Mere repacking from retail to bulk & labelling not amounts to manufacture

Global Adsorbents (P) Limited Vs Commissioner of Central Excise

It is undisputed that the appellant is selling activated carbon in bags with its own name pre-printed on them. Thus, if the appellant is selling the goods with its own name on the packets, it is labeling the product.

The next question is whether it is also packing from bulk to retail packs. From the data presented before us, which is also the basis of the SCN, it is evident that the appellant had in some cases packed 25 kg bags into 50 kg bags, i.e., from smaller bags to larger bags which cannot be called packing from bulk to retail. It is the other way round.

The next question is whether the appellant is also carrying out any other process so as to render the product marketable. The show cause notice alleges that the appellant was re-packing the product after sieving it to the required size because the purchase invoices of the appellant did not contain any grade of the product while the sale invoices had the grade indicated on them. In some cases, where the input invoices had the grade in them, it was found that the grade was inserted later which has been considered as manipulation of invoices by the Revenue. The appellant’s position has constantly been that it has not carried out sieving or any other process and hence the activity would not amount to manufacture and hence no duty is payable. Its purchase invoices did not indicate the grade of the activated carbon. On its request, in some of the invoices the suppliers had indicated the grade later. Hence, there was a difference in hand writing which is presumed by the Revenue to be manipulation of invoices. It produced

Apart from the fact that its purchase invoices / bill of entry do not indicate the grade of the material, while the sale invoices indicate the grade there is no other evidence brought on record by the Revenue that the Activated Carbon was sieved by the assessee. Since the assessee is registered with the Central Excise Department, officers could have gone and inspected and found out if the appellant had the equipment required for sieving the activated carbon to the required grades and was also carrying out this process. In the absence of such direct evidence, the Commissioner has drawn an indirect inference that material was received was sieved only on the ground that the purchase invoices did not have the grade of the material but the sale invoices. In our considered view, this discrepancy may be a cause for doubt but it required further investigation especially when the assessee had categorically denied having ever sieved the material before repacking. In the absence of any positive evidence, we are

Since we have found that the assessee has not packed from bulk to retail and there is no evidence, apart from the differences in the invoices, that the assessee actually carried out the process of sieving, the material to the required grade, the assessee is not covered by Chapter Notice 9 to Chapter 38. The processes carried out by the assessee of repacking from retail to bulk and labelling do not amount to manufacture.

FULL TEXT OF THE CESTAT HYDERABAD ORDER

These two appeals were filed by the assessee and Revenue assailing the same Order-in-Original ¹ No. 8/2009(CE)-Commr. dated 29.4.2009 passed by the Commissioner of Customs, Central Excise, Hyderabad-I. Earlier, appeals were rejected by Final Order No. A/30732 & 30733/2018 dated 19.7.2018. Thereafter, on an application for rectification of mistake, the final order was recalled vide Miscellaneous Order No. M/30161-30162/2019 dated 20.3.2019 and it is as follows:

“5. Accordingly, we recall our Final Order No. A/30732 & 30733/2018 dated 19.07.2018, registry is directed to restore the appeals to their original number and list the appeals for disposal.

6. Thus, the application for rectification of mistake stands disposed of an indicated herein above.”

2. Assailing the Miscellaneous order, the appellant filed Central Excise Appeal No. 21 of 2019 before the High Court for State of Telangana which was disposed of on 11 March, 2020 with the following observations:

“22. Therefore, we find no merit in this Appeal, and it is accordingly dismissed. However, it is made clear that both parties would be entitled to argue all points of law and fact available to them, when the appeals are reheard by the Tribunal pursuant to the order dated 25.03.2019 in Miscellaneous Application No. M/30161/2019. No order as to cost.”

3. The matter has now been listed and we have heard both sides and perused the records.

4. We find that the main contention of the appellant before the High Court in Central Excise appeal was that only one application seeking rectification of mistakes E/ROM/30090/2019 dated 18.1.2019 was filed by the appellant seeking rectification of mistake in the final order in appeal E/684/2009 and the Department had not filed any application seeking rectification of mistake. Application No. E/ROM/30086/2019 was wrongly listed in cause list dated 13.3.2019 as Item No. 10 as if the Department had filed a rectification of application with that number in the Department’s appeal no. E/827/2009. The Miscellaneous orders dated 25.3.2019 was passed recalling order No. A/30732 & 30733/2018 dated 19.7.2018 on the ground that there was an error apparent on record which needed rectification. The contention of the appellant assessee before the High Court was that since only one application was filed by it seeking rectification in the Final Order dated 19.7.2018 both the appeals (one filed by the assessee and the other filed by the Revenue) could not have been re-opened by the Tribunal for hearing and, therefore, the rejection of the appeal of the Revenue by the Final Order should stand and only assessee’s appeal should have been taken up for re-hearing. The Hon’ble High Court has held as follows :

“20. Though at first blush the arguments of the counsel for the appellant appears to be attractive, we are of the opinion that, the finding in the appeal of the appellant (in the case in hand, it is undisputed that confirmation of demands is on the goods which were received in 50 Kgs pack and subsequently repacked into smaller packs) has a direct co-relation to the finding in the appeal filed by the Revenue (in our view, in absence of any evidence to show that there was packing or repacking from bulk packs to retail packs, the demands dropped by the adjudicating authority is correct).

21. Therefore, if the former is held to be an error apparent on the face of the record warranting recall of the common order dated 19.07.2018 in the appeal filed by the appellant, naturally even the appeal filed by the Revenue would have to be reheard by recalling the order passed therein.”

5. Before examining the merits of the case, we proceed to examine as to how the application No. E/ROM/30086/2019 came to be mentioned in the miscellaneous order by the Tribunal when according to the assessee there was no such application at all. We also proceed to examine whether the assessee’s application seeking rectification of mistake covered only its appeal or both the appeals.

6. A perusal of records shows that an application seeking rectification of mistake arising out of Final Order No. A/30732 & 30733/2018 dated 19.7.2018 in Appeal No. E/684/2009 and E/827/2009 (i.e. covering both the appeals) was filed by the assessee appellant which was received in the Tribunal on 18.1.2019 which was numbered E/ROM/30090/2019. Another miscellaneous application was also filed by the assessee applicant seeking early hearing of the aforesaid application for rectification of mistake also in both the appeals No. E/684/2009 and E/827/2009 which was received in the Tribunal and was numbered E/Misc./30086/2019. These two miscellaneous applications were disposed of by the Miscellaneous order dated 25.3.2019. However, in the heading E/Misc./30086/2019 was wrongly mentioned as E/ROM/30086/2019. A further mistake in the heading was that instead of mentioning both the applications against both the appeals (as they were filed by the assessee), Miscellaneous application 30086/2019 was shown against Appeal No. E/827/2009 and miscellaneous application 30090/2019 was shown against E/684/2009. We also find that there was inaccuracy in the first sentence of the Miscellaneous Order which says “these two applications are seeking rectification of error in Final Order No. A/30732 & 30733/2019 dated 19.7.2018. It should have been written as application E/ROM/30090/2019 and the application E/Misc./30086/2019 seeking early hearing of the application for rectification of mistakes were filed by the assessee appellant in Appeals No. E/684/2009 and E/827/2009. In other words, the submissions made by the appellant before the Hon’ble High Court were not correct as follows:

(i) It was presented before the High Court that its application for rectification of mistake E/ROM/30090/2019 was filed only in Appeal No. E/684/2009, whereas the application filed by the appellant covered both its appeal E/684/2009 and Revenue’s appeal E/827/2009. Further, it appears an impression was created that there was no application E/ROM/30086/2019 filed by the Revenue which is not the complete truth. The application number was actually E/Misc./30086/2019 and it filed by the assessee itself seeking early hearing of the aforesaid miscellaneous application for rectification of mistakes again covering both the appeals.

7. We are surprised that the applicant had not presented the correct facts before High Court. To set the record, we paste below the scanned first page of the two applications:

We now proceed to examine the appeals on merits. The assessee is registered with Central Excise Department and manufactures chemicals such as Phosphoric Acid, Sodium Hexameta Phosphate, Mono Ammonium Phosphate and Di-ammonium Phosphate. During audit, it was found that the assessee also traded in Activated Granular Carbon, Activated Alumina and Activated Bleaching Earth. It was either importing or procuring domestically Activated Granular Carbon. Activated Carbon was classifiable under Chapter Heading 380200 of the Schedule to Central Excise Tariff Act, 1985 up to 27.2.2006 and under 3802100 after 27.2.2006. In terms of Chapter Note 9 to Chapter 38 “in relation to products of this Chapter (other than products of Heading 3808), labeling or re-labeling of containers and re-packing from bulk pack to retail packs or adoption of any other process to render the product marketable amounts to manufacture.” It was found that the assessee procured Activated Carbon in bulk by various Bills of Entry and repacked it to the required size and sold in pre-printed HDPE bags/containers containing the name and address of the assessee. Sometimes, Activated Carbon was also packed in drums.

9. After seeking clarifications from the appellant, a show cause notice dated 6.1.2009 was issued to the appellant alleging that the activity of packing and labeling or relabeling of Activated Carbon amounts to manufacture and is chargeable to duty. Accordingly, differential duty of Rs. 1,34,38,269/- was demanded on the Activated Granular Carbon valued at Rs. 8,20,46,435/- which was cleared without payment of duty during the period 2004-2005 to 2007-2008 under Section 11A of the Central Excise Act read with Rule 8 of the Central Excise Rules. Interest on the aforesaid amount was also demanded and penalty was proposed to be imposed under 11AC of the Act read with Rule 25 of the Central Excise Rules, 2002 for contravention of Rules 4, 6, 8 and 9.

10. The Commissioner passed the impugned order confirming a demand of only Rs. 35,93,990/- along with interest and imposing a penalty of equal amount under Section 11AC. The remaining part of the demand was dropped.

11. Revenue is aggrieved that the Commissioner dropped the remaining part of demand on the ground that certain purchase invoices produced by the assessee are themselves in retail packages of 50 kgs, 45 kgs, 40 kgs. etc. According to the Revenue, this conclusion of the Commissioner was contrary to the findings in the impugned order in paragraph 21 wherein it was held that there is no evidence to show that such packs were sold as such. Revenue’s prayer is that the entire demand as proposed in the show cause notice should be confirmed. Assessee’s appeal seeks dropping of the entire demand and the penalties imposed.

12. It is the case of the assessee that the entire demand in the SCN was based on details provided by it. For the period 2004­2008, it had repacked 1,920 bags of 50 kg from 3,840 bags of 25 kg each. In other words, it had packed from smaller bags to larger bags and not the other way around. While Chapter Note 9 deems ‘packing from bulk to retail’ to be manufacture, it does not deem ‘packing from retail to bulk’ as manufacture. Therefore, the activity of packing 25 kg bags into 50 kg during the period 2004­2005 does not amount to manufacture. Similarly, for the period 2005-2006 they packed and sold 4,372 bags of 50 kg each from 8,744 bags of 25 kg each. For the remaining bags, they have produced purchase invoices which showed that the bags were bought in retail and then were sold as such. Therefore, there was no justification for the Revenue to deem the activity as manufacture under Chapter Note 9 to Chapter 38. The relevant paragraphs of the impugned order in paragraphs 14, 15 and 20 are as follows:

“14. I have gone through the said Annexure. I find that during the year 2005-06, at Sl. No. B of the Annexure, 1810 bags of 50 Kgs were purchased whereas 4115 bags were sold. Thus, there is excess of 2305 bags. Even after deducting 385 bags of Closing Stock for the year 2004-05, still there is excess sale of 1920 bags when compared to purchases. Similarly, in the year 2006-07, at Sl. No. C of Annexure, 3564 bags of 50 Kgs were purchased whereas 7936 bags were sold. Thus, there is excess sale of 4372 bags when compared to purchases. For this, the assesses have accepted that they had repacked certain quantities. It is seen vide Sl. No. B of the said Annexure that 1920 bags of 50 Kgs. were packed from 25 Kgs of 3840 bags during the year 2005-06 and 4372 bags of 50 Kgs vide Sl. No. C of Annexure were packed from 25 Kgs of 8744 bags, totaling to 6292 bags. This is accepted by the asseessees by making a remark in the Annexure-I. This quantity is repacked and relabelled and as such liable to duty as per Note 9 of Chapter 38 of Central Excise Tariff Act, 1985. Certain purchase invoices produced by the assesses are in retail packages of 50 Kgs, 45 Kgs, 40 Kgs, 35 Kgs, 30 Kgs, 25 Kgs and 20 Kgs etc., hence abatement is required to be given on the rest of the quantity excepting 6292 bags, which is liable to duty, for the reasons given hereunder.

15. The sale of 6292 bags of 50 Kgs in excess of 50 Kgs bags purchased, as discussed above is possible only, if the material is received in bulk quantities. Hence, I am constrained to conclude that they had not received the subject goods in any retail packages but the material received in bulk were unpacked and repacked to suit the needs of the customers.

20. The sale invoices clearly indicate that sales were affected in retail form only, which is possible only after converting the bulk in to marketable form. As per Annexure I, the total stock details, produced by the assessee along with written submissions dated 18.02.2009, it is clearly mentioned that they have packed 3840 bags of 50 KGs during the year 2005­06 and 8744 bags of 50 KGs during the year 2006-07 after aggregation of 25 Kgs bags. This statement of the assessee is contradictory to their earlier stand that they sold the goods as such and there was neither packing nor repacking. In view of the above, it is evident that the assessee has undertaken the process of reprocessing and repacked the same in different retail bags.”

13. The assessee further submits that the impugned order also states the purchase invoices were manipulated and grades of 450 IV, 500 IV, 550I V, 600 IV, 650 IV, 700 IV, 800 IV, 900 IV were inserted later by the appellant. The contention of assessee is that the aforesaid numbers refer to grades of the Activated Carbon purchased by them and these grades were inserted by their suppliers M/s Venkateswara Industries and M/s Ruchira Chemical Corporation themselves later, on the request of the appellant to clarify the grades of the goods supplied by them.

14. Chapter Note 9 to Chapter 38 reads as follows:

“In relation to products of this Chapter (other than products of heading 3808), the labelling or relabelling of containers and re­packing from bulk to retail packs or adoption of any other treatment to render the product marketable to the consumer shall amount to manufacture.”

15. It is evident that there should be two activities to be deemed manufacture as per the above Chapter Note – one is labelling or relabeling and other is packing or repacking from bulk to retail packs or adoption of any other treatment to render the product marketable. In this case, no evidence has been brought on record by the Revenue to show that the assessee had repacked from bulk to retail and labelled or relabelled the goods or adopted any other treatment to render the product marketable. The appellant had either packed from retail (25 kg) to bulk (50 kg) or sold the goods as such.

16. There was no manipulation of purchase invoices by the appellant. In certain invoices, the grade numbers were incorporated later but that should not amount to manipulating the invoices since the insertion was done by the supplier to confirm the factual position. It had obtained letters from their suppliers i.e. M/s Venkateshwara Industries and M/s Ruchira Chemical as follows:

Learned counsel for the appellant also submitted that the demand is barred by limitation as there is no evidence of suppression of facts and activities were known to the Department.

17. We have considered the submissions advanced by both the sides.

18. The short point to be decided in this case is whether from the evidence available, the appellant had labelled or relabeled and re­packed activated carbon from bulk to retail or carried out any other process to render it marketable so that its activities fall under Chapter Note 9 to Chapter 38 of the Schedule to Central Excise Tariff Act, 1985. If so, whether it would amounts to manufacture and the appellant is liable to pay Central Excise duty and not otherwise.

19. It is undisputed that the appellant is selling activated carbon in bags with its own name pre-printed on them. Thus, if the appellant is selling the goods with its own name on the packets, it is labeling the product.

20. The next question is whether it is also packing from bulk to retail packs. From the data presented before us, which is also the basis of the SCN, it is evident that the appellant had in some cases packed 25 kg bags into 50 kg bags, i.e., from smaller bags to larger bags which cannot be called packing from bulk to retail. It is the other way round.

21. The next question is whether the appellant is also carrying out any other process so as to render the product marketable. The show cause notice alleges that the appellant was re-packing the product after sieving it to the required size because the purchase invoices of the appellant did not contain any grade of the product while the sale invoices had the grade indicated on them. In some cases, where the input invoices had the grade in them, it was found that the grade was inserted later which has been considered as manipulation of invoices by the Revenue. The appellant’s position has constantly been that it has not carried out sieving or any other process and hence the activity would not amount to manufacture and hence no duty is payable. Its purchase invoices did not indicate the grade of the activated carbon. On its request, in some of the invoices the suppliers had indicated the grade later. Hence, there was a difference in hand writing which is presumed by the Revenue to be manipulation of invoices. It produced letters from the suppliers to buttress this assertion.

22. Apart from the fact that its purchase invoices / bill of entry do not indicate the grade of the material, while the sale invoices indicate the grade there is no other evidence brought on record by the Revenue that the Activated Carbon was sieved by the assessee. Since the assessee is registered with the Central Excise Department, officers could have gone and inspected and found out if the appellant had the equipment required for sieving the activated carbon to the required grades and was also carrying out this process. In the absence of such direct evidence, the Commissioner has drawn an indirect inference that material was received was sieved only on the ground that the purchase invoices did not have the grade of the material but the sale invoices. In our considered view, this discrepancy may be a cause for doubt but it required further investigation especially when the assessee had categorically denied having ever sieved the material before repacking. In the absence of any positive evidence, we are unable to accept the finding in the impugned order that the assessee had carried out this process.

24. Since we have found that the assessee has not packed from bulk to retail and there is no evidence, apart from the differences in the invoices, that the assessee actually carried out the process of sieving, the material to the required grade, the assessee is not covered by Chapter Notice 9 to Chapter 38. The processes carried out by the assessee of repacking from retail to bulk and labelling do not amount to manufacture.

25. The demand, therefore, cannot sustain. Consequently, the demand of interest and the penalties also need to be set aside.

26. In view of the above, the impugned order is set aside and Excise Appeal No. E/684/2009 filed by the assessee is allowed. Excise Appeal No. E/827/2009 filed by the Revenue is rejected.

(Pronounced in open Court on 03.03.2022)