2025 (12) TMI 709 - AT - Central Excise

Penalty Set Aside; Duty Demand Remanded for Fresh Order on SION Consumption, Short Payment and Extended Limitation

The CESTAT allowed the appeal partly by setting aside the penalty and remanding the substantive demand to the adjudicating authority for de novo ... Recovery of short payment of duty - Appellant's consumption of inputs namely Master Batches, LDPE, and LLDPE is in compliance with the Standard Input Output Norms (SION) as prescribed in N/N. 52/2003-Cus dated 31.03.2003, No. 22/2003-CE dated 31.03.2003, and the relevant Foreign Trade Policy provisions or not - excess consumption as compared to SION can justify recovery of any alleged short payment of duty or not - applicability of time limitation - levy of penalty - HELD THAT:- The Revenue has relied upon the following decisions viz., Amardeep Exports Vs. C.C Jamnagar (Prev) [2024 (2) TMI 206 - CESTAT AHMEDABAD], M/s. Pelican Grani Marmo Pvt Ltd Vs. Additional Commissioner, Commissionerate, Jodhpur (Rajasthan) [2023 (2) TMI 740 - CESTAT NEW DELHI], GKB Ophthalmic Ltd. and GKB Vision Ltd. Vs. Commissioner of Customs [2017 (9) TMI 1662 - CESTAT MUMBAI], Ms. GKB Ophthalmics Ltd. & M/S. GKB Vision Limited Vs. Commissioner of Customs, Mormugao Harbor, Goa [2020 (2) TMI 1087 - BOMBAY HIGH COURT] and Commissioner of Customs (Import), Mumbai Vs. M/S. Dilip Kumar and Company & Ors. [2018 (7) TMI 1826 - SUPREME COURT (LB)] to support his contention that where SION norms are not followed, duty demands are sustained. However, as the issue is being remanded to the Original Adjudicating Authority, the relevancy and applicability of these decisions may be examined in detail. Further, it is found that the above judicial precedents and jurisprudence on this topic have evolved over period of time and the adjudicating authority did not have the benefit of these precedents at the time of concluding these proceedings. Hence, it would be just and appropriate to remand the matter to the adjudicating authority to consider the submissions of both Appellant and Department afresh and pass a well-reasoned speaking order. Needless to say, sufficient opportunity of being heard needs to be provided to the Appellant and the Appellant is further permitted to raise all the contentions before the Adjudicating Authority. Time limitation - HELD THAT:- The Hon'ble Allahabad High Court in the case of Commissioner of C. EX., Noida Versus Accurate Chemical Industries [2014 (2) TMI 770 - ALLAHABAD HIGH COURT] has held that extended period of limitation cannot be invoked in a case where short payment could have been detected by the jurisdictional officer - the issue as regards the invocation of extended period is required to be re-looked into afresh. Levy of penalty - HELD THAT:- It is legally settled principle in tax jurisprudence that penalty provisions are not attracted in cases where the issue involved is highly debatable or interpretative. When the assessee has taken a plausible view based on available legal interpretations or judicial precedents, and there is no element of deliberate concealment or misstatement, moreso when the said discrepancies were found during audit proceedings itself, the imposition of penalty is unwarranted - The Hon'ble Supreme Court and various High Courts have consistently held that penalty is not imposable where the Appellant have filed regular returns and audits have taken place. In such cases, the conduct of the Appellant herein cannot be termed as contumacious or mala fide. Following the ratio laid down by the Hon'ble Supreme Court in the of International Merchandising Company, LLC Vs. Commissioner Of Service Tax, New Delhi [2022 (12) TMI 556 - SUPREME COURT], and the Hon'ble Punjab Harayana High Court Commissioner Of Central Excise Vs. Jai Ganesh Processors [2011 (3) TMI 134 - PUNJAB AND HARYANA HIGH COURT] it is held that penalties are unsustainable in the facts of the present case. Taking note of the rival contentions, it is clear that various contentions raised by the Appellants have not been considered nor any findings rendered thereon in the impugned Order-in-Original - As such, the matter requires to be remanded for de novo proceedings. Appeal disposed off by way of remand. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether alleged excess consumption of Master Batches, LDPE and LLDPE, as compared to SION, can by itself justify denial of exemption under Notifications No. 52/2003-Cus and 22/2003-CE and consequential duty demand. 1.2 Whether the extended period of limitation was validly invoked for recovery of duty on inputs procured duty free under the said notifications. 1.3 Whether imposition of penalties under the Central Excise/Customs enactments was sustainable on the facts of the case. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Excess consumption vis-à-vis SION and sustainability of duty demand Legal framework (as discussed) 2.1 Notifications No. 52/2003-Cus and 22/2003-CE: The Tribunal noted that these notifications permit duty-free import/procurement of inputs by EOUs subject, inter alia, to the condition that the goods are used 'in accordance with SION' and contain provisos permitting use of additional inputs or higher waste/scrap on the basis of self-declared ad hoc norms, to be regularised by norms fixed by the jurisdictional Development Commissioner/Norms Committee. 2.2 SION for plastic products: The Commissioner (Appeals) order for a subsequent period (extracted in the judgment) showed that for certain plastic products, specific quantities of colour master batch are prescribed, while for Flexible Intermediate Bulk Containers (FIBC) (Sl. No. H97) the SION mentions UV master batch but not colour master batch. 2.3 Judicial precedents on SION-based demands: The Tribunal relied on decisions holding that SION represents average industry norms and cannot, by itself, justify a presumption of excess procurement/misutilisation or duty demand in the absence of evidence of diversion or non-use in export manufacture (including Agarwal Indotex Ltd., Goodluck Garments Pvt. Ltd., IOCEE Exports, Adsorbent Carbons and Oudh Sugar Mills). Interpretation and reasoning 2.4 The Tribunal recorded that the main allegation was excess use of Master Batches and other raw materials beyond SION, for which six show cause notices were issued covering 2008-2015. 2.5 It noted that for FIBC manufacture the actual input composition indicated by the appellant was: PP granules 89.5%, colour granules (master batches) 7%, LDPE/LLDPE granules 2%, UV master batch 1.5%. The adjudicating authority had not examined the appellant's specific contentions that: (a) UV stabiliser master batch and colour master batch are distinct; SION norms apply only to UV master batch for FIBC and not to colour master batch. (b) The 2% SION limit for UV master batch should be computed on polypropylene content, not on total finished product weight. (c) Department's computation wrongly included liner production and waste, instead of restricting comparison to LDPE/LLDPE content in the final product. (d) SION is framed on input quantity, not just finished goods weight, and the Department's calculations did not map actual input content (PP granules, LDPE/LLDPE, liners, filler cords) to the final FIBC bags. 2.6 Referring to the Commissioner (Appeals) order for a later period, the Tribunal highlighted that: (a) Colour master batch is an 'additional item' not expressly covered in SION for FIBC and is essential for coloured FIBC. (b) UV master batch and colour master batch are distinct and cannot be clubbed to compute excess consumption under SION. (c) Where additional inputs are required or waste exceeds 2%, the proper course, as per the provisos to the notifications, is for the unit to make a representation to the jurisdictional Development Commissioner for fixation of specific input-output norms, rather than for the Department to confirm demand on presumptive excess consumption. 2.7 The Tribunal accepted the appellant's reliance on precedents that SION is only an average benchmark and cannot alone support the inference that inputs were not used in manufacture or were diverted, particularly where: (a) Export of finished goods is not disputed. (b) There is no positive evidence of diversion or clandestine removal. (c) Waste levels and manufacturing practices had earlier been permitted (e.g. waste up to 12%) and audits had been conducted without adverse findings. 2.8 The Tribunal contrasted this approach with the Department's argument that any substantial deviation from SION by an EOU is per se a serious non-compliance, and that no rational manufacturer would consume inputs significantly beyond standard norms, which, according to the Department, implies clandestine removal. It held that the applicability and weight of the Department's cited case law (including Dilip Kumar & Co. and other SION-compliance decisions) would need detailed reconsideration by the adjudicating authority in light of the evolved jurisprudence. 2.9 Observing that many of the appellant's technical and legal submissions on separate treatment of UV and colour master batches, correct basis of 2% norms, inclusion of liners/waste, and the mandate to approach the Development Commissioner, had not been addressed in the impugned order, the Tribunal held that the demands, as presently confirmed, could not be sustained without a fresh, fact- and law-based examination. Conclusions 2.10 The Tribunal held that: (a) Deviation from SION, by itself and without corroborative evidence of diversion or misutilisation, cannot automatically justify denial of exemption and confirmation of duty demands under Notifications No. 52/2003-Cus and 22/2003-CE. (b) Colour master batch for FIBC, not specifically covered in SION, must be dealt with in accordance with the notifications' provisos by reference to the jurisdictional Development Commissioner for norm fixation. (c) Since the adjudicating authority had not examined the appellant's detailed contentions or the relevant jurisprudence, the entire issue of demand on merits requires de novo adjudication. (d) Accordingly, the matter on merits was remanded to the Original Adjudicating Authority to reconsider the demands afresh, after taking into account the appellant's submissions, the role of the Development Commissioner in norm fixation, and the cited precedents, and thereafter to pass a speaking order in conformity with principles of natural justice. Issue 2 - Validity of extended period of limitation Legal framework (as discussed) 2.11 The Tribunal applied the settled principles governing the extended period under the proviso to Section 11A of the Central Excise Act (and analogous provisions), as laid down in decisions such as Chemphar Drugs & Liniments, Pushpam Pharmaceuticals and Uniworth Textiles, requiring: (a) Positive evidence of fraud, collusion, wilful misstatement, suppression of facts, or contravention with intent to evade duty; and (b) Specific averments in the show cause notice to that effect, with the burden lying on the Department. 2.12 It also referred to the decision of the Allahabad High Court in Accurate Chemical Industries holding that where short payment could have been detected by the jurisdictional officer, the extended period cannot be invoked. Interpretation and reasoning 2.13 The Tribunal noted that the extended period in the show cause notices was invoked primarily on the grounds that: (a) Excess availment beyond SION was detected by the Internal Audit party. (b) The appellant had shown units of finished goods in numbers instead of kilograms and had clubbed various input figures, and liner production was not separately disclosed in ER-2 returns. 2.14 The Tribunal observed that the appellant's unit had been subjected to several departmental audits over the years, with records and consumption patterns examined, yet no earlier objection on the same ground was raised. This factor was considered relevant to assess whether there was any deliberate suppression or intent to evade. 2.15 Reiterating the ratio of the Supreme Court, the Tribunal emphasised that: (a) Mere inaction, omission, or an arguable interpretation of law does not constitute 'suppression of facts' or wilful misstatement. (b) When facts are within the Department's knowledge, failure to raise an objection earlier does not support invocation of the extended period. (c) The burden to prove mala fides or intent to evade lies squarely on the Revenue, and such allegations must be clearly articulated in the show cause notice. 2.16 It held that, in view of the conflicting claims on disclosure, the multiple audits, and the absence of clear findings on deliberate suppression in the impugned order, the question of limitation was intimately connected with the merits and required full re-examination by the adjudicating authority in light of the cited precedents. Conclusions 2.17 The Tribunal concluded that: (a) The justification for invoking the extended period, as recorded in the show cause notices and the impugned order, required reconsideration against the tests laid down in Chemphar Drugs, Pushpam Pharmaceuticals, Uniworth Textiles and Accurate Chemical Industries. (b) The matter of limitation, including the applicability of the extended period for each show cause notice, must be re-examined de novo by the adjudicating authority along with the merits, after fully considering the appellant's arguments and the audit history. (c) The issue of limitation was therefore also remanded to the Original Adjudicating Authority for fresh decision. Issue 3 - Sustainability of penalties Legal framework (as discussed) 2.18 The Tribunal relied on the principle, as recognised by the Supreme Court and various High Courts (including International Merchandising Company LLC, Jai Ganesh Processors and Beryl Drugs Ltd.), that: (a) Penalties are not to be imposed where the issue is debatable or interpretative and the assessee has taken a plausible view based on existing legal interpretations. (b) Penalty provisions are not intended to generate revenue and require evidence of contumacious conduct, deliberate concealment, or mala fide intent, which cannot be inferred merely from audit-detected discrepancies where regular returns are filed and records are maintained. Interpretation and reasoning 2.19 The Tribunal observed that: (a) The disputes turned predominantly on interpretation and application of SION, classification of UV versus colour master batches, computation methodology, and procedural requirements under the exemption notifications. (b) The appellant had maintained prescribed records, filed regular returns, and had repeatedly been audited by the Department; the alleged discrepancies emerged from such audits rather than from any detection of clandestine activity. (c) In such circumstances, and particularly in view of the remand on merits and limitation, the conduct of the appellant could not be characterised as contumacious or mala fide so as to justify penal consequences. Conclusions 2.20 The Tribunal held that the imposition of penalties was unwarranted in the facts of the case and: (a) Set aside all penalties imposed on the appellant. (b) Clarified that, notwithstanding the remand on duty and limitation issues, no penalty would survive.