Judgment:
1. This is an appeal against the Order of Collector of Central Excise, Delhi, No. 27/90, dated 8-6-1990.
2. At the outset, the learned Advocate has raised a preliminary objection filed vide letter, dated 3-12-1991. However, subsequently, he withdrew this objection on 15-1-1992 and both the sides were heard on merits.
3. The learned Advocate has stated that the appellants were engaged in the manufacture of Durone-10, a product made from rosin since 1979 for which they had been duly licensed.
4. From the very beginning, it was classified by the Department under Tariff Item 68 until new Tariff Act of 1985 came into being.
Thereafter, it was first classified under 3801.90 until 28-2-1987 and subsequently under 3806.90.
5. During the relevant period - July 1983 to 11-4-1988, the Department drew samples from time to time and approved the classification lists and the Assistant Collector had with him two test reports before the Classification Lists were approved in 1986-87.
6. The process of manufacture was also seen time and again by many central excise officers visiting the factory and some of these visits were by surprise.
8. As early as 8-4-1985, the Chemical Examiner had reported that "the sample is in the form of yellow coloured brittle lumps. It has a characteristic of estergum, an artificial resin".
9. Subsequently a show cause notice, dated 13-6-1985 was issued by the Superintendent asking them to show cause why it should not be classified under Tariff Item 15A but without giving any reason except that Assistant Collector has intimated that it was on the basis of test report obtained from Calcutta Customs. When another sample of Durone-10 was drawn and sent to Chemical Examiner, New Delhi, he reported that "it was rosin based artificial resin in the form of yellowish coloured brittle flake and powder".
10. However, despite the above show cause notice and the above test reports, the Department went on approving the assessment under Tariff Item 68 (without making the same provisional).
11. After the introduction of C.E.T. 1985, the Department again approved the Classification List of Durone-10 under Chapter 38 accepting the same as a derivative of rosin despite the above show cause notice. The assessment under Chapter 38 was also finally approved till December 1987. In April 1988, the D.A.E. officers visited the factory and drew samples and sent it to Chemical Examiner, New Delhi and the latter reported that "the sample is in the form of a light yellowish, brown coloured brittle lumps. It is a rosin modified natural resin (Artificial resin)". In the meanwhile, the Department had obtained and supplied to the appellants a re-test report, dated 25-4-1988 proving as under : "Each of the two samples is in form of a yellowish brittle lumps. Each is derivative of rosin (modified estergum). Certain modified estergums are known to find use as rubber tackifier. However, its actual use may be ascertained".
12. The D.A.E. officers recorded statements of various persons including Shri S.R. Patel, Technical Manager and the appellants complained to Chairman, C.B.E.C. about extorting of the statement from Shri Patel.
13. A show cause notice was subsequently issued on 5-9-1989 by the Collector of Central Excise, New Delhi on the grounds that the appellants had wilfully suppressed the fact of correct raw materials and correct manufacturing process and had wrongly declared the Durone-10 under Tariff Item 68 or 3801.90/3806.90 as rosin derivative with intent to evade payment of duty. It was the Department's contention that Durone-10 was an artificial resin different both from estergum as well as rosin derivative and was classifiable as an artificial resin under Tariff Item 15A and subsequently under 3913.90 as a modified natural polymer not elsewhere specified.
15. It was their submission that the demand was time barred because the process of manufacture of Durone-10 was always in the knowledge of the Central Excise officers since the very beginning and the test reports of the samples were drawn by the officers time and again and were always found to be in confirmity with the declaration made by the appellants.
16. On the merits, it was submitted that the show cause notice does not allege or state that it was not a derivative of rosin. Not only that the fact was even otherwise confirmed by two test reports.
17. No test report says that rosin was a natural polymer. Further it could not be a higher polymer. Its molecular weight was only between 1200 to 1300 and it could never be used for the manufacture of the modified natural polymer.
18. It was also their contention that Note 4(f) under sub-heading 39.13 HSN excludes rosin derivatives from that sub-heading.
19. It is also their contention that the re-test report, dated 11-7-1988 confirms that Durone-10 was a derivative of rosin and this re-test having been sought by the Department itself was binding and inclusive. It was their contention that the Department was always in dilemma because sometimes it called Durone-10 as estergum, sometimes rosin derivative and sometimes a modified natural polymer and now it was being called a high polymer. In a situation like this when the Department was itself in doubt, the benefit should go to the appellants.
20. The Board's letter issued in 1985 also shows that the estergum did not fall under Tariff Item 15A.21. The appellants had also requested for allowing cross-examination of the officers of the Department but no order was passed in this respect by the Collector. During the course of personal hearing, cross-examination of one Shri U.N. Mani representing the Chief Chemist was allowed but that not of other officers. Further, the detailed analytical report was also not supplied in spite of request. It was, therefore, their contention that there was denial of full opportunity which resulted in violation of the principles of natural justice. The Chandigarh Collector had issued a trade notice No. 117/79 and this was brought to the notice of the Collector, but he did not take into account although it is well settled that a Trade Notice issued by the Department is binding on it as evident from the case law cited by them in their Memorandum of Appeal. It is also their contention that the Collector had not taken all of their submissions on record and ignored some of them.
22. The ld. Collector has also ignored the Explanatory Note 4(f) under 39.13 HSN.23. Further as between 3806.90 and 3913.90, the former specifically covers rosin and derivatives thereof, but the learned Collector has ignored the interpretative Rule 3A.24. It was also their contention that in view of the Chandigarh Collectorate Trade Notice there could not be any attempt on the part of the appellants to evade duty particularly when the product had been tested time and again by the officers and at times seen the process of manufacture on number of occasions and no penalty was called for in view of the case law cited in the Memorandum of Appeal.
24A. Further Rule 209A came into effect only from 14-4-1986 by which time Tariff Item 15A had already been repealed.
24B. In pursuance to the queries from the Bench and the directions given in the course of hearing from time to time, the appellant had filed an affidavit regarding process of manufacture and the Department filed a counteraffidavit. Furthermore in response to the Court's direction, the Department also produced the Chief Chemist in the Court.
25. In the Department's submission the view point projected in the adjudication order was reiterated and it was emphasized during the course of the hearing that the fact of use of glycerine during the course of manufacture was suppressed by the appellant. As a result of queries from the Bench put to both the sides including Chief Chemist (on the Department's side) it appeared that while the appellants were using Pentaerythritol, they were also using glycerine. It was also admitted by the Chief Chemist that basically the process consists of esterification of rosin and no polymerisation is involved.
26. The learned Counsel also accepted that this was the basic process and for this purpose, Pentaerythritol as well as glycerine have been used.
27. The learned Advocate also reiterated his submissions with reference to the technical material, the written write-up and other documents filed by him. In particular, he referred to the exemption Notification No. 142/82-C.E., dated 22-4-1982, regarding effective rate of duty on estergum, the classification lists filed by them, the process of manufacture indicated by them and the extracts from Hawley's Condensed Chemical Dictionary and Encyclopaedia of Polymer Science and Technology.
28. Regarding non-declaration of glycerine and his other submissions, he cited the Supreme Court judgment in the case of Shrisht Dhawan (Smt.) v. M/s. Shaw Brothers [1992 (1) SC Cases 534] in which it has been held that non-disclosure of fact not required by statute to be disclosed is not a fraud.
29. He also drew attention to the Supreme Court judgment in the case of Civil Appeal No. 286/1988 filed by Collector of Customs, Indore against CEGAT Order No. 783-87-D, dated 5-10-1987. While dismissing the appeal, the Supreme Court had observed that where the Department itself was apparently in doubt for a long time over the classification and liability of the goods in question, the demand is to be limited for a period of six months only and the extended time limit of five years was not applicable. He also drew attention to the Board's ruling No. 13/65, dated 3i-7-I965 to the effect that estergums are not classifiable under Tariff Item 15A.30. The learned DR also drew attention to the Classification List and other documents filed by the appellant including the test Memos, the affidavit of the Chief Chemist and his report and the extracts from Hawley's Condensed Chemical Dictionary and Materials Handbook by George S. Brady and Henry R. Clauser as also extracts from Encyclopedia of Polymer Science And Technology and emphasized that non-declaration of glycerine as an input amounted to suppression of facts and therefore demand was not time barred. Further Board's Circular was not binding on the Tribunal which has to decide correct classification according to the law and the facts.
31. We have considered the submissions of both the sides and perused the technical literature as well as other documents filed by both the sides.
32. We find that rosin itself is a natural product obtained from pines etc. It contains, inter alia, various acids which on reaction with various alcohols produce ester(s) 32.1 Chemical reaction of an organic acid with an alcohol is called esterification and the product is called ester. Again any product derived from rosin whether by esterification or otherwise is required to be considered as rosin derivative. Therefore, the applicants' product is a rosin derivative in the nature of an ester. Further when the alcohol used is Pentaerythritol, the ester is commonly called as Pentaerythritol ester and when the alcohol used is glycerine (glycol), the product is called as "Estergum".
33. Furthermore, during the process of esterification in the presence of catalyst the rosin gets modified and a semi-synthetic or artificial product is obtained. In that sense, such esters are artificial products (as distinct from naturally occurring esters).
34. H.S.N. Heading 39.05 in fact describes "estergums" as "Artificial resins obtained by esterification with glycerol or other polyhydric alcohol".
35. The rosin itself is a mixture of a number of naturally occurring chemical compounds and the product of their esterification is also a material of complex composition. Again natural rosin can be modified and stabilised by a number of physical and chemical processes to yield rosin derivative(s).
36. The Encyclopaedia of Polymer Science and Technology Volume 12 mentions at page 140 as follows: Rosin or colophony, is a thermoplastic acidic product (resin) isolated by widely different procedures from exudates of living pine trees and from freshly cut and/or aged bole and stump wood or various species of pine.". . .
"Rosin is a clear, pale yellow to dark amber, thermoplastic resinous solid...." 37. The forms of rosin include: (1) Gum Rosin or Pine Gum (2) Wood Rosin etc.
"Composition: Rosin is a complex mixture of mutually soluble, naturally occurring high molecular weight, organic acids and related neutral materials. The acidic constituents that make up the major portion of rosin are known as resin acids." "Derivatives: The reactions of rosin which yield derivatives that are used in the production of synthetic polymers and as additives or modifiers for natural and synthetic polymers involve its carboxyl group and double bonds, singularly or together." 39. "Preparation of Rosin and modified rosin esters, as carried out commercially, has been described by Enos and co-workers (6) and Payne (10). Typical alcohols, glycols and other polyhydric alcohols used in the production of commercially available ester resins include methanol, ethylene glycol, triethylene glycol, glycerol and pentaerythritol".
40. As per Materials Handbook by George S. Brady and Henry R. Clauser, 11th Edition, page 660, rosin contains seven acids with very similar characteristics but consists chiefly of abietic acid.
41. "Rosin ester or estergum is prepared by heating rosin with glycerine".
42. "Rosin esterified with glycerine has lower molecular weight and is not as stable as rosin esterified with Pentaerythritol or other tetrahydric alcohol but modified rosin estergums develop hardness quickly...". "The Pentalyn resins of Hercules are pentaerythritol esters." "Poly-pale resin of Hercules, is a Polymerized resin".
43. From the above, it is clear that during the process of esterification, the resin gets modified and the resultant product is an ester.
44. We also take note of the fact that the Heading 15A as it is stood at the relevant time included "artificial resins obtained by esterification of natural resins or of resinic acids (estergums)." Therefore, the estergum produced by the appellant fell under Tariff Item 15A.45. After the new tariff came into existence, the Tariff Heading 38.06 covered rosin and rosin acids and derivatives thereof....
46. Since the appellants' product was a rosin derivative in the nature of an artificial resin obtained by esterification of natural resin or resinic acids, the Tariff Heading 38.06 was attracted.
47. Since it has been admitted during the hearing that no polymerisation is involved (and only esterification is involved) in the process undertaken by the appellant, we need not go into the question as to what are polymers and what constituted polymerisation and straightaway conclude that the product was not a polymer. Hence the Tariff Heading 39.13 which covered natural polymers and modified natural polymers was not attracted.
48. This brings us to the question of the appellants' actions, the correctness or incorrectness thereof and the liability if any.
49. In this context, we note that the appellants had declared their product merely as Durone-10 in the Classification List. This was by itself not sufficient as the assessee is expected to describe product in such sufficient details as may enable the officers to identify the products and classify them properly and determine their eligibility or otherwise to the Notification, if any applicable and arrive at a correct rate of duty.
50. There was, however, an equal responsibility cast on the assessing officer to call for such information as may be necessary or to make such enquiries as may be called for before finalising the assessment.
51. In the instant case the appellants' product has been repeatedly subjected to testing and classification had been approved after enquiry and testing. Therefore, the approval could not be faulted with.
52. It is also noteworthy that the Board had issued a Tariff ruling No.13/1965, dated 31-7-1965 (F. No. 10/35/64-CXI. VI) to the effect that "the Board have decided that estergums which are specifically defined in Item 39.05 of the Brussels' nomenclature as artificial resins obtained by modification of natural glycerines or resinic acids are not liable to central excise duty under Item 15A of the Central Excise Tariff which is essentially based on Item No. 39.01, 39.02, 39.03 and 39.07 of the Brussles' nomenclature".
53. In view of this circular, if the appellant has not classified the item under Tariff Item 15A, but under Tariff Item 68 and the Assistant Collector had approved it as such, neither the appellants nor the Assistant Collector could be faulted with. Indeed in our opinion, basically it is the Board's circular which appears to be erroneous inasmuch as the old Tariff was not based on HSN; and therefore, the exclusion of rosin, resin acids and their derivatives (other than estergums) (Heading 38.08) from 39.05 H.S.N. was immaterial and the language of the Tariff as it is stood at the relevant time was required to be taken into account.
54. It is also noteworthy that Item No. 68 - all other goods NES included "Rosin Turpentine and their products" vide Chandigarh Collectorate Trade Notice No. 117/79, dated 28-12-1979.
55. Although some derivatives of rosin could be obtained by polymerisation since in this case admittedly no polymerisation was involved, estergums obtained by esterification with glycerol or other polyhydric alcohol, if classified by the appellants as well as the Department's officers under Tariff Item 68, it could not be said that there was a deliberate suppression or misstatement of fact with intent to evade duty, under the above circumstances.
56. The fact that the appellant had initially declared only Pentaerithritol voluntarily and their use of glycerol became known only as a result of Departmental investigation has not escaped our notice.
However, it did not make any substantial difference to the situation inasmuch as the product remained a modified natural resin or an artificial resin classifiable under the same heading and chargeable to the same rate of duty as the ester obtained by reaction with Pentaerithritol. Hence non-supply of this information initially does not by itself change the basic character of the case or entail any penal liability as it could not be considered as a case of fraud perpetuated with intent to evade duty.
57. We also take note of the fact that the appellants' submission to the effect that they had discharged the duty liability in terms of approved classification list and this has not been controverted or shown to be wrong. In this respect we also note their alternative contention that even if the product was classifiable under Tariff Item 15A during the relevant period (prior to new tariff), the duty liability stands duly discharged inasmuch as estergum was chargeable to effective rate of duty 10% ad valorem only as for Notification No.142/82, dated 22-4-1982 and the effective rate of duty on goods falling under 15A and identifiable as estergum was also 10% ad valorem only whereas they had paid duty at 10%/12% as per approved classification list. We also take note of the submission that even if the Department's contention was accepted, that they were not only classifiable under 15A, but chargeable at the rate of 40 per cent of duty as held by the Collector even then the demand is time-barred for the period beyond the normal period of time, inasmuch as the Department itself was not sure of its stand and changed it from time to time the benefit of extended period of time was not available to the Department and the appellant was covered by Supreme Court judgment cited by the Counsel in this regard.
58. In view of the above observations and discussions, we find that Durone 10 was a rosin derivative in the nature of an artificial ester resin produced by esterification of natural rosin in the presence of catalysts at suitable temperature. Hence it was classifiable under Tariff Item 15A "as an artificial resin obtained by esterification of natural resin or a resinic acid" under old Central Excise Tariff as it stood during relevant period.
59. However, in view of the changing stand of the Department and the fact that the Board itself had excluded estergum from Tariff Item 15A by its ruling No. 30/1965, the appellants could not be blamed for classifying it under Tariff Item 68 and the Assistant Collector could not be faulted with in approving the classification as such. For the same reason, it cannot be said that they had mis-classified the item with intent to evade duty.
60. In the new tariff, the product was classifiable as rosin derivative under 38.06. The quantity produced on esterification with glycerine falling under 3806.10 which is specific for estergum and the quantity produced by reaction with any other polyhydric alcohol(s) was classifiable under 3806.50.
61. The appeal is, therefore, accepted as already announced in the open court.