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Collector of Customs Vs. the Atuo Products Ltd. and the Atic - Court Judgment

LegalCrystal Citation
CourtCustoms Excise and Service Tax Appellate Tribunal CESTAT Delhi
Decided On
Reported in(1985)(20)ELT147TriDel
AppellantCollector of Customs
RespondentThe Atuo Products Ltd. and the Atic
Excerpt:
.....from contaminating or interfering impurities-if it is to be classed as a separate chemically defined compound. he gave as his opinion that impurities like water or moisture which will not affect adversely the purpose or function for which the goods are bought or sold are the kind of impurities which would be tolerated by chapter 29. he accordingly came to the opinion that the dividing line of 79.4c was unacceptable because naphthalene had a melting point of 80c the goods of the importers were only refined naphthalene and not pure naphthalene.4. it was argued by mr. sundar rajan, on behalf of the department that in bill of entry cash no. 2289 dated 24-9-77 for 600 bags, the goods were described as naphthalene. this bill of entry also carries an endorsement that the test report of.....
Judgment:
1. These two matters arose from notice F. No. 380/126/81-Cus. II, dated 28-10-81 issued to M/s. Atic Industries Limited and F. No.380/70/81-Cus. II, dated 18-9-81 issued by the Government of India under Section 131(3) of the Customs Act, 1962, issued to M/s. Atul Products Limited, to show cause why the Order-in-Appeal No.S/49-2117/80-R dated 29-12-1980 passed by the Appellate Collector of Customs, Bombay against Order No. C/6-C-913/78-R dated 21-7-80 passed by the Assistant Collector of Customs, Refunds, Bombay and Order-in-Appeal No. S/49-1406/78R dated 30-11-78 passed by the Appellate Collector of Customs, Bombay against Order No. S/6-C-3422/77R dated 11-5-78 of the Assistant Collector of Customs, Refund Section, Bombay, should not be set aside and the Assistant Collector's order restored, etc. etc.

2. The dispute is the assessment of naphthalene imported by M/s Atul Products Limited and M/s. Atic Industries Limited. The Assistant Collector ordered assessment of the goods under heading 29.01/45(1) of the Customs Tariff. In the appeal, the Appellate Collector of Customs, Bombay ruled that the naphthalene should be assessed under heading 27.07 because he was of the opinion that as it had a melting point of 79.6C, and as the crystallisation point of pure naphthalene was over 80C, the goods would not qualify for assessment under Chapter 29.

3. The assessment centred around the interpretation of 'separate chemically defined organic compounds'. The Appellate Collector recorded in his order dated 29-12-80 that it must be a substance whose purity was such that the commercial purpose of buying it was served without further chemical or other process to remove the impurities. He wrote that a substance must have a high degree of purity-that is, freedom from contaminating or interfering impurities-if it is to be classed as a separate chemically defined compound. He gave as his opinion that impurities like water or moisture which will not affect adversely the purpose or function for which the goods are bought or sold are the kind of impurities which would be tolerated by Chapter 29. He accordingly came to the opinion that the dividing line of 79.4C was unacceptable because naphthalene had a melting point of 80C The goods of the importers were only refined naphthalene and not pure naphthalene.

4. It was argued by Mr. Sundar Rajan, on behalf of the department that in bill of entry cash No. 2289 dated 24-9-77 for 600 bags, the goods were described as naphthalene. This bill of entry also carries an endorsement that the test report of the sample showed that it was composed of an organic compound, naphthalene, a separate chemically defined compound. This test report was not challenged. The basis of the assessment is already given in the bill of entry. He argued that in the claim for refund dated 3-10-77, the importers M/s. Atic Industries Limited gave the reason for the claim only as "wrong classification"-no other reason was recorded. This is not a challenge of the assessment but merely a device to keep open a dispute and to find loopholes in the assessment for future use. Chapter 27 of the Customs Tariff says that 'it does not cover separate chemically defined organic compounds'. On the other hand, Chapter 29 specifically applies to "separate chemically defined organic compounds, whether or not containing impurities". The goods were not crude naphthalene. The ISI 539 of 1965 gives the melting point of pure naphthalene as having a crystallisation point of 79.4C and above. This importation is of naphthalene which has a crystallisation point of 79,6C and it must, therefore, fall under Chapter 29. The Materials Handbook by Brady gives the melting point of pure crystalline naphthalene flakes at 79.4C. The Appellate Collector was mistaken in fixing 80C as the dividing point between assessment under Chapter 27 and Chapter 29.

5. On behalf of the parties it was argued that the department's arguments were contrary to the show-cause notice issued by the Government of India which alone can form the basis for this present matter. The only point at issue was whether 80C or 79.4C should be the dividing point. The Appellate Collector referred to the Kirk Othmer Encyclopaedia and therefore, the department should not refer to any other authority like the Materials Handbook. The show-cause notice referred to the CCCN and ISI. It refers to the fact that only crude naphthalene is listed in the BTN under Chapter 27. This will not mean that a naphthalene like theirs which is not pure cannot fall under this chapter since, as found by the Appellate Collector, it cannot be classed as a separate chemically defined compound. The Indian Standard was not before the Appellate Collector and he had no opportunity to deal with it.

6. The learned counsel for the department pointed out that in the last paragraph of the order dated 30-11-78, The Appellate Collector referred to the overwhelming evidence produced by the appellants and from which the Appellate Collector came to his conclusion that in view of the fact that the melting point of the naphthalene imported was 79.6C as indicated in the invoice and not 80C which was the crystallisation point for pure naphthalene, the goods were correctly assessable under Item 27.07 of the Customs Tariff, 1975. He pointed out that the reference "crude or refined" which appears in the Explanatory Notes of the CCCN under heading 27.07, must yield before the statutory definition that this Chapter excludes 'separate chemically defined organic compounds'.

7. The counsel for the party rose to make a point that the show cause notice does not say that "crude or refined" was wrong. .

8. This matter has been complicated by the fact that there is no definition in the Customs Tariff of a separate chemically defined compound. The CCCN defines a separate chemically defined compound as a single chemical compound of known structure, which does not contain other substances deliberately added during or after its manufacture (including purification). The definition goes on to explain that a separate chemically defined compound falling under Chapter (Chapter 29) may contain impurities. Hence Chapter Note l(a) of Chapter 29 of both the Indian Tariff and the CCCN speak as covering separate chemically defined organic compounds, whether or not containing impurities. In their orders, the two Appellate Collectors who passed the orders impugned before us proceeded on the basis that since the melting point of the naphthalene in dispute before them was below 80C. It was not a separate chemically defined compound and should not, therefore, fall under Chapter 29 and that Chapter 27 was the appropriate heading.

9. Much has been made in the arguments before us of the fact that the CCCN classifies crude naphthalene under Chapter 27 and of the note under heading 27.07 that the heading includes products like crude naphthalene but excludes separate chemically defined compound in the pure or commercially pure stage. This note has relevance only to the extent that we will have to determine if the naphthalene in dispute is a crude naphthalene. We shall do so as we proceed.

10. Arguments were also raised about Note 2 under heading 27.07 especially the words "crude and refined". But this note has no application here because it is in regard to "similar oils and products". Our naphthalene is not a naphthalene oil-it is not a product similar to naphthalene oil. It is naphthalene. Whether it is crude or refined or pure is a subject we shall take up in the; paragraphs below.

The melting point is the only thing we know about this naphthalene. We do not know what, if any, impurities it has or whether the impurities it has, if any, were deliberately added at the time of its manufacture in order to modify or impart to it properties useful for particular uses or purposes. We can, therefore, proceed only on this one fact that the naphthalene has a melting point of 79.6C.11. The CCCN does have a note in Chapter 29.01 that in order to fall under this chapter, naphthalene must have a crystallisation point of 79.4C or more and that naphthalenes of lower purity were excluded to fall under heading 27.07. There is no such note in the Indian Tariff.

It only speaks of separate chemically defined organic compounds (Chapters 27 and 29.) and separate chemically defined compounds (Chapter 28).

12. The products imported by these two appellants are - naphthalene with melting point of 79.6C. The Enclyclopaedia of Chemical Technology 3rd Edition Volume 15 by Kirk-Othmer gives the melting point of naphthalene at 80 290C, and the normal boiling point is given as 2O7.993C. The Encyclopaedia of Science & Technology (McGraw-Hill) gives the melting point of naphthalene at 80.1 C and the boiling point 218C. The Appellate Collector has taken 80C as the dividing line to determine the purity of naphthalene and, to a point, nothing can be said against this because in terms of chemical structure naphthalene, that is, pure naphthalene, has a melting: point of slightly, over 80C.The problem here, however, is whether the crystallisation point of.

only a pure product must form the determining factor in a matter of assessment.

13. The only guide that we have from the Indian Tariff is that Chapter 29 applies only to separate chemically defined organic compounds, whether or not containing impurities. Chapter 27 covers mineral fuels, mineral oils and products of their distillation, bituminous substances; mineral waxes. It cannot cover separate chemically defined organic compound of the kind we are dealing now. It needs to be noted very carefully that Chapter 29 can cover a chemically defined organic compound even if it contains impurities. In scientific technology, an impurity has been defined as an undesirable foreign material in a pure substance. In certain branches of technology as solid state physics, an impurity is defined as a substance that when implanted into a semi-conductor in small amount helps in obtaining the required degree of resistance, conduction, that contributes to the performance of the crystal. The alien substance in the crystal lattice may add to or subtract from the density of free electrons and holes in the semi-conductor. We are, however, concerned only with the first kind of impurity-viz. presence of undesirable foreign matter in the substance.

Science recognizes that it is impossible to prepare an ideally pure substance. It is tied up with the processes of purification-that is, the removal of extraneous materials or impurities from the substance or the mixture, by separation techniques. It is of interest that one of the methods of purification is crystallisation; others being such processes as distillation, adsorption, physical separation etc. etc.

While the aim in technology and in industry is doubtless to produce as pure a substance as possible, many factors prevent the production of such a totally pure substance. Certain amounts of impurities will remain in the substance, the concentration of impurities varying with the amount and/or length of purification that the goods went through.

It is not difficult, therefore, to understand why the tariff; which is based on the CCCN, speaks of chemically defined compounds whether or not containing impurities.

14.It is useful to see what the CCCN says about a separate chemically defined compound. It defines it as a single chemical compound of known structure, which does not contain other substances deliberately added during or after its manufacture (including purification). The nomenclature also clarifies that the separate chemically defined compound falling within Chapter 29 may contain Impurities. The term impurities is clarified as applying exclusively to single chemical compound substances whose association with the single chemical compound results solely and directly from the manufacturing process (including purification). The substances (impurities) may result from any of the factors involved in the process and are principally the following :- (c) Reagents used in the manufacturing process (including purification) and 15. A substance that is deliberately left in the product to render it particularly suitable for a particular type of use or to improve its suitability for a specific use is not regarded as a permissible impurity for the purpose of the Chapter. As an example, a product of methyl acetate with methanol deliberately left in it to improve its solvent properties is not a substance containing permissible impurities.

16. From the above, the task before us, therefore, is to enquire and investigate whether the naphthalene is a separate chemically defined organic compound, and if so, whether it contained impurities and whether the impurities are of the permissible type. If it is a separate chemically defined compound, contains no impurities, then it will fall under Chapter 29. Or if it is a separate chemically defined compound and contains only permissible impurities, it will still fall under Chapter 29. Once we can determine this question, we will brave solved this problem, because Chapter 27 excludes separate chemically defined organic compounds.

17. The naphthalene imported by M/s. Atul Products/Atic Industries were said to have a melting point of 79.6C." The goods were described fn the bills of entry as naphthalene and were assessed under Chapter 29.

The Appellate Collector in the order dated 29-12-80 said that the dividing line should be drawn at 80C because of the authority of the Kirk-Othmer Encyclopaedia of Chemical Technology which among other things shows that pure naphthalene has a melting point of 80C. But it is not easy to see how he arrived at the conclusion that assessment under heading 27.07 was more appropriate than assessment under Chapter 29. For example, he discusses what kind of impurities will be tolerated by Chapter 29 in a separate chemically defined compound. He also discusses Chapter 28 and says that it has a similar definition about impurities. Earlier in the order he does mention heading 27 to note that the appellants' claim was under this heading and that products of distillation of high temperature coaltar fall under heading 27.07 whether crude or refind. But his discussion on the relative merits of assessment under 27 or 29 falls far short of throwing light on his process of reasoning. Even though he recognized that the impurities must be only of a kind which will not affect the commercial purpose for which the product is bought and sold, we do not learn very much from this where this recognition takes the argument. The following sentences will illustrate our difficulty in comprehending the process of argument by which the Appellate Collector arrived at his conclusion : "For a refined product of Chapter 15 or Chapter 27 small percentages of homologues or of such other ancillary compounds inevitable in the distillation of crude oil or coal or in the sapontfication of fatty acids is permissible. However, these are to be considered as the impurities permitted by Chapter 28 or Chapter 29 Note l(a). Those impurities must be only of a kind which will not affect the commercial purpose for which the product is bought and sold." 18. Chapter 28 has no relevance because it covers inorganic chemicals and naphthalene is not an inorganic chemical. We are unable to understand why the Appellate Collector brings in this Chapter into the discussion. Even the earlier reference to heading 27.07 as covering a product of distillation of high temperature coal-tar remains undeveloped and doss not appear to have been relied upon for the conclusion. The only ground on which he seems to base his arguments is that pure naphthalene has a melting point of 80C. Therefore, he would not consider naphthalene with a melting point of 79.6C as pure naphthalene assessable under Chapter, 29. The Appellate Collector has confused the purity of naphthalene with the provisions of the Customs Tariff; The Customs Tariff requires a product to be chemically defined organic compound in order to fall under Chapter 29, whether such compound contains impurities or not. The Kirk-Othmer Encyclopaedia shows that refined grades of naphthalene melt above 79C. It has been admitted that the naphthalene imported was not pure naphthalene; it was invoiced as naphthalene and its melting point was given as 79.6C. This is a very high grade of purity. We have been not told that the naphthalene contains impermissible purities, that is to say impurities deliberately added to it at the time of manufacture and processing in order to impart to it a special quality that it did not have. The naphthalene that We are dealing with is a naphthalene to all intents and purposes, and if it contains impurities, they are not impurities of the type that will interfere with its functions as a naphthalene.

19. Naphthalene is a chemically defined organic product with the formula C10H8 and has the following structure showing two benzenoid.

rings fused together; the numbers identify the carbons at which the substitution takes place- It is generally obtained from coal-tar oils by crystallisation and distillation as well as from petroleum fractionations. The first method is the most widely used, although petroleum naphthalene is gaining rapid popularity. The product before us is evidently a coal-tar product and there seems to be no dispute about this. There is no doubt whatever that the naphthalene that we are dealing with is a chemically denned organic compound and it appears that it does contain some impurities, but it does not appear that the impurities, whatever they may be, were deliberately added to it at the time of manufacturing and processing in order to impart to it special attributes it did not have, in order to make it fit for special uses. At any rate, we have not been told that the naphthalene is going to be put to uses to which it could not have been put as naphthalene, and that it contains some added properties and has been made suitable for special and unorthodox uses for which naphthalene is normally not suitable. The impurities seem to be unconverted starting materials associated with the compound from the manufacturing process. They are in association with the single chemical compound, the naphthalene, recognizable and known by its chemical structure C10H8. It is not crude naphthalene as its melting is 79.6C and crude naphthalene has a lower melting point. Nor has it been described as or claimed to be crude naphthalene. It is claimed to be "refined" (though not pure) naphthalene. There is little doubt in our mind that this naphthalene is a separate chemically defined organic compound that must be mandatorily classified under Chapter 29 and that it does not belong to the excepted category like methane and propane.

20. Chapter 27 has already been shown by us as a Chapter that does not cover separate chemically defined organic compounds. This being the case, the naphthalene before us, which is a separate chemically defined organic compound, cannot be covered by this Chapter, and that is all there is to be said about Chapter 27.

21. Much argument went into a note under heading 29.01 of the CCCN which says that to fall within Chapter 29, naphthalene must have a crystallisation point of 79.4C or more and that naphthalene of lower purities is excluded and will fall under 27.07. The Indian Tariff has no such note. We have to go by the headings and notes that appear in it. And we will have to take the help of books and authorities that can throw light on the subject. There are the standard books, reference and encyclopaedias. The CCCN itself is an authority that is reliable and widely respected. And we cannot forget that the Indian Customs Tariff introduced in 1976 is clearly patterned on this work, and its classifications and headings follow the international nomenclatures.

Our reasonings here, however, do not depend entirely on the CCCN or the note in Chapter 29.01 about naphthalene, but take in account the authorities relevant to this subject.

22. The order-in-appeal dated 30-11-1978 also assesses the goods under heading 27.07. In that order the Appellate Collector appears to have been impressed by the argument that the goods imported were obtained by distillation of coal-tar and that pure naphthalene has a melting point of 80C and that the goods imported, though refined, had a melting point of 79.6C. We consider that the Appellate Collector was mistaken to rely on the fact that a naphthalene was a product of distillation of coal-tar because though most naphthalenes are products of coal-tar distillation this would not in any way determine its assessment to customs duty under the Indian Tariff. He was also wrong to rely on the melting point of 79.6C indicated in the invoice as being lower than the 80C which is the crystallisation point of pure naphthalene. We are doubtful, in fact, if naphthalene of such a purity that it crystallises at 80C and shows an ass,ay of nearly 100%, can be obtained commercially in such qualities as have been imported in these consignments.It is one thing to describe naphthalene as having a crystallisation point of 80.290C, normal boiling point of 217.993C, critical temperature 475-2C, flash point (closed cup) 79C, ignition temperature 526C etc etc. for the purpose of defining a chemical substance. But it is quite another thing when dealing with a commercial product for the purpose of assessment. It is rare in commercial transactions that such high degrees of purities showing an assay of near 100% purity is ever demanded or offered for the simple reason that such purities more often than not make the product uneconomical for use on a commercial scale. It is not for nothing that the tariff contains nothing about assay purity. On the other hand, it recognizes that even a chemically defined compound means a chemical substance with a definite and recognized chemical structure and can contain impurities, because, as we have already said, total purity is not always practical to achieve. Hence, the assessment only requires that a product should be chemically recognizable as a given chemical substance even if it contains some impurities. Obviously, if the substance contains a very high proportion of impurities, it will not be chemically defined or so easily recognizable as the substance it is said to be. Its very structure can vary. The main impurity in crude 78C coal-tar naphthalene is sulphur which is present in the form of thionaphthane (1-3%). Methyl-and dimethyl naphthalenes also are present (1-2 wt %) with lesser amounts of indene, methylindenes, tar acids and tar bases.

But sulphur compounds are the most undesirable impurities for a number of uses to which naphthalene is put.

23. We are told by the Kirk-Othmer Encyclopaedia that naphthalene is usually sold commercially according to its freezing or solidification point, because there is a correlation between the freezing point and the naphthalene content of the product; the correlation depends on the type and relative amounts of impurities present. Because the freezing point can be changed appreciably by the presence of water, value, and specifications are listed on a dry, wet or as received basis using an appropriate method agreed upon between buyer and seller. The Kirk-Othmer Encyclopaedia also tells us that desulphurization of naphthalene can yield a product with a sulphur content of <0.05 wt %.

When purification of crude coal-tar naphthalene is done by practical crystallization techniques employing the Brodie Purifier the product achieved has a freezing point of 80C or higher and a sulphur content of ca 0.05 wt.%. It does not take too much to see from this that so-called pure naphthalene with 80C crystallization point still contains impurities and that since the purity has a correlation with the naphthalene content, the 80C crystallization point can be exceeded. It is, therefore, theoretically possible to envisage a 100% assay with an even higher freezing point. And this brings us back to our present down-to-earth practical problem.

24. We must remember that we are dealing with commercial sales and not with laboratory experiments, even if we bring the laboratory and scientific methods to our aid to determine assessment when in doubt.

25. The Encyclopaedia speaks of sulphur being the main impurity in crude 78C coal-tar naphthalene. Even so, the structure of naphthalene remains the same. If we do not class crude naphthalene as a separate chemically defined compound, it is because a crude product is not taken as that product if it can achieve or be brought to a higher purity by process, for the purpose of trade and commerce. , A buyer who intends to- buy naphthalene, will not,- ordinarily, accept the crude substance when he can just as easily obtain the purer or finer substance. There are various advantages in this-he will obtain a product that has a higher content of the substance he wants viz. naphthalane, and not be burdened by impurities in it for which he has no use. But much as he would like to obtain 100% naphthaleae, the manufacturing techniques will not produce the goods for him. So, he has to content himself with the next best: a product that is finer than crude but less than 100% pure. And the available product suits his needs. This is the naphthalene of commerce. This naphthalene before us is such a naphthalene. It is a naphthalene that is a separate chemically defined organic compound, a single chemical substance with a known and recognized structure in chemistry. It is called naphthalene by the buyer and by the seller. There is no reason why, knowing what its nature and structure and composition are, we should not say that Chapter 29 is the appropriate head, while for the same good reason, we should not say that Chapter 27 cannot cover it, a separate chemically defined organic compound.

26. We are not convinced by the arguments of the Appellate Collector that heading 27.07 is appropriate. In our view this heading is excluded by the note. We are of the view that Chapter 29 should be "preferred over Chapter 27, and that it is the most appropriate assessment for the naphthalene in question.

27. We accordingly set aside the two orders of the Appellate Collector viz. (1) Order No. S/49-2117/80R dated 29-12-1980 and (2) Order No.S/49-1406/78R dated 30-11-1978 and order that the naphthalene be assessed under Chapter 29. There is no dispute before us about countervailing duty, and therefore, we pass no orders about this subject.


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