1. M/s I.G. Petrochemicals Ltd (hereinafter referred to as IGPL for short) are a 100% EOU engaged in the manufacture and export of "Phthalic Anhydride" falling under Chapter Sub Heading 2917.90 of the Central Excise Tariff Act, 1985. They are also permitted to sell certain quantities of their final product in the Domestic Tariff Area (hereinafter referred to as DTA for short) by the Development Commissioner, SEEPZ, Mumbai in terms of the Exim Policy. They are manufacturing and clearing the said goods to DTA on payment of concessional rate of duty in terms of Serial No. 3 to Notification 23/03-CE dated 31.3.2003 (earlier Notification No. 8/97-CE dated 1.3.1997).
2. The notification prescribed that the goods cleared to DTA would be exempted as per rates prescribed therein subject to the condition that the said goods sold in DTA were only manufactured out of indegenuous raw materials. The benefit is not eligible if the same is manufactured out of imported and indigenous raw materials.
3. The Show Cause Notice dated 6.8.2004 was issued to the IGPL and the other appellant herein. The Notice contended that IGPL were using imported raw materials viz Vanadium Pentoxide in the manufacture Phthalic Anhydride, and the said Vanadium Pentoxide according to the department was an essential, as an indispensable item, in the manufacture of the end product. It is the contention of the department that the manufacturing plant is common and no correlation could be established between the indigenous input/imported inputs and finished goods Phthalic Anhydride manufactured out of indigenous inputs/imported inputs to conclusively prove that the final goods cleared to DTA is only manufactured out of the indigenous material only and therefore the benefit of the notification claimed could not be extended. They were therefore asked to show cause as to why duty demands should not be determined and penalties be imposed. The Commissioner, vide his order now impugned, came to the conclusion: The basic raw material for the manufacture of Phthalic Anhydride are ortho-xylene and air. The air is being drawn from the atmosphere with centrifugal blowers. Ortho-xylene is procured by Noticee No. 1 from indigenous sources (Reliance Industries Ltd. Jamnagar) or by import. Noticee's claim that separate records are maintained by them recording the manufacture of the finished product wholly out of indigenous raw material and imported raw material. Leave aside Vanadium Pentoxide which is imported by the Noticee, whether they will be able to maintain separate record in respect of ortho-xylene which is both imported and indigenously procured The process of manufacture followed by Noticee No. 1 is a continuous process and not a batch process. Naturally, it will not be possible to identify whether the end product is manufactured wholly out of indigenous raw material or imported raw material because of the continuous process nature of manufacturing process. They cannot stop their manufacturing activity in a continuous process just to identify what is being manufactured is out of indigenous ortho-xylene or imported ortho-xylene. Even if they are keeping any records to this effect it can never be the true records but falsified ones as it is humanly impossible to identify the Phthalic Anhydride manufactured out of indigenous raw material or imported raw material in a continuous process. And it is an admitted fact, as is also evident from the statement of Shri J.K. Saboo recorded under Section 14 of the Central Excise Act 1944 on (SIC)07/04, that they use both indigenous ortho-xylene and imported orthoxylene in the manufacture of Phthalic Anhydride.
Noticee No. 1 procuring "Vanadium Pentoxide" from sources outside India only.... They have submitted that Vanadium Pentoxide is a consumable. At the same time they have also submitted that Vanadium Pentoxide is neither consumed nor burnt up during the process of manufacture and according to them Vanadium Pentoxide is a catalyst which is used for the purpose of generating a particular reaction.
It is also an admitted fact that without the presence of Vanadium Pentoxide, the oxidation of ortho-xylene to Phlhalic Anhydride will not lake place and imported Vanadium Pentoxide is continuously present in the reaction vessel to facilitate the oxidation of ortho-xylene. Noticee No. 1 is availing the benefit of Notification No. 23/2003 CE dated 31.03.200. (Sr No. 3 of the table) on the ground that only indigenous raw material are used in the manufacture of final products. Condition No. 3 reads: i. The goods are produced or manufactured wholly from the raw material produced or manufactured in India, ii. The goods are cleared in to Domestic Tariff Area in accordance with sub paragraphs (a), (b), (d), and (h) of paragraph 6.8 of Export and import policy, and iii. Such finished goods, if manufactured and cleared by the unit other than export oriented undertaking are not wholly exempt from duties of excise or are chargeable 10 "Nil" rate of duty.
Hence for availing exemption under Sr. No. 3 of table to Notification the goods are to be produced or manufactured wholly from the raw material produced or manufactured in India.
Now let me examine whether the use of imported Vanadium Pentoxide can deny the benefit of the Notification to the Noticee.
As per definition given in Chapter 9 of the Exim policy 2002-2007 at Para 9.12 "Raw material" means i. Basic materials which are needed for the manufacture of goods, but which are still in a raw, natural, unrefined or unmanufactured state; and ii For a manufacturer, any materials or goods which are required for his manufacturing process, whether they have actually been previously manufactured or are processed or are still in a raw natural state. Exim policy give a very broad definition for the term "Raw material"- Raw material is any material or goods which are required for the manufacturing process. And the said definition given in the Exim policy covers Vanadium Pentoxide used as catalyst in the reaction process without which the manufacturing process cannot take place at all. Since the 100% EOU functions based on the Exim policy the definition given in the Exim policy holds good for them than any other interpretation.
Notification No. 8/97 CE dated 01.03.1997 provided for exemption on similar grounds as in Notification No. 23/2003 CE dated 31.03.2003 (Sr. No. 3) and provides EOU with a level playing. Held viz a viz DTA units as regards to payment of duty on goods cleared in DTA. However the said Notification is not applicable to units which manufacture the goods from both imported or indigenous raw materials. Vide circular No. 442/8/99 CX, Dated 04.03.1999, the benefit of Notification No. 8/97 CE dated 01.03.1997 was extended to units importing as well as indigenously procuring raw materials provided the unit is able to satisfy the jurisdictional Central Excise authorities beyond doubt that inputs used in the manufacture of goods to be sold in DTA are manufactured out of indigenous raw material only, by way of maintenance of records, physical scrutiny/verification of manufacturing process etc. The Central Board of Excise and Customs vide its Circular No. 614/5/2002 CX Dated 31.01.2002 have clarified that the benefit of Notification No. 8/97 CE dated 01.03.1997 shall not be applicable to those EOU's which use imported consumables. Noticee No. 1 in his written submissions have claimed Vanadium Pentoxide as a consumable which is used for a purpose of generating a particulars reaction. Since the goods in question are claimed to be consumables as per Board Circular dated 31.01.2002 above, the exemption under Notification No. 8/97 CE dated 01.03.1997 is not applicable to them and has to be denied forthwith.
The case laws cited by Noticee No. 1 in support of the stand are based on Central Excise procedures and as such are on entirely different footing and they cannot be made applicable to the present case as the definition of raw material given in Exim policy will have an upper hand in matters relating to EOU'S. With utmost regard I humbly defer with the CEGAT's interpretation of the Supreme Court decision in the case of Ballarpur Industries Ltd. case. The Supreme Court's decision related to the 4th type of ingredient mentioned in the case but the Court had prescribed the valid test for considering a product as a raw material which is reproduced below: ...one of the valid tests, in our opinion could be that the ingredient should be so essential for the chemical process culminating in the emergence of the desired end product, that having regard to its importance in and indispensability for the process, it could be said that its very consumption (SIC) burning up its quality and value as raw materials. In such a case, the relevant test is not its presence in the end product, but the dependence of the end product for its essential presence at the delivery end of the process....
It is an admitted fact that the reaction process in the manufacture of Phthalic Anhydride from ortho-xylene cannot proceed without the presence of Vanadium Pentoxide. It is indispensable for the process and it is very much essential for the chemical process culminating in the emergence of Phthalic Anhydride. Hence Vanadium Pentoxide is nothing but the raw material in the process of manufacture. Even if it is treated as a consumable, the Noticee is not eligible for the benefit of Notification No. 8/97 CE dated 01.03.1997 [present Notification No. 23/2003/23/2003-C.E. dated 01.03.2003 (Sr.No. 3)] in terms of Boards Circular dated 31.01.2002. Therefore, the goods cleared in DTA are liable to Central Excise Duty in terms of Sr. No. 2 of Notification No. 23/2003-C.E. dated 31.03.2003 (erstwhile Notification No. 2/95 CE dated 04.01.1995) Noticee No. 1 had taken ineligible benefit under the said Notification intentionally for defrauding Govt. Revenue and hence they are liable to penalty. Also they are liable to pay interest(SIC) Shri. J.K. Saboo, (Noticee No. 2) was aware of availing inadmissible exemption as he is the Executive Director of Noticee No. 1 and all major decisions regarding Excise matters are taken by him or with his approval.
Hence he has played an integral part in Noticee No. 1 availing ineligible benefit under the said Notification and intentional defrauding the Govt. of Revenue. He is therefore liable to penalty under Rule 26 of Central Excise Rules 2002.
And therefore the benefit of Notification No 23/03 at Serial No. 3 thereof was denied; duties were ordered to be recovered from IGPL as per the rates under Serial No. 2 to Notification 23/03. The duty demands were confirmed along with penalty of an equal amount under Rule 25 of the Central Excise Rule, 2003 read with Section 11AC and interest at appropriate rate under Section 11AB was also demanded. Penalty of Rs. 15.00 lakhs under Rule 26 of the Central Excise Rules, 2002 was imposed on Shri J.K. Saboo the other appellant herein. Hence these appeals.
4. After hearing the Ld Counsel Mr. A. Hidayatullah, Sr. Advocate for the appellants and Shri U.H. Jadhav, Ld J.D.R. for the Respondent, and considering the materials on record, it is found that: (a) the Commissioner has completely misdirected himself in applying the Supreme Court's decision in the case of CCE. v. Ballarpur Industries Ltd various ingredients/inputs which may go onto the use in the manufacture of the final products including catalytic agents, yet the conclusions dealt with only such of the material which burn out and are consumed in the chemical reactions. Vanadium Pentoxide in the present appeal was used as a catalytic. It is settled position that a catalyst cannot be equated with and be raw material. The findings of the Commissioner that the Catalyst, in this case, could be treated as a raw material therefore cannot be upheld. (b) The notification 105/81, under consideration, in case of Ballarpur was considered by the Tribunal in case of Amrit Vanaspati Co v. CCE wherein the Tribunal decided that a catalyst did not fall in the definition of "raw material." This definition has been followed & nothing contrary has been shown.
Relying on the catena of "decisions of this Tribunal Rashtriya Chemicals & Fertilizers Ltd v. CCE 1989 (43) ELT 294 (Tri) wherein the Bench has held that catalyst cannot be considered as raw material or component parts as also in the case of Nirma Ltd. v. CCE it was held by another Bench that spent catalyst due to usage or process undertaken is lost and a new emerging entity results that cannot be termed as raw material evolving and resulting into a new entity, even if it is marketable. Hence use & emergence of the spent catalyst, could not be held to be manufacture of excisable goods. In the case of Kusum Products , it was held that catalyst used were neither raw materials nor component parts. This settled law on the subject and the Supreme Court upholding the decision in the case of Kusum Products Ltd. would lead only to the inescapable conclusion that the use of Vanadium Pentoxide, which is imported catalyst in the manufacture of Phthalic Anhydride, in this case, cannot be found to be a cause to deny the benefit of the Notification. Since the notification serial No. 3 as extracted hereinabove in the order of the Commissioner impugned before us was clearly stipulating the condition would be eligible only if the goods were manufactured wholly from the raw materials produced or manufactured in India, the basic raw material admittedly of Phthalic Anhydride are Ortho-xylene and air. The air is drawn from the atmosphere with centrifugal blowers & ortho-xylene is indigenously sound. Therefore, when catalyst is not considered to be used in the manufacture and is used in any manner as other than raw materials, the benefit of notification cannot be denied on the grounds that the Catalyst Vanadium Pentozide was imported.
5. Considering the findings that the EOU is also importer of ortho-xylene & using the same, and the Commissioner's finding thereon, the assessee was not able to maintain separate records in respect of imported and indigenously procured ortho xylene since the manufacturer so processed the ortho-xyle. It is found that the Commissioner overlooked the following decisions of the Hon'ble High Court & Supreme Court as recorded in the case of Motibhai Fulabhai Patel & Co. 1978 ELT (J 370) which reads as follows: 8. ...In Sonavala's case ((1960) 42 B.L.R. p. 634) referred to earlier Desai, J. had held that the right to confiscate smuggled goods under Section 167(8) of the Sea Customs Act, 1878 does not carry with it the right to confiscate unsmuggled goods. The words "such goods" appearing in Section 167(8) of the Act cannot be Interpreted to mean similar goods. It is not open to the Customs authorities to confiscate similar goods even though they may be of the same quality, bulk and value. The words 'such goods' mean the very goods which have been smuggled. If the smuggled goods lose their Identity, it would not be open to the Customs officers to confiscate any part of those goods. Where, therefore, gold that has been smuggled has in the melting process got so mixed up with gold that is unsmuggled that it is impossible, to separate the smuggled gold from the unsmuggled one, the right to confiscate smuggled gold ceases when the two get inextricably mixed up. The broad proposition laid down by Desai, J. undoubtedly supports the contention advanced on behalf of the appellants. We shall presently show that this statement of the law is not correct but it in necessary to mention at this juncture that in the Sonavala's case (1960) 42 B.L.R p. 634) an innocent third party had purchased the smuggled gold for proper value and mixed the same with unsmuggled gold, which circumstance had an important bearing on the decision of the case.
9. In Institutes of Justinian at page 104 dealing with the topic commixtio it is observed: If the things mixed, still remaining the property of their former owners were easy to separate again, as for instance, cattle united in one herd, when one owner brought his claim by vindication his property was restored to him without difficulty but if there was difficulty in separating the materials from each other, as in dividing the grains of wheat in a heap, the obvious mode would be to distribute the whole heap in shares proportionate to the quantity of wheat belonging to the respective owners. But it might happen that the wheat mixed together was not all of the same quality, and therefore the owner of the better kind of wheat would lose by having a share determined in amount only by the quantity of his wheat; and the judge therefore was permitted to exercise his judgment how great an addition ought to be made to his share to compensate for the superior quality of the wheat originally belonging to him.
In Williams on Personal Property (18th Edn.) at p. 50, it is observed: The acquisition of ownership by accession or confusion of substances also presupposes a previous title. Thus the young of a domestic animal belong to the owner of the mother. If any substances, for instance tallow belonging to various owners be mixed by consent or accidentally, the mass appears to belong to the owners of its parts in common. And if the confusion be made willfully by one without the other's leave, the mass belongs to the latter, whose ownership is thus unlawfully invaded.
Dealing with the same topic it is observed in Halsbury's Laws of England 3rd Edn. (Vol. 29) at p. 378.
Ownership of goods may be acquired by confusion or intermixture, if the goods, when mixed, are indistinguishable. If the goods are mixed by agreement or consent the proprietors have an interest in common in proportion to their respective shares; if mixed by accident or the act of a third party, or which neither owner is responsible, the proprietors become owners in common of the mixed property in proportion to the amounts contributed. Where, however, one man wilfully mixes his goods with those of another without the approbation or knowledge of the other, the whole be longs to the latter.
The law on this topic was stated by Bovill, C.J. as early as 1868 in Spence and Anr. v. The Union Marine Insurance Co. Ltd. (Law Reports (Common Pleas) 3, 1867-68) thus: In our own law there are not many authorities to be found upon this subject but, as far as they go, they are in favour of the view, that, when goods of different owners become by accident so mixed together as to be undistinguishable, the owners of the goods so mixed become tenants in common of the whole, in the proportions which they have severally contributed to it. The passage cited from the judgment of Blackburn, J., in the case of the tallow which was melted and flowed into the sewers, is to that effect: Buckley v. Gross. And a similar view was adopted by Lord Abinger in the case of the mixture of oil by leakage on board ship in Jones v. Moore.
It has been long settled in our law, that where goods are mixed so as to become undistinguishable, by the wrongful act or default of one owner, he cannot recover, and will not be entitled to his proportion, or any part of the property, from the other owner, but no authority has been cited to show that any such principle has ever been applied, nor Indeed could it be applied, to the case of an accidental mixing of the goods of the two owners; and there is no authority nor sound reason for saying that the goods of several persons be the property of their several owners, and become bona-vacantia.
10. The same principle was again reiterated by the House of Lords in Smurthwaite and Ors. v. Hannay and Ors. ((1894) A.C. p. 494).
11. The rules enunciated above are of assistance in finding out a solution to the problem before us though they do not govern the same....
6. The findings of the Commissioner, "even if they are keeping any record to this effect, it can never be the true records but falsified ones as it is humanly impossible to identify manufacture out of indigenous raw material or imported raw material in a continuous process" cannot be upheld. The reason adduced and relied to deny the benefit of the notification on grounds of mixture of imported & Indian ortho-xylene, when the law on mixed goods is well established, and that also without examining the records & by an a brash finding terming the same as false is not a process of unbiased adjudication and or application of mind, the Commissioner was required to follow and take the recourse and arrive at his own conclusion (SIC) the records were false and were not possible to be maintained could be (SIC) after a detailed notice & decision after bearing the appellants. In any case, there is no positive findings that no records we ever produced. It is an established practice and extensive instructions issued on mixed tank components of liquids and the principle of first in first out is well established to be applied in such cases. The goods cannot be therefore established to have been manufactured from imported Ortho xylene only.
This exercise should have been done by the Commissioner, in stead of denying the benefit of the exemption based on his own fears and conjectures. The procedure prescribed and the law on the subject of treatment to be offered in case of such mixed raw material is very clear. It is not Revenue's case that the appellants have mixed tanks for ortho-xylene procured from India and abroad. The Commissioner's order impugned before us therefore on this account is emerging on baseless material & cannot be upheld.7. DGTD vide letter dated 27.9.1996 have listed Vanadium Pentoxide as a catalytic agent. The Commissioner's (SIC) on EXIM policy definition thereof is not called for and be a cause to upset the position of Vanadium Pentoxide to be a catalyst. Catalysis are covered as capital goods of Exim Policy and therefore when use of such capital goods will not impugn eligibility to the benefit of notification as applicable to DTA clearances in this case.
8. It is found that the benefit of Notification cannot be denied by the use of Vanadium Pentoxide to be the imported catalyst and no material exist to positively conclude that Phthalic Anhydride that was cleared under claim of the said notification was made by use of ortho xylene which onus is vested on the department and has not been discharged. The duty demands cannot be confirmed. Clearances made under serial No. 3 to Notification cannot be impugned. Once duty demands cannot be confirmed, and the clearances as effected cannot be impugned, the penalties as imposed on the EOU along with interest demands under Section 11AB, penalty under Rule 26 on the other appellant herein cannot be sustained and are therefore required to be set aside.
9. In view of the findings arrived hereinabove, these appeals are allowed, after setting aside the order on duty demands, interest and penalties.