Case: M/S. H.P.L. Chemicals Ltd Vs. Commnr. Of Central Excise, Chandigarh

3. Appellant 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 duty4. Divisional 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 case5. On the 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:(a) Central Excise Duty amounting to Rs.12,21,863/- should not be recovered under Rule 9(2) of the Central Excise Rules, 1944(b) Interest on the said duty be not recovered under Section 11AB of the Act(c) Penalty should not be imposed under Section 11AC, Rules 9(2) and 173Q of the Central Excise Rules, 1944(d) The appellants product should not be classified under Chapter Heading No.38.23 against 25.01 as claimed by the Appellants6. Appellant in reply to the show cause notices took a number of points, relevant ones of which are:1. That in the common parlance the product in dispute is described as Denatured Salt2. That the end use of the product is also as a replacement of the common salt3. That the classification of a mixture is to be decided according to the dominance of the constituent4. That Chemical 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 consumption5. That only those residual products are classifiable under Heading No.38.24 which are not elsewhere specified or included6. That it is not necessary that sodium chloride should be an input for the manufacture of Denatured Salt7. 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 HSN8. That even six months period is not available to the department for the raising of the demand and the entire demand is without the authority of law7. After 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 Act8. Aggrieved 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 38.249. The Tribunal has set aside the order of the Commissioner (Appeals) primarily by recording the following 4 findings:1. Firstly, by 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 cement2. That since the starting raw materials were not classifiable under Chapter 25, the residue in question cannot be a product covered by Chapter 253. That the Denatured Salt is a residue of the chemical industry covered by Chapter 38. It is not elsewhere specified and provided4. 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 products

Reasoning: 21. 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 residuaryheadingwhich 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 saidheadingis a specific. Chapter note 2 does not provide anywhere that in order to be covered by Headingthe 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, all impurities must be removed. Similarly, 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, the starting material must be salt. Residuary Sodium Chloride left after chemical processing is clearly covered by Headingas per HSN25. Rule 2(b) provides that any reference in aheadingto 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 thatheadingwhich provides for most specific description shall be preferred tos 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 Headingand not under Heading 38.23 which is a residuary Heading26. This 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 particularheadingordifferent from that claimed by the assessee, the Department has to adduce proper evidence and discharge the burden of proof. In the 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. The Department has not shown that the subject product is not boughtorsoldoris not knownor29. It was submitted by the learnedcounsel appearingr theRevenue that the goods were classifiable under Heading No.38.23 (now 38.24) as "residuary products of chemicalorallied industries not elsewhere specifiedorincluded" which was the last item covered by Heading No.38.23. The said Heading No.38.23 is only a residuaryheadingcovering residual product of chemicalorallied industries "not elsewhere specifiedorincluded". In the present casesince the goods were covered by a specific, i.e., Heading No., the same cannot be classifiedunderthe residuaryheadingat all. This position is clearly laid down in Rule 3(a) of the Interpretative Rules set out above. Asperthe saidInterpretative Rule 3(a), theheadingwhich provides the most specific description shall be preferred to theheadingproviding ae general description. This position is also well settled by a number of judgments of this Court. Reference may made to M/s. Bharate and Press Industries (P) Ltd. Vs.r of Central Excise,Baroda, Gujarat, 1990 (1) SCC 532.