Customs, Excise and Gold Tribunal - Delhi
Collector Of Central Excise vs Carbide Chemicals on 16 February, 1993
Equivalent citations: 1993ECR161(TRI.-DELHI), 1993(68)ELT125(TRI-DEL)
ORDER N.K. Bajpai, Member (T)
1. This appeal has been filed against the order of Collector of Central Excise (Appeals), Bombay by which he had set aside the order of the Assistant Collector, Central Excise, Division-I in which the latter had held that polyethylene granules which are used in the 'manufacture' of vulcanizable polyethylene can be used without payment of duty but duty should be paid on the final product - vulcanizable polyethylene. While setting aside this order, Collector (Appeals) has held as under :
"I have considered the submissions made. The Asst. Collector in his order has held that the product polyethylene granules are classifiable under tariff item 15A(1). This has also been accepted by the appellants. The Asst. Collector had also rejected the claim for exemption under Notification No. 68/71 dated 29-9-1971 and done so correctly. The problem now boils down to the fact whether the polyethylene granules after they are added with an anti-oxidant are again liable to duty. The goods after the addition of anti-oxidant, are called vulcanisable polyethylene and are used for high tension cable manufacture. Does this process tantamount to. manufacture is the question. As has been explained polyethylene granules are manufactured. They are normally cleared as such. A portion of it is used to vulcanisable polyethylene. This is made by addition of anti-oxidant. No change takes place chemically. The goods even after this addition remain polyethylene granules. The Supreme Court in the case of Delhi Cloth and General Mills had held that "the word manufacture used as a verb is generally understood to mean as bringing into existence a new sub-standard (substance) and does not mean merely" to produce some change in a substance", however minor in consequence the change may be. This distinction is well brought about in a passage thus quoted in Permanent Edition of Words and Phrases Vol. 26 from an American judgment. The passage runs thus "Manufacture implies a change, but every change is not manufacture and yet every change of an article is the result of treatment, labour and manipulation but something more is necessary and there must be transformation, a new and different article must emerge having a distinctive name, character or use". In this case the Supreme Court had held that even though the non-essential vegetable was subjected to chemical reaction of neutralisation by alkali bleaching, by activated earth and or carbon nevertheless, there was no manufacturing process because no completely new substance came to existence. In the light of the above, it is clear that adding of anti-oxidant to the polyethylene granules is a process which does not result in the manufacture of any new goods. The vulcanised polyethylene granules continue to remain under the same tariff item 15A(1). Had there been a change either in the Tariff item or sub-item then there would be fresh duty liability. It is not the case here. The polyethylene granules (though mixed with anti-oxidant). The Asst. Collector also holds so. He has held that the polyethylene granules fall under 15A(1). This is not disputed. In view of the foregoing I would hold that the process of mixing an anti-oxidant to the polyethylene granules does not amount to manufacture, no new goods come into existence. The goods continue to fall under 15A(1). If duty liability has been discharged on polyethylene granules no further liability arises after mixing of anti-oxidant. Appeal is disposed of accordingly."
(Emphasis added)
2. In their appeal against this order, the Department have contested it on the ground that (a) the visual look by which Collector (Appeals) has gone cannot be the basis, especially in the case of chemicals, to decide as to whether the products are different because it is technically possible to give exactly similar shape and look to any chemical of same colour.
(b) The appellant's claim that they have merely mixed the polyethylene granules with the anti-oxident is not correct because what happens in the present case is that polyethylene granules are coated with dicumyl peroxide so that it is just not possible to remove the coating.
(c) The coating of dicumyl peroxide imparts a different property to the polyethylene granules which does amount to changing their chemical property.
(d) The assessee has made a mis-statement before Collector (Appeals) by stating that they are adding anti-oxident to polyethylene granules. This is contrary to the report of the Chemical Examiner that an organic chemical has been used - viz. dicumyl peroxide.
3. It will be seen from the above that while the Assistant Collector held that no duty need be paid at the stage of production of polyethylene granules and the liability should be discharged on the final product viz. vulcanisable product, Collector (Appeals) has decided that if duty has been paid on polyethylene granules, no further liability arises after mixing of anti-oxident.
4. A brief narration of facts is necessary to explain the background of the dispute. Major portion of the polyethylene granules which the appellants manufacture is sold and a small portion is converted to make vulcanizable polyethylene. The Test Memo, dated 17-9-1984 for test of a sample of XLPE (HPDEI 4201) (vulcanizable polyethylene) with the report of the Chemical Examiner, dated 4-12-1984 on a test of the sample which was produced by the learned Departmental Representative is as under :
"Description of sample - XLPE (HPDEI 4201) (Vulcanizable Polyethylene) Process of manufacture in brief Low Density Polyethylene Granules (falling under TI 15A(1) are manufactured from ethylene by polymerisation process. LDPE granules as obtained after polymerization process, are used in the manufacture of XLPE (Vulcanizable Polyethylene) by mixing (?) of vulcanising against by mechanical blending.
Report The sample is in the form of granules. It is composed of LDPE physically treated with small amount of organic chemical."
5. The appellants' case is that when they initially started producing Vulcanizable polyethylene in the year 1970, the Supdt., Central Excise, Range No. I, Division No. VI had accepted their contention that the goods were not excisable and passed the following order on 20-2-1971 (copy of order produced) :-
"In view of the matter explained by you under your letter no. nil, dated 15-2-1971, the product 'Vulcanizable polyethylene" is classifiable as non-excisable. Any polygranules cleared for manufacture of Vulcanizable polyethylene should be on payment of duty for which separate accounts should be maintained."
6. When they decided to start once again the production of vulcani-zable polyethylene in February 1980, they addressed a letter to the Assistant Collector seeking the same order and enclosing a note on the manufacturing process and end-use. This note is significant and the relevant portions are reproduced below :-
"VULCANIZABLE POLYETHYLENE - BRIEF PROCESS & END-USE It is made from polyethylene granules by further processing - by addition of a vulcanising agent and mechanical blending of the mixture. Thus, it is a physical mixture of polyethylene granules, dicumyl peroxide and anti-oxidant. Because of its enhanced mechanical and electrical characteristics, it is used as an insulation in high voltage power cables.
Major improvements offered in high voltage power cables manufactured from Vulcanizable polyethylene insulation include:
(1) Continuous operating temperatures of 90 C are possible resulting in greater capacity than unvulcanizable polyethylene and moist rubbers. In emergencies Vulcanizable polyethylene can tolerate 130 C without seriously affecting the life of the cable and short-time overloads upto 30 seconds at 250 C. These operating and overload temperatures are higher than those of SBR butyl, oil base rubber or conventional polyethylene.
(2) The high dielectric strength of vulcanisable polyethylene promotes thinner insulation and smaller cable diameter compared to thicknesses necessary with paper cable and butyl rubber.
(3) The excellent moisture resistance of Vulcanizable polyethylene makes it suitable for duct and direct burial cable and permits more economical design criteria and installation facilities in high voltage service."
7. It is upon receipt of the Classification List and the note setting out the manufacturing process and end-use that the Assistant Collector passed the order which was set aside by Collector (Appeals).
8. Shri L. Narasimha Murthy, the learned Departmental Representative submits that the mixing of dicumyl peroxide to polyethylene should be regarded as a process "incidental or ancillary to the completion of the manufactured product" and to that extent, it cannot be denied that a commercially new product with a distinctive name, character and end-use emerges after the mixing. He referred to the Condensed Chemical Dictionary by Gessner & Hawley (X edition) in which one of the uses of dicumyl peroxide is shown as a "vulcanizing agent" and submitted that the quality of vulcanisation is imparted by treating polyethylene with dicumyl peroxide. It also appeared from "The Encyclopedia of Chemistry" by Hample & Hawley (p. 882) that all grades of polyethylene may be chemically cross-linked and dicumyl peroxide is an excellent cross-linking agent. Shri Murthy submitted that this publication also mentions that commercially, cross-linked polyethylene has found widest application as power cable insulation.
9. Shri Murthy placed reliance on the following decisions of the Tribunal in support of his contention :-
(a) Inarco Ltd., Bombay v. Collector of Central Excise, Bombay - 1987 (31) E.L.T. 469
(b) Collector of Customs, Madras v. Air Control Systems -1988 (33) E.L.T. 568
(c) Collector of C. Ex. v. Indian Dyestuff Industries Ltd. -1986 (26) E.L.T. 936
(d) Hindustan Polymers v. Collector of Central Excise, Guntur - 1986 (24) E.L.T. 697
10. Reading from the note on manufacture submitted by the appellants, Shri Murthy emphasised that according to the respondents themselves the "enhanced mechanical and electrical characteristics" of vulcanizable polyethylene offer certain "major improvements" in high voltage power cable manufactured from vulcanizable polyethylene and these include " ... greater capacity than unvulcanizable polyethylene", "thinner insulation and smaller cable diameter". "Excellent moisture resistance of vulcanisable polyethylene makes it suitable for duct and direct burial cable and permits more economical design criteria and installation facilities." Shri Murthy submitted that these properties of the vulcanizable polyethylene left no doubt whatsoever about the distinctly new character and use of the product different from those of unvulcanised polyethylene even though the transformation was not brought about by a chemical process but only by addition of an organic chemical. In support of this argument, he particularly referred to the decision of the Tribunal in the Air Control Systems case (supra) in which it was held that blending of sodium hexametaphosphate with Tephguard, although in very small quantities (parts per million -PPM) being essential for dispersion, amounts to manufacture. He referred to para-14 of the decision the relevant portion of which is extracted below :-
"14. The next point made on behalf of Revenue was that blending is not a process of manufacture, particularly when the product to be added - Sodium hexa-metaphosphate - is a very small quantity. The representative of the respondent explains that the additive sodium hexa-metaphosphate is a dispersal agent and it is used only in P.P.M. (Parts per million) quantities. It is not the smallness of the quantity used that matters but the results achieved. As it will be seen from the literature, what is sought to be achieved by the product is to effect a micro-thin coating of the resin on the moving surfaces of the engine i.e. in the piston rings and the sides of the chamber, so that the slippery surfaces that PTFE provides and the antistic property that it has, is achieved. Incidentally, there is also cleaning of the surfaces of contact and the coating is not corrosive. For this purpose, homogeneous bonding of a very high order is needed; hence what is described as blending is a controlled and delicate operation of manufacture to achieve the above desired objectives.
15. ...The dispersing agent, sodium hexa-metaphosphate does the trick of dispersion of PTFE in such a fine form and efficient way that what finally emerges is a micro-thin coating on the moving surfaces which are in contact."
(Emphasis added)
11. Shri Murthy's contention was that just as Sodium hexa-metaphosphate changed the properties of PTFE by blending in very small quantities, similarly the addition of dicumyl peroxide to polyethylene imparted to it certain properties which made it suitable for use as an ideal insulating material in high voltage power cables. If this did not result in the process incidental and ancillary to the completion of the manufactured product, submitted Shri Mur-thy, what else would? Shri Murthy also drew support from the decision of the Tribunal in the case of Hindustan Polymers (supra) in which it was held that Polystyrene (coloured) obtained by treating uncoloured polystyrene with pigments, stablisers and lubricants was classifiable under Item 15A (i) (ii) and not under Item 68 and the duty should be charged at the coloured stage when it was cleared from the factory after colouring it. If the principle underlying this decision is applied to the present case, there was no reason why duty should not be charged on vulcanisable polyethylene since this was the stage of clearance of the goods. He, therefore pleaded for the restoration of the order of the Assistant Collector.
12. Shri V. Lakshmi Kumaran, the learned Counsel for the respondents, referred to the test report and submitted that the addition of dicumyl peroxide was merely a physical process and did not result in the transformation of the polyethylene into a different article, having a "distinctive name, character or use" as held by the Supreme Court in the case of Union of India and Ors. v. Delhi Cloth & General Mills Co. Ltd. & Others, 1977 (1) E.L.T. (J 199). He also cited the following other decisions in support of his contention :-
(a) Asian Cables Corporation v. Collector of Customs, Bombay - 1990 (50) E.L.T. 530 (Tri.) (XLPE Compound HFDM-0595-BK is an insulating compound eligible for exemption from customs duty under Notification 196/84-Cus., dated 7-7-1984 on import)
(b) Collector of Central Excise v. Crescent Chemical Corporation - 1990 (48) E.L.T. 458 (Trib.) [Processing of lubricating oil not amounts to manufacture under Section 2(f)]
(c) Gujarat Steel Tubes Ltd. v. State of Kerala -1989 (42) E.L.T. 513 (SC) (Galvanisation of steel tubes does not bring a new commodity into existence for purposes of the Kerala General Sales Tax Act, 1963)
(d) Bakelite Hylam Ltd. v. Collector of Central Excise, Hyderabad Tribunal's Order No. 512/91-C, dated 31-5-1991 (unreported) (Addition of fillers to phenol formaldehyde resin does not result in emergence of a new product)
(e) Collector of Central Excise, Bangalore v. Mallaya Fine Chair (Pvt.) Ltd. -Tribunal's Order No. 1245/90-C, dated 13-11-1990 (unreported) (Food colours - adding of common salt or Glauber's salt or potable water and repacking into convenient retail packets did not amount to manufacture)
13. Shri Lakshmi Kumaran also placed a copy of the clarification issued by the Central Board of Excise & Customs in their Letter F. No. 93/2/82-Cx. 3, dated 5-5-1982 that conversion of duty-paid Phenol Formaldehyde resins into Phenol Formaldehyde moulding powder falling under Item 15A(1)(i) did not involve any chemical reaction and therefore the moulding powder was again not liable to duty.
14. On the question of "later the better" principle of collecting excise duty Shri Lakshmi Kumaran referred to the unreported decision of the Tribunal in the case of Modern Steels v. Collector of Central Excise, Chandigarh, [Order No. E/2/92-B1, dated 7-1-1992 - Since reported vide 1992 (57) E.L.T. 220 (Mad.)] and submitted that it was held by the Tribunal in this case that where duty was chargeable on steel ingots its levy could not be deferred to a later stage unless there was a notification exempting it from duty.
15. We have carefully considered the appeal and the submissions made at the hearing. The proceedings in this case started because the respondents claimed that the vulcanizable polyethylene which they were producing from duty-paid polyethylene granules was non-excisable. This claim was not accepted by the Assistant Collector who decided that the duty liability should be discharged on the final product - vulcanizable polyethylene and no duty need be paid on the polyethylene granules. He has referred to the following opinion, dated 15-2-1985 of the Deputy Chief Chemist :-
"It is known that Polyethylene can be cross-linked to upgrade its physical properties by use of organic peroxide. Peroxide cross-linking of Polyethylene improved its tensile strength, aging and weathering characteristics. The major use of such resin is in wire and cable insulation."
(Emphasis added)
16. Collector (Appeals) has, on the other hand, proceeded on the basis that vulcanizable polyethylene is the result of mixing an anti-oxident to polyethylene granules. Some confusion has no doubt arisen because the appellant's note on the manufacturing process of vulcanizing polyethylene mentions about it as "a physical mixture of polyethylene granules, dicumyl peroxide and anti-oxidant", whereas in their written submissions given to Collector (Appeals) they have conveyed the impression as if dicumyl peroxide itself is an anti-oxidant. However, what we have to consider is whether, because of the mixing of dicumyl peroxide such a transformation takes place that a new and different article emerges having a distinctive name, character or use in terms of the test laid down by the Supreme Court in the classic judgment in DCM's case cited before us. We do not consider that it is of material consequence that a chemical reaction must necessarily take place to bring about such a transformation. This view is supported by the decision of the Tribunal in the case of Air Control Systems (supra) cited by the learned DR in which it is the process of blending of sodium hexa-metaphosphate in very small quantities as a dispersal agent which brings about the requisite micro thin coating on the moving surfaces.
17. The three attributes of the transformation referred to in the DCM case are distinctive name, character or use. In the present case, the name of the product does not change in the sense that it continues to be called polyethylene, though, of course, vulcanizable polyethylene. But its properties (character) as well as its uses undergo material change. This fact is fully explained in the note on the manufacturing process submitted by the respondents (reproduced in para-6) and, as highlighted by the learned DR and indicated in para-10. It is also clear from the "Encyclopaedia of Chemistry" by Hampel & Hawley cited by the learned DR referred to in para 9. In view of these factors, we are of the considered view that vulcanizable polyethylene is a distinctly different product from polyethylene in terms of the tests prescribed by the Supreme Court.
18. We have also to consider the points made by Shri Lakshmi Kuma-ran and the case law cited by him. The decision in the Asian Cables Corporation case relies heavily on the "Encyclopaedia of Chemistry" and refers to chemically cross-linking of polyethylene with dicumyl peroxide; and commercially cross-linked polyethylene having found widest application in power cable insulation. The essential test of excisability is marketability of a product and this test is fully supported by the Encyclopaedia which is extensively cited in the Asian Cables Corporation case. This decision indirectly strengthens our view.
19. The view taken in the decision of the Tribunal in Crescent Chemical Corporation case (supra) that processing of lubricating oil by which its usability may be reduced or enhanced would not attract the applicability of Item 11 so long as the lubricating oil retains its character as lubricating oil and does not become a different excisable commodity, is not disputed. In the present case, as we have seen, the properties (character) and uses of polyethylene have undergone material change by treating it with dicumyl peroxide. The circumstances are, therefore, different and the ratio of the Crescent Chemical Corporation case would not apply to the case of vulcanizable polyethylene.
20. The Supreme Court decision in the case of Gujarat Steel Tubes v. State of Kerala (supra) is not applicable to the present case. What it deals with is steel tubes - before and after galvanisation. The Apex Court has held that galvanization does not bring into existence a new commodity. To quote :
"5. The purpose of galvanizing a pipe is merely to make it weather proof. It remains a steel tube. By being put through the process of galvanization it is made rust proof. Neither its structure nor function is altered. As a commercial item it is not different from a steel tube."
(Emphasis added)
21. We have seen how the character and use of vulcanizable polyethylene are very different from polyethylene before being treated with dicumyl peroxide as a result of which it gets chemically cross-linked. Commercially too, according to the "Encyclopaedia of Chemistry", cross-linked polyethylene has wide applications which are different from those of polyethylene. Thus, the ratio of the Gujarat Steel Tube case will have no application to the present case.
22. The two decisions in Bakelite Hylam and Mallaya Fine Chem cited by the learned Counsel are clearly not applicable. For the same reason Board's clarification about Phenol Formaldehyde moulding powder by addition of fillers to Phenol Formaldehyde Resin is not applicable. In that case, the Chief Chemist had opined as under :-
"So far as the classification of the P.F. resin and P.F. moulding powder for the levy of duty under Item 15A is concerned, it has since been opined by the erstwhile Chief Chemist vide this office U/o C No. 22-Ex. 0/75, dated 9-4-1975 (page 3/n.s. of linked file No. 93/20/74-CX. 3) that both phenolic resin and phenolic moulding powder are covered as "Phenoplast" under Item 15A(1)(i) of C.E.T. The generic name "Phenoplast" comprises a wide range of resinous material derived from the condensation reaction of Phenol or its homologues (cresols, xylenol, etc.) or substituted phenol with aldehydes such as formaldehyde, etc. The abbreviation "P-F" stands for Phenol formaldehyde.
The process of mixing fillers, dyes, catalyst like "Hexa Methylene Tetramine", lubricant, etc., with the Novolac or two stage P-F resin does not involve chemical reaction. This compounding process can be regarded as a physical blending. The change in physical properties does not result from condensation, polycondensation, etc. These fundamental reactions actually take place during the process of manufacture of the P-F resin itself from the raw materials. A similar change in form, i.e. powder to liquid/paste takes place in case of PVA (Polyvinyl alcohol) resin where no chemical reaction occurs. Attention is invited to M.F. (DR) F. No. 93/1/72-CX, dt. 24-10-1979 in this context.
The word "Manufacture" implies a change but every change is not a manufacture in spite of the fact that such change may be brought about by treatment, labour and manipulation. For the purpose of manufacturing something more is necessary, and there must be a transformation, a new and different article must emerge having a distinctive name, character and use. In an uninterrupted and continuous process of manufacture of P.F. moulding powder transformation of P.F. resin into the form Moulding Powder, in my opinion, may not constitute a distinctive process of manufacture."
(Emphasis added)
23. We have discussed in great detail how the properties and uses of vulcanizable polyethylene are very different from those of polyethylene before its being treated with dicumyl peroxide because of the chemical cross-linking which takes place. Commercially also they are different. The analogy of P-F moulding power is, therefore, not applicable.
24. We now proceed to consider the later the better principle cited by Shri Lakshmi Kumaran. What we have to bear in mind in this case is the final form in which the goods are being removed from the factory in which the manufacturing process does not come to an end with the production of polyethylene. It is true that the appellants have stated that vulcanizable polyethylene was proposed to be manufactured out of duty paid polyethylene granules. As we have seen, the production of vulcanizable polyethylene involves a process incidental or ancillary to the completion of the manufactured product, the liability of payment of duty would arise only at the final stage. This would naturally imply that no duty need be paid in respect of the quantities of polyethylene which are taken for further processing - that is treating with dicumyl peroxide. Even otherwise, since the final product is commercially a distinct product it would be excisable only at that stage. We observe that all this should present no difficulty since the further processing is done in the same factory.
25. In view of the foregoing, the order of Collector (Appeals) is set aside and the appeal of the Department is allowed.