1968 (2) TMI 36 - SC - Central Excise

Supreme Court sets aside demand notices, rules in favor of appellant companies. Kiln gas not under excise.

The Supreme Court allowed the appeals and the writ petition, setting aside the orders passed by the High Court. The court held that the demand notices ... Manufacture of goods - goods - marketable article - kiln gas - compressed carbon dioxide - Item 14-H - duty on manufactureKiln gas - compressed carbon dioxide - Item 14-H - marketable article - manufacture of goods - Whether the gas produced in lime kilns and used in the carbonation and solvay processes is 'compressed carbon dioxide' or 'carbonic acid (carbon dioxide)' liable to excise under Item 14-H of Schedule I - HELD THAT: - The Court found on the materials and expert affidavits that combustion of limestone with coke produces a mixture of gases - kiln gas - comprising carbon dioxide, carbon monoxide, oxygen, nitrogen and particulates, with carbon dioxide content substantially below the purity of commercial carbon dioxide. Texts and affidavits show commercial or marketable carbon dioxide ordinarily contains at least about 99 per cent CO2 and is supplied compressed, liquified or solidified (e.g., in specified cylinders). The manufacturers here do not separate and market pure CO2; they produce and use kiln gas as such and, although the kiln gas may be pumped at modest pressures in the course of the integrated manufacturing process, that pumping does not convert the kiln gas into 'compressed carbon dioxide' as understood in trade and market. The Court applied the established principle that excise attaches to goods which are new and different and known to the market as such; an intermediate substance attracts duty only if it is a marketable article distinct in name, character or use. Kiln gas was found to be known in trade and science as kiln gas, not as carbon dioxide, and is not marketable as compressed, liquified or solidified carbon dioxide without elaborate separation and purification. Consequently kiln gas is not the 'compressed carbon dioxide' described in Item 14-H and does not fall within that taxable description even though carbon dioxide is a constituent of the kiln gas and is used in the manufacturing processes. [Paras 12, 13, 14, 15, 16]The kiln gas produced and used by the appellants is not 'compressed carbon dioxide' within Item 14-H and therefore is not liable to excise duty under that item.Final Conclusion: The appeals and the writ petition are allowed; the High Court's orders are set aside, the demand notices are quashed, and costs are awarded to the appellants and the petitioner. Issues Involved:1. Whether the excise duty levied on carbon dioxide produced by the appellant companies falls under Item 14-H of Schedule I to the Central Excises and Salt Act, 1944.2. Whether the gas produced by the appellant companies is carbon dioxide as known to the market.3. Whether the gas produced is compressed carbon dioxide as per the legal and market definition.4. Whether the appellant companies are manufacturers of carbon dioxide.5. Whether the mixture of gases produced is marketable and known to the trade as carbon dioxide.Issue-wise Analysis:1. Whether the excise duty levied on carbon dioxide produced by the appellant companies falls under Item 14-H of Schedule I to the Central Excises and Salt Act, 1944:The appellant companies challenged the legality of the excise duty levied under Item 14-H in Schedule I to the Central Excises and Salt Act, 1944. Item 14-H pertains to 'Compressed liquified or solidified gases, the following: (iv) Carbonic acid (Carbon dioxide) Fifty per cent ad valorem.' The appellant companies contended that the gas produced by them does not fall under this item as it is not compressed, liquified, or solidified carbon dioxide as defined by the Act.2. Whether the gas produced by the appellant companies is carbon dioxide as known to the market:The appellant companies manufacture sugar and soda ash using processes that involve the production of a mixture of gases, including carbon dioxide. However, they argued that the gas produced is not carbon dioxide as known to the market. The gas produced is a mixture of gases, commonly referred to as kiln gas, which includes carbon dioxide, nitrogen, oxygen, and carbon monoxide. The carbon dioxide content in this mixture ranges from 27 to 36.5 percent, which is significantly lower than the 99 percent purity required by the Indian Standard Institution for marketable carbon dioxide.3. Whether the gas produced is compressed carbon dioxide as per the legal and market definition:The appellant companies argued that at no stage in their manufacturing process is carbon dioxide compressed, liquified, or solidified. The gas produced is not stored or sold in cylinders under high pressure, as is typical for compressed carbon dioxide in the market. The mere fact that the gas is passed through a conduit pipe by a process of suction does not mean that it becomes compressed carbon dioxide. The court agreed that the gas produced is kiln gas and not compressed carbon dioxide as understood in the market.4. Whether the appellant companies are manufacturers of carbon dioxide:The appellant companies contended that they are not manufacturers of carbon dioxide as it is not separated from the mixture of gases produced. The process employed by them does not result in the production of carbon dioxide in a form that is marketable or known to the trade. The court found that the gas produced is kiln gas, which is not known in the market as carbon dioxide.5. Whether the mixture of gases produced is marketable and known to the trade as carbon dioxide:The court examined affidavits and scientific works which showed that the mixture of gases produced by the appellant companies is known as kiln gas and not as carbon dioxide in the trade. Kiln gas is not a marketable article as it is not transported or sold in the market. The court concluded that the gas produced is not carbon dioxide as known to the market and therefore does not attract Item 14-H in the First Schedule.Conclusion:The Supreme Court allowed the appeals and the writ petition, setting aside the orders passed by the High Court. The court held that the demand notices served on the appellant companies were illegal and must be quashed. The court concluded that the gas produced by the appellant companies is kiln gas and not carbon dioxide as known to the trade, and therefore, it does not fall under Item 14-H of Schedule I to the Central Excises and Salt Act, 1944. The respondents were ordered to pay costs to the appellants and the petitioner.