The appellant is an agriculturist having a farm and used to purchase Ammonium Nitrate for use as fertilizer. He started a firm under the name and style of "Supreme Nitrate" in 1979 and in 1986 changed the name of the firm as "Archana Agross". The earlier firm was registered as SSI Unit with the Director of Industries and Commerce, Karnataka which was later on changed to "Archana Agross". Under the name of the said firm, the appellant started manufacturing Ammonium Nitrate and marketing it. According to the appellant, it is a fertilizer and was generally used as such. It was classifiable as a fertilizer under T.I. No. 14HH (CET) and completely exempted from C.E. duty as per Notification No. 40/83 and that is why was completely exempt from licencing control as per Notification No. 111/78, and so the appellant did not apply for licence for manufacture under provisions of the Central Excises & Salt Act, 1944 (hereinafter referred to as the said Act). On 09.09.1987, the appellant sold a consignment of 160 bags of "product" to M/s. Sri Chemicals and Fertilizers and the motor lorry carrying the above consignment to Pune, was intercepted by Anti Evasion Squad of Preventive Unit of Bangalore C.E. Collectorate. Goods were seized.
Thereafter, the officers of the Department visited the factory of the appellant and stock of 14 bags of Ammonium Nitrate was seized alongwith some record. Statement of the appellant was recorded on 10.11.1987. Thereafter, show cause notice dated 02.03.1988 was issued to the appellant alleging that the appellant had suppressed the fact of manufacture of Ammonium Nitrate and had clandestinely cleared the said goods without paying C.E. Duty and following C.E. Procedure, during the years 1983-84 to 1987-88 of the value of Rs. 77,28,875/- attracting C.E. duty of Rs. 10,53,550/75. So, the appellant was called upon to show cause why the duty should not be demanded and to show cause why the goods seized should not be confiscated and why penalty should not be imposed. On adjudication, the Ld. Collector (CE), Bangalore, confirmed the demand and imposed penalty of Rs. 1 lakh on the appellant. He ordered confiscation of the goods seized and imposed fine of Rs. 9,300/- in lieu thereof.
Aggrieved by the said order, the appellant preferred this appeal.
2. We have heard Shri D.N. Kohli, Ld. Consultant for the Appellant and Sh. V. Chandersekharan, Ld. S.D.R. for the Department.
The Department had drawn sample of the product in question, for chemical test when they visited the factory and result thereof has not been made known to the appellant. So, it should be presumed that the test result is in favour of the appellant and as the Department is withholding the report, adverse inference should be drawn against the Revenue. The finding of the Collector that Ammonium Nitrate manufactured by the appellant was classifiable under T.I. 68 of the erstwhile CET, is not correct because Ammonium Nitrate manufactured by the appellant was classifiable under T.I. 14HH and this contention derives support from the fact that the Ld. Collector has classified the product under Chapter Heading 31.02 of CET Act 1985 from 01-03-1986 onwards. According to Chapter Note 2(A)(ii) of Chapter 31 of CET, Heading 31.02 among others, applies to "(ii) Ammonium Nitrate whether or not pure", and so the product, in question, would stand covered under this entry, which has been accepted by the Ld. Collector. In that case, before the amendment, it was fully exempt under Notification No. 40/83 upto 1986 and thereafter, under Notification No. 181/86-CE. The appellant had sold it as fertilizer and the purchasers might have used it for some purpose other than as fertilizer but that should not come in the way of classification or benefit of exemption notification available to the appellant. The product was totally exempt from CE duty and so the appellant was not required to take out licence or file declaration as per Notification No. 111/78 CE. He was within exemption limit as a small scale unit and so, even if the product was classifiable under T.I. 68, then also it was under exemption limit as a small scale unit till 28-02-1986 because total yearly clearances of the appellant never exceeded Rs. 20 lakhs till then.
Thereafter also, the total clearances, above Rs. 15 lakhs, would attract duty @ 5% only if the product is not treated as fertilizer.
Even if licensing formalities were required to be observed and were not observed, then also concessional rate of duty could not be denied. There was no justification for levying penalty as the appellant bonafidely believed the product to be fertilizer and being exempt from duty, no licence was required to be taken by him.
4. Ld. D.R. contended that, as stated in the impugned order, the appellant had admitted that Ammonium Nitrate can be of different grades and all such grades could not be utilised as fertilizer. There is enough evidence on record to prove that in fact the product of the appellant was used for manufacture of explosives; for claiming benefit as a small scale unit, the appellant should have filed declaration, otherwise, he was not entitled to claim the benefit. So, the appeal should be dismissed.
5. Till 28-02-1986, fertilizers were covered under T.I. 14HH which read as under: "14HH - FERTILIZERS, all sorts, but excluding natural, animal or vegetable fertilisers when not chemically treated".
6. Under provisions of Notification No. 40/83-CE dated 01-03-1983, fertilizers all sorts falling under T.I. 14HH were exempt from the whole of the duty of CE.7. Under CET Act, 1985, fertilisers are covered under Chapter 31 and Chapter Heading 31.02 reads as under : 8. By Notification No. 181/86 dated 01.03.1986 (CE), as amended by Notification No. 384/86, the whole of the duty of excise leviable on products, covered under this Chapter 31, are exempt. Therein, there is a provision which reads as under : "Provided that nothing contained in this notification shall apply to such goods when they are clearly not to be used, (b) in the manufacture of other fertilisers, whether directly or through the stage of an intermediate product." 9. From the above, it can be seen that till 28-02-1986, if the product could be classified under T.I. 14HH, it would be totally exempt from duty. Thereafter, even if the product was classifiable under Chapter 31, which chapter specifically covers fertilisers only, then also the product would be entitled to total exemption under provision of Notification No. 181/86 only if same was "to be used as fertiliser." 10. So, the position as it emerges from above, is that till 28-02-1986, the aspect of the use was not to be considered and if the product was fertiliser, if would be classifiable under 14HH. So, the question, is what was the product manufactured by the appellant? In the impugned order, the Ld. Collector has referred to Condensed Chemicals Dictionary by G.G. Hawley and has noted that "Ammonium Nitrate has several grades, one of which is fertiliser grade and it has also been stated therein that "Fertilizer Institute states that the fertilizer grade of Ammonium Nitrate is not explosive." The uses of the Ammonium Nitrate have been stated in said Dictionary as "Fertilizer" explosives, especially as Drills/oil mixture; pyrotechnics; herbicides and insecticides; manufacture of nitrons oxide; absorbent for nitrogen oxides; ingredient of freezing mixtures, oxidizer in solid rocket propellants, nutrient for antibiotics and yeast; catalyst". It, therefore, follows from the above that Ammonium Nitrate which is used as explosives is not of fertilizer grade but is a separate variety by itself." 11. The Ld. Collector has also noted that as per records, the appellant used to visit his dealers'/customers' premises and he knew that they were selling the product, in question, to persons who did not use it for agricultural purposes and so the Ld. Collector has concluded that "Ammonium Nitrate produced by him was of explosive grade and not of fertilizer grade". The Ld. Collector has also referred to Hindsons (P) Ltd. [1985(19) ELT 19 (SC)] and M/s. Hico Products Ltd. (1983 ELT 2483) wherein it has been held that predominant use of product is relevant for the purpose of classification.
12. We have also noted that several purchasers, who purchased the product from the appellant, have in their statements, admitted that the product which they purchased from the appellant were sold to persons who used them as explosives (as discussed in the impugned order). We have also noted that in the impugned order, contention of the appellant has been noted "Ammonium Nitrate has not been classified under Fertilisers Control Order of 1957". We have also noticed trade notice issued by the Central Board of Excise & Customs vide letter No.30/29/69-CX.3, dated 28-08-1972 which states "Technical or chemical grades of products whether specifically mentioned in the Fertiliser (Control) Order or not, would fall outside the scope of Item 14HH, ibid, if they are not marked, bought, sold or known in the market as 'fertilizer'." 13. Sh. Kohli drew our attention to the Mahazar (copy of which is on record) and as per this, samples of the product were taken and were sealed in the presence of the Panch Witnesses. This fact is not denied by the respondent. So samples must have been sent for chemical test and it is not contended by the respondent that the same were not sent. So, according to Sh. Kohli, result of the test should have been made available to the appellant, but it has not been made available and the Ld. Collector has not referred to it at all in the impugned order. So, according to Sh. Kohli, adverse inference should be drawn against the Department that the test result was in favour of the appellant. There is some force in this argument, but chemical test is not the only basis for classification, though, it may be an important and significant factor. In light of evidence on record, as discussed above, there is every reason to believe that the product, in question, was being utilised for purposes other than as fertilizer. It is not the case of the appellant that the product which the appellant was manufacturing before 28.02.1986, was different from what he has been producing after that date. So, it could be concluded that the product was not of fertilizer grade and so it was not fertilizer. So, the decision of the Collector to classify it under T.I. 68 is correct and legal.
14. As discussed above, the position after 01.03.1986 is that the product, in question, is classifiable under Chapter Heading 31.02. But then, classification by itself, could not make the product entitled to exemption benefit because as per Notification No. 181/86 (as amended), as excerpted above, the use of the product should be as fertilizer to claim benefit of this exemption. There is sufficient evidence on record to show that the product, in question, was not so used. On the other hand, except contending that the product was used as fertiliser in plantations of coffee, etc., the appellant has not produced definite evidence of such use. It is for the manufacturer to produce positive evidence to claim benefit of notification which the appellant has failed to do. It is true that the Chapter covers fertilizers only, but that by itself, would not make the product, in question, available for exemption in light of clear evidence that it was not being used as such. So, even if the Ld. Collector has classified the product under Chapter Heading 31.02 from 1-3-1986 and in our view rightly so and we uphold it then also the appellant would not be entitled to claim benefit of exemption under Notification No. 181/86.
15. The appellant has also claimed benefit of Notification No. 175/86 dated 1-3-1986 (as amended from time to time). According to this notification, the first clearances of the value of Rs. 15 lakhs would be totally exempt and thereafter on next clearances upto Rs. 60 lakhs, the duty exemption would be equivalent to an amount calculated @ 10% ad valorem. As per para 4 of the said notification, to claim such notification, the factory has to be registered with either of the authorities as stated therein but this condition is not applicable if - "(a) in a case where the value of clearances from a factory during the preceding financial year or in the current financial year did not exceed or is not likely to exceed rupees seven and a half lakhs; or (b) in a case where a manufacturer who is manufacturing specified goods in a factory, other than a factory which is registered under the Industries (Development and Regulation) Act, 1951 (65 of 1951) with the Directorate General of Technical Development in the Ministry of Industry, has been availing of the exemption under this notification or any of the notifications specified below, during the preceding financial year :- 77/83-Central Excises, dt. 1-3-1983 (Notifications relevant for the purpose) 16. Sh. Kohli has made following submissions for claiming exemption benefit under this notification: (i) The factory of the appellant was registered as a small scale unit with the Director of Industries (copy of which is on record) and as per this "M/s. Supreme Chemicals and Allied Industries", is registered on 2-1-1980 as a small scale industrial unit with the Government of Karnataka. The appellant has also produced copy of memo. dt. 8-12-1987 issued by the Joint Director (SSI), Govt. of Karnataka whereby approval for change of name of the said unit from Supreme Chemicals & Allied Industries to M/s. Archana Agross has been accorded.
As rightly observed by the Id. Collector in the impugned order (para 28), the goods during the period of show cause notice, were cleared under the invoices of M/s. Supreme Nitrate and M/s. Archana Agross.
The two units were started by appellant and change in the name from Supreme Chemicals and Allied Industries into M/s. Archana Agross, was applied for on 3-11-1987 and approval was accorded on 8-12-1987 (as per the memo.). So, when actually the goods were sold in the names of these two units, these units were not registered as small scale units, so they would not be entitled to claim exemption.
(ii) As for the period before 1-3-1986 also, these units were small scale units and were eligible for exemption under provisions of Notification No. 77/83 and/or 77/85, so they would continue to be eligible to claim benefit under the present notification also. This is not correct interpretation, because as excerpted above, these units can claim benefit under this notification irrespective of their being not registered as small scale units only, if they were already availing of the benefit under notifications 77/83 and/or 77/85. Only because they were eligible for such benefit under the said notifications, assuming that they were so eligible, they would not be eligible to claim benefit under this notification No. 175/86 as per provisions of para 4(B). So, this contention is also not correct.
(iii) Sh. Kohli also submitted that even if necessary formalities like filing of declaration, etc. were not observed by the manufacturer, then also he would be entitled to claim benefit of concessional rate, if he otherwise fulfils the conditions. He cited - (1) C.C.E. v. Atlas Radio and Electronics Pvt. Ltd. -1989 (39) ELT 123 (Tribunal); (2) M/s. Himachal Air Products Ltd. v. C.C.E., Chandigarh 17. We are in agreement with this contention of Sh. Kohli. The benefit of exemption notifications should not be denied if the appellant is otherwise found eligible. On perusal of the impugned order, we find on page 7, a table showing financial yearwise clearance of the product, in question, and the appellant would be entitled to claim exemption on first clearances of...and at concessional rate of duty for the remaining clearances upto limits prescribed under various small scale exemption notifications, if otherwise eligible.
18. The Ld. Collector has imposed penalty of Rs. 1 lakh on the appellant. In his view, the appellant did not obtain the manufacturing licence and did not follow the C.E. procedure with the intention to evade duty. The Ld. Consultant has argued that the appellant, bonafidely, believed that what he was manufacturing was fertilizer and being totally exempt from levy of C.E. duty, so the appellant was not obliged to take out licence or to follow any C.E procedure under provisions of Notification No. 111/78. He has also contended that the appellant, bonafidely, believed like this and so it cannot be said that he tried to mislead or mis-represent or did so with an intention to evade the duty. In our view, the ignorance of law is no excuse and when, as discussed above, the appellant knew that he was selling the product for being used for manufacture of explosives, it cannot be argued that he was acting bonafidely. So, it was incumbent upon him to have applied for manufacturing license and by not doing so, he was liable to pay penalty. For the same reasons, it cannot be said that the extended period of limitation could not have been invoked. Sh. Kohli has cited several decisions. We do not think it necessary to discuss them at length because principles laid by catena of decisions are quite clear. At the same time, considering that the appellant would be eligible to claim benefit of exemption notifications for the period the amount of penalty imposed would be excessive. So, we reduce it to Rs. 25,000/-.
(i) The appellant would be liable to pay C.E. Duty but would be entitled to claim exemption benefits under provisions of Notification No. 175/86 and other earlier Notifications in force at the relevant time, if any.
(iii) The matter is remanded back to the adjudicating authority for calculating the duty in light of the above order and he shall decide the matter after giving an opportunity to the appellant for representation/hearing.