2025 (10) TMI 112 - AT - Central Excise

2016 circular prospective; excise demands 2012-17 set aside; products held fertilizers (CETH 3105/3101); penalties and MD penalty quashed; deposits refundable

M/s. Total Agri Care Concern Private Limited and Shri Mihir Dey Versus Commissioner of C.G.S.T. and Central Excise, Kolkata

CESTAT KOLKATA - AT held the Board's 06.04.2016 circular is prospective; retrospective application to demand central excise for 2012-17 was impermissible, ... Misclassification of products as fertilizers instead of under Chapters 28/29/38 as Micronutrients, Multi-micronutrients, Plant Growth Regulators or Fungicides - Suppression of facts by not obtaining registration - Misdeclaration of specific products - Non-maintenance of excise records for the earlier period - Intent to evade payment of duty - time limitation - penalty and interest - denial of natural justice - refund of amount paid under protest. Misclassification of products such as ACE, BLOOM F, Totoroot, Biostar Plus and Totozyme manufactured by the appellants - HELD THAT:- The classification of micronutrients and Plant Growth Regulators is a dispute going on many years. To resolve the long-standing disputes, Board has issued the Circular dated 06.04.2016. We observe that the 2016 Circular expressly rescinded earlier Circulars and introduced new guidelines. It admitted classification of micronutrients remained a disputed area until 2016. Thus, we are of the view that the said Circular can be applied prospectively. In the impugned orders, it is found that the Ld. adjudicating authority has applied this Circular retrospectively for the past period and confirmed the demand of central excise duty for the period from 2012-13 to 2016-17, which is legally not permissible. The 2016 Circular cannot be applied to demand duty retrospectively. Accordingly, the demands of central excise duty confirmed in the impugned orders by applying the 2016 Circular retrospectively, are not sustainable. Thus, the demands confirmed in the impugned orders are liable to be set aside on this ground itself - Bio fertilisers and micronutrients used as fertilizers are classifiable under the CETH 3105, whereas, Plant Growth Regulators are classifiable under the CETH 3808. Classification of the product ‘ACE’ - HELD THAT:- ‘ACE’ is essentially a micronutrient preparation containing trace elements such as Zinc, Boron, and Iron, intended to supplement soil fertility and correct deficiencies. These are nutrients, not regulators. As per the Fertiliser Control Order (FCO), micronutrients fall within the ambit of fertilisers, not PGRs - the classification of the product ACE under Chapter 31 is proper. Applying the ‘essential character’ test under the General Interpretative Rules, ACE derives its essential character from the nutrient content, not from incidental traces of plant growth substances. The test report relied upon was inconclusive and did not establish the presence of effective concentrations of hormones or regulators - ACE is appropriately classifiable under the Heading 3105. Classification of the product ‘BLOOM F’ - HELD THAT:- The said BLOOM F is formulated with nutrients and organic substances that enhance flowering. It is a growth promoter that aids natural physiological processes and not a regulator that alters them. The essential function of BLOOM F is nutritional support. The presence of natural plant extracts or auxin-like substances in negligible amounts does not change its character into a regulator. Market evidence shows BLOOM F is perceived as a fertiliser supplement to enhance flowering, not a PGR. Dealer certificates confirm its use in agriculture as a promoter. It is pertinent to refer to the decision in the case of Northern Minerals Ltd. v. CCE, [2001 (5) TMI 74 - CEGAT, COURT NO. III, NEW DELHI], wherein it was held that mere presence of auxins does not make a product a PGR. Similarly, in Jayashree Rasayan Udyog Ltd. v. CCE [2015 (10) TMI 1777 - CESTAT NEW DELHI], the Tribunal distinguished between growth promoters and growth regulators. Therefore, we find that BLOOM F is appropriately classifiable under the Heading 3105. Classification of the product ‘Totoroot’ - HELD THAT:- Totoroot is a bio-fertiliser-based product promoting root initiation and growth. It aids the natural processes of root development, without altering, inhibiting, or regulating plant physiology. It is observed that the Ld. adjudicating authority has equated promotion with regulation, which is legally incorrect. A Plant Growth Promoter (PGP) like Totoroot supports plant processes; a PGR alters or regulates them - reference made to the decision in Northern Minerals Ltd. v. CCE [2001 (5) TMI 74 - CEGAT, COURT NO. III, NEW DELHI] which has held that mere presence of auxins does not classify a product as a PGR. In the case of Leeds Kem v. CCE [2001 (1) TMI 314 - CEGAT, MUMBAI], it has been held that the essential character of a product governs classification, not incidental presence of chemicals. In the case of Jayashree Rasayan Udyog Ltd. v. CCE, [2015 (10) TMI 1777 - CESTAT NEW DELHI], the Tribunal has distinguished growth promoters from regulators - there are no merit in the classification adopted by the ld. adjudicating authority in this regard. Classification of the product ‘Biostar Plus’ - HELD THAT:- The Test report described Biostar Plus as: 'an organic material based on Carboxylic Acid functional group coated/treated on inorganic substance (Carbonate, Calcium, Magnesium, Iron) The organic base is Humic Acid and Humus, derived from biodegraded organic matter. Carrier is Dolomite/Bentonite granules, used widely in the bio-fertilizer industry. Insignificant traces of Ca, Mg, Fe are inherent in the carrier material, not deliberately added - the certificates from distributors/dealers submitted during adjudication show Biostar Plus is marketed and used as a bio-fertilizer. This commercial understanding supports Heading 3101. The adjudicating authority ignored these documents, rendering the order non-speaking and violative of natural justice - On going through the Certificates obtained from the Ministry of Agriculture and Farmers Welfare, Govt. of India, New-Delhi and Deputy Director of Agriculture (Manures and Fertilizers), Govt. of West Bengal which indicate that the combination clearly fell in the category of bio-stimulant. Moreover, no further tests were conducted at agricultural research institutes as recommended and thus, reliance on such a report is not proper. Thus, there are merit in the classification of Biostar Plus under Heading 3101. Classification of the product ‘Totozyme’ - HELD THAT:- There are force in the appellant’s submission that Super Potassium Humate is the main and dominant ingredient of the product, which is a well-known Bio fertilizer, and accordingly, the product ought to have been classified as bio-fertiliser under heading no 3101. It is also relevant to mention that reliance on an incomplete and inconclusive test report to arrive at the present conclusion is bad in law. Further test suggested was not conducted nor any market verification as proposed was made. Thus, the classification adopted by the ld. adjudicating authority in the impugned order on this count is unsustainable. The appellants have cited the decision in case of Commissioner Of C.Ex. & S.T., Hyderabad-IV v. Aries Agrovet [2017 (7) TMI 289 - CESTAT HYDERABAD], the Tribunal at Hyderabad has dealt with a similar issue holding that 'it clearly emerges that the impugned products definitely do contain more than one of the essential nutrients listed in the circular, they have also contain recognisable percentage of nitrogen. This being so, the disputed items are certainly micronutrients. In view of presence of nitrogen, and also considering that they are mixtures and not separate chemically defined compounds, the said goods would therefore come under the ambit of micronutrient fertilisers and will then required to be classified as in “other fertilisers” in CETH 31.05.' Interest and penalties - HELD THAT:- As the demands of central excise duty confirmed in the impugned orders by applying the 2016 Circular retrospectively are not sustainable, there are no justification in the demand of interest or imposition of penalties on the appellant-company vide the impugned orders and accordingly, the same are set aside. Imposition of penalty on Shri Mihir Dey, Managing Director under Rule 26(1) of the Central Excise Rules, 2002 - HELD THAT:- For imposition of personal penalty on any person under Rule 26(1) of the Central Excise Rules, 2002, the element of mens rea had to be necessarily established so far as that person is concerned. However, no positive and/or cogent evidence was adduced by the revenue to show that the said appellant had resorted to or indulged in deliberate evasion of excise duty. Accordingly, the penalty imposed on Shri Mihir Dey is also set aside. Refund of amount paid under protest - HELD THAT:- The amount of Rs.20 lakh paid by them in respect of the Kolkata Commissionerate and the amount of Rs.40 lakh paid by them in respect of the Howrah Commissionerate, under protest during investigation, are to be refunded to them. The demands against the appellants itself have been found to be unsustainable. As the said amounts have been paid by the appellants during the course of investigation, we consider the said amounts to be a deposit and the same are liable to be refunded to the appellants. However, the issue of unjust enrichment is to be tested before sanction of refund to the appellants. Appeal disposed off. ISSUES PRESENTED AND CONSIDERED 1. Whether Circular No. 1022/10/2016-CX dated 06.04.2016 could be applied retrospectively to sustain demands of central excise duty for periods prior to its issuance. 2. Whether the impugned products (ACE, BLOOM F, Totoroot, Biostar Plus, Totozyme) were correctly classified under Chapter/Headings 38.08/3824 (Plant Growth Regulators / micronutrient mixtures) or should properly be classified under Chapter 31 (various fertilizer headings), applying relevant tariff notes and the 'essential character' test. 3. Whether demands, interest and penalties (including personal penalty under Rule 26(1) read with Section 174) were sustainable in absence of mens rea/wilful suppression. 4. Whether proceedings were vitiated by denial of natural justice for non-supply of relied-upon test reports and non-speaking adjudication. 5. Whether amounts paid under protest during investigation are refundable and subject to unjust enrichment test. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Retrospective application of Circular No. 1022/10/2016-CX (2016 Circular) Legal framework: Administrative/circular guidance may clarify classification but cannot ordinarily be applied retrospectively to create or enlarge tax liability where disputes existed; retrospective application requires clear enabling principle and fairness considerations. Precedent treatment: Followed - decisions cited include Karnataka Agro Chemicals (Supreme Court), Aries Agrovet (Tribunal), Suchitra Components (SC), Nakamichi Techo (Tri-Del.), which held clarificatory circulars cannot be applied retrospectively to impose past liabilities. Interpretation and reasoning: The 2016 Circular acknowledged classification of micronutrients and PGRs was a long-standing disputed area and expressly rescinded prior circulars while providing new guidelines. Because it resolves an ongoing controversy rather than supplying purely declaratory clarification of an unambiguous rule, applying it to past clearances amounts to retroactive imposition of liability. The adjudicating authority applied the 2016 Circular to periods 2012-13 to 2016-17; the Tribunal found such retrospective application legally impermissible. Ratio vs. Obiter: Ratio - clarificatory circulars that change administrative stance on disputed classification cannot be relied upon to retrospectively impose duties for earlier periods absent clear statutory mandate; reliance on the cited Supreme Court and Tribunal precedents forms binding ratio for this context. Conclusion: The demands confirmed by applying the 2016 Circular retrospectively are not sustainable and are set aside; consequential interest and penalties founded on those demands also fall. Issue 2 - Classification of products (ACE, BLOOM F, Totoroot, Biostar Plus, Totozyme) Legal framework: Classification governed by Central Excise Tariff headings (notably CETH 31.05, 31.01, 31.03, 38.08), General Rules of Interpretation (essential character test), Fertiliser Control Order (FCO) schedules and HSN/explanatory notes distinguishing fertilisers (nutrients) from plant growth regulators (organic compounds other than nutrients that affect physiological processes). Precedent treatment: Followed and applied - Karnataka Agro Chemicals, Northern Minerals Ltd. (Tri-Del.), Jayashree Rasayan (Tribunal), Leeds Kem (Tri.), Aries Agrovet, KPR Fertilizers (Tri. Hyd.) - holdings emphasizing essential character, market perception, presence of N/P/K as criteria, and that mere presence of auxins or hormonal traces does not convert a nutrient into a PGR. Interpretation and reasoning - ACE, BLOOM F, Totoroot: - The products are formulated primarily as micronutrient preparations or bio-fertiliser-based promoters containing nutrients (e.g., Zn, B, Fe, humic substances) whose essential character is nutritional support rather than hormonal regulation. - Under the essential character test (GRI), incidental or negligible auxin-like or organic extracts do not convert a nutrient preparation into a PGR; market evidence (dealer certificates, invoices) supports classification as fertilisers; test reports relied upon by adjudicating authority were inconclusive on effective regulatory concentrations. Interpretation and reasoning - Biostar Plus: - Test reports were incomplete and laboratory not equipped to test bio-fertilisers; the report recommended further agricultural institute testing which was not done. Product composition (humic acid, humus, potassium humate, dolomite/bentonite carrier) yields essential character of a bio-fertiliser (Heading 3101), not a micronutrient mixture under 3824. FCO Schedule 1 Part-A Sl.1(f) micronutrient list does not include the constituents as relied upon by revenue. Interpretation and reasoning - Totozyme: - Dominant ingredient (super potassium humate) is a recognised bio-fertiliser; incomplete/inconclusive testing and lack of market verification render the adjudicating classification under Heading 3103 unsustainable. Ratio vs. Obiter: Ratio - where a product's predominant ingredient confers nutritional function and market usage shows it as a fertiliser, classification under Chapter 31 is appropriate; mere incidental presence of hormone-like substances or organic extracts does not reclassify the product as a plant growth regulator under Chapter 38.08. The Tribunal's application of essential character and reliance on FCO and precedent is ratio. Conclusion: ACE, BLOOM F, Totoroot, Biostar Plus and Totozyme are properly classifiable under Chapter 31 (respective headings 3105/3101/3103 as applicable) and not under Chapter 38.08/3824; therefore classifications in the impugned orders are unsustainable on merits (subject to non-retrospectivity caveat in Issue 1). Issue 3 - Penalty, interest and personal penalty (mens rea / wilful suppression) Legal framework: Imposition of penalty under Section 11AC and personal penalty under Rule 26(1) requires establishment of culpable mens rea or deliberate suppression; extended period/penalty requires proof of willful suppression (per Supreme Court authorities like Uniflex Cables and other cited decisions). Precedent treatment: Followed - Uniflex Cables, Padmini Products, Cosmic Dye Chemical, Uniworth Textile decisions requiring mens rea for penalty and restricting extended limitation absent willful suppression. Interpretation and reasoning: Classification dispute was genuine and long-standing; appellants acted under bona fide belief and industry practice; no cogent evidence of deliberate evasion or suppression was adduced. Because substantive demands themselves were set aside for being based on retrospective application of the 2016 Circular (Issue 1) and classification on the merits favored appellants (Issue 2), imposition of penalty and interest is not sustainable. Personal penalty on the Managing Director lacked proof of mens rea and is set aside. Ratio vs. Obiter: Ratio - penalties cannot be imposed where the case is an interpretational dispute without evidence of deliberate suppression; personal penalty requires positive evidence of mens rea. Conclusion: Interest and penalties (including personal penalty) are set aside for lack of mens rea and because underlying demands are unsustainable. Issue 4 - Natural justice / non-supply of relied-upon documents and non-speaking order Legal framework: Adjudicatory process must be quasi-judicial, speaking and based on disclosed evidence; denial of documents relied upon vitiates adjudication; adjudicating authority must apply independent mind and not merely echo the show cause notice. Precedent treatment: Reliance on Mohan Lal Capoor and Ballarpur Industries principles that non-speaking mechanical orders and introduction of new grounds without notice are unsustainable. Interpretation and reasoning: Several test reports were not furnished in full; key test report recommended further testing which was not undertaken and was nevertheless relied upon. The impugned orders reproduced SCN allegations verbatim and failed to address appellant's substantive rebuttals and documentary market evidence; such non-speaking treatment contributes to invalidity of adjudication. Ratio vs. Obiter: Ratio - failure to disclose relied-upon documents and issuance of non-speaking orders constitutes procedural infirmity invalidating adjudication; here this supports setting aside orders on merits and procedural grounds. Conclusion: Procedural defects (non-disclosure and non-speaking adjudication) further weigh against sustaining the impugned orders. Issue 5 - Refund of amounts paid under protest and unjust enrichment Legal framework: Amounts deposited under protest during investigation can be refundable when demands are set aside; refunds subject to verification of unjust enrichment principles as per law. Interpretation and reasoning: Since the demands themselves are found unsustainable, sums paid during investigation are treated as deposits and liable for refund; however, the entitlement to refund is subject to verification on the issue of unjust enrichment before sanction. Ratio vs. Obiter: Ratio - deposits made under protest are refundable where demands are quashed, but refund is conditional upon unjust enrichment enquiry. Conclusion: Amounts paid under protest are to be refunded, subject to the department's unjust enrichment verification in accordance with law.