Collector of Central Excise Vs. Union Carbide (i) Ltd. - Court Judgment

Excerpt:
1. brief facts of the case are that the respondents herein applied in 1967 for l-6 licence for receiving the toluol falling under tariff heading 6 of the erstwhile central excise tariff item under chapter x procedure in terms of notification no. 276/67 dated 21-12-1967 (as amended). this toluol was used by them for making c.p. 3 coating used in the manufacture of layer flat cells.2. it is not disputed that in the year 1967-68 the question was raised as to the precise use of toluol brought by the respondents under chapter x. the then deputy chief chemist examined the product and reported 'c.p. 3 coating is not similar to that of a normal paint or varnish sold in the market nor its function is that of paint and varnish, hence it cannot be identified as paint or varnish'. the question about the character of c.p. coating manufactured by the respondents out of toluol was again raised in 1977. test report of the then deputy chief chemist dated 14-10-1980 was that 'thus from the mode of manufacture of the product, its application as a coating material by roller coating technique and the chemical composition, the product bears similarity to paint and may be considered by the term 'allied materials'. the assistant collector, therefore, confirmed the various demands as follows :-date of order-in-original period of demand amount of duty date of demand confirmed(1) 7-12-1979 sept. 1968 to rs. 4,66,583.79p may 1977(2) 7-8-1980 july 1979 to rs. 28,017.96 nov. 1979(3) 28-11-1981 4-8-1977 to 28-6-1979, rs. 16,121.48 23-7-1979 2.1 on appeal, the lower appellate authority, namely the appellate collector of central excise, calcutta, set aside the impugned orders on the following grounds :- "but in view of the fact that in a series of three chemical tests one in 1967-68 and the other in 1977 and the latest in october, 1980, two reports specifically stated that product c.p. 3 compound is neither paint nor a varnish. it is only in the chemical test report of october, 1980 where it is stated that from the mode of manufacture of the product and the mode of application as a coating material by roller coating technique and also on the basis of the chemical composition the product bears similarity to paint and may be considered as covered by the term 'allied materials'. in the central excise tariff item no. 14 there is no term as 'allied materials'. this term seems to have been taken from notification no. 53/73 dated 1-3-1973 which exempts to some extent certain mineral oil products used as thinner or diluent for the manufacture of paints etc. including allied materials. only because the term 'allied materials' occurred in this exemption notification, it is doubtful if the product of the applicants which is stated to be bearing some similarity to paint can be treated as other than chemical formulations. the question involved in this appeal is whether the c.p. 3 compound manufactured by the appellants is a chemical formulation as mentioned in exemption notification no. 276/67 dated 21-12-1967 or a formulation other than chemical. since two chemical test reports had specifically stated that this product is neither a paint nor a varnish, majority of the chemical opinion had to be taken. even in the last chemical test report it only says that the products have some similarity to paint. only because the product has similarity to paint it cannot be treated as a paint. with regard to the finding of the assistant collector that their product is a resin formulation because it contains 54% of resin, it is not known on what basis this finding was made in view of the chemical test report dated 14-10-1980 where it is stated that the binder resin content was 19.16% presence of small amount of resin is admitted by the appellants. but that itself cannot make the formulation as a resin formulation. all these facts leads to a conclusion that the product is nothing but a chemical formulation. the appellants are fully entitled to the exemption under notification no. 276/67. moreover, the fact that on more than one occasion their entitlement to the exemption had been questioned but no attempts appear to have been made to revoke or cancel the l-6 licence of the appellants this is a fact in favour of the appellants that central excise department are not clear of their grounds." 3. the appellant-collector has now urged in the memo of appeal that toluol is being used in two stages - he further adds that it is already indicated in the impugned order that the c.p. 3 contains 19.3% carbonaceous matter, 19.16% of binder resin and the rest volatile solvents mainly toluol. he thus urges that toluol is used not only as a diluent but, also as a thinner during actual coating operation to make up the loss of the solvent due to evaporation to adjust viscosity and maintain the consistency. from the stated use of the toluol it cannot be inferred that this is a chemical formulation. none of the ingredients like carbon particles, binding agent like resin and solvent present in the product are capable of functioning as chemicals by themselves or the combinations as a whole.it has, therefore, been urged that the benefit of notification no.276/67-c.e., dt. 21-12-1967 would not be available to the respondents.hence the prayer that the impugned order be set aside.4. the respondents' learned advocate, on the other hand, urges that c.p. 3 is nothing but a chemical formulation. it is used, as already stated, in the manufacture of layer flat cells and the formulation prepared is coated on a zinc plate. in support of this, the learned advocate has relied upon encyclopaedia of chemical technology, third edition, vol. 3 in which section relating to 'dry cells' on page 398 states as follows :- "flat cells are usually made with duplex electrodes. the zinc is coated on both sides with a carbonaceous coating, which serves to conduct electricity between the zinc and the black mix of the adjacent cell." "the flat cell construction utilises a series of unit cells usually rectangular in shape. each unit cell is partially enclosed in an insulating elastic envelope as shown in figure 3. carbon is coated on a zinc plate and serves as the cathode current collector of the adjacent cell. contacts to adjacent cells are made through the opening of the envelope when the cells are stacked in series. the flat cell construction is used for high voltage, low current applications where space is important." he has further submitted that the findings of the lower appellate authority are correct in law and on facts. the respondents had been working under chapter x procedure after taking the due permission and approval of the central excise authorities and after obtaining an l-6 licence from the said authorities. the deputy chief chemist's report of 1980 relied upon by the departmental authorities to upset the practice prevalent in 1967 is also not categorical so as to call for any change and it has been adequately discussed in the impugned order. he, therefore, submits that the appeals deserve to be dismissed.5. we have carefully considered the pleas advanced on both sides. we agree with the lower appellate authority and the unrebutted evidence brought on record by the respondents' learned advocate. no doubt is left that the c.p. 3 coating manufactured by the respondents is clearly a chemical formulation and, therefore the toluol has been rightly extended the benefit of notification no. 276/67-c.e. the test report relied upon by the appellant-collector is not categorical. the report only says that the product bears similarity to paint. it does not say that it is paint. merely because the mode of manufacture and the application of the product is as that of a paint, it does not mean that the product is a paint by itself. paint is normally applied to surfaces for the purpose of protection and decoration. it has nowhere been brought on record that these are the two purposes of the product in question. on the other hand, it is clear that the c.p. 3 coating is carbonaceous coating used in the manufacture of layer flat cells.

Judgment:
1. Brief facts of the case are that the respondents herein applied in 1967 for L-6 licence for receiving the Toluol falling under Tariff Heading 6 of the erstwhile Central Excise Tariff Item under Chapter X Procedure in terms of Notification No. 276/67 dated 21-12-1967 (as amended). This Toluol was used by them for making C.P. 3 coating used in the manufacture of layer flat cells.

2. It is not disputed that in the year 1967-68 the question was raised as to the precise use of Toluol brought by the respondents under Chapter X. The then Deputy Chief Chemist examined the product and reported 'C.P. 3 coating is not similar to that of a normal paint or varnish sold in the market nor its function is that of paint and varnish, hence it cannot be identified as paint or varnish'. The question about the character of C.P. coating manufactured by the respondents out of Toluol was again raised in 1977. Test report of the then Deputy Chief Chemist dated 14-10-1980 was that 'thus from the mode of manufacture of the product, its application as a coating material by roller coating technique and the chemical composition, the product bears similarity to paint and may be considered by the term 'allied materials'. The Assistant Collector, therefore, confirmed the various demands as follows :-Date of order-in-original Period of Demand Amount of duty Date of Demand confirmed(1) 7-12-1979 Sept. 1968 to Rs. 4,66,583.79P May 1977(2) 7-8-1980 July 1979 to Rs. 28,017.96 Nov. 1979(3) 28-11-1981 4-8-1977 to 28-6-1979, Rs. 16,121.48 23-7-1979 2.1 On appeal, the lower appellate authority, namely the Appellate Collector of Central Excise, Calcutta, set aside the impugned orders on the following grounds :- "But in view of the fact that in a series of three Chemical Tests one in 1967-68 and the other in 1977 and the latest in October, 1980, two reports specifically stated that product C.P. 3 compound is neither paint nor a varnish. It is only in the Chemical Test Report of October, 1980 where it is stated that from the mode of manufacture of the product and the mode of application as a coating material by roller coating technique and also on the basis of the Chemical Composition the product bears similarity to paint and may be considered as covered by the term 'allied materials'. In the Central Excise Tariff Item No. 14 there is no term as 'allied materials'. This term seems to have been taken from Notification No. 53/73 dated 1-3-1973 which exempts to some extent certain mineral oil products used as thinner or diluent for the manufacture of paints etc. including allied materials. Only because the term 'allied materials' occurred in this exemption notification, it is doubtful if the product of the applicants which is stated to be bearing some similarity to paint can be treated as other than chemical formulations. The question involved in this appeal is whether the C.P. 3 compound manufactured by the appellants is a chemical formulation as mentioned in exemption Notification No. 276/67 dated 21-12-1967 or a formulation other than chemical. Since two Chemical Test Reports had specifically stated that this product is neither a paint nor a varnish, majority of the chemical opinion had to be taken. Even in the last chemical test report it only says that the products have some similarity to paint. Only because the product has similarity to paint it cannot be treated as a paint.

With regard to the finding of the Assistant Collector that their product is a Resin Formulation because it contains 54% of Resin, it is not known on what basis this finding was made in view of the Chemical Test Report dated 14-10-1980 where it is stated that the binder resin content was 19.16% presence of small amount of Resin is admitted by the appellants. But that itself cannot make the formulation as a resin formulation. All these facts leads to a conclusion that the product is nothing but a chemical formulation.

The appellants are fully entitled to the exemption under Notification No. 276/67. Moreover, the fact that on more than one occasion their entitlement to the exemption had been questioned but no attempts appear to have been made to revoke or cancel the L-6 licence of the appellants this is a fact in favour of the appellants that Central Excise Department are not clear of their grounds." 3. The appellant-Collector has now urged in the memo of appeal that Toluol is being used in two stages - He further adds that it is already indicated in the impugned order that the C.P. 3 contains 19.3% carbonaceous matter, 19.16% of binder resin and the rest volatile solvents mainly toluol. He thus urges that Toluol is used not only as a diluent but, also as a thinner during actual coating operation to make up the loss of the solvent due to evaporation to adjust viscosity and maintain the consistency. From the stated use of the Toluol it cannot be inferred that this is a chemical formulation. None of the ingredients like carbon particles, binding agent like resin and solvent present in the product are capable of functioning as chemicals by themselves or the combinations as a whole.

It has, therefore, been urged that the benefit of Notification No.276/67-C.E., dt. 21-12-1967 would not be available to the respondents.

Hence the prayer that the impugned order be set aside.

4. The respondents' learned advocate, on the other hand, urges that C.P. 3 is nothing but a chemical formulation. It is used, as already stated, in the manufacture of layer flat cells and the formulation prepared is coated on a zinc plate. In support of this, the learned advocate has relied upon Encyclopaedia of Chemical Technology, Third Edition, Vol. 3 in which section relating to 'Dry Cells' on page 398 states as follows :- "Flat cells are usually made with duplex electrodes. The zinc is coated on both sides with a carbonaceous coating, which serves to conduct electricity between the zinc and the black mix of the adjacent cell." "The flat cell construction utilises a series of unit cells usually rectangular in shape. Each unit cell is partially enclosed in an insulating elastic envelope as shown in Figure 3. Carbon is coated on a zinc plate and serves as the Cathode current collector of the adjacent cell. Contacts to adjacent cells are made through the opening of the envelope when the cells are stacked in series. The flat cell construction is used for high voltage, low current applications where space is important." He has further submitted that the findings of the lower appellate authority are correct in law and on facts. The respondents had been working under Chapter X Procedure after taking the due permission and approval of the Central Excise authorities and after obtaining an L-6 licence from the said authorities. The Deputy Chief Chemist's Report of 1980 relied upon by the departmental authorities to upset the practice prevalent in 1967 is also not categorical so as to call for any change and it has been adequately discussed in the impugned order. He, therefore, submits that the appeals deserve to be dismissed.

5. We have carefully considered the pleas advanced on both sides. We agree with the lower appellate authority and the unrebutted evidence brought on record by the respondents' learned advocate. No doubt is left that the C.P. 3 coating manufactured by the respondents is clearly a chemical formulation and, therefore the Toluol has been rightly extended the benefit of Notification No. 276/67-C.E. The Test Report relied upon by the appellant-Collector is not categorical. The Report only says that the product bears similarity to paint. It does not say that it is paint. Merely because the mode of manufacture and the application of the product is as that of a paint, it does not mean that the product is a paint by itself. Paint is normally applied to surfaces for the purpose of protection and decoration. It has nowhere been brought on record that these are the two purposes of the product in question. On the other hand, it is clear that the C.P. 3 coating is carbonaceous coating used in the manufacture of layer flat cells.