Per S.L. Peeran :

This appeal arises from the order in original No. 7/98 passed by the Commissioner of Central Excise, II, Chennai, confirming duty demand of Rs. 5,78,71,613 by invoking Rule 9 (2) of the Central Excise Rules, 1944 read with Sub section (1) of Section 11A of the CE Act, 1944, as per calculation in the work sheet annexed to the order in original for the period 1.10.92 to 31.8.97. He has imposed a penalty of Rs. 1,53,64,165/- under Section 11AC of the Act and a further penalty of Rs. 10,00,000/- under Rule 173Q. He has also demanded interest on the duty confirmed under Section AB (Sic - 11AB) of the Act, for the period after 28.9.96.

2. The appellants are engaged in the manufacture of automotive and industrial chains in their factories at Ambattur, Chennai-53 in Tamil Nadu and at Kazipally Village, Medak District in Andhra Pradesh. The chains manufactured by the appellants are classified under Heading 73.15 and are used in Cycle, Cycle-rickshaw, motor cycle etc. Appellants have commenced their production of the aforesaid items in the year 1960. Appellants have also been manufacturing and supplying automotive chains and connecting links to various OE manufacturers of two wheelers i.e. motor cycle. Besides this, appellants have also been supplying these items to the replacement market (domestic/overseas) as spare parts through its depot/dealership network. In the course of time the appellants earned market goodwill for their various types of chains popularly known as "Diamond chains" among the general public and the industrial consumers. In order to avoid spurious sprocket of lower quality and non standard specifications, being sold along with their chains. They decided to market their automotive chains and connecting links along with the quality sprockets procured from various independent sprocket manufacturers and vendors in the country. They therefore, took up the following activities :

(a) To buy sprockets from genuine independent manufacturers/vendors;

(b) To undertake the testing of the bought out sprockets to ensure their quality and durable nature.

(c) To make available such sprockets along with the automotive chains;

(d) To present them in a skin wrapping to ensure that it is pilfer proof packing.

They stated that information was given to the department and permission in relaxation of the rules was sought from the Commissioner through the Assistant Commissioner vide their letter dated 14.7.88. Subsequently, in response to their letter the range Supdt. of Central Excise sought further clarification from the appellants vide letter dated 29.7.88 and the same was furnished vide their letter dated 4.8.88. They stated that the activities of procuring, testing and packing of the sprockets along with automotive chains and connecting links were undertaken by the 'sprocket kit' Division of the appellants factory and subsequently the activities were undertaken at B-6, Ambattur Industrial Estate and at SIDCO Industrial Estate, Chennai. They have narrated in their facts of the case [that]they purchased sprockets mainly from five separate units whose names have been given including the purchase invoice from the said units. They stated that in order to avoid any pilferage in the course of marketing and sale so as to prevent replacing of the quality sprockets with spurious ones they adopted the skin-board packing. The quality control tests employed on the procured sprockets are as follows:

(a) Wrap test

(b) Bore test

(c) Fitment test

(d) Visual examination

(e) Hardness test

(f) Depth of Case Hardening (on random supplies)

(g) Quality and thickness of electroplating

They stated that they raised invoice for four items viz. automotive chain, connecting links, sprockets (both gear box and rear wheel), assigning only code to these items collectively in the absence of any nomenclature under which these items can be identified either by the trade, industry or the end-user. Prior to skin packing or after re-packing all the four it