H.P.L. Chemicals Limited Vs. Commissioner of Central Excise, Chandigarh  Insc 218 (20 April 2006)
Bhan & Lokeshwar Singh Panta
with C.A. Nos.7500-7501 of 2004 Bhan, J.
appeals pertain to the same issue. For the sake of convenience, the facts are
taken from Civil Appeal No.1836 of 2001.
(for short "the appellant") being aggrieved by the final order
No.526/2000/C dated 7.12.2000 passed by the Central Excise and Gold (Control)
Appellate Tribunal, New Delhi (for short "the Tribunal") in Appeal
No.E/2154/2000-C has filed the present appeal under Section 35-L of the Central
Excise Act, 1944 (for short "the Act"). The Tribunal by the impugned
order has set aside the order of the Commissioner (Appeals) classifying 'Denatured
Salt' under the Chapter Heading 25.01 and held that 'Denatured Salt' is
classifiable under the Chapter Heading No.38.24 of the Central Excise Tariff
Act, 1985 (for short "the Tariff Act").
is a limited company incorporated under the Companies Act, 1956 and is engaged
in the manufacture of Hydrazine falling under the Chapter Heading No.28.25 of
the Tariff Act. Appellant, during the course of manufacture of the final
product produces residuary by-product, i.e., 'Denatured Salt'. Appellant filed
classification list claiming classification of the said product under the
Heading No. 25.01 carrying 'Nil' rate of duty.
Preventive Officers of the Central Excise visited the plant of the appellant
and observed that the raw materials used by the appellant are Urea, Caustic
Soda (Sodium Hydroxide) and Chlorine Gas. The process of manufacture followed
by the appellant, as stated in the show cause notice based on the report of the
prevent staff is as under: Caustic Soda and Chlorine Gas are reacted in a
closed tank and transferred to another tank. In the said other tank Urea is
mixed. The mixture is then heated upto 100 centigrade with the help of steam.
Chemical reaction starts in the tank and on completion of it, Hydrazine in
liquid form gets generated. It is removed to another tank through pumps. From
this tank, the materials in limited quantities are taken to evaporator tank
where Hydrazine evaporates along with water and passes through a condenser and
is collected. The remaining material in the evaporator tank is taken into
centrifuge. In the centrifuge, out of the remaining materials, solids and
liquids are separated. The liquid form centrifuge is again passed through the
evaporator tank and, in turn, through condenser to collect Hydrazine. This
process is continued for all remaining liquids and is a continuous process for
further retrieval of Hydrazine. The residue solid which remains in the
centrifuge is taken out from its bottom and it is in the form of white
crystalline powder and which is sold by the appellant as Denatured Salt. It is
this product whose classification is in dispute in the present case.
basis of the report submitted by the Preventive staff, the Deputy Commissioner
of Central Excise, Chandigarh issued two show cause notices dated
28.2.1997 and 12.3.1997 requiring the appellant to show cause as to why :
Duty amounting to Rs.12,21,863/- should not be recovered under Rule 9(2) of the
Central Excise Rules, 1944.
Interest on the
said duty be not recovered under Section 11AB of the Act.
not be imposed under Section 11AC, Rules 9(2) and 173Q of the Central Excise
product should not be classified under Chapter Heading No.38.23 against 25.01
as claimed by the Appellants.
in reply to the show cause notices took a number of points, relevant ones of
That in the
common parlance the product in dispute is described as Denatured Salt.
That the end use
of the product is also as a replacement of the common salt.
classification of a mixture is to be decided according to the dominance of the
Examiner report supports that the product is a salt in denatured form, i.e.,
impure and is not usable as edible salt, because it contains sodium carbonate
which is not fit for human consumption.
That only those
residual products are classifiable under Heading No.38.24 which are not
elsewhere specified or included.
That it is not
necessary that sodium chloride should be an input for the manufacture of
That it is not
the intention of the legislature that first salt should be produced and
thereafter it should be denatured because the legislation was fully aware that
impure/inedible salt is available whether natural or through some chemical
process that is why it appear on the HSN.
That even six
month's period is not available to the department for the raising of the demand
and the entire demand is without the authority of law.
considering the replies filed by the appellant, the Deputy Commissioner of
Central Excise, Chandigarh decided both the said notices by
order in original dated 31.3.1999. By the said order the Deputy Commissioner
held that the subject product was correctly classifiable under Heading No.
38.23 (now 38.24) and he accordingly confirmed the demand of duty and directed
the appellant to deposit the same along with the interest. It was further held
that since there was no material on record to indicate any suppression or mis-statement
of facts, a case for imposing the penalty was not made out. Against the order
passed by the Deputy Commissioner, the appellant filed an appeal before the
Commissioner (Appeals), Central Excise and Customs, Chandigarh, who allowed the same by order in
appeal dated 28.3.2000 by holding that the subject product was classifiable
under Heading 25.01 of the Tariff Act.
by the order passed by the Commissioner (Appeals) the Revenue filed appeal
before the Tribunal which has been accepted by the impugned order. The Tribunal
has set aside the order passed by the Commissioner (Appeals) and restored that
of the adjudicating authority. It has been held that the subject product was
classifiable under Heading 38.24.
Tribunal has set aside the order of the Commissioner (Appeals) primarily by
recording the following 4 findings:
referring to the titles of Section V and Chapter 25 of the Central Excise
Tariff the Tribual has held that in order to be covered under Chapter 25, the
goods must be "mineral products" and that these must be salt, sulphur,
clay and stone, plastering materials, lime and cement.
That since the
starting raw materials were not classifiable under Chapter 25, the residue in
question cannot be a product covered by Chapter 25.
Denatured Salt is a residue of the chemical industry covered by Chapter 38. It
is not elsewhere specified and provided.
The residue in
the instance case being from Hydrazine, which is a chemical product would be
classifiable under Chapter 38.24 which was a specific heading for such
adverting to the legal submissions addressed by the learned counsels appearing
for the assessee and the Revenue, it would be relevant to detail two important
findings on fact recorded by the authorities below.
Central Excise Authorities conducted market enquiry through the Assistant
Commissioner of Central Excise, Chandigarh and the said enquiry inter alia revealed as under:- "The enquiry
revealed that instant goods were being consumed by the local soap manufacturers
as a filler in the detergent and as a substitute of the common salt. As these
manufacturers of soaps had started purchasing the goods only for a few years
since the noticee started producing and supplying the same under the name of
'denatured salt' in their invoices, the goods were known to the localized
consumers by this name only".
fact has been recorded in the order in original dated 31.3.1999 passed by the
Deputy Commissioner, Central Excise, Chandigarh.
subject product was sent for examination by the authorities to the Central
Examiner of Central Revenue Control Laboratories (in short "CRCL").
CRCL found the subject product to be composed of Sodium Chloride, Sodium
Carbonate and other inorganic salts. It was opined by CRCL that the subject
product is to be taken as Sodium Chloride.
report of CRCL as quoted in the order of the Commissioner (Appeals) dated
28.3.2000 is reproduced below:- "being composed of Sodium Chloride, Sodium
Carbonate and other inorganic salts" Sodium Chloride Content - 53.6%
Sodium Carbonate Content - 19.6% Moisture at 100o C - 9.0% Is to be taken as
Nos. 25.01 and 38.23 of the Central Excise Tariff are reproduced below for
reference:- "Head -ing No.
of Goods Rate of duty 25.0 1 2501.00 Salt (including table salt and denatured
salt) and pure sodium chloride, whether or not in aqueous solution or
containing added anti-caking or free flowing agents Nil 38.2 3 3823.00 Prepared
binders for foundry moulds or cores; chemical products and preparations of the
chemical or allied industries (including those consisting of mixtures of
natural products), not elsewhere specified or included; residual products of
the chemical or allied industries, not elsewhere specified or included"
20% Heading 25.01 is a specific heading covering "Denatured Salt" by
name. The fact that the product in question is a "Denatured Salt" is
clear from the test report of the Chemical Examiner, CRCL, who has found that
the product comprises of 53.6% Sodium Chloride and "is to be taken as
Sodium Chloride". This test report was obtained by the Central Excise
authorities themselves from their own Chemical Examiner. Even as per market and
trade enquiries conducted by the Central Excise Department itself, it was found
that the said goods are being consumed by local soap manufacturers as a filler
in the detergent and as a substitute of the common salt; these are purchased
and sold as "Denatured Salt" and are known to the local consumers by
this name only. Thus, as per the said market and trade enquiries conducted by
the Central Excise Department the goods in question are bought and sold as
explanatory notes below Heading No.25.01 in the Harmonized Commodity
Description and Coding System (in short "HSN") are reproduced below:-
"This heading relates to sodium chloride, commonly known as salt.
is used for culinary purposes (cooking salt, table salt), but it also has many
other uses and, if necessary, may be denatured to render it unfit for human
Salt which is
extracted from underground:
by conventional mining (rock salt), - or by solution mining (water is injected
under pressure into a layer of salt and returns to the surface as saturated
salt (sea salt) is obtained by evaporation of sea water by the sun;
salt is obtained by evaporation of saturated brine.
Sea water, brine
and other saline solutions.
table salt) which has been slightly iodised, phosphated, etc., or treated so
that it will remain dry.
Salt to which
anti-caking agents or free-flowing agents have been added.
Salt which has
been denatured by any process.
chloride, in particular that left after chemical processing (e.g.,
electrolysis) or obtained as a by- product of the treatment of certain
ores." As per HSN this Heading 25.01 relates to sodium chloride, commonly
known as salt. Salt is not only used for culinary purposes i.e., cooking salt,
table salt, but it also has many other uses and, if necessary, may be denatured
to render it unfit for human consumption. The heading includes Salt extracted
from underground, evaporated salt, sea water salt obtained by evaporation of
sea water by the sun, refined salt obtained by evaporation of saturated brine
and other saline solutions and also covers table salt, salt to which
anti-caking agents or free-flowing agents have been added, salt which has been
denatured by any process and also covers residuary sodium chloride, in
particular that left after chemical processing or obtained as a by- product of
the treatment of certain ores.
CRCL Report, apart from 53.6% Sodium Chloride, subject product also contains
Sodium Carbonate. It is derived due to chemical reaction of caustic soda,
chlorine gas and urea and is unfit for human consumption. This position was
also clarified in the statement of the appellant's representative Shri Surinder
Singh Chawla, who stated that the subject product is "Sodium
Chloride" which is the technical name of the salt and known in the market
as such. That it is unfit for human consumption and was used only for
industrial applications such as by soap manufacturers as filler in the
detergents and the same was not used for human consumption.
the fourth category mentioned in the explanatory notes in the HSN, Chapter
Heading 25.01 covers, inter alia, "residuary Sodium Chloride, in
particular that left after chemical processing".
subject product fully answers the fourth category of goods covered by Chapter
Heading 25.01 as per HSN. Even, according to the process of manufacture
described in the show cause notice, the subject product arises as a residuary
product left after the chemical processing for the manufacture of Hydrazine.
The Chemical Examiner of the Department has also opined that the said product
"is to be taken as Sodium Chloride". The explanatory notes, below
Chapter Heading 25.01 of the HSN make it clear that the sodium chloride which
is obtained by the chemical processing would be covered by the Chapter Heading
referring to the titles of Section V and Chapter 25 of the Central Excise
Tariff, Tribunal has held that in order to be covered by Chapter 25 the goods
must be "mineral products" and these must be Salt, Sulphur, Clay and Stone, plastering
materials, lime and cement. This finding of the Tribunal is totally incorrect
and is contrary to Rule 1 of the Rules for Interpretation of Central Excise Tariff
which is reproduced below:- "1. The titles of Sections and Chapters are
provided for ease of reference only; for legal purposes, classification shall
be determined according to the terms of the headings and any relative Section
or Chapter Notes and, provided such headings or Notes do not otherwise require,
according to the provisions hereinafter contained." It is specifically
provided in Rule 1 of the Interpretative Rules, titles of Sections and Chapters
are provided for ease of reference only and for legal purposes classification
must be determined according to the terms of the headings and relative section
or Chapter notes. Tribunal has totally failed to consider the said
interpretation of Rule 1.
Tribunal has further held that since the starting raw materials were not
classifiable under Chapter 25, the residue in question cannot be a product
covered by Chapter 25. This finding is based on wrong assumptions and
reasoning. There is no such requirement in law that before a product is
classified under Chapter 25 it must be manufactured out of raw materials
falling under Chapter 25. It goes against the explanatory notes of HSN below
Tribunal has further held as under:- "....On a study of the process of
manufacture we find that certain chemicals are reacted, none of these chemicals
are classifiable under chapter 25, thus the Residue in question cannot be a
product obtained after chemical processing e.g. (electrolysis). None is a
bye-product of a treatment of certain ores. The product is obtained after crystallisation.
The product is obtained as a bye-product or Residue while manufacturing
is admittedly a chemical.
the Residue in the instant case is nothing but a residue of chemical and allied
industries. We note that there is specific heading for Residue of chemical and
allied industries under the present chapter Heading 38.24. Since there is
specific heading, we need not go to decide the issue by resorting to be Rules
for interpretation of tariff. These Rules are attracted only when the heading
is not specific or the product is a composite one." The aforesaid
reasoning of the Tribunal in our view is incorrect. Heading No.38.23 (which was
subsequently renumbered as Heading No.38.24) is a residuary heading which
applied only to "residual products of chemical and allied industries, not
elsewhere specified or included". The Tribunal totally erred in picking up
the expression "residue of chemical and allied industries" and on
that basis holding as if the said heading is a specific heading. It is on such
wrong assumption that the Tribunal further proceeded to hold that Rules for
Interpretation of the Tariff are irrelevant. Thus the entire reasoning of the
Tribunal is totally misconceived and untenable. Tribunal has missed the words
"not elsewhere specified or included".
present case, we find that "Denatured Salt" is specifically included
in Chapter Heading No.25.01.
the course of hearing, learned senior counsel appearing for the Revenue relying
on Chapter note 2 of Chapter 25 of the Central Excise Tariff submitted that in
order to be classified as "Denatured Salt" under Heading No.25.01,
the starting raw material must be salt and the product must not contain any
impurities. Chapter note 2 is reproduced below:-
where their context otherwise requires, heading Nos.25.01, 25.03 and 25.05
cover only products which have been washed (even with chemical substances,
eliminating the impurities without changing the structure of the product),
crushed, ground, powdered, levigated, sifted, screened, or concentrated by
flotation, magnetic separation or other mechanical or physical processes
(except crystallization), but not products that have been roasted, calcined,
obtained by mixing or subjected to processing beyond that mentioned in each
heading or sub- heading." On a reading of Chapter note 2 of Chapter 25 we
find that there is no requirement or condition anywhere either in Chapter note
2 or in any other provision of law that the starting material must itself be
salt. The process adopted by the appellant as mentioned in paragraph 3 of the
show cause notice is a physical process. In the said process Hydrazine is
concentrated by physical process and the residual solids are obtained as
"Denatured Salt". These residuals are the residuary Sodium Chloride
left after chemical processing which fully answers the fourth category of
explanatory notes in HSN. Apart from this, similar chapter notes also appears
in Chapter No.1 of Chapter 25 in HSN which clearly provides that residuary
Sodium Chloride left after chemical processing is covered by Heading No.25.01.
Chapter note 2 does not provide anywhere that in order to be covered by Heading
No.25.01 the product must not contain impurities. The bracketed portion in Chapter
note 2 is being totally misread by the Revenue. The only effect of the
bracketed portion is that if the goods in question are washed, such wash may be
even with chemical substances eliminating the impurities without changing the
structure of the product. It is not as if Chapter note 2 provides that in order
to be covered by Heading No.25.01, all impurities must be removed.
it is not provided either in Chapter 25 of the Central Excise Tariff or in
Chapter note 2 or in HSN that in order to be covered by Heading No.25.01, the
starting material must be salt.
Sodium Chloride left after chemical processing is clearly covered by Heading
No.25.01 as per HSN.
by applying Rues 2(b), 3(a) and 3(b) of the "Rules for the
Interpretation" of the Central Excise Tariff (which are part of the
Central Excise Tariff Act, 1985) the subject product is to be treated as Sodium
Chloride as the same is unfit for human consumption. Rules 2(b), 3(a) and 3(b)
of the Interpretative Rules is set out below:- " 2(b) Any reference in a
heading to a material or substance shall be taken to include a reference to
mixtures or combinations of that material or substance with other materials or
substances. Any reference to goods of a given material or substance shall be
taken to include a reference to goods consisting wholly or partly of such
material or substance. The classification of goods consisting of more than one
material or substance shall be according to the principles contained in rule 3.
application of sub-rule (b) of rule 2 or for any other reason, goods are, prima
facie, classifiable under two or more headings, classification shall be
effected as follows:
which provides the most specific description shall be preferred to headings
providing a more general description. However, when two or more headings each
refer to part only of the materials or substances contained in mixed or
composite goods or to part only of the items in a set, those headings are to be
regarded as equally specific in relation to those goods, even if one of them
gives a more complete or precise description of the goods.
composite goods consisting of different materials or made up of different
components, and goods put up in sets, which cannot be classified by reference
to (a), shall be classified as if they consisted of the material or component
which gives them their essential character, insofar as this criterion is
applicable." Rule 2(b) provides that any reference in a heading to a
material or substance shall be taken to include a reference to mixtures or
combinations of that material or substance with other materials or substances.
The classification of goods consisting of more than one material or substance
shall be according to the principles contained in Rule 3. Sub-rule 3(a)
provides that heading which provides for most specific description shall be
preferred to headings providing a more general description. Sub-rule 3(b)
provides that mixtures, composite goods consisting of different materials or
made of a different components, and goods put up in sets, which cannot be
classified with reference to sub-rule (a) of Rule 3, shall be classified as if
they consisted of the material or component which gives them their essential
character. In the present case, the goods in question admittedly contain 53.6%
Sodium Chloride and their essential character is derived by the Sodium
Chloride, which is salt. Since in the present case the salt is unfit for human
consumption, the same would be classifiable as "Denatured Salt" under
the specific Heading No.25.01 and not under Heading 38.23 which is a residuary
apart, classification of goods is a matter relating to chargeability and the
burden of proof is squarely upon the Revenue. If the Department intends to
classify the goods under a particular heading or sub-heading different from
that claimed by the assessee, the Department has to adduce proper evidence and
discharge the burden of proof.
present case the said burden has not been discharged at all by the Revenue. On
the one hand, from the trade and market enquiries made by the Department, from
the report of the Chemical Examiner, CRCL and from HSN, it is quite clear that
the goods are classifiable as "Denatured Salt" falling under Chapter
Heading No. 25.01. The Department has not shown that the subject product is not
bought or sold or is not known or is dealt with in the market as Denatured
Salt. Department's own Chemical Examiner after examining the chemical
composition has not said that it is not denatured salt. On the other hand,
after examining the chemical composition has opined that the subject matter is
to be treated as Sodium Chloride.
been held by this Court in number of judgments that burden of proof is on the
Revenue in the matter of classification. In Union of India 1996 (10) SCC 413,
in para 15 this Court held as under:-
"In our view, the conclusion
reached by the High Court is fully in accord with the decisions of this Court
and the same is justified in law. The burden of proof is on the taxing
authorities to show that the particular case or item in question is taxable in
the manner claimed by them.
assertion in that regard is of no avail. It has been held by this Court that
there should be material to enter appropriate finding in that regard and the
material may be either oral or documentary. It is for the taxing authority to
lay evidence in that behalf even before the first adjudicating authority.
Especially in a case as this, where the claim of the assessee is borne out by the
trade enquiries received by them and also the affidavits filed by persons
dealing with the subject-matter, a heavy burden lay upon the Revenue to
disprove the said materials by adducing proper evidence.
no such attempt was made. As stated, the evidence led in this case conclusively
goes to show that Nylon Twine manufactured by the assessee has been treated as
a kind of Nylon Yarn by the people conversant with the trade. It is commonly
considered as Nylon Yarn. Hence, it is to be classified under Item 18 of the
Act. The Revenue has failed to establish the contrary. We would do well to
remember the guidelines laid down by this Court in Dunlop India Ltd. v. Union
of India, AIR 1977 SC 597 at page 607. in such a situation, wherein it was stated
(AIR p.607 : SCC p 254, para 35):-- "..... When an article has, by all
standards, a reasonable claim to be classified under an enumerated item in the
Tariff Schedule, it will be against the very principle of classification to
deny it the parentage and consign it to an orphanage of the residuary
clause." Collector of Central Excise, Bombay, 1997 (2) SCC 677, it is held
in para 4 as under:- "It is not in dispute before us, as it cannot be,
that the onus of establishing that the said rings fell within Item 22-F lay
upon the Revenue.
Revenue led no evidence. The onus was not discharged. Assuming therefore, that
the Tribunal was right in rejecting the evidence that was produced on behalf of
the appellants, the appeal should, nonetheless, have been allowed".
submitted by the learned senior counsel appearing for the Revenue that the
goods were classifiable under Heading No.38.23 (now 38.24) as "residuary
products of chemical or allied industries not elsewhere specified or
included" which was the last item covered by Heading No.38.23. The said
Heading No.38.23 is only a residuary heading covering residual product of
chemical or allied industries "not elsewhere specified or included".
In the present case since the goods were covered by a specific heading, i.e.,
Heading No. 25.01, the same cannot be classified under the residuary heading at
position is clearly laid down in Rule 3(a) of the Interpretative Rules set out
above. As per the said Interpretative Rule 3(a), the heading which provides the
most specific description shall be preferred to the heading providing a more
general description. This position is also well settled by a number of
judgments of this Court. Reference may made to M/s. Bharat Forge and Press
Industries (P) Gujarat, 1990 (1) SCC 532. It was observed
in para 4 inter alia as under:-
question before us is whether the Department is right in claiming that the
items in question are dutiable under tariff entry 68. This, as mentioned
already, is the residuary entry and only such goods as cannot be brought under
the various specific entries in the tariff should be attempted to be brought
under the residuary entry. In other words, unless the department can establish
that the goods in question can by no conceivable process of reasoning be
brought under any of the tariff items, resort cannot be had to the residuary
item...." India & Others, 1976 (2) SCC 241, this Court held:-
".....When an article has, by all standards, a reasonable claim to be
classified under an enumerated item in the Tariff Schedule, it will be against
the very principle of classification to deny it the parentage and consign it to
an orphanage of the residuary clause. The question of competition between two
rival classifications will, however, stand on a different footing."
Looking from any angle it cannot be held that the subject product would fall
under the sub- heading 38.34 (now 38.24). It would fall under the specific
Heading 25.01 as has been claimed by the assessee/appellant in the
classification list filed by it.
the reasons stated above, these appeals are accepted and the impugned orders
are set aside with consequential effects. Parties will bear their own costs.