Judgment:
1. The above two appeals involving common issues of classification and applicability of extended period of limitation were heard together and are being disposed of by this common order.
2. The brief facts of the case are that the appellants herein are engaged in the manufacture of Urea, Ammonium Sulphate and Diammonium Phosphate fertilizers as well as Caprolactum, Melamine and Nylon-6 chips in their factory situated in Fertilizer Nagar, District Vadodara.
With the introduction of Tariff Item 68 in the Schedule to the erstwhile Central Excise Tariff, the appellants classified Demineralised water (DM water) i.e. river or pond water from which the appellants removed calcium and magnesium by Ion exchange process, under Tariff Item 68, and excise duty was collected thereon under this heading; however, subsequently by letter dated 14-7-1986, the Superintendent of Central Excise informed the appellants that DM water fell outside the scope of Tariff Item 68 and the appellants, therefore, applied for grant of refund of duty paid by them on DM water from March, 1975 onwards and refund was sanctioned on 17th March, 1977. No duty was levied on DM water till February, 1986. With the introduction of the Central Excise Tariff Act, 1985 (effective from 28-2-1986) Chapter 28 covered "inorganic chemicals and organic or inorganic compounds of precious metals of rare earth, metals of Radio active elements or isotopes, and sub-heading 2851.00 covered "other inorganic compounds including distilled or conductivity water and water of similar purity." 3. As the department was of the view that DM water was classifiable under Heading 2851.00 and since the appellants were manufacturing and captively consuming DM water in the manufacture of Caprolactum, Melamine, Nylon 6 chips, fertilizers etc. as well as were also clearing DM water outside the factory without payment of duty, a show cause notice was issued on 7-1-1988 proposing recovery of duty of Rs. 36,86,529/- on a total quantity of 12,28,843 MT of DM water during the period 1-7-1987 to 23-11-1987. The Assistant Collector vide his order dated 22-9-1989 confirmed duty demand of Rs. 2,03,271 /- on DM water cleared outside the factory; on the quantity of DM water captively consumed within the appellant's factory, he dropped the duty demand in view of exemption granted thereto under Notification No. 3/89, dated 22-2-1989 issued under Section 11C of the Central Excises and Salt Act, 1944. The lower Appellate authority confirmed the order of the Assistant Collector and this has given rise to E/ Appeal No. 2808/90-C.4. After the passing of the order dated 16-4-1990 of the Collector (Appeals), another show cause notice dated 11-7-1990 was issued proposing recovery of duty of Rs. 5,32,569.30 p. on 2,30,205,560 MT of DM water falling under sub-heading 2806.00 from 28-2-1986 and thereafter under sub-heading 2851.00 of the Central Excises Tariff Act, 1985 manufactured and cleared without payment of duty during the period 1-3-1986 to 30-6-1987 and proposing imposition of penalty. This duty demand was confirmed and penalty of Rs. 50,000/- was imposed on the appellants by the Collector of Central Excise, Vadodara vide his order dated 15-3-1991 giving rise to E/Appeal No. 844/91-C.5. Shri Willingdon Christian, learned Counsel for the appellants urges the following points : (1) The de-mineralisation of water which is a process of purification of natural water obtained by the appellants from rivers or ponds is not a process of manufacture giving rise to any duty liability and DM water is not of purity similar to the purity to distilled water or conductivity water and since DM water is not 'goods' within the meaning of the Central Excises and Salt Act, 1944, the question of its classification either under Chapter 28 or elsewhere does not arise.
(2) The duty demand on unaccounted loss of DM water captively consumed but not accounted due to human error, cannot be sustained in the absence of any allegation or evidence about clandestine removal or the same outside the appellant's factory.
(3) The extended period of limitation is not available to the department, as even though the appellants did not file a classification list for the product in dispute during the period covered in both the appeals, there was no wilful suppression or mis-statement with intent to evade payment of duty and process of de-mineralisation of water was carried out openly and the Excise officers were fully aware of the process of de-mineralisation of water carried out by the appellants.
6. Our findings on the above three points are recorded hereunder : I.Excisability of DM water: The process of de-mineralisation of water by the appellants is as under : "The DM water required for raising steam in various plants is manufactured in water treatment plant. The raw water received from Mahi river contains dissolved solids in the form of Calcium and Magnesium salts. As these salts deposit scales in boilers while raising steam they are removed from the water by a process of de-mineralisation. The raw water is passed through a bud of resin called cation resin, where the calcium and manufacturing Ions are selectively exchanged and removed from the water. As the cation resins have certain maximum capacity to remove calcium and magnesium, they became ineffective in length of time. The resins are then regenerated by passing 30% Sulphuric acid (by diluting 98.5% Sulphuric acid with water through the exchange bed). Once the resin is regenerated, the unit becomes ready to de-mineralise the raw water again. The decation water from cation unit is passed through weak base and strong base anion bed in order to remove anion from the water. The DM water from water treatment plant is then distributed in various consuming plant i.e. Ammonia, Sulphuric acid and Steam generations plant." The only contention of the appellants that the process of de-mineralisation is not a process of manufacture and is only purification process as water remains water after purification by removal of calcium and magnesium salts is not acceptable as the test of manufacture laid down by the Hon'ble Supreme Court, in a catena of decisions, viz. change in name, character and use is satisfied in the present case what was river water (natural water) has become de-mineralised water; water containing impure water containing inter alia calcium and magnesium has become pure water from which calcium and magnesium have been removed, thus establishing change in character and there is also a change in use as river water cannot be put to use for the same purpose for which de-mineralised water is put i.e. water for the generation of steam. Hence a new commercial commodity having distinct name, character and use emerges as a result of the process of de-mineralisation and therefore, the process amounts to manufacture.
The case law relied by the learned Counsel for the appellants is distinguishable as in those cases, with reference to the facts therein, it was held that no new product having different name, character and use resulted after the carrying out processes by the assessees. The case of S.D. Finechem (Pot.) Ltd. v. C.C.E. 1996 (12) RLT 121 in which it was held that distillation/re-crystalisation is not a process of manufacture of chemicals of higher purity, is distinguishable as in that case, the Tribunal has no new commercial commodity come into existence that a distinct, name character or use as a result of the process of distillation/re-crystalisation undertaken by the appellants.
Having held that the goods are excisable, let us determine their classification.
From the process, it cannot be disputed nor is it disputed that the water is treated with Ion exchange media. Heading 2851.00 of the CETA, 1985 covers 'Other organic compounds (including distilled or conductivity water or water of similar purity; liquid air....).' The Explanatory Notes to HSN at page 322 acts as a useful guide in support of the above entry and the Explanatory Notes state that 'Heading 2851.00 covers distilled water, re-distilled osmotic water, conductivity water and water of similar purity, including water treated with ion exchange media.' On a simple reading of the entry in the Central Excise Tariff along with HSN Explanatory Notes, it is seen that the de-mineralised water (by ion exchange media) falls for classification under Heading 2851.00.
There is no dispute regarding production figures and figures of captive consumption. No explanation has been put forth by the appellants for the unaccounted loss of DM water within their plant which if properly explained, could have been condoned by the appropriate authority. Their submission that there is bound to be variation up to 5% in production figures because of variation in measuring instruments or meters used in chemical plants, is also not borne out by any material, for example, meters manufacturer's, specifications about error. In these circumstances, the appellants plea that no duty can be demanded on un-accounted loss of DM water in the absence of any allegation of clandestine removal or sale by outsiders, is not acceptable. Since the appellants have failed to prove that the DM water unaccounted for was used captively in the factory itself, the benefit of exemption to captive consumption is not available and we hold that the duty has been correctly demanded on this score.
With the coming into force of the CETA, 1985, the assessees were under a legal obligation in terms of Rule 173B(4) of the Central Excise Rules to file a new classification list which admittedly was not done. The fact that prior to 1-3-1986, de-mineralised water was held to be non-excisable does not alter the position. Non-filing of the classification list under the new Tariff has resulted in contravention of the Central Excise Rules. The intention to evade payment of duty becomes clear in the context of the exemption granted only to captive consumption of demineralised water. By suppressing the fact of manufacture and salt of DM water, the appellants have obtained a undue advantage or benefit to which they were not entitled and this clearly establishes their mala fide intention. The submission of the learned Counsel that an earlier show cause notice dated 7-1-1988 was issued for recovery of duty on DM water cleared outside during the period 1-7-1987 to 24-7-1987 and therefore, the present show cause notice demanding duty for a prior period is time barred is also not acceptable, looking to the definition of relevant date contained in Section 11 A. In view of the above, we hold that the extended period of limitation has been rightly invoked by the department and the demand is not hit by time bar. The finding on the applicability of the extended period of limitation depends upon the facts and circumstances which will vary from case to case and the case law cited by the appellants is distinguishable on facts.
(a) The appellants process of de-mineralisation of water is a process of manufacture within the meaning of Section 2(f) of CESA, 1944; (b) DM water falls for classification under Heading 2851.00 of the CETA, 1985; 7. With due respects to Hon'ble Member (Judicial), my views and orders in the matter are as follows.
8. I observe that the appellants are required to subject the Mahi river water to a treatment in their water treatment plant with a view to de-mineralise the same by cation exchange method so as to make the water suitable for their industrial purposes. In this respect, I observe that 'Mcgraw-Hill Encyclopedia of Science & Technology' Volume 14 at page 513 reads as under : Physical and chemical processes for making water suitable for human consumption and other purposes. The water treatment can be done by various processes including water softening." 9. It may be mentioned in this connection that the relevant portion from 'Mcgraw-Hill Encyclopedia of Science & Technology' Volume 14 (page 508) reads as under: A water treatment process by which undesirable cations (of calcium and magnesium) are removed from hard waters. The presence of these cations in water is undesirable for household purposes, boiler feed, food processing, and chemical processing, because of reactions that form soap scum, boiler scale, and unwanted by-products.
Hard waters may be softened by precipitation processes, cation-exchange processes, or combinations of these. The choice of a process depends on a number of factors, among which are the composition of the hard water, the end uses of the softened water, the type or types of hardnesses to be removed, the degree of removal required, and the relative processing costs." 10. From the above, it appears that the process employed is basically in the nature of a water softening process and soft water so obtained cannot be compared with distilled water, re-distilled or electro-osmotic water or conductivity water unless it could be shown that water so obtained (after treatment with ion exchange media) was of similar purity.
11. It would also be seen from the technical material cited above that while hardness is practically reduced to zero by cation-exchange process, the other types of impurities may not be removed by cation-exchange process alone and different processes or combinations thereof may be required to be adopted depending upon the purpose or use for which the purified water is required to be put.
12. Learned Counsel has claimed that by the process to which Mahi river water is subjected in their plant, the water of same degree of purity as conductivity water or distilled water is not obtained. However, neither side has produced any chemical test report or any other material to show the actual degree of purity of the water in question.
13. As regards Heading 28.51 of HSN, it is noteworthy that the Explanatory Note indicates as under : "The heading covers only distilled water, re-distilled or electro-osmotic water, conductivity water and water of similar purity, including water treated with ion exchange media.
Natural water, even if filtered, sterilised, purified or softened, is excluded (heading 22.01). When put up as a medicament in measured doses or in packings for retail sale, water falls in Heading 30.04." 14. Heading 28.51 of Central Excise Tariff is para materia with this heading. Therefore, the Explanatory Notes have pursuasive force.
Heading 22.01 of HSN and relevant portion of the Explanatory Note reads as under : "22.01 - Waters, including natural or artificial mineral waters and aerated waters, not containing added sugar or other sweetening matter nor flavoured; Ice and snow." "(A) Ordinary natural water of all kinds (other than sea water - see Heading 25.01). Such waters remain in the heading, whether or not clarified or purified, except that distilled or conductivity water and water of similar purity are classified in Heading 28.51.
15. The HSN is basically a customs tariff where products are classified irrespective of whether they are of manufactured or unmanufactured type. Therefore, while applying it to Central Excise side, we have to keep this fact in mind; And, where both natural and synthetic forms of a substance(s) are included, we have to consider which one satisfies the criteria of excisability. In my opinion, Heading 22.01 of Central Excise Tariff would therefore, cover only such water as is manufactured or synthesized as for example, by combining hydrogen and oxygen in the required ratio (H2 : O1) or the water which is obtained during a chemical process (es) as one of the product or a by-product or otherwise could alone be considered as a manufactured product whereas natural water even after treatment for the purpose of purification or softening etc. would basically remain water and such a purified water cannot be automatically considered as an excisable product unless it could be shown that the process involved amounted to manufacture and it was marketed as such or it acquires a form, packaging or use as a distinct commodity known to the market as for example, distilled water sold in ampules as medicament for injection purposes etc. Unless therefore, test of marketability is satisfied, natural water simply subjected to such treatments for putrification or softening purposes could not be considered as excisable product.
16. In the case before us, no such evidence has been led and the burden in this regard has not been discharged by the Department.
17. Even otherwise, there is nothing to show that any mala fides were involved and the appellants deliberately suppressed any facts or mis-stated any facts with the intention to evade duty.
18. In fact, the Board's letter No. 35/38/75-TRU, dated 10-5-1976 to the effect that treated water /demineralised water does not attract levy under Tariff Item 68, even though it is subjected to chemical treatment, supports the view that no process of manufacture was involved and therefore, no excisable goods came into existence and the item was not dutiable under Tariff Item 68 under the old tariff; And, there is nothing to indicate that this position has changed under the new tariff. Therefore, the appellants' contention that they were under the bona fide belief that the item was non-excisable and therefore, there was no need to file the classification list etc. appears to have a lot of force. In the above circumstances, the extended period of time was not available to the Department. Therefore, the demand was also time-barred.
19. In view of the above position, it is not necessary to go into the gamut of case law cited before us and it is sufficient to hold that in view of the above factual and technical position, the impugned orders are not sustainable.
20. In view of the above position, I set aside the impugned order and accept the appeal.
In view of the difference of opinion between Hon'ble Member (Judicial) and the Vice President, the matter is submitted to Hon'ble President for reference to a Third Member on the following points : "(i) Whether de-mineralisation of water amounted to a process of manufacture; (ii) and if so, whether de-mineralised water was classifiable under Heading 2851.00 or 22.01; (iii) whether the demand was barred by limitation or not and if not, whether duty demand to the extent proposed by Hon'ble Member (Judicial) was required to be confirmed; (iv) or, there was no process of manufacture involved and in any eventuality, the demand was time barred and hence, the appeal was required to be accepted." Sd/- Sd/-(Jyoti Balasundaram) (S.K. Bhatnagar) Member (J) Vice PresidentDated : 28-8-1997 21. The difference of opinion between the learned Member (J) and the learned Vice President was heard by me today i.e. 17th Oct., 1997.
22. The facts of the case as well as the contention of both the sides and the points of difference has already been brought out in the respective orders.
23. The first question that has to be addressed by me in this case is as to whether the properties of river water or in other sense water has changed into a new product on appellants carrying on the process of de-mineralisation inasmuch as by the process known as cation exchange method by which two of the impurities in the river water namely, Calcium and Magnesium are removed and the water has thus become useful for the purpose of using it in boilers. This process helps in preventing corrosion in the boilers. This is the common method adopted to make the water more useful. The department had considered this process to be a process of manufacture to bring into existence a new commodity and a different one known in the market as "goods" with a different name namely, de-mineralised water. It is the contention of the payment that the same is captively consumed and that the appellants are also selling it to other industrial units for use in their boilers and hence the same is liable for classification under Tariff Heading 2806.00/2851.00 of the CET. In other words, on the introduction of the new tariff and after the change of the tariff, these two headings have been suggested. It has been the case of the appellants that there has been no change in the properties of the water by removing two impurties for the purpose of its use in the boiler and all the characteristics and properties of the water continues to be remain the same. Such process does not result into a new commodity known in the market as a different goods. In this context, the appellants drew reference to the Tribunal's judgment rendered in the case of S.D. Fine Chem Pvt. Ltd. v.Collector of Central Excise as reported in 1996 (12) RLT 121 wherein the process of distillation/re-crystalisation of an impure chemicals to bring into a pure stage is held to be not a process of manufacture and the said judgment has since been confirmed by the Hon'ble Supreme Court by rejecting the Revenue appeal. However, the learned Member (J) in her order has distinguished this judgment on the ground that in that case no new commercial commodity emerged with a distinct name, character or use, while in the present case a different commodity has emerged. The learned Member (J) has also drawn strength for classification from Explanatory notes to HSN appearing at page 322. The learned Member (J) has also proceeded to hold that there has been suppression in the matter and therefore, the invokation of larger period is totally justified.
24. On this point, the learned Vice President has differed and has held after examining the process of water appearing at page 513, Volume 14 in Mcgraw-Hill Encyclopedia of Science & Technology and also the definition of water softening at page 508 that such softening of water cannot be compared with distilled water, re-distilled or electro-osmotic water or conductivity water unless it could be shown that water so obtained (after treatment with ion exchange media) was of similar purity. The learned Vice President has also on examination of the Heading 28.51 of the HSN has noted that the said HSN itself excluded from that heading natural water even after filtered, sterilised, purified or softened. Since the water has been softened by the appellants by removing of two of the impurities namely, calcium and magnesium, therefore, the learned Vice President held that the Tariff Chapter 28 is not attracted in the present case. While so holding the learned Vice President has expressed his opinion in Para 15 pertaining to the items which are likely to fall or not likely to fall under Heading 22.01.
25. The learned Advocate submits that he does not agree with the said finding and does not want to support it as it is not material for the purpose of deciding the issue in question and the said observations are in the nature of obiter dicta.
26. The learned DR also agree that the observation in Para 15 is not material for the purpose of deciding the issue.
27. I agree with the contentions made by both the sides that the observations of Hon'ble Vice President in Para 15 is obiter dicta and not pertinent for the purpose of deciding the issue in question.
28. As stated earlier, the question that has to be addressed by the Bench is as to whether the properties of water has changed on the process of de-mineralisation inasmuch as the hard water has been softened by removing of two of its impurities. In this connection, the learned Advocate brought to my notice large catena of judgments which has been rendered by the Tribunal and the Supreme Court in identical matters like vegetable oil, wherein the Hon'ble Supreme Court after a detailed discussion held that the removal of impurities or even 'hydrogenation' does not bring a change of properties of the vegetable oil, as oil continues to be oil even after the removal of impurities and hydrogenation, as in the case of Tungabhadra Industries Ltd. v. The Commercial Tax Officers as reported in AIR 1961 SC 412, the Hon'ble Supreme Court observed that when raw groudnut oil is converted into refined oil, there is no doubt, processing, but this consists merely in removing from raw groundnut oil that constituent part of the raw oil which is not really oil. The matter removed from the raw groundnut oil not being oil cannot be used, after separation, as oil or for any purpose for which oil could be used. In other words, the processing consists in the non-oily content of the raw oil being separated and removed, rendering the oil content of the oil 100 per cent. It further held that for this reason refined oil continues to be groundnut oil within the meaning of Rules 5(I)(k) and 18(2) notwithstanding that such oil does not possess the characteristic, colour, or taste, ordour, etc., of the raw groundnut oil. It further observed that a liquid state is not an essential characteristic of a vegetable oil and even if the oil is not liquid, it does not cease to be an oil. If beyond the process of refinement of the oil, the oil is hardened, again by the use of chemical processes it is not rendered any the less "groundnut oil." The Hon'ble Supreme Court has further gone on to accept this proposition and in subsequent judgments as in the case of Collector of Central Excise v. Jayant Oil Mills Pvt. Ltd. as reported in 1989 (40) E.L.T. 287 and again in the case of Collector of Central Excise v.Jayant Oil Mills as reported in 1993 (67) E.L.T. 986. These judgments were again followed by the Tribunal in the case of Collector of Central Excise v. Jayant Oil Products Pvt. Ltd. as reported 1995 (77) E.L.T.360 (Tribunal).
29. I have given a careful thought and consideration to the submissions and also taken into consideration the submissions made by the learned DR in this regard. These judgments are not distinguishable and are directly applicable to the facts of this case inasmuch as river water has been made more useful, as it has become de-mineralised water for use in the boilers. The Revenue's contention is that it has become industrial water and it cannot be compared with the river water, as it is marketed by a different name and it has a different use and different characteristics and since it finds entry in the Tariff it has to be considered as different goods. I am not in a position to agree with this proposition putforth by the learned DR, for the reason that as far back as in 1962, the Hon'ble Supreme Court in the case of Union of India v. Delhi Cloth and General Mills Co. Ltd. as reported in 1977 (1) E.L.T. (J 199) has gone into the scope of the term "manufacture" and "goods" within the ambit of Section 2(f) and Section 3 of the Central Excise Act. The Hon'ble Supreme Court in Para 14 has quoted the passage appearing in American Judgment and 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." 30. The Hon'ble Supreme Court while looking into the definition of the term "goods" has analysed and held that the definition makes it clear that to become "goods" an article must be something which can ordinarily come to the market to be bought and sold. It further held that these considerations of the meaning of the word "goods" provides strong support for the view that "manufacture" which is liable to excise duty under the Central Excises and Salt Act, 1944 must be the "bringing into existence of a new substance known to the market." In the light of these understanding laid down by the Hon'ble Supreme Court, number of judgments have come into existence and the ruling that has followed throughout is that an article itself should emerge and the original product should transform itself inasmuch as that there should be change in the characteristics, property and name. Applying the test, we have to see as to whether the water drawn from the river has changed its characteristics by any transformation into a new commodity known in the market differently as a different goods. Now, examining the properties of water as defined in the Hawleys' Condensed Chemical Dictionary, 11th Edition at page 1232 which is reproduced herein below: Properties : Colourless, odorless, tasteless liquid. Allotropic forms are ice (solid) and steam (vapour). Water is a polar liquid with high dielectric constant (81 at 17C), which largely accounts for its solvent power. It is a weak electrolyte, ionizing as H3O and OH". At atmospheric pressure it has d 1.00 (4C), fp OC (32F) and expands about 10% on freezing. Viscosity 0.01002 poise (20C), sp heat 1 calorie/g, vap press 760 mm (100C), triple point 273.16K at 4.6 mm, surface tension 73 dynes/cm at 20C, latent heat of fusion (ice) 80 cal/g, latent heat of condensation (steam) 540 cal/g. Bulk d 8.337 Ibs/gal, 62.3/lb/cu ft. Refr index 1.333. Water may be superheated by enclosing in an autoclave and increasing pressure; it may be supercooled by adding sodium chloride or other ionizing compound. It has definite catalytic activity especially of metal oxidation. Physiologically water is classed as a nutrient substance." "Derivation : (1) Oxidation of hydrogen, (2) end product of combustion, (3) end product of acidbase reaction, (4) end product of condesation reaction, Purification : (1) Distillation, (2) ion exchange reaction (zeolite), (3) chlorination, (4) filtration.
Use: Suspending agent (papermaking, coalsluries), solvent (extraction, scrubbing), diluent, beer and carbonated beverages, hydration of lime, paper coatings, textile processing, moderator in nuclear reactors, debarking logs, industrial coolant, filtration, washing and scouring, sulfur mining, hydrolysis, Portland cement, hydraulic system, power source, steam generation, food industry, source of hydrogen by electrolysis and thermochemical decomposition." 31. On examination of the above properties, we have to see as to whether there has been transformation in the water and whether the removing of the two minerals in making water more useful for the purpose for which it has put to use in the boiler, will bring into existence new goods. As can be seen from the definition of 'water' extracted above, there are several industrial uses. In the present case, the same water is put to one more use and that is for use in boiler. For putting use in boiler, it is necessary for removing two essential impurities namely Calcium and Magnesium to prevent corrosion of the boilers. By doing so, its property has not varied into a different commodity like steam or vapour or ice. It is this variation of bringing into existence steam or ice, which are being treated as different goods, but here in the present case no such transformation in the properties of the water has occurred, as water has continued to be water with all its properties as per the definition of "water". It continues to have the property of solvent power, to absorb all other compounds or chemicals, it retains its property to extinguish the fire as an oxidation agent, to help in the process by quenching the thirst, both for humans and animals. Therefore, to make the commodity more useful and to bring in certain change in that commodity will not transform the water into a different commodity; in the light of test laid down by the Hon'ble Supreme Court in the case of Union of India v.DCM.32. We may draw lot of strength from number of judgments which has come up on the basis of this strength. For instance, the question of forged product undergoing several treatment whether it brings into existence a different article was considered by the Tribunal and later by Hon'ble Supreme Court. It was the contention of the Revenue that the forged item undergoing various processes will result into a part or by applying the Note 2(a) of Interpretative Rules, it has acquired essential characteristics of a specific part and therefore, it should be considered as a part. This aspect was gone into by the Tribunal and examined by a larger Bench in the case of BHEL v. Collector of Customs, as reported in 1987 (28) E.L.T. 545. This aspect was examined and it was held that an incomplete article continues to remain so and does not acquire the essential character of a complete article even by applying the Explanatory Notes or Interpretative Rule 2(a). It held that by applying Rule 2(a), the item cannot be considered as having acquired the essential character of a complete article. This aspect of the matter has been again examined by the Hon'ble Supreme Court in the case of TISCO v. Union of India as reported in 1988 (35) E.L.T. 605 which upheld such a view expressed by the Tribunal in BHEL's case. Although the BHEL has not been specifically quoted therein, but yet the judgment of the Delhi High Court in case of Metal Forging Pvt. Ltd. v. Union of India as reported in 1985 (20) E.L.T. 280 has been approved.
33. This aspect of the matter was gone into in great depth by the Tribunal in the case of Aravali Forgings Ltd. v. Collector of Central Excise, as reported in 1994 (70) E.L.T. 693 and also in the case of Echjay Industries Ltd. v. Collector of Central Excise, as reported in 1994 (51) E.L.T. 270. Likewise, we find in the case of Deputy Commissioner, Sales Tax (Law), Board of Revenue (Taxes) v. Pio Food Packers as reported in 1980 (6) E.L.T. 343, the Hon'ble Supreme Court held that although a degree of processing is involved in preparing pineapple slices from the original pineapple yet the commodity continues to possess its original identity, notwithstanding the removal of inedible portions, the slicing and thereafter canning it or adding sugar to preserve it and it cannot be said to have undergone a process of "manufacture". The Hon'ble Supreme Court held that the fact the pineapple slices have higher price than the original fruit, is occasioned only because of the labour put into making fruit more readily consumable and because of the cane employed to contain it.
Taking que from this judgment and also the definition of the term "manufacture" referred to in Para 4 of the UOI v. DCM wherein it has been held that 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 the present case, indeed there is a process of de-mineralisation as a result of treatment, labour and manipulation and that the appellants are utilising it and also selling it, but as Hon'ble Supreme Court has laid down that there has to be something more, which is necessary to transform this de-mineralised water, by bringing a change in the property of the water into a different commodity. As river water has retained all its original properties, excepting it has been softened, therefore, there is no emergence of a new commodity into new goods for the purpose of attracting the charging Section 3 of the Central Excise Act for the purpose of excisability and dutiability of this product.
34. The learned DR submits that the de-mineralised water finds place in Chapter heading and as it is mentioned in the Schedule of the Central Excise Tariff Act, 1985, therefore, the item is deemed to be goods and thus exigible. The Hon'ble Supreme [Court] has already answered this point in the case of Bhor Industries Ltd. v. Collector of Central Excise, as reported in 1989 (40) E.L.T. 280. After examining the previous judgments on the point of 'manufacture' and 'goods' as rendered in the case of Union of India v. Delhi Cloth and General Mills Co. Ltd.South Bihar Sugar Mills Ltd. v. Union of India as reported in 1978 (2) E.L.T. (J 336), Union Carbide India Ltd. v. Union of India as reported in 1986 (24) E.L.T. 169 and that of Governor General in Council v. Province of Madras as reported in 1978 (2) E.L.T. (J 280); Hon'ble Supreme Court observed in Para 7 as follows : "7. It is necessary in this connection to reiterate the basic fundamental principles of excise. The Judicial Committee of the Privy Council in Governor General in Council v. Province of Madras 1945 F.C.R. 179, this Court observed at page 1287 of the report that excise duty was primarily a duty on the production or manufacture of goods produced or manufactured within the country. This Court again in In Re. The Bill to Amend Section 20 of the Sen Customs Act, 1878, and Section 3 of the Central Excises and Salt Act, 1944 1964 (3) SCR 787 at page 822 of the report referring to the aforesaid observations of the Judicial Committee reiterated that taxable event in the case of duties of excises is the manufacture of goods and the duty is not directly on the goods but on the manufacture thereof.
Therefore, the essential ingredient is that there should be manufacture of goods. The goods being articles which are known to those who are dealing in the market having their identity as such.
Section 3 of the Act enjoins that there shall be levied and collected in such manner as may be prescribed duties of excise on all excisable goods other than salt which are produced or 'manufactured' in India. "Excisable goods" under Section 2(d) of the Act means goods specified in the Schedule to the Central Excise Tariff Act, 1985 as being subject to duty of excise and includes salt. Therefore, it is necessary, in case like this, to find out whether there are goods, that is to say, articles as known in the market as separate distinct identifiable commodities and whether the tariff duty levied would be specified in the Schedule. Simply because a certain articles falls within the Schedule it would not be dutiable under excise law if the certain article falls within the Schedule it would not be dutiable under excise law if the said article is not "goods" known to the market. Marketability, therefore, is an essential ingredients in order to be dutiable under the Schedule to Central Excise Tariff Act, 1985." 35. As can be seen from the above, the test is that mere mention in the tariff is not sufficient to presume a product to be a separate goods but the processes carried on should bring in a transformation in the properties of the product and it should change itself into a different product. Thus, mere carrying of a process to make the product more saleable like polishing an article or cleaning an article or such type of activity to make the article better for marketability purpose by itself will not result into a new product unless the trade recognises it as a different product. The water, which is stored in aqua-filters, gets purified by removal of minerals, dust, smell and other impurities, such water although continues to be water as observed earlier, however, has become more potable for drinking purpose, it does not loose its essential character or properties. There is no transformation in the water to make it a different commodity as already noted. Therefore, as can be noted below, the Board itself appreciated this point and after taking opinion from the Chief Chemist issued circulars to the effect that mere purification of the water by Municipal Corporation and supplying through tap for household purpose will not make the water a different commodity. Hard water are difficult to use for washing cloths therefore, even dhobies and launders boil the water to make it soft for cleaning dirty cloths. Therefore, such supply of water for such use after softening will not make the water a different commodity but it has become more useful commodity by such processes only. The Hon'ble Supreme Court again appreciated a similar point in the case of Collector of Central Excise v. Ambalal Sambhai Enterprises as reported in 1989 (43) E.L.T. 214, wherein the department wanted to classify starch hydrolysate which was quickly fragmented and losing its character in a couple of days, as goods falling within Item IE of erstwhile Central Excises and Salt Act. The Hon'ble Supreme Court appreciating the party's contention dismissed the Revenue appeal and held that the burden of proving that the item is goods is on the department and the department has not produced any evidence, while the assessee had adduced positive evidence in this regard, the order favourable to the assessee, the Hon'ble Supreme Court observed, cannot be said to be incorrect. In this citation the Hon'ble Supreme Court again examined its own previous judgments as noted in the case of Bhor Industries Ltd. and Ors. referred to above.
36. Be that as it may be, the understanding of the Revenue itself in the present case is that the item is not goods. This is evident by the Board so treating this commodity and delicensing the appellants. The Board by its Circular No. F.No. B/35/38/75-TRU, dated 10-5-1976, took the view that the treated/de-mineralised water was considered to be non-dutiable under the Item 68. This view was reiterated again by their Circular No. 9/87-CX.I in F.No. 9/1/87-CX.I, 28-7-1987 which is based on the opinion expression by the Chief Chemists and also examining the Explanatory note, the same is reproduced herein below: "A doubt has been raised as to whether the product known as "Aqua Mineral Bisleri Treated Water" is excisable under Heading 22.01 of the Central Excise Tariff or whether the product is non-excisable.
2. The matter has been considered by the Board. It is noted that the process of manufacture of the product is as follows : "Water is treated with bleaching powder to eliminate injurious micro-organisms. Thereafter, it is purified by filtration.
Subsequently it is softened. Finally, it is sterlised to keep such drinking water free from bacteria, and to avoid contamination during treatment".
3. It is observed that the earlier Central Excise Tariff the product in question was considered as non-exciable. By Board's F. No. B/35/38/75-TRU, dated 10-5-1976, treated /de-mineralised water was considered to be non-dutiable under Item 68. Board has also noted that Collector (Appeals) Bombay in his Order-in-Appeal No. HN-2635/B/II-621/85, dated 27-12-1985, while holding that the product in question was non-excisable, had relied on the argument that the process of treating was intended to make water potable for hygenic reasons and there was no transformation of form or end use, since the product remained drinking water.
4. Heading 22.01 of the Present tariff covers "natural or artificial mineral waters and aerated waters, not containing added sugar or other sweetening matters, not flavoured; ice". Collector of Central Excise, Bombay-II who raised this issue has referred to the Explanatory Note to HSN relating to Chapter 28.51 which reads as under: "natural water, even if filtered, sterlised, purified or softened, is excluded (Heading 22.01)" On this basis, the question has been raised whether treated water could be excisable under Heading 22.01.
5. After due consideration of the matter in consultation with the Chief Chemist, Board is of the view that the product would be non-excisable even in the new tariff. Firstly, Section 2(f) of the Central Excises and Salt Act defining "manufacture" has no specific provision in respect of this commodity unlike in some cases and therefore if the product was earlier non-excisable, it should continue to be so even under the new tariff. Secondly, the Explanatory Notes to HSN may not provide conclusive basis for deciding the issue in Central Excise matters as the HSN has special bearing for the purpose of trade and not manufacture. Chapter 22 of the new Tariff does not indicate that such items are to be included.
HSN Explanatory Notes to Chapter 22.02, also do not make specific mention of the product in question, although "sweetened or flavoured mineral water" find mention thereunder. Thirdly, if such products are considered as excisable, tap water for domestic use supplied by the Municipal Corporation could also get covered since "waters" are specifically mentioned under Heading 22.01 of HSN, but charging of duty thereon is not intended on Central Excise side. There is a difference between the Heading 22.01 of H.S. and Heading 22.01 of the CET in asmuchas the excise tariff does not include all kinds of water, whereas sub-heading 2201.90 of the H.S. has residuary entry for "other water". The Explanatory Note to H.S. page 163 includes clarified or purified water under the category of "ordinarily natural water of all kinds". But there is no such entry on Central Excise side." 6. In view of the aforesaid position, Board is of the view that Aqua Mineral Bisleri Treated Water is non-excisable." 37. This view of the Board was again reiterated by Circular No. F.No.9/1/94-CX. 1, dated 20-12-1994, which is also reproduced herein below : "Please refer to Board's circular No. 87-C.E. (F.No.9/l/87-CX. 1), dated 28-7-1987 on the subject noted above clarifying that Aqua Mineral Bisleri Treated Water is non-excisable. The process of manufacture of the product has been explained in Para 2 of this circular and is reproduced below: "Water is treated with bleaching powder to eliminate injurious microorganisms. Thereafter, it is purified by filtration.
Subsequently it is softened. Finally, it is sterlised to keep such drinking water free from bacteria and to avoid contamination during treatment." 2. It has been brought to the notice of the Board that in addition to processes given above, some manufacturers are also de-mineralising the treated water and are adding minerals in it. The Chief Chemist has earlier advised that the process that distinguishes artificial mineral water from purified potable water, is whether mineral salt have been added or not. In case, there is addition of mineral salt, the product will have to be treated as mineral water and will be liable to duty accordingly.
3. It is, therefore, clarified that in case in addition to processes mentioned above, if mineral salt(s) are also added in the treated water, the resultant product will be mineral water and will be excisable and liable to duty under sub-heading 2201.90.
4. The word "Bisleri" wherever it occurs in circular No. 9/87 stands deleted." 38. The learned DR attempted to distinguish this circular on the ground that these circulars pertain to aqua mineral bisleri treated water and not to de-mineralised water. I am not in a position to agree with him as the circular of 1986 has been quoted in the circular 87 as can be seen from the above. Furthermore, the Board has gone to the extent of saying that if soften or flavoured mineral water is required to be treated as goods then tap water, domestic water, Municipal Corporation gets covered, since water was specifically mentioned under Heading 22.01 of HSN. As can be seen from the circulars, Municipal water is much higher purity than that of de-mineralised water from river, for the reason that the Municipal Corporation water is more purified one and potable for the purpose of human consumption. The other commodity is aqua mineral treated water is still on a higher stage of purification. All these three items are held to be non-excisable by the Board and such Board's circulars are having binding effect on the authorities as has been held time and again by the Hon'ble Supreme Court in the following judgments :Poulose and Mathen v. Collector of Central Excise 1997 (90) E.L.T. 264 (S.C.)Collector of Central Excise v. Ganesh Foundry Works 1996 (12) RLT 781Ranadey Micronutrients v. Collector of Central Excise 1996 (87) E.L.T. 19 (S.C.)Purewal Associates Ltd. v. Collector of Central Excise 1996 (87) E.L.T. 321 5. Korcs (India) Ltd. v. Collector of Central Excise 1997 (93) E.L.T. 322S.D. Fine Chem. Pvt. Ltd. v. Collector of Central Excise, as reported in 1996 (12) RLT 121, the third member expressed that mere process carried out to remove the impurities will not bring into existence a new product, as the product in its earlier stage continued to remain the same with all its original properties.
Therefore, I am not in a position to agree with the learned Member (J) that this judgment is distinguishable. The learned Member (J) herself looked into this aspect and applied several judgments to come to the conclusion and it being well reasoned order, it is required to be followed in the present case.
40. The last question which remains to be answered is pertaining to invokation of the larger period in this case. It is nobody's case that the appellants had clandestinely removed the goods without the knowledge of the department. The department is having their office within the compound of the appellants' factory for the last 20 years.
This is not the only commodity which is said to be processed in the appellants' factory. The main activity of the appellants is manufacture of Urea, Ammonium Sulphate and Diammonium Phosphate as well as Caprolactum, Melamine, Nylon-6 Chips in their premises. In respect of the manufacture of these goods, the appellants have declared their manufacturing process. The entire layout plan of the factory has been approved by the authorities. The existence of it is well known to the department and it has been examined by them while granting licence and approval of lay out plan. Further, the department themselves had classified the goods under erstwhile Tariff Item 68 and after the issue of the Board's circular, the department directed the appellants not to pay the duty and it also refunded the duty which had been collected. In the light of these facts, it is difficult to say that there has been suppression of manufacture of this product. Furthermore, the department initiated proceedings by issue of show cause notice dated 7-1-1988 for the period 1-7-1987 to 24-7-1987. In this show cause notice, the department alleged that the appellants have resorted to fraud, mis-statement or suppression of facts with an intent to evade duty. In this connection, the appellants contended that the aspect of manufacture was well within the knowledge of department in the erstwhile tariff. It was also pointed out that Board had issued clarifications with regard to non-excisability of the items and therefore, the appellants were under a bona fide belief that such clearances for captive consumption or sale for other industrial users was non-dutiable and therefore, the question of suppression did not arise in the facts and circumstances of the case. In this regard, large number of Hon'ble Supreme Court's judgments have been cited. The aspect of suppression has to be viewed in the background of the appellants' manufacturing several commodities and paying duty. The department also after the introduction of the new tariff remained silent and did not call upon the appellants to file classification list or declaration. It is only as late as in 1988, the department issued demands alleging suppression of facts. In the background and the facts and circumstances of the case and in the light of the Board's circular, I am of the view that the Board's Circular has a binding effect on the authorities. I am not in a position to agree with the department's contention that there has been fraud, wilful suppression of facts. The learnt Member (J) has expressed a view that non-filing of Classification list amounts to suppression. With due respect, I am not able to accept this proposition that merely because a classification list has not been filed it amounts to suppression. The filing or non-filing of classification list is not determinative to come to the conclusion that there is suppression.
There can be suppression even where clearances have been done after filing classification list, on the department enumerating facts to show that there is mis-declaration and other factors for invokation of larger period. In the case of Collector of Central Excise v. Chemphar Drugs & Liniments as reported in 1989 (40) E.L.T. 280 (S.C.), the Hon'ble Supreme Court has laid down a clear law. The Hon'ble Supreme Court held that in order to establish the grounds for invokation of larger period it has to be shown that: "something positive other than mere inaction or failure on the part of the manufacturer or producer or conscious or deliberate withholding of information when the manufacturer knew otherwise, is required before it is seddled with any liability, before the period of six months. Whether in a particular set of facts and circumstances there was any fraud or collusion or wilful mis-statement or suppression or contravention of any provision of any Act, is a question of facts depending upon the facts and circumstances of a particular case. The Tribunal came to the conclusion that the facts referred to here-in-before do not warrant any inference of fraud. The assessee declared the goods on the basis of their belief of the interpretation of the provisions of the law that the exempted goods were not required to be included and these did not include the value of the exempted goods which they manufactured at the relevant time. The Tribunal found that the explanation was plausible, and also noted that the department had full knowledge of the facts about manufacture of all the goods manufactured by the respondent. The respondent did not include the value of the product other than those falling under Tariff Item 14E manufactured by the respondent and this was in the knowledge, according to the Tribunal, of the authorities. These findings of the Tribunal have not been challenged before us or before the Tribunal itself as being based on no evidence. In that view of the matter and in view of the requirements of Section 11A of the Act, the claim had to be limited for a period of 6 months as the Tribunal did. We are, therefore, of the opinion that the Tribunal was right in its conclusion. The appeal therefore fails and is accordingly dismissed".
41. In the present case also the department knew about the processing of de-mineralised water for use in the boilers in the appellants' plant. Therefore, the allegation of suppression or fraud on the appellants' part does not exist. In 1988 itself, the department had alleged suppression and in the show cause notice dated 7-1-1988, the department had all the facts with their knowledge, therefore, in 1990, the department cannot again plead that there has been suppression for invoking for a period prior to 1987. This precisely what has been expressed by the Tribunal in the Neyveli Lignite Corporation Ltd. v.Collector of Central Excise' as reported in 1992 (58) E.L.T. 76 (Tribunal). In the result, I agree with the learned Vice President that there has been no suppression for invokation of larger period under the proviso to Section 11A of the Central Excise Act, 1944.
42. In the result, I hold that the de-mineralised water is not new goods emerging out of a process of manufacture and that they are not excisable and dutiable under Chapter 28 as held by the Vice President.
I am also of the view that the larger period in the present case cannot be invoked.
43. I hold that there is no process of manufacture involved and in any eventuality, the demands were time barred, hence, the appeals were required to be accepted. I direct the registry to place the file before original Bench for passing the final order.