1. The challenge in this writ petition is to the levy of excise duty on the aqueous solution of phenolic resin (hereinafter referred to as the solution) which is manufactured by the petitioner.
2. Item No. 15-A of the First Schedule to the Central Excises and Salt Act, 1944 provides for levy of excise duty on artificial and synthetic resin. The relevant portion of the said entry reads as under :-
'Artificial or synthetic resin and plastic materials and articles thereof. -
(1) Artificial or Synthetic resin and plastic materials in any form, whether solid, liquid or pasty or as a powder, granules or flakes, or in the form of moulding powders, the following namely :-
(i) Condensation, Poly-condensation and Poly-addition products, whether or not modified or polymerised including phenoplasts, Aminoplasts, Alkyds, Polvufethane, Polyally Esters and others Unsaturated Polyesters.'
On 23rd September, 1965 a notification was issued under Rule 8(1) of Central Excise Rules. By the said notification phenolic resins were exempted from so much of the duty of excise levied over thereon as was in excess of 0.30 paise per kg.
3. By letter dated 21 August, 1968 the petitioner asked excise authorities for the approval of the price list for the purpose of excise duty. In this application it was stated that the petitioner would opt for payment of duty on the specific rate as per the aforesaid notification dated 23-9-1965, subject to the duty being on the plastic content of the solution. The specific rates stated therein was of duty of phenol-formaldehyde at 0.30 paise per kg. plus 20 per cent surcharge. If the excise duty was to be charged on the entire weight of the solution then the petitioner wanted that they should be asked to pay ad valorem duty. On 19th September, 1968 the excise officer granted provisional approval to the price list.
4. On the 14th September, 1968 the excise authorities took a sample of the petitioner's product and sent it for analysis by the Chemical examiner of the Government of India. The result of the said analysis was not communicated to the petitioner. During the period 16th September, 1968 to 9th December, 1968, the excise duty was assessed @ 0.30 paise per kg. plus special excise duty of 20% on the phenolic resin content of the said solution at the uniform maximum content taken at 45 per cent of the solution, on a provisional basis.
5. By letter dated 6th December, 1968 the petitioner was informed that duty would be charged on the whole of phenolic resin solution itself and that the provisional assessment was being revised in the light of Chemical test. It was further stated that as per the report of the Chemical examiner it was not possible to estimate the amount of resin in an aqueous solution.
6. A demand was raised from the petitioner for the payment of the differential amount of duty. It might be stated that the present writ petition is in respect of the period 16th September, 1968 to 31st August, 1970. Some correspondence took place between the petitioner and the respondents. The contention of the petitioner always was that it was possible to find out the resin content of the aqueous solution. The petitioner filed an appeal to the Assistant Collector of Customs. In the said appeal it was inter alias contended that the solution manufactured by the petitioner was not a resin at all but was a mixture of resin and water. It was, thereforee, sought to be contended that the same could not be subjected to excise duty under item 15-A.
7. The petitioner, on its own, also sent the solution which was manufactured by it to the Central Public Health Engineering Research Institute at Bhopal, which was a Government of India Undertaking. It received a report dated 26th December, 1968 from Bhopal. As per the said report the resin content was 41.04 per cent. This report was communicated by the petitioner to the Assistant Collector of Central Excise. Thereafter, the Assistant Collector of Central Excise ordered further samples to be drawn. These samples were drawn on 31st January, 1969 under the seal of the excise authorities. Without awaiting for the test report on this second set of samples the Assistant Collector passed an order on 30th April, 1969 and the demand of duty on the entire quantity of the solution was confirmed.
8. The petitioner thereafter, filed an appeal to the Collector of Central Excise, Nagpur in which the aforesaid contentions were reiterated. In the meantime the petitioner again sent the samples, which were with them when they had been drawn on 31st January, 1969, for being tested at Bhopal. It received a communication of the report which stated that the percentage of non-volatile matter determined after drying at 105 degree centigrade was 43.3 by weight. Copy of this was also sent by the petitioner to the Collector of Excise.
9. By order dated 30th July, 1969 the Collector of Excise rejected the appeal. In the said order the Collector of Central Excise had relied upon certain documents which, according to the petitioner, had never been disclosed to it. The petitioner accordingly wrote a letter dated 19th August, 1969 to the Collector asking for the test report dated 6th May, 1969, as well as other four documents which had been referred to in the said order. The said documents were, however, not supplied to the petitioner. The petitioner, without having the opportunity of seeing the report or the test report of the Chemical examiner, filed a revision petition with the Government of india. A personal hearing was granted to the petitioner. By order dated 27th May, 1972 the revision application was rejected but with the following observations :
'However what can be allowed is that since it was at the option of the petitioners' factory to get the resin assessed at ad valorem rates or at specified rates and since they chose the specific rates thinking that they would be assessed on the weight of the solid contents they may avail of the ad valorem rates, if they so desire. Obviously no exemption notification can have the effect of increasing the duty liability on a product than what the tariff itself contemplates. thereforee, if the specific rates work out to more than the ad valorem rate they are allowed to choose the letter. Subject to this the revision application is rejected.'
10. In the present writ petition the challenge is to the aforesaid order of the Central Government passed in revision, as well as to the orders of the sub-ordinate authorities. The first contention on behalf of the petitioner is that the product of the petitioner is a 'Solution of Resin' and not 'Resin' and is not covered by item No. 15-A. The process of manufacture of phenolic resin has been set out by the petitioner in the writ petition as follows :-
'Phenol and Formaldehyde solution in water are mixed in a kettle with further water and a small quantity of a catalyst (Caustic Soda in our case). Formaldehyde is used as Formaline which is a solution of Formaldehyde in water, being 35 to 37% say 36% Formaldehyde and 64% water approximately. By Chemical combination of phenol and Formaldehyde, phenolic Resin is formed but remains in solution in water. By subsequent processes the phenolic resin is separated and made into a solid or pasty form. These processes are further, cooking, followed by separation from solution by any of the three processes namely vacuum distillation, by evaporation of water or spray drying or by pracipitation. It is only after any of these three processes are gone through that phenolic resin comes into existence as known in the market or in chemistry.'
11. The petitioner has also relied upon certain extracts from standard text books in order to show that 'solution of Resin' is not Resin but is Resin to which solvent has been added. In the book 'phenolic Resins' by White House, Poitchett and Barnet the manufacture of Resin is described as under :
'For resol, the phenol formaldehyde solution and alkaline catalyst are charged into the still, and, with the valves set for reflex, the temperature is raised to the required reaction temperature and held at this value until the reaction has proceeded sufficiently. In some cases the catalyst is neutralised at this stage. The valves are then set for evaporation and vacuum is applied for the dehydration of the resin. The evaporation of resol has to be carried out under reduced pressure, so that the temperature does not rise sufficiently to cause rapid heat hardening. If evaporation is carried out at 100-150 mm Hg. and completed at less than 100 Degree C, solid grindable resol may be obtained.
When most of the water has been distilled from the resin, the temperature of the mixture in the still rises rapidly are samples and taken very few minutes, and tested for degree of polymerization, melting point, hardness, or any other property suitable for determining the end-point. As soon an end-point is reached, the resin is run out, and cooled rapidly if a solid resin is required. If a varnish or lacquer is required, alcohol or some other suitable solvent is added to the hot resol in the still, to bring it into solution.'
The reading of the aforesaid passage shows that manufactured phenolic resin is in solid form. For the purpose of using this Resin, it may be necessary to prepare different types of solutions by adding different solvents. The solution thus prepared is not resin thought the solution contains resin.
12. In 'Phenolic Resins' by David F. Gould, the last stage of the manufacture of Phenolic Resin is described as under :
'Water and unreacted volatile materials are then removed by distillation. This is generally done under vacuum to keep to a minimum the temperature to which the resin is subjected. The finished resin is run out into pans to cool or, when a grindably-hard type of resin, it may be run out into a concrete floor. The total time to this point will vary widely with the formulation of the resin, the type of reactor, the size of the batch, and other factors. It is usually in the range of 4 to 12 hours. After cooling, hard resins are ground and mixed with other materials, if required, in preparation for application of the resin or for further processing, as in the production of moulding compounds.'
Therefore, said passage, also lends full support to the petitioner's contention that the manufacture of Resin is completed only when water and unreacted volatile materials have been removed. In the present case, according to the petitioner, manufacturing process has been stopped at an intermediate stage and the resultant solution obtained by it is not Resin.
13. It is evident from the reports received from Bhopal that the sample sent by the petitioner disclosed that the water content was more than 55%. Even in the reports which had been relied upon by the respondents, while levying excise duty, the petitioner's product has been grouped as 'resin in aqueous solution.' This is apparent from the letter dated 6th December, 1968, received by the petitioner from the Circle Officer, Central Excise Department. In the letter dated 10th December, 1968, written by the Excise Officer to the petitioner, it was stated that duty would be paid by the petitioner on 'the complete solution of resin.' It was further stated in the said letter that the Chemical examiner's reports shows that samples sent to him were of 'aqueous solution of phenolic resin and not the solution of resin in volatile organic solvents.' The product of the petitioner was clearly commercialised 'resin of an aqueous solution.' The aforesaid documents, along with the reports of the Chemical examiner from Bhopal, leave no manner of doubt that the product of the petitioner can only be categorised as an 'aqueous solution of resin' where the solid content was less than 45%.
14. The next question which would arise for consideration is as to whether such a product can be regarded as resin in liquid from Item No. 15-A refers to all types of artificial and synthetic resins. These resins may be in different forms. Whatever may be the form, the product must necessarily be a resin. Sh. Dewan, the learned counsel for the petitioner has relied on : 1973ECR56(SC) Union of India vs. Delhi Cloth Mills - 1977 ELT (J 177) and contended that unless the product manufactured by the petitioner is known as 'resin' and unless the manufacture has been completed, it cannot be subjected to excise duty. In other words, the contention is that the product of the petitioner is not artificial or synthetic resin because an essential step, namely dehydration, has not taken place. It has not been denied by the learned counsel for the respondents that liquid resins are different from solution of resins. A Solution, is a homogeneous mixture of the molonles, atoms or ions of two more different substances (See General College Chemistry by Leeann and Wood 217). In other words, a combination of two different substances which are completely harmonised results in the formation of a solution. In the present case, it is not denied that the product of the petitioner consists of two different substances, namely water and solid, and the two have been so harmonised that the extent of the solids is not more than 45 per cent. To my mind this product cannot be regarded as artificial or synthetic resin in liquid form. It is, at best a solution of resin which is not covered by the aforesaid entry. Reference in this behalf may also usefully be made to the instructions which have been issued by the Central Board of Customs and Excise. In the said instructions it has been inter alias stated as follows :-
'Solution of artificial or synthetic resin in volatile organic solvent, are excluded from the scope of this item, if and when the weight of SUCH SOLVENT EXCEEDS 50 per cent of the weight of the solution.
In other cases the duty should be levied on the actual weight of the resin contained in the solution and not on the total weight of the solution.'
The aforesaid instructions, refer to solutions in organic solvent. The important point, however, is that it is recognised that where the solvent exceeds 50 per cent of the weight of the solution then such a product cannot be regarded as being covered by item No. 15-A. In the same instructions it is also stated as follows :-
'When the solvent is other than volatile organic one, if the weight and volume of the resin or basic plastic material can be determined, that quantity used attracts duty; if not, duty would be payable on the total weight and volume of the solution, irrespective of the weight of solvent added.'
The aforesaid shows two things. Firstly, 'resin' in item 15-A refers to the resin as fully manufactured and not any 'solution of resin'. Secondly, if more than 50 per cent weight is that of solvent then the product cannot be regarded as 'resin' at all. There may be force in the contention on behalf of the respondents that these instructions are not binding. But these instructions the Government has, to my mind, sought to explain the meaning of the aforesaid Item No. 15-A.
15. It will be seen, that in the present case, originally the excise authorities were provisionally levying duty on the solid content of the product by regarding the solid content to be not more than 45 per cent. It is only when, initially, a report was given by the Chemical examiner, that it is not possible to find out the solid content, that the excise authorities sought to levy excise duty on the entire product. This clearly shows that the excise authorities also were, initially, of the opinion that 'solution of resin' is not resin and that the excise duty is livable only on the solid content in the solution. The petitioner has also placed on record two affidavits, one of Dr. R. C. Badami and other of Dr. A. Purushotham. In both the affidavits it has been stated that the manufacture of phenolic resin is not completed till the water has been eliminated from the product. The following passage from the affidavit of Dr. Badami may usefully be referred to :
'I further say that the two terms 'Liquid' and 'Solution' are not synonymous. The term 'Liquid' refers to one of the three fundamental states in which matter i.e., a substance can exist. These fundamental-states are solid, liquid and gas. The term 'Solution' refers to a homogeneous mixture of two or more substances and it can be in solid form, liquid form or in gaseous form. The substance which is present in larger quantity in a solution is called the solvent while the other one which is present in smaller quantity is called the solute. If the solvent is in a liquid state, the solution made in it would also be in liquid state, yielding a homogeneous mixture of the solvent and the solute. Neither a solute nor a solvent in the liquid form is a solution. For a solution there must be a solvent in which the solution dissolves to give a homogeneous mixture. The solute by itself could be a gas, liquid, or solid. Thus a 'Solution' of phenolic resin, i.e. an aqueous solution of phenolic resin will mean a homogeneous mixture of phenolic resin in the solvent which is water. The solution will be in liquid form by virtue of the solvent, i.e., water being a liquid. This mixture cannot be called phenolic resin in liquid form. 'Liquid phenolic resins' would be resin itself in liquid form and thereforee, distinct from 'Phenolic Resin Solutions' although both could have the same liquid form of existence.'
16. It would, thereforee, follow that the product of the petitioners is only a intermediary product and is not manufactured resin in liquid form and would, thereforee, not be covered by Item No. 15-A. Mr. Anand, learned counsel for the respondents has sought to place reliance on a passage from a book entitled 'Phenolic Resin by David F. Gould' in which it is stated that liquid phenolic resin are water soluble types and available in a number of varieties. Reference has also been made to the book 'Phenoplasts' by T. S. Caraswell. In the said book it is sated on page 243 that, in the plywood industry phenoplast resin is supplied in three forms. The first form which is referred to therein is the aqueous solution. None of these passages can assist the respondents. If phenolic resin in manufactured only after the process including that of dehydration is completed then the mere fact that in the plywood industry it is an aqueous solution which is used does not mean that the said intermediate product, before the stage of manufacture is completed, can also be regarded as 'resin in liquid form'. In the present case the product is a solution of resin and not a resin in a liquid form. 'Resin in a liquid form' is a single substance but a 'solution of resin' is a combination of two different substances namely resin and water. The aforesaid passages relied upon by Sh. Anand do not detract from the other passages which have been referred to and relied by the petitioner wherein it is clearly stated that the process of manufacture of phenolic resin is completed only after the process of dehydration has taken place.
17. In view of the fact that I am of the opinion that the product manufactured by the petitioner is not covered by Item No 15-A; it is not necessary for me to decide the other contentions raised on behalf of the petitioner.
18. For the aforesaid reasons the writ petition is allowed. A writ of certiorari is issued quashing the orders dated 27th May, 1972, 30th July, 1969, 30th April, 1969 and 10th December, 1968. The respondents are further directed to refund the excise duty of Rs. 8,70,710.40 to the petitioner within three months of this Judgment. The petitioner would be entitled to costs. Counsel's fee Rs. 550.