1. Both the appeals are directed against the same impugned order.
Accordingly, they are disposed of under this common order.
2. The first appellant M/s SPL Siddhartha Ltd. had been manufacturing and clearing go-down dunnage (flooring) from 2000, without paying any central excise duty. In September 2004, Directorate General of Central Excise Intelligence searched its premises based on intelligence that appellant was evading central excise duty. The investigation led to issue of show-cause notice dated 1.6.05 alleging that the said dunnage floorings were liable to central excise duty under heading 3918/5903 and that duty evasion of about Rs. 4 crores is involved. The show-cause notice proposed to recover the said duty and impose penalties. The appellant resisted the proposed classifications and duty demand; but failed. Under an adjudication order dated 28.7.05, the Commissioner, Central Excise, Noida confirmed the duty demands and imposed penalties on the appellant manufacturer and its director, Shri N.K. Gupta. The present appeals are directed against the duty demands and penalties made under that order.
3. The finding in the impugned order is that "floor covering with plastic lamination on both sides" will be excisable under tariff heading 3918.90 and "floor covering with plastic lamination on single side" would be classifiable under tariff heading 5903, during the relevant period. Thus, the finding is that the plastic lamination on both sides makes the material "floor covering of plastics", while with plastic lamination on one side, the material is laminated "textile fabrics". The appellant contends that both varieties are not plastic items. It is being contended that these are rot proof jute products which were liable to central excise duty at nil rate and thus there was no duty liability.
4. Having noted the controversy, we may now state the products in question. Undisputedly, the product is dunnage and it is specifically made for go-down floor. Traditional Dunnage means 'Mats and other materials used to protect cargo'. It may be used on board ships, in go-downs or in camps. Traditional dunnage materials are mats, battens, planks etc. The present products have been developed specifically as go-down flooring and is sold to Food Corporation of India, State Warehousing Corporation etc. who handle huge qualities of grains and other food items. The item is invoiced as "H.E.F. Spl.s 0491 (A complete Go-down Dunnage Flooring for preventing Dampness)". It is made in rolls and is sold and priced per square foot. The appellant has also pointed out that its rival manufacturer namely, Air Trax Polymers Pvt.
Ltd. produces the same item and sells them as "high efficiency dunnage, material" without paying any central excise duty.
5. The item is made out of Hessian cloth, bitumen and plastic. It is basically two or more layers of Hessian cloth bonded together by bitumen and given a plastic film cover on one side or on both sides.
The composition of the item may also be noted. The chemical examiner of Revenue has reported the composition as "48.2% jute products, 31.4% bituminous matter and that balance are polythylene type plastic film".
The report of Shriram Institute for Industrial Research gives 'Breaking Load of Jute, kg. - (a) lengthwise direction - 66 and (b) widthwise direction - 34 for jute and breaking load of plastic film - (a) lengthwise direction - 4.3 and (b) widthwise direction - 4.5' in addition to composition. The report also indicates "Protocol Adopted as IS 1060 Par-I - 1966" for the purpose of determining the composition.
6. The appellant's sales literature highlights the product as "anti-moisture, rodent repellant, anti-fungus, anti-bacteria.". It also describes the product as for "sugar and food grain go-down and sugar fertilizer go-down". They have also brought on record the sale order to Food Corporation of India which describes the stores as "go-down flooring material of polythene floor film bonded with Hessian for use as dunnage for storage of food grains, laminated, heat resistant etc, free from holes, cuts, blisters, cracks untrue edges and other manufacturing defects. It should be anti-fungus and anti-termite and preferably rodent repellant.
7. Though the material is thus, undisputedly, made predominantly jute, though sold exclusively as dunnage material for food, sugar and fertilizer go-downs and though falling under IS for fabric etc., the revenue has classified the two sides laminated material under Chapter 39 which is for plastic. The main reason for such a classification is that Note 2(a)(3) under Chapter heading 59 has clarified the product as falling outside heading No. 59.03 and would fall under Chapter 39. We may read that Note: (a) Textile fabrics impregnated, coated, covered or laminated with plastics, whatever the weight per square metre and whatever the nature of the plastic material (compact or cellular) other than: (3) Products in which the textile fabrics either completely embedded in plastics or entirely coated or covered on both sides with such material, provided that such coating or covering can be seen with the naked with no 'account being taken of any resulting change of colour (Chapter 39) In regard to flooring material which is laminated only on one side, revenue is in agreement that the heading would be 59.03, which is for textile fabrics.
9. The contentions of the appellant are that the classification orders are in gross violation of the commercial and material (composition) identity of the product and such a classification is illegal; the classification under heading 39.18 is grossly incorrect as the item in question is a composite item and is not an item predominantly of plastic so as to warrant classification as of plastic under Chapter 39; the classification under 39.18 is not correct inasmuch as the floor coverings envisagesd in that heading are floor coverings which are 'normally' used in offices, homes etc. and not floor covering used only in storage places; denying the appellant same treatment as to its rival is wholly unjustified discrimination. Much case-law has also been cited in support of each of these contentions.
10. As against the above contentions of the appellant, learned SDR has highlighted that it is well settled that assistance of chapter and heading notes of HSN are to be followed in cases of doubt for the purpose of classification of products. It is being stressed that the Commissioner has exhaustively dealt with all the issues and has shown how the classification of the product in question was correctly under Chapter 39. It is thing particularly emphasized that flooring which is covered on both sides is correctly classifiable under Chapter 39 as "plastic and articles thereof in view of note 2(a)(3).
11. The moot question is whether the item in question is an "article of plastic" and if so, plastic floor covering classifiable under 3918.
Chemical examination reports are unanimous that jute predominates. It is not disputed that dunnage material is for the protection of materials stored in go-downs from rot and pests. As godowns flooring it also bears the load of the stored material. According to the report of Shriram Institute for Industrial Research the load bearing property of the material is derived from jute fabrics and not from plastic (para 5). Therefore, the buyers choose these items going by the presence of jute in the materials and not the plastic lamination. Thus, the technical as well as commercial identity of the product is derived from jute. It is well settled that excise classification should follow commercial identity, unless contrary is specified in the statute. The Hon'ble Supreme Court in the case of Atul Glass Industries Ltd. and Ors. v. C.C.E. and Ors.
8. The test commonly applied to such cases is: How is the product identified by the class or section of people dealing with or using the product? That is a test which is attracted whenever the statute does not contain any definition. Porritts and Spencer (Asia) Ltd. v. State of Haryana (1978) 42 S.T.C. 433 : 1983 E.L.T. 1607 (S.C.). It is generally by its functional character that a product is so identified. In Commissioner of Sales Tax, U.P. v. Macneill & Barry Ltd. Kanpur ammonia paper and ferro paper, used for obtaining prints and sketches of site plans could not be described as paper as that word was used in common parlance. On the same basis the Orissa High Court held in State of Orissa v. Gestetner Duplicators (P) Ltd. (1974) 33 S.T.C. 333 that stencil paper could not be classified as paper for the purposes of the Orissa Sales Tax Act. It is a matter of common experience that the identity of an article is associated with its primary function. It is only logical that it should be so. When a consumer buys an article, he buys it because it performs a specific function for him. There is a mental association in the mind of the consumer between the article and the need it supplies in his life.
It is the functional character of the article which identifies it in his mind. In the case of a glass mirror, the consumer recalls primarily the reflective function of the article more than anything else. It is a mirror, an article which reflects images. It is referred to as a glass mirror only because the word glass is descriptive of the mirror in that glass has been used as a medium for manufacturing the mirror. The basic or fundamental character of the article lies in its being a mirror. It was observed by this Court in Delhi Cloth and General Mills Co. Ltd. v. State of Rajasthan and Ors.
In determining the meaning or connotation of words and expression describing an article or commodity the turnover of which is taxed in a sales tax enactment, if there is one principle fairly well settled it is that the words or expressions must be construed in the sense in which they are understood in the trade, by the dealer and the consumer. It is they who are concerned with it, and it is the sense in which they understand it that constitutes the definitive index of the legislative intention when the statute was enacted.Geep Flashlight Industries Ltd. v. Union of India and Ors. 1985 (22) ELT 3. Where the goods are not marketable that principle of construction is not attracted. Indian Aluminium Cables Ltd. v. Union of India and Ors. .
The question whether thermometers, lactometers, syringes, eye-wash glasses and measuring glasses could be described as 'glassware' for the purpose of the Orissa Sales Tax Act, 1947 was answered by the Orissa High Court in State of Orissa v. Janta Medical Stores (1976) 37 STC 33 in the negative. To the same effect is the decision of this Court in Indo International Industries v. Commissioner of Sales Tax, Uttar Pradesh syringes were regarded as falling more accurately under the entry relating to "hospital equipment and apparatus" rather than under the entry which related to "glasswares" in the U.P. Sales Tax Act.
12. The rival tariff headings in question do not specifically mention the product or define the product. Both headings are general in nature, 'of plastics' and 'of textile fabrics'. Therefore, between these two entries, the entry 'for textile fabric' would appear to be more appropriate inasmuch as the main material in the article in question is hessian and the commercial identity is derived from properties of hessian.
13. Apart from the above, the HSN Note under 3918 also would appear to rule out classification under that heading. We may read the heading and the relevant note: 39.18: Floor coverings of plastic, whether or not self-adhesive, in rolls or in the form of tiles; wall or ceiling coverings of plastics, as defined in Note 9 to this chapter.
The first part of the heading covers plastics of the types normally used as floor coverings, in rolls or in the form of tiles. It should be noted that self-adhesive floor coverings are classified in this heading.
The evidence showing that the floor coverings in question are 'normally' used as floor covering is entirely lacking in the record.
The revenue has not procured any evidence in this regard. Instead, there is a large amount of material showing that material in question is specifically for the purpose of floor covering of go-downs. It is hard to canvass that dunnage used in go-downs can as well serve drawing rooms and offices. Further, the mention of 'plastic tiles' along with floor covering makes the position clear. It indicates that floor covering of plastics under 39.18 are the same kind as plastic floor tiles. The dunnage in question is very different from plastic tiles which are normally used for tiling floors of homes and offices. Go-down flooring would be positively offensive as floor covering for homes or offices. Thus, the conclusion arrived at in the impugned order regarding classification of hessian which are laminated on both sides would appear to be contrary to the note under that sub-heading itself.
A note under another sub-heading cannot overrule the heading notes itself.
14. The appellant's contention about discrimination also is valid. It is not disputed that the appellant's rival is not paying duty. The Commissioner has brushed aside the objection by noting that one individual's liability to tax cannot be avoided by saying that another individual is not being taxed. While this view is legally correct, this is to misunderstood appellant's grievance. An indirect tax is a tax which is passed on to buyers and discriminatory application of tax law is not contemplated. In fact, the contention was that the authorities in the rival's case was understanding the law correctly and that the notice issued to the appellant was erroneous. The appellant had also relied on several notifications to contend that Government policy was to exempt jute goods, whether laminated or not, from excise. We may reproduce the entries in those notifications: Notification No. 6/2000-CE dated 1.3.2000 (Sl.No. 169)169 53, Rot proofed jute products, laminated jute products Nil 59 and fire resistant jute products, provided the or appropriate duty of excise under the First Notification No. 3/2001-CE dated 1.3.2001 (Sl.No. 120)120 53, Rot proofed jute products, laminated jute products Nil - - 59 and fire resistant jute products, provided the or appropriate duty of excise under the First Notification No. 6/2002-CE dated 1.3.2002 (Sl.No. 116)116 53, Rot proofed jute products, laminated jute products Nil - 21 59 and fire resistant jute product It is to be noted from the above notifications that rot-proof jute products, laminated or not, were being subjected to nil rate of duty.
We have already observed that the product in question is a jute product going both by its composition and commercial identity and the notifications make it clear that even laminated jute products would fall under that category. It is hard to argue that a laminated item retains its identity only if it is laminated on one side, and upon lamination on both sides, it assumes the identity of the lamination material, particularly, when trade and commerce recognise the item for the properties derived from the basic material (jute) in the area of moisture resistance, pressure resistance and heat resistance.
15. The appellant has also brought on record that other tax authorities are treating the product as a jute product. When the dispute arose under sale tax law in West Bengal, as to whether the same item is a product of jute, it was held that it was an item of jute and not an item of plastic. The excise tariff also provides for classification of materials and articles based on their identity as to whether they are products of a particular material (plastic or textile). There is nothing in the excise law which makes articles of fabric, articles of plastic for excise purposes.
16. The question as to whether lamination with plastic or mixing plastic changes the identity of a product was considered by the Tribunal in regard to laminated aluminium foil. The Tribunal in the case of CCE v. India Foils Ltd. held that aluminium foils will continue to be classified under heading 76, as aluminium.
Similarly, it was held in the case of Bohr Industries Ltd. that adding 10 to 15% plastic material would not make the tiles classifiable under 39.18. The present is a case of lamination. While plastic lamination may add to the quality of a product, it does not change its identity.
17. From the foregoing discussions, it is clear that the items in question are not classifiable as held in the impugned order. Therefore, the duty demands made also are not sustainable. Further, in the absence of duty demand, there could be no penalties.
18. In the result, the impugned order is set aside and the appeals are allowed with consequential relief to the appellants.
(The operative part of the order was pronounced in the open Court at the end of the hearing).