Amrit Bottlers Pvt. Ltd. vs Commissioner of C. EX.

Tarun Agarwala, J.—The appellant is a Public Limited Company, engaged in the manufacture of aerated water falling under subheading No. 2201.20 and 2202.00 of the First Schedule to the Central Excise Tariff Act, 1985. In transpires that on 1-3-2000 the Central Excise Officer visited the factory of the appellant and, upon investigation, on the basis of the production format/register maintained by the appellant, found that the maintenance of the production format was not disclosed by the appellant as required under Rule 173G(5) of the Central Excise Rules, 1944 (hereinafter referred to as the "Rules") and that the appellant was draining out the aerated water without entering it first in the R.G.-1 register and were not maintaining any record relating to draining out of the aerated water. The officers also found that the aerated water so drained out was not on account of being unfit for human consumption, but on account of the fact that it was not in conformity with the specifications provided under the Prevention of Food Adulteration Act and Weights and Measures Act, 1976.

Accordingly, a demand-cum-show cause notice for the period August, 1995 to May, 2000 was issued alleging that the appellant had disposed of 18958 crates and 5 bottles of manufactured aerated water without accounting it in R.G. 1 register and without payment of the Central Excise Duty and that the appellant had also disposed of 615 creates and 11 bottles of aerated water taken as samples required for laboratory test, without accounting it in the R.G. 1 register and without payment of Central Excise Duty and consequently, directed the appellant to show cause as to why duty amounting to Rs. 6,59,137/- along with interest and penalty should not be imposed.

The appellant denied the demand and contended that they are not liable to pay any duty, inasmuch as, the aerated water was drained out prior to the stage of entering the finished goods in R.G.-1 register as certain bottles were found to be defective on account of contamination, under/over filling of the bottles or it was badly crowned bottles. The appellant submitted that under and over filling of the bottles makes it unusable under the Weights and Measures Act as well as under the Prevention of Food Adulteration Act and, therefore, not marketable and consequently, the same was not required to be entered in R.G. 1 register.

The appellant further contended that the aerated water, which was drained out were not marketable and did not qualify as finished goods for the purpose of levying duty. The appellant submitted that the goods which have been manufactured and which are marketable can only be subjected to excise duty and since the bottles, which were under filled or over filled or the bottles had badly crowned caps were not marketable, consequently, no excise duty was payable far less any penalty.

The Additional Commissioner, Central Excise by his order dated 12-4-2002 confirmed the demand of duty amounting to Rs. 6,59,137/- under the proviso to Section 11A(1) of the Central Excise Act, 1944 read with Rule 49(1) of the Rules along with interest u/s 11AB of the Act. The authority further imposed a penalty of the same amount u/s 11AC of the Act read with Rule 173Q of the Rules.

The Additional Commissioner in its order held that the production format maintained by the appellant was not declared under Rule 173G(5) of the Rules and, therefore, cannot be termed as an authentic record. The Additional Commissioner further observed that the bottles which had been under filled or over filled or were badly crowned caps were manufactured goods and even if the said bottles were unfit for human consumption, nonetheless, it was required to be entered in R.G. 1 and register and thereafter the assessee should have applied for remission, which was not done. The Additional Commissioner further found that the appellant had not brought to the notice of the department the factum of draining out of aerated water and drawl of sample for the laboratory test and, consequently, suppressed the above facts from the department, which leads to an inference that there has been clandestine removal of the goods without payment of excise duty.

The appellant, being aggrieved, filed an appeal before the Commissioner (Appeals), who by its order dated 9-4-2003 dismissed the appeal and confirmed the order of the Additional Commissioner. The appellant, being aggrieved, filed a Second Appeal before the Customs, Excise & Service Tax Appellate Tribunal. The Tribunal, by its order dated 20-7-2004 2004 (116) ECR 394 dismissed the appeal affirming the demand, but reduced the penalty to Rs. 65,000/-.

The Tribunal held that there was no evidence on record to prove that fully manufactured aerated water bottles were destroyed by them nor the destroyed bottles were entered in the R.G.-1 register and that only a few bottles were shown in the production format against the columns of under filled, over filled, contaminated or badly crowned caps. The Tribunal was of the opinion that these bottles which were under filled or over filled, etc. were excisable goods and before destroying the same, the appellant were required to take permission from the authority. The Tribunal was further of the opinion, that if the goods were defective or were non-marketable, the appellant was required to seek remission under Rule 49 of the Rules, which in the instant case was not done. The Tribunal was further of the opinion that an entry was required to be made in R.G.-1 immediately the screening test was completed, which in the instant case was not done in the register.

The appellant, being aggrieved by the aforesaid orders of the authorities, has filed the present appeal u/s 35G of the Central Excise Act contending that substantial questions of law arises for consideration.

Having heard Sri Bharatji Agarwal, the learned senior counsel assisted by Sri Subham Agarwal, the learned counsel for the petitioner and Sri R.C. Shukla, the learned counsel for the respondents, we find that the following questions of law arises for consideration, namely:-

(1) Whether the contaminated, under or over filled bottles or badly crowned bottles amounts to a manufactured finished goods, which is required to be entered under R.G.-1 register and which is exigible to payment of excise duty?

(2) Whether the draining out of contaminated water amounts to clandestine removal of the goods and, consequently, the excise duty is payable?

Having heard the learned counsel for the parties and having perused the orders and the evidence that was filed before the authority, we find that the appellant had intimated the excise authority by its letter dated 8-8-1996 with regard to the records maintained in their factory as per Rule 173G(5) of the Central Excise Rules. A perusal of this document indicates that production book has been mentioned at Sl. No. 15.

The authorities refer in the impugned orders to the production format produced by the appellant before the inspection team. This production format is nothing else, but the production register or the production book maintained by the appellant indicating the production of the aerated water in their production line. We further find that the show cause notice and the presumption drawn that there has been an evasion of payment of duty on the aerated water which has been drained out is based on the information derived from the production register. Consequently, we are of the opinion, that all the authorities including the Tribunal were not justified in holding that the appellant had not disclosed its production register u/s 173G(5) of the Rules to the Department. This finding is perverse and is against the material evidence on record.

Further, we find that the Additional Commissioner was not justified in holding that the production register is not an authentic record since it was not disclosed u/s 175G of the Rules. If the production register was not an authentic record then the figures indicated in the show cause notice, which is based on the figures taken from the production format could not become the basis for imposition of the excise duty.

This leads us to the question as to whether the assessee was required to account the drained out water in the R.G.-1 register. R.G.-1 register is maintained under Rules 53 and 173G of the Rules. Rule 173G of the Rules provides that the appellant is required to maintain a register in such forms as prescribed under the Act and the Rules with regard to excisable goods. Rule 53 of the Rules provides that every manufacturer shall maintain a stock account in such Form, which would be called a daily stock account disclosing the description of the goods, quantity manufactured, quantity deposited in the store room under Rule 47, quantity removed after payment of duty, etc. Based on Rule 53 of the Rules, Form RG-1 has been prescribed. R.G. 1 is a register, which is required to be maintained to indicate the daily stock of manufactured goods. A perusal of this register indicates that entry is required to be made in R.G. 1 register of the "finished product" on which excise duty is payable. The quantity of the finished product manufactured is required to be indicated in column No. 3. The value of the finished product is required to be indicated in column Nos. 6 and 8. In column No. 13, the rate of duty is required to be indicated. In column No. 14, the amount of duty, that is payable, is required to be indicated.

We also find that the product manufactured by the assessee undergoes a screening test and only thereafter finished goods which are not contaminated, under filled, over filled or badly crowned bottles are entered in R.G.-1 register.

In the light of Rule 53 of the Rules, read with the columns indicated in R.G. 1 register, we are of the opinion, that only "finished goods" are required to be entered in R.G. 1 register.

The question which arises for consideration is, whether the contaminated bottles or the over filled or under filled bottles or badly crowned capped bottles are "finished goods" or not?

In FGP Ltd. v. Union of India and Another, (2003) 10 SCC 270 : 2004(168) E.L.T. 289 (S.C.), the Supreme Court held that excise duty u/s 3 of the Act is levied and collected on manufactured goods, which is marketable. The Supreme Court held that u/s 3 of the Excise Act, exigibility of duty is on the goods which are produced or manufactured and brought and sold in the market. The Supreme Court held that the marketability of the goods is an essential ingredient of excisable goods for being subjected to excise duty.

Where a product is manufactured but is not marketable, no excise duty would be leviable. The law requires the appellant to provide a screening test before it can declare the manufacture product as a finished product, which is marketable. If the product does not pass the test for the reasons of being contaminated under filled or over filled or where the bottle has a badly crowned cap, such bottles are not manufactured finished goods which are marketable and, consequently, are not required to be entered in R.G. 1 register.

We are of the opinion, that in R.G. 1 register only a finished product is required to be entered. In our opinion, a finished product is a manufactured goods which is marketable.

In the instant case, we find from a perusal of the show cause notice that the drainage of the aerated water from the contaminated bottles or over filled or under filled or badly crowned caps bottles had taken place during the production stage. The appellant contended that in terms of the provisions of Weights and Measures Act they were required to fill the bottles with aerated water containing the declared quantity of goods, failing which, they would be liable to penal action in terms of the said Act. Consequently, filling less or more aerated water in the bottles is not marketable under the Weights and Measures Act. We are of the opinion that such over filled or under filled or badly crowned bottles were not completely manufactured finished goods and, therefore, would not be exigible to excise duty. As such, under filled or over filled or badly crowned caps bottles cannot be treated as being fully manufactured nor could it be treated as finished goods and, consequently, there was no occasion for such goods to be entered in R.G. 1 register. The finished goods after undergoing the screening test are only required to be accounted for in R.G. 1 register having found that they are fit for sale.

In the light of the aforesaid, we are of the opinion, that the authority had misdirected itself in holding that under filled, over filled, badly crowned cap bottles and even contaminated bottles were required to be entered in R.G. 1 register. The authorities were wholly incorrect and misdirected itself in coming to the conclusion that since these under filled, overfilled, badly crowned bottles were not entered in R.G. 1 register, it amounts to clandestine removal of goods without payment of excise duty, is patently erroneous.

We are of the opinion that these under filled, over filled, badly crowned bottles and contaminated water bottles found at the stage of production were not marketable goods and consequently, no excise duty was payable. Since no excise duty was payable, the question of imposition of penalty does not arise.

We also find that identical notice was issued to the appellant for imposition of excise duty, interest and penalty for the period June, 2000 to January, 2001, which was allowed by the Tribunal and the demand and penalty was set aside against which the Excise Department filed Central Excise Appeal No. 471 of 2007, which was dismissed by a judgment of this Court dated 22-10-2010 holding that there was no illegality in the order of the Tribunal.

For the reasons stated aforesaid, the question of law is answered accordingly and we hold that the imposition of payment of excise duty along with interest and penalty could not have been imposed. The impugned orders passed by the Additional Commissioner, the 1st Appellate Authority as well as by the Tribunal cannot be sustained and are quashed.

The appeal is allowed. In the circumstances of the case parties shall bear their own cost.