P.R. Chandrasekharan, Member (T)

1. These appeals are directed against the order-in-original No. 2/PD/Th-II/2007, dated 30-8-2007 passed by the Commissioner of Central Excise, Thane-II. Briefly stated facts of the case are as follows.

2. M/s. Angadpal Industries Pvt. Ltd., the main appellant in this case is an independent textile processor and undertakes processing of fabrics on job work basis for merchant manufacturers. The department received information that they were clearing processed fabrics by paying duty on assessable value determined under cost construction method wherein the job charges shown were less than what was actually recovered from the merchant manufacturers thereby evading payment of excise duty. The factory premises of the appellants were searched on 12-7-2004 and certain incriminating documents/records were recovered. These records revealed that the appellant assessee was recovering extra charges namely rotary charges, peaching charges, zero-zero charges etc. over & above the declared charges from the merchant manufacturers. However, they were not including these charges in the assessable value of the processed fabrics resulting in short payment of Central Excise duty. Similarly in the case of export consignment also it was found that the assessee had, in the price declaration filed by them, declared processing charges higher than what they were actually collecting under their job charges bills and they had also added 15% notional profit to the assessable value thereby declaring more assessable value than the actual value and availing excess "deemed credit" than what was actually admissible. This excess deemed credit was used for payment of Central Excise duty for goods cleared for home consumption. After completing the investigation, the department issued a show-cause notice dated 23-8-2006 wherein it was alleged that the appellant assessee had short paid Central Excise duty amounting to Rs. 7,85,423/- in respect of processed fabrics cleared from their factory during the period from August, 2001 to March, 2004. The show-cause notice further proposed to dis-allow deemed Cenvat credit amounting to Rs. 90,89,899/- availed by the assessee on the clearance of processed fabrics for home consumption during the period from August, 2001 to March, 2004 under the provisions of para 6 of Notification No. 6/2002-C.E. (N.T.), dated 1-3-2002. The show-cause notice was also proposed to recover wrongly availed excess deemed credit of Rs. 45,51,113/- on the clearance for export which were over-valued during the period from August, 2001 to March, 2004. The show-cause notices was adjudicated by the impugned order wherein the learned Commissioner confirmed duty demand of Rs. 7,85,423/- under Section 11A(1) of the Central Excise Act, 1944 being the amount short paid by the assessee on the clearance of fabrics in respect of which the job charges were mis-declared. He also confirmed interest on the amount short paid under Section 11AB and also imposed equivalent amount of penalty under Section 11AC. The learned Commissioner further dis-allowed the "deemed credit" amounting to Rs. 90,89,899/- availed by the assessee under the provisions of Section 11AQ(1) read with Rule 12 of the Cenvat Credit Rules, 2002/Rule 14 of the Cenvat Credit Rules, 2004, and imposed equivalent penalty under Section 11AC read with Rule 13 of the Cenvat Credit Rules, 2002. He further dis-allowed an amount of Rs. 33,39,673/- being "deemed credit" wrongly availed and utilized by over-valuing the export under the provisions of Section 11A(1) read with Rule 12 of the Cenvat Credit Rules, 2002. He also imposed equivalent penalty under Section 11AC and also ordered for recovery of interest under Section 11AB. He also imposed penalty of Rs. 5,00,000/- on Shri Rapinder Pal Singh Arora, Director of the appellant Company, a penalty of Rs. 2,00,000/- on Shri Ranbir Sharma, Manager of the Company and a penalty of Rs. 50,000/- on Shri Kashmir Singh Mehra, Excise in-charge of the appellant Company under the provisions of Rule 26 of the Central Excise (No. 2) Rules, 2001/Central Excise Rules, 2002. The appellants are before us against the said order.

3.1 The learned Counsel for the appellants submits that in certain cases they had failed to include job charges in the assessable value of the fabrics under clearance which was mainly for the reason that after the processing is over the fabrics were inspected by the customers, certain defects were noticed and in order to rectify the defects they undertook additional processing such as rotary, peaching or zero zero etc. and job charges for these processing carried out subsequently went un-noticed by the dealing clerk; hence duty was not paid. However, they submit that they have all along been paying excise duty on job charges including a notional profit of 15%. The notional profit of 15% was included in the job charges as per Trade Notice No. 20/C.Ex./Ch.54 & 55 (03)/2001/M-III dated 24-3-2001 issued by the Mumbai-III Commissionerate wherein the trade was directed to load 15% towards notional profit and 4.2% towards shrinkage. The Central Board of Excise and Customs (C.B.E.C.) vide Circular No. 24/14/93 dated 31-12-1993 had clarified that landed cost of raw material+job charges would be the assessable value for the job work. In-spite of the clarification given by the C.B.E.C., the Commissioner, Mumbai-III had issued a Trade Notice directing the trade to load 15% notional margin of profit. Further, the C.B.E.C. vide Circular No. 619/10/2002, dated 19-2-2002 had further clarified that there was no requirement of loading 15% notional margin of profit for valuation of goods manufactured on job work basis. However, Mumbai-III Commissionerate continued to collect 15% notional profit margin and withdrew the Trade Notice in terms of the clarification given by the Board only on 30-9-2002. If the amount of 15% of the notional profit, which was not required to be included while arriving at assessable value but which was forced on the trade by the Commissionerate to include is taken into account, there will be excess payment of duty by the appellants than what is required to be paid under the law. If such excess payment is adjusted towards short payment, there will not be any requirement to pay any duty at all. It is their contention that due to inclusion of 15% notional profit they have paid excess payment of Rs. 2,10,76,501/- as against the short payment of Rs. 7,85,433/-.

3.2 The learned Counsel has further argued that as per the same Trade Notice they were required to take shrinkage only to the extent of 4.2% whereas in their case they have actually taken shrinkage @ 6.2%; thus they have taken 2% extra towards shrinkage and if this is also taken into account, there will not be any short payment of duty as alleged in the show-cause notice. According to them, during the period from April, 2001 to March 2004, they have paid excess duty of Rs. 60,93,800/- On account of considering excess percentage of shrinkage i.e. 6.2% as against 4.2%. Since they have paid excess duty, the question of denial of duty credit of Rs. 90,89,899/- would not arise at all.

3.3 As regards the excess availment of deemed credit of Rs. 33,39,673/- alleged to have been availed wrongly in respect of export by declaring higher value than what was actually collected, they contend that if the additional 15% notional profit and 2% shrinkage are taken into account, there will not be any excess availment of credit as alleged in the show-cause notice.

3.4 He further argued that erroneous loading of 15% notional profit margin and excess loading of 2% shrinkage pertains to the very same fabrics on which short payment is alleged and such adjustments in respect of very same set of fabrics is permissible and he relied upon the following judgements in support of above contention viz. (1) Krishna Indl. Chemicals - : 2002 (146) E.L.T. 565 (T), (2) Indian Oil Corporation - 2005 (71) RLT 686 (T), (3) Order No. C-III/315 & 316/03 dated 20-2-2003 in the case of Indian Oil Corporation and (4) Indian Oil Corporation - 2007 (80) RLT 573 (T).

3.5 The learned Counsel further submits that as regards shrinkage, they have computed the actual shrinkage for the period from 2005-06 to 2009-10 and in their case it works out to 4.82% whereas as per Trade Notice they were required to take shrinkage @ 4.2% while during the period in question they have taken shrinkage at 6.2% which is much more than the shrinkage limit prescribed in the Trade Notice as also the shrinkage actually observed in their case.

3.6 The learned Counsel further submits that as regard the exports during the period from 2001-02 to 2003-04, they have exported fabrics worth of Rs. 196.45 crores approximately. Out of this, they have exported fabrics worth about Rs. 16.80 crores under claim for rebate of duty implying that they have paid more duty which is not taken into account by the department. He also submits that the learned Commissioner vide impugned order had admitted that "when the department itself insisted that the method of valuation specified in Trade Notice No. 20/2001, dated 24-3-2001 should be followed, the assessee was not unjustified in doing so till 4-10-2002 on which date the Trade Notice No. 20 was modified by Trade Notice No. 63." and, accordingly, he had dropped the demand for Rs. 12,11,439/- in respect of exports. The same logic should be adopted in respect of clearance for home consumption also which he has not done.

4. The learned departmental representative submits that the loading of 15% notional profit in the assessable value of the processed fabrics till 4-10-2002, though contrary to the Boards instructions on the matter, was as per the general understanding of law at that time. If the appellants were aggrieved by this loading, they should have filed refund claim rather than asking for adjustment in respect of demand for short levy made by the department. As regards shrinkage, the learned DR submits that as per Trade Notice No. 20/2001 dated 24-3-2001 shrinkage was allowed @ 4%; however, the said notice also provided that if the actual shrinkage is substantially more than that, then the actual shrinkage should be taken. In the assessees case, the actual shrinkage is more and, therefore, they have taken 6.2% as shrinkage. Therefore, the belated claim of the appellants that they have taken excess shrinkage has no merit and is liable for rejection. The learned DR also submits that the excess payment of duty claimed to have been made by the appellants is only an after-thought since as per the general understanding of the law prevalent at the relevant time, notional profit was added. In any case, the appellants have passed on the duty incidence to the customers and, therefore, they cannot make a claim for adjustment of such excess payment now towards short levy of duty. The learned DR also submits that as regards the denial of credit of duty of Rs. 90,89,899/-, Notification No. 6/2002-C.E. (NT), dated 1-3-2002 as well as Notification No. 53/2001-C.E. (NT), dated 29-6-2001 provided that the provisions of "deemed credit" shall not apply to final products on which duty of excise is leviable under the law which has not been levied or paid or has been short levied or short paid or erroneously refunded by reason of fraud, collusion or any willful mis-statement or suppression of facts, or contravention of any provisions of the Central Excise Act or of the Rules made there-under with intent to evade payment of duty. In the instant case, the appellants have short paid duty amounting to Rs. 7,85,423/- by willfully mis-declaring and suppressing the job charges on account of rotary charges, peaching charges, zero zero charges etc. Therefore, the appellant is not eligible for the deemed credit in terms of the above said provisions. In his written submission, the learned DR has confirmed that the amount of Rs. 90,89,899/- of deemed credit pertains to the entire "deemed credit" taken by the appellants in respect of processed fabrics done on job work basis to domestic customers and it is not limited to the invoices where the value has been mis-declared. In the light of the above submissions the learned DR submits that the appeals are devoid of merit and the same deserve to be rejected.

5. We have carefully considered the rival submissions.

6.1 We notice that during the material period of time from August, 2001 to October, 2002, the appellants (textile processors) were directed to load their job charges by 15% towards notional profit vide Trade Notice No. 20/2001 dated 24-3-2001 issued by the Mumbai-III Commissionerate. This Trade Notice was clearly in contravention of law and against the direction of the Board issued vide Order No. 24/14/93/Cx., dated 31-12-1993 wherein the Board had clarified that in respect of job work, the assessable value shall consist of only the cost of materials at the premises of the job worker + job charges. Further in the instruction issued on 19-2-2002 the Board had reiterated the same in the light of the Honble Apex Courts decision in the case of Ujagar Prints [1989 (39) E.L.T. 493 (S.C.)]. However, in-spite of these clear directions, the Mumbai-III Commissionerate kept on insisting to load trade/job work charges by 15%. Therefore, it has to be noted that excess valuation has arisen as per the directions of the department. When the department alleges short levy of duty due to non-inclusion of processing charges in certain transactions, they cannot shut their eyes towards the excess payments collected by them on the very same transactions which is not in accordance with law. Therefore, such excess payments have to be necessarily adjusted towards the short payments alleged by the department on the very same transactions. Therefore, if the department alleges that the assessee had short paid duty amounting to Rs. 7,85,425/- in respect of certain invoices pertaining to certain quantity of fabrics under clearance, they need to take into account whether the appellant has paid more duty than what was required to be paid under the law. To this extent the claim of the appellants, that they have paid excess duty which needs to be taken into account while computing the short payment, has merit and force. Therefore, in respect of clearances made from August 2001 to October 2002 as the appellant was paying duty at a value including 15% notional profit as per the directions of the Commissionerate, such excess payments has to be necessarily be adjusted against the short payments made in respect of the very same invoices where the assessee has been alleged to have short paid the duty. Therefore, the demand of Rs. 7,85,423/- has to be re-computed taking into account the excess payments made by the appellants on account of additional of 15% notional profit and we order accordingly.

6.2 As regards the excess payments made by the appellants towards shrinkage of fabrics, it is seen that the Trade Notice provided for a shrinkage of 4.2% whereas the appellants took shrinkage at 6.2%. The Trade Notice also provided that if the shrinkage is substantially more than 4.2% as provided in the Trade Notice, actual shrinkage should be taken into account. The contention of the assessee is that the actual shrinkage for the period from 2005-06 to 2009-10 is 4.8%. If they can adduce evidence that they have taken higher amount of shrinkage than what is actually incurred, then the benefit of the same should be given to them. Of-course this will be subject to adducing evidence before the adjudicating authority that the actual shrinkage which has been actually incurred is less than what they have provided for while arriving at the value of the goods. Therefore, we hold that the appellant-assessee is entitled to the adjustments on account of addition of 15% notional profit and also on account of shrinkage which was taken into account more than the actually incurred shrinkage. After making such adjustments, the department has to determine whether any demand towards short levy exist and only to that extent the department can make legitimate claim from the appellant-assessee.

6.3 With regard to the denial of Cenvat credit amounting to Rs. 90,89,899/- the Notification provided that "deemed credit", should not be availed in respect of cases where duty of excise has been short paid by reason of fraud, willful mis-statement or suppressions of fact etc. The said provision does not say that even if in respect of the same fabrics when duty liability is discharged correctly "deemed credit" can be denied. In the instant case, it is observed that the learned adjudicating authority has denied the deemed credit facility for the entire period even in respect of fabrics cleared under invoices wherein duty liability has been discharged correctly. Such a denial is not provided for in the Notification or in the law. Para 6 of Notification 6/2002-C.E. (NT), dated 1-3-2002 read as follows :-

The provision of this Notification shall not apply for final products on which duty of excise is leviable under the Central Excise Act, 1944 or as the case may be, the additional duty leviable under the Additional Duties of Excise (Goods of Special Importance) Act, 1957 has not been levied or paid or has been short levied or short paid or erroneously refunded by reason of fraud, collusion, willful mis-statement or suppression of facts, in contravention of any provisions of the Central Excise Act or of the Rules made thereunder with intent to evade payment of duty.

Therefore, denial of entire credit of Rs. 90,89,899/- has no legal basis what-so-ever and has to be set aside. In the instant case, from the records it is seen that while short levy is alleged on a quantity of 2343679.99 sq. meters of fabrics valued at Rs. 58,78,579.41, deemed credit is sought to be denied as a quantity of fabrics of 2625367.13 sq. meters valued about Rs. 11,13,27,107.53. Thus there is no connection whatsoever between the fabrics on which short levy is alleged and the fabrics on which "deemed credit" is sought to be denied. Therefore, we direct the adjudicating authority to re-compute the deemed credit wrongly availed only in respect of those quantum of fabrics specified under invoices in respect of which there is short payment of duty and not on the entire quantum of fabrics cleared during the material period. Needless to say, while considering short payment, the excess payment on account of addition of 15% notional profit and excess shrinkage taken will have to be adjusted and only if short payment still exist, the question of denial of deemed credit would arise.

6.4 We also observe that the same principle, as discussed above, will apply in respect of export clearance also and, therefore, the extent of "deemed credit" wrongly availed in respect of exports will have to be re-computed taking into account the above factors.

6.5 In the light of fore-going discussions, we set aside the impugned order and remit the case back to the original adjudicating authority to consider the matter afresh in the light of directions given above after affording a reasonable opportunity to the appellants to submit their case and also to produce evidence in support of their contentions.

Appeals are thus disposed of by way of remand as per the terms discussed above.

(Pronounced in open Court on 27-7-2011)