1. The Collector of Central Excise (Appeals), Bombay decided in his Order-in-Appeal No. M-2420/AUR-80/84, dated 4th December, 1984 that prilled ammonium nitrate was not liable to duty. The factory M/s. Anil Chemicals Pvt. Limited, Aurangabad buy ammonium nitrate of 75% to 82% and by the process of prilling concentrate, convert the ammonium nitrate to 99%. This process of concentration was held by the Assistant Callector of Central Excise, Aurangabad, to be a process of manufacture and he directed the factory to pay duty of Rs. 74,846.82 by his Order No. V. 68(4)-5/TB/84/1443, dated 21st February, 1984.
2. The factory buys ammonium nitrate from M/s. Rashtriya Chemicals and Fertilizers. This ammonium nitrate is cleared on payment of duty under item 68. The Asstt. Collector said that duty paid 75% concentrated ammonium nitrate melt is processed and converted into prilled ammonium nitrate. The ammonium nitrate melt cannot be used as such unless water is evaporated. The end-product manufactured by the party is used for different purposes such I as raw materials for explosives, drug industries, textile industries and even though it is a physical conversion, the conversion of ammonium nitrate melt to prilled ammonium nitrate will amount to manufacture as per the provisions of Section 2(f) of the Central Excises and Salt Act, 1944. The ammonium nitrate melt as such cannot be used for the purposes for which prilled ammonium [ nitrate is used.
3. The Appellate Collector, however, differed from this view and said that once a product had paid duty under Item 68, it cannot be subjected to the same duty a second time as long as it remained in that heading He depended for his decision on a number of decisions, namaly, 1982 E.L.T. 10 (Bombay), Tribunal decision in 1984 (3) ETR 734 and Bombay High Court decision in 1977 E.L.T. J 34, M/s. Empire Dyes and Manufacturing Co., Tribunal decision in 1983 (2) ETR 147 Golden Paper.
4. The learned Counsel for the department quoted the decisions of the Supreme Court in DCM Civil Appeal No. 168-170 of 1980 and the South Bihar Sugar Mill case also of the Supreme Court Civil Appeal No.289-311/65-AIR 1968 S.C. 922 : 1978 E.L.T. (J 336) (S.C.). He argued that in these two judgments the Supreme Court laid down the rule that if a new product has arrived with a new name, character or use, there has been a manufacture and central excise duty is attracted to that goods. The Bombay High Court in 1983 E.L.T. 1736 New Shakti Dye Works Pvt. Limited approved the recovery of duty on processed cotton fabric even though the base grey fabric had been subjected to duty once already. The Andhra High Court in 1984 (15) E.L.T. 32 Brooke Bond India said that chicory coffee mixture was a distinct commercial commodity differing from the two ingredients, chicory and coffee, and therefore, was liable to duty under Item 68 of the central excise tariff. He read the article on prilling in the Kirk-Othmer ENCYCLOPAEDIA. He said that this was not a fertilizer, there has also been a chemical process of coating with oil and there was a process of removal of water. A new product has emerged and the fertilizer is coverted into an explosive etc. He then quoted 1984 E.L.T. 434 Indian Cable Co. and 1984 (18) E.L.T. 319 Lallubhai Amichand. The Tribunal has ruled that aluminium sheets and aluminium circles are not commercially the same articles. It ruled that circles should be treated as manufactures and that they were liable to duty even if made from duty paid sheets. He next quoted 1983 E.L.T. 1192 and added to them, 1984 E.L.T. 317 where even tyre scraps were ruled by the Tribunal to be manufactures.
5. The learned Counsel for M/s. Anil Chemicals said that the Appellate Collector's order have not been refuted by the department. The department argues that the prilling is done in a factory costing crores of rupees but it is impossible to see what this has got to do with determining whether an article has been manufactured and has become excisable. The department's reliance on the Bombay High Court decision 1983 E.L.T. 736 New Shakti Dyeing Work was a misplaced one. In this case, the Court ruled that the processed cotton cloth was dutiable because there was a special item for such processed cloth. He said that this ruling is correct and the processed cloth cannot escape duty in view of the specific entry in the tariff. There is no specific entry for prilled ammonium nitrate to differentiate it from ammonium nitrate.
The reliance by the department on the decision about coffee was also unsound. The chicory coffee was a completely different product and was understood to be a different product from plain chicoriless coffee. To buttress his argument, he quoted 1980 E.L.T. 268 (Bombay) Colgate Palmolive, 1980 E.L.T. 343 (Supreme Court) on Pineapple ; 1980 E.L.T.696 re : Sandoz.
6. The prilled ammonium nitrate is still an ammonium nitrate and cannot be described as anything else. It has no diffrent properties that the unprilled ammonium nitrate did not have. The appeal deserves to be rejected.
7. The department came back to say that turning ice to water and water to steam is a manufacture and so is this process of prilling.
8. We will briefly examine the character of the ammonium nitrate from one or two authoritative books. Kirk-Othmer's ENCYCLOPAEDIA OF CHEMICAL TECHNOLOGY, Third Edition Vol. 2, page 525 describes Ammonium Nitrate- "Ammonium nitrate, NH4NO3, formula weight 80.0, does not occur in nature and was first made and described, in 1659 by Gauber, who called it nitrum flammans because of the difference of its yellow flame (from traces of sodium) from that of potassium nitrate. It is most important of the ammonium compounds from the standpoints of volume of production and major uses in the United States and the world. Large tonnages are used as a nitrogen fertilizer, in military explosives, and in blasting compositions." Physical and Chemical Properties.
"Ammonium nitrate is a white crystalline solid, d204 1.725. Its extremely high solubility in water is shown in Table 4.
As would be expected from its high solubility, ammonium nitrate is very hygroscopic. This complicates its use in explosives and until about 1940 made its extensive use in fertilizers disadvantageous.
Solid ammonium nitrate picks up water from air in which the aqueous vapour pressure exceeds the vapour pressure of a saturated solution of the salt at the same temperature." "Although ammonium salts of strong acids tend generally to lose ammonia and become slightly acid on storage, ammonium nitrate is considered a very stable salt. Its decomposition under extreme shock or at elevated temperatures may take place in at least two widely divergent manners with the formation of different products as shown below : The first reaction, which occurs when ammonium nitrate is heated to temperatures from 200 to 260C, can be carried out safely; even when the reaction is rapid, it can be controlled. It is the basis for the commercial preparation of nitrous oxide. The second reaction takes place with great rapidity and violence when ammonium nitrate detonages, e.g., when it is. used as an ingredient in commercial blasting mixtures.
For effective use in blasting, ammonium nitrate is mixed with oil and sometimes powdered aluminium as a sensitizer. Ammonium nitrate of lower density (greater porosity) is preferable for this use because it absorbs-the oil more effectively.
For reasons of safety, the detonators, ammonium nitrate, oil, and aluminium powder are transported separately. The sensitizers are mixed with the ammonium nitrate just before use. Generally speaking the second reaction occurs only with extreme heating under confinement, or through initiation by a powerful priming explosive charge. The presence of free oxygen in the decomposition products indicates that ammonium nitrate, which has an oxygen balance of 20%, acts as an oxidizing agent as well as a strength-producing material in explosive and propellant charges. In this respect a resemblance may be seen between ammonium nitrate and ammonium perchlorate [7790-98-9], another stable compound that can act explosively.
Although the reactions shown for ammonium nitrate are the ones characteristic of the two extremes of controlled decomposition and complete detonation, decomposition may take place according to both equations in varying ratios. Also, varying amounts of higher oxides of nitrogen may be formed." 9. The ENCYCLOPAEDIA informs us that ammonia and nitric acid are the two basic raw materials in the manufacture of ammonium nitrate.
10. Under Manufacture, the book explains the raw materials used, the process steps like neutralization, evaporation and control of particle size and properties. At page 529, the book contains this paragraph on Prilling Process- "The prilling process for production of ammonium nitrate is a system in which concentrated ammonium nitrate solution (95% or 99+%) is sprayed downward in a large tower where the droplets are cooled by an upward flow of air. The droplets solidify to form spherical prills that are collected at the bottom of the tower. For reasons of safety and convenience in pumping, the second-stage evaporator (to 99+% soln) is unsually located at the top of the prill tower. Since the evaporator is small, this arrangement presents no structural problems. A drying step is required when solution concentration is about 95%; the later systems using 99+% solution require only cooling of the prills (24-25). Prilling towers using 95% solution are 33 to 60 m high to produce so-called low-density prills. Towers using 99+% solution are only about 20 to 30m high (26). The surface of the prills is coated with 2.5 to 3% of activated clay or a diatomaceous earth conditioner. Some producers use chemical additives to the melt, and a surface conditioner is not required.
The grade of the product is increased slightly and 34% nitrogen content is assured. The low-density prills prepared from 95% solution are more porous and, therefore, better suited to absorb the needed oil for producing blasting agents. Some prilling towers have a fluidized bed cooler covering most of the cross-sectional area at the bottom of the tower. Others use conventional rotary coolers." It will be seen from this paragraph that prilling results in the formation of spherical prills that collect at the bottom of the spherical tower. The prilling is meant to solidify the concentrated ammonium nitrate. For use in explosives, the book says that the ammonium nitrate should have a content of around 99% (before any addition of coating material). It should have a water content of not more than 0.15%, and should contain only small amounts of ether-soluble and water-insoluble material, sulphates, and chlorides, and should contain no nitrates. When the material is intended for use in nitrous oxide manufacture, even higher quality is required-a purity of not less than 99.5%, with almost complete absence of organic material, ion chloride and solvents. A very interesting description of the behaviour of the ammonium nitrate is given at page 531 under Safety Considerations- "Ammonium nitrate, as commonly handled in small amounts, is properly considered a safe material. It is, however, a potential high explosive. When primed with high-strength gelatin dynamite, e.g., it has on a weight basis about 70% the disruptive strength of nitreglycerin.
A violent explosion occurred in Oppau, Germany (31) in 1921 when 4500 tons of ammonium sulfate-ammonium nitrate mixture detonated with tremendous destructive force. Caretul investigation of conditions preceding the disaster revealed that it had been customary at this location to blast the material with dynamite to break up the coked mass. Previous tests and continued use of this procedure had indicated the blasting practice to be safe, yet the disaster did occur. A thorough study in the following year of the explosibility of ammonium nitrate found it to be altogether safe for handling, when properly treated. The report by Munroe (32) concluded that ''ammonium nitrate, when stored by itself ... and apart from explosive substances is for transportation and storage, not an explosive." A subsequent disaster occurred in 1947 at Texas City, Texas, where explosions took place on two freighters loaded with several thousand tons of ammonium nitrate. Both explosions, which occurred many hours apart in time, followed vigorous fires aboard the vessels. The ammonium nitrate, which was packed in heavy paper containers of 45 kg content, was intended for use as fertilizer and was so labelled. Ammonium nitrate is a strong oxidizing agent and a vigorous supporter of combustion and considerable oxidizable material was certainly present, both in the form of the paper containers and the surface coating of oxidizable organic materials used to prevent caking. Miscellaneous cargoes aboard the vessels also included other highly combustible materials. Following the explosion, a joint report of the Fire Prevention Bureau of Texas and the National Board of Fire Underwriters (33) outlined precautions to be observed in handling and transporting ammonium nitrate.
In view of the foregoing and other occurrences, ammonium nitrate must be considered a high explosive when three conditions are present : 11. The book does not differentiate ammonium nitrate from prilled ammonium nitrate except to point out that the latter is obtained by the prilling process. But this process is only one of several processes to obtain ammonium nitrate of a given character and form. There is nothing anywhere to indicate that in spite of its form of spherical prills which generally results in higher content, it is in any way different from the ammonium nitrate that went into the prilling process. In fact, prilling is used for different solutions : the one before us is reported to be a 75% to 82% content.
12. The paragraphs on the explosive nature of ammonium nitrate will not bear out the theory that only prilled ammonium nitrate is explosive.
These paragraphs tell us that an ammonium nitrate to be considered high explosive must be primed by a high-velocity explosive, must be confined at elevated temperature and must have an oxidizable substance. We read also that in an explosion in 1947 at Texas City, the ammonium nitrate was intended for use as a fertilizer and was so labelled, and had been packed in heavy paper containers of 45 kgs. It is clear from this authority that to be used as an explosive, the ammonium nitrate has to be primed and conditioned properly. One should not ignore the fact that ammonium nitrate is always an explosive substance and can explode if, by accident, the right conditions are created, even when the ammonium nitrate is meant to be a fertilizer. It is reported that Munroe concluded that "ammonium nitrate, when stored by itself ... and apart from explosive substances is, for transportation and storage, not an explosive", a very significant observation.
13. At page 532, the ENCYCLOPAEDIA continues that the economic status of ammonium nitrate has changed greatly since World War II. Before this war, its principal use was as an ingredient of high explosives but since then the greatest proportion of ammonium nitrate produced goes into fertilizer. Following World War II, ammonium nitrate became the leading nitrogen fertilizer in the United States and in the world.14. Another authority gives us useful clues, Hawley's THE CONDENSED CHEMICAL DICTIONARY has an article on ammonium nitrate. On grades, it writes "usually expressed in per cent of nitrogen, as 20.5% N; 33.5% N.FGAN is a fertilizer grade, prilled and usually coated with kieselguhr". On hazards, it writes "may explode under confinement and high temperatures, but not readily detonated". It should be noted that the fertilizer grade FGAN is prilled.
15. The purity of the ammonium nitrate has nothing to do with its use as an explosive. When it is intended for use in nitrous oxide manufacture even higher quality is required-a purity of not less than 99.5% with almost complete absence of organic matter, ion chloride and sulphates.
16. It would be easy to say that prilling results in a higher concentration and amounts to manufacture. It is difficult to see why this would be so. There is no authority whatever for saying that concentrating a product will by that fact alone produce a different product. It may, perhaps, be said that there has been processing and a manufacture but if the result is the production of the same good, even a higher purity, then the manufacture/processing cannot have the effect of making the purer product liable by that fact alone to excise duty. A manufacture under the Central Excises and Salt Act is required to be a manufacture that creates an "excisable goods". A manufacture that does not have this effect is of no interest to central excise.
17. None of the judgments quoted by the two sides offer us guidance directly on whether prilling of ammonium nitrate solution or melt results in a manufacture of an excisable goods. The problem is whether there has been a manufacture of an excisable goods on which duty has become recoverable. All the judgments deal with pineapple, rubber, scrap, PVC, etc. etc. The two decisions of the Hon'ble Supreme Court i.e. DCM judgement and the South Bihar Sugar Mill concern themselves with, in the one case whether a vegetable oil has become a refined oil assessable under Item 12 of the central excise tariff, and in the other, with whether a gas known as kiln gas was carbon dioxide assessable under 14H as a compressed gas.
18. These two epic' judgments have been frequently quoted and as frequently misunderstood. In the DCM dispute the factory claimed that its oil was not assessable under Item 12 because it had undergone neutralization and bleaching but not deodorization; while the department said that even without deodorization, the oil was an oil assessable under Item 12. The Court did not accept this. It said that a vegetable oil must be a refined oil, and to be a refined oil, it must undergo neutralization, bleaching and deodorization : until then it was not an oil that had been created by the processes to which it had been subjected in order to make it assessable as a refined oil under Item 12. We see here that there was a heading in the tariff into which the department was trying to fit the oil. The Court went into the nature of the oil the processes it was subjected to, and concluded that the heading would not accommodate the oil because that oil had not qualified to be accommodated there. The question the Court examined was whether the processes had qualified the oil for assessment under a heading with a definite description of what commodities it would accept. In the South Bihar Sugar Mill judgment, the Supreme Court arbitrated upon a dispute whether the kiln gas was carbon dioxide because it contained carbon dioxide. The department contended that it was carbon dioxide, the factory meanwhile claiming that it was not carbon dioxide, because, for one thing, its carbon dioxide content was too low while other gases like nitrogen were present in larger volumes.
The Supreme Court judged that the gas was not a carbon dioxide gas because the gas was not known and did not have the characteristics of carbon dioxide but was known as kiln gas. Furthermore, the gas had not been compressed and Item 14H at the time accepted only compressed carbon dioxide. For various reasons, the Court prohibited the department from assessing the kiln gas as carbon dioxide.
19. The problem with the ammonium nitrate is not that there was an item of prilled ammonium nitrate, like there was an item of vegetable oil and an item of compressed carbon dioxide into which it would be attracted. The department wants to assess it under Item 68, an item that covers goods that are not specified in any of the preceding items of the tariff. It has no other description than this, and in fact, does not describe anything. Only undefined goods fall in it, and because they are not acceptable to any of the other preceding headings of the tariff. Unlike the vegetable oil and the compressed carbon dioxide which had headings that appeared reasonably adequate to cover them but which, on scrutiny by the Supreme Court, were found to be not so qualified, Item 68 cannot be said to be in the same class. The attention of the Supreme Court in the two cases was on whether the goods qualify for definite headings. The problem here is not this but whether certain processes carried out on the ammonium nitrate have made it susceptible to duty under Item 68 and there lies the paradox.
20. The ammonium nitrate solution from which the prilled ammonium nitrate is prepared was a duty paid commodity and had been assessed under Item 68. If we apply the reasoning of the DCM and the South Bihar Sugar Mill and say with the department that the prilled ammonium nitrate had qualified for entry into Item 68, then since it has already entered into 68, there is no need for the good to enter it again. It must be understood very clearly that the DCM and the South Bihar Sugar Mill judgments are not sanctions for charging duty on an article in the way the department wants to charge duty on the prilled ammonium nitrate. The Supreme Court in the two judgments dealt with articles which had not paid that duty under that or any other head and which the department wanted to categorize as goods of a particular description.
The judgments cannot be read to say that a commodity undergoes this and that and at the end, becomes dutiable even without ever leaving the item description.
21. In support of its case, the department cited the very recent judgment of the Supreme Court dated 6th May, 1985 in the Empire Industries Ltd. v. Union of India Writ Petition Civil No. 11728 of 1984-1985 (20) E.L.T. 179 (S.C.)-and of the Bombay High Court judgment in New Shakti Dye Works Pvt. Limited-1983 E.L.T. 1736. These judgments, however, are firstly on the retrospective amendment of the Central Excises and Salt and Additional Duties of Excise (Amendment) Act, 1980, and the retrospective amendment of Tariff Items No. 19, No, 22 and of the definition of manufacture in Section 2(f) of the Central Excises and Salt Act, 1944. There was a dispute between the assessees and the central excise in regard to the levy of duty on processed fabrics. The manufacturers said that there was no difference between a processed fabric and an unprocessed grey fabric. This point of view had been upheld once by the Gujarat High Court necessitating the amendment Act with its retrospective effect. By this amendment, manufacture of cotion fabrics falling in Item 19(1 )-I in the Central Excise Act was enlarged to include bleaching, mercerising, dyeing etc., and of man-made fabrics falling in Item 22(1) to include bleaching, dyeing, printing etc. Thus, the items themselves came to acquire two sub-items--one, fabrics not processed and the other, fabrics processed. Both the Hon'ble Courts i.e. Bombay High Court and the Supreme Court, upheld the retrospective amendment and consequently the recovery of duty on processed fabrics.
They held that the entry of a new sub-item for processed fabrics by means of the retrospective amendments, recoveries on processed fabrics were completely legal. They both held that the processing of the fabric would amount to manufacture and that such manufactured product would be dutiable under the new heads (sub-heads) marked out for them. There is nothing in these judgments to support the proposition that prilling of ammonium nitrate amounts to a manufacture that would attract duty to it, especially when it is borne in mind that the ammonium nitrate had already paid the same duty under the same Item 68. The approval given by the Supreme Court to the recovery of duty on processed fabrics will not be an approval of this recovery of duty on prilled ammonium nitrate.
22. The central excise say that there is a difference in the prilled ammonium nitrate from the material from which it was made viz. the ammonium nitrate melt 75%-82%. They claim that the prilled ammonium nitrate has been dehydrated, converted into a higher concentration in a prilled form, has been coated with oil and is to be used as an explosive. They are right in saying that it has a higher concentration, has been prilled and has been coated with oil, but they are wrong to say that because it is to be used as an explosive, it has become somehow different. The unprilled ammonium nitrate was still ammonium nitrate and could still detonate. On the other hand, the prilled ammonium nitrate if affected by moisture or is allowed to cake, does not detonate easily, and as we have seen in the chemical books, ammonium nitrate including prilled ammonium nitrate still require sensitizer, initiator, a propellant and detonators. We have read that the 1947 Texas City explosion involved fertilizer grade ammonium nitrate. There is no authority for saying that the raw material ammonium nitrate cannot be used as an explosive. While it is useful to remember that this ammonium nitrate melt requires preparation like prilling, concentration, for further use as explosive, the prilling itself does not turn it into an explosive, but this, with other ingredients, and supplements, and other preparations makes it suitable for use in detonation. It is also useful to remember that the purity itself is not a factor because an ever higher purity of 99.5% has to be achieved when the ammonium nitrate is to be used in the manufacture of nitrous oxide. There is no authority that we have been able to find that will support the department's proposition that prilling turns an ammonium nitrate into an explosive. It does nothing of the kind and its explosive nature is one it already had before prilling. We have further seen the CONDENSED CHEMICAL DICTIONARY report about a fertilizer grade ammonium nitrate FGAN being prilled and coated with kieselguhr.
23. The greatest barrier before the department, however, is the fact that the ammonium nitrate has already paid duty under Item 68. Having paid this duty and having retained its character, as a fertilizer, as a raw material for the manufacture of nitrous oxides, oxidizer, explosive and catalysts, we cannot say that it has become a new and fresh excisable goods, different from the raw material from which it was made even if we overlook the fact that it has already paid the duty which the department now wants it to pay. No commodity can be made to pay the same duty twice unless the law provides for such an action. At present the law does not sanction this. The dyeing of a cotton fabric makes it a manufacture as defined in the law to fit it (dyed fabric) into a new heading and to pay a duty it had never paid before. To prill and coat ammonium nitrate does not make it a manufacture for the purpose of preparing and fitting it into a new item, for prilled ammonium nitrate.
The prilled ammonium nitrate remains ammonium nitrate, a good not elsewhere specified. The dyed cotton fabric no longer fits into the item for unprocessed cotton fabric, but the prilled ammonium nitrate still fits perfectly into the item for goods not elsewhere specified.
It, therefore, cannot be made to pay the same duty twice.
25. I agree with my learned Brothers that the appeal deserves to be rejected. However, I would like to say that my reading of the Bombay High Court judgment in the New Shakti Dye Works case (supra), which was upheld by the Supreme Court in its judgment dated 6-5-1985, is somewhat different. The Bombay High Court considered the excisability of processed cotton and man-made fabrics as distinct from unprocessed cotton and man-made fabrics from the point of view of first principles with reference to a period when there were no separate items for un-processed and processed fabrics. The Court came to the conclusion that processed fabric was a variety of fabric different from the un-processed one and, that, therefore, the former was liable to be charged to duty under the item "cotton fabrics, all sorts", even though the base un-processed fabric had already suffered duty. Having said this, the Court also held that the retrospective amendment of the two tariff items providing for separate levy of duty on processed and un-processed fabrics was not ultra vires. This was the decision which was upheld by the Supreme Court. However, in the present case, for the detailed analysis set out in the main Order, I agree that prilled ammonium nitrate would not be liable to be charged to duty under Item No. 68 of the Central Excise Tariff Schedule when it is made out of ammonium nitrate which had already suffered duty under the same Item No. 68.