1. For the sake of convenience, facts as involved in the case of the first appellant would be given in the order below.
2. Since a common question is involved in both these appeals a common order is being passed.
3. Short question involved in both these appeals is whether a mixture of formaldehyde and caustic soda and resorcinol is resol resin and as such is liable to duty under Tariff Item 15-A of the CET as it stood during the period 5-9-1980 to 20-5-1983. From 21-5-1983 by Notification No. 158/83 the said solution has been exempted.
4. The process of manufacture as described in the order-in-original which in turn was narrated by the appellant herein M/s. Dunlop India Ltd. is as follows:- "3(i) Mix resorcinol, formaldehyde, caustic soda and water with the solution in continuous agitation and with temperatures strictly within 15.5C-26.5C use as soon as possible after 15 hours for final mixing with 'B' stock.
(ii) 'B' stock comprising rubber latex, caustic soda and water prepared. Simultaneous with above and kept as 15.5C-26.5C under continuous agitation." 4.1. The department contends that the first mixture consisting of resorcinol, for-maldehyde, caustic soda and water results into A stage resin known as resol and therefore, falls under Tariff Item 15-A. This contention of the department is based on chemical examiner's report dated nil March 1977 which reads as follows : - "Report: The sample is an aqueous solution of resorcinol formaldehyde (Phenolic resin) Note: The sample as received is a phenolic resin (in resol stage) and would be covered by Tariff Item 15A l(i) as a condensation product whether or not modified or polymerised.
5. In the first instance a show cause notice dated 5-2-1981 was issued to the first appellant. Relevant extracts from the said show cause notice are given below: - Sub: - Central Excise - Resorcinol formaldehyde solution - Classification of regarding - Messrs. Dunlop India Ltd., Madras-53 are manufacturing a solution using Resorcinol, formaldehyde and V.P. Latex. This solution is a resin classifiable under Tariff Item No. 15A. The Chemical Examiner, Madras to whom samples of the product was sent has also opened that the product is resin falling under Tariff Item 15A, of the Central Excise Tariff. Messrs. Dunlop India Limited had been instructed to take out a licence as early as 10-12-1976, but the assessee had so far been contending that the product was not liable to Central Excise duty. As the Assessee's contention was not acceptable, the assessee had again been instructed to take out a license by the Range Officer in his letter OC. No. 739/79 dated 20-7-1979. In reply to that letter the assessee requested the Department to keep the matter in abeyance as the matter had already been taken up by Automotive Tyre Manufacturer Association to the Central Board of Excise and Customs. Now it is held by the Department that 'Resorcinol Formaldehyde' would be classifiable under Item No. 15A(1) of Central Excise Tariff vide a Trade Notice No. 224/80, dated 3-12-1980. The assessee has been instructed on 9-12-1980 by the Range Officer to take out a licence and pay appropriate duty immediately. The assessee has also been instructed to furnish the value of solution per litre and quantity of the solution produced so far. The assessee has neither takea out a licence nor furnished the required particulars. The assessee has finally been instructed on 30-12-1980 to take out a licence within 10 days from the date of receipt of the letter failing which action will be taken for seizure of the goods for which also the assessee has not taken care of even after the lapse of 10 days. Therefore, the quantity of resorcinol formaldehyde solution manufactured by M/s. Madras Dunlop India Ltd., Madras has to be construed as having been manufactured without a Central Excise licence, contravening Rule 174 read with Section 6 of the Central Excises and Salt Act, 1944.
Whereas it appears that Messrs. Dunlop India Ltd., Madras-52 have contravened Rule 174,173B, 173C, 173F and 173G, 9C and 9(2) inasmuch as they have manufactured Resorcinol formaldehyde solution without taking out a Central Excise Licence and without taking out a Central Excise Licence and without filing classification list, pricelist and without payment of appropriate duty and failed to maintain any accounts, the assessee has not produced the particulars called for by the Department and thereby suppressed the fact with wilful intention to evade payment of Central Excise duty, due on the product. Messrs. Dun-lop India Ltd., Madras-33 are hereby required to show cause to the Collector of Central Excise, Nungambakkam High Road, Madras-34 as to why a penalty should not be imposed on them under Rule 1730 of Central Excise Rules and why the duty on the Resorcinol formaldehyde manufactured by the assessee so far should not be demanded under Rule 9(2) in respect of clearances made up to 16-11-1980 and not under Section 11A of Central Excises and Salt Act, 1944 for the subsequent period. The quantity and the duty to be demanded will be communicated in due course, after ascertaining from M/s. Dunlop India Ltd., Madras. Messrs. Dunlop India Ltd., Madras-53 are further directed to produce at the time of showing cause, all the evidence upon which they intend to reply in support of their defence." 6. Later on another show cause notice dated 2-11-1981 in modification of the earlier show cause notice dated 5-2-1981 was issued by the department to show cause to the Additional Collector of Central Excise, Madras.
6.1. On adjudication, the learned adjudicating authority has demanded a sum of Rs. 1020626.42 for the period 5-8-1980 to 16-11-1981 under Rule 9(2) of the Central Excise Rules, 1944. He has also demanded appropriate duty for the subsequent period i.e. 16-11-1981 to 21-5-1983 till issue of Notification 158/83 granting exemption to the resorcinol formaldehyde solution for captive consumption. The learned adjudicating authority has also imposed a penalty of Rs. 1000/- on the first appellant under Rule 173-Q of the Central Excise Rules.
6.2. Similarly in the case of the other appellant i.e. M/s. MRF Ltd. a penalty of Rs. 1000/- has been imposed under Rule 173Q ibid and duty of Rs. 577470.06p for the period 30-7-1980 to 23-11-1981 under Rule 9(2) ibid has been demanded. In addition duty for the subsequent period 23-11-1981 upto 21-5-1983 till issue of the Notification 158/83 mentioned above has also been demanded.
7. Shri T.K. Ramasubramanian, Controller Taxation for M/s. Dunlop India Ltd. has made the following submissions. (For the facility of recording, submissions made by him both at the first stage and in the course of reply to the submissions of the departmental representative for the Revenue are mentioned below) : - (1) The solution tested by the chemical examiner on which rests the department's case is not the one which was drawn as a sample by the department. In this connection, he invites attention to the cross-examination of Shri S. Krishnamurthy, the chemical examiner who has signed the report dated nil March 1977 and the test report itself. He submits that while the report indicates that the sample is an aqueous solution of resorcinol for-maldehyde (Phenolic resin).
He admits in reply to a question as follows: "There is no known chemical method by which we can find out when the chemical reaction starts. In fact, till it becomes a full resin, there is no means of finding out as to when the chemical reaction has started except by retrospective theorisation." He has also drawn attention to another question namely, "This (sample) was collected as a liquid and test conducted as a jelly." The reply given was in the affirmative.
(2) The mixture of chemical aqueous solution under consideration is highly unstable and cannot be kept for more than a few hours. If this is not used after this limited period.it becomes a useless jelly like mass which has no application whatsoever. It is, therefore, submitted that the product under consideration is not Capable of being marketed. Its only use is for manufacture of further dip solution which in turn is used in the manufacture of tyres for the purpose of adhesion. He submits that reference to the example of actual marketing of the product in one case has not been disclosed by the Collector either in the impugned order itself nor in the show cause notices. This finding, therefore, of the Collector that the product under consideration is marketable or is marketed should be ignored. In the absence of the goods being marketable these cannot be treated as excisable goods in view of Supreme Court's judgment in the case of Union Carbide Ltd. v. Union of India [1986 (24) ELT 169 SC].
(3) The learned representative also relies strongly on two decisions of Bombay High Court in the cases of (i) CEAT Tyres of India Ltd. [1987 (30) ELT 857 (Bom.) and (ii) Shakti Insulated Wires Pvt. Ltd. v. Union of India [1987 (31) ELT 623 (Bom.). The first case of CEAT Tyres of India Ltd. deals with durability of dip solution which is manufactured by the appellant by mixing the mixture in aqueous solution under consideration with the solution of rubber latex, caustic soda and water prepared separately. The other case of Shakti Insulated Wires Pvt. Ltd. also deals with an intermediate product prepared in situ.
(4) Reliance placed by the learned departmental representative on the two judgments of the Tribunal, namely (i) CCE Ahmedabad v. Jai Enterprises [1987 (29) ELT 288] and (ii) Flexo PlastAbrasives (India) Ltd. v. CCE, Pune [1988 (36) ELT 119] are distinguishable on facts as follows: (a) It has been held in both the above cases that unless dehydration takes place manufacture of 'A' stage resin (resol) cannot be said to have taken place. In the case of Flexo Past dehydration was so much that the water content, in the resol prepared in that case was to the extent of 20% only whereas in the instant case it is 94%.
(b) The shelf life of the product in the cases of Jai Enterprise and Flexoplast is about 15 days and 5 days respectively whereas in their case the shelf life is just a few hours. In the two cases cited by the department the temperature rises to 60C and above whereas in their case the temperture is not allowed to go beyond 25C to 27C. (c) In the case of Jai Enterprise and Flexoplast the product was a viscous syrup. In their case no change in viscosity takes place. In any case it was not measurable. For production of resin, even at the stage of resol, viscosity is essential. The fact that there is no change in viscosity is clear from the chemical examiner's cross-examination who has replied to the following effect in answer to a question "the viscosity remains constant or nearly constant and suddenly it becomes a solid mass". He also relies for this proposition on the text-book of Polymer Science by Fred W. Billmeyer Jr. The extract relied upon is given as follows : "The formation of resole and novolac is evidenced by increase in viscosity. Water is then driven off under vacuum and thermoplastic.
'A' stage resin soluble in organic solvents, remains. This material is dumped from the kettle, cooled and ground to a fine powder." From the aforesaid points of distinction between their case and that of Jai Enterprise and Flexoplast, the learned representative has submitted that in their case 'A' stage resin (resol) has not yet been manufactured whereas in the two cases cited by the department the 'A' stage resin manufacture has taken placed.
(5) The technical literature relied upon by the learned departmental representative, namely, Handbook of Adhesives by Irving Skeist, according to the learned representative, itself makes a distinction between performed 'A' stage which is available in the market and that prepared in situ by mixing resorcinol and formaldehyde in aqueous solution in the presence of caustic soda. He also points out that this literature also supports their contention that the solution is ripened for 2 to 4 hours only and requires careful maintenance at room temperature or the below. Marketability of this product prepared in situ has nowhere been hinted at in this literature relied upon by the department whereas it speaks of precondensed resorcinol resin which are available in the market "either in the form of brittle, solid resins which may be dissolved in water or as stable, concentrated solution which may be dissolved in water to be used directly in RFL (Resorcinol Formaldehyde Latex) dips." (6) The learned representative of the first appellant has urged a plea on limitation. He states that notification 2-11-1981 is totally a new notice with its subject matter on the dutiability of resorcinol formaldehyde aqueous solution whereas the earlier show cause notice dated 5-2-1981 was in respect of a solution "using resorcmol formaldehyde and V.P. latex". This latter solution including V.P. latex has been termed in the latter notice as falling under Tariff Item 68 of the CET. The learned representative, therefore, urges that a limitation of six months for demand of duty prior to the date of issue of show cause notice should be counted not from 5-2-1981 but from 2-11-1981.
(7) Supplementing the arguments of the learned representative of M/s. Dunlop India Ltd. Shri S. Ignatius, the learned representative of MRF Ltd. has stated that while the department calls the mixture as 'A' stage resin (resol), they call it master batch. This solution is very much different from resol as already pointed out by Shri T.K. Ramasubramanian. He further points out that the test report given by the chemical examiner does not at all reflect the data that it is resol. He merely gives a text-book opinion.
7.1. In view of the aforesaid submissions the learned representatives observe that the product under consideration not being resol at all and not being marketable there is no question of liability to duty as has been held in the impugned order.
8. Learned D.R. Shri Sunder Rajan has urged that the solution under consideration is nothing but a 'A' stage resin i.e. resol. He strongly relies for his proposition on the Tribunal's decision in the cases of Jai Enterprise and Flexoplast mentioned earlier. He urges that the appellants' reliance on the decision of Bombay High Court in the case of CEAT Tyres relates to the dip solution including V.P. latex. That decision, therefore, has no application to the product under consideration here. He states that the decisions of Jai Enterprise and Flexoplast are directly applicable to the instant case.
8.1. He also relies in support on another decision of the Tribunal in the case of FLAT-O-Vee Traders v. CCE Madurai (Order No. C-2/85, dated 2-1-85). This decision, according to him, relates to a dipping solution using resorcinol formaldehyde, sodium hydroxide, rubber latex and water. He submits that in that order as well, the appellants therein contended that the dipping solution manufactured by them was neither marketed nor marketable as it hardened only in about 2 hours.
8.2. He submits that 'goods' are defined under Article 366 of the Constitution as all materials, commodities and articles. It is not necessary that they should be marketable or they are marketed. He also submits that in a case reported in AIR 1970 SC 732 {Commissioner of Sales Tax, Madhya Pradesh v, Madhya Pradesh Electricity Board, Jabalpur and vice versa) a question arose whether electricity was goods or not in terms of the provisions of the Madhya Pradesh General Sales Tax Act.
He submits that in para 9 of the said Report the Hon'ble Supreme Court has held electricity, though intangible as goods. This is how the Supreme Court says about electricity: - "...merely because electrtic energy is not tangible cannot be moved or touched like, for instance, a piece of wood or a book it cannot cease to be movable property when it has all the attributes of such property. It is needless to repeat that it is capable of abstraction, consumption and use which, if done dishonestly, should attract punishment under Section 39 of the Indian Electricity Act, 1910. It can be transmitted, transferred, delivered, stored, possessed etc. in the same way as any other movable property...if there can be sale or purchase of electric energy like any other movable object we see no difficulty in holding that electric energy was intended to be covered by the definition of goods in the two Acts.
8.3. He also submits that appellants' arguments that it is merely a mixture of different chemicals in aqueous solution and cannot, therefore, be termed as 'goods' is not valid. He states that if by a process of mixture another product has come into existence which is known to the market by a different name, character and the mixture itself would be another product liable to excise duty separately on the different chemicals being mixed. He relies for this submission on Tribunal's decision in the case of Unique Beauty Care Products [1988(37) ELT 369-para 18]. In this case he submits that the product under consideration was kajal which was nothing but a mixture of several other products and it was held by the Tribunal that a new product known to the market had come into existence.
8.4. The fact that the product under consideration is known as 'A' stage resin(resole), Learned JDR relies strongly on Handbook of Adhesives by Irving Skeist mentioned supra. He draws particular attention to the following extracts :- The adhesive predominantly in use at the present time for the bonding of rayon and nylon tyre cords is the resorcinol formaldehyde latex type. RFL ad-hesives, as they are popularly known, are generally prepared by the condensation of resorcinol or rescorcinol resins with formaldehyde in the presence of a rubber latex. Many variations are in use in secret formulations of the individual tyre and rubber companies. They vary with respect to the following factors : The usual practice in compounding this type of adhesive is to prepare an aqueous resin solution about 5 to 15 per cent solids, either by direct reaction of resorcinol with formaldehyde or by reaction of a preformed, partially condensed resorcinol resin with additional formaldehyde. In both cases an alkaline catalyst is used at this stage. The solution is "ripened" for 2 to 4 hr. carefully maintaining it at room temperature or below."[Exphasis supplied] by learned JDR He observes on the basis of the above extracts that method of preparation of resin adopted by the appellants in this case is one in situ and this has also been described in the aforesaid extract as resorcinol resin. He submits that for the purpose of Central Excise it is immaterial whether the product is prepared by the manufacturers for captive consumption or he takes a product from the market for his use.
Merely because a product is produced for captive consumption it does not mean that it is not excisable. He submits that the resorcinol resin prepared by the appellants has the same characteristics and serves the same use as that of preformed resorcinol resin available in the market referred to earlier by the learned representative for the first appellants. He also submits that unless this solution is resin it will not impart any adhesive property which is the sole essential quality for the bonding of rayon tyre cords with the rubber latex.
8.5. Regarding the plea of limitation, the learned JDR reiterates what has been stated in the Collector's order to the effect that the issue involved in both the show cause notices is one and the same viz.
excisability of resorcinol formaldehyde solution falling under T.I.15A(1). The learned Collector has stated that in both the show cause notices a reference has been made to Trade Notice No. 224/80, dated 3.12.80 regarding classification of the said resol solution under Tariff Item 15A(1). Since the process of manufacture in the first show cause notice had not been correctly described, the second show cause notice had to be issued.
9. We have carefully considered the pleas advanced on both sides. On the basis of overall evidence brought on record as mentioned above, we are of the view that the question of classification of the product under consideration can no longer be considered in dispute in view of the decisions of the Tribunal in the cases of (i) Jai Enterprise and (ii) Flexoplast as mentioned earlier. There is enough authoritative material mentioned in the aforesaid judgments of the Tribunal and also now brought on record that the resor-cinol formaldehyde aqueous solution results into formation of 'A' stage resin (resol). It is apparent from the extracts from Hand-book of Adhesive by Irving Skeist that what has been prepared by the appellants is nothing but resorcinol resin and it serves the same purpose as that of precondensed resorcinol resin available in the market. Based on this comparison the marketability of the product under consideration cannot also be doubted. Accordingly, appellants' reliance on Supreme Court's judgment in the case of Union Carbide is of no relevance because that relates to the marketability of another product and not of resorcinol resin. It is, therefore, immaterial whether the product is actually marketed or not for the purpose of levy of excise duty.
10. Reliance placed by the appellants on the judgmcnts of Bombay High Court in the case of CEAT Tyres does not have direct bearing on this issue. The product under consideration therein was dipping solution which, inter alia, included the rubber latex. The department's case is the resorcinol formaldehyde solution alone before mixing it with the rubber latex solution converting it into dipping solution is resin. The department has already observed that the dipping solution fall under Tariff Item 68. Therefore, the judgment of Bombay High Court in the case of CEAT Tyres is not relevant to the issue. Similarly, judgment of Bombay High Court in the other case of Shakti Insulated Wires Pvt. Ltd. also relates to another product. In the matter of classification and marketability of various products, the judgment in respect of one product cannot be applied to a judgment in respect of another product inasmuch as their process of manufacture, their characteristics and their uses may differ. Each product has to be considered on its own merits.
10.1. Attempt of the learned representatives for the two appellants to distinguish their product from the 'A' stage resin referred to in the cases of Jai Enterprise and Flexoplast in our view is not very successful in the face of the authoritative literature on the product relied upon by the departmental representative and referred to in the earlier decisions of the Tribunal. Since the opinion of the chemical examiner is essentially based on the technical literature, record of his cross-examination regarding the drawal of sample, manner of conducting the test after 5 to 6 hours is not of much relevance so far as the classification of the product is concerned. It is clear from the technical litera ture brought on record the chemicals which are mixed together and a resorcinol formal dehyde aqueous solution is prepared for the purpose of making resorcinol resin required to impart adhesion between the rayon/nylon tyre cord and the rubber latex. We have, therefore, no doubt that the resorcinol formaldehyde aqueous solution is a resin falling under T.I. 15A as it then stood. We uphold the finding of the learned adjudicating authority in the impugned order.
11. As regards the plea of limitation made by the appellants we are also not inclined to accept it. A reading of the earlier show cause notice, extracts of which have been given above in extenso makes it very clear that the notice dated 5.2.81 related to resorcinol formaldehyde solution and not to the dipping solution. This is evident from the subject of the show cause notice dated 5.2.81 given at the top. Excepting the mistake in the first sentence of the show cause notice dated 5.2.81 committed by the issuing authority no doubt is left that this notice related to resorcinol formaldehyde solution and not to the dipping solution containing V.P. Latex. This is clear from the reference to the Trade Notice No. 224/80, dated 3.12.80 adverted to by the learned adjudicating authority in the impugned order. It is also evident from the use of the words 'resorcinol formaldehyde solution' in the last sentence of the first para of the show cause notice dated 5.2.81. It becomes further evident from the 2nd para when the appellants have been called upon to "show cause...as to why a penalty...and why the duty on the resorcinol formaldehyde manufactured by the assessee so far should not demanded...". There is thus no doubt that the show cause notice dated 5.2.81 is valid and the subsequent show cause notice dated 2.11.81 has merely attempted to rectify the mistake in describing the process of manufacture of the solution as mentioned by the learned Collector in his impugned order.
12. In view of the foregoing discussion, we have no reason to interfere with the impugned order. Hence, we reject both the appeals.