2005 (2) TMI 119 - SC - Central Excise

Supreme Court ruling on product classification and excise duty burden of proof

HINDUSTAN ZINC LTD. Versus COMMISSIONER OF CENTRAL EXCISE, JAIPUR

The Supreme Court allowed the appeal, setting aside the Tribunal and Commissioner's judgments. The Court held that the intermediate product was ... Whether the intermediate product produced in the manufacture of zinc in the assessee's factory is marketable and if it is marketable then whether the product is to be classified under Tariff Heading 28.43? Held that:- In the present case, the department has made no efforts to ascertain whether silver chloride emerging from the treatment adopted in the assessee's factory, having 50% to 53% silver content, had a market. Mathematical ratio between total quantity of silver chloride and silver content cannot establish marketability. The burden was on the department to prove such marketability. In the circumstances, on facts, we hold that the department has failed to prove the test of marketability. That since 1990, when the case of Hindustan Zinc Ltd. (1989 (9) TMI 228 - CEGAT, NEW DELHI) came to be decided, the question of excisability of silver chloride has been cropping up and yet till this day no steps have been taken by the department to go to the market and collect proper evidence of marketability. In most of the matters, we find lethargy and reluctance on the part of the department to collect evidence on marketability and even in cases where market enquiry is made it is made in a perfunctory manner. Consequently, despite the department having good case on classification, we are constrained to allow the appeal of the assessee on marketability for want of evidence. Assessee appeal allowed. Issues:Classification of intermediate product in the manufacture of zinc under Tariff Heading 28.43; Marketability of the product.Analysis:The central issue in this civil appeal was the classification of the intermediate product produced during the manufacture of zinc in the assessee's factory and its marketability under Tariff Heading 28.43. The department contended that the silver chloride residue from the extraction process was a marketable commodity liable to duty under Tariff Item 2843.10. On the other hand, the assessee argued that the silver chloride was merely an intermediate process residue, not amounting to excisable goods, as it had no market and was not commercially viable due to its lower silver content and impurities compared to the silver chloride sold in the market.The Supreme Court emphasized that for excise duty to be levied on an item, it must satisfy two conditions: the process must constitute manufacture, and the product obtained must be commercially marketable. Citing previous judgments, the Court reiterated that goods must be capable of being bought or sold in the market to be considered excisable. Applying these principles to the case at hand, the Court examined the flow-chart of the manufacturing process and determined that the silver chloride obtained was a chemically defined compound classifiable under Chapter Heading 28.43, satisfying the first test of 'manufacture.'Regarding marketability, the Court analyzed the differences between the silver chloride produced by the assessee and that available in the market. The Court highlighted that marketability is a question of fact and observed that the department had failed to prove the marketability of the silver chloride residue from the assessee's factory. Despite some market inquiry data presented, the Court found that the burden was on the department to establish marketability, which it had not done satisfactorily. The Court criticized the department for its lack of efforts in collecting proper evidence on marketability over the years, leading to a lack of substantiated claims.In conclusion, the Court allowed the appeal of the assessee, setting aside the judgments and orders of the Tribunal and the Commissioner. The Court directed the department to return the duty amount collected during the appeal process to the assessee. The judgment highlighted the importance of proving both the manufacturing process and the marketability of goods for the levy of excise duty, emphasizing the burden of proof on the department in establishing marketability.