2005 (4) TMI 72 - SC - Central Excise

Supreme Court rules Revenue failed to prove marketability of chemicals

The Supreme Court held that the Revenue failed to prove the marketability of intermediate chemicals DECA and CMBE formed during Butachlor production. The ... Marketability - excise duty - intermediate products - commercial identity - onus of proof on the Revenue - stability not sufficient for marketabilityMarketability - intermediate products - commercial identity - stability not sufficient for marketability - onus of proof on the Revenue - Whether the intermediate chemicals Diethyl Chloro Acetanilide (DECA) and Chloro Methyl Butyl Ether (CMBE) were marketable and therefore liable to excise duty - HELD THAT: - The Court applied the marketability test as explained in earlier decisions and held that mere inclusion of an article in the tariff or its chemical stability does not establish marketability. Marketability requires that the product be capable of being sold and known in the market as a distinct commercial commodity with a commercial identity; actual sales are not necessary but commercial recognition is. The onus to prove marketability lay on the Revenue. The sole evidence produced by the Revenue - a chemical test report stating the items were organic chemicals and thus stable - did not demonstrate commercial recognition or marketability. The Tribunal erred in treating stability and hypothetical capability of purchase and sale as sufficient proof; it also ignored the appellant's evidence and misapplied the legal test. A letter relied upon by the department in fact stated that the intermediates were not marketable. In view of these findings the Tribunal's conclusion that the products were marketable and liable to excise was set aside and the Collector (Appeals) order restored. [Paras 5, 7, 8, 9, 10]DECA and CMBE were not shown to be marketable commercial products and therefore were not liable to excise duty; the Tribunal's decision is set aside and the Collector (Appeals) order restored.Final Conclusion: The appeal is allowed: the findings of CEGAT that the intermediate chemicals were marketable are set aside; the Collector (Appeals) decision that DECA and CMBE were not liable to excise is restored, security (if any) deposited is to be discharged and there shall be no order as to costs. 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.