Holding

The Court held that kimam is a distinct, marketable product dutiable under the relevant tariff headings, the extended period of limitation is validly invoked, and the appellant’s claim to proforma/modvat credit as a bonafide defence fails.

Summary

The appellant, a partnership engaged in manufacturing chewing tobacco, produced a compound called "kimam" in unregistered and unlicensed factories and claimed it was an intermediate, non‑marketable product not liable to excise duty. The Revenue Department contended that kimam was a distinct, identifiable, marketable product known in the market and therefore dutiable under tariff headings 2404.49/2404.40, and that the appellant had deliberately concealed its units, justifying the invocation of the extended period of limitation under the proviso to Sec. 11A(1) of the Central Excise Act. The appellant also sought to rely on proforma/modvat credit as a defence of bonafides, arguing that the compound was used captively and that it was entitled to exemption under Notification No. 121/94. The Supreme Court held that kimam satisfied the test of marketability and dutiability, that the appellant’s claim of non‑marketability was untenable, and that the department was right to invoke the extended limitation period; the appellant failed to prove bonafide entitlement to proforma/modvat credit. Consequently, the Court dismissed the civil appeals with no order as to costs.

Issues considered

Whether the compound "kimam" is dutiable and classifiable under tariff headings 2404.49/2404.40 of the Excise Tariff Act.
Whether the product is marketable (saleable) and thus chargeable to excise duty.
Whether the Revenue Department was justified in invoking the extended period of limitation under the proviso to Sec. 11A(1) of the Central Excise Act.
Whether the appellant could claim proforma/modvat credit as a defence of bonafides.
Whether Notification No. 121/94 is applicable to the appellant’s situation (remanded).

Legislation cited

Central Excise Act, 1944s. 11A(AB), s. 11A(AC), s. 11A(J), s. 173Q
Central Excise Rules, 1944s. Rule 9(2)

Subjects

excise dutymarketabilitydutiabilityextended period of limitationMODVAT creditproforma creditclassificationunregistered factorychewing tobaccocentral exciseNotification 121/94

Judgment

A DHARAMPAL SATYAPAL ·
v.
COMMISSIONER OF CENTRAL EXCISE, NEW DELHI

APRIL 21, 2005

B [S.N. VARIA VA, DR. AR, LAKSHMANAN AND
S.H. KAPADIA, JJ.]

Central Excise Act, 1944; Ss. JJ(A), ll(AB), ll(AC), 173Q/ Central
Excise Rules, 1944; R. 9(2)/ Excise Tariff Act, 1985, Tariff Headings 2404.49
C and 2404.40/Notification No.121194:

Levy ofexcise duty-Kimam manufactured by assessee in its unregistered/
unlicensed factories-Assessee claiming the product as intermediate item and
not marketable-Revenue held the product as distinct, identifiable and
marketable and levied excise duty by invoking extended period of limitation
D as assessee failed to obtain registration and MODVAT credit inadmissible-
Affirmed by Tribunal by remanding the matter to Revenue for re-examination
of the applicability of Notification No. 121194-0n appeal, Held: Assessee
manufactured and used the product in question for manufacturing the final
product in its other factories-..-Assesssee also purchased similar product from
E other licensed dealers for manufacturing the final product-Hence, Rt~enue
rightly held the product in question as distinct, identifiable product known to
the market, and thus excise duty leviable thereon.

Extended period of Limitation-invoking of-Held: Since assessee
clandensinely manufacturing the product in question without getting the units
F registered/licensed with the Excise department, under the circumstances
Revenue was right in invoking the extended period of limitation.

MOD VAT Credit-Right to claim against excise duty on final product
vis a vis using it as defence of bonqfides against invoking of larger period of
limitation in terms of proviso to Sec. 1JA(J) of the 1944 Act-Distinction
G between.

Words & Phrases-Marketability, 'Dutiability' 'test of marketablity',
'Wilfulness '-Meaning of in the context of Central Excise Act, 1944.

The questions which arose for determination in these appeals were
H 746
DHARAMPAL SATYAPAL v. C.C.E. 747
as to whether excise duty could be levied on the product 'Kimam' A
containing chewing tobacco classifiable under Tariff Heading 2404.40/
2404.49 of the Excise Tariff Act, which was manufactured by the assessee
in its units unlicensed/unregistered with the Excise Department and used
it for manufacturing 'Tulsi Zafrani Zarda'/final product in its other
factories; as to whether Revenue was right in invoking the extended
period of limitation under the proviso to Section l lA (1) of the Central B
Excise Act; and as to whether the benefit of proforma/modvat credit in
respect of the product, was available in the facts and circumstances of
the case.

Dismissing the appeals, the Court
c
HELD : 1.1. Marketability is an attribute of manufacture. It is an
essential criteria for charging the excise duty. Identity of the product and
marketability are the twin aspects to decide chargeability. Dutiabillty of
the product depends on whether the product is known to the market. The
test of marketability is that the product which is made liable to duty D
must be marketable in the condition in which it emerges. Marketable
means saleable. The test of classification is, how are the goods known in
the market. (755-F-G]

Moti Laminates Pvt. Ltd v. Collector of Central Excise, Ahmeda~ad,
(1995) 76 ELT 241; Union ofIndia v. Delhi Cloth & General Mills Co. Ltd, E
(1997) 92 ELT 315 and Cadila Laboratories Pvt. Ltd v. Commissioner of
Central Excise, Vadodara, (2003) 152 ELT 262, relied on.

1.2. The assessee adverted that the said "compound" was not capable
of being used for any purpose, other than for manufacture of branded
chewing tobacco. This statement of the assessee establishes that the said F
compound (kimam) was not edible, it was not capable of consumption as
such, however, it was used as preparation in the manufacture of Tulsi
Zafrani Zarda which was a branded chewing tobacco manufactured in
the licensed factories of the assessee. Further, from time to time, the
assessee bought from the market a similar compound (Lucknowi kimam) G
and used it in the manufacture of the final product which indicated that
on blending of sada kimam with saffron, spices, menthol etc., the
compound in question (kimam) which emerged was a distinct, identifiable
product, known to the market as kimam. Hence, no infirmity is found in
the impugned judgment of the tribunal which has held that the said
compound (kimam) was marketable and classifiable as chewing tobacco H
-
748 SUPREME COURT REPORTS [2005) 3 S.C.R.

A or a preparation for chewing tobacco under chapter sub-heading 2404.49/
2404.40 of the Excise Tariff Act. (756-B-C-D-E-F(

1.3. The assessee was in the business of manufacturing Tulsi Zafrani
Zarda for couple of years. It used to buy similar compounds from the
market from time to time. That, other traders, used to manufadure
B compounds similar to the compound manufactured by the assessee; that .
r
I
they had their units duly licensed/registered with the excise department; !:
that they had maintained their books and documents in accordance with
the.rules under the Central Excise Act, 1944; and that they paid duty on
clearances of the compound. On the other hand, the assessee carried on
C their business of manufacturing the product without disclosing the
. existence of their units; they did not get their units licensed I registered;
they did not maintain any records under the excise law; thaf: they
clandestinely manufactured their compound without informirng the
department; and in the circumstances, the department was ri.ght in
invoking the extended period of limitation. (757-C-D]
D
1.4. The words "wilfulness" and "intent" in Section HA of the 1944
Act are expression~ of mental state at the time of manufacture and
clearance of the goods. The situs of the levy of central excis1~ is on
manufacture. Pricing and value of clearances are matters specially within r
the knowledge of the. assessee. The assessee was in the business of _,
E manufacture of cbewing tobacco and its preparations for last couple of
years. In the course of business, it had dealt with similarly situated traders
and was fully aware that those traders had their units licensed or
registered and yet it did not take steps to get the two units, in which the
impugned compound (kimam) was manufactured, registered or licensed.
F It has been buying a '"''llilar product from various traders. These
circumstances constituted evidence of suppressfon brought on record by
the department. (758-A-B-C]
·--~
l
)
~
1.S. No explanation has been given by the assessee for not disclosing j
the affairs of its units, particularly whe~ the assessee was iri business for \_
G couple of years and when the assessee had betn dealing with other traders
i
who operated from licensed factories. It was for the assessee :to explain !I
the reasons for not getting the units registered or licensed, its failure to
maintain the records under the 1944 Act/Rules and also the basis of its
alleged bonafide impression. In this connection, no evidence was put before L
H the commissioner/Revenue by the assessee and also it was not shown that
DHARAMPAL SATYAPAL v. C.C.E. [KAPADIA, J.) 749
the amount of proforma/modvat credits was equal to the duty demanded. A
(758-E-F-G)

Amco Batteries Ltd v. Collector of Central Excise, Bangalore, 2003
(153) ELT 7; Padmini Products v. Collector of Central Excise, (1989) 43
ELT 195 and Formica India Division v. Collector of Central Excise, (1995)
77 ELT 511, distinguished. B
3.1. Modvat is basically a duty collecting procedure which provides
relief to the manufacturer on the duty element borne by him in respect of
the inputs used by him. The relief is given under the modvat scheme on
the actual payment of duty on the input. On such payment, the assessee
gets a right to claim adjustment/set-off against the duty on the final C
product. The question of duty adjustment/set-off against duty on the
final product was not in issue. In any event, no record on credit entitlement
was produced. [758-H; 759-A)

3.2. A right to claim proforma/modvat credit against duty on final D
product was different from the defence of bonafides in a case where
circumstances mentioned in the proviso to section llA(J) of the 1944 Act
stands proved by t.bc Revenue for invoking larger period of limitation.
The burden to prove tile defence of bonafides was on the assessee and the
assessee in this case has failed to prove its bonafides. Under modvat,
excisable finished products made out of duty-paid inputs are given relief E
of excise duty to the extent of duty paid on inputs. In the circumstances,
Revenue was justified in invoking the extended-period of limitation under
the proviso to Section llA(l) of the 1944 Act. [759-B-C)

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1506-1508 of
2000. F
From the Judgment and Order dated l.10.99 of the Central Excise,
Customs and Gold (C) Appellate Tribunal, New Delhi in F.O. Nos. 846-848/
1999-D in A. Nos. E/2187 of 1998-D.
V. Lakshmikumaran, Alok Yadav and V. Balachandran for the Appellant. G
A. Subba Rao, Rupesh Kumar, P. Parmeswaran and B. Krishna Prasad
....... for the Respondent.
The Judgment of the Court was delivered by

KAPADIA, J. Whether, in the facts and circumstances of this case, the H
750 SUPREME COURT REPORTS [2005] 3 S.C.R.

A Tribunal was justified in upholding the order of the commissioner dated
28.4.1998 with respect to (a) the excisability of the kimam and classification
thereof under sub-heading 2404.49 prior to 23. 7.1996 and under sub-heading
2404.40 w.e.f. 23.7.1996; (b) rationale for invoking the extended period of
limitation under the proviso to section llA(l); and (c) eligibility for the
benefit of proforma/modvat credit in respect of the chewing tobacco kimam,
B is the question which arises for determination in these civil appeals filed by
the appellant - assessee under section 35-L(b) of the Central Excise Act,
1944 (hereinafter referred to for the sake of brevity as "the 1944 Act").

Briefly, the facts of the case are that Mis Dharampal Satyapal (assessee),
C having its head office at 7/22, Ansari Road, Darya Ganj, New Delhi and
factories at 96, Okhla Industrial Estate, Phase-III, New Delhi I E-1, Maharani
Bagh, New Delhi was found engaged in the manufacture of compound (kimam)
containing chewing tobacco under sub-heading 2404.40/2404.49. The assessee,
a partnership firm, was not registered with the Central Excise department as
a manufacturer. The assessee appeared to have been manufacturing and
D clearing the said compound (kimam) without the knowledge of the depa1tment.

During the investigations carried out by the department, the assessee
claimed that the compound (kimam) manufactured by them was moved in
"balties" on stock transferred basis to their three branded chewing tobacco
. manufacturing factories located at 68/2, Okhla Industrial Estate, Phase-II,
E New Delhi; Noicfa (UP) and Barotiwala (Hp). The assessee claimed that the
compound (kimam) was an intermediate item, not marketable as such and
was, therefore, not excisable. Enquiries were made by the department at
Barotiwala (HP), where the assessee claimed to have transferred the compound
(kimam). The said enquiries indicated receipt of the said compound (kimam)
F in balties at Bar"•iwala during the period 16.2.1995 to 20.12.1996.
Based on the above investigations carried out by the department, it
appeared that the compound (kimam) was excisable and had been
manufactured and cleared without obtaining registration and without payment
of duty on the clearances during the period 1.4.1994 to 3.10.1996.
G
Accordingly, a show-cause notice dated 19.6.1997 answerable to the
• commissioner was served upon the assessee demanding duty under mle 9(2)
of the Central Excise Rules, 1944 read with proviso to section l lA(l) of the ~
said 1944 Act with interest under section 1 lAB. By the said show-cause
notice, penalty under rule l 73Q and section l IAC was also proposed to be
H levied. The show-cause notice alleged suppression of material fac:ts with
DHARAMPAL SATYAPAL v. C.C.E. [KAPADIA, J.] 751

intent to evade payment of duty. It referred. to manufacture of the compound A
(kimam) without obtaining registration. It also referred to clandestine clearance
of the said compound (kimam) without maintenance of statutory records.

After considering the defence put forth by the assessee, the commissioner
held, vide order dated 28.4.1998, that sada kimam (raw-material) was
purchased by the assessee and blended with saffron, spices, perfumes and B
- menthol; that consequent upon such blending, a compound (kimam) emerged,
which was a separate identifiable product; that from time to time, the assessee ,
used to pi:;:c'1ase from the market a similar compound (Lucknowi kimam)
from Mis Globe Traders and Mis Laxmi Fragrances Pvt. Ltd.; that the
compound (kimam) was used in the manufacture of the chewing tobacco C
which was sold under the brand name "Tutsi Zafrani Zarda". The commissioner
further found that Mis Globe Traders and Mis Laxmi Fragrances Pvt. Ltd.
were manufacturers of similar compound. That, the said Mis Globe Traders
and Mis Laxmi Fragrances Pvt. Ltd. were manufacturing their compound in
their registered units; they were license holders; they were maintaining records
under the excise law. In the circumstances, the commissioner came to the D
conclusion that the compound (kimam) manufactured by the assessee in their
unregistered/unlicensed factories at 96, Okhla Industrial Estate,. Phase-III,
New Delhi I E-1, Maharani Bagh, New Delhi was excisable. By the impugned
decision, the commissioner came to the conclusion that the assessee had
deliberately and without any reason whatsoever suppressed its affairs and E
they had deliberately failed to obtain registration which circumstances
constituted evidence of suppression and, therefore, the department was right
in invoking the extended period of limitation.

Aggrieved by the above order of the commissioner dated 28.4.1998,
the assessee challenged it in Customs, Excise & Gold (Control) Appellate p
Tribunal, New Delhi (hereinafter referred to as the "tribunal") inter-alia on
the ground that the said compound (kimam) was neither chewing tobacco nor
preparations for chewing tobacco; they were not capable of being used as
such and could be used only after dilution; their manufacturing formula was
secret and the said compound (kimam) was not sold in the market but it was
sent to the assessees' own factories at 6812, Okhla Industrial Estate, Phase- G
.....,._ II, New Delhi, Noida (UP) and Barotiwala (HP). The order of the commissioner
was also challenged on the ground that the assessee was under a bonafide
impression that no duty was leviable on the compound (kimam); the full
quantity of the compound (kimam) manufactured at 96, Okhla Industrial
Estate, Phase-III, New Delhi I E-1, Maharani Bagh, New Delhi was used H
752 SUPREME COURT REPORTS [2005) 3 S £.R.

A captively and, therefore, proforma credit I modvat credit was available to the
assessee and, therefore, there was no intention to evade payment of duty.
That, the assessee was entitled to exemption under notification no.121/94-CE
dated 11.8.1994 even though the assessee had not complied with the procedure
under chapter-X.

B After hearing both the sides, the tribunal upheld the commissioner's
order dated 28.4.1998 with respect to : (a) the excisability of the goods in
dispute and the classification thereof under sub-heading 2404.49/2404.40; (b)
the rationale for invoking the.extended period of time under proviso to section
---
1 lA; and (c) inadmissibility of proforma credit I modvat credit. However, as
C regards appli~ability of notification no.1.21/94, the tribunal observed that
though the assessee had not followed the chapter-X procedure, if substantial
compliance was shown regarding receipt and utilization of the input material
then the rigours of chapter-X procedure could be diluted in the interest of the
natural justice. The tribunal noted that the commissioner had not rec:orded
any finding in his order to the extent of the compliance of the conditions
D mentioned in the notification no.121 /94. Hence, the tribunal remaridc!d the
case back to the commissioner for re-examination of the limited question of
applicability of the said notification no.121/94. The tribunal also directed the
commissioner to give to the assessee an opportunity to present their case and
reconsider the quantum of penalty, fine, interest etc. in the light of his findings
E as to the applicability of the notification no.121 /94.

Being aggrieved by the impugned decision of the tribunal dated
.J. l 0.1999, the assessee has come to this Court by way of Civil appeals under
section 35L(b) of the'1944 Act.
•.{'

F On the question of excisability, Mr. V. Lakshmikumaran, learned counsel
appearing on behalf of the assessee submitted that the compound (kimam)
which emerged on account of blending· of sada kimam (raw-material) with
spices, saffron, perfumes, menthol etc. had no use as such; it had no market;
it was highly concentrated; that it was an intermediate product captively
consumed in the three factories of the assessee at Okhla Industrial Estate,
G Phase-II; Noida (UP) and at Barotiwala (HP); that, the blending was based on
a trade secret and that the said compound was neither a chewing tobacco nor
a preparation thereof. It was further submitted that the said compound (kiimam)
was not akin to Lucknowi kimam; that the components thereof differed; that
Lucknowi kimam was edible whereas the compound in question was not
H edible and, therefore, the same was not excisable. It was urged that though
DHARAMPAL SATYAPAL v. C.C.E. [KAPADIA, J.] 753
the assessee had bought Lucknowi kimam from the above traders the ratio of A
Lucknowi kimam in the final product, which contained tobacco leaves/flakes,
was l: l whereas the ratio of the compound in question in the final product
was 1:5. According to the learned counsel, the ability of the manufacturer to
prepare a compound (kimam) and utilize the same for his own purpose would
not makt the said compound (kimam) a marketable commodity as the
preparation was exclusive for the assessees' own use as an intermediate B
product. In the circumstances, it was urged that the said compound (kimam)
was neither a chewing tobacco nor a preparation containing chewing tobacco
and, therefore, it was neither marketable nor excisable.

On the rationale for invoking extended period, learned counsel submitted C
that the assessee was under a bonafide impression that the compound (kimam)
was not excisable; the full quantity of the compound (kimam) was used
captively and, therefore, proforma I modvat credit was available and, therefore,
there was no intent to evade payment of duty. In this connection, it was
submitted that prior to 1.3 .1994, branded chewing tobacco including
preparations therefrom came under 2404.41 and were made liable to duty D
whereas unbranded products falling under 2404.49 were chargeable to nil
rate. However, after l .3.1994, the nil rate on unbranded products was given
a go by and consequently, the unbranded items falling under 2404.49 attracted
duty and duty was again required to be paid on the branded item under
2404.41 which created an anomaly. Therefore, on and from 8.3.1994, the E
benefit of proforma credit was made available for the duty paid on the
unbranded item, which was to be set-off against the payment of duty on the
branded item. Learned counsel, therefore, submitted that the history of levy,
exemption and benefit of modvat credit during the period l.3.1994 up to
23. 7 .1996 indicated that the Government did not intend to collect duty on the
unbranded item. Learned counsel submitted that w.e.f. 23.7.1996, chewing F
tobacco and preparations containing chewing tobacco, whether branded or
unbranded, stood classified under sub-heading 2404.40 and modvat credit
was also extended to the unbranded items. In the circumstances, learned
counsel submitted that though the assessee was entitled to the benefit of
proforma I modvat credits as well as to the benefit of exemption vide
notification no.121/94 dated 11.8.1994, the assessee did not avail of such G
credit and, therefore, there was no intention to evade payment of duty,
particularly when the assessee had paid much higher duty on the branded
item, namely, Tulsi Zafrani Zarda, manufactured in the above three licensed
units of the assessee at Okhla Industrial Estate, Phase-II, New Delhi, Noida
(UP) and Barotiwala (HP). H
754 SUPREME COURT REPORTS [2005) 3 S.C.R.

A Mr. A. Subba Rao, learned counsel appearing on behalf of the
department, on the other hand, submitted that the compound (kimam) whic:h
emerged on account of blending was identifiable, transportable and purchasable
in the market; that, in fact it was captively consumed in the manufacture of
chewing tobacco; that merely because the assessee had refused to sell the
B product, it was not open to the assessee to say that there was no market and
that the item was not marketable. Learned counsel submitted that if such an
argl!ment was to be accepted, it would be open to all producers of monopoly
products to contend that their item was not marketable since they have refused '-
to sell the same in the market. Learned counsel further submitted that the
compouncl in question was not a by-product.
c On the question of limitation, learned counsel submitted on behalf of
the department that the assessee had suppressed the following facts from the
department. The assessee had manufacturing units at 96, Okhla Industrial
Estate, Phase-III, New Delhi I E-1, Maharani Bagh, New Delhi, which fact
was not disclosed to the department. They had manufactured and cleared the
D impugned .goods without informing the department and without payment of
central excise duty. Further, the assessee had not obtained registration for
their above units at 96, Okhla Jndustrial Estate, Phase-III, New Delhi I E-1,
Maharani Bagh, New Delhi_. That, they have not filed declarations I returns
requ~red under the said 1944 Act and the rules framed thereunder. Learned
E counsel further submitted thai in the original hand-written challans,. the
compound in question was indicated by the word "balties" whereas in the
computerized challans, the word "balti" was replaced by "perfumed mixture
+ kimam poly bags". In this connection, it was submitted that'the assessee
was fully aware that if they had used the word "compound I additive mixture",
it would have indfoated "manufacture". That, to mislead the department; the
F assessee had .changed the w9rd "balti" and had replaced it by the words
"perfumed mixture+ kimam poly bags" to show that perfumed mixture and
kimam were dispatched in separate packings from the factory. According to
the learned counsel, the .entire exercise was to conceal the activity of
manufacture and to evade payment of duty. Further, the assessee had failed
G to maintain statutory accounts for the manufacture of the compound at 96,
Okhla· Industrial Estate, Phase-III, New Delhi/ E-1, Maharani Bagh, New
Delhi. They have also not maintained records of clearances from the above
two unlicensed units. That, all these circumstances constituted evidence of
suppression and, therefore, the department was right in invoking the extended
period of limitation.
H
OHARA MP AL SATY APAL v. C.C.E. [KAPADIA, J.) 755

Learned counsel further submitted that the entire adjudication was A
regarding two issues, namely, excisability of the impugned compound and
the clandestine manufacture and clearance of the compound without payment
<?f duty from 96, Okhla Industrial Estate, Phase-III, New Delhi I E-1, Maharani
Bagh, New Delhi units; that, despite opportunity, the assessee had failed to
explain the reasons for not registering the above two units at 96, Okhla
Industrial Estate, Phase-III, New Delhi and E-1, Maharani Bagh, New Delhi, B
particularly when they were in the trade buying similar compounds (kimam)
from other traders who had licensed units.

In these civil appeals, four issues, namely, excisability and Classification
of the compound, quantum of duty confirmed, rationale for invoking the C
extended period of limitation, and inadmissibility of proforma and modvat
credits, arise for determination.

At the outset, we may clarify that the investigations by the department
were focussed on excisability and manufacture and clearance of the said
"compound" without payment of duty from 96, Okhla Industrial Estate, Phase- D
III, New Delhi I E-1, Maharani Bagh, New Delhi.

EXCISABILITY and CLASSIFICATION:

The main contention advanced on b~half of the assessee herein was that
the compound (kimam) was neither a chewing tobacco nor a preparation for E
chewing tobacco under chapter sub-heading 2404.49 prior to 23.7.1996 and
• under 2404.40 w.e.f. 23.7.1996; it was neither edible nor consumable; it was
made by the assessee from a secret formula and that the entire production
was captively consumed by their three factories at Okhla Industrial Estate,
Phase-II, New Delhi, Noida (UP) and Barotiwala (HP).
F
We do not find merit in the above submissions. Marketability is an
attribute of manufacture. It is an essential criteria for charging duty. Identity
of the product and marketability are the twin aspects to decide chargeability.
Dutiability of the product depends on whether the product is known to the
market. The test of marketability is that the product which is made liable to G
duty must be marketable in the condition in which it emerges. Marketable
means saleable. The test of classification is, how are the goods known in the
market. These tests have been laid down by this Court in a number of
judgments including Moti Laminates Pvt. ltd v. Collector of Central Excise,
Ahmedabad, (1995) 76 ELT 241; Union of India v. Delhi Cloth & General
Mills Co. Ltd., (I 997) 92 EL T 315 and Cadila Laboratories Pvt. Ltd. v. H
756 SUPREME COURT REPORTS [2005] 3 S.C.R.

A Commissioner of Central Excise, Vadodara (2003) 152 ELT 262.

Applying the above tests to the facts of this case, we find that sada
kimam was bought b)- the assessee as a raw material which was then blended
with saffron, perfumes, menthol etc. to form a compound which was then
packed in "balties" and cleared to the above three licensed units at Okhla
B Industrial Estate, Phase-II, New Delhi, Noida (UP) and Barotiwala (HP),
where Tulsi Zafrani Zarda was manufactured. That, the assessee used to buy
a similar compound (Lucknowi kimam) from the market from time to time·
and used in the manufacture of their final product. That, the compound
(kimam) prepared by the assessee at 96, Okhla Industrial Estate, Phase-III,
C New Delhi and at E-1, Maharani Bagh, New Delhi, in the highly concentrated
form, was cleared therefrom and taken to the above three licensed factories
where it was diluted and used in the manufacture of Tulsi Zafrani Zarda. In
their reply to the show-cause notice, the assessee admitted that the said
"compound" was not capable of being used for any purpose, other than for
manufacture of branded chewing tobacco (underline supplied by us). This
D statement of the assessee in reply to the show-cause notice establishes that
the said compound (kimam) was not edible, it was not capable of consumption
as such, however, it was used as preparation in the manufacture of Tutsi
Zafrani Zarda which was a branded chewing tobacco manufactured in the
licensed factories of the assessee at Okhla Industrial Estate, Phase-II, New
E Delhi, Noida (UP) and Barotiwala·(HP): Further, from time to time, the
assessee herein bought from the market a similar compound (Lucknowi kimam)
and used it in the manufacture of the final product which indicated that on
.
blending of sada kimam with saffron, spices, menthol etc., the compound in
question (kimam) which emerged was a distinct, identifiable product, known
to the market as kimam. Hence, we do not find any infirmity in the impugned
F judgment of the tribunal which has held that the said compound (kimarr1) was
marketable and classifiable as chewing tobacco or a preparation for ch•ewing
tobacco under chapter sub-heading 2404.49/2404.40.

INVOCATION OF THE EXTENDED PERIOD OF LIMITATION AND
ADMISSIB/l/TY OF PROFORMA and MODVAT CREDITS:
G
At the outset, it may be stated that the investigation in this case was
focussed on the excisability, manufacture and clearance of the compound
(kimam) without payment of duty from the said two unlicensed units at 96,
Okhla Industrial Estate, Phase-HI, New Delhi and E-1, Maharani Bagh, New
H Delhi. That, the admissibility of the proforma I modvat credits, which could
DHARAMPAL SATYAPAL v. C.C.E. [KAPADIA, J.) 757.

have warranted an enquiry at the end of the above three factories at Okhla A
Industrial Estate, Phase-II, New Delhi, Noida (UP) and Barotiwala (HP) as
to receipt and utilization of the said compound, was not the subject of
investigation. Therefore, the show-cause notice was confined to demand for
duty on the goods manufactured and cleared from the two unlicensed and
unregistered units at 96, Okhla Industrial Estate, Phase-III, New Delhi and E- B

- I, Maharani Bagh, New Delhi.

As stated above, assessee was in the business of manufacturing Tulsi
Zafrani Zarda for couple of years. It used to buy similar compounds from the
market from time to time. That, other traders, namely, M/s Globe Traders and
M/s Laxmi Fragrances Pvt. Ltd. used to manufacture compounds similar to C
the compound manufactured by the assessee; that they had their units duly
licensed I registered with the excise department; that they had maintained
their books and documents in accordance with the rules under the said 1944
Act; and that they paid duty on clearances of their compound. On the other
hand, the assessee carried on their business of manufacturing the said
compound without disclosing the existence of their units; they did not get .D
their units licensed I registered; they did not maintain any records under the
excise law; that they clandestinely manufactured their compound without
informing the department; and in the circumstances, the department was right
in invoking the extended period of limitation.

It was urged that the assessee was under a bonafide impression that no E
duty was leviable on the goods; the full quantity of disputed goods was used
captively and, therefore, proforma credit/modvat credit was available in respect
thereof and, therefore, there was no intent to evade payment of duty. In
support of the aforestated submissions, it was urged that suppression or breach
of rules by itself would not amount to intention to evade; that some positive F
act of deliberate suppression or breach of rules was required to be shown by
the department; that, if the assessee showed that credit available to it was
equal to the demand then there may not be the case of intention to evade
payment of duty. In this connection, reliance was also placed on the judgments
of this Court in Amco Batteries Ltd v. Collector of Central Excise, Bangalore,
reported in (2003) 153 EL T 7; Padmini Products v. Collector of Central G
Excise, reported in (l 989) 43 EL T 195 and Formica India Division v. Collector
of Central Excise, reported in (l 995) 77 EL T 51 l.

We do not find merit in the above contentions. In this matter, we are
concerned with the application of the above judgments to the facts of this H
758 SUPREME COURT REPORTS [2005] 3 S.C.R.

A case. The words "wilfulness" and "intent" in section 1 lA are expressions of
mental state at the time of manufacture and clearance of the goods. The situs
of the levy of central excise is on manufacture. Pricing and value of clearances
are matters specially within the knowledge of the assessee. As stated above,
the assessee herein was in the business of manufacture of chewing tobacco
B and its preparations for last couple of years. In the course of business, the
assessee had dealt with similarly situated traders. It was fully aware that
those traders who produced similar compounds had their units licensed or
registere.d and yet the assessee herein did not take steps to get the above two
units, iri which the impugned compound (kimam) was manufactured, registered
or licensed. As stated above, it has been buying a similar kimam from various
C traders. Thes.e circumstances constituted evidence of suppression brought on
record by the department in answer to which it was contended on behalf of
the assessee that they were under a bonafide impression that the compound
was not excisable and that the benefit of proforma and niodvat credit togethe:r
with the be.nefit of exemption under notification no.121/94 dated t' 1.8.1994
was substantially equal to the demand for duty herein and, therefore, there
D was no intention to evade payment of duty.

We do not find any merit in these submissions. As stated above, thte
adjudication in this case was confined to the question of excisability and
concealment of the existence of tw9 units in which the compound (kiman1)
E was manufactured. No explanation has been given by the assessee for not
disclosing the affairs of these units, particularly when the· assessee was in
business for couple of years and when the assessee had been dealing with
other traders who operated from licensed factories; It was for the assessee to

F
explain the reasons for not getting the units registered or licensed. It was for
the assessee to explain its failure to maintain the records under the 1944 Act
and rules thereunder. In each of the above decisions, we find that there was
·-
substantiai compliance of the rules under the said Act. In each of the decisions
the findings indicate technical non-compliance and not total non-compliance
of the rules; It was for the assessee to explain the basis of its alleged bonafide
impression. In this connection, no evidence was put before the commissioner
G about receipt and utilization of the compound in the manufacture of Tutsi
Zafrani Zarda. No evidence was led to show that the amount of proforma I
modvat credits was equal to the duty demanded, although it was urged that
after 3/94, the liability to duty on inputs stood shifted to the final product.

Modvat is basically a duty collecting procedure which provides relief
H to the manufacturer on the duty element borne by him in respect of the inputs
DHARAMPAL SATYAPAL v. C.C.E. [KAPADIA, J.) 759
used by him. The relief is given under the modvat scheme on the actual A
payment of duty on the input. On such payment, the assessee gets a right to
claim adjustment/set-off against the duty on the final product. The question
of duty adjustment/set-off against duty on the final product was not in issue.
In any event, no record on credit entitlement was produced. A right to claim
proforma/modvat credit against duty on final product was different from the B
defence of bonafides in a case where circumstances mentioned in the proviso
to section l lA(l) stands proved by the department for invoking larger period
of limitation. The burden to prove the defence of bonafides was on the
·assessee and the assessee in this case has failed to prove its bonafides. Under
modvat, excisable finished products made out of duty-paid inputs are given
relief of excise duty to the extent of duty paid on inputs. In the circumstances, C
we are satisfied that the department was justified in invoking the extended
period of limitation under the proviso to section I I A{l ).

On the applicability of the notification no.121194 dated 11.8.1994, the
tribunal remanded the case back to the commissioner for re-examination of
the limited question of its applicability. The tribunal also directed the D
commissioner to reconsider the quantum of penalty, fine etc. in the light of
its findings on the applicability of the said notification. We do not wish to
express any opinion on the applicability of the notification dated 11.8.1994.
Suffice it to state, that, on the issue of excisability and clandestine manufacture
and removal of the compound (kimam) from the two unlicensed/ unregistered E
units at 96, Okhla Indu!.trial Estate, Phase-III, New Delhi I E-l, Maharani
Bagh, New Delhi, we do not find any infirmity in the impugned judgment.

Accordingly, these civil appeals filed by the assessees are· dismissed
with no order as to costs.

S.K.S.
F
Appeals dismissed.

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