finance admitted (December 1995) the objection.

(b)     Another assessee manufacturing plant and machinery irregularly availed Modvat credit (November 1994 and December 1994) of Rs.2.99 lakhs for spectrometer which is a testing equipment treating the same as capital goods.

On this being pointed out (March 1995), the Ministry of Finance stated (December 1995) that the amount had been recovered.

iv)     Avaiiment of credit on capital goods not covered under the definition of the term capital goods

Capital goods are defined in explanation below rule 57Q(1). The Modvat scheme which was extended to capital goods from 1 March 1994 does not allow credit of specified duty on capital goods, if such duty was paid before 1 March 1994.

Three assessees availed Modvat credit of Rs.10.25 lakhs during different periods between April and October 1994 for capital goods which were not covered in the explanation below rule 57Q.

On the irregularity being pointed out (October 1994 and January 1995), the department/Ministry reported (March and November 1995) recovery of Rs.3.82 lakhs and issue of a show cause-cum demand notices for Rs.6.43 lakhs.

v)     Availment of credit of customs duty on capital goods

As per rule 57Q(1) of the Central Excise Rules, 1944, the credit of specified duty in respect of any capital goods shall be restricted to the extent of duty which is equal to the additional duty leviable on like goods under Section 3 of the Customs Tariff Act, 1975 (51 of 1975) equivalent to the duty of excise paid on such goods.

Two assessees engaged in the manufacture of cement (chapter 25), availed credit of customs duty of Rs.9.22 lakhs, in addition to additional duty leviable under Section 3 of Customs Tariff Act, 1975. As customs duty was not covered as specified duty for availment of credit under rule 57Q(1) ibid, the credit of duty of Rs.9.22 lakhs, so availed by the manufacturers, was irregular.

On this being pointed out (December 1994), the department stated (March 1995/April 1995) that the credits wrongly taken had been recovered from the assessees.

Reply of the Ministry of Finance has not been received (December 1995).

3.58     Credit availed on goods other than inputs

i)     Graphite electrodes

As per the explanation to rule 57A and CEGAT's decision dated 29 August 1985 in the case of Collector of Central Excise, Madras V/s. Muthu Chemical Industries {1986 (26) ELT 581(T)} "electrode" is merely a device to pass on current into the material for reaction and it is not a raw material for availing of Modvat credit.

Fifteen assessees in six Commissionerates , manufacturing iron and steel castings falling under chapters 72 and 73 brought into their factories duty paid 'graphite electrodes' for use in running electric "arc furnace" and took credit of duty paid thereon to the extent of Rs. 214.61 lakhs for the periods between April 1990 and February 1994.

On the irregularities being pointed out (during 1992, 1993, 1994 and 1995), the department justified the availment of credits stating (August 1993 and November 1994) that graphite electrodes used in the electric arc furnace are consumables. A similar case was also reported at para 1.036(i)/l 993-94 and 3.41/1991-92. The Ministry of Finance had contended that Modvat credit of the duty paid on electrodes is available irrespective of whether such electrodes form part of the final product or not as electrode is consumed in the process of manufacture. The Ministry also stated that in view of extension of credit facility on capital goods, the audit objection has no relevance in future.

The Ministry's reply is not acceptable because the graphite electrodes were being used by the assessees in the electric arc furnace only to increase the current intensity and not for the manufacture of final product as required under rule 57A of Central Excise Rules, 1944. Therefore the availment of Modvat credit was not in order. The Ministry was requested (January 1991) to get a technical opinion on this issue from D.G.T.D. which has not been received (November 1995).

ii)     Packaging material

As per explanation below rule 57A of Central Excise Rules, 1944, input does not include packaging materials, the cost of which is not included or had not been included during the preceding financial year in the assessable value of the final product under Section 4 of Central Excises and Salt Act, 1944.

Three assessees manufacturing aerated water chargeable to duty under headings 22.01 and 22.02 availed Modvat credit of duty paid on glass bottles used as packing materials. This was irregular since the value of glass bottles was not included in the value of aerated water because the glass bottles were durable and returnable as shown in the register of empty bottles and resulted in incorrect availment of Modvat credit of Rs.45.81 lakhs during the periods between November 1991 and July 1994.

On this being pointed out (April 1993, May and August 1994) the department/Ministry of Finance did not admit the objection and stated (May, August 1994, January and April, November and December 1995) that the explanation (iii) to rule 57A is applicable to those final products which are chargeable to ad valorem rates of duty and this bears no relevance to the final products the duty on which is assessed on specific rate.

The above contention is not acceptable since the cost of glass bottles used as packaging material was not included in the value of aerated water in the preceding financial year and the bottles were durable in nature, and put to repeated use by the assessee for packing the final product. As such, the bottles do not fall within the ambit of "inputs" under rule 57A of Central Excise Rules, 1944.

However, the credit of duty paid on glass bottles has since been denied vide issue of notification No.36/95-CE (NT) dated 17 November 1995.

iii)    Tamping mix

An assessee engaged in the manufacture of aluminium (Chapter 76) by electrolysis reduction method, brought into the factory duty paid tamping mix and aluminium casing sheets for joining the carbon cathode blocks and for use as containers respectively and took credit of duty. Tamping mix and aluminium casing sheets being in the nature of appliances/equipments/apparatus used by the assessee in the electrolysis reduction process are not eligible for Modvat credit under rule 57A of the rules, ibid. This resulted in irregular availment of Modvat credit amounting to Rs.8.89 lakhs during the period from July 1991 to October 1993.

On this being pointed out (September 1992 and February 1994), the department stated (February 1995) that a show cause cum-demand notice covering period from April 1991 to June 1992 had been issued. Demand for the subsequent period is yet to be issued.

Reply of the Ministry of Finance has not been received (December 1995).

iv)     Bags

As per explanation (vi) below rule 57-A inputs do not include bags or sacks made out of fabric (whether or not coated, covered or laminated with any other material) woven strips or tapes of plastics.

A manufacturer of ABC polymers falling under sub heading 3903.30 was allowed to take Modvat credit of duty paid on reinforced paper bags (sub heading 3923.90) used as packing material for their final products. As these bags were made out of fabrics woven from strips/tapes of plastics covered with a layer of paper, Modvat credit was not admissible. This resulted in irregular availment of Modvat credit amounting to Rs.8.85 lakhs between June 1992 and March 1993.

The Ministry of Finance admitted the objection and stated (September 1995) that show cause cum-demand notices for Rs.12.44 lakhs for the period from May 1990 to January 1993 and for Rs.1.88 lakhs covering further period had been issued.

v)     Spin finish oil

An assessee engaged in the manufacture of polypropylene filament yarn (heading 54.03 and 54.02) and polypropylene fibre (heading 55.01) availed credit for the inputs "spin finish oil - cinapurol" (heading 38.09). The said input was used as cleaning and lubricating agent which improves the mobility of PP filament yarn to avoid static generation during further down stream activities and also improved the flow characteristics of final product. Since the input did not go into the final products, it can not be treated as input and as such did not qualify for availment of Modvat credit. This resulted in irregular availment of Modvat credit of Rs.5.46 lakhs for the period from June 1992 to February 1993.

On this being pointed out (May 1994), the department stated (May 1995) that the input spin finish oil was essential and inevitable for the manufacture of PPF yarn but simultaneously issued a show cause notice for Rs.0.81 lakh for the period November 1993 to February 1994 and another show cause notice for Rs.4.65 lakhs for the period from May 1992 to February 1993 was under issue. In a similar case (para 3.41 (iv) of Audit Report No.4 of 1993), the Ministry of Finance had admitted the objection.

Reply of the Ministry of Finance has not been received (December 1995).

3.59     Availment of credit on inputs used in exempted output goods

As per rule 57-C of the Central Excise Rules, 1944, no credit of duty paid on the inputs used in the manufacture of final products shall be allowed if the final product is exempt from whole of the duty of excise leviable thereon or chargeable to nil rate of duty. Where it is not possible to segregate the inputs used in the manufacture of duty free and dutiable goods, the manufacturer is allowed to take credit of duty paid on all inputs initially and as and when duty free goods are cleared, the credit relating to the inputs used in duty free products is recovered/ reversed.

i)     Ten assessees in nine Commissionerates engaged in the manufacture of different excisable goods viz., stationary batteries, agricultural tractors and other electronic goods cleared the products without payment of duty in terms of exemption notifications. However, the Modvat credit availed on the inputs used in the manufacture of the exempted final products were not reversed by the assessees. This resulted in irregular availment of credit of Rs.99.79 lakhs during the periods between December 1993 and October 1994.

On the irregularities being pointed out (between November 1993 and March 1995) the department accepted the objections in seven cases and reported recovery of Rs 60.28 lakhs and issue of show cause cum-demand notices for Rs.32.93 lakhs in two other cases. Reply in one case has not been received (October 1995).

The Ministry of Finance admitted (July, August, September and December 1995) the objections in seven cases; reply in the remaining three cases has not been received (November 1995).

ii)     "Tea" falling under chapter 9 of the schedule to the Central Excise Tariff Act, 1985, is exempt from the whole of the duty of excise leviable thereon as per notification No.2/93-CE issued on 28 February 1993. Therefore, the credit already taken on inputs prior to issue of the exemption notification on the inputs lying in stock, contained in the semi finished products and in the final products was subsequently to be expunged.

Two leading "package tea" manufacturers availed of the Modvat credit on inputs used in the manufacture of such package tea but did not expunge the proportionate Modvat credit on the inputs contained in the in process products, those in finished product and on stock of inputs as such even though the final products were exempt from payment of duty. It was noticed in audit that the assessee had already utilised credit which was in excess of the prorata credit of goods in the form of inputs lying in stock, inputs contained in processing stage and finished stock. This resulted in excess utilisation of Modvat credit of Rs. 12.41 lakhs as on 28 February 1993.

On the irregularity being pointed out (May 1993) the Ministry of Finance admitted the objection (October 1995).

3.60     Modvat goods sent to job workers

i)     Irregular permission for removal of waste to job workers

As per rule 57F(4) (renumbered 57F(5) from 2 November 1993) of the Central Excise Rules, 1944, any waste arising from the processing of inputs in respect of which credit had been taken may be removed on payment of duty as if such waste is manufactured in the factory.

The Central Board of Excise and Customs by issue of a circular dated 12 January 1993 clarified that removal of waste and scrap outside the factory arising during the processing of inputs, would be governed by the provisions of rule 57F (4) and such removal should be made on payment of appropriate duty thereon.

(a)     An assessee manufacturing storage batteries (heading 85.06) availed credit of duty paid on lead (chapter 78) and utilised the same towards payment of duty on final product. The lead waste and scraps arising during the manufacture of finished goods were cleared without payment of duty m terms of rule 57F(2) {now rule 57F(3)} of the Central Excise rules, 1944, to a job worker for recovery of the metal. This resulted in non levy of duty of Rs. 17.74 lakhs on the clearances of waste and scraps of lead during the period from 15 April 1993 to 31 March 1994.

On this being pointed out (June 1994), the department stated (July 1994) that a show cause-cum demand notice for Rs.40.92 lakhs covering the period from 12 January 1993 to 31 March 1994 was forwarded to the Commissioner for orders for issue.

The Minstry of Finance confirmed the facts (July 1995).

(b)     Four assessees manufacturing aluminium conductors, insulated aluminium wires, L.P.G cylinder valves and copper goods etc., cleared metal scraps and alloy scraps arising out of inputs on which Modvat credit had been taken without payment of duty. Two assessees continued the clearance even after the issuance of Board's instructions dated 12 January 1993. The duty on scrap and alloy scrap cleared during January 1990 to March 1994 worked out to Rs.37.72 lakhs.

On this being pointed out (March, December 1993 and August 1994), the department stated (June 1994, March 1995) that permission was granted by department to the assessees to remove waste and scrap for conversion into rods on job work basis under rule 57F(2). Even otherwise, if duty had to be paid on waste and scrap under rule 57F(4) removed for conversion into rods, the assessee could take Modvat credit on rods.

The department's reply is not acceptable in view of provisions of 57F(4) and Board's instructions dated 12 January 1993 according to which such a scrap can only be cleared on payment of duty.

Further, permission under rule 57F(2) was not given correctly as the goods returned by the job workers were new final products {ingot) and not intermediary goods.

Reply of the Ministry of Finance has not been received (December 1995).

ii)     Credit taken on inputs sent for job work not received back

As per rule 57F(2) (now rule 57F(3)) a manufacturer may remove the inputs obtained by him and on which Modvat credit was availed as such to a place outside his factory for further manufacture of final product. If the intermediate products are not received back within the stipulated period, credit of duty availed thereon has to be reversed.

An assessee manufacturing motor cycles and mopeds (heading 87.11) removed some components, raw materials, etc. to various job workers for further processing and return. It was pointed out in audit (December 1992) that in respect of 979 illustrative cases (March 1991 to August 1992) the inputs removed to various job workers were not received back after processing.

The Ministry of Finance accepted the facts and stated (September 1995) that the demand of Rs.43.95 lakhs had been confirmed and recovered besides levy of a penalty of Rs.5 lakhs.

3.61     Credit taken not expunged

Rule 57 I of the Central Excise Rules, 1944, provides that if inputs on which credit has been taken are not fully accounted for as having not been disposed of in the manner specified, the manufacturer is liable to pay duty leviable on such inputs.

i)     An assessee engaged in the manufacture of electronic automatic exchanges and parts thereof (chapter 85) was availing Modvat credit of duty paid on inputs used in the manufacture of telecommunication equipments. In the balance sheet of the company for the year ending 31 March 1994, the assessee had written off Rs.268.90 lakhs being the value of obsolete raw materials and production stores. The assessee utilised the credit of duty without expunging the prorata amount of credit amounting to Rs.55.21 lakhs on the written off value of material.

On this being pointed out (August 1994), the department issued show cause notice (January 1995) demanding duty amounting to Rs. 55.21 lakhs; further developments are awaited.

Reply of the Ministry of Finance has not been received (December 1995).

ii)     An assessee engaged in the manufacture of steel tubes, pipes (sub heading 7306.90) during February and March 1992 debited 801 tonnes of C.R. sheets in RG-23A Part-1 on account of weight difference between invoice weight and actual weight and invisible loss. But the proportionate credit for the shortage for Rs.8.81 lakhs was not reversed in RG-23A Part-11.

On this being pointed out (June 1994), the department accepted the objection and stated (April 1995) that the demand notice for Rs.8.81 lakhs was issued in August 1994 which was however dropped by the Assistant Collector of Central Excise in February 1995 on the ground of time bar under Section 11 A of the Central Excises and Salt Act, 1944. Thus delay in taking timely action resulted in loss of revenue of Rs.8.81 lakhs.

Reply of the Ministry of Finance has not been received (December 1995).

iii)     An assessee manufacturing polyester staple fibre and tow (sub heading 5501.20) was availing Modvat credit on "pure terephthalic acid" (PTA) falling under sub heading 2917.20. During 1992-93 PTA weighing 132.681 tonne was returned by the processing department of the unit to its store department as it was damaged and not usable for manufacture of final product. Therefore, the credit of duty amounting to Rs.8.51 lakhs taken on the damaged input was to be reversed.

On this being pointed out (June 1993), the Ministry of Finance admitted the objection (November 1995).

It is recommended that a suitable provision may be inserted in the rules regarding time limit for use of inputs in the final product so as to check unintended benefit to the assessee.

3.62     Availment of credit for undeclared goods

i)     Credit taken on inputs not used in declared output

In accordance with rule 57F(4), as amended, of the Central Excise Rules, 1944, credit of specified duty allowed in respect of any inputs may be utilised towards payment of duty of excise on any of the final product in or in relation to the manufacture of which such inputs are intended to be used in accordance with the declaration filed under rule 57G.

Four assessees engaged in the manufacture of various excisable goods availed Modvat credit of duty paid on inputs under rule 57A. The assessees utilised the credits of Rs.58.48 lakhs during the periods between January 1988 and November 1994 for payment of duty on final products in the manufacture of which the declared inputs had not actually been used.

The irregularities were pointed out to the department during the periods between January 1991 and February 1995.

The Ministry of Finance admitted the objections in three cases and stated that the fourth case was under examination (September 1995).

ii)     Availment of Modvat credit taken on undeclared inputs

As per rule 57G of Central Excise Rules, 1944, every manufacturer intending to avail credit of duty paid on inputs under rule 57A, shall file a declaration with the proper officer of central excise, indicating the description of the final products and the inputs intended to be used in the manufacture of the said products.

Two assessees in two Commissionerates manufacturing electronic teleprinters (heading 85.17), availed credit of Rs.9.94 lakhs without filing the prescribed declaration.

On this being pointed out (July and August 1994), the department admitted the objections (August 1994 and September 1995) and reported recovery of Rs.4.61 lakhs in one case.

The Minsitry of Finance admitted (August 1995) the objections.

3.63     Availment of credit not restricted

i)     Availment in excess of the restricted limits

As per notification No.177/86-CE, dated 1 March 1986 issued under rule 57A of the Central Excise Rules, 1944, as amended, the grant of credit of duty paid on paper and paper board falling under chapter 48 (other than headings 48.03, 48.06, 48,09, 48.10 and sub headings 4802.91 or 4811.40) has been restricted to Rs.800 per tonne or the actual amount of duty paid which ever is less. The monetary restriction has been removed with effect from 1 March 1994.

Five assessees manufacturing different excisable goods used printed cartons (sub heading 4819.12) for packing purposes. The asseessees were allowed to avail credit of duty paid thereon in excess of the prescribed limit of Rs.800 per tonne, under the aforesaid notification resulting in excess availmnent of credit of Rs.42.51 lakhs during different periods between April 1992 and February 1994.

On this being pointed out (between September 1993 and May 1994), the Ministry of Finance stated (July and September 1995) that the matter had been referred to Law Ministry.

ii)     Availment of credit in excess of duty actually paid

As per rule 57A. of the Central Excise Rules, 1944, read with notification dated 1 March 1986 (now dated 1 March 1994) credit of duty paid on the inputs used in or in relation to the manufacture of specified final product is admissible. The credit is eventually restricted to the duty actually paid on inputs (other than on input received from small unit on payment of duty at concessional rate viz., higher notional credit).

An assessee engaged in the manufacture of electronic goods (chapter 85) availed of Modvat credit of Rs. 11.15 lakhs during the period from February to April 1993 as against admissible credit of Rs.0.05 lakh only. This resulted in excess availment of credit of Rs. 11.10 lakhs.

On this being pointed out (Januray/May 1995), the department recovered the amount of Rs.11.10 lakhs in January 1995.

The Ministry of Finance confirmed the facts (September 1995).

3.64     Clearance of Modvat inputs as such

As per rule 57F(l)(ii) of the Central Excise Rules, 1944, the inputs in respect of which a credit of duty has been allowed under rule 57A, may be removed subject to prior permission of the Collector for home consumption on payment of appropriate duty of excise, as if such inputs have been manufactured in the said factory and at the rates prevalent on the date of clearance.

i)     An assessee manufacturing "boilers and components" (heading 84.02) availed Modvat credit of the duty paid on the inputs viz., certain electronic items like modules, scanner etc. (heading 85.38) and other items such as flowgrills (headings 73.14 and 7326.90). These goods were removed to the site on classification as boiler components under heading 84.02 and duty at 5 per cent ad valorem was paid. The incorrect classification of the Modvat inputs under the above head as boiler components which were removed as such resulted in short payment of duty of Rs.23.15 lakhs during the period from January 1993 to June 1993.

On this being pointed out (February 1994), the Ministry of Finance stated (November 1995) that the matter was under examination.

ii)     Five assessees availing Modvat facility had cleared the inputs as such under rule 57F(l)(ii) on payment of duty equivalent to the rate at which credit was availed under rule 57A instead of payment of duty at the rates prevalent on the date of clearance. This resulted in short levy of duty of Rs.9.24 lakhs, during the periods between December 1992 and December 1994.

The Ministry of Finance have admitted the objections and reported (August and October 1995) recovery of duty of Rs.7.10 lakhs in four cases so far.

3.65    Use of Modvat credit balance towards payment of differential duty

As per rule 57F (4) of the Central Excise Rules, 1944, credit of specified duty allowed in respect of any inputs may be utilised towards payment of duty of excise, on any of the final products in or in relation to the manufacture of which such inputs are intended to be used in accordance with the declaration filed under sub rule (1) of rule 57-G.

An assessee engaged in the manufacture of goods (chapter 55) had paid duty on yam used for captive consumption. The rate of duty on yarn was changed from specific rate to ad valorem basis with effect from 1 March 1994. Since the assessee had paid duty at old rates upto 20 March 1994, the assessee was liable to pay differential duty of Rs.31.63 lakhs for the period from 1 March 1994 to 20 March 1994.

Meanwhile the assessee had started availing Modvat facility on 18 March 1994. It was seen in audit that out of total differential duty of Rs.31.63 lakhs, the assessee paid Rs.12 lakhs on 30 March 1994 through RG 23A part II Account. Utilisation of Modvat balance of Rs.12 lakhs for the payment of differential duty on the goods manufactured and cleared prior to availment of Modvat facility was not in order and contrary to the provisions of the rules.

On this being pointed out (July 1994), the Ministry of Finance have admitted the objection and reported recovery of duty through PLA on 2 August 1994.

3.66     Unintended financial accomodation to the assessee

As per the provisions of rule 57F(3) of the Central Excise Rules, 1944, credit of specified duty allowed in respect of any inputs may be utilised towards payment of duty of excise on any of the final products in or in relation to the manufacture of which such inputs are intended to be used in accordance with the declaration filed under sub rule (1) of the rule 57G. Under rule 57A(1) credit is allowed on the goods used in or in relation to the manufacture of finished goods and such credit is allowed to be utilised towards payment of duty on the final product. Utilisation of credit under rule 57A is thus permissible to the extent of duty on inputs used in manufacture and not to the extent of inputs intended to be used and not actually used. Though conflicting judgements exist by Calcutta and other Tribunals regarding one to one co-relation between the inputs and the finished goods under the provisions of sub rule (3) of rule 57F, ibid, the Calcutta judgement being a later one {1989(40) ELT 126(T)} and {1991 (54) ELT 355 (CL)} advocate a one to one co-relation.

An assessee engaged in the manufacture of bar and billets of iron and steel out of iron and steel scrap both falling under chapter 72 took Modvat credit on the input (scrap) at a specific rate of duty of Rs. 1000 per tonne. A scrutiny of RT5 returns for the year 1993-94 revealed that the yield of final product was roughly 82 percent. The utilisation of credit was thus to the extent of Rs.820 per tonne of the final product. Balance credit of Rs.180 per tonne which got accumulated over the years stood at Rs.244.31 lakhs as on 1 March 1994. Tariff rate applicable for chapter 72 was changed from specific to ad valorem with effect from 1 March 1994.

Audit scrutiny revealed that during March 1994, the assessee cleared 8732 tonnes of final products on payment of duty of Rs.253.19 lakhs by debiting RG-23A part II. For production of 8732 tonnes the assessee would have used 10648 tonnes of input which would have enabled him to utilise the credit of Rs. 106.48 lakhs (at Rs.1000 per tonne) only. Thus the assessee paid Rs 146.71 lakhs out of the balance credit as on 1 March 1994 representing the unutilised credit which could not be related to subsequent production and clearance. This resulted in unintended availment of Modvat credit of Rs. 146.71 lakhs.

This was pointed out in May 1994. The Ministry of Finance contended (October 1995) that though prior to 16 March 1995 there was correlation of inputs and the final product in accordance with the declaration filed by the assessee under rule 57G, there was no batch wise correlation of inputs and the final products. The Ministry added that the final product was cleared on payment of duty and the only change that took place was the change in duty structure from specific to ad valorem rate on the final product which had no bearing on the assessee's right of availment of credit accumulated in his account.

Reply of the Ministry is not acceptable. The Tribunal in the case of M/s. East India Pharmaceutical Works Limited Vs. Collector of Central Excise {1991 (54) ELT (T)} while amplifying the ambit of rule 57G in relation to rule 57F had made it clear that strict apportionment of credit in respect of duty on inputs for duty on the final products arising from them is inherent. The Tribunal had further viewed that the restriction imposed by rule 57C will become otiose if a liberal construction is given to rule 57F(3); the latter has got to read down to make the functioning of rule 57C meaningful. Thus the Ministry's contention that no correlation of input/output can be insisted is not correct.

Further, Central Board of Excise and Customs vide their instructions issued on 1 July 1986 had clarified that when duty on output is less than duty on input, the excess credit will have to lapse. Thus it clearly shows that intention of the Government had been not to allow utilisation of excess credit of duty.

3.67     Loss of revenue due to late issue of notification

The vegetable products (sub heading 1504.00) were chargeable to duty at Rs.1900 per tonne on which a money credit of Rs. 1000 per tonne was allowable for use of specific oils. Since intention of the government was to restrict the benefits availed under the money credit scheme and the Modvat scheme to the total of the amount of duty payable on the inputs (vegetable oil), the availment of Modvat credit under rule 57A was restricted to Rs.900 per tonne. From 28 February 1993, the duty rate on vegetable product was reduced to Rs.1500 per tonne from Rs.1900 per tonne, the availment of Modvat credit was accordingly required to be restricted to Rs.500 per tonne, so that the total of money credit (Rs.1000 per tonne) and Modvat credit (Rs.500 per tonne) could not exceed the duty payable (Rs.1500 per tonne) on vegetable products. This was, however, restricted with effect from 1 March 1994.

An assessee engaged in manufacture of biscuits, chocolates and confectionery (chapters 17, 18 and 19) was availing money credit and Modvat credit at the rate of Rs. 1900 per tonne.

The non issue of the notification restricting the Modvat credit to Rs.500 per tonne resulted in excess utilisation of Modvat credit and loss of revenue amounting to Rs.15.24 lakhs during the period 28 February 1993 to 28 February 1994.

The irregularity was pointed out in May 1994. The department and the Ministry of Finance while not accepting the objection stated (November 1994) that the assessee had taken Modvat credit as per notification issued on 1 March 1986 and it was nowhere mentioned that duty paid on the vegetable product through money credit account (RG23B part II) should not be allowed as credit under rule 57A of the Central Excise Rules, 1944).

The above reply is not tenable as the Government's intention was to restrict the benefit on account of money credit scheme (Rs.1000 per tonne) and Modvat credit (Rs.500 per tonne as against Rs.900 per tonne) to the duty rate of vanaspati (Rs.1500 per tonne) with effect from 28 February 1993. The intention is reflected in the late issue of notification dated 1 March 1994 restricting the availment of credit to Rs.500 per tonne.

3.68     Other cases

In seventeen other cases of incorrect availment of Modvat credit, the Ministry/department accepted the objections involving Rs.82.34 lakhs of which Rs.58.21 lakhs have been recovered. The details are as under:

(Amount in lakhs of rupees)

Sl.No.

 Particulars

Amount of duty accepted

Amount recovered

1.

Iron and steel (2)

14.37

11.08

2.

Electrical equipment (4)

14.93

7.71

3.

Articles of HDPE (4)

30.44

22.75

4.

Snuff

4.69

4.69

5.

Machinery and appliances

2.30

2.42

6.

Colour television

2.52

 

7.

Alkyl benzene

2.29

2.29

8.

Man made staple fibre

3.24

3.24

9.

Articles of shoe

4.03

4.03

10.

Computer parts

3.53

 

 

Total

82.34

58.21

IRREGULAR AVAILMENT OF MONETARY CREDIT

Where inputs on which excise duty has been paid are used for manufacture of specified finished goods, monetary (encashable) credit at specified rates is allowed under rule 57K of the Central Excise Rules 1944, subject to fulfilment of conditions laid down in the notifications issued under that rule.

3.69     Availment of money credit without production of requisite certificates

As per the notification issued on 11 October 1989 under rule 57K of the Central Excise Rules, 1944, credit may be allowed for payment of duty on vegetable products falling under sub heading 1504.00 at Rs.3250 per tonne of solvent extracted sunflower oil used in the manufacture of such vegetable product, subject to the specified conditions. According to condition (iv) of the aforesaid notification, where credit has been taken in respect of any solvent extracted variety of the oils specified in the table annexed to the notification, the manufacturer shall, within five months from the date of taking credit or such extended period as the Assistant Collector may allow, produce a certificate from an officer not below the rank of Deputy Director in the Directorate of Vanaspati, Vegetable Oils and Fats in the Ministry of Food and Civil Supplies to the effect that the said oil had been manufactured by the solvent extraction method.

Four manufacturers of vegetable products had availed credit of Rs.34.59 lakhs on use of 1061.044 tonne of solvent extracted sunflower oil, minor oils/ mustard oils used in the manufacture of vegetable products during July to December 1993. The requisite certificates were not produced within the prescribed time limit of five months nor was the period extended by the Assistant Collector. Consequently, the availment of the said credit was irregular.

On this being pointed out (July 1994), the department intimated (December 1994) that the amount of Rs.31.61 lakhs on account of 1002.834 tonne of oil had since been recovered by reversing the credits. For the remaining 58.210 tonnes of oil a show cause cum-demand notice for Rs.1.90 lakhs was issued. In the absence of provisions for levy of interest in such cases, there was financial accommodation and unintended benefit to the assessees.

The Ministry of Finance admitted the objections (August and September 1995).

3.70     Utilisation of money credit towards payment of arrears of duty

The money credit scheme under notification dated 1 March 1987 was rescinded on 25 August 1989 and reintroduced with effect from 11 October 1989. The benefits under these two notifications were subject to conditions that (i) the credit shall be taken only on the date on which the oil has been hydrogenated; (ii) the credit taken during any calendar month shall be utilised for payment of duty on the said final product only after the commencement of the succeeding month; and (iii) the amount of credit utilised for payment of duty shall not exceed Rs.1000 per tonne of vegetable products cleared and the excess credit if any available in the credit account shall not be refunded to the manufacturer or adjusted against or utilised for payment of duty on any excisable goods under any circumstances.

The Collector of Excise, Jaipur had confirmed (October 1992), a demand of Rs.2.07 crores against an assessee who had irregularly availed the money credit.

Application of assessee for stay against this demand was also rejected by CEGAT (April 1993). However the department allowed (May 1993) the assessee to utilise money credit amounting to Rs.77.75 lakhs out of the balance accumulated after 11 October 1989 towards payment of the aforesaid demand. This was irregular in view of the notifications dated 1 March 1987 and 11 October 1989. As such the entire demand should have been paid in cash. The assessee has yet to pay the balance of Rs. 129.27 lakhs (June 1995).

On this being pointed out (June 1994) the department contended (July and August 1994) that the debit was in accordance with notification dated 11 October 1989 and the telex message dated 10 December 1992 from the Central Board of Excise and Customs.

The reply of the department is not tenable in view of the specific conditions (ii) and (iii) of the notifications. The telex message cited by the department related to Modvat scheme and was not relevant to money credit scheme.

The Ministry of Finance stated (December 1995) that the assessee has gone in appeal against the orders of the adjudicating authorities as such, legal proceedings could take their own course.

3.71     Availment of money credit in excess of admissible limit

As per rule 57K of the Central Excise Rules, 1944, read with notification No.46/89-CE(NT) dated 11 October 1989, as amended, credit of duty at specified rates is admissible on use of certain minor oils in the manufacture of soap and the same could be utilised for payment of duty on the final product subject to the conditions laid down in the said notification.

An assessee engaged in the manufacture of soaps falling under sub heading 3401.10 availed money credit at the rate of Rs.640 per tonne on rice bran oil upto 24 July 1991 and at the rate of Rs. 1000 per tonne from 25 July 1991 under notification No.26/91-CE(NT) dated 25 July 1991. It was noticed in audit that the assessee also took the differential credit at the rate of Rs.360 per tonne on the closing stock of rice bran oil as on 24 July 1991 and utilised it for payment of duty on the final product in August 1991. As there is no provision in the notification to avail differential credit on the closing stock, the availment of credit of Rs. 12.19 lakhs in excess of the credit admissible as on the date of receipt of minor oil in the factory was not in order. This resulted in short levy of duty of Rs. 12.19 lakhs.

On this being pointed out (July 1992), the department contended (May 1993) that both under the notifications issued and the relevant rule the availability of credit was linked to the condition of use of input for the final product. Therefore, the rate of credit was the rate as per the relevant notification on the date of such use of the input for the manufacture of final products.

The reply of the department is not acceptable. The Tribunal had in the case of Collector of Central Excise, Chandigarh Vs. M/s. Hindustan Lever Limited {1994 (75) ELT 333 (T)} passed an order holding that rate at which credit to be allowed under rule 57K was the rate in force on the date of receipt of input oil in the factory, and that such credit could be utilised for payment of duty only after such inputs were actually utilised in the manufacture of final product. Further where the rate is increased the credit of duty lying in accounts cannot be inflated through addition of differential credit in respect of stock lying in the factory.

Reply of the Ministry has not been received (December 1995).

DEMANDS FOR DUTY

3.72     Delay in adjudication of demands

The Public Accounts Committee in its 84th report (1981-82) had adversely commented on the inordinate delays in finalisation of adjudication proceedings in demand cases. Accordingly the Central Board of Excise and Customs had issued instructions (January 1983) requiring that earnest efforts should be made by the adjudicating officers to adjudicate the demand cases expeditiously. It was also stressed that the demand cases should be adjudicated within a maximum period of six months from the dates of their issue.

Pune collectorate had issued show cause notices, from time to time during June 1988 to July 1993 objecting to the availment of Modvat credit by an assessee engaged in the manufacture of two wheelers in 'respect of grinding wheels and abrasive but the same were not adjudicated till July 1993. The non adjudication of demands over a period of five years resulted in unintended financial accommodation to the assessee company to the extent of Rs.71.70 lakhs (approx.) besides, the notional loss of interest to the Government.

On this being pointed out (October 1993), the department while admitting the delay in the adjudication stated (March 1994) that the assessee took considerable time to quantify the dates regarding actual availment of Modvat credit and thereafter verification and clarification continued under correspondence until the end of 1990. Since in a similar case in Aurangabad collectorate the department had filed an appeal with the Tribunal (January 1993) against the order of the Collector (Appeals) who had held that Modvat credit on abrasives cannot be denied, the demands in the instant case were kept pending awaiting the decision of the Tribunal.

It was however observed that in the case of the assessee under the jurisdiction of the same Commissionerate, the concerned Assistant Collector had confirmed (June 1994) the demands and Collector (Appeals) had upheld (February 1995) the views of Assistant Collector in favour of revenue. The department has failed to adjudicate the demand quickly even after the Collector (Appeals) had confirmed the demand in the similar case.

Reply of the Ministry has not been received (December 1995).

3.73     Demands not raised

An assessee engaged in packing (in gas cylinder) mixture of different gases obtained from outside, in different proportions paid duty on the clearances of such mixture upto 12 September 1990 under sub heading 2804.90 but discontinued paying duty thereafter on the ground that the process of mixture did not amount to manufacture. The department raised demand (December 1991) for the period covering clearances during June 1991 to August 1991 when the case was detected by the preventive wing but no demand was raised for the earlier period i.e., from 13 September 1990 to May 1991.

On this being pointed out (August 1993), the Ministry of Finance admitted the objection (October 1995) and stated that a show cause cum-demand notice for Rs.8.59 lakhs covering the period 13 June 1990 to 31 May 1991 had been issued and was pending adjudication.

3.74     Non recovery of Government revenue

As per Section 35F of the Central Excises and Salt Act, 1944, in the matter of appeal against any decision or order demanding duty or penalty levied under the Act, unless specifically dispensed with by the Collector (Appeals) or Appellate Tribunal, the duty or penalty involved in such cases should, pending the appeal, be deposited with the adjudicating authority.

An assessee manufacturing engineering goods also manufactured 'shaft' and cleared the same under sub heading 8419.99 of the schedule to the Central Excise Tariff Act, 1985, on payment of duty at 15 per cent ad valorem instead of at 20 per cent ad valorem under sub heading 8403.00 of the said schedule. The department issued two demand notices for short payment of duty covering the period from November 1987 to January 1988 and from February to July 1988. While both the demands were withdrawn, in an adjudication order passed by the Assistant Collector of Central Excise on 30 November 1988 and 18 December 1989, a separate demand covering the period from April 1987 to October 1987 was subsequently confirmed by the Additional Collector of Central Excise on 8 January 1990. After paying the duty demanded in this order, the assessee preferred an appeal to CEGAT (November 1990) and continued to pay duty at lower rate thereafter though no interim order for payment of duty at the lower rate was passed by CEGAT pending disposal of the appeal. Failure of the department to send the initial adjudication order of the Assistant Collector of Central Excise for review to the appropriate authority and to realise duty at higher rate in the absence of any stay order by CEGAT resulted in non recovery of Government revenue of Rs.39.73 lakhs during the period from November 1987 onwards.

On this being pointed out (November 1993), the department stated (September 1994) that show cause-cum demand notices covering the entire period upto October 1993 were being sent from time to time to the Collector of Central Excise but no show cause cum-demand notice has so far been issued (November 1995).

Reply of the Ministry has not been received (December 1995).

3.75     Non enforcement of demand leading to unintended financial accomodation to the assessee

According to the instructions issued by the Central Board of Excise and Customs on 22 April 1992, the assessees should pay up the dues within a period of one month from the date of communication of the order in respect of cases decided by the Collector (Appeals), Tribunals or the Government of India. Recovery proceedings should be initiated if the assessee does not pay the dues within the prescribed time limit.

i)     An assessee engaged in the manufacture of goods falling under chapter 85 of the schedule to the Central Excise Tariff Act, 1985, had not paid the dues arising out of cases decided by the Tribunal or the Collector (Appeals). The dues payable amounted to Rs.583.04 lakhs (Rs.165.81 lakhs based on Tribunals judgement of February 1994; Rs.417.23 lakhs based on decision of the Collector (Appeals) delivered in June 1994; and Rs.90.84 lakhs for the year 1992-93). No action was initiated to enforce the demand. Non enforcement of demand resulted in financial accommodation to the assessee and consequential loss of interest of Rs. 55.16 lakhs calculated at the rate of 17.5 per cent per annum.

The objection was raised in May 1995. The reply of the department and the Ministry of Finance has not been received (December 1995).

ii)     A jute mill was served with nineteen show-cause notices for payment of cess amounting to Rs.6.30 lakhs pertaining to the period from October 1981 to April 1984 and these demands were confirmed in June 1992 by the jurisdictional Assistant Collector office directing the assessee to pay the dues forthwith. Aggrieved with the order, the assessee went in appeal before the Appellate Collector who rejected (May 1993) the appeal as time barred. But the department did not take action to realise the dues.

On this being pointed out (June 1994), the department admitted the objection and stated (October 1994) that after several persuasive measures the assessee had paid a sum of Rs.0.40 lakh only.

Reply of the Ministry has not been received (December 1995).

3.76     Non payment of interest charges on excise duty paid in instalments

Delhi High Court in its decision in the case of M/s. Parekh Prints and others Vs. Union of India and others {CWP - 2422/90} held (9 July 1991) that the assessee who collected duty from the customers but did not credit it to Government account cannot be permitted to make profit at the cost of public revenue. They must restore the advantage they got to the detriment of revenue and hence interest at bank rate of 17.5 per cent should be paid to Government.

In compliance with the above order an assessee paid the full principal amount being arrears of central excise duty in July and August 1991. The total amount of interest payable on the principal amount of duty was worked out to Rs.6.60 lakhs. The assessee paid a total sum of Rs. 1.75 lakhs in seven instalments of Rs.0.25 lakh each eventhough it was neither represented to nor allowed by the Board to pay central excise dues in instalments. The balance amount of Rs.4.85 lakhs was not paid till the date of audit.

Non observance of the directions of High Court, instructions of the Board and non recovery of Government dues of Rs.4.85 lakhs for the last 3 years resulted in unintended benefit and financial accommodation to the assessee.

On this being pointed out (September 1994) the department stated (July 1995) that the assessee had paid Rs.2.99 lakhs in 12 instalments and efforts were being made to recover the balance amount of Rs.3.60 lakhs. The matter was under consideration to refer the case to the Law Ministry for further course of action and to file contempt of Court order against the assessee.

The Ministry of Finance admitted the objection and reported (December 1995) recovery of Rs.6.60 lakhs.

CESS COLLECTION AS EXCISE DUTY

Cesses are levied and collected in the same manner as excise duties by the department of Central Excise under the provisions of Acts administered by other Ministries and departments. The major cesses collected are detailed below:-

Name of cess

Levied and collected on behalf of Ministry or department

Amount collected in

Products on
which levied

1993-94

1994-95

(Rupees in crores)

Oil Industry (Development) Act, 1974

Ministry of Petroleum

2141.01

2638.46

Crude Oil

Produce Cess Act, 1966 (Sugar Cess Act, 1982)

Ministry of Agriculture

165.47

143.64

Sugar produced by any factory in India

Jute Manufactures Cess Act, 1983

Ministry of Textile

19.16

17.17

Jute manufactures

Beedies Workers Welfare Cess Act, 1976

Ministry of Labour

14.07

14.72

Manufactured biris

Tea Act, 1953

Ministry of Commerce

11.24

11.63

Tea

Industries (Development and Regulation) Act, 1951

Ministry of Industry

12.88

17.19

Automobiles (Motor cars, buses, trucks Jeep type vehicles, vans, scooters, motor cycles, mopeds and the like)

Industries (Development and Regulation) Act, 1951

Ministry of Industry

8.24

11.40

Paper and paper board all sorts produced in big units

Textile Committee Act, 1963

Ministry of Textile

N.A.

N.A.

Textiles and textile tile machinery (other than textile manufactured from out of handloom or power loom)

Produce Cess Act, 1966

Ministry of Agriculture

0.15

0.10

Oil extracted from oil seeds crushed in any mill in India

Produce Cess Act, 1966

Ministry of Agriculture

0.06

0.05

Cotton

Produce Cess Act, 1966

Ministry of Agriculture

0.44

0.24

Vegetable oil

Some of the cases in which cess was short levied/collected/or incorrectly refunded are given below:-

3.77     Short levy of cess on jute products

As per Section 3(1) of the Jute Manufactures Cess Act, 1983, on every article of jute manufacture specified in the schedule to the Act, cess is leviable at the rates prescribed from time to time.

Three jute mills in Calcutta II Commissionerate cleared 'sack and bags of jute' (heading 63.01) on payment of cess at lower rate of Rs.105.30 per tonne as applicable to 'sacking' instead of at the correct rate of Rs.122.70 per tonne as applicable to 'any other articles of jute manufacture'. This resulted in cess being levied short by Rs.8.98 lakhs during the period from April 1991 to February 1995.

On this being pointed out (January, February and March 1995), the Ministry of Finance stated (December 1995) that the matter had been referred to the administrative Ministry and their reply was awaited.

3.78     Non levy of cess on automobile parts

The Ministry of Industry, Department of Industrial Development, issued notification No.S.0247(E) dated 22 March 1990 prescribing levy of cess at the rate of 1/8 per cent ad valorem on motor cars, buses, trucks, jeep type vehicles, vans etc., and all other automobiles.

Automobiles (motor cars, buses, trucks etc.) have been listed at serial 5 of heading No. 7 of the first schedule to the Industries (Development and Regulation) Act, 1951. As per Explanation 1 of the first schedule, the articles specified under heading 7 shall include their component parts and accessories. It, therefore, follows that parts of automobile are also liable to levy of cess at the rate of 1/8 per cent ad valorem. Such parts, however, are exempted fully from payment of cess under notification No.S.0.852(E) dated 26 May 1994.

An assessee engaged in the manufacture of motor vehicles and parts thereof cleared motor vehicle parts without payment of cess upto 25 May 1994 though there was no exemption notification of cess on such parts. This resulted in non levy of cess of Rs.2.20 lakhs on the clearances made during the period from 1 April 1993 to 25 May 1994.

On this being pointed out (December 1994), the department/Ministry of Finance while not admitting the objection contended (February and December 1995) that notification dated 22 March 1990 did not stipulate any condition for levy of cess on automobile parts. Otherwise the Central Government would have to issue notification.

The contention of the department/Ministry of Finance is not acceptable since the notification dated 22 March 1990 specified that cess was leviable on motor cars, buses, trucks etc., all of which were automobiles as per the list of articles of industrial production given in the First schedule to the Industries (Development and Regulation) Act, 1951 and that the term automobiles included their component parts and accessories as per the Explanation 1 below the said schedule. The amending notification No.S.0.852(E) dated 26 May 1994 specified that cess leviable at 1/8 per cent ad valorem on automobiles (motor cars, buses, trucks etc.) and at nil rate on component parts and accessories of automobiles. It is, therefore, clear that prior to the date of issue of notification dated 26 May 1994 automobile parts which stood included in the term automobiles as per the explanation 1 of the First Schedule to the Act, were chargeable to cess at the rate of 1/8 per cent ad valorem.

PROCEDURAL IRREGULARITIES WITH REVENUE IMPLICATIONS

3.79     Clearance of goods without sufficient credit balance in the personal ledger account (PLA)

As per rules 9 and 49 read with rule 173-F of the Central Excise Rules, 1944, excisable goods shall not be removed from the factory of manufacture until excise duty leviable thereon has been paid. Rule 173G(1) requires that in cases where maintenance of account current has been permitted, sufficient amount shall be credited therein periodically so as to cover the duty due on the goods intended to be removed.

A public sector undertaking in Bolpur Commissionerate manufacturing iron and steel and articles thereof (chapters 72 and 73) cleared such goods against debit balance in their PLA during August 1992 to March 1993 and again from May to July 1993. The credit balance in the RG-23A part II (Modvat) account was also not sufficient to make good the insufficiency of balance in PLA during the material period. On the balance of credit lying in the Modvat account being set off against the balance in PLA during the corresponding two periods a net debit balance arose in the PLA which ranged between a maximum of Rs.8.27 crores and Rs.1.85 crores respectively during the aforesaid two spells. Thus, clearance of goods while the balance in the PLA was not sufficient contravened the provisions of rule 173-G and was in the nature of a deemed loan from the Government. This resulted in financial accommodation to the assessee and notional loss of revenue to the extent of Rs.64.05 lakhs in the shape of interest on the amount the assessee had utilised by way of debiting the PLA.

On the irregularity being pointed out (August 1993), the Ministry of Finance admitted (October 1995) the objection relating to clearance of goods without sufficient credit balance in PLA/Modvat account and stated that the assessee had since deposited Rs.10 crores in PLA to replenish the total debit balance for the earlier period and a penalty of Rs.66.88 lakhs had been levied. The Ministry did, not however, charge interest on the amount availed by the assessee in excess on the plea that no provision existed in the Central Excise Law for charging of interest in such cases.

Although the Central Board of Excise and Customs have issued instructions for charging interest on delayed payments under Section 11AA of the Central Excises and Salt Act, 1944, vide notification No.21/95-CE(NT), dated 29 May 1995, these instructions do not apply to the case of the type indicated above. It is recommended that Government may consider making necessary provision for levy of interest in such cases in addition to levy of penalty which is discretionary.

3.80     Non vacation of stay orders - blocking of revenue due to short payment of duty

As per notification No.l38/86-CE dated 1 March 1986 paper and paper boards (chapter 48) are exempt from so much of the duty of excise leviable thereon which is specified in the said schedule as is in excess of the amount calculated at the rate specified therein. As per proviso to the notification, the exemption is available to a factory which does not have a plant attached thereto for making bamboo pulp or wood pulp. The above notification was, however, superseded by notification No.23/94-CE dated 1 March 1994 but the proviso as prevailed in the earlier notification had been retained.

A paper mill engaged in the manufacture of paper and paper board was denied exemption under notification No.l38/86-CE dated 1 March 1986 and a show cause-cum demand notice for Rs.2.67 crores for the period from February 1990 to December 1991 was issued on the ground that the factory owned a plant attached thereto for making bamboo pulp or wood pulp. The assessee moved the Honourable High Court on the ground that the attached plant was not functioning. The Honourable High Court while granting stay order on 25 January 1993 ordered that the parties would maintain status quo and the assessee would go on paying duty at the same rate (i.e. Rs.355 per tonne) and the department would not demand duty at the higher rate till the disposal of the application. The Court also ordered that the matter should be placed before the Court for further orders on 15 February 1993. However, the assessee paid duty at a lower rate upto 5 March 1994 and only with effect from 6 March 1994 started paying duty at the specific rate of Rs.355 per tonne as per the Court's order.

Meanwhile, ad valorem rates of duty were introduced in place of specific rate of duty with effect from 1 March 1994. The assessee also declared that the attached plant for making bamboo pulp started functioning from 22 January 1993. But, the department did not move the Court for further orders on 15 February 1993 in compliance with Court's order dated 25 January 1993.

The assessee continued to pay duty at specific rate resulting in short recovery of duty of Rs.2.03 crores on the clearances during the period from 1 March

1994 to 31 July 1994 when the ad valorem rate was applicable and the exemption notification No.24/94-CE dated 1 March 1994 was not applicable since the plant for making bamboo pulp attached to the factory had already started functioning.

On this being pointed out (September 1994), the department intimated (November 1994) that though the notification No.l38/86-CE dated 1 March 1986 was superseded no action could be taken unless the stay order was vacated.

The fact remains that the department did not move the Court to get the stay order vacated despite the direction of the Court that the matter should again be brought up before it on 15 February 1993 for orders.

Reply of the Ministry of Finance has not been received (December 1995).

OTHER IRREGULARITIES

3.81     Loss of revenue due to delay in implementation of ad valorem rates for tyres and tubes

In accordance with the provision of clause (b) of Section 62 of the Finance Act, 1994 read with Fourth schedule to the Act, the tariff description of heading 40.11 (pneumatic tyres, etc.) and 40.13 (inner tubes, etc., for tyres) was to be changed by restructuring the sub heading and duty rates from specific plus ad valorem rates to ad valorem rates. It was also provided in the Act that this amendment would come into force from a date to be notified by the Central Government. The Finance Act was enacted with effect from 13 May 1994. But no notification has been issued bringing into force the said amendment to the tariff. The delay has caused a loss of revenue of about Rs.3.70 crores on the clearances made by an assessee manufacturing tyres and tubes during the period from July 1994 to January 1995.

The Ministry of Finance stated (December 1995) that the matter was under consideration.

3.82     Duty collected but not remitted to Government Account

As per Section 11D (as amended on 20 September 1991) every person who has collected any amount from the buyers of any goods in any manner as representing duty of excise, shall forthwith pay the amount so collected to the credit of Central Government. The amount so paid shall be adjusted against the duty of excise payable by the person on finalisation of assessment and where any surplus is left after such adjustment, the amount of such surplus shall be credited to the consumer welfare fund or refunded to the person who has borne the incidence of such amount in accordance with the provisions of Section 11B.

i)     Footwear classifiable under sub heading 6401.11 was assessable to duty at 20 per cent ad valorem. As per a notification dated 10 February 1986, as amended, footwear of a value not exceeding Rs.75 per pair (Rs.125 from 28 February 1993) were exempt from payment of duty.

A leading manufacturer of footwear (sub heading 6401.11) transferred his entire production of shoes to his sales outlets, for subsequent sale in retail. The assessee cleared some of the varieties without payment of duty by availing exemption under the notification dated 10 February 1986 as the value of footwear was shown not exceeding Rs.75 or Rs.125 per pair and subsequently sold them at the declared retail price which included an element of duty which was abated while determining their assessable value. The duty so recovered from the buyers but not credited to the Government account was retained by the assessee. The duty so recovered and retained amounted to Rs.293.19 lakhs from October 1991 to December 1993.

On this being pointed out (February 1994) the Ministry of Finance admitted the objection and stated (July 1995) that show cause cum-demand notices had been issued for Rs.333.90 lakhs for the period from 20 September 1991 to 28 February 1994.

ii)     An assessee engaged in the manufacture of handsaws, blades of saws, hacksaw blades, special tools, tool bit blanks, etc., was aggrieved by the decision of the Appellate Collector that the item 'tool bit' was classifiable under chapter 82 of the schedule to the Central Excise Tariff Act, 1985, and obtained an interim order from the High Court on 21 July 1987. Though the High Court had permitted the assessee to clear the 'tool bit blanks' following the procedure under rule 9B of the Central Excise Rules, 1944, the assessee cleared the goods without payment of duty after classifying the product under heading 82.07 with the remarks "under protest".

It was noticed in audit that duty at appropriate rates was collected from the buyers of the goods, but was not credited to Government. During the two years 1993-94 and 1994-95 (upto January 1995) the assessee had collected excise duty amounting to Rs.153.91 lakhs and retained it in contravention of the provisions of Section 11D of the Central Excises and Salt Act, 1944.

On this being pointed out (February 1995), the department stated (March 1995) that the assessee's solicitors had pointed out in October 1993 that any action to assess/demand/levy and/or collect any duty pending the hearing and final disposal of the High Court writ petition, would amount to contempt of the High Court order. It was further stated that action was being initiated for taking up the matter with the legal section of the department.

The contention of the department is not correct as the audit point is not connected with the order of the High Court but with the irregular retention of the central excise duty by the assessee.

Reply of the Ministry of Finance has not been received (December 1995).

iii)     The assessable value of the goods cleared to duty paid godown of an assessee was arrived at based on the maximum retail price by deducting post manufacturing expenses, sales tax and the stockist/retailers discounts. Scrutiny of the depot invoices, price lists (filed under part-I) of RG 23 A returns and price circulars revealed that duty was collected from the customers over and above that paid at the time of clearance.

On this being pointed out (August 1993), the department reported (January 1995) the issue of a show cause notice demanding Rs. 10.86 lakhs, being the excess duty collected during the period from January 1992 to December 1993.

The Ministry of Finance accepted (July 1995) the objection and stated that the demand had been confirmed.

3.83     Irregular grant of reward to Government servants for routine work

In accordance with para 4 of the Ministry of Finance letter dated 30 March 1985, reward is only an ex gratia payment and cannot be claimed as a matter of right. While sanctioning the amount, the sanctioning authority should keep in mind, the special initiative, efforts/ingenuity displayed by the Government servant and the extent to which his vigilance led to the seizure. Hence, it follows that detection of cases of seizures which form part of the discharge of normal duties of the officers and staff do not qualify for grant of reward.

A test check of records in Aurangabad Commissionerate revealed that rewards in 8 cases amounting to Rs. 11.85 lakhs were paid to the officers and staff for performing normal duties as detailed below:-

i)     for exercising normal preliminary checks (3 cases);

ii)     for detecting the irregularity at a later stage which the officers had failed to notice at the time of initial verification (3 cases); and

iii)     for follow up action on the information furnished by informers (2 cases).

On the irregularity being pointed out (January, March and May 1995), the department stated (June 1995) that for grant of rewards to informers and Government servants, the reward committee examined the reward proposals in cases of detection of evasion of central excise duty, concealment or suppression of production, surreptitious removal of dutiable goods etc., and had considered each case on merits.

Reply of the department is not acceptable as the rewards were paid to officers for discharge of normal duties which were expected to be performed by them.

Reply of the Ministry of Finance has not been received (December 1995).