S.S. Sekhon, Member (T)
1. All these appeals arising out of SCNs No. DGCE/BZU/205/30-10/2001, dt. 29-3-2001 - 12-4-2001 and SCN No. DGAE/BZU/205/30-28/2000, dt. 8-8-2000 and SCN dt. 29-3-2001 issued pursuant to a common operation by Anti Evasion Officers, are being disposed by this order.
1.2 An intelligence was received, that one unit, located at Muktanand Farm House, Wagholi, Pune belonging to Mr. & Mrs. J.M. Joshi (the Chairperson of J.M. Group of Companies) was engaged in the clandestine manufacture and sale of "scented tobacco", reported to be an excisable product falling under CHS 2404.40 the officers of DGCEI (formerly DGAE) searched the said premises as well as office premises of J.M. Group at Mumbai, on 18-2-2000. The J.M. Group was found to be incorporating manufacturing companies and are having their factories at Village Galonda/Silvassa. Therefore the searches were also immediately extended to cover up the factory premises of each company at Silvassa.
1.3 The investigations conducted relating to the activities of other group companies revealed as under:-
(i) M/s. Yogesh Associate : It has been manufacturing 'scented tobacco' thereof since 1998-99 by claiming exemption under Notification No. 1/93-C.E. as amended. The unit remained Proprietary concern of Shri J.M. Joshi since its inception till 28-2-1999 the same has been reconstituted as Proprietary concern of Shri J.M. Joshi (HUF).
(ii) M/s. J.M. Enterprises : Shri J.M. Joshi floated this unit as his sole Proprietary concern and operated at small level from Pune to manufacture scented tobacco till 1007-98 and thereafter suspended its activities. The unit did not register itself under C.Ex. Act during its operation period at Pune.
(iii) M/s. J.M. Perfumery, Silvassa : Shri J.M. Joshi floated this firm as his sole proprietary concern in the year 1994-95. It has its factory at Silvassa to manufacture perfumes/perfume blends, mainly required by Pan Masala/Gutka manufactures. The unit is registered under C.Ex. Act and is paying duty at normal rate as applicable for goods falling under SCH No. 3202.10.
(iv) M/s. J.M. Essential Oil Company : Shri J.M. Joshi floated this unit as his sole Proprietary concern having its factory at Silvassa. The unit is engaged in the manufacture of natural herbal extracted products by way of hydro distillation, without the aid of power.
(v) M/s. J.M. Laminates and Packaging Silvassa : This is also sole proprietary concern of Shri J.M. Joshi having factory at Silvassa. The unit is primarily engaged in the manufacture of laminated and printed BOPP films, for use as packing material for Gutka and Pan Masala and is registered under the C. Ex. Act, 1944.
(vi) M/s. J.M. Advertising and Marketing Pvt. Ltd. : Shri J.M. Joshi promoted the company as its Managing Director, mainly for providing marketing services to group companies, to protect various brands which the group companies have launched, and also to explore and appoint franchise for manufacture of Gutka/Pan Masala with the brands established by J.M. Joshi, and other marketing services to franchise. The enquiries made resulted in SCN dated 29-3-2001.
1.4 So far as investigations relating to M/s. Suresh Enterprises; premises at Muktanand Farm House, Wagholi, Pune, are concerned separate proceedings under Show Cause Notice F.No. DGAE/BZU/205/30-28/2000, dated 8th August, 2000 & SCN dated 29th March, 2001 were separately initiated.
1.5(a) Appeal Nos. E/2703/02 & E/2704/03 have been filed by M/s. Yogesh Associates and M/s. J.M. Enterprising. The product (Scented Tobacco) processed and cleared by M/s. Yogesh Associates product, has been classified under Heading 2404.40 and duties have thereafter been demanded from them on denial of the SSI benefit claim, by clubbing their clearances with the clearances of other units of J.M. Joshi Group of Companies. Duty demand on M/s. J.M. Enterprises is also made for the reason of denial of SSI benefit only. (b) Appeals No. 3195/02, has been filed by the proprietor of M/s. Sureh Enterprises, at Muktanand Farm House Wagholi, Pune, on whom duty demands on 'Scented Tobacco' and penalties are imposed, consequent to SCN dt. 8th August, 2000 and 29th March, 2001. They have been charged manufacture and clearance of their product 'Scented Tobacco' classified as held to be under 2404.40 clandestinely and without obtaining registration to various manufactures of Gutka/Pan Masala.
1.6 After hearing the Id. Sr. Counsel for Appellant and Id. DR and considering the issues involved, it is found that the core issue to be decided is whether the classification as arrived at of the entity Scented Tobacco as excisable under Heading 2404.04 is appropriate. The Revenue supports the classification and the Appellant strongly contest the same. Therefore, the classification issue is first resolved.
1.7 On perusal of the SCN issued and order impugned, (references to para numbers of order; SCN etc. taken as in E/2703/02 of M/s. Yogesh for ease since the process; product impugned is same in all respects) it is found -
(a) the notice issued relies upon the values of the product in the case of M/s. Dhariwal Tobacco (herein after referred to as DTPL) and the impugned order also finds the entity under classification dispute to be analogues to the product in the DTPL case. Yet the Id, Adjudicator does not approve the product classification and excisability, as arrived at in the DTPL case by the Commissioner, subsequently upheld by the Tribunal in the case reported as Dariwal Tobacco Products Ltd. v. CCE - .
(b) The notice issued in E/2703 and 2704/02 terms the product under dispute to be as 'preparation containing chewing tobacco', however it now where defines the term 'preparation' nor the adjudicator finds out or explains this term, nor does it raise grounds as to how it is 'Chewing Tobacco'.
(c) There is no contest to the fact of Quimam, which is admittedly an extract of tobacco in aqueous solution, which is applied on the surface of the raw tobacco leaves procured form the market/farmers. The purpose of this application is stated to be to ensure restoration/enhancement of tobacco smell and to achieve homogeneity, which is not in contest. After application of Quimam, (perfumes) is applied or/and sometimes aqueous saffron solution is sprayed, if required. After such manual application, the leaves are left for a day or so and thereafter packed in 30Kg. plastic bags and put in gunny bags without any brands and removed to various gutka/pan masala manufactures, who add other ingredients as per the chapter notes to Chapter 24 and as per their formulas dilute the product received and thereafter pack it in panches and sell it under their brand names. There is no material relied in SCN or in order to arrive at that the Quimam or other ingredients applied manually to the raw tobacco leaf are known as 'Chewing Tobacco'. However the Id. DR relies upon the decision of the Apex Court in the case of Dhammpal Satyapal - to claim classification of the product under 2404.49/2404.40. However, on reading para 19 of this decision we find that the Apex Court in that case was concerned with the classification of a compound termed "Kimoun" to be marketable and as the same was found to be used to manufacture Chewing tobacco the classified the Compound Kimmoun made for Aqueous Solution of Tobacco and perfume, Saffron etc. under 2404/49 or 2404.40. The duty demands herein are not made on Ki-maun or a mixture of Aqueous Solution of Tobacco being called as Quimam applied separately... and thereafter perfumes applied to Raw leaf manually and Aqueous Saffron solution sprayed separately. No such compound of Aqueous Tobacco, solution perfume and Saffron is being considered in this case for classification. Therefore, the Apex Court ruling will not assist the Id. DR as the product to be classified is different.
Process Flow Chart
Raw Tobacco (Cut Size) Purchased From Jaisinghpur, Borsad.
Receiving along with bill and Issued By Sellers
Sieving It Remove Dust
Applying of quimam (2 gms per By hand process (purpose : smell of
kg of tobacco) tobacco not to deteriorate and to
ensure no formation of Fungus)
Applying of perfume (28 gram By hand process
Initial packing in poly bag To prevent exposure to dust
Final packing in gunny bags For final despatch no identifica-
tion/no brand Name.
(1) Quimam is extract of tobacco boiled in hot water and used after 15 days.
(2) Products Described As 'Loose Unbranded Scented Tobacco In The Despatch Challan.
The process as explained and the submissions made as regards the same are not under contest.
2.1 The notices issued termed the entity under dispute at places as "chewing tobacco" and at other "preparation for chewing tobacco". The Id. Adjudicator records in paragraph 95 of the impugned order a finding as :
95. The SCN proposes to seek recovery of duty on the product by referring to it as chewing tobacco preparation of chewing tobacco without pinpointing as to under which of the two description the duty is sought to be determined. While at the time portion of SCN it is claimed that the product merit classification as a preparation in the subsequent portion it is also claimed to be chewing tobacco. The Assessee are denying duty liability under either of the category. From the momenclature used in the tariff it would also be clear that a product is a chewing tobacco " the same cannot be categorised as "Preparation of chewing tobacco", then the starting point....
And thereafter in paragraph 95 a finding is recorded that the product is a chewing tobacco and finally in paragraph 103 a final view is arrived at the goods would merit classification as chewing tobacco with the following finding :
103... In the discussions in the preceeding paras it has been conclusively demonstrated that the product is a "Chewing tobacco"and not a "Preparation of Chewing Tobacco". Therefore, the grounds alleged in the SCN for seeking classification as preparation of chewing tobacco deserves to be rejected and consequently there is not need to discuss the points raised by the notices challenging the said grounds. Since the notice had been provided adequate opportunities to dispute both the claims and their arguments have been properly analysed, they cannot make a grievance that the SCN is ambiguous....
as Heading 2404.40 reads as follows,
2404.40 chewing tobacco and preparation containing chewing tobacco". & since Revenue has not contested these findings, before us, having accepted the position that the disputed entity is not qualifying to be a "Preparation of chewing tobacco" the only point that is contested and determined is whether it enables 'chewing tobacco'.
2.2 On examining whether the entity could be "chewing tobacco" it is found-
(a) No material has been garnered by Revenue in this regard of commercial understanding of the entity. Appellants had produced materials in the form of affidavits of the buyers and actual, admittedly Industrial, Users of the entity under dispute to establish that the product under dispute is not understood as "chewing tobacco" by the persons dealing with the same. The Id, Adjudicator has not found anything amiss about the material. He is concluding in paragraph 94 :
that the term "chewing tobacco" has not been explicitly defined in the Tariff. However, it is well known fact the world over that, the raw tobacco as such is consumed by chewing without addition of any other material thereto. It is also common knowledge that, raw unpacked tobacco is purchased from vendors by the consumers and is consumed for chewing, at times in admixture with lime and other additives. The mixing of lime and tobacco is done by the individual consumer at the point of consumption and yet the raw tobacco un-mixed with any additives qualifies to be a chewing tobacco. This raw chewing tobacco being a product without any additives would therefore, qualify to be an unmanufactured tobacco and is fully exempt from central excise duty as long as the same is not sold under a brand name. It is not the allegation that the product in question is sold under a brand name. Therefore, "Manufactured tobacco" alone is subjected to duty during the relevant time. In the manufactured section under Chapter 24 "Chewing Tobacco" and Preparation of chewing tobacco" are listed as being subjected to duty.
The above finding accepts that raw tobacco is used as a chewing tobacco and consumed as such at the point of individual consumers consumption, by mixing of lime and at times with lime and other additives. There is no lime added in the entity herein to render it a Chewing Tobacco, as it leave the premises. The Appellants have relied upon the Apex Court decision in the case of Damodar J. Malpani - wherein the Apex Court while dealing with the classification of chewing tobacco has laid down,
2. It is not in dispute that the appellants product is chewing tobacco. It is also no tin dispute that chewing tobacco is not necessarily manufactured tobacco or classifiable under Tariff heading 24.04 the classification of chewing tobacco will ultimately depend on the process adopted for an consumption of the chewing tobacco...
In this view of the law, laid down by the Apex Court, even if the entity is 'Chewing tobacco' in this case , it need not be classified as manufactured Tobacco falling under 24.04, It can be as well be unmanufacture and fall under 2401. The law laid down by the Supreme Court, induces us to set aside the findings and the basis of the Commissioner holding the product, in this case, to be Chewing tobacco.
(b) In the same decision of D.J. Malpani (Supra) the Apex Court in paragraph 3 had observed that the Appellants therein were calling for test of the product which was ignored by Revenue and the Apex Court directed the test should be performed and thereafter it should be determined whether it was unmanufactured tobacco or manufactured and covered under Heading 24.01 as was the case of chewing tobacco of other manufacturers. In the case before us there is no test report relied upon the Appellants in the paper book have submitted that samples were taken; test report if any is not relied upon. However absence of test Report will not materially affect the position herein, as the constituents, the ingredients & process used by the appellants, in their premises, is not under contest by both side and are well known. They are analogues to the contents & process etc. as in the case of M/s. DTPL, as found by the Id. Adjudicator. In paragraph 101 of the order impugned along with noting to the effect "that the mixture in question is too concentrated for comfortable consumption by human beings". There is no contradiction of this fact with any trade opinion. It was averred by the assessee that in the existing form, the mixture becomes too costly to be viably marketed as 'Chewing Tobacco', Taking note of these facts it was concluded in the said order-in-original that the product fails to meet the test of marketability of the product as "chewing tobacco". This finding of the adjudicator along with the finding as arrived in paragraphs 102,104 and 105 of the order, that the production in question was marketed to several industrial consumers who use the same in the manufacture of gutka which is a pan masala containing chewing tobacco figuring at sub-heading No. 2404.49 of the tariff and in the said pan masala (gutka) "this preparation" alone could contribute the component 'chewing tobacco' other ingredients being non-tobacco origin and thereafter relying and interpreting chapter note 2 under Chapter 24 in details as recorded in paragraph 99 and 100, it was concluded that the treatments brought about on the raw tobacco rendered the product marketable to an industrial consumer and therefore the process employed by the appellants would amount to manufacture by the application of said note 2 to Chapter 24. This finding of the Commissioner cannot be upheld, when the findings and reliance as placed by the Id. Sr. Counsel on the Tribunal decision in the case of Sr. Ayyappan Silicate & Chemical Products (P)Ltd. v. CCE - especially the following findings therein are shown.
14... The term "Consumer" has already been extracted from the Dictionaries above. The item has to be in a marketable stage to be used by the consumer who are the ultimate users of the goods. In the present case, the solid sodium silicate was converted into liquid sodium silicate by addition of water and pumped into the boiler with a mixture of 60 Kgs. of Sodium Hypo chlorides (Liquid Bleach) which helps in colouring and bleaching the final products i.e. Sodium Silicate. The finished product is manufactured by Steam boiler to a pressure of approx to Kgs/cm,sq, equivalent 45 Celsius....
is reckoned. In view of the above, we find that there are no reasons to arrive at and conclude that the entity under dispute herein, which is admittedly marketed to industrial consumers only and cannot be comfortable or economically viable as for chewing, by human beings as it is and is an ingredient raw material for manufacture of pan masala and gutka, which, in turn are consumed by humans by chewing. The entity herein cannot be accepted as manufactured 'chewing tobacco' as arrived at the Id. Adjudicator.
2.3(a) It is found from the impugned order that the Commissioner has come to a conclusion that the processes indulged in by the Appellants bring about an irreversible change in the raw tobacco. Therefore he arrives at his classification under 24.04. In absence of any test report or other material on record, it is not understood, how the Id. Adjudicator could come to a conclusion that raw tobacco by the treatments indulged by the Appellants have undergone a irreversible change. We cannot uphold this finding,
(b) There is no material to conclude that Raw Tobacco leaf has undergone irreversible change. Since the applications on Raw Leaf do no result in proven irreversible change, the Raw Leaf Tobacco remains Raw leaf Tobacco unmanufactured.
(c) Tobacco leaf, treated by the Appellants, would remain to be classified as unmanufacture tobacco when we find that the HSN General notes to Chapter 24 of Tariff provide for and inform about the various methods in which raw leaf tobacco are "Cured and packed". The following notes would be relevant in this case, as pointed by the Id. Advocate, for the appellant. ...In some cases, in addition to (or instead of) fermentation, flavoring or moistening substances are added (casing) in order to improve the aroma or keeping qualities....
And thereafter reliance on the scope of the coverage as per the HSN notes under the heading unmanufactured tobacco cannot be ignored, which reads as,
(1) Unmanufactured tobacco in the form of whole plants or leaves in the natural state or as cured or fermented leaves, whole or steamed/stripped, trimmed or untrimmed, broken or cut (including pieces cut to shape, but not tobacco ready for smoking). Tobacco leaves, blended, stemmed/stripped and "cased" ("sauced" or liquored") with a liquid of appropriate composition mainly in order to prevent mould and drying and also to preserve the flavour are also covered in this heading.
A reading of these mandatory provisions to be applied, for purpose of classification, which have been totally ignored by the Id. Adjudicator, induces us to conclude that the treatments and process conducted at the premises of the Appellants are nothing more than flavouring or moistening substances added to be a curing or a casing of tobacco leaf in order to improve the aroma or keeping qualities and such Tobacco leaf," cased" ("sauced" or "liquored") leaf with a liquid of appropriate composition, mainly in order to prevent mould and drying would not render raw tobacco to be classified out of Heading 2401 of C. Ex. Tariff Act, 1985. Casings and flavours used in cigarette/tobacco industry are understood to be a solution of flavouring materials in water or other solvents that are applied to leaf tobacco blends; in the present case application is of a solution of quimam (which is tobacco flavoured water) and other flavours including saffron water which admittedly serve no other purpose than to prepare a blend of unmanufactured tobacco for purposes of use in further manufacture of Gutkas/Pan Masala. The process indulged herein is found to be casing of Raw tobacco leaf relying upon material from internet submitted by the Id. Advocate. We would therefore uphold classification to be under 2401.10.
(d) As we find that the Explanatory Notes make it very clear that addition of or an application on the leaf of raw tobacco, as in this case, does not render the tobacco ready for smoking/chewing by a human consumer then such cased Tobacco cannot be ruled out of classification under 2401 of chapter 24 especially when we find that Heading 2401 of Central Excise Tariff, 1985 are pari materia HSN and the further headings 2402, 2403 and 2404 are not aligned with HSN. The explanatory notes to HSN especially when pari materia are binding to arrive at the classification and the law on this issue is well settled. We, therefore have no reason to take out the product impugned in these appeals, from the Heading 2401.10 as arrived by us and place it elsewhere under Chapter 24.
(e) Board vide its Circular No. 37/90-CX. 3, dt. 17-7-90, in case of flavours/scents added in preparation of scented snuff held the view that Snuff Tobacco even after addition of "Perfumes, Scents and Menthol" remain Tobacco. Therefore, the explanatory notes of HSN bringing in the leaf treated with Tobacco Solution Quimam herein and thereafter with flavouring perfumes agents cannot transform Raw leaf tobacco unmanufactured to manufactured tobacco. The addition of there volatile flavours will not amount to rendering unmanufactured tobacco to manufactured tobacco following the settled position that process of treatment Raw of leaf of Tobacco by effecting various processes, e.g. sieing etc. would keep the tobacco as unmanufactured. See ; ; ; 1997 (96) E.L.T. 712; 2002 (147) E.L.T. 1184 and classification under heading 2401 cannot be disturbed and Board Circular 81/5/87-CX. 3, dt. 23-6-87 upholds the view.
(f) The addition of various solutions e.g. of water jaggery mix on the harvested Tobacco has not been held to be manufactured (Sale Tax Case of A.V. Dachlapp Challure and Sons - 1962 STC (3) page 202 (para 28). In absence of manufactured tobacco definition and non applicability of Chapter Note 2 of CETA 1985 as found, the classification under 2404 cannot be upheld. The Tribunal in the case of CCE v. Viral Crane Inds - did not uphold the Revenue plea of classification of similar products under 2404.40 (see also Dariwal Tobacco Products ,
(g) Therefore, classification under 2404.40 cannot be upheld. The apex Court in case of Dharampal Satyapal - also was of the view that for unbranded Chewing Tobacco Preparations the classification has to be under 2404.49 or 2404.40 depending on whether unbranded or branded as the case may be, if the entity is held to be manufactured tobacco. Therefore there is no cause to uphold the classification under 2404.40 & issue demands of duty in there case of unbranded entity.
2.4 When we find that the classification of the disputed admittedly unbranded entity is under 2401.10 and we cannot uphold the classification thereof under 2404.40 as arrived at by the adjudicator and on finding that the tariff rate of duty under 2401.10 or and 2404.49 is NIL as also, we find no reasons to uphold the duty demands and the consequent penalties and liabilities arrived at by classifying the entity under 2404.40.
2.5 When the entity is to be classified under 2401.10 at nil tarrif rate of duty the question of determining any duty demand on M/s. J.M. Enterprises and/or others by clubbing the clearances as arrived at in the impugned order in Appeal Nos. E/2703/02 and E/2704/02 and denying the benefit of SSI cannot be upheld since the SSI notification provide that goods at 'nil' tariff rate and/or wholly exempt under other notifications unconditionally, cannot be reckoned for determining SSI turnover.
2.6 Since the goods cleared are determined to be at nil rate of duty there was no condition or requirement to even obtain a registration under a Central Excise Act and Rules or/and follow any procedures. The charges on clandestine unaccounted removal and penalties thereafter therefore cannot be upheld.
3.1 In view of the findings the order impugned in Appeal Nos. E/2703 and E/2704/02 and E/3195/02 are required to be set aside.
3.2 Consequent to the setting aside of the orders the appeals are to be allowed.
3.3 Ordered accordingly.
(Pronounced in Court on 6-9-2005)