1. This appeal is against the order passed by the Collector of Central Excise, Madras dated. 9-1-1984. By the impugned order, differential duty of Rs. 4,89,574.50 is demanded and a penalty of Rs. 5,000/- has been imposed.
2. For a proper appreciation of the controversy, certain facts have to be set out. One Shri Prithvi Raj Singh (P.R. Singh) as sole proprietor commenced the business in the sale of battery plates at No. 168, Mount Road, Madras 2 in the' name and style "RAJ BROTHERS AGENCIES" during 1951. Shri P.R. Singh commenced manufacture of battery plates at No.40, Whites Road, Madras 14 in 1962. The factory was located in the first floor of the said premises and in the ground floor there were more than 20 tenants. On the death of Shri P.R. Singh, a partnership was formed by his widow and his eldest son, Shri Dharam Kumar with two other minor sons of the deceased. Some changes in the constitution arose subsequently. The manufacturers had opted for compounding levy on the battery plates as prescribed by Rule 96Y of the Central Excise Rules. This rule restricted the number of workers to 5 in the actual manufacturing process. On 1-9-1970, Smt. Neeru Kumar, wife of Shri Dharam Kumar, started the manufacture of grids and lead welding rods as sole proprietrix in the name of "N.K. INDUSTRIES" in a portion of the ground floor of the premises No. 40, Whites Road, Madras 14. On 6-11-1970, an agreement was entered into between the two firms regarding the supply and delivery of grids and rods. As per the arrangement, N.K. Industries had to deliver the grids manufactured at the factory of Raj Brothers Agencies (for convenience called as R.B.A.). According to the appellants, R.B.A. was subjected to periodical inspection by the Central Excise Department and other authorities. One Mr. Ralli was appointed as Officer in charge of the Mount Road business on 29-4-1978. Subsequently, he was given additional charge of distributing raw materials, allocating work to the workers and other functions at the factory of RBA at Whites Road.
3. The entire controversy arose on a surprise inspection made by the Preventive Staff of the Central Excise Department on 23-3-1981 at 6 p.m. They went to the factory of RBA at about 6 p.m. and found a person carrying electric grids from the factory downstairs (N.K. Industries) to R.B.A. Two persons by name Sadagopan and Subramaniam were found working in the factory of ''RBA. Four workers were found working in the factory of N.K. Industries. On interrogation, the workers informed that they were working for both the concerns. On a reasonable belief, that RBA workers were availing the compounded levy by suppressing the actual number of workers employed in the factory, the preventive staff interrogated Shri K.K. Ralli and also seized, among others, the salary register, Shop Act Register - Form 'F', "Work for daily" (two books) of RBA under a Mahazer. Statements of Shri K.K. Ralli and others were also recorded. Later, a statement was also recorded from Shri Dharam Kumar.
Shri Ralli, in his statement, inter alia, admitted that he was asked by Smt. Neeru Kumar to look after the factory for a payment of Rs. 250/- per month. In respect of certain dates, he stated that the workers of N.K. Industries were also utilised in the manufacture of battery plates at R.B.A. as directed by the managing partner. S/Shri Subramani, Arumugam, Sadagopan and Tulasi Ram of R.B.A. have admitted, in their statements, that "As per the orders of Shri K.K. Ralli they used to work in both the companies". Shri K. Govindarajan of N.K. Industries would say that "Whenever there was heavy work at Raj Brothers Agencies, he used to go there and work". A statement was recorded from one Shri V. Rajkumar. He also stated that he used to work in the factory situated upstairs manufacturing battery plates. At this stage, we must also refer to two other statements recorded by the Department, one by Shri G. Harvey and the other from one Shri K. Wilson dated 12-5-1981.
These persons were employees of N.K. Industries. Shri Harvey would say that "He had attended to packing and other works in R.B.A." Shri Wilson has stated that "Whenever there was no work in N.K. Industries he used to attend to the work of cleaning, finishing and packing of battery plates at M/s Raj Brothers Agencies". In his statement, Shri Dharam Kumar has stated "If the grid manufacture is done in our factory with five workers we cannot increase our production. If we increase the number of workers of our factory from the present strength of five workers then naturally we will be asked to clear the plates after payment of Central Excise duty under tariff rate which in turn will increase the cost of our Battery Plates. Due to the above said reason only we have given the grid manufacturing process of M/s N.K.Industries, 40, Whites Road, Madras 14". He was not aware if the electricity for N.K. Industries was being taken from his electricity connection. He could not explain how the workers of N.K. Industries have been deputed for working in R.B.A. The statement of Smt. Neeru Kumar of N.K. Industries was also recorded and she would say "The rough note books containing the manufacturing details pertaining to my factory which was shown to me were maintained without my knowledge".
The Department called on the appellants to furnish the actual total sale value of the battery plates for the years 1978-81. A reply was sent by the appellants.
4. A show cause notice was issued on 11-1-1982 alleging that the appellant had employed more than five workers including Mr. K.K. Ralli in the actual process of manufacturing on the following dates.
23-6-1978, 28-6-1978, 14-1-1980, 7-8-1980, 14-8-1980, 16-8-1980, 21-3-1981.
Since the appellant had employed more than five workers it was alleged that he had contravened the provisions of Rules 96(Z), 173(B), 173(C) and 173(G) of the Central Excise Rules for mis-declaration. The appellant sent a reply to the show cause notice contending, inter alia, that the two factories were in different portions and were distinct legal entities. The appellant had referred to the periodical visits made by the Central Excise officers. It was further stated that some of the workers of N.K. Industries were used only for the purpose of packing manufactured battery plates outside the place of manufacture (in the common verandah used by all the tenants). R.B.A. disowned knowledge of the note book in which the offending entries were found.
The Collector passed an impugned order on 19-1-1984 holding that Ralli did not actually take part in the manufacture of battery plates and could not be classified as a worker. He however, held that on 23-6-1978, 26-6-1978, 14-1-1980,, 16-6-1980 and 21-3-1981 R.B.A. had employed more than five workers The location of the two factories, the movement of the workers, the relationship of the managing partner of R.B.A. with the sole proprietrix of N.K. Industries, engagement of Shri K.K. Ralli as Manager of both the units and the starting of N.K.'Industries solely for the purpose of manufacture of grids were taken into account and he held that the appellants were liable to pay differential duty of Rs. 1,88,024.75 for 1979-80 and Rs. 3,01,449.7 5 for 1980-81. He also imposed a penalty of Rs. 5,000/- under Rule 173Q.5. Shri S. Raghavan, the learned counsel for the appellants, stated that the manufactured plates have to be initially packed in brown paper or newspaper with 25 plates for each bundle and the final packing would be done in deal wood boxes containing 100 battery plates. The battery plates were sold both to retailers and wholesalers. He argued that the activity of packing cannot be considered as a "process of manufacture" of battery plates. The definition of 'Factory' in the Central Excise Act referred to "manufacturing processes connected with the production of the goods". The definition of "Factory" under Section 2K of the Factories Act was 'wide enough and included the process of packing. He relied on Mrs. Kausalya Narayanan's case, in 1980 E.L.T. 102 [Mrs.
Kaushalya Narayanan and Ors. v. Dadajee Dhackjee and Co. (Pvt.) Ltd]; of the Bombay High Court wherein the Lordship have held that the words "Manufacturing Process" referred to "A process which has nothing to do with the manufacture of production' of excisable goods and persons employed in such a process are not to be taken into account." He, therefore, urged that even if some workers were engaged in packing it cannot be considered as being engaged in the manufacturing process. He further urged that the decision of the Supreme Court in 1983 E.L.T.1986 (S.C.) (Union of India and Ors. etc. etc. v. Bombay Tyre International Ltd. etc. etc.) and also a subsequent decision of the Supreme Court in 1985 (22) ELT 306 (S.C.) (Union of India and Ors. v.Godfrey Phillips India Ltd. and Ors.) have held that determination of value included cost of packing of the excisable article. He also drew our attention to Section 2f(ia) and (iii) of the Central Excise Act which made particular reference to packing only in respect of manufactured tobacco and re-packing from bulk packs of patent and proprietary medicines. In respect of the names furnished in the note book, he would say that no weight could be attached to them because they were not regularly kept books of R.B.A. and on 23-6-1978 and 28-6-1978 worker Elumalai has been assigned the duty of packing. If Elumalai, who was assigned the work of packing was excluded, the number of workers employed in the work of manufacture of battery plates was only 5. Regarding 14-1-1980, he stated that the statement of Shri Wilson which was taken long after the visit should not be taken into account. Regarding the two slips which was alleged to be in the handwriting of Shri Ralli he would say that even the lower authorities have not relied upon it. He drew our attention to AIR 1960 Supreme Court 210 (State of Rajasthan v. Rehman) where the Supreme Court has held that "recording of reasons is an important step in the matter of search and to ignore it is to ignore the material part of the provisions governing searches". In AIR 1968 Supreme Court 59 (V 55 C 17) (Board of Revenue, Madras v. Ramkishan Shrikishan Jhaver, etc.) the Supreme Court has held that, "As the safeguards provided in Section 165 of the Code of Criminal Procedure were not followed, anything recovered on a defective search of this kind must be returned". He stated that the provisions of Section 18 of the Act read with Section 165 W.P.C.have not been complied with in the present case. However, he fairly stated in 1963 AIR Supreme Court 822 (Radha Kishan v. State of Uttar Pradesh) the Hon'ble Supreme Court has held that, "because of the illegality of the search, the Court may be inclined to examine carefully the evidence regarding the seizure. He pointed out that the statement from the workers were stereo typed and not reliable. Shri Harvey and Shri Wilson have not been produced for cross-examination either. The factors relied on by the Collector to support his findings are not sufficient. In regard to value also, the particulars have, been furnished and the determination of duty on is also erroneous.
6. Shri A.K. Jain, the learned SDR, argued that the term 'workers' has to be seen in the context of further provisions. According to him, the names of all the workers have to be declared and the nature of the work covered all activities including those relatable to manufacture. The muster roll covered cases of persons engaged otherwise than in manufacturing process. He cited the ruling reported in 1986 (24) ELT 9 (Raja Industrial Works Sringeri v. Asstt. Collector of Central Excise, Davangere and Ors. where the Hon'ble Karnataka High Court has held that even the staff in the sales section should not be treated as a different unit for the purpose of determining the value of the goods cleared by it. He stated that packing would also come within the scope of Rule 96(ii) and cited 1978 ELT 673 (M/s Aurofood Private Limited).
In 1981 E.L.T. 884 (Mettur Chemical Industrial Corporation), the Madras High Court has held that manufacture would include each and every other process incidental or ancillary to the completion of the manufactured product so as to put the same into market as a marketable commodity.
Following an earlier ruling in 1978 E.L.T. (J 673) (Aurofood Private Limited v. Union of India and Ors.) wherein it was held that "packing of biscuits in tin containers cannot be characterised as post-manufacturing operation so as to exclude their cost from the value of biscuits." He also relied on Bombay Tyre International and stated that even in that ruling the Supreme Court has adverted to in Section 4(4)(d)(i) and has stressed the relevancy of packing of goods at the time of removal. In a recent decision in 1986 (24) E.L.T. 135 the Tribunal has held that packing is part of the process of manufacture, incidental or ancillary process to complete manufacture of the product.
He relied on 1961 (Kerala) 8 (Kochan Velayudhan v. State of Kerala) for the proposition that "Although the failure to comply with the procisions regulating searches may cast doubts upon the. bona fides of the officers conducting the search, there is nothing in law which makes the evidence relating to an irregular search inadmissible. He pointed out that one Chellamathu who was shown in the attendance register of N.K. Industries was found working on the relevant dates in R.B.A. On l4-l-1980, all the workers of N.K. Industries were doing 'Upstair' work. If the records show that the appellants had employed more than five workers then the appellants cannot avail the compounded levy. He argued that N.K. Industries were not aggrieved by the order. According to him, the appellants have resorted to this method only to remain within the special procedure. The workers were shifted from one activity to another to facilitate the production. Merely because one was engaged in packing he would not cease to be a worker. He, therefore, argued that the case against the appellant had been established. The appellant was following S.R.P. and hence Rule 173G would apply. He laid stress on the decision ' of the Supreme Court in Mac Dowell's case (1985) 59 STC 277 and argued that colourable devices were resorted to avoid payment of tax. The totality of the circumstances has to be taken into consideration which would establish that the appellant was availing the procedure even though the number of workers exceeded five.
(1) Whether in the manufacture of electric storage batteries, the appellants had employed or had at any time during the calendar years 1978-79, 1979-80 and 1980-81 employed more than five workers; (1) It is common case that the appellants manufactured electric storage batteries and followed the special procedure under Rule 96 Y. Rule 96YYY reads as follows: "Nothing contained in this section shall apply to a manufacturer who employs or had at any time during the calendar year preceding the date of application employed more than five workers".
(2) The show cause notice refers to two dates in 1978, four dates in 1980 and one date in 1981 as the dates on which the appellant had employed more than five workers including Mr. Ralli. Under the impugned order, the Appellate Collector has found that on the following dates i.e., 23-6-1978, 26-6-1978, 14-1-1980 and 21-3-1981, the appellant had employed more than five workers. On 23-6-1978, the daily work book of R.B.A. indicates the names of the following persons and the work assigned to them.
8. It was argued that this date has not been mentioned in the show cause notice. The show cause notice mentions a date, i.e., 28-6-1978 and on that day, the position was as follows: The total number exceeds five. On l4-l-1980, the note book indicates of upstair works. The proceeding in respect of 21-3-1981 have been left upon. It is manifest from the above particulars that at any rate on 23-6-1978, 28-6-1978 and 14-1-1980, more than five persons were employed by the manufacturer. The appellant endeavoured to show that much emphasis should not be attached to these entries. But these note books were seized at the time of the visit of the officers and there is no reason why the entries should be ignored. The mahazar which was prepared on 23-3-1981, contains a reference to these note books. It is also significant to note that Shri K.K. Ralli produced these registers and papers which were seized by the Department. Mr. Ralli, in his statement, has admitted that on the dates on which there was no casting and melting works at the N.K. Industries, the workers were utilised in the manufacture of battery plates at R.B.A. Though he could not recollect the exact date, he remembered that more than six workers were employed in R.B.A. during the years 1978-79 and 1979-80. He also prepared a paper containing the particulars of permanent work relating to N.K. Industries. The records were seized from the office room of R.B.A. and under these circumstances, the contention of the appellant that much weight should not be attached to these records is not tenable.
9. Apart from the entries in the note book, we have the statement of the workers themselves admitting that more than five workers were employed by their manufacturer. An argument was advanced that these statements were stereo typed and would not have been given by these illiterate workers. But it must be remembered that some of the statements were made on the date of the visit and there is no reason to ignore those statements. The workers would not have falsely implicated their employer or given the statement under duress or coercion.
10. The location of R.B.A. and N.K. Industries assumes considerable significance in the light of the admissions of Shri Dharam Kumar. His object in starting N.K. Industries was with a view to get the benefit of the special procedure. These two industries were located in the same premises - one in the upstairs and the other in the downstairs - for easy movement of the workers from one institution to the other. If the two factories are independent then normally they would have been located in different premises.
11. The appointment of Mr. K.K. Ralli to manage both the institutions is yet another factor that it was with a view to exercise supervision and control over the workers in both the factories. Needless to point out that Mr. Ralli has produced these registers and also has admitted that he was supervising the work of both the factories. Mr. Ralli has admitted that he was doing supervision work in N.K. Industries. He was also maintaining their registers and was in charge of allocation of work. In this background, it is clear that he was deputing workers from N.K. Industries to R.B.A. in the manufacture of batteries whenever the workers of N.K. Industries were without any work. The entries in the registers are confirmed by his conduct and exercise of overall supervision in the allocation of work.
12. The records of both the firms were kept in a room situated in R.B.A. This is yet another circumstance confirming that both the institutions were under the same supervisory control facilitating easy movement of the workers. The workers, who were admittedly in the pay-roll of N.K. Industries, have worked in R.B.A. Of course, Mr.
Harvey and Mr. Wilson have not been produced for cross-examination.
Even ignoring these statements, there is enough material to hold that during the period in question, atleast on the dates specified more than six workers were employed by the appellant manufacturer.
13. Shri Dharam Kumar and Smt. Neeru Kumar, who could have thrown some light with regard to the working of these two factories, have conveniently denied knowledge of the registers. This is a very vital circumstance lending support to the case of the Department. The way in which the firm has been re-constituted and the starting of N.K.Industries with a view to secure the benefit of the special procedure proves, beyond doubt, that there was a deliberate attempt to get the benefit without conforming to the conditions.
14. The argument that some of the Workers were assigned only the work of packing and hence could not be considered to be "employed in a manufacture" is not acceptable. Rule 96 YYY makes mention of the manufacturer employing more than five workers. The learned counsel for the appellant argued that the definition of "manufacturing process" as defined in the Factories Act should not be taken into consideration in interpreting the word "manufacture" under the Central Excise Act. Rule 96YYY ' refers to manufacture. The term "manufacture" has not been defined under the Central Excises Act. It is an inclusive definition.
The concept of manufacture includes any process incidential or ancillary to the completion of the manufactured product. It is important to note that the term "manufacture" covers all processes, incidental or ancillary, until the stage of completion of the manufactured product occurs. Sections 3 & 4 have to be read together.
While Section 3 refers to the taxable event Section 4 indicates the stage at which the same shall be levied and is the machinery section.
Section 4 contemplates delivery at the time and place of removal. If all these sections are read together in the context of the inclusive definition of "Manufacture" it would be apparent that even packing would be a process incidental or ancillary to the completion of the manufactured produce.
15. The learned counsel for the appellant stated that the plates would be initially packed in paper in 25 numbers each and thereafter put in dealwood boxes containing 100 battery plates. Of course, he stated that even one battery plate would be sold to the customer. But the normal mode of sale at the time and place of removal was initial packing in brown paper or newspaper and final packing in dealwood boxes. So, packing is a process incidental or ancillary to the sale of the manufactured product either in retail or wholesale. Packing has to be taken into consideration for the purpose of the provisions of the Central Excises Act including Section 2(f)of the Act. This is apparent from the decision of the Supreme Court in 1983 E.L.T 1896 (S.C.) (Union of India and Ors. etc. etc. v. Bombay Tyre International Ltd. etc.
etc.). Para 53 of the judgement is as follows: "We have also been referred to s.2(f) of the Act which defines the expression "manufacture" and it is urged that the degree of packing to be considered for the purpose of including its cost in the "value" of an excisable article should be spelled out from that definition. We are unable to accept the suggestion. The expression "manufacture" is related to the taxable event and refers to a process which enters into the character of the article, while "packing" has been defined by s.4(4) (d) (i) in relation to the "value" of the article".(Tribunal) (Collector of Central Excise, Calcutta v. Kanoria Jute Mills, Calcutta) the Tribunal considered the import of packing qua the definition of manufacture in - Section 2(f).
It was held that the goods were treated as fully manufactured for the purpose of accounting in the statutory records only if the goods have been put in the normal minimum packing without which they cannot be delivered to the market. The contention that Section 2(f) recognised packing as a process of manufacture only in respect of specified goods is repelled. In 1986 (24) E.L.T. 135 (Tribunal) (Collector of Central Excise, Bhubaneswary. Orient Paper Mills, Brajraj Nagar) the Tribunal has held that normal packing should be treated as a process incidental or ancillary to the completion of the manufactured product. It is thus manifest that packing is integrally connected with the ultimate production of the goods and the expression "in the manufacture" would include within its campass all processes which are directly related to the actual production. We do not accept the contention that the concept of packing should be taken into consideration only in respect of assessment of the value and not for the determination whether the product has been manufactured or not. As rightly contended by the SDR, if more than five persons have been employed in the manufacture, which term would include packing, which is also ancillary to the manufacture, the contravention would have been made out. It is significant to note that the appellant has followed SRP procedure and had a responsibility to adhere to the terms and conditions of the special procedure. He has violated and contravened the provisions by employing more than five persons during the calendar years 1978-79 and 1979-80, contrary to Rule 96 (YYY). He has not sought cross-examination of the workers who have given statements in support of this fact. Of course, they could not precisely say the dates but the entries in the note books taken together with the statements confirm the contravention. The totality of the circumstances have to be looked into in order to find out whether there was any violation of rules. The records and the statements taken together and the other circumstances enumerated above prove beyond doubt that the appellants have employed more than five persons. It is not open to the appellant to contend that the activity of packing should be excluded in arriving at a decision. The ruling reported in 1980 E.L.T. 102 has no application to the present facts for the process of repairs of motor cars and recharging of batteries had nothing to do with the manufacture of the excisable goods. It is rightly emphasized by the Department that the appellant has resorted to colourable devices basically to avoid payment of tax. We are also not impressed with the argument that the seizure is irregular. Even assuming without conceding that there is some irregularity, the evidence relating to the search would not be inadmissible and a finding could be arrived at and after scrutiny of the evidence. We have scrutinised the evidence in the light of the legal principles.
16. We, therefore, hold on point (1) that the appellant had employed more than five workers during the years 1978-79 and 1979-.80.
17. An objection has been raised that the calculations for purpose of duty is not proper. The Collector has fixed the value of the batteries on the ground that particulars have not been furnished by the appellants. In para 44 of the order it' is observed that the appellants have failed to furnish the details of the quantity of battery plates produced and cleared and the value of the plates for each financial year. But, we find that on 2-5-1981, the appellant had mentioned that the figures had already been furnished. The appellants have also furnished the value of the battery plates cleared for the periods 1978, 1979 and 1980 (vide page 81 of paper book). In view of the circumstances, we are of the opinion that the value for purposes of duty has to be re-assessed in the light of the figures furnished by the appellant after due verification.
18. It was argued that the maximum penalty that could be imposed under Rule 96(ZZZ)(iv) could only be Rs. 2,000/- and the Collector had erred in levying penalty. We do not see any force in the contention that Rule 173Q would apply only in cases where the compounding levy assessment is not opted by the assessee. 96 ZZZ would apply for misdeclaration only but 96YYY states that the special procedure allowing compunded levy would not apply to a manufacturer who had employed more than five workers during the calender year preceding the date of the application.
So, 96YYY excludes the special procedure itself. Under these circumstances, it cannot be urged that the penalty could be imposed only under Rule 96 ZZZ. Imposition of penalty under Rule 173Q is justified. Considering the manner in which the evasion has been carried out penalty cannot be said to be excessive.
19. In the result, the appeal is dismissed except for the direction to the Collector of Central- Excise, Madras to re-work the differential duty in the light of the documents produced and after due verification.