Excise Appeals Nos. 1366/LB, 1656/LB, 1658/LB to 1660/LB, 1662/LB, 1676/LB, 1677/LB to 1681/LB Versus Excise Appeals Nos. 1366/LB, 1656/LB, 1658/LB to 1660/LB, 1662/LB, 1676/LB, 1677/LB to 1681/LB
MEHMOOD ALAM, MEMBER (TECHNICAL).--- The appeals listed in the preamble of this order involve the common question of law as well as merits and relate to the same period of dispute i.e. 1996, 1997, 1998 and part of 1999. These are therefore being disposed of together through this consolidated judgment.
2. Appellants in these cases are the manufacturers of paper and paper board. Their manufactured products include writing paper, wrapping paper, fluting paper, corrugated paper, liner, kraft liner, straw board, box-board, cone board and file card etc. These products, during the respective years (i.e. from July, 1996 to February, 1999) were chargeable to central excise duty and sales tax under the respective statutes. As such the manufactures of these products were under obligation to pay the central excise duty thereon at the values determined under section 4(1) of the Central Excise Act, 1944 whereas the sales tax was required to be charged on the "duty-paid" values of the products. Besides, they were also required to maintain their central excise and sales tax records in the prescribed manner. Application and interpretation of the said section 4(1) is the subject-matter of these appeals which reads as under:
"(4) Determination of value for the purposes of duty .---(1) Where under this Act any article is chargeable with duty at a rate dependent on the value of the articles, such value shall be deemed to be the wholesale cash price for which an article of the like kind and quality is sold or is capable of being sold to the general body of retail traders or, if there is no general body of retail traders, the general body of consumers on the day on which the article which is being assessed duty is removed from the factory or the warehouse, as the case may be, without any abatement or deduction whatever except the amounts of 'duty and sales tax then payable."
3. Brief facts giving rise to these appeals are that the Directorate General of Intelligence and Investigation (Customs, CE & ST) received information that the paper and paper board manufacturer of Lahore and its surrounding locations were indulging in phenomenal evasion of central excise duty and sales tax by mis-declaring the values and assessing their products at lower prices instead of the actual prices charged from the recipients of these products as well as the prices as were prevailing in the open market. In pursuance of the said information, the officers of the Directorate General requisitioned detailed information and some of the prescribed records from the respective manufacturing units for the period, 1996, 1997 and 1998. Part of the needed information and some records were provided by the manufacturers but the complete information and records were not made available.
4. Scrutiny of the said information and records, nevertheless, strengthened the suspicion that the manufacturers of paper and paper-board had been suppressing the assessable values of their products. The matter was further investigated by the officers of the Directorate General by determining:
(i) cost of the respective inputs or raw materials;
(ii) cost of the energy inputs;
(iii) other manufacturing expenses and administrative overheads; and
(iv) the open market prices of the products.
These factors were largely determined through the market surveys and enquiries whereas the data/information provided by the manufacturers was partly used in the process. Directorate General of Intelligence and Investigation thus reached the conclusion that the manufacturers of paper and paper board had suppressed the assessable values of their products by substantial margin. Contravention reports were accordingly forwarded to the adjudicating officer(s). Consequently, show-cause notices were issued to the respective manufacturers and the adjudication proceedings were completed in the due process. The amounts of central excise duties and sales tax found to have been evaded in each case were determined as a result, which the respective manufacturers were directed to pay. Besides, the liabilities of additional duty, additional tax and the penalty etc. were also adjudged against them. Hence the appeals.
5. The appellants were heard by us on several dates through Messrs Naveed Sohail Malik and Nasrullah Cheema advocates whereas the respondent department was represented by Miss Kausar Akhtar advocate and Mr. Jamshed Yousaf, SIO. Learned counsel of the appellants, during these proceedings, pleaded that the impugned orders were invalid and un-sustainable, inter alia, on the following grounds:
(i) That the impugned orders were based on conjectures and surmises and had been passed in a mechanical fashion without due application of mind whereas the show-cause notices were time-barred.
(ii) That, officers of the Directorate General of Intelligence and Investigation (Customs, CE & ST) had no powers to conduct inquiries with regard to the values of excisable products in terms of section 4(1) of the Central Excise Act.
(iii) That, the-parameters laid down in section 4(1) of the Central Excise Act had been ignored by the adjudicating officer(s) while working out the assessable values of the paper and paper-board products.
(iv) That, manufacturing units of the appellants were subject to the supervised clearance system during the period under reference. As such, the appellants could not have cleared their consignments without the permission or approval of the appropriate Central Excise Officer. Therefore, impleading the appellants in massive evasion of central excise duties and sales tax at a subsequent stage was not justified.
(v) That, the prices of inputs (i.e. raw material) had been estimated by the detecting officers and accepted by the adjudicating officer(s) without adequate supporting evidence. This entire exercise was conducted arbitrarily and without giving due consideration to the relevant factors.
(vi) That, the production costs so worked out by the dubious means are invalid in the eyes of law. Similarly, the so-called "open market prices" ascertained from the sale records of irrelevant persons cannot withstand the test of judicial scrutiny.
(vii) That, the costing of a product is a highly complex phenomenon for which the officials of the investigation agency are not trained. Costing of a product is purely a function of the cost accountants and professionals which, in the impugned cases, had been wrongly assumed by the Investigation agency.
(viii) That, the alleged evidence based on the electricity bills and electricity consumption per unit of the output by the appellants was inadmissible firstly because the calculations made in this behalf were incorrect and secondly it was against the legal norms as same were not corroborated by any primary evidence.
(ix) That, many products of the appellants (such as writing paper, kraft paper and liner etc.) consist of several grades or specifications. But the grades and specification of various products were unduly ignored by the investigation agency as well as the adjudicating officer(s) while ascertaining their assessable values.
(x) That, it was a settled principle of the interpretation of the statutes that the tax statutes are to be interpreted in favour of the taxpayer rather than the government. Therefore, the inter pretation of the statutory provisions have to be done in favour of appellants.
6. Counsel of the respondent department assisted by Mr. Jamshed Yousaf SIO, on the other hand, emphasized that the assessable values determined by the adjudicating officer(s) in each case were fair as the same were based on documentary evidence. That the entire exercise conforms to the meanings and spirit of section 4(1) of the Central Excise Act and the amounts of liabilities of central excise duties as well as sales tax had been correctly adjudged. On conclusion of hearings both the parties submitted summaries of their written arguments.
7. We have looked into the grounds of appeals, arguments of the parties and connected records. To begin with, the question of limitation with regard to the impugned show-cause notices was examined and it was observed that the show-cause notices in each case had been issued within the prescribed period of limitation. We agree that the technical objections raised in this behalf are without merits and un-sustainable.
8. The question of jurisdiction of the investigation agency was examined next. According to the respondent department, an officer of A the Directorate General of Intelligence and Investigation (Customs and Excise), not below the rank of a Deputy Superintendent, is authorized under notification S.R.O. 543(I)/75, dated 8-5-1975 for the purposes of section 14 of the Central Excise Act, of 1944. By virtue thereof, the officers of the investigation agency are invested with the powers to summon persons to give evidence and produce documents in inquiries under the Act ibid. As such the respective officers had exercised their lawful jurisdiction while inquiring into the assessable values of the products. Having gone through the text of S.R.O. 543(I)/75 and section 14 of the Act ibid, both of us are inclined to agree to the aforesaid version. The investigation agency had gathered information and recorded evidence with regard to the assessable values of excisable goods which is well within the ambit of said section 14. No further inquiry for the purposes of sales tax was needed because the additional liability of sales tax was only consequential.
9. A major argument of the appellants relates to the scope of application of section 4(1) of the Central Excise Act. The main issue which emerges from their averments in this behalf poses a question as to whether or not the open market price of a product can be used to work out the assessable value thereof for the purpose of the levy of central excise duties under the said section 4(1). We have focused on this question at length. The provisions of section 4(1) are, obviously, based on the notional concept of equalized wholesale cash prices. In cases where the wholesale cash prices declared by manufacturers of excisable products are of doubtful character, the actual assessable values can be ascertained either on the basis of retail prices and if there is no body of retail traders, the general consumer prices can be used for the purpose. However, in cases where the assessable values are so ascertained on the basis of retail prices, on alternatively the consumer prices, the incidence of excise duty and sales tax is to be deducted therefrom. The mechanism of "work-back method" explicitly provided for in the text of section 4(1). In our candid observation, the retail prices or consumer prices of a product or the product of a like kind or quality can validly be used for determination of the assessable values. In other words, the open market prices, where so needed, can be relied upon by the central excise authorities for assessment of the fair values.
10. The above-said observation is very well supported in a judgment of the Peshawar Bench of the learned Appellate Tribunal (Messrs Paramount Paper Board v. Deputy Director, Intelligence and Investigation 2003 PTD (Trib.) 1751. Learned Bench of the Appellate Tribunal had, inter alia, observed as follows:--
"The provisions of section 4(1) of the Central Excise Act, 1944, show that it is based on the notional concept of equalized whole-sale cash price at which an article of the like kind and quality is sold or is capable of being sold to the general body of retail traders or the general body of consumers if there does not exist any general body of retail traders. The word "wholesale cash price" and the words "articles of like kind and quality" and the words "capable of being sold" and also the words "without any abatement or deduction except the amount of duty and sales tax" are very important directions for the determination of the notional assessable price under section 4(1) of the Central Excise Act. By making it wholesale cash price, it excludes cash discounts and it includes all expenses, even post clearance or ex-factory, up to the wholesale stage or the wholesale market. If there is no wholesale market, it shall further extend to the consumer's stage or consumer market."
It obviously follows that the notional assessable price under section 4(1) of the Central Excise Act can validly be ascertained by deducting the element of central excise duty and sales tax from the open market price of an article or the article of the like kind and quality by employing the work-back method and such exercise, as a matter of fact, would conform to the spirit and content of the statute.
11. We have further looked into the evidence that has been used against the appellants and relied upon by the adjudicating officer(s) in the impugned orders. This evidence, in our observations, consists of two categories:--
(a) the primary evidence that includes the open market prices of various products as well as the products o the like kind and quality; and
(b) the secondary, corroborative or supportive evidence which is based on the cost of respective inputs plus overhead expenses reflecting the cost of production.
12. Scrutiny of the records produced by the respondent department vividly shows that the open market prices of the paper and paper-board products were procured by the Investigation Agency from many sources including the "Anjuman-i-Tajran, Urdu Bazar, Lahore" and several dealers of paper and paper-board products. The market prices disclosed by these sources were specific and categorically covered almost the entire range of the products under reference. Anjuman-i-Tajran, Urdu Bazar, Lahore is a registered trade body whereas the respective prices were provided by its president. Apart from the other dealers of paper and paperboard, these prices were further confirmed by the Investigation agency from some of the main consumers of these items. These facts are documented and as such the open market prices so ascertained from a reliable basis for determination of assessable values of the respective products through the work-back method.
13. We also have reviewed the secondary or supportive evidence that was relied upon by the adjudicating officer(s) in the impugned orders. It is primarily based on the "cost of manufacture" of the paper and paper-board products. Pulp, various types of waste paper and wheat straw are the basic materials which are utilized by the manufacturers in the process. Energy inputs such as electricity and gas etc. are also consumed in the process of conversion. Some expenses are also incurred on wages and salaries of the labourers and their supervisors in addition to the administrative overheads. Prices of these "factors of production" can be added together after giving due allowance for the "wastage" in order to determine the costs per unit of the manufactured products. The exercise forms a reasonable criterion for working out the correct assessable values of the manufactured products provided that the prices of input factors are fairly ascertained.
14. It was further observed that the manufacturers of excisable products, in the given period of time, were required to maintain accounts of the following inputs in connection with the manufacture of goods under rules 53-B and 53-BB of the Central Excise Rules, 1944:--
(i) predominant raw materials
(ii) electricity
(iii) fuel (used in the process of manufacture)
(iv) gas
(v) telephone
(vi) wages of labour and emolument of staff etc.
Perusal of the erstwhile rules 53-B and 53-BB evidently shows that the accounts of raw materials, energy inputs and wages etc. were the important factors in the management and accounting of the central excise revenues and accurate maintenance of these accounts was a compulsory obligation of the manufacturers. Basic intent and purpose of this legislation was to keep a strict watch on the quantum and values of the finished products. It also implied that these accounts, as and when needed, could be used for determination of the correct amount of the liability of central excise duties.
15. The impugned orders adequately show that the prescribed accounts were either not correctly maintained or were partly maintained or were manipulated by the appellants by design and motive. Convincing reasons have been recorded in the orders in support of this conclusion. As such these accounts could not be fully relied upon by the Investigating agency or the adjudicating officer(s) for computing the cost of finished goods. Therefore, their reliance on the other sources for working out the cost of respective raw materials and other inputs was justified. It simultaneously reflects on the in-efficiency or involvement of the respective Central Excise staff who were posted in these manufacturing, units during these years. We expect that the department concerned will look into their role for suitable action.
16. Anyhow the documentary evidence that was produced by the Investigation agency before the adjudicating officer(s) in support of the cost of manufacture of the paper and paper-board products, in our considered opinion, was exhaustive. Prices of the waste-paper (street picking, corrugated carton waste, old and used cement sacks/bags etc.) were confirmed from several sources including the waste paper dealers. Sales tax invoices of many registered persons were also used for the purpose. Prices of the wheat straw etc. were similarly ascertained from the market sources. Cost of electricity consumed per unit of the output was worked out on the basis of records of some of the appellants units by using the principle of averages. Wages, salaries and administrative overhead etc. too, were added on the basis of respective records. Element of wastage of input material was duly allowed whereas the input-output ratios of the materials consumed vis-a-vis the quantities of paper or board produced were precisely worked out. The cost of manufacture of various products was thus ascertained on the basis of empirical analyses which appears fair and objective.
17. The respondent-department has particularly asserted that the prices of only two input factors (leaving aside the remaining factors) i.e. the raw materials and electricity consumed, when added together, were found higher than the declared assessable values of the products under reference. Meaning thereby that the cost of manufacture works out for higher if the costs of the remaining factors of production are also added. We have looked into the logic of this argument and feel that stance of the respondent department carries weight and it cannot be ignored.
18. For the reasons recorded at paras. 12-16 above, we agree that the secondary or corroborative evidence relied upon in the impugned orders is valid and it supports the fair assessable values that had been determined on the basis of open or retail market prices of paper and paper-board products.
19. Perusal of the impugned orders further indicates that relevant aspect of the assessable values of the products under reference have been examined in detail. Input-output ratios of raw materials vis-a-vis the finished products have been computed with due care. The assessable values so computed have been correctly applied for working out the liabilities of central excise duty and sales tax. Also that the recovery of additional duty, additional tax and penalties etc. has been correctly ordered.
20. We, therefore, do not find any cogent reason to amend or modify the impugned orders. Consequently the orders of the adjudicating officer(s) are upheld in toto whereas the appeals are rejected.
21. The subject appeals, as listed in the preamble of this judgment, are accordingly disposed of.
C.M.A./38/Tax (Trib.) Appeals rejected.