Important pointWhere the assessee had disclosed the relevant facts in the gate passes and there was no wilful suppression of facts on the part of the assessee, the department was not entitled to invoke the proviso to Section 11A(1) of the Central Excise Act, 1944.

Headnote:Central Excise Act, 1944—Sections 11A and 35L(b)—Central Excise Rules, 1944—Rule 9(2)—Central Excise Tariff Act, 1985—Chapter Heading 29—Exemption Notification No. 234/86 dated 3-4-1986—Appellant, a manufacturer of bulk drugs in India manufactures Ascorbic Acid and Salts of I.P. (Vitamin ‘C’) as well as Sorbitol Solution USP—Appellant’s goods falling under Chapter Heading 29 of the Excise Tariff Act—Appellant submitted its classification list for approval claiming exemption under the notification No. 234/86—Assistant Collector permitted appellant to clear goods under the notification—Subsequently, show cause notices received by appellant from Collector of Central Excise denying the exemption under notification No. 234/86—Allegations that appellant has wrongly availed nil rate of duty in respect of its clearances by not bringing to the notice of the department the fact that certain quantities of sorbitol solution and vitamin ‘C’ had been sold to non pharma concerns—Whether department was justified in invoking proviso to Sec. 11A(1) of the Act—(No).
       Held : A bare reading of the notification No. 234/86 indicates that the exemption in favour of bulk drugs falling under chapter 28 or chapter 29 of the schedule annexed to the Central Excise Tariff Act, 1985 is not an unconditional exemption. The said notification had a proviso. Under the proviso, the manufacturer was required to furnish to the Competent Authority a certificate from the Drugs Controller to the effect that the drug for which exemption was claimed was a “bulk drug” within the meaning of the expression “bulk drug” given in the explanation to the notification and, which was normally used for diagnosis, treatment etc. in human beings or animals and used as such or as an ingredient in any formulation. The explanation to the notification defines “bulk drugs” to mean any chemical, biological or plant product, normally used for diagnosis, treatment etc. in human beings or animals and used as such or as an ingredient in any formulation. The question is - whether in the said exemption notification, end use of the bulk drug was made imperative. According to the appellant, mere production of the certificate from the Drugs Controller was sufficient to attract the benefit of the exemption notification. We do not find any merit in this argument. The bulk drug is defined under section 2(a) of the Drugs (Prices Control) Order, 1979 to mean any substance including pharmaceutical, chemical, biological or plant product which is used as such or as an ingredient in any formulation. A substance may have several uses other than in drugs/pharmaceuticals. The eligibility for exemption under notification No. 234/86-CE dated 3.4.1986 requires the substance (sorbitol solution) to be actually used in manufacture of drugs/medicines/pharmaceuticals. In other words, sorbitol solution may have different uses. However, sorbitol solution got the benefit of exemption only when it was used actually in manufacture of drugs/medicines/pharmaceuticals. The exemption was given to a drug. It was not given to a sorbitol solution, which has uses other than in pharmaceuticals. A sorbitol solution could be called a drug for the purposes of exemption only when it was actually used as drug or as an ingredient in any formulation. The notification No. 234/86 gave exemption to only those substances, which are, in reality, drugs and not to the substances, which are not drugs even though they are capable of acting as drugs. Therefore, the exemption was extendable to sorbitol solution, cleared by the appellant, when used in the manufacture of drugs, medicines, pharmaceuticals. By diverting a specified quantity of sorbitol solution etc. to liquor units, cigarettes units, soap units etc., the appellant lost the benefit of exemption and in the circumstances, the department was right in raising the aforestated demand. (Para 21)
       The question is, whether in the present case, there was any wilful suppression of facts. On facts, as stated above, we find that the appellant had filed a classification list indicating notification No. 234/86 dated 3.4.1986 as well as the chapter under which the goods fell. We have gone through the classification list. It indicates the claim for exemption. The classification list was duly approved by the department. So also monthly returns were filed by the appellant in the form of RT-12, in which there was a complete disclosure regarding the nature of the goods. These returns were regularly assessed by the department. The material placed on record shows filing of gate passes, invoices, classification list. They indicated the names of the consignees. A mere reading of these names would indicate that sorbitol solution was sold to non-pharmaceutical companies like, M/s Golden Tobacco Co. Ltd. Despite such disclosure, the department approved the classification list as well as RT-12 returns. There was no reopening of the approvals and assessments within the stipulated period. In the circumstances, the Judicial Member of the Tribunal was right in holding that no case was made out for invoking the extended period of limitation. As stated above, the end use was built in the exemption notification. Therefore, the department could have demanded duty within one year from the relevant date under section 11A(1). However, this was not done. In the absence of evidence of suppression of facts, the J.M. was right in setting aside the show-cause notices. (Para 27)
       In the present case, we have come to the conclusion that there was no wilful suppression of facts on the part of the appellant as the appellant had filed the gate passes, invoices and monthly returns, which were all duly approved by the department from time to time. The invoices, gate passes and the monthly returns indicated the names of the consignees from which it was possible for the department to infer sale of sorbitol solution to non-pharmaceutical companies and yet no steps were taken by the department to raise the demand in time and, therefore, we hold that there was no wilful suppression of material facts for invoking the proviso to section 11A(1). The facts of the present case are not confined only to gate passes clearances. In such cases, it would not be proper to Courts to rely on the evidence furnished only by gate passes. In the circumstances, although on merits the department succeeds, these appeals need to be allowed as the impugned show-cause notices-cum-demands were time barred and as no case is made out by the department for invocation of the proviso to section 11A(1) of the said Act. (Paras 28 & 29)

Judgment

Kapadia, J.—These appeals under section 35L(b) of Central Excise Act, 1944 are directed against a majority decision dated 11.1.1999 passed by the Customs, Excise and Gold (Control) Appellate Tribunal, New Delhi, by which common order, the Appeal Nos. E-736/91-C, E-738/91-C and E/747/91-C filed by the appellant were dismissed.

2. The facts, briefly, stated are as follows:

M/s Sarabhai M. Chemicals, the appellant herein, is a manufacturer of bulk drugs in India. It manufactures Ascorbic Acid and Salts of I.P. (Vitamin ‘C’) as well as Sorbitol Solution U.S.P. The said goods fall under chapter heading 29 of Central Excise Tariff Act, 1985.

3. By notification No. 234/86 dated 3.4.1986, the Central Government exempted the bulk drugs as defined in the said notification from payment of excise duty. The appellant submitted its classification list for approval claiming exemption under the said notification. By letter dated 17.4.1986, the Assistant Collector permitted the appellant to clear the bulk drugs under the above notification subject to production of a certificate from the Drugs Controller, Government of India. The appellant obtained certificates from the Drugs Controller dated 17.4.1986, 15.5.1986, 21.5.1986 and 6.8.1990, in respect of their claim for exemption under the aforestated notification. In the classification list, exemption was sought by the appellant under notification No. 234/86 on the basis of certificates received by the appellant from the Drugs Controller, Government of India. The classification lists were scrutinized, verified and approved by the Assistant Collector. The appellant cleared the goods upon submission of the gate passes in which they disclosed the names of the consignees. The appellant also submitted its monthly returns on excisable goods manufactured by it in the prescribed RT-12 forms, which gave the particulars of the goods removed, gate passes under which the goods were removed etc.

4. Three show-cause notices were received by the appellant on 30.12.1987, 6.4.1988 and 20.6.1988 from Collector of Central Excise, Vadodara, denying the exemption under notification No. 234/86. All the three show-cause notices alleged that the appellant has wrongly availed nil rate of duty in respect of its clearances by not bringing to the notice of the department the fact that certain quantities of sorbitol solution and vitamin “C” had been sold to non-pharma concerns knowing fully well that the commodities would not be normally used as drugs or medicines by its customers. By the said show-cause notices, the appellant was asked to show-cause inter alia as to why excise duty should not be recovered under section 11-A(1) of the said Act read with rule 9(2) of the Central Excise Rules, 1944. The said three show-cause notices related to the period, April 1986 to November 1986, March 1984 to February 1986, and April 1986 to 30th April, 1987. The grounds for demand stated that on verification of the records of the appellant, it was noticed by the department that the appellant had cleared sorbitol solution to cigarette manufacturers, which fact was not brought to the notice of the department at the time of clearance.

5. By its reply dated 2.3.1988, 18.7.1988 and 6.10.1988 respectively, the appellant submitted that the Drugs Controller to the Government of India had issued a certificate certifying sorbitol solution etc. as a Bulk Drug after scrutinizing and examining the product; that the sorbitol solution manufactured by the appellant met the requirement of the said notification; and that the word “normally” used in the notification did not restrict the exemption based on individual end use. It was urged that if the intention was to restrict use of sorbitol solution by drug manufacturing units only for diagnosis, treatment, medication or in prevention of diseases or as an ingredient in any formulation then the Legislature would have used the word “exclusively” instead of the word “normally”; that the notificatio

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2004 Supreme(SC) 1592

Important pointWhere the assessee had disclosed the relevant facts in the gate passes and there was no wilful suppression of facts on the part of the assessee, the department was not entitled to invoke the proviso to Section 11A(1) of the Central Excise Act, 1944.

Cases Referred (2)