1. Both these appeals arise from Order-in-Original No. 37/97, dated 30-10-1997 passed by Commissioner of Central Excise, Cochin, holding that the appellants M/s. Mc Dowel & Co. Ltd. had manufactured and cleared Demineralised water falling under Tariff subheading 2851.00 of Central Excise Tariff Act, 1985 in contravention of various provisions of Central Excise Act and rules and therefore duty amount of Rs. 41,32,352/- was demanded under provisions of Rule 9(2) read with proviso to Section 11A(1) of Central Excise Act. He has also ordered for confiscation of land, building, plant and machinery of M/s. Mc Dowel & Co. Ltd. and has ordered for release of the same on Redemption Fine of Rs. 1,00,000/- under Rule 173Q of Central Excise Rules, besides imposing a penalty of Rs. 2,00,000/-under Rule 173Q of Central Excise Rules on Mc Dowel & Company and Rs. 50,000/- penalty on M/s. UBL under Rule 209A of Central Excise Rules for having purchased non-duty paid water from M/s. Mc Dowel Co. Ltd. 2. The appellants Mc Dowel & Co. was issued with show cause notice alleging clearances of manufactured excisable goods viz. Demineralised water falling under the above said Tariff heading without following Central Excise formalities and without payment of duty, by wilfully suppressing the production and clearances with an intention to evade payment of duty to the extent indicated above. The annexure to the show cause notice relies on the recorded statement of Shri S. Balakrishna Kartha, Quality Control Superintendent of the factory who, in his statement stated that he is incharge of the Demineralised water plant and also acting as the Quality Control Superintendent of M/s. Mc Dowel & Co. Ltd. He had stated that the said plant was set up for manufacture of Demineralised water of anion grade and that they were manufacturing two types of Demineralised water in the said plant and the process of manufacture is as follows :- "Raw water from the borewell is degased in a degaser to remove dissolved gases and then passes through a multigrade sand filter to remove suspended solids and then passed through a Ultra Violet System to destroy micro organism present and subsequently passed to cation and anion columns for the purpose of removing the mineral ions and this water is supplied to M/s. United Breweries situated adjacent to M/s. Mc Dowel & Co. for the manufacturing of beer. The quantity supplied are recorded in a register on the basis of meter reading. About 25,000 to 40,000 litres of D.M. water are being supplied to M/s. United Breweries Ltd. Other categories of D.M. water are also produced in the same plant for blending, fermentation and for general purposes within their plant. He also stated that the details regarding the transaction with United Breweries Ltd. are maintained by their accounts department at their factory in relation to the D.M. water production. He also produced before the officers photostat copies of the flow sheet of the water system".
3. After detailed investigation and further recording of statements of various persons, it was revealed through the statement of G.Visweswaran that Mc Dowel & Company which supply Demineralised water to M/s. United Breweries Ltd... through pipeline. As per his statement the accounting method of supply of Demineralised water is as follows :- "The debit notes issued to M/s. U.B. Ltd. were purchased on the basis of date given by the respective department heads the original of these entries are given to M/s. U.B. Ltd. with a copy to their Headquarters. The amount received by them from M/s. U.B, Ltd. are in the form of cheques. These amounts are then transferred to their Headquarters by way of credit advice which will be accounted at their end. He also admitted that, though they issued debit notes to M/s. U.B. Ltd., there are no selling element involved since both being related companies. Shri G. Viswesaran also produced a computer printout showing the details of debit notes issued for the period from April 1990 to February 1995 for verification".
Statements of other persons including Accounts Officer, Accounts Assistant the person incharge of brewing section which revealed about the manufacture and supply of Demineralised water to M/s. United Breweries Ltd. (U.B. Ltd.).
4. The show cause notice state that on analysis of the statements given by Sri S. Balakrishna Kartha before the Superintendent of Central Excise (Prev.), it is clear that from the degased stage, the borewell water is passed through Ultra Violet lamp system. Here the micro organisms present in the 'degased and desuspended borewell water' are destroyed by the high energy/high frequency Ultra Violet rays generated by Ultra Violet arc lamps. Then this water which is of gases; suspended particles and micro organisms are first passed through 'anion' columns; for the purpose of removing the mineral ions. It is further stated that in a way, by virtue of passing the water through both columns what is achieved is the demineralisation of water. It is this D.M. water, which is cleared by M/s. Mc Dewel & Co. Ltd. to M/s. United Breweries Ltd. through pipelines. It is further stated that in order to further analyse the properties of the D.M. water of anion grade which is processed through an ion exchange media, the chemical analysis report of the same prepared by the Central Laboratories of Kerala State Pollution Control Board is relied upon. The show cause notice states that it implied from the report that the minerals viz. calcium and magnesium are not at all present in the water cleared from M/s. Mc Dewel & Co. and sodium even if present, is very negligible in total content. Hence the total clearance of 44201.82 KL of supply of DM water to M/s. United Breweries Ltd., Cherthala during the period from February 1991 to February 1995 was arrived at from the documents recovered and assessments carried out for arriving at the duty figures in the show cause notice.
5. The appellants in their reply to the show cause notice contended that they were not sending demineralised water and enclosed a write up of the process done in the factory in connection with the conversion of borewell water to anion water. They further submitted that they were not engaged in the manufacture of any excisable commodity and therefore would not come under the ambit of Central Excise. It was contended that anion water is not specified in the Schedule of the Central Excise Tariff Act. The classification of the water cleared by them cannot be made under T.S.H. No. 2851.00 as alleged in the Show Cause Notice as the purity of distilled water could not be attributed to the water in question. They stated that they were engaged only in the purification of water obtained from borewell to make it suitable for use in distillery. The only change effected was the removal of certain mineral ions thereby making soft water as evident from test report of the Kerala State Pollution Control Board. They stated that even De-mineralised water would not fall under T.S.H. 2851.00 as its purity was less than that of distilled water and therefore anion water which was even less pure would not come under 2851.00. They also referred to Circular No. 9/87-C.E., dated 26-7-1997 which clarified that Aquo Mineral Bisleri treated water was non-excisable and further submitted that the process of manufacture of that product was similar to the processes done at their factory, the only difference of anion water cleared by them being one stage removed from De-mineralised water in terms of purity. They also referred to CBEC Circular No. 84/84/Cen.
Ex., dated 20-12-1994 and submitted that in their case they did not enrich the water purified by them and therefore the question of manufacture of a different kind of water did not arise. They submitted that as per the explanatory note in the HSN, natural water even if filtered, sterilised, purified or softened is excluded from the entry in the Central Excise Tariff Act. Regarding valuation, they pointed out that the price at which they cleared anion water to M/s. U.B.L. was arrived at on the basis of the cost of purification of the said water.
The clearance of M/s. Kelara State Drugs and Pharmaceuticals being water of different specification, could not be treated as clearances of comparable goods and therefore was not acceptable.
6. Ld. Commissioner rejected all their pleas and proceeded to hold the items to be goods classifiable under sub-heading 2851.00 which covers "distilled water, re-distilled water or electroosmotic water, conductivity water and water of similar purity including water treated with ion exchange media". He has relied on the process of manufacture of the said water as explained by Shri S. Balakrishnan Kartha, who is incharge of the D.M. Water Plant. He rejected the contention that the item is not conductivity water. On the grounds that the process of manufacture has made it clear that the water is treated by passing through ion exchange media and hence there is no doubt that water treated with ion exchange media falls under sub-heading 2851.00 irrespective of the conductivity of the water as long as it is treated through the ion exchange media, it has to be classified under 2851.00.
He has noted that tube well water is subjected to various processes and as a result of this process the de-mineralised water emerges. The D.M.water is a different commodity in the sense that it has a distinct character and a different use compared to the well water. Therefore, he holds that it is different commodity. Regarding the marketability also he held that there is no doubt inasmuch as the demineralised water is capable of being marketed. He rejected the plea of valuation raised by the appellants. He has held that the appellants did not declare the manufacture of the water to the department and hence there was a deliberate intention to suppress the information to the department with an intention to evade payment of duty, and hence, larger period is invokable including imposition of penalty.
7. The appellants have taken the same contention as raised before the original authorities. We have heard ld. Advocate Shri Arvind P. Datar for the appellants and Shri Victor Thiagaraj, ld. S.D.R. for the Revenue. Ld. Advocate submitted that the issue has been gone into in a great detail by the Tribunal in the case of Gujarat State Fertilizer Ltd. as reported in 1998 (98) E.L.T. 840 and has held that the issue of softening of water from the river for use in the boiler does not amount to process of manufacture and that they were not goods. He pointed that in this connection various circulars wherein the Board has clearly indicated that Acqua Guard Bislery Distilled water would not be goods.
It is his contention that they are only softening the water for further de-mineralising which is not carried out in their factory. He placed before us a chart showing the process carried out by them and submitted that the process of De-mineralising water was being carried out differently was not being carried out by them. He pointed out that HSN Tariff Note is not applicable in the present case, as the said explanatory note does not deal with their item. Therefore, he submitted that the judgment of the Tribunal in the above said case is required to be applied and the impugned order is required to be set aside. He also submitted that in view of the Board's Circulars party held a bona fide belief that the item is not dutiable and hence the question of suppression does not arise and the demands were barred by time.
8. Ld. SDR pointed out that the water pumped from the bore-well is de-cast by passing it through U.B. system, i.e. through cation and Anion for D.M. and it is different commodity than the one referred to by the Tribunal in the case of Gujarat State Fertilizer v. C.C.E. and pointed out that in terms of explanatory notes appearing at page 338, the item is clearly covered under Excise Tariff 2851.00. He pointed out that the Board's circular referred to by the party is not applicable to the facts of the present case.
9. Countering the arguments Id. Advocate submitted that the process carried out by the appellant did not convert the item water into any other commodity; water remains water and therefore there was no process involving change in the name, character and use. He submitted that the Tribunal had gone into this aspect in great detail in the referred case and therefore, the judgment is binding on the Tribunal.
10. On a careful consideration of the submission, we notice that the citation referred to by ld. Advocate in the case of Gujarat State Fertilizers Co. Ltd. v. C.C.E. dealt with an identical situation. In that case the appellants were engaged in the manufacture of Urea, Ammonium Sulphate & Diammonium Phosphate Fertilizers as well as other items in their factories situated in Fertilizer Nagar, District Vadodara. With the introduction of Tariff Item 68 in the Schedule, the erstwhile C.E.T., they classified Demineralised water (DM Water) i.e.' river or pond water from which the appellants removed calcium and magnesium by Iron exchange process, under Tariff Item 68. The Superintendent subsequently informed them that DM Water fell outside the scope of Tariff Item 68 and hence they have applied for refund of duty paid by them on DM Water from March, 1975 onwards and refund was sanctioned from 17th March, 1977. No duty was levied on DM water till February 1986. With the introduction of CET 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". Therefore, 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 various products as well as clearing the same outside the factory without payment of duty, show cause notices were issued and the matter was adjudicated. Some defence was taken by the appellants that this DM water are not goods and they are not excisable and further larger period was not invokable. The majority view of the Tribunal was after considering the various technical literature from McGraw Hill Encyclopedia of Science & Technology at page Nos. 508 and 513 including after examining the HSN Notes very carefully, it was held that the item natural water even after treatment of the purpose of purification or softening, etc. was basically remained water and such a purified water cannot be automatically considered as an excisable product. The third member in his detailed opinion concurring with the Vice-President's view examined large number of judgments including definition of water appearing in Hawley's Condensed Chemical Dictionary, 11th Edition at page 1232 and agreed with the Vice-President. It was noticed that merely removal of two impurities calcium and magnesium did not make the water a distilled water and it continues to remain water. The Tribunal also examined the circulars which are referred in the present case and also it was noticed that the Board itself has clarified that the item Acqua Mineral Biserly treated water is not excisable. The process was identical to the present one inasmuch as water is treated with bleaching powder to eliminate impurities & micro-organism. Thereafter it is purified by filtration. Subsequently it is softened. Finally it is sterilised to keep such drinking water free from bacteria and avoid contamination during treatment. The Board itself has examined HSN Explanatory note and held that even in terms of such notes the item would not be excisable. It is further clarified that if the item is considered as excisable, then tap water for domestic use supplied by Metropolitan Corporation would also get covered since waters "waters" are specifically mentioned under Heading 22.01 of the Annexure-I charging of duty thereon is not intended by Central Excise Act. The Board itself clarified that there is a difference between Heading 22.01 of HSN and Heading 22.01 of CET inasmuch as the Excise Tariff does not include all kinds of water, whereas sub-heading 2201.90 of HSN has residuary entry for other water. It further pointed out that the explanatory note to HSN page 163 includes purified water under the category of "ordinarily natural water of all kinds" but there is no such entry on Central Excise. In that view the Board clarifies on "Acqua Mineral Bisleri treated water is not excisable". In the present case also the appellants are merely carrying out ionising process of removing two minerals that is calcium and magnesium and the process makes only the water soft water and there is no further process to purify and distill it. When the Board itself clarified that acqua mineral bisleri water is not excisable, but to hold that the item in the present case merely because it indicates the concerned process could transform itself into a new commodity and bring within the ambit of excisability and dutiability. Further in the cited case the Tribunal clearly analysed the facts pertaining to bona fide belief held by the manufacturer and by applying the ratio of Supreme Court judgment in the case of C.C.E. v. Chemphar Drugs & Liniments as reported in 1989 (40) E.L.T. 280 (S.C.) to held that due to such act of bona fide belief, suppression cannot be allowed and larger period cannot be invoked. In the present case also we are of the considered opinion that larger period is not invokable in view of the appellants holding belief that such process would not make the bore-well water into a new commodity which is classifiable and excisable. Water remains water even after the process carried out by the appellants and hence mere softening of the water would not make it a different commodity and therefore, applying the ratio of the Tribunal's judgment we set aside the impugned order and allow the appeals.