Little Star Foods Pvt. Ltd. and Vs. Commissioner of Central Excise - Court Judgment

Excerpt:
1. all these appeals raise a common question of law and fact. hence, they are taken up together for disposal as per law. the matter pertains to classification of a product named 'bytes' manufactured on job work by the appellant for m/s cadbury india ltd., mumbai. the anti-evasion wing of the revenue took up investigation on gathering intelligence that the assessee are discharging duty at a 16wer rate in terms of notification no. 37/03 dated 30th april 2003 by adopting chapter sub-heading 9005.39 which is a residuary entry instead of chapter subheading 1905.31 which refers to "coated with chocolate or containing chacolate' for the residuary entry under subheading 1905.39, the duty is at concessional rate at 8% advalorem while for the chapter heading adopted by the revenue under 1905.31 the duty is 16%. on the basis of allegation of suppression of facts, the demands for the larger period have been raised denying the benefit of concessional rate of duty available for sub-heading 1905.39 and the revenue has reclassified the goods under sub-heading 1905.31 as 'coated with chocolate or containing chocolate'. contents: wheat flour, edible vegetable oil, milk solids, cocoa solids, edible starches, permitted emulsifiers and salt. process: a batter of wheat flour, sugar and starch is mixed in water with a small quantity of vegetable oil and emulsifier added into it. this batter is spread/sheeted on the drum surface of a rotary oven heated on the inside by a gas flame. the baked wheat flour sheet is then rolled into pencils and cream is pumped into the hollow portion within. the cream is cocoa based cream prepared by mixing milk solids, sugar, cocoa solids, flavors, vegetable oil and emulsifiers to get the desired viscosity. the centre-filled pencil is then passed between rollers where the edges are crimped and cut to form pillows.on the basis of the contents and the process of manufacture, the revenue alleged that the product "bytes" are nothing but wafers pillow containing cream made out of milk solids, sugar, cocoa solids, vegetable oils, emulsifiers and flavours i.e. chocolate. hence, the revenue proceeded to reclassify the item under sub-heading 1905.39 of ceta and have raised demands. the statements of s/shri shaik sulaiman, managing director, m/s little star foods (p) ltd., unit-1 and 11, c.m.kulkarni, contract manufacturing manager of m/s cadbury india ltd, shivanand sanadi, general manager (legal affairs) of m/s cadbury india ltd., and that of t.v. ananthan, manager legal were recorded and were relied for raising demands. the assessee vide their reply dated 7.10.04 have interalia submitted as follows: 18. the assessees vide their reply, dated 07.10.2004 have interalia submitted the following: that the captioned notice was based upon the fundamental allegation that the so called refined milk chocolate for bytes i refined cocoa cream for bytes is a chocolate and consequently the said product cadbury bytes falls for classification under chapter heading no. 1905.31, and not under chapter heading 1905.39. that the entire scn was based upon the preconception that the refined milk chocolate for bytes / refined cocoa cream for bytes is chocolate, and that the addition of palm oil, emulsifiers and flavors does not in any manner change the character of the same. that, what is contained in the said product cadbury bytes is not refined milk chocolate for bytes i refined cocoa cream for bytes, but a product which is prepared by mixing palm oil, emulsifiers and flavours with the said refined milk chocolate for bytes / refined cocoa cream for bytes, which is admittedly received by them in a powder form from dr. writer's food products ltd., (drw), a job worker for cadbury india limited. that the above preconception is incorrect and that in fact what is filled into the wafer pencil is a cream, which consists of refined cocoa cream for bytes, which has been mixed with palm oil, emulsifiers and flavors. as set out in the captioned notice, refined milk chocolate / refined cocoa cream for bytes is in a powder form. it is therefore, obvious that the same could not be filled in to the said process of cream making, which is done in their factory. the refined milk chocolate in powder form as received from drw, could not be directly inserted / injected into the said wafer pencils, and accordingly the same would have to be converted into the semi-solid cream before it can be injected into the said wafer pencil. it is for this reason that the said palm oil and emulsifiers are added. that the resultant product is completely different in all its properties such as consistency, feel, taste and fat content. it is this resultant product in the form of a cream, which is required to be a chocolate for the said product to be classifiable under chapter heading no. 1905.31, as proposed in the captioned notice. that the department has not even sought to make out a case in the captioned notice, as to the effect that the said cream manufactured in their factory by mixing palm oil, emulsifiers and flavors to the said refined milk chocolates / cocoa cream for bytes is a chocolate. therefore, the notice is completely misconceived, misdirected and untenable, inasmuch as the entirety of the allegations in the captioned notice are directed towards refined milk chocolate / cocoa cream, and not to the product manufactured in their factory, which is finally filled in the wafer pencils / pillows. that all the evidence produced in support of the allegations set out in the captioned notice, particularly the letter dated 12.08.2004 issued by the joint commissioner of central excise, pune-ii commissionerate, enclosing the test report given by the chemical examiner, central excise laboratory, mumbai of the sample, of refined milk chocolate sent to him for testing, it therefore not material and germane to the fact arising in the present case. if at all it is the department's case that the said product manufactured in their factory is chocolate, a sample of the said product was required to be drawn and sent for analysis to verify as to whether the same is chocolate or not, which has not been done. they denied all the allegations made in the captioned notice, specifically the misclassification of the said product under chapter sub heading 1905.39 instead of chapter sub heading 1905.31. they also denied that they are liable to pay differential duty as alleged or that any interest is recoverable from them under section 11ab of the act or any penalty is imposable under section 11ac of the act or under rule 25 of the rules, 2002. that for the purpose of pfa act and the rules, a confectionery food articles, which contain cocoa, milk, sugar and vegetable oil are not considered to be chocolate. that if a product was not a chocolate in terms of the standard prescribed in the pfa act and the rules, the manufacture and description of the same as chocolate would result in the product being considered to be "adulterated" and attract stringent provisions of prosecution and penalty of not less than 3 years imprisonment in terms of the pfa act against the manufacturer and the person controlling the business. they have further submitted that when a product cannot be considered to be chocolate for the purpose of the pfa act and the rules made thereunder and described as such on its label or in any form of advertising or promotion material, no manufacturer, trader or customer would term the same or deal with the same as chocolate. that it is evident not only from the process and description but also from the statements of shri sulaiman, shri kulkarni, shri sanadi and shri ananthan, all of which were recorded under section 14 of the act, that the so-called refined milk chocolate for bytes/ refined cocoa cream for bytes contains vegetable oil and therefore, ipso facto, cannot be considered to be chocolate. the entire case of the department, which is based upon the allegation that the said cocoa cream is in fact chocolate is, therefore, patently fallacious and the captioned notice is required to be withdrawn on this ground alone. 19. they also submitted that after the said refined cocoa cream for bytes is received in their factory the same is mixed with palmolein oil (a vegetable oil) and heated so as to convert the same into thick liquid cocoa cream which is filled into the wafer pencils. that after being mixed with palmolein oil and emulsifiers it definitely ceases to be chocolate for the reason, that, a product which contains vegetable oil cannot be manufactured and sold as chocolate, without attracting the penal provisions of the pfa act and the rules made thereunder. for this reason, the final product i.e., cadbury bytes, which admittedly contains a cream which is manufactured by mixing and heating the refined cocoa cream for bytes received from drw with palmolein oil, emulsifters and flavours, can never be held to be a product containing chocolate. that the said refined cocoa cream for bytes could ever have been considered to be chocolate, as a result of being mixed and heated with such palmolein oil emulsifiers and flavours, the same would have ceased to have the character of chocolate and consequently, the said product filled with the said cream can never be considered to be wafer containing chocolate. 20. they craved leave to produce and refer to and rely upon material to establish, first, that a product containing vegetable oil can never be a chocolate, second, that the refined cocoa cream for bytes admittedly did contain vegetable oil, and third, that in any event, after further mixing the refined milk chocolate / refined cocoa cream with palmolein oil, emulsifiers and flavours, the resultant product would, in any event, cease to be a chocolate. 21. they have denied the allegation of the department interalia, that the presence of vegetable / palmolein oil does not alter the definition of chocolate as the pfa act / rules can only prescribed standards with respect to quality of product manufacture in india. they submitted that it is obvious that the pfa act / rules prescribes standards with regard to quality of products manufactured in india, and it is precisely for this reason that the said refined cocoa cream could never have been described / regarded as chocolates in india without violating such standards prescribed by the pfa act / rules. they stated that the presence of vegetable / palmolein oil would definitely "alter the definition of chocolate", as the resultant product would not be considered as "chocolate". they reiterated that they are obviously concerned with the manufacture of products in india; and the levy of excise duty in india, and it is therefore obvious that indian standards alone would apply to such products. 22. with regard to explanatory notes of hsn, they submitted that the definition of "cocoa and cocoa preparations" and "chocolate in any form" given in the hsn are not relevant in the present context, as the hsn is admittedly an international nomenclature / code of classification, and has been adopted / adapted to suit the indian tariff classification, therefore, the explanatory note, while being an aid to interpretation if required for classification purposes in india, are not sacrosanct, particularly when they are in conflict with indian laws, such as the pfa act and rules made thereunder. therefore, they have stated that the said explanatory notes of hsn have no application to the facts of their case. 23. in view of the foregoing they have submitted that the notice required to be withdrawn in its entirety particularly the demand of rs. 60,11,251/- and the proposal to charge interest under section 11ab and penalty under section 11ac as also under rule 25 of the ce rules, 2002 is also required to be withdrawn. 24. all the other three co noticees, s/shri. shaik sulaiman, managing director, m/s. little star foods (p) limited, jaiboy phillips, director - operations, m/s. cadbury india limited and c.m. kulkarni, contract manufacturing manager, m/s. little star foods (p) limited, in their respective replies to show cause notice have denied the allegation as to the manner in which they have breached the provisions of rule 26. they have stated that since, there is no evidence established in any mariner in support of the allegation made in the show cause notice, they are not liable to be penalized under rule 26 of ce rules, 2002. 25. all the four noticees have expressed their desire to be heard personally through their advocate before any orders are passed in this regard. 26. accordingly, personal hearing was offered and s/shri medhavin p. baxi, advocate and shivanand sanadi, general manager, legal affairs of m/s. cadbury india limited, have appeared for personal hearing on 05.01.2005. the learned advocate reiterated the contents made in their reply to the notice and also requested 10 days time to submit detailed written brief. they submitted written brief dated 17.01.2005 on 19.01.2005. in their written brief they have once again denied all the allegations made in the notice and submitted that the notice is required to be withdrawn in its entirety against all the noticees. they further submitted a laboratory test report dt.20.01.2005 on received in this office on 10.02.2005.3. the commissioner after detailed examination of the charges and the submissions distinguished with the appellants contention and proceeded to uphold the allegation that the item is required to be classified under the sub-heading 1905.39 as waffels and wafers 'coated with chocolate or containing chocolate'. the commissioner has rejected the plea that if the product i.e. chocolate contains vegetable oil then it would entail penal action for the violations of prevention of food adulteration act 1955 and rules. he has also rejected the assessee's contention that the definition of cocoa and cocoa preparations and chocolate in any form given in the hsn explanatory notes are not relevant in the present context, as the explanatory note being an aid to the interpretation if required for classification purpose in india, is not sacrosanct, when particularly; there is a conflict with indian laws such as prevention of food adulteration act and rules there-under.in this context the commissioner has relied on the apex court judgment rendered in the case of cce shillong v. woodcraft products ltd. 1995 (77) elt 23 sc. he has also upheld the charge of willful mis-declaration of the product with an intent to evade payment of duty by availing the benefit of concessional rate of notification.4. we have heard learned advocate shri m.p. baxi for the appellants and learned dr shri k.s. reddy for the revenue.5. learned counsel at the outset submitted that the classification of the item in a similar case of their competing unit has been decided by the mumbai bench in their favour in the case of cce mumbai v. britannia industries ltd. 2005 (183) elt 257. he submits that the tribunal has considered non-applicability of the explanatory notes of 'hsn' and also the apex court judgment in the case of cce shillong v. woodcrafts ltd., (supra) he has submitted that the tribunal has taken a view in para-3 and 4 as follows: 3. considering the material on record it is found that based on the classification of the chocolate cream placed between two sliced biscuits-wafers and the fact that the said chocolate cream would be classifiable under heading 1803 taken irrespective of the fact of percentage of cocoa in the entity, the ground taken that the decision relied upon by the commissioner (appeals) in the appellant's own case vide order no. 802/86, dated 3.9.1986 (26) elt 628 (t) was as regards the classification in case of bourbon cream manufactured by the respondents in the year 1986, which was under the erstwhile tariff and was based on the applicability of isi specification for use of chocolate and that decision cannot be applied to the facts of this case as isi and the prevention of food adulteration act, would not rule the classification to be arrived under the tariff based on hsn cannot be accepted, as the classification of the 'chocolate cream' which forms a layer between two slices of biscuits cannot determine the classification of the biscuits itself. there is no material to consider that the biscuit is a cocoa product merely because of its certain percentage of cocoa which do not even predominate, were found in such entity. the entities are understood and have to be classified, as such they cannot be called chocolate for the reason as given. 4. as regards the third ground taken by the appellant's of markings on their packages/wrappers to indicate them as chocolates that word chocolate advertised on them will not ipso facto lead the entities be classified as chocolate following the well settled law that advertised cannot be a guide or determinant to classification, as held by the bombay high court 1980 (6) elt 280 (bom).6. learned counsel pointing to the above paragraph submits that even in their case, the prevention of food adulteration act would not rule the classification arrived under the tariff basis of hsn and the item is not waffels and wafers coated with chocolate or containing chocolate and hence they are required to be classified under the residuary entry 1905.19. he further drew our attention to the mumbai bench order rendered in the case of nestle india ltd., v. cce (f.o. no. c-ii 1348/wzb/1999 dated 21.5.1999) which pertain to the classification of the item "kit kat". even in this case, the ingredients were almost same and it contained hydrogenated vegetable oil. the department had proceeded to classify this item under chapter heading 18.03 with the description waffels in any form including drinking chocolates. 18.04 is for other food preparations containing cocoa. drawing strength from this judgment, learned counsel submitted that the judgment clearly held that for a product to be classified as a chocolate containing vegetable oil is prohibited under the pfa act, the product: has to satisfy the terms and definition of chocolate, as per pfa act and isi specifications. he also submitted that tribunal has referred to explanatory notes as well as to apex court judgment in the case of cce v. woodcraft industries. learned counsel submitted that in view of the specific finding recorded in the above two judgments use of vegetable oil would not make the product a chocolate. therefore, he submits that the department's contention to classify the item as waffels and wafers coated with chocolate or containing chocolate is required to be negatived and only it has to be classified in the residuary entry "others" under chapter heading 1905.39 and extends the concessional benefit in terms of notification no. 37/03 dated 30.4.03.7. learned dr took us through the entire order and contended that the presence of cream prepared by mixing milk solids, sugar, cocoa solids and vegetable oil would make the product waffels and wafers coated with chocolate or containing chocolate. he submits that both the cited judgments are clearly distinguishable. he further submits that the details had not been submitted and hence, the impugned order for larger period is required to be confirmed, as the impugned order relies on hsn explanatory notes which is binding on the bench in the light of apex court judgment rendered in the case of cce v. wood crafts (supra).8. on a careful consideration, we notice that the tribunal has dealt with the similar matter of wafers with chocolate cream placed in between layers for classification under sub-heading 1905.31 and residuary sub-heading 1901.99 of cet. in the case of cce v. britania industries ltd., (supra) wrb, which decided the matter, looked into the hsn explanatory notes as well as the apex court judgment in the case of woodcraft ltd and have clearly held that in view of the fact of prohibition of use of vegetable oils in pfa act, the items namely wafers with chocolate cream cannot be classified as "waffels and wafers coated with chocolate or containing chocolate" carrying duty of 16%.they have clearly held that the item has to be classified under residuary entry 1905.90 of the central excise tariff. the finding portion has already been extracted.9. the wrb had also an occasion to consider earlier, the classification of the product 'kit kat' in the case of nestle india ltd v. cce wherein also there was use of vegetable oil. the item contained the ingredients waffer, sugar, milk powder, wheat flour, cocoa paste, cocoa powder, hydrogenated vegetable oil and process additives. revenue had proposed to classify the item under heading 18.03 with description "chocolates in any form including drinking chocolate and other food preparations containing cocoa." the tribunal negatived the claim for classification of the item as 'chocolate' or food preparation containing cocoa solely on the ground that the product does not satisfy the definition of chocolate under prevention of food adulteration act and also isi specifications. the tribunal also considered the interpretative rules to hsn explanatory notes which was not in consonance with the tariff entry. the marketing pattern was also considered. the finding recorded by the tribunal in nestle's case, from para 7 to 22 are reproduced below. 7. the conflicting entries during the relevant period are as follows:heading heading description of goodsno. no. chocolates in any form, whether or not18.03 1803.00 containing nuts, fruit kernels or fruits, including drinking chocolates.19.05 empty cachets of a kind suitable for pharmaceutical use, sealing wafers," rice 1905.11 which any process is ordinarily carried on with the aid of power 8. the note to chapter 18 excluded at the relevant time, preparations of heading 04.04, 19.01, 19 04, 19.05, 21.05, 22.02, 30.03, these headings cover other diary product, edible products of animal origin not else specified or included (heading 04.04); malt extract, food preparations of flour, malt, etc. not containing cocoa powder in a proportion by weight of less than 50% not elsewhere specified; food preparations of milk or ghee not containing cocoa powder (19.01); or containing cocoa powder in a proportion by weight of less than 10% not elsewhere specified; prepared foods obtained by swelling or roasting of cereals or cereal products (19.04); ice-creams and other edible ice, whether or not containing cocoa (21.05) other than mineral water (21.05), medicaments (including veterinary medicaments) (30.03). out of the products contained in any of these headings, we will exclude for the moment heading 19.05 from the scope of our consideration. product classifiable under any of the remaining headings may or may not contain cocoa. the fact of presence of cocoa, or in the case of heading (such as 19.04) where a minimum proportion of cocoa is specified, the presence of cocoa lip to this limit will not render the goods classifiable under chapter 18 as cocoa preparation. the object of note 1 to chapter 18 is to exclude cocoa products of this heading notwithstanding that they may contain cocoa, or as the case may be, cocoa within limits specified. ice-cream, notwithstanding that it may contain cocoa (in the form of chocolate) as a predominant component in terms of value or even possibly weight, continues to be classified as ice cream under heading 21.05. a preparation of milk, sugar and cocoa powder is classifiable under heading 04.04 notwithstanding that its taste, flavour and appearance may have been contributed to by means of cocoa and sugar, a combination of which by itself may be classifiable under chapter 18. thus by application of note 1 to chapter 18 to these products and the products of the heading 19.05 will not be classifiable under chapter 18 because of the mere presence of cocoa. this is made clear by note 2 to chapter 19 at the relevant time. this provided that heading 19.04 does not cover preparations containing more than. 8% by weight of cocoa powder or coated with chocolate, or any other preparations containing cocoa of chapter 18. these products, if otherwise classifiable under heading 19.04, would, if coated with chocolate or containing more than 8% by weight of cocoa be classifiable under chapter 18. 9. this scheme of classification in the central excise tariff, follows closely that in the harmonized system of nomenclature. by and large, the headings in chapter 18 and 19 of the tariff and in the explanatory notes, tally except for minor differences. heading 19.05 of the tariff tallies, word for word, with the same heading in the explanatory notes. heading 18.03 of the tariff is for chocolate in any form and heading 18.06 of the explanatory notes is for chocolates and other food preparations containing cocoa. note 2 to chapter 18 of the tariff is identical in contents with note 2 chapter 18 of the explanatory notes, except for the differences with the numbering in the tariff headings (18.03 and 18.06). note 2 to chapter 19 of the tariff tallies (except for the percentage of the cocoa) with note 4 to chapter 19 of the explanatory notes. in fact, each of the heading of the chapter 19 at the relevant time tallied word for word with the heading in the hsn except to the extent of difference in the percentage of cocoa powder (referred to in heading 19.01). the hsn used the word cocoa and not cocoa powder as in the present tariff after its amendment in march, 1998. there is a difference in the arrangement of the chapter, in that any prepared cocoa in the form of pitments and shells is not classifiable under chapter 18 in the tariff (unlike in the hsn) and processed cocoa base is also excluded from the chapter. cocoa butter and oil in heading 18.01 of the tariff corresponds to the 18.04 of the hsn. heading 18.02 with 18.05. heading 18 of the hsn, chocolates and other food preparations containing cocoa, had been split up into two; 18.03 for chocolates in any form, whether or not containing nuts, etc. and 18.04 for other food preparations containing cocoa, in the tariff. 10. in the light of this correspondence reference to the explanatory note in deciding the scope of the tariff is justified. the supreme court stated in paragraph 18 of its judgment cce v. wood craft industries ltd. 1995 (77) elt 23 that the structure of the central excise tariff is based on the internationally, accepted nomenclature in the hsn and therefore dispute relating to tariff classification must, as far as possible, be resolved with reference to the nomenclature indicated by the hsn unless a difference in intention in the statute is indicated by the central excise tariff act, 1985. the comparison between the headings in both the tariffs and the explanatory notes, when we have attempted does not show the presence of a different intention. on the contrary, the headings are closely aligned and in many cases are identical. reference to the hsn explanatory notes is therefore called for. 11. these notes are clear that biscuits and waffles covered with chocolate are to be classified under heading 19.05. the second edition of the explanatory notes provide at page 141, for exclusion from heading 18.05, biscuits and other bakers' wares covered with chocolates. these are shown as classifiable under heading 19.05 and the note at page 153 under heading 19.05 includes the following goods under that heading: waffles and wafers, which are light fine bakers' wares baked between patterned metal plates. this category also includes thin waffle products, which may be rolled, waffles consisting of a tasty filling sandwiched between two or more layers of thin waffle pastry, and products made by extruding waffle dough through a special machine (ice cream cornets, for example). the water content must be 10% or less by weight of the finished product. waffles may also be chocolate-covered. wafers are products similar to waffles. by applying these notes it is clear that, irrespective of the proportion of the chocolate by weight or value, these goods would be classifiable under heading 19.05. 12. it is difficult to find the material on the basis of which the department alleges that the product is commercially known and sold as chocolate. it is not contended in any of the notices that the appellant advertised the product to its customers as chocolate. the representative of the department referred to what he called advertising brief prepared by one of the appellant's officers, to guide the advertising of the product. the brief in fact goes against the department's case. it describes the product as "a delicious, light, crisp, wafer covered with milk chocolate snack" it emphasised that the product draws from both the chocolate and biscuit markets. it further described the. product as "biscuit covered with chocolate snack". there is certainly some reference in the guidelines, with regard to storage arid transport suggesting that the product must, for the purposes of ambient temperature, be considered to be chocolate "must care as for chocolate". there is incidentally a reference to caution in handling - "handle like eggs -with care". from that direction by itself, it would not be legitimate to draw a conclusion that the appellant marketed the product as chocolate or that any of the buyers purchased the same as chocolate: or that it is commonly considered as chocolate. 13. it might have been necessary, in view of the presence of chocolate, to refrigerate the product to prevent its melting or spoiling. that alone cannot justify the view that the product's essential character of the product has been conferred upon it by chocolate. there is nothing to show that the buyers of the goods bought as chocolate, not as a combination of chocolate and biscuits; that it was the presence of the chocolate alone (as distinct from the chocolate and biscuits) which length of the product its appeal to customers. on the other hand, the market advertising brief produced by the appellant refers to the presence of the biscuit market as well as the chocolate market and it talks of the products as wafer covered with crisp chocolate and say that the product creates niche for itself, drawing from both the biscuit market as well as the chocolate market. even on the assumption that the product is sold and known as chocolate, the classification confirmed cannot be justified. in akbar badruddin jiwani v. collector of customs 1990 (47) elt 161 the supreme court was of the view that "marble" occurring in heading 25.15 of the customs tariff, refer not only to marble but for other calcareous stones. the supreme court said that while there is no doubt that general principles of tariff entries occurring in a text statute is of a commercial nomenclature and understanding between persons in the trade but it is also a settled legal position that the said doctrine of commercial nomenclature or trade understanding should be departed from in a case where the statutory content in which the tariff entry appears, requires such a departure. "in other words, in cases where the application of commercial meaning or trade nomenclature runs counter to the statutory context in which the said word was used then the said principle of interpretation should not be applied. trade meaning or commercial nomenclature would be applicable if a particular product description occurs by itself in a tariff entry and there is no conflict between the tariff entry and any other entry requiring to reconcile and harmonise that tariff entry with any other entry". the relevant headings in the tariff provides for classification on the basis of principles which may be contrary to the common or commercial understanding. the explanatory notes provides for classification of waffles and wafers containing chocolate in heading 19.05 and exclude their classification from chapter 18. the scheme of classification in the central excise tariff also follows closely the scheme in the explanatory notes. it is therefore on the basis of the principles incorporated in the explanatory notes and in the tariff that we must decide the classification and the test of common parlance and understanding would not apply. 14. it is also to be noted at this juncture that the appellant, in view of the provisions of the prevention of food adulteration could not, except by violation of law has sold the goods as chocolate. we must also refer here to the decision of this tribunal in kirloskar oil engines ltd. v. union of india 1995 (77) elt 479 and national sales corporation 1995 (78) elt 653 to the effect that the indian standard institute are good and reliable indication of the common parlance and understanding. we have noted that the isi specifications for biscuits include biscuit covered or coated with chocolate. even if the common parlance test was to be applied presence of the contents of isi specifications would be in favour of the appellant. 15. the representative of the department relies upon the supreme court's judgment in cce v. wood polymers ltd. the bench of the supreme court, which delivered that judgment, was concerned with classification of decorative paper based laminating sheets. the court did not accept the contention of the manufacturer of the goods that by applying the common parlance test must be considered to be fairer, except, "in view of the rules regarding interpretation which are containing in the new tariff the matter of classification has to be considered in the light of the said rules". it thereafter proposed to apply rule 3(b) of the interpretation rules on the view that it contains the principles to be applied to the classification of the goods which are prima facie classifiable under two or more headings. since the case of composite goods classification must be determined under rule 3(b). 16. rule 3 of interpretative rules laid down the principles for classification of the goods, which are prima facie, classifiable under two or more headings. sub-rule (a) of that rule provides that the heading which provides the most specific description shall be preferred to headings providing a more general description. sub-rule (b) provides that mixtures of composite goods consisting of different materials or made up of difference components and goods put up for such retail sale which cannot be classified by reference to (a), shall be classified as if they consist of the material or component which gives them their essential character insofar as this criterion is applicable. application of rule 3 therefore would be resorted to only if on a plain reading of the tariff the goods cannot be classified in a particular heading. in view of the specific contents of the notes and chapter headings, which we have discussed, there is no reason to refer to rule 3. even if there is, sub-rule (a) will have to be excluded before we proceed to sub-rule (b). by reference to the notes to the chapter 19 and 18 and others that we have seen, the most specific description of the goods in conformity with the terms of the tariff headings and the related chapter notes is that the most specific description is provided in the heading claimed by the appellant. it is not permissible to ignore the provisions of sub-rule (a) of rule 3 to proceed directly to sub-rule (b) of rule 3, since in our view sub-rule (a) itself provides the answer. reference to sub-rule (b) is uncalled for. 17. on the basis of these discussions it has to be held that the goods are classifiable under heading 19.05. there is another aspect of the matter which requires consideration. this is the amendment carried out to heading 19.05 by the budget of 1998. by this amendment two new sub-headings have been created in heading 19.05, for wafers and waffles. sub-heading 1905.31 for waffles and wafers coated with or containing chocolate carried a rate of duty of 18% (corresponding to the same rate of duty as was applicable to heading 18.03). sub-heading 39 is "other". it can hardly be disputed that wafers and waffles coated with or containing chocolate are classifiable, after the amendment, under heading 1905.31. now, in the amendment made in 1998, there has been no change in the wordings of heading 19.05 or of heading 18.04, nor there has been any change in any of the notes to the chapter 18 and 19 with which we are concerned. the headings 19.05 and 18.03 and the notes, therefore remain unchanged before and after the amendment. that being the case, the effect of introduction of these two sub-headings would be only to carve a separate niche within the same heading for these products. this would mean that both before and after the amendment, waffles and wafer coated or covered with chocolate were classifiable under heading 19.05. 18. the representative's of the department contend that this amendment is not retrospective in nature for which he cites supreme court judgment in shri vijayalakshmi rice mills v. state of a.p. air 1976 sc 1471. the retrospective application of the amendment is not an issue; it is not the appellant's contention that the amendment is retrospective. the contention, which has to be accepted is that the amendment shows that the product was always classifiable under the particular heading (19.05) in which it has now been assigned a particular sub-heading which were not present earlier. therefore waffles and wafers containing chocolate, even prior to the amendment were classifiable under heading 19.05. the appeal would succeed on this ground also. 19. the representative of the department raises a point that sub-heading 1905.31 refers to waffles and wafers coated or containing chocolate, whereas heading 19.05 refers to products whether or not containing cocoa. the larousse gastronomique, a recognised cookery encyclopaedia refers, in the 1988 mandarin paperback edition, to chocolate as a product consisting essentially of a mixture of cocoa and sugar, to which milk, honey, dried fruit, etc., may be added. the new shorter oxford dictionary gives the following meanings for chocolate: article of food made from cacao seeds, infl. by unrelated cacaua-atl drink made from cacao; 1. a drink made of prepared chocolate (sense 2) dissolved in hot. milk or water. 2 an edible paste or solid made from cacao seeds by roasting, grinding, etc.; a small sweet or confection made of or covered with chocolate. we are concerned with the second meaning. the new oxford dictionary gives the following meaning for 'cocoa' and 'cacao':cocoa: 1. now only more fully cocoa bean. 2. the powder produced by crushing and grinding cacao beans (often with other ingredients); a drink made from this. a shade of brown resembling the colour of this powder.cacao: the seed of the tree theobroma cacao, native to tropical america, from which cocoa and chocolate 20. the prevention of food adulteration act, 1955. defines chocolate as a homogeneous product obtained by an adequate process of manufacture from a mixture of one or more of the ingredients, namely cocoa (cocoa) beans, cocoa (cocoa) nib, cocoa (cocoa) mass, cocoa press cake and cocoa dust (cocoa fines/powder), including fat reduced cocoa powder with or without addition of sugars, cocoa butter, milk solids including milk fat and non prohibited flavouring agents. that the explanatory notes also proceed on this understanding that chocolate must contain cocoa is clear from the following extract in these notes in heading 18.06 at page 143 of the 1996 explanatory notes. chocolate is composed essentially of cocoa paste and sugar or other sweetening matter; usually with the addition of flavouring and cocoa butter; in some cases, cocoa powder and vegetable oil may be substituted for cocoa paste. milk, coffee, hazelnuts, almonds, orange-peel, etc. are sometimes also added. 21. thus while all chocolate must necessarily contain cocoa, it is not every cocoa product or preparation that is chocolate. the fact that heading 39.05 uses the word "cocoa" whereas sub-heading 1905.31 refers to chocolate, therefore it is not significant in considering classification of this product. the tariff itself reconises that chocolate must contain cocoa. heading 18.03 is for "chocolates in any form . . . including drinking chocolates"; heading 18.04 is for other food preparations containing cocoa. the other food preparation containing cocoa of heading 18.04 therefore must be those preparations other than the chocolates of heading 18.03. it is therefore evident that the chocolates of heading 18.03 must contain cocoa 22. in view of this conclusion we do not consider it necessary to go into the aspect of limitation. it would also follow that penalty ordered cannot be impossable. appeal allowed. impugned order set aside with consequential relief.it is clear from the above case that use of vegetable oil is prohibited in terms of pfa act in manufacture of chocolates and in products of cocoa. in view of this position we are not agreeable with the revenue to classify the product under the heading 1905.31 as waffels and wafers coated with chocolate or containing chocolate carrying 16% duty. the ingredients used also does not bring the product under this heading.they are required to be classified only under the residuary entry "others" under 1905.19.10. further more, we have examined the wrappers of 'bytes'. the appellants are not marketing the item as chocolates or waffels and wafers coated with chocolate. they are marketing them as "cadbury bytes crispy cocoa filled snack". hence the department's contention to consider the item as waffels and wafers coated with chocolate or containing chocolate is required to be negatived by applying the trade parlance test. the appellants succeed in the appeals. appeals allowed with consequential relief.

Judgment:
1. All these appeals raise a common question of law and fact. Hence, they are taken up together for disposal as per law. The matter pertains to classification of a product named 'BYTES' manufactured on job work by the appellant for M/s Cadbury India Ltd., Mumbai. The anti-evasion wing of the Revenue took up investigation on gathering intelligence that the assessee are discharging duty at a 16wer rate in terms of Notification No. 37/03 dated 30th April 2003 by adopting Chapter sub-heading 9005.39 which is a residuary entry instead of Chapter subheading 1905.31 which refers to "coated with chocolate or containing chacolate' for the residuary entry under subheading 1905.39, the duty is at concessional rate at 8% advalorem while for the chapter heading adopted by the revenue under 1905.31 the duty is 16%. On the basis of allegation of suppression of facts, the demands for the larger period have been raised denying the benefit of concessional rate of duty available for sub-heading 1905.39 and the Revenue has reclassified the goods under sub-heading 1905.31 as 'coated with chocolate or containing chocolate'.

Contents: Wheat Flour, Edible Vegetable Oil, Milk Solids, Cocoa Solids, Edible Starches, permitted emulsifiers and Salt.

Process: A batter of Wheat flour, sugar and starch is mixed in water with a small quantity of vegetable oil and emulsifier added into it.

This batter is spread/sheeted on the drum surface of a rotary oven heated on the inside by a gas flame. The baked wheat flour sheet is then rolled into pencils and cream is pumped into the hollow portion within. The cream is cocoa based cream prepared by mixing milk solids, sugar, cocoa solids, flavors, vegetable oil and emulsifiers to get the desired viscosity. The centre-filled pencil is then passed between rollers where the edges are crimped and cut to form pillows.

On the basis of the contents and the process of manufacture, the revenue alleged that the product "BYTES" are nothing but Wafers Pillow containing cream made out of milk solids, sugar, cocoa solids, vegetable oils, emulsifiers and flavours i.e. chocolate. Hence, the Revenue proceeded to reclassify the item under sub-heading 1905.39 of CETA and have raised demands. The statements of S/Shri Shaik Sulaiman, Managing Director, M/s Little Star Foods (P) Ltd., Unit-1 and 11, C.M.Kulkarni, Contract Manufacturing Manager of M/s Cadbury India Ltd, Shivanand Sanadi, General manager (Legal affairs) of M/s Cadbury India Ltd., and that of T.V. Ananthan, Manager Legal were recorded and were relied for raising demands. The assessee vide their reply dated 7.10.04 have interalia submitted as follows: 18. The assessees vide their reply, dated 07.10.2004 have interalia submitted the following: That the captioned notice was based upon the fundamental allegation that the so called refined milk chocolate for Bytes I refined cocoa cream for Bytes is a chocolate and consequently the said product CADBURY BYTES falls for classification under Chapter Heading No. 1905.31, and not under Chapter Heading 1905.39. That the entire SCN was based upon the preconception that the refined milk chocolate for Bytes / refined cocoa cream for Bytes is chocolate, and that the addition of palm oil, emulsifiers and flavors does not in any manner change the character of the same.

That, what is contained in the said product CADBURY BYTES is not refined milk chocolate for Bytes I refined cocoa cream for Bytes, but a product which is prepared by mixing palm oil, emulsifiers and flavours with the said refined milk chocolate for Bytes / refined cocoa cream for Bytes, which is admittedly received by them in a powder form from Dr. Writer's Food Products Ltd., (DRW), a job worker for Cadbury India Limited.

That the above preconception is incorrect and that in fact what is filled into the wafer pencil is a cream, which consists of refined cocoa cream for Bytes, which has been mixed with palm oil, emulsifiers and flavors. As set out in the captioned notice, refined milk chocolate / refined cocoa cream for Bytes is in a powder form.

It is therefore, obvious that the same could not be filled in to the said process of cream making, which is done in their factory. The refined milk chocolate in powder form as received from DRW, could not be directly inserted / injected into the said wafer pencils, and accordingly the same would have to be converted into the semi-solid cream before it can be injected into the said wafer pencil. It is for this reason that the said palm oil and emulsifiers are added.

That the resultant product is completely different in all its properties such as consistency, feel, taste and fat content. It is this resultant product in the form of a cream, which is required to be a chocolate for the said product to be classifiable under Chapter Heading No. 1905.31, as proposed in the captioned notice.

That the Department has not even sought to make out a case in the captioned notice, as to the effect that the said cream manufactured in their factory by mixing palm oil, emulsifiers and flavors to the said refined milk chocolates / cocoa cream for Bytes is a chocolate.

Therefore, the notice is completely misconceived, misdirected and untenable, inasmuch as the entirety of the allegations in the captioned notice are directed towards refined milk chocolate / cocoa cream, and not to the product manufactured in their factory, which is finally filled in the wafer pencils / pillows.

That all the evidence produced in support of the allegations set out in the captioned notice, particularly the letter dated 12.08.2004 issued by the Joint Commissioner of Central Excise, Pune-II Commissionerate, enclosing the test report given by the Chemical Examiner, Central Excise Laboratory, Mumbai of the sample, of refined milk chocolate sent to him for testing, it therefore not material and germane to the fact arising in the present case. If at all it is the Department's case that the said product manufactured in their factory is chocolate, a sample of the said product was required to be drawn and sent for analysis to verify as to whether the same is chocolate or not, which has not been done.

They denied all the allegations made in the captioned notice, specifically the misclassification of the said product under Chapter Sub Heading 1905.39 instead of Chapter Sub Heading 1905.31. They also denied that they are liable to pay differential duty as alleged or that any interest is recoverable from them under Section 11AB of the Act or any penalty is imposable under Section 11AC of the Act or under Rule 25 of the Rules, 2002.

That for the purpose of PFA Act and the Rules, a confectionery food articles, which contain cocoa, milk, sugar and vegetable oil are not considered to be chocolate. That if a product was not a chocolate in terms of the standard prescribed in the PFA Act and the Rules, the manufacture and description of the same as chocolate would result in the product being considered to be "adulterated" and attract stringent provisions of prosecution and penalty of not less than 3 years imprisonment in terms of the PFA Act against the manufacturer and the person controlling the business. They have further submitted that when a product cannot be considered to be chocolate for the purpose of the PFA Act and the Rules made thereunder and described as such on its label or in any form of advertising or promotion material, no manufacturer, trader or customer would term the same or deal with the same as chocolate. That it is evident not only from the process and description but also from the statements of Shri Sulaiman, Shri Kulkarni, Shri Sanadi and Shri Ananthan, all of which were recorded under Section 14 of the Act, that the so-called refined milk chocolate for Bytes/ refined cocoa cream for Bytes contains vegetable oil and therefore, ipso facto, cannot be considered to be chocolate. The entire case of the Department, which is based upon the allegation that the said cocoa cream is in fact chocolate is, therefore, patently fallacious and the captioned notice is required to be withdrawn on this ground alone.

19. They also submitted that after the said refined cocoa cream for Bytes is received in their factory the same is mixed with palmolein oil (a vegetable oil) and heated so as to convert the same into thick liquid cocoa cream which is filled into the wafer pencils.

That after being mixed with palmolein oil and emulsifiers it definitely ceases to be chocolate for the reason, that, a product which contains vegetable oil cannot be manufactured and sold as chocolate, without attracting the penal provisions of the PFA Act and the Rules made thereunder. For this reason, the final product i.e., CADBURY BYTES, which admittedly contains a cream which is manufactured by mixing and heating the refined cocoa cream for Bytes received from DRW with palmolein oil, emulsifters and flavours, can never be held to be a product containing chocolate. That the said refined cocoa cream for Bytes could ever have been considered to be chocolate, as a result of being mixed and heated with such palmolein oil emulsifiers and flavours, the same would have ceased to have the character of chocolate and consequently, the said product filled with the said cream can never be considered to be wafer containing chocolate.

20. They craved leave to produce and refer to and rely upon material to establish, first, that a product containing vegetable oil can never be a chocolate, second, that the refined cocoa cream for Bytes admittedly did contain vegetable oil, and third, that in any event, after further mixing the refined milk chocolate / refined cocoa cream with palmolein oil, emulsifiers and flavours, the resultant product would, in any event, cease to be a chocolate.

21. They have denied the allegation of the Department interalia, that the presence of vegetable / palmolein oil does not alter the definition of chocolate as the PFA Act / Rules can only prescribed standards with respect to quality of product manufacture in India.

They submitted that it is obvious that the PFA Act / Rules prescribes standards with regard to quality of products manufactured in India, and it is precisely for this reason that the said refined cocoa cream could never have been described / regarded as chocolates in India without violating such standards prescribed by the PFA Act / Rules. They stated that the presence of vegetable / palmolein oil would definitely "alter the definition of Chocolate", as the resultant product would not be considered as "chocolate". They reiterated that they are obviously concerned with the manufacture of products in India; and the levy of excise duty in India, and it is therefore obvious that Indian standards alone would apply to such products.

22. With regard to explanatory notes of HSN, they submitted that the definition of "cocoa and cocoa preparations" and "chocolate in any form" given in the HSN are not relevant in the present context, as the HSN is admittedly an international nomenclature / code of classification, and has been adopted / adapted to suit the Indian Tariff Classification, therefore, the Explanatory Note, while being an aid to interpretation if required for classification purposes in India, are not sacrosanct, particularly when they are in conflict with Indian laws, such as the PFA Act and Rules made thereunder.

Therefore, they have stated that the said explanatory notes of HSN have no application to the facts of their case.

23. In view of the foregoing they have submitted that the notice required to be withdrawn in its entirety particularly the demand of Rs. 60,11,251/- and the proposal to charge interest under Section 11AB and penalty under Section 11Ac as also under Rule 25 of the CE Rules, 2002 is also required to be withdrawn.

24. All the other three co noticees, S/Shri. Shaik Sulaiman, Managing Director, M/s. Little Star Foods (P) Limited, Jaiboy Phillips, Director - Operations, M/s. Cadbury India Limited and C.M. Kulkarni, Contract Manufacturing Manager, M/s. Little Star Foods (P) Limited, in their respective replies to Show Cause Notice have denied the allegation as to the manner in which they have breached the provisions of Rule 26. They have stated that since, there is no evidence established in any mariner in support of the allegation made in the Show Cause Notice, they are not liable to be penalized under Rule 26 of CE Rules, 2002.

25. All the four noticees have expressed their desire to be heard personally through their advocate before any orders are passed in this regard.

26. Accordingly, personal hearing was offered and S/Shri Medhavin P. Baxi, Advocate and Shivanand Sanadi, General Manager, Legal affairs of M/s. Cadbury India Limited, have appeared for personal hearing on 05.01.2005. The learned advocate reiterated the contents made in their reply to the notice and also requested 10 days time to submit detailed written brief. They submitted written brief dated 17.01.2005 on 19.01.2005. In their written brief they have once again denied all the allegations made in the notice and submitted that the notice is required to be withdrawn in its entirety against all the noticees. They further submitted a laboratory test report dt.20.01.2005 on received in this office on 10.02.2005.

3. The Commissioner after detailed examination of the charges and the submissions distinguished with the appellants contention and proceeded to uphold the allegation that the item is required to be classified under the sub-heading 1905.39 as Waffels and Wafers 'coated with chocolate or containing chocolate'. The Commissioner has rejected the plea that if the product i.e. chocolate contains vegetable oil then it would entail penal action for the violations of Prevention of Food Adulteration Act 1955 and Rules. He has also rejected the assessee's contention that the definition of cocoa and cocoa preparations and chocolate in any form given in the HSN Explanatory Notes are not relevant in the present context, as the explanatory note being an aid to the interpretation if required for classification purpose in India, is not sacrosanct, when particularly; there is a conflict with Indian laws such as Prevention of Food Adulteration Act and rules there-under.

In this context the Commissioner has relied on the Apex Court judgment rendered in the case of CCE Shillong v. Woodcraft products Ltd. 1995 (77) ELT 23 SC. He has also upheld the charge of willful mis-declaration of the product with an intent to evade payment of duty by availing the benefit of concessional rate of notification.

4. We have heard learned advocate Shri M.P. Baxi for the appellants and learned DR Shri K.S. Reddy for the Revenue.

5. Learned Counsel at the outset submitted that the classification of the item in a similar case of their competing unit has been decided by the Mumbai bench in their favour in the case of CCE Mumbai v. Britannia Industries Ltd. 2005 (183) ELT 257. He submits that the Tribunal has considered non-applicability of the explanatory notes of 'HSN' and also the Apex Court judgment in the case of CCE Shillong v. Woodcrafts Ltd., (supra) He has submitted that the Tribunal has taken a view in para-3 and 4 as follows: 3. Considering the material on record it is found that based on the classification of the Chocolate Cream placed between two sliced biscuits-wafers and the fact that the said Chocolate cream would be classifiable under heading 1803 taken irrespective of the fact of percentage of Cocoa in the entity, the ground taken that the decision relied upon by the Commissioner (Appeals) in the appellant's own case vide order No. 802/86, dated 3.9.1986 (26) ELT 628 (T) was as regards the classification in case of Bourbon Cream manufactured by the respondents in the year 1986, which was under the erstwhile tariff and was based on the applicability of ISI specification for use of chocolate and that decision cannot be applied to the facts of this case as ISI and the Prevention of Food Adulteration Act, would not rule the classification to be arrived under the tariff based on HSN cannot be accepted, as the classification of the 'chocolate cream' which forms a layer between two slices of biscuits cannot determine the classification of the biscuits itself. There is no material to consider that the biscuit is a cocoa product merely because of its certain percentage of cocoa which do not even predominate, were found in such entity. The entities are understood and have to be classified, as such they cannot be called chocolate for the reason as given.

4. As regards the third ground taken by the appellant's of markings on their packages/wrappers to indicate them as chocolates that word chocolate advertised on them will not ipso facto lead the entities be classified as chocolate following the well settled law that advertised cannot be a guide or determinant to classification, as held by the Bombay High Court 1980 (6) ELT 280 (Bom).

6. Learned Counsel pointing to the above paragraph submits that even in their case, the Prevention of Food Adulteration Act would not rule the classification arrived under the tariff basis of HSN and the item is not waffels and wafers coated with chocolate or containing chocolate and hence they are required to be classified under the residuary entry 1905.19. He further drew our attention to the Mumbai Bench order rendered in the case of Nestle India Ltd., v. CCE (F.O. No. C-II 1348/WZB/1999 dated 21.5.1999) which pertain to the classification of the item "KIT KAT". Even in this case, the ingredients were almost same and it contained hydrogenated vegetable oil. The department had proceeded to classify this item under Chapter heading 18.03 with the description Waffels in any form including drinking chocolates. 18.04 is for other food preparations containing cocoa. Drawing strength from this judgment, learned Counsel submitted that the judgment clearly held that for a product to be classified as a chocolate containing vegetable oil is prohibited under the PFA Act, the product: has to satisfy the terms and definition of chocolate, as per PFA Act and ISI specifications. He also submitted that Tribunal has referred to explanatory notes as well as to Apex Court judgment in the case of CCE v. Woodcraft Industries. Learned Counsel submitted that in view of the specific finding recorded in the above two judgments use of vegetable oil would not make the product a chocolate. Therefore, he submits that the department's contention to classify the item as Waffels and Wafers coated with chocolate or containing chocolate is required to be negatived and only it has to be classified in the residuary entry "Others" under chapter heading 1905.39 and extends the concessional benefit in terms of Notification No. 37/03 dated 30.4.03.

7. Learned DR took us through the entire order and contended that the presence of cream prepared by mixing milk solids, sugar, cocoa solids and vegetable oil would make the product Waffels and wafers coated with chocolate or containing chocolate. He submits that both the cited judgments are clearly distinguishable. He further submits that the details had not been submitted and hence, the impugned order for larger period is required to be confirmed, as the impugned order relies on HSN explanatory notes which is binding on the bench in the light of Apex Court judgment rendered in the case of CCE v. Wood crafts (supra).

8. On a careful consideration, we notice that the Tribunal has dealt with the similar matter of wafers with chocolate cream placed in between layers for classification under sub-heading 1905.31 and residuary sub-heading 1901.99 of CET. In the case of CCE v. Britania Industries Ltd., (supra) WRB, which decided the matter, looked into the HSN explanatory notes as well as the Apex Court judgment in the case of woodcraft Ltd and have clearly held that in view of the fact of prohibition of use of vegetable oils in PFA act, the items namely wafers with chocolate cream cannot be classified as "waffels and wafers coated with chocolate or containing chocolate" carrying duty of 16%.

They have clearly held that the item has to be classified under residuary entry 1905.90 of the Central Excise Tariff. The finding portion has already been extracted.

9. The WRB had also an occasion to consider earlier, the classification of the product 'KIT KAT' in the case of Nestle India Ltd v. CCE wherein also there was use of vegetable oil. The item contained the ingredients waffer, sugar, milk powder, wheat flour, cocoa paste, cocoa powder, hydrogenated vegetable oil and process additives. Revenue had proposed to classify the item under heading 18.03 with description "chocolates in any form including drinking chocolate and other food preparations containing cocoa." The Tribunal negatived the claim for classification of the item as 'chocolate' or food preparation containing cocoa solely on the ground that the product does not satisfy the definition of chocolate under Prevention of Food Adulteration Act and also ISI specifications. The Tribunal also considered the interpretative rules to HSN explanatory notes which was not in consonance with the tariff entry. The marketing pattern was also considered. The finding recorded by the Tribunal in Nestle's case, from para 7 to 22 are reproduced below.

7. The conflicting entries during the relevant period are as follows:Heading Heading Description of goodsNo. No. Chocolates in any form, whether or not18.03 1803.00 containing nuts, fruit kernels or fruits, including drinking chocolates.19.05 empty cachets of a kind suitable for pharmaceutical use, sealing wafers," rice 1905.11 which any process is ordinarily carried on with the aid of power 8. The note to chapter 18 excluded at the relevant time, preparations of heading 04.04, 19.01, 19 04, 19.05, 21.05, 22.02, 30.03, These headings cover other diary product, edible products of animal origin not else specified or included (heading 04.04); malt extract, food preparations of flour, malt, etc. not containing cocoa powder in a proportion by weight of less than 50% not elsewhere specified; food preparations of milk or ghee not containing cocoa powder (19.01); or containing cocoa powder in a proportion by weight of less than 10% not elsewhere specified; prepared foods obtained by swelling or roasting of cereals or cereal products (19.04); ice-creams and other edible ice, whether or not containing cocoa (21.05) other than mineral water (21.05), medicaments (including veterinary medicaments) (30.03). Out of the products contained in any of these headings, we will exclude for the moment heading 19.05 from the scope of our consideration. Product classifiable under any of the remaining headings may or may not contain cocoa. The fact of presence of cocoa, or in the case of heading (such as 19.04) where a minimum proportion of cocoa is specified, the presence of cocoa lip to this limit will not render the goods classifiable under chapter 18 as cocoa preparation. The object of note 1 to chapter 18 is to exclude cocoa products of this heading notwithstanding that they may contain cocoa, or as the case may be, cocoa within limits specified.

Ice-cream, notwithstanding that it may contain cocoa (in the form of chocolate) as a predominant component in terms of value or even possibly weight, continues to be classified as ice cream under heading 21.05. A preparation of milk, sugar and cocoa powder is classifiable under heading 04.04 notwithstanding that its taste, flavour and appearance may have been contributed to by means of cocoa and sugar, a combination of which by itself may be classifiable under chapter 18. Thus by application of note 1 to chapter 18 to these products and the products of the heading 19.05 will not be classifiable under chapter 18 because of the mere presence of cocoa. This is made clear by note 2 to chapter 19 at the relevant time. This provided that heading 19.04 does not cover preparations containing more than. 8% by weight of cocoa powder or coated with chocolate, or any other preparations containing cocoa of chapter 18. These products, if otherwise classifiable under heading 19.04, would, if coated with chocolate or containing more than 8% by weight of cocoa be classifiable under Chapter 18.

9. This scheme of classification in the Central Excise tariff, follows closely that in the Harmonized System of Nomenclature. By and large, the headings in chapter 18 and 19 of the tariff and in the Explanatory Notes, tally except for minor differences. Heading 19.05 of the tariff tallies, word for word, with the same heading in the Explanatory Notes. Heading 18.03 of the tariff is for chocolate in any form and heading 18.06 of the Explanatory Notes is for chocolates and other food preparations containing cocoa. Note 2 to chapter 18 of the tariff is identical in contents with note 2 chapter 18 of the Explanatory Notes, except for the differences with the numbering in the tariff headings (18.03 and 18.06). Note 2 to chapter 19 of the tariff tallies (except for the percentage of the cocoa) with note 4 to chapter 19 of the Explanatory Notes. In fact, each of the heading of the chapter 19 at the relevant time tallied word for word with the heading in the HSN except to the extent of difference in the percentage of cocoa powder (referred to in heading 19.01). The HSN used the word cocoa and not cocoa powder as in the present tariff after its amendment in March, 1998. There is a difference in the arrangement of the chapter, in that any prepared cocoa in the form of pitments and shells is not classifiable under chapter 18 in the tariff (unlike in the HSN) and processed cocoa base is also excluded from the chapter. Cocoa butter and oil in heading 18.01 of the tariff corresponds to the 18.04 of the HSN. Heading 18.02 with 18.05. Heading 18 of the HSN, chocolates and other food preparations containing cocoa, had been split up into two; 18.03 for chocolates in any form, whether or not containing nuts, etc. and 18.04 for other food preparations containing cocoa, in the tariff.

10. In the light of this correspondence reference to the explanatory note in deciding the scope of the tariff is justified. The Supreme Court stated in paragraph 18 of its Judgment CCE v. Wood Craft Industries Ltd. 1995 (77) ELT 23 that the structure of the Central Excise Tariff is based on the internationally, accepted nomenclature in the HSN and therefore dispute relating to tariff classification must, as far as possible, be resolved with reference to the nomenclature indicated by the HSN unless a difference in intention in the statute is indicated by the Central Excise Tariff Act, 1985.

The comparison between the headings in both the tariffs and the explanatory notes, when we have attempted does not show the presence of a different intention. On the contrary, the headings are closely aligned and in many cases are identical. Reference to the HSN explanatory notes is therefore called for.

11. These notes are clear that biscuits and waffles covered with chocolate are to be classified under heading 19.05. The second edition of the Explanatory Notes provide at page 141, for exclusion from heading 18.05, biscuits and other bakers' wares covered with chocolates. These are shown as classifiable under heading 19.05 and the note at page 153 under heading 19.05 includes the following goods under that heading: Waffles and wafers, which are light fine bakers' wares baked between patterned metal plates. This category also includes thin waffle products, which may be rolled, waffles consisting of a tasty filling sandwiched between two or more layers of thin waffle pastry, and products made by extruding waffle dough through a special machine (ice cream cornets, for example). The water content must be 10% or less by weight of the finished product. Waffles may also be chocolate-covered. Wafers are products similar to waffles.

By applying these notes it is clear that, irrespective of the proportion of the chocolate by weight or value, these goods would be classifiable under heading 19.05.

12. It is difficult to find the material on the basis of which the department alleges that the product is commercially known and sold as chocolate. It is not contended in any of the notices that the appellant advertised the product to its customers as chocolate. The representative of the department referred to what he called advertising brief prepared by one of the appellant's officers, to guide the advertising of the product. The brief in fact goes against the department's case. It describes the product as "a delicious, light, crisp, wafer covered with milk chocolate snack" it emphasised that the product draws from both the chocolate and biscuit markets.

It further described the. product as "biscuit covered with chocolate snack". There is certainly some reference in the guidelines, with regard to storage arid transport suggesting that the product must, for the purposes of ambient temperature, be considered to be chocolate "must care as for chocolate". There is incidentally a reference to caution in handling - "handle like eggs -with care".

From that direction by itself, it would not be legitimate to draw a conclusion that the appellant marketed the product as chocolate or that any of the buyers purchased the same as chocolate: or that it is commonly considered as chocolate.

13. It might have been necessary, in view of the presence of chocolate, to refrigerate the product to prevent its melting or spoiling. That alone cannot justify the view that the product's essential character of the product has been conferred upon it by chocolate. There is nothing to show that the buyers of the goods bought as chocolate, not as a combination of chocolate and biscuits; that it was the presence of the chocolate alone (as distinct from the chocolate and biscuits) which length of the product its appeal to customers. On the other hand, the market advertising brief produced by the appellant refers to the presence of the biscuit market as well as the chocolate market and it talks of the products as wafer covered with crisp chocolate and say that the product creates niche for itself, drawing from both the biscuit market as well as the chocolate market.

Even on the assumption that the product is sold and known as chocolate, the classification confirmed cannot be justified. In Akbar Badruddin Jiwani v. Collector of Customs 1990 (47) ELT 161 the Supreme Court was of the view that "marble" occurring in heading 25.15 of the Customs tariff, refer not only to marble but for other calcareous stones. The Supreme Court said that while there is no doubt that general principles of tariff entries occurring in a text statute is of a commercial nomenclature and understanding between persons in the trade but it is also a settled legal position that the said doctrine of commercial nomenclature or trade understanding should be departed from in a case where the statutory content in which the tariff entry appears, requires such a departure. "In other words, in cases where the application of commercial meaning or trade nomenclature runs counter to the statutory context in which the said word was used then the said principle of interpretation should not be applied. Trade meaning or commercial nomenclature would be applicable if a particular product description occurs by itself in a Tariff Entry and there is no conflict between the Tariff Entry and any other Entry requiring to reconcile and harmonise that Tariff Entry with any other Entry". The relevant headings in the tariff provides for classification on the basis of principles which may be contrary to the common or commercial understanding. The Explanatory Notes provides for classification of waffles and wafers containing chocolate in heading 19.05 and exclude their classification from chapter 18. The scheme of classification in the Central Excise tariff also follows closely the scheme in the Explanatory Notes. It is therefore on the basis of the principles incorporated in the Explanatory Notes and in the tariff that we must decide the classification and the test of common parlance and understanding would not apply.

14. It is also to be noted at this juncture that the appellant, in view of the provisions of the Prevention of Food Adulteration could not, except by violation of law has sold the goods as chocolate. We must also refer here to the decision of this Tribunal in Kirloskar Oil Engines Ltd. v. Union of India 1995 (77) ELT 479 and National Sales Corporation 1995 (78) ELT 653 to the effect that the Indian Standard Institute are good and reliable indication of the common parlance and understanding. We have noted that the ISI specifications for biscuits include biscuit covered or coated with chocolate. Even if the common parlance test was to be applied presence of the contents of ISI specifications would be in favour of the appellant.

15. The representative of the department relies upon the Supreme Court's judgment in CCE v. Wood Polymers Ltd. The bench of the Supreme Court, which delivered that judgment, was concerned with classification of decorative paper based laminating sheets. The Court did not accept the contention of the manufacturer of the goods that by applying the common parlance test must be considered to be fairer, except, "in view of the rules regarding interpretation which are containing in the new tariff the matter of classification has to be considered in the light of the said rules". It thereafter proposed to apply Rule 3(b) of the Interpretation Rules on the view that it contains the principles to be applied to the classification of the goods which are prima facie classifiable under two or more headings. Since the case of composite goods classification must be determined under Rule 3(b).

16. Rule 3 of Interpretative Rules laid down the principles for classification of the goods, which are prima facie, classifiable under two or more headings. Sub-rule (a) of that rule provides that the heading which provides the most specific description shall be preferred to headings providing a more general description. Sub-rule (b) provides that mixtures of composite goods consisting of different materials or made up of difference components and goods put up for such retail sale which cannot be classified by reference to (a), shall be classified as if they consist of the material or component which gives them their essential character insofar as this criterion is applicable. Application of Rule 3 therefore would be resorted to only if on a plain reading of the tariff the goods cannot be classified in a particular heading. In view of the specific contents of the notes and chapter headings, which we have discussed, there is no reason to refer to Rule 3. Even if there is, Sub-rule (a) will have to be excluded before we proceed to Sub-rule (b). By reference to the notes to the chapter 19 and 18 and others that we have seen, the most specific description of the goods in conformity with the terms of the tariff headings and the related chapter notes is that the most specific description is provided in the heading claimed by the appellant. It is not permissible to ignore the provisions of Sub-rule (a) of Rule 3 to proceed directly to Sub-rule (b) of Rule 3, since in our view Sub-rule (a) itself provides the answer. Reference to Sub-rule (b) is uncalled for.

17. On the basis of these discussions it has to be held that the goods are classifiable under heading 19.05. There is another aspect of the matter which requires consideration. This is the amendment carried out to heading 19.05 by the budget of 1998. By this amendment two new sub-headings have been created in heading 19.05, for wafers and waffles. Sub-heading 1905.31 for waffles and wafers coated with or containing chocolate carried a rate of duty of 18% (corresponding to the same rate of duty as was applicable to heading 18.03). Sub-heading 39 is "other". It can hardly be disputed that wafers and waffles coated with or containing chocolate are classifiable, after the amendment, under heading 1905.31. Now, in the amendment made in 1998, there has been no change in the wordings of heading 19.05 or of heading 18.04, nor there has been any change in any of the notes to the chapter 18 and 19 with which we are concerned. The headings 19.05 and 18.03 and the notes, therefore remain unchanged before and after the amendment. That being the case, the effect of introduction of these two sub-headings would be only to carve a separate niche within the same heading for these products. This would mean that both before and after the amendment, waffles and wafer coated or covered with chocolate were classifiable under heading 19.05.

18. The representative's of the department contend that this amendment is not retrospective in nature for which he cites Supreme Court judgment in Shri Vijayalakshmi Rice Mills v. State of A.P. AIR 1976 SC 1471. The retrospective application of the amendment is not an issue; it is not the appellant's contention that the amendment is retrospective. The contention, which has to be accepted is that the amendment shows that the product was always classifiable under the particular heading (19.05) in which it has now been assigned a particular sub-heading which were not present earlier. Therefore waffles and wafers containing chocolate, even prior to the amendment were classifiable under heading 19.05. The appeal would succeed on this ground also.

19. The representative of the department raises a point that sub-heading 1905.31 refers to waffles and wafers coated or containing chocolate, whereas heading 19.05 refers to products whether or not containing cocoa. The Larousse Gastronomique, a recognised cookery encyclopaedia refers, in the 1988 Mandarin Paperback edition, to chocolate as a product consisting essentially of a mixture of cocoa and sugar, to which milk, honey, dried fruit, etc., may be added. The New Shorter Oxford Dictionary gives the following meanings for chocolate: Article of food made from cacao seeds, infl. by unrelated cacaua-atl drink made from cacao; 1. A drink made of prepared chocolate (sense 2) dissolved in hot. milk or water. 2 An edible paste or solid made from cacao seeds by roasting, grinding, etc.; a small sweet or confection made of or covered with chocolate.

We are concerned with the second meaning. The New Oxford Dictionary gives the following meaning for 'cocoa' and 'cacao':Cocoa: 1. Now only more fully cocoa bean. 2. The powder produced by crushing and grinding cacao beans (often with other ingredients); a drink made from this. A shade of brown resembling the colour of this powder.Cacao: The seed of the tree Theobroma cacao, native to tropical America, from which cocoa and chocolate 20. The Prevention of Food Adulteration Act, 1955. defines chocolate as a homogeneous product obtained by an adequate process of manufacture from a mixture of one or more of the ingredients, namely cocoa (cocoa) beans, cocoa (cocoa) nib, cocoa (cocoa) mass, cocoa press cake and cocoa dust (cocoa fines/powder), including fat reduced cocoa powder with or without addition of sugars, cocoa butter, milk solids including milk fat and non prohibited flavouring agents. That the Explanatory Notes also proceed on this understanding that chocolate must contain cocoa is clear from the following extract in these notes in heading 18.06 at page 143 of the 1996 Explanatory Notes.

chocolate is composed essentially of cocoa paste and sugar or other sweetening matter; usually with the addition of flavouring and cocoa butter; in some cases, cocoa powder and vegetable oil may be substituted for cocoa paste. Milk, coffee, hazelnuts, almonds, orange-peel, etc. are sometimes also added.

21. Thus while all chocolate must necessarily contain cocoa, it Is not every cocoa product or preparation that is chocolate. The fact that heading 39.05 uses the word "cocoa" whereas sub-heading 1905.31 refers to chocolate, therefore it is not significant in considering classification of this product. The tariff itself reconises that chocolate must contain cocoa. Heading 18.03 is for "chocolates in any form . . . including drinking chocolates"; heading 18.04 is for other food preparations containing cocoa. The other food preparation containing cocoa of heading 18.04 therefore must be those preparations other than the chocolates of heading 18.03. It is therefore evident that the chocolates of heading 18.03 must contain cocoa 22. In view of this conclusion we do not consider it necessary to go into the aspect of limitation. It would also follow that penalty ordered cannot be impossable. Appeal allowed. Impugned order set aside with consequential relief.

It is clear from the above case that use of vegetable oil is prohibited in terms of PFA Act in manufacture of chocolates and in products of cocoa. In view of this position we are not agreeable with the revenue to classify the product under the heading 1905.31 as waffels and wafers coated with chocolate or containing chocolate carrying 16% duty. The ingredients used also does not bring the product under this heading.

They are required to be classified only under the residuary entry "Others" under 1905.19.

10. Further more, we have examined the wrappers of 'BYTES'. The appellants are not marketing the item as chocolates or waffels and wafers coated with chocolate. They are marketing them as "cadbury bytes crispy cocoa filled snack". Hence the department's contention to consider the item as waffels and wafers coated with chocolate or containing chocolate is required to be negatived by applying the Trade Parlance Test. The appellants succeed in the appeals. Appeals allowed with consequential relief.