2001(04)LCX0225

IN THE CEGAT, COURT NO. III, NEW DELHI

S/Shri Lajja Ram, Member (T) and S.S. Kang, Member (J)

PESHAWAR SOAP & CHEMICAL WORKS

Versus

COMMR. OF C. EX., CHANDIGARH

Stay Order No. 17/2001-C, dated 11-4-2001 in E/Stay/108/2001-C in Appeal No. E/110/2001-C

Cases Quoted

Colgate Palmolive (I) Ltd. v. U.O.I. — 1980(01)LCX0012 Eq 1980 (006) ELT 0268 (Bom.) — Followed................. [Para 13]

Hindustan Lever Ltd. v. Collector — 2000(06)LCX0240 Eq 2000 (121) ELT 0451 (Tribunal) — Referred.............. [Para 2]

Leukoplast (I) Pvt. Ltd. v. U.O.I. — 1984(08)LCX0012 Eq 1985 (020) ELT 0070 (Bom.) — Followed...................... [Para 9]

Oswal Agro Mills Ltd. v. Collector — 1993(04)LCX0046 Eq 1993 (066) ELT 0037 (S.C.) — Followed...................... [Para 8]

Ram Tirth Yogashram v. State of Maharashtra — 1968 (22) S.T.C. 76 (Bom.) — Followed. [Para 9]

State of Gujarat v. Prakash Trading Co. — 1972 (30) S.T.C. 348 (S.C.) — Followed.......... [Para 13]

Subhash Chandra Nishad v. U.O.I. — 1979 (004) ELT (J 212) (Bom.) — Followed.............. [Para 9]

U.O.I. v. T.S.R. & Co. — 1985(03)LCX0063 Eq 1985 (022) ELT 0701 (Mad.) — Relied on....................................... [Para 9]

Wipro Ltd. v. Commissioner — 2000(06)LCX0060 Eq 2001 (136) ELT 0885 (Tribunal) — Referred...................... [Para 2]

Advocated By :   Shri V. Lakshmikumaran, Advocate, for the Appellant.

Shri K. Swami, Sr. Advocate, for the Respondent.

[Order per : Lajja Ram, Member (T)]. - Being aggrieved with the order-in-original, dated 30-11-2000 passed by the Commissioner of Central Excise (Adjudication), New Delhi, M/s. Peshawar Soap and Chemical Works, Patiala (Punjab), (hereinafter referred to as ‘M/s. Peshawar’), filed an appeal with the Tribunal, which was received in the Registry on 18-1-2001. Along with the appeal, M/s. Peshawar also filed stay application under Section 35F of the Central Excise Act, 1944 (hereinafter referred to as the ‘Act’ ), which was also received in the Registry of the Tribunal on 18-1-2001. The matter relates to the classification of the product - ‘Kesh Nikhar’, which M/s. Peshawar described as soap classifiable under sub-heading No. 3401.12 of the Central Excise Tariff (CET), which covered “soap in or in relation to the manufacture of which no process has been carried on with the aid of power or of steam”. In the show cause notice dated 16-12-1999, it was mentioned that the “Kesh Nikhar” branded bar/cake manufactured by M/s. Peshawar was a bath preparation, containing soap exclusively meant for use on the hair (refer para 3.0 of the show cause notice). It was further summarised at page 10 of the show cause notice that “Kesh Nikhar” functioned more or less as a shampoo and that it could be used as an alternative to soap and could be rightly termed as a poor man’s shampoo. It was proposed in the said show cause notice that the goods in question were correctly classifiable under Heading No. 33.05 of the Central Excise Tariff as preparations for use on the hair. Central Excise duty of Rs. 8,42,17,562/- for the period 1-12-1994 to 30-11-1999 was demanded invoking the extended period of limitation. Penal provisions were also invoked.

The matter was adjudicated by the Commissioner of Central Excise (Adjudication), New Delhi, who under her order-in-original dated 30-11-2000, framed the question for her consideration as to whether the product - Kesh Nikhar was a soap or a shampoo in the form of soap/cake (refer para 35 of the adjudication order). It was held, after applying the principle of common trade parlance that the goods in question were a shampoo in the form of a soap and were classifiable under Heading No. 33.05 of the Central Excise Tariff as preparations for use on the hair. Demand of duty of Rs. 8,42,17,562/- was confirmed and an equal amount of penalty was imposed. Further, a penalty of Rs. 2,00,00,000/- under Rule 52A(8) of the Central Excise Rules, 1944 (hereinafter referred to as the ‘Rules’), Rs. 2,000/- under Rule 9(2) and Rs. 2,000/- under Rule 226 of the Rules were also imposed. Interest under Section 11AB of the Act was also demanded.

2. The stay application was heard on 15-3-2001 when Shri V. Lakshmi Kumaran, Advocate, appeared for the applicants. The Revenue was represented by Shri K. Swami, Sr. Advocate.

Shri V. Lakshmi Kumaran, Advocate, submitted that the product - Kesh Nikhar in question was a soap and it was not a shampoo. He dealt with the distinction between a soap and a shampoo. Reference was made to the Test Report dated 28-7-1999 of the Chemical Examiner, Central Revenue Control Laboratory (CRCL), wherein the goods have been categorised as a soap. He referred to the relevant Chapter Notes of the Tariff to plead that soap was outside the purview of Chapter 33 of the Central Excise Tariff. Even on common parlance test, the Kesh Nikhar in the form of bar/cake was not known as a shampoo. How the goods were advertised was not relevant for classification. There was no suppression of any fact. Financial hardship was also pleaded. Reference was also made to the Tribunal’s decisions in the case of (i) M/s. Hindustan Lever Ltd. v. Collector of Central Excise, Mumbai - 2000(06)LCX0240 Eq 2000 (121) ELT 0451 (Tribunal) and (ii) M/s. Wipro Ltd. and Panchajanya Enterprises v. Commissioner of Central Excise, Bangalore in Appeal Nos. E/1272/99 and E/1424/99 disposed of by Final Order Nos. 773-774/2000, dated 6-6-2000 [2000(06)LCX0060 Eq 2001 (136) ELT 0885 (Tribunal)] by the South Zonal Bench at Chennai.

In reply, Shri K. Swami, Sr. Advocate submitted that the product was a preparation for use on the hair and referred to the various advertisements inserted by the applicants. The trade and the consumers treated it as a shampoo. He pleaded that the evidence in support of the financial hardship was sketchy and in any case, the interests of Revenue should be safeguarded.

3. We have carefully considered the submissions made by both the sides.

Although, presently, we are concerned only with the disposal of the stay application, even at this prima facie stage, the matter deserves a relatively more careful consideration in view of the large amount of duty and penalty involved. We have done so. It is however, made clear that our conclusions drawn for disposal of the present stay application are tentative, and a more detailed examination of the issues involved will be required when the main appeal comes up for final disposal.

4. It is an undisputed fact that the product in question - “Kesh Nikhar” was in the form of soap cake/bar. It was used by the consumers as a soap cake/bar. Its ingredients were as of any other toilet soap. In the show cause notice, it had been noted that the Kesh Nikhar was a soap, although it was argued that it was not a normal soap as it was for application on the hair. The adjudicating authority had also observed that the product - Kesh Nikhar was in the form of a soap. Both in the show cause notice and the adjudication order, it has been mentioned that the product - Kesh Nikhar was being used by the consumers as a substitute for shampoo. The question for consideration is whether by virtue of its use for washing the hair, the product - Kesh Nikhar could be classified as a shampoo for the purposes of CET.

5. In common parlance, shampoo is a soapy/cleansing preparation to wash the hair or scalp. It is generally marketed in liquid or viscous form in bottles or pouches. Soap in the form of cake/bar, even when used for washing the hair, is not commonly understood as a shampoo. In fact all the toilet soaps used for body bath could as well be used on the hair too. In fact, majority of the people in the country use the toilet soap for washing the hair as well. Such soaps even when used on the hair are treated as a normal toilet soap and not as a shampoo.

6. In the Kirk-Othmer Concise Encyclopaedia of Chemical Technology, Third Edition at page 326, it has been described that soap, shampoos are primarily aqueous solutions of soft soap, combined with preservaties, sequestrants, colour and perfume. At page 576, it is discussed that almost all shampoos are inclear liquid and opaque lotion form. Typical shampoo formulations are given in Table-1 at page 576 as under :-

Table 1. Typical Shampoo Formulations

At page 575 of the above Encyclopaedia, it is mentioned that during application, the shampoo must spread easily over the head and into the hair. It should foam quickly and copiously in both soft and hard water and then rinse out thoroughly, leaving no detectable residues. It has been added that almost without exception, shampoos consist of an aqueous solution, emulsion, or dispersion of one or more cleansing agents, together with additives employed for the purposes of modifying and stabilizing the various functional and aesthetic properties of the finished product.

7. The process of manufacture of the soap “Kesh Nikhar” has been given in para 3.3.2 of the show cause notice as under :-

(page 18)

“Different types of non-edible grade vegetable oils namely Coconut solvent extracted, Mahuwa oil, Cotton seed oil, castor oil and coconut oil, etc., are weighed in required proportion and mixed manually with the help of wooden poles. Then liquid caustic soda lye is gradually added in the oil and thoroughly mixed. In this process heat is generated and the mixture starts thickening. As soon as saponification starts, colour and perfume are added in the mass. The perfume/fragrance added are PESCO-1, PESCO-II, PESCO-III. YARA-YARA and Isobornyl Acetate. The mass is put in the moulds and allowed to cool for 48 hours. Then the blocks are taken out and cut into desired shapes and packed for sale.”

Could such a product be considered as a shampoo as described above. Even in the show cause notice, Kesh Nikhar soap has been mentioned as a poor man’s shampoo. It is mentioned that Kesh Nikhar functions more or less as a shampoo and that it is used as an alternative to shampoo and could be termed as a poor man’s shampoo. As is clear from the above technical description, shampoo is a well defined product and even when it may or may not contain soap, it could not be treated as a soap in the form of cake/bar. Similarly, while soap could be in the form of liquid, nowhere shampoo has been mentioned as a product in the form of cake/bar.

8. We find that no material has been placed on record to show that the consumers, which were using the product in question understood it as a shampoo. The product may have an effect as that of a shampoo; but this will not make the product a shampoo.

According to Shri Bharat Bhusan, Authorised Signatory of M/s. Peshawar Soap & Chemical Works in his statement dated 10-6-1999 recorded under Section 14 of the Act, the Kesh Nikhar soap could be used for body bath and for other purposes, but the Company as a marketing strategy was giving stress on hair wash to market their product (refer page 31 of the paper book). According to Shri Omprakash Khandelwal, a dealer, poor consumers, who could not afford shampoo, used soaps like Kesh Nikhar.

It is thus seen that while the Kesh Nikhar was a general purpose soap suitable for body bath, as a matter of advertising strategy its use for washing hair was being highlighted by the applicants/appellants.

In the case of Oswal Agro Mills Ltd. v. Collector of Central Excise - 1993(04)LCX0046 Eq 1993 (066) ELT 0037 (S.C.), the Hon’ble Supreme Court in para 8 of their judgment have observed as under :-

“8. Individual preference or choice or taste of a particular soap for bath is not relevant.”

9. Classification of a product could not be determined on the basis of certain characteristics of a product highlighted in its advertisement. The nature of the product and its description in the relevant Tariff Entry, have to form the basis of classification. It has been held by the Bombay High Court in Ram Tirth Yogashram v. State of Maharashtra - 1968 (22) STC 76 (Bombay) that the mode in which a person may choose to advertise his commodity cannot be decisive in determining its real nature (refer para 5 of Union of India v. TSR and Company - 1985(03)LCX0063 Eq 1985 (022) ELT 0701 (Mad.).

In the case of Subhash Chandra Nishad v. Union of India - 1979 (004) ELT (J 212) (Bombay), the Bombay High Court had observed in para 10 of their judgment “it is usual for an advertiser of products to claim all possible virtues for his products, but it would be erroneous to rely on all these claims to determine the trade use of the products.

In the case of Leukoplast (I) Pvt. Ltd. v. Union of India - 1984(08)LCX0012 Eq 1985 (020) ELT 0070 (Bombay), the Bombay High Court had held in para 12 as under :-

“12. .... However, it may be pointed out that for the purposes of classification for levy, the advertisements are of no value or help. Advertisements are published by the manufacturers of a product in order to attract consumers and have nothing to do with the classification of the same product for levying of duty. This Court dealing with such contention has held, inter alia, in the case of Blue Star Ltd. v. Union of India and another - 1980 (006) ELT 280 that payment of duty under a particular Tariff Item must depend upon the facts of the case and not on the advertisement gimmick of the advertiser. The same view was also taken in Subhash Chandarnishat v. Union of India and another - 1979 (004) ELT 212, and by a Division Bench of the Kerala High Court in the case of The Dy. Commissioner of Agricultural Income-tax and Sales Tax (Law) Board of Revenue (Taxes), Ernakulam v. Union Carbide India Ltd., Madras-2, 1976 Sales Tax Cases (Vol. 38), page 198.”

10. In para 38 of her order, the adjudicating authority had referred to the Test Report of the Chemical Examiner, CRCL, wherein it had been stated that the sample conformed to the requirements for toilet soap as per IS 2888 of 1983. The Test Report is extracted below :-

“Report : The sample is in unit container.

The sample is a Octahedral cake of greyish blue colour. It is composed of soap with colouring matter and perfumery compound. It conforms to the requirements for toilet soap as per IS 2888-1983.”

Reference has also been made to the other reports adduced by M/s. Peshawar, but they were not considered to be relevant. No reasons are forthcoming from the impugned order as on what grounds the above reports particularly the report dated 28-7-1999 of the Chemical Examiner, CRCL have been discarded. Mainly, based on advertisement material, it has been concluded that the product in question was a shampoo though in the form of soap. As we have discussed above, neither the soap in the form of cake/bar could be considered as a shampoo, nor the advertisement material alone could form the basis for classification under the Central Excise Tariff.

11. For Tariff purposes either the product will be shampoo or it will be soap. It could not be both.

In the scheme of the Tariff, preparations for use on the hair were classifiable under Heading No. 33.05 of the Central Excise Tariff. Perfumed hair oils and hair fixer were specifically covered by sub-heading No. 3305.10 and sub-heading No. 3305.91. In Chapter Note 1(b), it was provided that Chapter 33 did not cover soap or other products of Heading No. 34.01. According to Chapter Note 6, Heading No. 33.05 applies, inter alia, to the following products :-

“Brilliantines, perfurmed hair oils, hair lotions, pomades and creams, hair dyes (in whatever form), shampoos, whether or not containing soap or organic surface active agents.”

In the Harmonised Commodity Description and Coding System (HSN) Explanatory Notes, the scope of Heading No. 33.05 is given as under :-

This heading covers :-

(1)     Shampoos, containing soap or other organic surfaceactive agents [see Note 1(c) to Chapter 34], and other shampoos.

(2)     Preparations for permanent waving or straightening.

(3)     Hair lacquers (sometimes known as “hair sprays”).

(4)     Other hair preparations, such as brilliantines; hair oils, creams (“pomades”) and dressings; hair dyes and bleaches used on the hair; cream-rinses.

            Preparations applied to hair on parts of the human body other than the scalp are excluded (heading 33.07).

While shampoos containing soap or other organic surface active agents and other shampoos are covered, products that are not known and understood commercially as shampoo do not appear to be covered by Heading No. 33.05. In the present case, it appears from the facts on record that Kesh Nikhar is a substitute for shampoo but is not treated as a shampoo by those who are concerned with the product.

12. In Chapter 34 of the Central Excise Tariff, soap and preparations for use as soap in the form of bars, cakes, moulded pieces or shapes, among others, were covered. In Chapter Note 2, the scope of Heading No. 34.01 is explained as under :-

“2. For the purposes of Heading No. 34.01, ‘soap’ applies only to soap soluble in water. Soap and the other products of heading No. 34.01 may contain added substances (for example, disinfectants, abrasive powders, fillers or medicaments). Products containing abrasive powders remain classified in Heading No. 34.01 only if in the form of bars, cakes or moulded pieces or shapes. In other forms, they are to be classified in Heading No. 34.05 as “scouring powders and similar preparations.”

The product in question is in the form of cake/bar. It is soluble in water. It may be a substitute for shampoo but it is not a shampoo. According to HSN Explanatory Notes, shampoos and dentifrices are excluded from the purview of soap (refer page 483).

13. We may refer to the Supreme Court’s decision in the case of State of Gujarat v. Prakash Trading Company - 1972 (30) STC 348 (S.C.). It had been urged by the assessee that the product Palmolive shampoo was a kind of liquid soap. The issue for consideration was whether the Palmolive shampoo was a toilet article or was soap. The Hon’ble Supreme Court referred with approval the following passage from the Encyclopaedia of Chemical Technology :-

“....... The soaps used for shampooing the hair are essentially the same as those described under ‘soap’. (See Cosmetics, Vol. 6, page 550, soap). They are available in several forms; bar, cake, liquid, powder (or granules) and jelly. Although there will undoubtedly always be a number of individuals who will wash their hair with any cake or soap that may be at hand, the prepared liquid shampoos have rapidly risen to first place in the retail trade. The bars and cakes are shaved down, the granules are dissolved and the jellies are diluted, to prepare liquid shampoo of the desired concentration.....”.

It is clear from the above passage that while soaps could be used for shampooing the hair, shampoos are the prepared liquid shampoos.

The Hon’ble Supreme Court had held that the shampoos is a kind of liquid soap. It was observed as under :-

“The High Court concluded from the above that Palmolive Shampoo was soap covered by entry 28 of Schedule C to the Act. We agree with the High Court in this respect and are of the opinion that shampoo is a kind of liquid soap. It has all the essential ingredients of a soap. It may be that the proportion of the ingredients of the liquid soap differs from those of a soap in the form of a cake but that fact would not alter the basic character of shampoo and take it out of the category of soaps.”

In the present case, the goods are not in liquid form but in the form of cake/bar. Thus, its classification as soap does not appear to be appropriate.

In the case of Colgate Palmolive (I) Ltd. v. Union of India - 1980(01)LCX0012 Eq 1980 (006) ELT 0268 (Bombay), for classification of the product coconut shampoo, it was argued by the Revenue that it was nothing other than soap with the only difference that it was produced from liquid soap after adopting certain processes to give it perfume, colour, etc. The petitioners’s contention that shampoo was not known commercially as soap had not been accepted. The High Court had held that commercially soap and shampoo were known differently. The discussion about the relevancy of commercial understanding is contained in para 15 of the judgment, which is extracted below :-

“15. It is not difficult to reject these submissions urged by Mr. Dalal. The logical conclusion of Mr. Dalal’s contention would be that any article capable as being used as a “soap” would necessarily qualify for assessment under Item 15. In that way, I suppose sawdust or ash or even dust can be used as a “soap” which in the olden days it was. Would that mean that such a cleanser would qualify as soap under Item 15 ? Most certainly not, for to do so would be to nullify the definition of soap appearing in Item 15, viz., that it must be “known commercially” as “soap”. What is important is not whether lather shaving cream and shampoo are used (assuming they are) as “soap” in the manner in which soap is conventionally understood to be used, but what is of importance is whether the lather shaving cream and shampoo are known commercially as “soap” as required by Item 15 itself. The user is of no consequence. If some rich and/or eccentric person uses shaving cream and/or shampoo instead of “soap” as commonly understood, he is entitled to do so. But surely such user would not make “known commercially” the lather shaving cream or shampoo as “soap” as defined in Item 15. It is the known commercial user that is the important and the only consideration to attract duty under Item 15. If a person were asked for soap from a shopkeeper and instead was given shaving cream or shampoo, it would require no great degree of intelligence and common sense on the part of the person making the purchase, to reject outright what the shopkeeper offered him in the place of soap. Even before the appellate and revisional authorities, the petitioner had agitated in the forefront that its shaving cream and shampoo were not known commercially as “soap”. Both the appellate and the revisional authorities, however, chose to side-step that cogent and valid contention of the petitioner and instead the appellate authority alluded to the function of the petitioner’s shaving cream and the revisional authority alluded to its composition. Neither the function nor composition of the petitioner’s products can be said to be germane for the ascertainment whether they attract duty under Item 15 where the only qualification and criterion is whether these products are “known commercially” as “soap”. The burden of proving that the petitioner’s products are known commercially as “soap” was certainly on the part of the Department. Neither before the appellate nor the revisional authority, did the Department take the slightest step to discharge this burden which was essentially upon it. Mr. Dalal, however, urged that before the appellate and the revisional authorities, it was for the petitioner to have established that its products were not known commercially as “soap”. This is a curious contention. It was the Department which wanted to assess the petitioner’s products to duty under Item 15. It was, therefore, for the department to establish that the petitioner’s products were known commercially as “soap” and thus fell within Item 15 and not for the petitioner to establish a negative. This contention urged by Mr. Dalal is a negation of the well established principle that such burden is upon the Department. The latest of such decisions is of the Division Bench of this Court in Sandoz (India) Limited v. Union of India and others (Special Civil Application No. 2829 of 1974) decided on 5th July, 1979 where it was observed as under :

“It is settled law that in a case of taxation the burden of proving that the necessary ingredients prescribed by the taxing provision are satisfied is entirely upon the taxing authority. It was primarily, therefore, for the taxing authority to satisfy the Court that the formulation of the Foron pigment in the form of Foron liquid is an entirely distinct commodity having entirely a distinct name, character and use as compared with the pigment itself.....”

14. It is also seen from the material on record that the product - Kesh Nikhar was being produced, marketed and sold by the appellants since 1935 and at no stage, prior to the issue of the present show cause notice dated 16-12-1999, it was held by the Revenue to be a shampoo. Excise duty was levied on shampoo w.e.f. 1-3-1954 under Item No. 15 of the erstwhile Central Excise Tariff. Cosmetics and toilet preparations were added to the Tariff w.e.f. 1-3-1961 under Item No. 14F of the erstwhile Central Excise Tariff. With effect from 1-3-1971, the item shampoos whether or not containing soap or detergent, was added as Item No. (ii)(c) to Item No. 14(F) under the Heading Cosmetics and Toilet Preparations. Item 15, however, remained the same. Sub-item (ii) under Item No. 14F covered the following :-

“(ii) Preparations for the care of the hair

(a) Hair lotions, creams and pomades

(b) Perfumed hair oils

(c) Shampoos, whether or not containing soap or detergent.”

In reply to the show cause notice, the appellants had referred to their registration certificate, classification lists, registration from State Industries Department and exchange of correspondence with the Department in the year 1994-95. They have pleaded that there is no ground for invoking the extended period of limitation (refer para 10 at page 110 of the paper book).

Prima facie, we find force in this plea also, of the appellants.

15. After giving our careful consideration to the matter, we are of the prima facie view that the appellants have a good case on merits as well as on limitation. We, therefore, waive the requirement of pre-deposit of duty and the penalty amount and stay its recovery till the disposal of the appeal.

16. However, to safeguard the Revenue’s interests, we direct the appellants to give within a period of one month from the date of receipt of this order an undertaking to the jurisdictional Commissioner of Central Excise not to alienate the land, building, plant and machinery of the firm till the disposal of the appeal.

17. Appeal to come up for regular hearing in its own turn. Ordered accordingly.

_______

Equivalent 2001 (137) ELT 850 (Tri. - Del.)