2013(04)LCX0233

IN THE CESTAT, WEST ZONAL BENCH, MUMBAI [COURT NO. I]

S/Shri P.R. Chandrasekharan, Member (T) and Anil Choudhary, Member (J)

KOMAL TRADING COMPANY

Versus

Commissioner Of Cus. (Import), Mumbai

Final Order Nos. A/1196-1222/2013-WZB/C-I(CSTB) and Stay Order Nos. S/889-894/2013-WZB/C-I(CSTB), dated 5-4-2013 in Application Nos. C/Stay/ 1763-1768/2011 in Appeal Nos. C/720-725/2011-Mum., C/439-442, 444, 448-449, 418, 706, 452, 719/2007-Mum., C/411-416, 423-424/2010 and 11/2010-Mum. and Cross Objection No. C/CO/08/2010-Mum.

Cases Quoted -

Adani Wilmar Ltd. v. Commissioner - 2010(07)LCX0144 Eq 2010 (259) ELT 0464 (Tribunal) - Relied on [Paras 2.2,4.8]
Collector v. Business Forms Ltd. - 2002(01)LCX0193 Eq 2002 (142) ELT 0018 (S.C.) - Referred [Para 4.6]
Commissioner v. Gaurav Enterprises - 2005(09)LCX0386 Eq 2006 (193) ELT 0532 (Bom.) - Referred [Para 4.10]
Divya Enterprises v. Commissioner - 2005(11)LCX0297 Eq 2006 (201) ELT 0339 (Tribunal) - Relied on [Paras 2.2,4.8]
Manek Chemicals Pvt. Ltd. v. Commissioner - 2002(05)LCX0202 Eq 2002 (145) ELT 0335 (Tribunal)
- Relied on [Paras 2.2,4.8]
Margra Industries Ltd. v. Commissioner - 2006(07)LCX0142 Eq 2006 (202) ELT 0244 (Tribunal-LB) =
2006(07)LCX0142 Eq 2008 (010) STR 0081 (Tribunal-LB) - Relied on [Para 4.12]
Northern Plastic Ltd. v. Collector - 1998(07)LCX0097 Eq 1998 (101) ELT 0549 (S.C.) - Referred [Para 4.10]

Departmental Clarification Quoted-

C.B.E. & C. Circular No. 32/2002-Cus., dated 10-6-2002 [Paras 4.6,4.9,4.10]

Advocated By -

S/Shri Prakash Shah, Anil Balani, J.C. Patel, Naresh
Thacker, J.H. Motzvani, N.D. George and R.G. Seth, Advocates, for the Appellant.
Shri Amand Shah, Additional Commissioner (AR), for the Respondent.

[Order per : P.R. Chandrasekharan, Member (T)]. -

There are 6 stay applications, 26 appeals and one cross objection. Since a common issue is involved in all these cases, they are taken up together for consideration and disposal.


2. The common issue involved in all these appeals is classification of activated Bentonite clay imported from abroad, whether under CTH 2508 or under CTH 3802 of the Customs Tariff. The period involved is both prior to 1-1-2007 and on or after 1-1-2007.
2.1 The arguments of the appellants can be summarised as follows. Activated Bentonite merits classification under CTH 2508 since the said heading includes both unprocessed (crude) Bentonite as well as processed Bentonite. Since activation is treating with acid/alkali, it is a process and therefore, acid/alkali treated Bentonite merits classification under CTH 2508 as processed Bentonite. It is also argued that CTH 2508 is more specific in description compared to CTH 3802 and hence, as per the interpretative Rules, CTH 2508 has to be preferred over CTH 3802. Alternatively it is argued that even if it is held classifiable under CTH 3802, since in most of the cases the demands for differential duty have been issued invoking the extended period of time, the demands are time barred. Another argument raised is that since the changes in the tariff description has been brought about by means of a notification and the said notification allows only change in the tariff description and not any change in the rate of duty, differential duty demands cannot be made on account of change in classification.
2.2 Revenue's contention is that since on account of activation, there is change" in the structure of Bentonite, the same cannot be classified under CTH 2508 in view of Chapter Note 1 to Chapter 25 which specifically excludes goods in respect of which there is a change in the chemical structure on account of activation. Revenue also relies on three decisions of this Tribunal, namely, (1) Manek Chemicals Pvt. Ltd. [2002(05)LCX0202 Eq 2002 (145) ELT 0335 (Tri.-Del.)]; (2) Adam Wilmar Ltd. [2010(07)LCX0144 Eq 2010 (259) ELT 0464 (Tri.-Ahmd.)] and (3) Divya Enterprises [2005(11)LCX0297 Eq 2006 (201) ELT 0339 (Tri.-Bang.)] wherein it has been held that activated Bentonite merits classification under CTH 3802.

3. As the matter relates to classification, we take up the appeals themselves for consideration after dispensing with the requirement of pre-deposits, if any, and with the consent of both the sides.

4. Prior to the introduction of the 8 digit Customs Tariff with effect from 1-2-2003, CTH 2508 and 3802 read as follows :-


"25.08 Other clays (not including expanded clays of Heading
68.06), andalusite, kyanite and sillimanite, whether or not calcined; mullite; chamotte or dinas earths
2508.10 - Bentonite
2508.20 - "
"38.02 Activated carbon; activated natural mineral products; ani-
mal black, including spent animal black
3802.10 - Activated carbon
3802.90 - Other"


4.1 After the introduction of 8 digit tariff vide Customs Tariff (Amendment) Ordinance, 2003, effective from 1-2-2003, the tariff description
read as follows :-

"2508 Other clays (not including expanded clays of Heading
68.06), andalusite, kyanite and sillimanite, whether or not calcined; mullite; chamotte or dinas earths
2508.10 - Bentonite:
2508 1010 - Crude
2508 10 90 - Other (includes processed, activated and ground)"
"3802 Activated carbon; activated natural mineral products;
animal black, including spent animal black
3802 10 00 - Activated carbon
3802 90 - Other:
--- Activated natural mineral products :
3802 9011 - Activated alumina
3802 9012 - Activated bauxite
3802 9019 - Other
3802 90 20 --- Animal black (for example bone black, ivory black), including spent animal black"

4.2 With effect from 1-1-2007, the tariff description underwent the fol
lowing changes vide Notification No. 137/2006-Cus. (N.T.), dated 29-12-2006.

"2508 Other clays (not including expanded clays of Heading
68.06), Andalusite, kyanite and sillimanite, whether or not calcined; mullite; chamotte or dinas earths
2508.10 - Bentonite:
25081010 - Crude
250810 90 - Other (includes processed and ground)"

In other words, the word "activated" was omitted from CTH 2508 10 90. There was no change in the tariff description of CTH 3802.


4.3 Chapter Note 1 to Chapter 25, which remained unchanged during the above period, read as follows :-

"I. Except where their context or Note 4 to this Chapter otherwise requires, the headings of this Chapter cover only products which are in the crude state or which have been washed (even with chemical substances eliminating the impurities without changing the structure of the product), crushed, ground, powdered, levigated, sifted, screened, concentrated by flotation, magnetic separation or other mechanical or physical processes (except crystallization), but not products that have been roasted, calcined, obtained by mixing or subjected to processing beyond that mentioned in each heading."

As per this Chapter Note, only products whose structure has not undergone any change after processing, remains within the Chapter. If the product has undergone structural changes on account of processing, then the product goes out of Chapter 25.

4.4 HSN Explanatory Notes for Heading 25.08 reads as follows :-
"This heading covers all natural clayey substances (other than kaolin and other kaolininc clays or Heading 25.07) consisting of earths or rocks of sedimentary origin with a basis of aluminium silicates. The characteristic properties of these products are plasticity, the faculty of hardening when fired and resistance to heat

These products remain in this heading even if they have been heated to remove some or most of the associated water (to produce absorbent clay) or when fully calcined.
In addition to common clays, the following special products also fall in the heading :
o Bentonite, a clay derived from volcanic ash; largely used as an in
gredient of moulding sand, as a filtering and decolouring agent in
oil refining and for degreasing of textiles.
This heading does not include :

o Activated clay (Heading 38.02)
4.5 HSN Explanatory Notes for Heading 38.02 relating to activated natural mineral products read as follows :-
"Carbon and mineral substances are said to be activated when their superficial structure has been modified by appropriate treatment (with heat, chemicals, etc.) in order to make them suitable for certain purposes, such as decolourising, gas or moisture adsorption, catalysis, ion-exchange or filtering.
"(3) Activated clays and activated earths. These consist of selected colloidal clays or clayey earths activated, according to their intended use, by means of an acid or an alkali, dried and then ground. When activated by means of an alkali, they are emulsifiers, suspension agents and agglomerating agents; these are used, in particular, in the manufacture of polishing or cleaning preparations, and, because of their swelling properties, for improving foundry sands and drilling sludge. When activated by means of an acid, they are mainly used for decolourising animal, vegetable or mineral oils, fats or waxes."

4.6 A careful reading of Note 1 to Chapter 25 read with HSN Explanatory Notes to CTH 25.08 and 38.02, make it abundantly clear that activated Bentonite merits classification under Heading 38.02. As per technical literature, activation of Bentonite by acid or alkali results in changes in the molecular structure of the product. C.B.E. & C. vide Circular 32/2002, dated 10-6-2002, after examining the issue in depth, has clarified that activated Bentonite merits classification under CTH 3802. The Hon'ble Apex Court in the case of CC v. Business Forms Ltd. [2002(01)LCX0193 Eq 2002 (142) ELT 0018 (S.C.)l has held that since the Indian Customs Tariff is based on Harmonised System of Nomenclature (HSN), the Explanatory Notes to HSN have not only persuasive value but are entitled to greater consideration in classifying goods under Central Excise & Customs Tariff. Therefore, the correct classification of activated Bentonite is CTH 38.02 and not CTH 25.08 and we hold accordingly.

4.7 However, when the 8 digit tariff was introduced w.e.f. 1-2-2003, in our view, an error was committed by specifically including activated Bentonite in CTH 2508 10 90 (para 4.1 above refers). This mistake was rectified only vide Notification No. 137/2006-Cus. (N.T.), dated 29-12-2006 which amended the tariff description by omitting the words "activated" in the said tariff entry. The said changes in the tariff description came into effect from 1-1-2007. Since classification has to be determined in terms of the headings and any relative Section or Chapter Notes, we are constrained to hold that, for the period from 1-2-2003 to 31-12-2006, activated Bentonite has to be classified under CTH 2508 10 90 (because of its specific inclusion in the tariff description). However, for the period prior to 1-2-2003 and from 1-1-2007 onwards, when there is no specific inclusion, in view of Note 1 to Chapter 25 which excludes products whose structure has undergone a change, the said product merits classification under CTH 3802 90 19 and we hold accordingly.


4.8 All the three decisions relied upon by the Revenue, namely, (1) Manek Chemicals Pvt. Ltd.; (2) Adani Wilmar Ltd. and (3) Divya Enterprises dealt with an identical issue during the period prior to 1-2-2003 (before the 8 digit tariff was brought into force) and in these decisions, it was clearly held that activated Bentonite would merit classification under CTH 3802. These decisions also support the view that we have taken for the period prior to 1-2-2003 and from 1-1-2007 onwards.

4.9 The C.B.E. & C. had issued a Circular No. 32/2002-Cus., dated 10-6-2002 regarding import of activated bleaching earth/activated clay as "processed bentonite". Relevant portion from the said circular is reproduced below :-
Subject:- Imported of activated earth/activated clay as 'processed bentonite'; classification thereof- Reg. I am directed to refer to the subject mentioned above and to say that a representation in this regard has been received in Board's office. In the representation, it has been stated that such goods are being wrongly classified under Heading 25.08 as 'decolourising earth/processed bentonite'. Some of the popular brands and their country of origin of such goods are stated to be as follows :-
Brand Country of origin
Tonsil Optimum 210 FF Germany
Tonsil Optimum 230 FF Indonesia
Tonsil Optimum 250 FF USA
WAC Excel Malaysia
WAC Classic Malaysia
Galleion V2 Super Japan

It has also been alleged that the incorrect classification was resorted to so as to evade customs duty.

"2. The matter has been examined. Goods, namely, "Bentonite" in natural or crude form is classifiable under sub-heading 2508.10 whereas decolourising earth would be classifiable under sub-heading 2508.20. Bentonite is stated to be a naturally occurring clay predominant in Indonesia, Germany, Japan, USA and India. India is, however, stated to be importing bentonite and its derivatives for use in cosmetics, medicinal formulations, drilling industry and food industry. HS Explanatory Notes to Heading 25.08 states that it includes all natural clay substances, but it excludes activated clay from the scope of the heading.

3. Clay Bentonite in crude form is stated to be made effective by activating it with acid or alkali. Some of the mineral acids used for acid activation are hydrochloric acid, sulphuric acid, etc. After the acid activation process, it is stated that the molecular structure undergoes modification. The acid activation process is stated to be effective in removing the deficiencies by creating voids in the crystal structure of bentonite by replacing bigger atoms or mol-ecules, like aluminium, magnesium, iron, etc. by small atoms of hydrogen and such an activated bentonite is stated to have specific PH ranging from 2 to 5 depending on the brand and grade of the product. The activation is sometimes also done by soda ash resulting in a product which is alkaline in nature with a PH ranging from 8.5 to 10.5. After acid or alkali activation, the bentonite undergoes washing, grinding, heating and packing resulting in a new chemical product, namely, bleaching earth/activated clay, etc. This finished product is said to have properties like adsorptive capacity, acid properties, catalytic properties, ion exchange capacity and particle size distribution which is highly useful for various industrial applications like purification, filtration, bleaching, etc. HS Explanatory Notes to Heading 38.02 states that the heading includes activated clays and activated earths, but excludes natural clayey substances.

4. Keeping the foregoing view, the Board is of the considered opinion that such goods misdeclared as 'decolourising earth /processed bentonite' are classifiable under CTH 3802.90 as 'activated bleaching earth'. The Custom Houses shall take note of the above classification opinion so that such goods are classified correctly. Demand notices may be issued in appropriate cases to realize the short levy."


4.10 In spite of these clear instructions from the Board, we find that the demand notices have been issued invoking extended period of time, alleging suppression of facts on the part of the appellants. The importer may claim a wrong classification based on his understanding of the tariff. That per se would not amount to misdeclaration or suppression. Classification of goods, determination of correct rate of duty and valuation of goods are part of the assessment functions, the responsibility for which lies solely and wholly on the department. Merely because the appellants have claimed a wrong classification, that does not mean that the department need not ascertain/verify the claim of the appellant and can issue demand notices for short-levy alleging suppression, especially in view of the Board's circular dated 10-6-2002 cited supra which had alerted the departmental officers about the misdeclarations made by the importers of processed bentonite. Even for the period prior to 10-6-2002, the same principle would apply. We have also perused the description declared by the appellants in the various B/Es filed by them. The goods have been described in various ways such as bleaching earth, decolourising earth, processed clay/bentonite and sometimes by their brand names, mentioned in the Board's circular cited above. Nothing prevented the department from calling for the detailed specifications of the product, drawing of samples and getting them tested, to ascertain whether the product imported is activated or not. Further these items are imported on a regular basis by various traders/actual users such as foundry industry, oil exploration industry, vegetable oil industry and so on. If that be the case, the department should have been well aware of the nature of the product and its classification. As could be seen from the records, in many cases, the department itself had assessed activated clay/Bentonite/bleaching, earth under CTH 3802 for the period prior to 1-2-2003 which shows that the department was well aware of the correct classification. Yet they failed to determine the correct classification in the present appeals and accepted the claim of the importers. If that be so, for the failure and lapses on the part of the assessing officers, extended period of time is not invoca-ble for demand of short levy. Accordingly, we hold that in all the impugned appeals, wherever the demand has been raised beyond the normal period of limitation (other than where assessments were provisional), such demands are not sustainable in law. The Hon'ble Apex Court in the case of Northern Plastics Ltd. 11998 (101) ELT 549] held that laying claim to some exemption, whether admissible or not, is a matter of belief of the assessee and does not amount to misdeclaration and consequently confiscation under Section 111 of the Customs Act and imposition of penalty are not warranted. A similar view was held by the Hon'ble Bombay High Court in the case of Gaurav Enterprises [2006 (193) ELT 532] wherein it was held that an untenable claim for exemption of duty is not a misdeclaration. Following these decisions, we hold that wherever the demands have been made invoking the extended period of time (other than where provisional assessments are involved), the same are not sustainable and as a result, no penal consequences shall ensue. However, wherever the demands have been made within the normal period of time or where provisional assessments have been finalized by classifying the product under CTH 38.02 for the periods prior to 1-2-2003 and from 1-1-2007 onwards, the demands are sustainable and the appellants would be liable to pay differential duty along with interest thereon and we hold accordingly.


4.11 An argument has been made that as per Section 5 of the Central Excise Tariff Act, 1985, the Central Government can amend the Schedules to the said Tariff Act by issue of a notification. However such amendments shall not alter or affect the rate(s) of duty leviable in respect of such goods. The argument is that in the present case, since the change in the tariff description was made effective from 1-1-2007 and since the goods were classifiable prior to that date under Heading 25.08, the same rate shall continue even under Heading 38.02. This argument has merit only for a short period between 1-1-2007 to 28-2-2007 when in the Finance Bill, 2007, rates of duties were altered. Further, in the present appeals, where thL. issue has been raised, the imports took place in 2008. Therefore, this argument has no relevance.

4.12 Another argument has been made that for computing the time limit of normal period of limitation, it is not the date of the show cause notice demanding short levy that is relevant but the date on which such show cause notice is served on the importer. There is merit in the argument. Section 28(1 )(a) stipulates that whenever there is a short levy or non-levy or erroneous refund of duty, then the proper officer shall, within one year from the relevant date, serve notice on the person chargeable with the duty or interest which has not been so levied or which has been short-levied or short-paid or to whom the refund has erroneously been made, requiring him to show cause why he should not pay the amount specified in the notice. Thus it is not date of issue of show cause notice but service of notice that is relevant for computing the time period. Further, as per the definition of relevant date, for reckoning the time period, it is not the date of filing of the bill of entry, but the date of payment of duty that would be relevant. If the show cause notice has been served on the party within a period of six months/one year, as the case may be, from the date of payment of duty, the demands would be valid and sustainable. The decision of the Larger Bench of this Tribunal in the case of Margra Industries Ltd. [2006(07)LCX0142 Eq 2006 (202) ELT 0244 (Tri.-LB) = 2006(07)LCX0142 Eq 2008 (010) STR 0081 (Tri.-LB)] also supports this view.
5. In the light of the foregoing discussion, the outcome of the appeals before us would be as follows :-




S. No. Appeal No. Period of de-mand Date of issue
of show cause notice Outcome of appeal Remarks
1 C/418/2007 27-12-1997 to 11-4-2001 5-12-2002 Allowed Demand time barred
2 C/439/2007 29-4-1998 to 18-7-2001 21-10-2002 Allowed Demand time barred
3 C/440/2007 29-4-1998 to 18-7-2001 21-8-2002 Allowed Demand time barred
4 C/441/2007 January, 1998 to May, 2000 26-12-2002 Allowed Demand time barred
5 C/442/07 January, 1998 to May, 2000 26-12-2002 Allowed Demand time barred
6 C7 444/2007 August, 1997 to September, 1998 27-8-2002 Allowed Demand time barred
7 C/448/2007 29-11-1997 to 20-4-2000 22-11-2002 Allowed Demand time barred
8 C/449/2007 29-10-1997 to 24-7-2001 24-10-2002 Allowed Demand time barred
9 C/452/2007 30-9-1997 to 30-3-2002 4-10-2002 Allowed Demand time barred
10 C/706/2007 October 1997 to July, 2001 24-10-2002 Allowed Demand time barred
11 C/719/2007 24-7-2001 30-1-2002 Duty de-mand con-firmed along with interest Assessment was provisional and hence demand is in time. Confiscation and penalty set aside as the issue re-lates to classi-fication dis-pute.
12 C/411/2010 8-12-2004 to 29-10-2007 19-5-2009 Allowed Classification correct prior to 1-1-2007. De-mand time barred for sub-sequent period.
13 C/412/2010 26-7-2007 to 27-2-2008 19-5-2009 Allowed Demand time barred
14 C/413/2010 22-8-2007 to 6-2-2008 19-5-2009 Allowed Demand time barred
15 C/414/2010 14-7-2004 to 24-12-2007 19-5-2009 Allowed Classification correct prior to 1-1-2007. De-mand time barred for sub-sequent period.
16 C/415/2010 7-3-2007 to 5-12-2007 19-5-2009 Allowed Demand time barred
17 C/416/2010 3-9-2004 to 24-1-2008 19-5-2009 Allowed Classification correct prior to 1-1-2007. De-mand time barred for sub-sequent period.
18 C/423/2010 1-4-2004 to 29-1-2008 31-3-2009 Allowed Classification correct prior to 1-1-2007. De-mand time barred for sub-sequent period.
19 C/424/2010 13-4-2004 to 15-2-2008 2-4-2009 Allowed Classification correct prior to 1-1-2007. De-
mand time-barred for sub-sequent period.
20 C/ll/2010 &C/CO/
8/2010 September & October, 2000 9-9-2005 Allowed Time barred
21 C/720/2011 13-3-2008 to 19- 5-2008 10-9-2008 Duty
Demand for normal period up-held Normal period to be computed from date of payment of duty till date of service of SCN
22 C/721/2011 10-6-2008 17-9-2008 Duty
Demand
upheld Demand within normal period
23 C/722/2011 17-3-2008 to 10-6-2008 11-9-2008 Duty Demand for normal period up-held Normal period to be computed from date of payment of duty till date of service of SCN
24 C/723/2011 17-3-2008 to 10-6-2008 11-9-2008
o Duty Demand for normal period up-held Normal period to be computed from date of payment of duty till date of service of SCN
25 C/724/2011 17-3-2008 to 10-6-2008 15-9-2008 Duty Demand for normal period up-held Normal period to be computed from date of payment of duty till date of service of SCN
26 C/725/2011 10-3-2008 18-9-2008 Duty
Demand
upheld Demand within normal period
The appeals are disposed of in the above terms. Wherever duty demands have been upheld, interest liability will also accrue in accordance with law. As the matter relates to a classification dispute, confiscation is not warranted and consequently, no fine or penalty is imposable. Consequential reliefs, if any, shall be in accordance with law including the bar of unjust enrichment. The stay applications and cross objection are also disposed of.
(Operative part of the order pronounced in the Court)

Equivalent 2014 (301) ELT 0506 (Tri. - Mumbai)