Custom, Excise & Service Tax Tribunal
M/S. English Indian Clay Ltd vs Cce, Panchkula on 17 October, 2014
CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL,
WEST BLOCK NO.II, R.K. PURAM, NEW DELHI-110066.
BENCH-DB
Date of Hearing/Order: 17.10.2014
E/Misc./50431,55585,55642/2014
E/2342/2006-EX[DB]
[Arising out of Order-in-Original No. 3-4/COM/PKL/2006 dated 30.03.2006 passed by the Commissioner (Appeals), Central Excise, Panchkula]
For Approval & Signature :
Honble Mr. Justice G. Raghuram, President
Honble Mr. R.K. Singh, Member (Technical)
1.
Whether Press Reporter may be allowed to see the Order for publication as per Rule 27 of the CESTAT (Procedure) Rules, 1982?
2.
Whether it would be released under Rule 27 of the CESTAT (Procedure) Rules, 1982 for publication in any authoritative report or not?
3.
Whether their Lordships wish to see the fair copy of the order?
4.
Whether order is to be circulated to the Department Authorities?
M/s. English Indian Clay Ltd. Appellant
Vs.
CCE, Panchkula Respondent
Present for the Appellant : Shri V. Lakshmikumaran, Advocate Present for the Respondent : Shri Yashpal Sharma, AR FINAL ORDER NO. 54471/2014 PER: R.K. Singh Miscellaneous application No. 50431/2014-EX[DB] has been filed by Revenue for early listing of the appeal. Another Misc. application No. 55642/2014-EX[DB] has been filed by Revenue seeking vacation of stay and for early listing of the appeal Misc. application No. 55585/2014-EX[DB] has been filed by the appellants seeking extension of stay granted by CESTAT vide stay order No. 992/2006-EX[DB] dated 18.08.2006.
Having regard to the fact that appeal pertains to the year 2006 and in the wake of Revenues repeated requests, not opposed by the appellants, we allow Revenues Misc. applications and take up the appeal, as a result of which the appellants misc. application is rendered infructuous.
2. The appellants have filed appeal against Order-in-Original No. 3-4/COM/PKL/2006 dated 30.03.2006/12.4.06. In terms of the said Order-in-Original the adjudicating authority confirmed a demand of Rs. 3,17,47,298/- along with interest and equal mandatory penalty on the ground that the appellants had evaded duty on their product which was modified maize starch classifiable under sub heading 350520 while they mis-declared the same as maize starch and classified under 11.03 thereby evading duty indulging in wilfull misstatement/suppression of facts.
3. The only issue involved in this case is whether the impugned goods are maize starch classifiable under Tariff heading 11.03 or it is modified maize starch classifiable under Tariff heading 35.05. It is pertinent to mention that maize starch classifiable under heading 11.03 was exempt from duty during the relevant period while modified maize starch classifiable under heading 35.05 was not.
4. Before we proceed further it will be useful to briefly mention the process of manufacture of the impugned goods:
The maize undergoes the processes of maize cleaning, steeping and grinding. These processes separate the starch from the maize grain. The starch obtained after the above processes contains fibre and gluten both of which are removed by further separation of starch through the DSM box, Bran Extractor and by centrifuging. The resultant product is the starch slurry which is used to produce the different varieties of starch. To produce Maize starch, BSIL added negligible of potassium permanganate (0.17-0.34 kg/tone) to the starch slurry. The effect of potassium permanganate was controlled by the negating action of sodium meta bi sulphite. The neutralizer used was to the extent of 0.43-0.86 kg/tone. The slurry was treated in the above way for a maximum period of two hours. The maize starch (K) was finally obtained by drying this starch slurry.
5. The adjudicating authority in para 120 of the impugned order admitted that the issue before him is whether such addition of potassium permanganate to plain starch will change its classification from chapter 11 to chapter 35. The adjudicating authority duly took note of the fact that the quantity of potassium permanganate used is small and that it is used to enhance the brightness of the product. The adjudicating authority however opines that addition of a chemical resulting in any change irrespective of how it acts on the chemical structure of starch would shift this product from the scope of plain or native starch to a starch commercially processed for specific use by a customer. He referred to the chapter notes of chapters 11 and 35 of Central Excise Tariff vis-`-vis the HSN note to chapters 35.05 and observed that:
(i) To interpret the HSN notes to mean that the starch can be considered as modified only if there is chemical change in the structure of the starch is in fact to read more than what the note actually means.
(ii) Changes can be structural, they can also be physical.
(iii) There is no doubt that brightness is a physical property and increasing the brightness of starch by bleaching results in a changed product and such change is deliberate to make it suitable for specific commercial requirements.
The adjudicating authority, thus, concluded that the use of the chemicals changed the product from plain starch to what can be called modified starch.
6. It is seen that essentially the adjudicating authority came to a finding that the impugned product was modified starch only on the ground that any change, physical or chemical, including the change in brightness shifted the ordinary starch to the category modified starch classifiable under chapter 35 of Central Excise Tariff and as a consequence the impugned duty liability and penalty followed as the appellants were also held guilty of wilfull misstatement/suppression of fact with intent to evade duty.
7. The Ld, advocate laboriously and in great detail described the manufacturing process and the reason and effect of using small quantity of potassium permanganate and sodium meta bi sulphite to show that these were only for the purpose of enhancing the brightness of starch and did not result in modified starch. He cited various pieces of literature on the subject as well as the chapter notes of chapter 11 and 35 of the Central Excise Tariff and also the relevant Explanatory Notes to HSN to buttress the point. We are not summarizing them here because they will get adverted to and analysed during the discussion in the following paras. The appellants also stated that they used to manufacture modified starch of chapter 35 also on which they used to pay duty and added that modified starch is way more expensive than ordinarily starch and thus even the price at which they sold the impugned product is reflective of the fact that the impugned goods were not modified starch but ordinarily starch.
8. The Ld. A.R. essentially reiterated the arguments adopted by the adjudicating authority.
9. Heard both sides. There is no dispute as far as the manufacturing process, briefly narrated above, is concerned. It is also admitted by the adjudicating authority in para 118 and 119 of the impugned order that there was no test report of the impugned product in as much as:
(i) The test report submitted by the appellants related to samples not drawn from the appellants factory.
(ii) Certain other test reports of CRCL dated 03.01.2002 and other reports pertaining to the year 2004 were introduced during the adjudication proceedings.
(iii) The reports from CRCL produced did not relate to samples of products drawn at the relevant time but are subsequent to the companys letter stating that they had ceased to use the chemicals in question.
The adjudicating authority conceded that none of these reports can be relied upon as the dispute pertains to the period prior to December 2002. Further as stated earlier, the adjudicating authority conceded that the potassium permanganate was used in small quantities and was used only for increasing the whiteness of starch.
10. We find that in the remand order No. 345-346/05-NB(A) dated 07.03.2005 (in the wake of which the impugned order was issued) CESTAT had clearly observed:
2. The appellants case is that it has been producing both the varieties of starch and discharging duty correctly on both. During the hearing of the case, the test reports of the chemical examiner have come on record. Apparently, these relate to different varieties. One set clearly records that the samples were modified clay and the other set does not do so. Certain differences about characteristics of the two sets of samples are also to be noticed. However, a conclusive finding can be reached only after the chemical examiner is examined or cross-examined and full details are brought on record. Proceedings, before the lower authorities have been concluded without doing this. In these circumstances, we are of the opinion that case is required to be remitted to the original authority for fresh adjudication after examination/cross examination of the chemical examiner. In order to facilitate the same, the impugned order is set aside and the appeals are allowed by way of remand. No such examination/cross examination of the CRCL official took place and this alone is arguably a fatal blow to the impugned order. However, as the adjudicating authority has ignored the test reports, absence of cross examination has not caused any prejudice against the assessee.
11. It is well settled that in the matters relating to classification the HSN explanatory notes are an authentic guide. The HSN note relating to chapter 11.08 states that:
Starches, which chemically are carbohydrates, are contained in the cells of many vegetable products. The most important sources of starch are the cereal grains (e.g., maize (corn), wheat and rice), certain lichens, certain tubers and roots (potato, manioc arrowroot, etc.) and the pith of the sago palm.
Starches are white odourless powders composed of fine grains which crackle when rubbed between the fingers. They generally give an intense dark blue colour with iodine (except amylopectin starches, where the colour is reddish brown). Viewed under the microscope in polarized light the grains display characteristic dark polarization crosses. They are insoluble in cold water, but, if heated in water to above their gelatinization temperature (about 60 0C for most starches), the grains break up and a starch paste is formed. Starches are commercially processed to give a wide range of products classified under other heading, e.g., modified starch, roasted soluble starch, dextrin, malto-dextrin, dextrose, glucose. They are also used as such in a wide variety of industries, especially the food, paper, paper converting and textile industries.
12. The HSN explanatory note relating to chapter 35.05 clearly states that in general modified starches of this heading may be distinguished from unmodified starches of chapter 11 on the basis of changes in their properties for example solution and gel clarity, tendency to gel or to crystallize, water binding capacity, freeze-thaw stability, gelatimisation temperature or peak viscosity. It is thus evident that mere change in brightness would not result in transporting starch from chapter 11 to chapter 35 unless the change is such as is described in the above quoted explanatory note (to chapter 35.05). In the adjudication order reference is made to the fact that potassium permanganate is an oxidation agent and therefore may have resulted in the oxidation of starch to make it modified starch. The appellants have clearly explained that the small quantity of potassium permanganate which they have used cannot result in oxidation of starch; it can only act as a purifying agent. They also added that the use of meta bi sulphite was to stop any possible action of oxidation of starch. Thus they have been able to convincingly drive home the point that the process which they undertook was only for purification of starch which increased its brightness. While it is not really legally necessary to refer to technical literature to decide this case, it is pertinent to mention that from the book on Modified Core Starches by Ralph W. Kerr it is clear that such addition of potassium permanganate is only to remove impurities and that reagents are used for whitening of the starch by bleaching xanthophylls and related pigments. In the book chemistry and Industry of Starch by Ralph W Kerr, it is stated (on page 63) that:
After the native starch has been prepared, as outlined in the preceding chapters, it is frequently modified or altered in some characteristic to make the starch more suitable for some particular use. These modifications vary in degree from those in which there is practically no chemical change in the molecules of the starch granule to those in which a significant change can be detected. In a paper Corn Starch Modified and Uses, by F.T. Orthoefer of A.E. Stanley Manufacturing Co. Decatur Illinois (contained in Corn Chemistry and Technology), it is stated that Bleaching is performed on aqueous slurries Sodium bisulfate may be used for neutralization. The color bodies solubilized by bleaching are removed during filtering and washing of the starch before drying.
13. The adjudicating authoritys observation that any physical change like change in brightness/whiteness will result in modified starch covered under Ch. Heading 35.05 is devoid of any basis. Further mere conjecture (on the part of the adjudicating authority) that potassium permanganate may have resulted in the oxidation of starch cannot be the basis of concluding that such oxidation actually happened specially when there is no evidence thereof and the appellants have convincingly contended that no such oxidation was allowed to happen nor it actually happened. It is also clear from the explanatory notes to chapter heading 35.05 that whether product would qualify for coverage under heading 35.05 can be determined on the basis of changes in properties of the product. Thus, as a corollary, unless the product is tested to ascertain if such changes actually happened, it is not possible to infer whether the product is modified starch warranting classification under 35.05.In the case of Riddhi Siddhi Gluco Boils Lt V. CCE, Belgaum 2011 (270) ELT 291 (Tri-Bag.) CESTAT observed we note that different physical and chemical properties distinguish modified starches of chapter heading 35.05 from native starch of chapter 11. We find that unless the parameters are ascertained on test it can not be conclusively found as to whether the impugned goods are correctly classifiable under chapter 11 or chapter 35.05 of the tariff. The civil appeal against this CESTAT was dismissed by Supreme Court 2014 (301) ELT A128 (SC). As has been admitted there are no test reports of the impugned product available in this case and therefore following the ratio laid down by CESTAT in the case of Riddhi Siddhi Gluco Boils Ltd. (supra), there is no basis to conclude that the impugned product was classifiable under heading 35.05. Further, following the CESTAT judgment in the case of Ridhi Sidhi Gluco Boile (supra), CESTAT in case of CCE Ahmadabad Vs. Gujrat Ambuja Exports 2013 (297) ELT (57) and in the case of CCE Ahmadabad Vs. Maize Products 2013 (298) ELT 439 (Tri.-Ahm) upheld the classification of such goods under ch. 11 of Central Excise Tariff.
14. It is evident from the foregoing discussion that there is no basis whatsoever to conclude that the impugned product was modified starch classifiable under chapter 35 of Central Excise Tariff. Consequently, we do not find the impugned order sustainable and set aside the same.
(Justice G. Raghuram) President (R.K. Singh) Technical Member Neha 2