1. The captioned appeal (1) was initially filed as a revision application before the Central Government and the appeal (2) was filed before the Central Board of Excise and Customs. Under Section 35-P of the Central Excises and Salt Act, 1944, these have come as transferred proceedings to this Tribunal for disposal as if they were appeals filed before it.
2. There are several contentions raised before us but the crucial issue falling for determination in both the cases is whether the gas which the appellants call 'fermentation gas' and contains about 99% of carbon dioxide (CO2) falls for classification under item No. 14-H of the First Schedule to the Central Excises and Salt Act, 1944 (CET, for short).
The appellants' contention is that the gas in question is not compressed carbon dioxide within the meaning of item 14-H CET, whereas the contention of the Department is that it is.
3. We are concerned in both the appeals with item No. 14-H CET as it stood prior to its amendment by the Finance (No. 2) Act of 1977. The item, at the material time, reads as follows : "14-H. Compressed, liquefied or solidified gases, the following, namely : "14-H. Gases, including liquefied or solidified gases, the following, namely :- 4. Carbon dioxide in gaseous, liquid or solid forms falls under item No. 14-H. However, during the material time, i.e. prior to the amendment of the item in 1977, in so far as the gaseous form was concerned, only compressed carbon dioxide fell for classification under item 14-H. The dispute in the present case revolves round the question : What is Compressed Carbon Dioxide gas? 5. The allegation against M/s. Mohan Meakins Breweries Ltd., Solan was that they had contravened the provisions of Rules 9 and 174 of the Central Excise Rules, 1944 inasmuch as they had manufactured carbon dioxide gas during the years 1973-74 and 1974-75 without obtaining central excise licence and during 1975-76 (upto January 1976) after obtaining central excise licence and that the entire production of CO, gas was consumed by them without payment of the central excise duty leviable thereon. These allegations were set out in a show cause notice dated 5-5-1976 issued by the Supdt. of Central Excise, Chandigarh Range in which the quantity of carbon dioxide was mentioned as 12,862.84 Kgs.
and the duly leviable was mentioned as Rs. 15,435.41 (Rs. 12,862.84 basic excise duty plus Rs. 2,572.57 as auxiliary duty). M/s. Mohan Meakins were called upon to show cause to the Assistant Collector of Central Excise. Chandigarh as to why the aforesaid duty should not be demanded from them and why a penalty under Rule 173-Q should not be imposed on them. After nearly A\ years, the Supdt. of Central Excise, Simla issued a corrigendum dated 29-9-1980 to the show cause notice wherein the quantity of carbon dioxide gas was amended to the figure 3,58,398.67 Kgs. and the duty amount was amended to the figure Rs. 3,58,398.67. Further, the assessee was called upon to show cause to the Collector of Central Excise, Chandigarh. The Collector, after holding adjudication proceedings, by an order dated 4-12-1980 rejected the assessee's contention that the subject CO, was not compressed CO, gas as known to the market compressed it a pressure ranging between 1000 to 1800 pounds per sq. inch and filled incylin-lers. He also rejected the contention that since the gas was not removed out of he factory, no liability attached on the assessee for payment of excise duty under "Central Excise Rules 9 and 49. He further rejected the contention that the show cause notice was hit by limitation and that the corrigendum was time-barred. As regards the quantity of C02 gas on which duty was to be paid, the Collector gave certain allowances on account of factors such as escape of gas into the atmosphere, etc. and scaled down the figure to 2,93,277.575 Kgs. He ordered that M/s. Mohan Meakins should pay central excise duty at the appropriate rates on the aforesaid quantity of CO2 gas. He also levied a penalty of Rs. 4,50,000 on the assessee for contravention of the provisions of the Central Excise Rules. The assessee filed an appeal against this order which we are now disposing of as an appeal filed before us.
6. The facts in the case pertaining to M/s. Punjab Breweries Ltd. Ludhiana are more or Jess similar. The allegation against the assessee was that they had removed 9,427.2 Kgs. of compressed carbon dioxide gas during the period from June 1974 to June 1976, without payment of central excise duty amounting to Rs. 9,427.20. The Assistant Collector of Central Excise, Ludhiana who adjudicated the case held that the CO2 was liable to be charged to duty under item No. 14-H CET. However, on the basis of the material on record, he fixed the duty liability at Rs. 6,552.70. The appeal against this order was rejected by the Appellate Collector of Central Excise, New Delhi. We are now disposing of the revision application filed against the Appellate Collector's order as if it were an appeal filed before us.
7. We have heard at length Shri Ravindra Narain, Counsel for M/s. Mohan Meakins Ltd. and Shri S.P. Bhatnagar, Counsel for Punjab Breweries and Shri N.V. Raghavan Iyer, Chief Dept1 Representative and Shri A.S.Sunder Rajan, Deptl. Representative, for the Respondent-Collector.
8. A number of submissions were made before us on several aspects of the dispute. It, however, appears to us that it is not necessary to deal with all of them for the purpose of disposal of the present appeals. For the reasons which we shall set out in the following paragraphs of this order, we are taking the view that the fermentation gas or the CO2 gas on which duty is sought to be recovered by the Department did not fall for classification under item No. 14-H CET as compressed CO2. Once this conclusion is reached, no other contention survives for consideration and it is, therefore, why we do not propose to set out the other contentions and discuss them.
9. Shri Ravindra Narain very strenuously urged that the gas in dispute was not compressed CO2 gas as commercially known. In the instant case, the gas was not filled in cylinders of the specifications described in the Gas Cylinder Rules, 1940 at pressures ranging from 1000 to 1800 pounds per sq. inch. Further, the subject CO2 was not odourless as required under the Indian Standard Specification IS: 307-1266 as re-affirmed in 1977. Heavy reliance was placed for this purpose on the Supreme Court decision in South Bihar Sugar Mills Ltd. v. Union of India and Ors.- 1978 ELT J 336, wherein the Supreme Court had occasion, inter alia, to examine the scope of the expression 'compressed CO2.
Reliance was also placed on this Tribunal's Order No. 207/83-C, dated 12-5-1983 in Appeal No. ED(SB) (T)A. 283/80-C-EID Parry India Ltd., Madras v. Collector of Central Excise, Madras. The learned Counsel submitted that the fermentation gas in the present case, though containing over 99% COa, contained certain other impurities besides the odour of beer which must necessarily be removed before commercially pure CO2 could emerge. The ISI Specification on CO2 required that it should be odourless. Nor was the gas compressed in cylinders at pressures stipulated in the Gas Cylinder Rules, 1940. Reliance was also placed on the Government of India's Order-in-Revision in re: M/s.
Dhrangdara Chemical Works Ltd., Sahupuram-1978 ELT 713, which followed the Supreme Court's decision in the South Bihar Sugar Mills case. In any event, the onus was on the Revenue to show that the CO2 in the present case was compressed CO2 as commercially known and understood.
The Revenue had not led any evidence to this effect. Certain other decisions were also cited (to which we shall refer later) in support of the contention that the condition of goods for levy of excise duty was the condition in which they were removed for home consumption or export and the marketability was a decisive test to determine whether a given article fell under an excisable description or not.
10. The arguments advanced by Shri S.P. Bhatnagar, learned Counsel for M/s. Punjab Breweries were on the same lines.
11. On behalf of the Revenue, it was submitted by Shri N.V. Raghavan Iyer that the ISI Standard was framed for the purpose of quality control so as to have a certain uniformity in commercial transactions.
However, it would not follow that goods which did not conform to ISI specifications would cease to be goods of that description In the present case, the fact that the subject CO2 was not odourless would not militate against its being called CO2. Only it would not be according to ISI specifications. Shri Iyer further submitted that, for transport of gas, it was not essential that cylinders should be employed.
Transport of gas through pipe-lines was a well-known mode of transport and the fact that, in the present cases, the subject gas was not compressed in cylinders at pressures laid down in the Gas Cylinder Rules would not lead to the conclusion that the product was not CO2 gas.
Shri Iyer sought to distinguish the present case from the one before the Supreme Court in 1978 ELT J-336 by urging that in the South Bihar Sugar Mills case, the Supreme Court was concerned with kiln gas in which CO2 was present only to a limited extent and would have to be processed if CO2 were to be manufactured out of it. In the present case, however, CO2 was present to the extent of over 99% in the fermentation gas and was used as CO2 by the appellants for flushing of beer. In the South Bihar Sugar Mills case, the Supreme Court clearly held that kiln gas, comprised as it was of CO2, nitrogen and some other substances was not CO2 falling under item No. 14-H CET. The question whether the gas was compressed in cylinders at the specified pressures was, therefore, not really relevant to that dispute. In any event, even in the present cases, there was a certain degree of compression without which the gas would not have moved through pipe lines into the beer flushing tank and it was not necessary that, for this purpose, the gas need be subjected to the degrees of compression required by the Gas Cylinder Rules or that it should have been stored in gas cylinders.
Shri Iyer urged that if CO2 was to be marketed, it would have to be compressed in cylinders at the pressures required under the Gas Cylinder Rules. Here the gas was not being marketed but was being captively consumed and, therefore, it need not have conformed to the practices followed for marketing CO2. He further stated that the word 'compressed' referred to the state of the gas and not to the actual degree of compression. Scientific and technical literature offered but limited guidance in such matters. Compression was relevant when one talked of storage but not of consumption.
12. We have carefully considered the submissions of both sides. The term "compressed gas" has not been defined in the Central Excise Tariff. However, we find the following definition at page 67 of the Glossary of Chemical Terms by Clifford A. Hampel and Gessner G. Hawley : "Compressed gas. Any gaseous element or compound that is subjected to specific pressure and introduced into metal cylinders or special tanks for shipment in either liquid or non-liquid form. Common inorganic gases handled in this way are nitrogen, Oxygen, ammonia, chlorine, carbon dioxide, helium, fluorine, hydrogen and nitrous oxide. Liquefied petroleum gases (LPG) comprise a sub-group of compressed organic gases; they include butane, butene propane and propylene and are chiefly used as household and industrial fuels.
Other organic gases in compressed forms are vinyl chloride, acetylene. in shipping, storage, and handling, and, in the case of flammable gases, the safety factor." The term has also been defined at page 269 of the Condensed Chemical Dictionary, Tenth Edition, revised by Gessner G. Hawley : "Compressed gas-Any material or mixture that, when enclosed in a container, has an absolute pressure exceeding 40 psi at 21.1 C or, regardless of the pressure at 21. 1C has an absolute pressure exceeding 140 psi at 54.4 C; or any flammable material having a vapor pressure exceeding 40 psi absolute at 37.7 C (Vapor pressure determined by Reid method (ASTM). Compressed gases include liquefied petroleum gases (q.v.), as well as oxygen, nitrogen, anhydrous ammonia, acetylene, nitrous oxide and fluorocarbon gases. Some of these are shipped in tonnage volume".
13. It is clear from the aforesaid definitions that the term "compressed gas" is used in relation to gas compressed into a container-a cylinder or a special tank. The compression is done for economy and convenience in shipping, storage, handling, apart from the safety factor in the case of inflammable gases. The term does not contemplate gas which is moving in a pipe-line under pressures that are higher than atmospheric pressure. The idea of compressing a gas is to reduce its volume for facility of storage and transport. On the other hand, when gas is required to be moved by pipe-line, a certain amount of pressure is built up at the transmitting end so that on account of the differential pressure, i.e. the difference between the pressure existing at the transmitting point and the pressure at the other end of the pipe, the gas moves in the direction of the latter. The need for a certain amount of pressure to be applied to transport CO2 gas through a pipe-line can be readily appreciated if it is borne in mind that CO2 is about 1 1/2 times heavier than air and unless pressure is applied it would not normally move along pipe-lines. But could CO2 moving under pressure through pipe-lines qualify to be termed "compressed gas" Going by the two definitions we have extracted above, it would not because the term "compressed gas", as already noted, is used with reference to gas compressed into containers, ordinarily metallic cylinders or special tanks.
14. Indian Standard Specification IS: 307-1966 sets out certain specifications for CO2. Para 2.1 says that the gas shall be of two grades, namely- (a) Grade 1, suitable for use as a re-agent and for welding purposes; and, (b) Grade 2, suitable for beverages, fire extinguishers, refrigeration and general commercial purposes.
Para 4.1 says that the cylinders shall conform to the Gas Cylinder Rules, 1940 with such modification or relaxation or both, as may be ordered from time to time by the Chief Inspector of Explosives, Government of India, or other duly constituted authority. Para 4.2 says that the packing, marking, painting, labelling and transport of cylinders shall be in accordance with the requirements of the Gas Cylinder Rules, 1940 with such modifications or relaxations or both, as may be ordered from time to time by the Chief Inspector of Explosives, Government of India or other duly constituted authority.
15. The Gas Cylinder Rules, 1940 regulate the manufacture, possession, transport and importation of any gas which has been declared to be an explosive within the meaning of the Indian Explosives Act, 1884. The Government of India in the Department of Labour has, by notification No. M-1272(1) dated 28-9-1938 under Section 17 of the Indian Explosives Act has declared any gas when contained in any metal container in a compressed or liquefied state to be an explosive. Rule 11 of the Gas Cylinder Rules provides that the working or internal pressure in any cylinder charged with a permanent gas shall not exceed 1800 pounds to the sq. inch at a temperature at 60F. Sub-rule (2) provides that cylinders charged with liquefiable gases shall not be filled in excess of the filling ratios specified in Schedule 2 (Filling ratio means the weight of gas permitted for each one pound of water capacity of the cylinder, the accuracy of the charge being determined by weighing).
Schedule II to the Rules sets out the filling ratio in respect of CO2 as 0.667 and the working pressure as 1800 pounds per sq. inch at a maximum temperature of 65C.It is, therefore, clear that the manufacture, possession and transport of compressed CO2 is rigorously regulated by the Gas Cylinder Rules, 1940.
16. Though the product in South Bihar Sugar Mills case before the Supreme Court in 1978 E.L.T. J 336 was not fermentation gas containing CO2 to the extent of more than 99 % as in the cases before us, considerable guidance can be had from a careful study of the court judgment in that case. It is true that the product under consideration before the Supreme Court was kiln gas containing about 35% of COa and about 53% of nitrogen. The Court observed that if as the Revenue would have it, kiln gas was to be called CO2, then, having regard to the major component of the mixture, kiln gas could as well be called nitrogen. This inter alia was one of the considerations which led the Supreme Court to hold that kiln gas not CO3 falling under Item No.14-H, CET. Shri Raghavan Iyer has drawn our attention to this aspect of the case and has urged that in the light of this basic fact, the other considerations like compression into cylinders at specified pressures, etc., was not relevant. We do not agree. A careful reading of the judgment would show that the Supreme Court had given close attention to the question whether even if kiln gas could be termed CO2, could it be considered to be compressed gas within the meaning of Item No. 14-H, CET. We, therefore, think that the Court's observations and findings in this regard are of considerable assistance and guidance in arriving at a solution to the dispute before us.
17. In the kiln gas case, the gas was compressed to a pressure of 40 to 45 pounds per sq. inch. After considering the submissions made and the technical and other authorities cited, the Court at paragraph 17 of the report says as follows : "It cannot be called compressed carbon dioxide as understood in the market among those who deal in compressed carbon dioxide. Compressed carbon dioxide is understood generally as carbon dioxide compressed in cylinders with pressures ranging from 1000 to 1800 pounds per sq.
inch. The mere fact that at one stage or the other kiln gas is pressed at 40 to 45 pounds per sq. inch by pump or otherwise, cannot mean that it is compressed carbon dioxide." The above observations and finding were arrived at despite the clear enunciation in the same paragraph that-"At the same time the duty being on manufacture, and not on sale, the mere fact that kiln gas generated by these concerns is not actually sold would not make any difference if what they generate and use in their manufacturing process is carbon dioxide. The fact that the gas so generated has carbon dioxide below 99% and does not conform to the specification of the Indian Standards Institution also would not matter for the gas may be sub-standard provided what is produced is carbon dioxide." 18. Applying the ratio of the Supreme Court judgment, the fermentation gas in the present appeals would qualify to be called carbon dioxide.
Since it does not conform to the Indian Standard Specification in that it is not odourless as enjoined by the specification, what could, at the most, be said is that it is substandard or off-standered carbon dioxide, not conforming to the Indian Standard Specification. This argument of Shri Iyer appeals to us and we agree with it. However, this would not yield the result which Shri Iyer wants it to. So long as the gas is not compressed into cylinders at the specified pressures in terms of the Gas Cylinder Rules, we have, following the Supreme Court decision in the South Bihar Sugar Mills case, to necessarily hold that the fermentation gas in the present appeals is not compressed gas within the meaning of Item 14-H, CET.19. Reliance was placed by the Counsels for the appellants on the Tribunal's decision in the EID Parry India Ltd. case. The gas in that case was oxygen and was carried by pipe-lines to a naphtha cracking plant. In that decision, the Tribunal observed that when one spoke of compressed gas, the reference was to gas compressed in a container which must pass rigorous pressure tests. It was further observed that a pressure vessel was always a closed container of limited length in contrast to the indefinite length of a pipe. Such containers were always portable or movable. Oxygen being heavier than air (the situation in the present cases is the same), it would require propulsion to move it forward in a pipe-line. This propulsion which could be by means of a fan or a screw would result in a differential pressure at the exit point. Without such a differential pressure, the gas would not move from the starting point to the exit point. To call this compression of the gas was, in the opinion of the Tribunal, far-fetched. Compressed gases required strong vessels able to stand the pressure. They were also containers unlike pipes which were only channels for carriage of gas much in the manner of canals for transport of water.
All these arguments apply with equal force to the carbon dioxide in the present cases. The ratio of the decision in the EID Parry case squarely applies to the present cases as well.
20. We cannot but take note of the fact that even the Government of India in its Order-in-Revision in the Dhranghdara Chemical Works case-1978 E.L.T. 713 held, following the Supreme Court decision in the South Bihar Sugar-Mills case, that chlorine gas driven along pipe-lines by means of blowers was not compressed chlorine as contemplated in Item 14-H, CET having regard to the position that the compression as contemplated in the said item should be compressed as generally understood in the relevant trade. The Indian Standard Specification was also relied upon in arriving at this decision.
21. The Counsels for the appellants relied upon the Supreme Court decision in Dunlop India Ltd. v. Union of India and Ors.- 1983 E.L.T.1566 (S.C). The Court held that the condition of the article at the time of importation was a material factor for the purpose of classification as to under what head duty would be leviable. We agree with the Counsels that it would follow from this judgment that the condition of the article at the time of its removal from the factory (which would include removals within the factory for captive consumption) would be a material factor for deciding the tariff entry under which it should be classified. We have found that the fermentation gas in the present cases was not compressed carbon dioxide within the meaning of Item No. 14-H, CET. The allegation in the present case is that the gas was captively consumed. At the stage at which it was consumed it was certainly not "compressed" carbon dioxide within the meaning of Item 14-H.Shri Iyer, however, contended that the word "compressed" refers to the state of the gas and not to the actual degree of compression. In other words, his contention is that carbon dioxide which is subjected to a pressure higher than atmospheric pressure for the purpose of transporting it along a pipe-line, would be carbon dioxide under compression. The actual degree of compression would not matter. If the decision of the Supreme Court is read keeping the above argument in view as also the fact that for the purpose of the brewery industry for flushing of beer, the high degree of compression laid down in the Gas Cylinder Rules was not required, it would follow that the carbon dioxide in the present appeals would be "compressed" gas. We are afraid, we cannot agree. For one thing, we have already held following the Supreme Court's decision in the South Bihar Sugar Mills case and the Tribunal's decision in the EID Parry case that the carbon dioxide in the present cases was not compressed gas within the meaning of Item 14-H, CET. For another, at the stage of consumption of the fermentation gas or carbon dioxide in the flushing of beer, it was not compressed gas within the meaning of Item 14-H, CET which alone could be brought under that item.
22. It is interesting to note that apart from the Government of India's decision in the Dhrangdhara Chemical Works case in its quasi-judicial capacity, the Central Board of Excise and Customs in its executive capacity has also held that carbon dioxide gas produced in distilleries and fertilizer factories or in any other factory would fall outside the purview of item 14-H, CET so long as the gas did not conform to the marketable grade as prescribed in the Indian Standard Specification.
Such gas would be properly classifiable under item 68, CET. This view is contained in the Board's Tariff Advice No. 83/81, dated 24-8-1981 as reproduced at page 334 of the Central Excise Tariff of India 1984-85 published by the Central Law Office, New Delhi.
23. There is yet another aspect of the case that we must refer to.
Arguments were addressed and technical authorities cited by the Counsels for the appellants to show that elaborate equipment was necessary and processes required to be undertaken in order to process fermentation gas to the required degree of purity to make it marketable carbon dioxide. We do not consider it necessary to go into this aspect except to say that the fermentation gas was, despite the existence of some impurities and a certain odour, suitable for and was in fact put to use for flushing of beer by the appellants. It would be reasonable, therefore, to hold that it would have become equally useful for flushing of beer by other beer manufacturers. We have already noted the observations of the Supreme Court in the South Bihar Sugar Mills case that the fact carbon dioxide might be off-standard, not conforming to the Indian Standard Specification, would not mean that it would cease to be carbon dioxide so long as what was produced was in fact carbon dioxide.
24. Shri Iyer referred to the Tribunal's Order No. C-263 and 264/85-C dated 19-3-1985 [1985(21) E.L.T. 532 (Tribunal)] in Ilac Limited, Bombay v. Collector of Central Excise, Bombay. After discussing several authorities, the Tribunal said in that order that goods answering to descriptions of excisable goods need not necessarily conform to prescribed standards, qualities, purity, etc. to make them excisable.
If they do not conform to standards, they would be sub-standard or off-standard but that would not mean that they are not goods of the excisable description. This order does not advance the case of the Department in view of our finding that the fermentation gas in the present cases was not compressed gas.
25. There have been much arguments on other aspects of the case such as limitation, whether the issue of the corrigendum to the show cause notice in the Mohan Meakins case was time-barred, whether captive consumption of fermentation gas without removal from the factory premises would attract duty under Rules 9 and 49, the absence of mens red and the quantum of penalty imposed, etc. In view of our finding that the fermentation gas was not compressed gas, we need not consider these aspects of the case.
26. In the result, we set aside the impugned orders and allow the appeals with consequential relief to the appellants.