2006 (11) TMI 486 - AT - Central Excise

Tribunal Overturns Penalties, Cites Lack of Proper Notice for Unsustainable Goods Classification.

The Tribunal set aside the impugned orders, allowing the appeals and vacating the penalties imposed on the appellants. It ruled that the Commissioner's ... Demand Duty - ‘backing cloth’ - Show cause notice - final product (Heading 68.01 of the CETA Schedule) - classified under Heading 52.06 of the Schedule to the Central Excise Tariff Act - HELD THAT:- Admittedly, no SCN had been issued for classifying the product under Heading 52.06/52.07 and demanding duty on that basis for any part of the period of dispute (15-12-95 to 28-2-2002). Ld. Commissioner’s order is a determination of duty under sub-section (2) of Section 11A of the Central Excise Act and the same is on a basis different from the one laid down by the department in the relevant SCNs. The order classified the product differently and demanded duty at higher rates. Such action is not permissible in law as held by the A.P. High Court in Raphael Pharmaceuticals case[1988 (6) TMI 51 - HIGH COURT OF JUDICATURE, ANDHRA PRADESH AT HYD.]. Hence, we hold that the demand of ADE (GSI) or that of BED on the subject goods under Heading 52.06/52.07 is not sustainable in law for want of show-cause notice for the purpose and consequently the penalties imposed on the appellants are also liable to be vacated. In the result, the impugned orders are set aside and these appeals are allowed. However, this order does not stand in the way of the department issuing proper show-cause notice to the party and proceeding further in accordance with law. Issues Involved:1. Classification of 'backing cloth' under the Central Excise Tariff Act.2. Demand of duty and penalties on the assessee.3. Applicability of exemption notifications.4. Legality of the adjudicating authority's classification and demand beyond the scope of the show-cause notices (SCNs).Detailed Analysis:1. Classification of 'Backing Cloth':The primary issue revolves around the classification of 'backing cloth,' an intermediate product in the manufacture of coated abrasives. Initially, the product was classified under Heading 52.06 for the period prior to March 1990, as upheld by the Supreme Court. For the period from 15-12-1995 to 31-3-2000, the department attempted to reclassify the product under Heading 59.01, but their appeals were dismissed by the Tribunal. Consequently, the classification under Heading 52.06/52.07 was settled for the period up to 31-3-2000.2. Demand of Duty and Penalties:The impugned order demanded duty of over Rs. 8.6 crores for the period from 15-12-1995 to 28-2-2002 and imposed penalties on the assessee. The Commissioner classified the goods under Heading 52.06/52.07, which carried a higher rate of duty than Heading 59.01 proposed in the SCNs. The Commissioner's findings included that the process of obtaining backing cloth amounted to manufacture, the goods were marketable and excisable, and the assessee was liable to pay both Basic Excise Duty (BED) and Additional Duty of Excise (ADE) (GSI).3. Applicability of Exemption Notifications:The Commissioner held that the assessee was not entitled to exemptions under Notification No. 8/96-C.E. and its successor notifications, as well as Notification No. 9/96-C.E. However, the assessee was eligible for exemption from payment of BED for captive consumption under Notification No. 67/95-C.E.4. Legality of the Adjudicating Authority's Actions:The adjudicating authority classified the goods under a different heading (52.06/52.07) than proposed in the SCNs (59.01). The Tribunal found this action impermissible, citing several judicial precedents:- Bright Brothers Ltd.: The Supreme Court upheld that no demand for basic excise duty under a different tariff item could be made without a proper SCN.- Nestle India Ltd.: The Tribunal held that classification under a different heading without a SCN was not sustainable.- Warner Hindustan Ltd.: The Supreme Court set aside the Tribunal's order for classifying goods under a heading not mentioned in the SCN.- Metal Forgings: The Supreme Court emphasized the necessity of a SCN for any demand of duty.- Raphael Pharmaceuticals: The A.P. High Court held that determination of duty on a different basis without a SCN was not permissible.The Tribunal concluded that the Commissioner's order demanding duty under Heading 52.06/52.07 was not sustainable due to the absence of a SCN for such classification. The Tribunal also noted that the case law cited by the SDR, including Madura Coats and Shree Ram Multi Tech Ltd., did not support the Commissioner's actions in the present case. The Tribunal distinguished the facts and legal principles involved in these cases from the current matter.Conclusion:The Tribunal set aside the impugned orders, allowing the appeals, and vacated the penalties imposed on the appellants. However, the Tribunal left open the possibility for the department to issue a proper SCN and proceed in accordance with the law.Operative part of the order was pronounced in open court on 28-11-2006.