1. This appeal dated 30th April, 1983 has been filed on behalf of Arti Paints and Chemicals Industries, Bombay against Order-in-Appeal No.A-160/B-II-35/83 dated 12th February, 1983 passed by the Collector of Central Excise (Appeals), Bombay. The subject is a demand for Rs. 367,265.50 on the ground that toluene falling under tariff item No. 6 and obtained by Arti Paints and Chemicals at the concessional rate of the duty under notification No. 35/73-CE was not used for the intended purpose as laid down in the notification. The Appeallate Collector in his order dated 12th February 1983 concluded thus: We have seen the concession was available only if the toluene was used in the manufacture of thinners used for paints etc. The appellants have not satisfied that the thinner manufactured from the toluene was so used.
Accordingly, demand of duty is justifiable." 2. We can see from this that the Appellate Collector held that the toluene, if it was to be given exemption under notification No.35/73-CE, should have been used in the manufacture of thinners used for paints. The show-cauee notice dated 8-3-1980 however proceeded on the charge that the goods ahd not been used as thinners in the manufacture of paints etc. as per notification 35/73-CE. But the facts are different as we shall demonstrate below.
3. Notification No. 35/73-CE dated 1-3-1973 exempts motor spirit known as benzene, ethyl benzene, benzole, toluene toluol, solvent naphtha and mixed xylenes consisting of orthoxylene, metaxylene, paraxylene, and ethyl bezene and falling under item no. 6, from so much of the duty of excise leviable thereon as is in excess of Rs, 472.50 per kilolitre at 15 degrees of centrigrade thermometer.
4. There is also a proviso which provided that an officer not below the rank of an Assistant Collector of Central Excise was satisfied that the motor spirit was intended to be used, amongst other things, as solvent or diluent or thinner for the manufacture of paints, varnishes, lacquers and allied materials....; 5. At the end it prescribed that where such use is elsewhere than in the factory of production, the exemption shall be allowable only if the procedure laid down in Chapter X of the Central Excise Rules, 1944, is followed.
6. This notification allows the clearance of toluene and other specified motor spirits if they are intended to be used as solvent or diluent or thinner for the manufacture of paints, varnishes, lacquers and allied products. In an application dated 23rd Nov., 1974 in form AL-6 addressed to the Assistant Collector of Central Excise, Bombay, Arti Paints and Chemicals while applying for the L-6 licence to be permitted to use toluene amongst other products for special industrial purposes under rules 176 and 192, declared that the toluene which they wanted to obtain at concessional rate of duty was meant to be used in the manufacture of thinners at their factory at Thane-Belapur Road, Thane and requested for its renewal for the year ending 31st December, 1975. The licence was granted and was last renewed on 26-11-1976 by the Superintendent of Central Excise, Range No. 6, Bombay Division II. The application contained a schedule in which the commodities to be manufactured were declared as thinners. The manner of manufacture was also said to be mixture with denatured spirits, methanol, SBP-55-115, mineral turpentine, butyl acetate, butanol, acetone, the finished products becoming thirmers. The sources from which the toluene would be obtained were declared : (1) Union Carbide, (2) National Organic Chamicals, (3) Indian Oil Corporation, and (4) Indian Petro-Chemicals Corporation, Baroda.
[However, around December 1978 M/s. Arti Paints closed down their factory at Thane-Balapur Roard, Thane.] 7. The Assistant Collector by his order of 22nd October, 1980 held that the toluene had not been proved to have been used for the intended purpose as per notification No. 35/73-CE. His reasons for coming to this conclusion are many and elaborate. He says amongst other things that in his considered opionion, this concession was available only to those who were paint manufactures. He points out that in the body of the licence issued to the party it had been mentioned that the goods received in terms of the notification would be used in manufacture of thinners for the manufacture of paints, varnishes etc. But he goes on to say that under the scheme of this exemption notification it is not open to a person to take a licence for exclusive so called of thinners.
He comes to the conclusion that there has been no manufacture of thinners because all that Arti Paints did was to add certain chemical like ethyl acetate mineral turpentine, methanol. From this he concluded that there was no industrial use within the meaning of rule 192 since there was no manufacture. Therefore he says that there was no manufacture of the kind under notification No. 35/73-CE. A little further on he says that there has been no proper accounting and use of the goods received by Arti since Arti was not a paints manufacturer and therefore, that means the goods were not utilized in the manufacture of paints. This in turn means the goods were sold as such after some physical treatment.
8. Much objections were raised at the time of the adjudication proceedings before the Assistant Collector, one of which was that under Chapter X it was not necessary to produce D-3 declaration, but these disputes are not really of much relevance to the case before us.
Eventually the Assistant Collector arrives at his conculsion after much verbiage, but we gain little enlightenment from them. But we do have the conclusion which we have seen above.
9. At the time of the argument on 6-10-1983 the learned counsel for the appellant argued his case, the arguments being directed mainly at demolishing the reasonings of the Assistant Collector and the bases he rests his conclusions on. The learned counsel for the appellants argued also that the thinners were used in the manufacture of paints and if the Assistant Collector had taken the trouble to ask for their record to show proof of the destination of thinner, M/s. Arti Paints would have satisfied him conclusively that their thinners went to no one but paints manufacturers. The counsel declared M/s. Arti Paints had faithfully followed all the procedures and complied with all the requirements of the law but the Assistant Collector had wanted to harass and victimise them. The Assistant Collector took his action even after they have been assured by higher authorities that there would be no further problems in the supply of toluene/motor spirit which have been stopped by the suppliers on directions from the Assistant Collector. The Assistant Collector defied his own superiors and acted contrary to their assurances. The demand was wrongful and cannot be sustained on any view of the matter and deserved to be struck down by this Tribunal.
10. The learned counsel for the department strongly opposed the appellant saying that there is good reason to believe that they had abused the concession and had not used the motor spirit in the manner permitted by the notification and had thus gained undue benefits. He pointed out that at one time they held, on record, more motor spirit than the area of the premises licensed under L-6 would be able to hold.He pointed out to the fact that the Central Excise office was only a stone's throw away, but they did not file D-3 declarations to them in person but sent them by post. There was already an action pending against them in which they have been penalised by the Assistant Collector (Preventive), Bombay in respect of goods in which originated from their premises and seized at Baroda.
Long and elaborate arguments were presented by both sides on behalf of their points of view, each saying that the other side was totally wrong. But our view is that both sides are in error. We have already seen that the notification No. 35/73-CE allows the use of the toluene as solvent or diluent or thinner for the manufacture of paints by the person who receives the motor spirits under the notification. Although the concession is earned by the manufacturer of the motor spirits, to earn the concession it is also necessary that the goods intended to be so used are also actually used in the manner provided by the notification, as can be seen from the fact that the exemption was to be allowed only if the procedure laid down in Chapter of the Central Excise Rules, 1944, was followed, if the toluene is put to the intended use elsewhere than in the factory of its production. At the hearing the learned counsel for the department argued that Chapter X procedure is envisaged for the removal of the finished thinners from the thinner manufacture to the paints manufacturer but we are not able to agree with this. The Chapter X procedure must be followed for the movements of the motor spirit from the motor spirit manufacturer to the person who uses motor spirit as solvent or diluent or thinner for the manufacture of paints. The Central Excise authorities were in error when they allowed this concession to Arti Paints because Arti Paints had clearly declared in their application that they would be manufacturing thinners from the toluene, benzene xylene, which they wanted to obtain at concessional duty under notification No. 35/73-CE.That error continued till the very end and no body appears to have discovered it. The adjudication says that the goods were not used for the intended purpose as notification no. 35/73-CE, but this conclusion appears to have been arrived at because the Assistant Collector held that the thinners manufactured by Arti Paints were not used in the manufacture of paints. Knowing it as they did that Arti Paints were not manufacturers of paints but only of thinners, the central excise should not have allowed the removal to them at concessional rate of duty of the toluene from the manufacturers, Indian Oil Corporation ; Union Carbide etc. We would like to repeat here that the notification does not allow the removal at concessional rate of motor spirit for manufacture of thinners but only for use as a solvent, a diluent or a thinner but only for use as a solvent, a diluent or a thinner for the manufacture of paints. What Arti Paints have done is merely to mix the motor spirit with chemicals like butanol, acetone, mineral turpentine etc. etc. to manufacture thinners. At any rate this is what they claim they did.
11. But to blame M/s. Arti Paints is pointless because they did what they did under a proper licence given by the competent authorities. It is not clear why such a licence was given when the notification does not allow it. This is to say nothing of the long time it took the central excise to make up their mind that M/s Arti Paints had misused the concession. Even when the discovery was made, the reason for thinking there was a misuse was not the right one.
12. It is very important to note now that the show cause notice charges that by doing what they did M/s. Arti Paints misused the concession granted to them under rule 192 of the Central Excise Rules, 1944. They are changed with contravention of provisions of rules 192, 194 and 196 of the Central Excise Rules. The Assistant Collector himself holds that rule 196 has been involved here since it is the licensee who failed to satisfy the central excise about the appropriate use of the material.
The demand is a demand under rule 196 and it falls under Chapter X.13. This rule provides that if any excisable goods obtained under rule 192 are not duly accounted for as having been used for the purpose and in the manner stated in the application or are not shown to the satisfaction of the proper officer to have been lost or destroyed, the applicant shall on demand by the proper officer immediately pay the duty leviable on such goods. Under rule 192 the Central Government can by notification under rule 8 sanction the remission of duty on excise goods used in a specified industrial process and the person who wants to avail the exemption is to make an application to the Collector stating the estimated annual quantity of the assessable goods required and the purpose for and the manner in which it is intended to use them and shall declare that the goods will be used for such purpose and in such a manner. The rule requires the central excise to satisfy themselves by inspection that the concession can be granted without danger to the revenue and that the premises are suitable etc. etc.
Certain other formalities are to be undergone, but we need not dwell on them here. What we need to focus on is that when a demand under rule 196 is made it is made in respect of goods not duly accounted for as having been used for the purpose and in the manner stated in the application required to be made under rule 192 in respect of goods which the Central Government has notified under rule 8 as eligible to exemption when used in specified industrial processes. The proceedings in this case show that though the permission was given, it was not in accordance with the notification issued by the Central Government under rule 8, since the purpose for which the goods were intended and for which they were used was not as prescribed by the notification 35/73-CE. Therefore the demand under rule 196 in the show-cause notice and the confirmation of the demand by the Assistant Collector in his order dated 22-10-1980 cannot be a recovery of duty under rule 196 as it purports to be. [Let it be recorded here that though the notification was not satisfied, the removal of the motor spirit was in accordance with the application made under rule 192].
14. As the permission was given by the central excise mistakenly and since the clearances were not under notification No. 35/73-CE, the short recovered duty cannot be recovered under rule 196, and since the permission was given wrongly when it should not have been given at all, it is from the manufacturer of the goods cleared at concessional duty i.e., motor spirit, toluene, xylene, etc. etc., that the short recovered duty can be recovered. We must, therefore, pronounce the order of the Appellate Collector to be wrong and unlawful and set it aside and allow the appeal.
15. The above being our order, we shall not go into the various other arguments advanced before us by the two sides.