2005 (4) TMI 72 - SC - Central Excise

Supreme Court rules Revenue failed to prove marketability of chemicals

GUJARAT NARMADA VALLEY FERT. CO. LTD. Versus COLLECTOR OF EX. & CUS.

The Supreme Court held that the Revenue failed to prove the marketability of intermediate chemicals DECA and CMBE formed during Butachlor production. The ... Whether the intermediate chemicals, Diethyl Chloro Acetanilide (DECA) and Chloro Methyl Butyl Ether (CMBE) which are formed in the process of manufacture of Butachlor are liable to tax under the Central Excise and Salt Act, 1944? Held that:- The onus was on the Revenue. The only piece of evidence which has been produced by the Revenue was a test report which merely stated that the sample showed that the items were organic chemicals . It does not in any way establish marketability. Nor can marketability be established on the basis of mere stability. Something more would have to be shown to establish that DECA AND CMBE were known in the market as commercial products. The Tribunal has ignored the evidence given by the employees of the appellant. In fact the wrong test was applied to determine the issue. The issue was not whether there was a hypothetical possibility of a purchase and sale of the commodity but whether there was sufficient proof that the product is commercially known. We fail to understand how the letter of M/s. Gharda Chemicals could in any way be stated to have supported the conclusion of the Tribunal that the product was marketable as the letter categorically states that none of the intermediates of Butachlor are marketable in India or overseas. For all these reasons, the decision of the CEGAT is set aside and the order of the Collector (Appeals) is restored. The security, if any, deposited by the appellant pursuant to interim orders of this Court be discharged. Issues:1. Tax liability on intermediate chemicals formed during the manufacture of Butachlor under the Central Excise and Salt Act, 1944.Analysis:The appeal in question revolved around the tax liability of intermediate chemicals, Diethyl Chloro Acetanilide (DECA) and Chloro Methyl Butyl Ether (CMBE), formed during the production of Butachlor under the Central Excise and Salt Act, 1944. During the period of 1989 to 1991, Butachlor was exempt from excise duty. The Assistant Collector raised a demand on the appellant for the intermediate products, claiming they were 'coming into existence.' However, the Commissioner (Appeals) set aside the demand, stating that the products were not marketable as there was no factual basis to establish their marketability. The products were deemed non-marketable based on Chapter Note 1(a) to Chapter 29 of the Central Excise Tariff Act, 1985, when read with Section 2(F) and Section 3 of the Act.The Customs, Excise and Gold (Control) Appellate Tribunal (CEGAT) reversed the Commissioner's decision, asserting that the products were stable and hence marketable. CEGAT considered a Chemical Examiner's test report, which indicated that DECA and CMBE were organic chemicals with adequate shelf life, making them suitable for sale in the market. The tribunal emphasized that the products' stability met the marketability criteria established by previous court decisions. Additionally, CEGAT referred to a letter from M/s. Gharda Chemicals, produced by the appellant, to support its conclusion that the products were marketable based on actual production figures.The appellant contended that CEGAT's decision was illogical and based on conjectures. Citing a previous court ruling, it was highlighted that for excise duty to apply, the product must be capable of being marketed and recognized in the market as a distinct commodity. The appellant argued that the mere inclusion of items in a schedule does not automatically render them marketable; they must have commercial identity and be known in the market as goods. The appellant further emphasized that marketability must be established based on evidence of commercial recognition, not just stability or theoretical market potential.The Supreme Court found that the Revenue failed to provide sufficient evidence to establish marketability of DECA and CMBE. The test report merely identified the products as organic chemicals without proving market recognition. The Court criticized CEGAT for disregarding the appellant's evidence and applying the wrong test to determine marketability. Additionally, the Court dismissed the relevance of the letter from M/s. Gharda Chemicals, which explicitly stated that the intermediates of Butachlor were not marketable. Consequently, the Court set aside CEGAT's decision, reinstated the Commissioner (Appeals) order, and allowed the appeal without costs.